The result of all of this? Energy companies must develop coherent strategies
for sustainable growth. To help guide that process, this white paper describes
seven key principles for growth and shows how two energy companies have
successfully followed those principles to achieve high shareholder returns.

The Importance of Growth

To gain a better understanding of the importance of growth, we examined
the impact of growth on shareholder value by studying the value creation
record of Fortune 500 companies in various industries from 1988 to 1998.
For each company, we compared the average total shareholder return and
revenue growth and found that revenue growth is strongly related to value
growth. While this finding isn’t particularly surprising, it’s important
to note that we also found companies that have grown without creating
value. So it’s clear that revenue growth is a key driver of shareholder
value, but it’s equally clear that revenue growth alone doesn’t guarantee
superior returns. Moreover, we found that even companies that grow and
create value have difficulty maintaining their performance over time.

In analyzing how some companies have implemented successful growth strategies
while others have failed, we’ve found it useful to place companies into
four categories:

Successful Growers – Companies that have achieved both revenue
growth and shareholder value growth above the average for their peer group.
These companies have found the keys to growth and implemented them successfully.

Unsuccessful Growers – Companies that have above-average growth
but below-average value creation. These companies have achieved growth,
but that growth has not generated corresponding profits.

Cost Cutters – Companies that have below-average revenue growth
but above-average value growth. These companies are continuing to successfully
re-engineer to reduce costs, but they need to focus on growth as well
to sustain value growth over the long term.

Shrinkers – Companies that combine below-average revenue growth
with below-average value growth. The long-term prospects for these companies
are questionable, and they will certainly have difficulty competing for
capital.

The Seven Growth Principles

Building on our experience in working with companies in developing and
implementing growth strategies, we recognized that four broad areas distinguish
Successful Growers from other companies:

• Organization and culture

• Strategy formulation

• Strategy enablement

• Readiness for execution

Using these four areas as a starting point, we identified the most critical
potential factors within each area. We then tested the importance of these
factors by studying companies and establishing which potential factors
have actually contributed to the companies’ successful growth. Our study
resulted in the specification of seven key growth principles, as outlined
in Figure 1.

Figure 1
The Seven Growth Principles: Capturing Value Across the Enterprise

The Growth Principles in Practice at Energy Companies

We next focused our attention specifically on energy companies, first
by categorizing them as Successful Growers, Unsuccessful Growers, Cost
Cutters, and Shrinkers; the results are shown in Figure 2.

Figure 2
10-year TSR and Revenue Growth in Energy/Petroleum Industry

We then studied the companies in each category to better understand why
they succeeded or failed in their quest for growth. Among the energy companies
that have achieved Successful Grower status, Williams and Duke Energy
Corporation serve as good examples of companies that have developed and
implemented coherent and successful growth strategies. Williams and Duke
Energy each operate across several components of the energy industry value
chain:

• Williams is a diversified pipeline company that operates three primary
  lines of business: natural gas pipelines, midstream energy services,
  and telecommunication networks.

• Duke Energy is an integrated energy and energy services provider
  engaged in the electric generation, transmission, and distribution
  businesses, as well as the natural gas pipeline business.

The following describes the seven growth principles in more detail, with
references to how Duke Energy and Williams have successfully implemented
and executed growth strategies by following these principles.

Principle 1 – Create a Hunger for Growth

Successful Growers create a hunger for growth by fully committing to
growth throughout the organization at all times. This commitment is demonstrated
in four primary ways:

• Executive-level communication that frequently and consistently reinforces
  the importance of growth

• Employee incentive structures that reward growth-related behavior

• Communications with the investor community that convey a compelling,
  credible, and achievable growth story

• Promotion of customer-centricity across all levels and functions
  of the company, and use of this focus to drive and unite the growth
  culture

For example, Williams clearly exhibits its hunger for growth by including
growth as a central strategic objective, with explicitly stated growth
goals for all three business units. And Williams isn’t shy about aggressive
growth targets; for its pipeline business, Williams’ goal is to grow profits
at two to three times the rate of U.S. natural gas demand growth. In its
rapidly growing telecommunications business, Williams plans to complete
its 32,000-mile fiber optic network during 2000, and it has conveyed a
compelling picture of its telecommunications growth strategy to investors.

Duke has also shown a hunger for growth, with the stated goal of growing
earnings per share by 8 to 10 percent per year. Duke creates the hunger
for growth throughout the company by aligning training, pay, and benefits
to reward successful execution of the company strategy.

Principle 2 – Develop an Insightful Vision of the Future

Successful growers bring two critical elements together to develop an
insightful vision of the future and the ways it can be shaped to create
value:

• They bring a customer-centric view to their efforts to identify how
  customer needs and markets are evolving

• They tap their innovation capabilities to find creative ways to increase
  customer and company value

For example, Duke was one of the companies that recognized early on the
significance of energy trading and marketing and the convergence of electricity
and gas in a deregulated environment. These insights have helped to guide
Duke in the establishment of partnerships and pursuit of acquisitions
over the last five years.

Williams has shown a consistent ability to anticipate and capitalize
on new opportunities. The best example is Williams’ pioneering use of
decommissioned pipelines and pipeline rights of way to build a fiber optic
network. In fact, Williams built one fiber network, sold it for considerable
profit, and plans to finish building another during 2000.

Principle 3 – Find the Fit that Sustains Advantage

Not all growth opportunities in the marketplace are right for each and
every company. Successful Growers recognize this and find the fit that
sustains advantage by pursuing only those opportunities that:

• Support or advance strategic intent, as expressed in the company’s
  mission, vision, and values, and as reflected by its culture

• Fit with the company’s unique capabilities (both those that exist
  today and those that can be developed) and activity systems

• Establish, maintain, or enhance a unique competitive position and/or
  barriers to the entry of competitors

For example, Duke’s activities fit well with its integrated, regional
energy center business model. Duke tries to focus its investments in areas
with the greatest growth, allowing it to exploit opportunities that involve
generation and natural gas supply. Duke’s purchase of a pipeline in Queensland,
Australia, and generation assets in Latin America, and its opening of
a Duke Energy Trading and Marketing office in Argentina are good examples.
But Duke also knows to avoid opportunities that don’t fit – its decision
to stay out of the retail electricity market because it doesn’t build
on Duke’s competitive advantage is a good example.

Principle 4 – Create an Innovation Pipeline

Successful Growers renew their business through their ability to create
and manage an innovation pipeline, and by constantly tuning and adjusting
the pipeline through experimentation and application of lessons from the
past. In managing the innovation pipeline to refresh their strategies,
Successful Growers:

• Demonstrate a clear understanding of the stages of the pipeline

• Appropriately balance the allocation of resources and management
  among both mature and developing ideas

• Understand how to apply metrics and gates to meet growth objectives

• Ensure that the pace of innovation outperforms that of competing
  firms

Williams has created an innovation pipeline to renew each of its three
businesses. For example, Williams developed an innovative way to capitalize
on the opportunities presented by the deregulation of long distance telephone
services. By leveraging its skills in negotiating rights-of-way for pipelines
and managing capacity for wholesale gas transmission, Williams reinvented
its growth strategy by diversifying from delivering gas to delivering
voice, video, and data communications.

Principle 5 – Draft and Enable the Growth Blueprint

Successful Growers draft and enable the growth blueprint by detailing
their growth initiatives and developing or acquiring the capabilities
needed for execution. They use alliances and partnerships to build or
enhance their capabilities where organic development or direct acquisition
of a capability is impractical, uneconomical, or would limit flexibility.

Duke has systematically acquired the capabilities it needs to enable
and pursue its growth strategies. For example, Duke recognized that participation
in the marketing and trading portion of the new energy value chain was
a key to its growth. Recognizing the difficulty in developing such capabilities,
Duke acquired Pan Energy to build its expertise in gas marketing.

A good example of drafting and enabling the growth blueprint at Williams
is its development of Wiltel. In 1985, Williams launched Wiltel and constructed
a $50 million, 750-mile fiber optic link. During the period from 1986
through 1993, Williams systematically grew this business through both
the construction of fiber optic lines and the strategic acquisition of
other communication networks that complemented its existing infrastructure.
In 1994, Williams sold 95 percent of its Wiltel network for a substantial
profit.

Principle 6 – Recognize that It’s Not Only Growth; It’s also Capturing
Value

Successful Growers recognize that it’s not only about growth, it’s also
about capturing value across the enterprise-wide value chain. While growth
is a key strategic priority for these companies, they also recognize the
importance of cost management and asset efficiency, and they successfully
link these to create customer and shareholder value.

As the electric business deregulates, Williams is capturing value across
the elements of the changing value chain. For example, Williams is extracting
value out of portions of the electric value chain through the creative
use of tolling arrangements with electric power producers. Under these
arrangements, Williams supplies fuel to electric producers and also sells
the output from these generators, allowing Williams to derive value on
both sides of the generation portion of the value chain.

Principle 7 – Wire for Execution

Successful Growers prepare for effective and seamless implementation
of their growth strategies by “wiring” the company for execution using
three critical components:

• Strategy Deployment Process: Successful Growers continually
  identify, test, and measure the fitness of various projects against
  the company’s strategy. The strategy deployment process includes a
  balanced portfolio of market-facing and capability-enhancing initiatives,
  provides visibility of resources, and allows for efficient tradeoffs
  among competing projects.

• Governance Model: The governance model of a Successful Grower
  defines roles and accountabilities appropriately, actively tracks
  performance against logical and measurable key performance indicators,
  and rewards employees based on an incentive system tied to those indicators.

• Operational Plan: Successful Growers have an operational plan
  that focuses on the management of operating costs to achieve industry
  best practices and the continual optimization of asset use.

Duke’s growth strategy is fully “wired” into its day-to-day operations,
with a governance model that clearly defines roles and accountabilities.
Each business segment’s performance is tracked by earnings, and the Director’s
and Executive Officer’s compensation programs are linked to Duke’s performance,
with a focus on enhancing shareholder value. Short-term incentive plans
are also linked to performance indicators, with employee bonuses tied
to earnings.

The Growth Journey

Williams and Duke have clearly demonstrated successful application of
the growth principles. But knowing what separates Successful Growers from
other companies is only part of the battle. How do you actually make these
principles come alive for your company? We believe that each company,
in its quest for sustainable growth and value creation, must undertake
what we call “The Growth Journey,” with the seven Growth Principles as
its foundation.

Before any growth strategy is considered, the company must strongly embrace
the growth mindset, with a growth strategy that is intimately linked to
the company’s overall corporate strategy. Once the growth mindset has
been established, the company can begin the strategy formulation stage.
In our view, companies begin with a choice of six potential growth paths
that provide broad direction for the strategy:

• Product and service innovation

• Channel innovation

• Customer intimacy

• Globalization

• Convergence/Consolidation

• Diversification

But knowing the path and being able to walk down it are not the same
thing. The unique route that each firm must follow on its journey to growth
and value creation requires exceptional capabilities, some of which are
new to the company. We believe that this is the point at which many firms
stumble, since it can be difficult to fully understand and articulate
the required capabilities. As a result, they are often discussed at high
levels of abstraction, left largely undefined, and not clearly mapped
to the market initiatives they are intended to enable. Our examination
of Successful Growers has identified five key growth-enabling capabilities:

• Customer Relationship Management

• Innovation Management

• M&A and Alliance Management

• Information Technology Management

• Agility and Change Management

Once the growth-enabling capabilities have been identified and put in
place, the strategy deployment process converts the strategic direction
into specific projects, and assesses the fit of growth initiatives projects
emerging from the organization. A well-functioning deployment process
not only prioritizes the necessary projects and allocates appropriate
resources, it also identifies gaps when the current project mix is not
sufficient to execute the strategy. An effective governance model controls
the entire process by defining roles and accountabilities appropriately,
clarifying lines of authority, and tracking performance against measurable
key performance indicators. Finally, an operational plan manages operating
costs and assets throughout the growth journey.