Four Pathways to Sustainable Value Creation
T here is more than one way to achieve sus- tainable value creation. The experience of the companies on our list of the top 25 sus- tainable value creators suggests four dis- tinct pathways to sustainability. Each has its own preconditions, necessary management disciplines, and potential pitfalls. Choosing the right strategy must take into account a company’s starting point in the capi- tal markets, its competitive position, and the evolving dy- namics of its industry. And over time, a company must be prepared to change its approach as its circumstances change.
The Growth Engine
Previous Value Creators reports have emphasized that the longer the time period, the more that profitable growth becomes the dominant contributor to a compa- ny’s TSR.8 So it should be no surprise that many of the companies on our list are market leaders in fast-growing and highly profitable segments of the world economy that enjoyed extraordinary growth during the ten-year period of our assessment (from 1999 through 2008). We call such companies growth engines, and they are oen among the most successful value creators in their sectors over the long term.
Typically, growth engines deliver sales growth that is well above the GDP average—usually 15 percent per year or more. As one would expect, some of the most successful value creators on our list are relatively small companies that are growing rapidly off a small base in a key growth market. A dramatic example is our number-one sustain- able value creator, drug maker Gilead Sciences. Special- izing in developing and marketing drugs to treat antiviral diseases, with a primary focus on HIV/AIDS, Gilead was
founded in 1988, went public in 1992, introduced its first product in 1995, and didn’t make a profit until 2002. But its revenues increased at a nearly stratospheric rate. Be- tween 1998 and 2003, for instance, the company’s sales grew 574 percent. And since 2003, the company’s sales have grown at a still-extraordinary 44 percent per year (more than four times the rate of our global pharmaceu- ticals and medical technology sample). Gilead’s market leadership and relentless focus on cost-effectiveness have also allowed it to improve its margins by 5 percent per year. The result: Gilead is the only company on our list to beat its local stock-market average for all ten years of our study. And from 2004 through 2008, the company gener- ated an average annual TSR of 28.5 percent (compared with the global pharmaceuticals sample average of only 1 percent).
Other growth engines on the list have been the benefi- ciaries of broad macroeconomic trends such as deregula- tion, globalization, or the recent boom in commodity prices. Vale (4), BHP Billiton (7), and Rio Tinto (14), for example, together control roughly 70 percent of the mar- ket for iron ore, a critical raw material in steel making.9 During a decade when the rise of rapidly developing economies such as China and India has fed a boom in commodity prices, these companies have seen their rev- enue grow at an average annual rate of 30 percent, 15 percent, and 23 percent, respectively—well above the global average for GDP growth. And Indian chemical giant Reliance Industries (5) has grown on the back of India’s expanding economy to become that country’s
8. See Spotlight on Growth: The Role of Growth in Achieving Superior Value Creation, The 2006 Value Creators Report, September 2006.
9. See Beyond the Boom: The Outlook for Global Steel, BCG report, February 2007.
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