After years of cost cutting and risk management to bring companies “back to
the basics” in response to the market anomalies, reliability issues and regulatory
uncertainty of the past decade, growth has moved back onto the CEO’s agenda.
In a 2004 IBM survey of more than 450 global CEOs, an overwhelming majority
cited growth as the top priority for driving their companies’ performance in
the coming years.[1] More than 80 percent of the CEOs surveyed highlighted growth
as a key component of their near-term strategy portfolios, more than 15 percentage
points higher than those citing cost reduction as key goals and over twice the
number of those emphasizing asset utilization and risk management.

Though the more pressing short-term priorities took their rightful place at
center stage over the last five years, the case for growth has remained self-evident.
Growth creates shareholder value, advances careers and makes work more rewarding.
From a societal perspective, growth drives the economy, creates jobs and improves
quality of life by bringing new products and services to the world. Thus, it
is important for utility executives to understand how companies achieve consistent,
successful growth – and how those lessons can be used in their own growth efforts.

Survey Says

To investigate what successful companies do to achieve growth and sustain it
over long periods, IBM completed a global study at the end of 2004 that focused
on three questions:

  • Who are the successful growers and what patterns are associated with them?
  • What do successful growers do differently?
  • How can other companies apply what they do?

To answer these questions, the team analyzed the growth and value creation
record of 1,238 companies that had been included in the S&P 1,200 for all or
part of the decade spanning 1994 to 2003. The companies included in the study
represent a wide range of sizes, industries and global geographies. Together
they account for 70 percent of the world’s market capitalization. Of these companies,
79 were electric and gas utilities – 41 North Americanbased companies, 22 based
in Europe, 11 based in the Asia-Pacific region and five based in South America.

The team went on to examine the actions of those companies defined as “successful
growers” – those that grew both revenue and total shareholder return (TSR) faster
than the median for their peer group – to determine what they do differently
from others that do not achieve successful growth. Collectively, this group
recorded median revenue growth of 8.5 percent and median TSR growth of 8.8 percent.
Proving that growth has not been limited to specific sectors or emerging economies,
these 413 companies are an eclectic group. It includes many well-known consumer
products, electronics, telecommunications, financial and other diversified firms
such as Procter & Gamble, Cisco Systems, Vodafone and Capital One, as well as
20 leading electric and gas utilities spanning the globe, such as FirstEnergy,
Exelon, Constellation Energy, National Grid, Centrica and Australian Gas and

Our team formulated hypotheses to explain the variation in outcomes and analyzed
individual companies. We found that successful growers break free of perceived
constraints related to industry boundaries, geographic neighborhood and company
size; use merger and acquisition (M&A) strategies effectively, contrary to the
belief of some that M&A destroys value; and possess the conviction and resilience
they need to recover from setbacks, correcting their course to sustain industry-leading
growth over the long term.

Facts or Urban Legends?

Executives sometimes view their growth potential as limited by a number of
factors: the nature of their industry and geographic “neighborhoods,” the size
of the company, the perceived dangers of M&A activity and the very real difficulty
of sustaining growth year after year. This study strongly suggests that these
perceptions are more likely self-imposed limits than marketplace realities and
as such can be overcome.

Is Neighborhood Really Destiny?

Growth leaders are not limited by industry maturity or geography. The S&P 1,200
companies demonstrated a much wider range of growth within each industry and
geography than across them. In each of four primary geographies and across 18
industries, high-growth companies not only outperformed their peers, but did
so by wide margins.

Figure 1 shows the range of compounded annual growth rate (CAGR) and the median
for eight industry groups. Within the utility sample in the study group, the
median growth rate was 8.4 percent – but with the fastestgrowing company sustaining
a CAGR of over 10 times that rate. This was not a wild outlier – seven of the
companies grew at three or more times the median, and nearly a third of the
companies exceeded the median by 50 percent or more. And geography was not the
primary driver of robust, sustained growth; while Europe and South America had
strong showings and the Asia-Pacific region a relatively weak one, no single
geographic region dominated the list of the top 25 fastest growers.

The message is clear: Neighborhood is not destiny. Executives have more room
to be ambitious than they tend to believe. Winning companies set ambitious growth
plans regardless of industry or geographic limits. They aim for targets above
and beyond what they and their peers typically expect.

Can a Company Be Too Big to Grow?

Another common perception is that large companies are slow growing. Our study
suggests otherwise.

As Figure 2 illustrates, companies with more than $10 billion in revenue increased
and grew revenue and TSR as fast as, if not faster than, their smaller counterparts
within the S&P 1200 sample. Now, admittedly, a billion-dollar company is not
exactly “small.” However, this data is powerful motivation indeed for the leaders
of multibillion-dollar utilities who have been led to believe that they are
too large to envision strong growth.

M&A: Value Destroyer or Growth Engine?

Several widely read articles and white papers have reported that a high percentage
of acquisitions (typically more than 50 percent) destroy value. But the growth
rates observed for the large companies in this study beg the question: Are these
companies using M&A to sustain their growth? The short answer is yes; companies
with revenue greater than $10 billion made 50 percent more acquisitions over
the decade than smaller companies. And contrary to the aforementioned works,
this acquisition-led growth did not come at the cost of value creation. In fact,
large firms grew their value (TSR) at 10.5 percent, versus 7.2 percent for their
smaller counterparts. Furthermore, we found that successful growers, regardless
of size, were more likely to acquire companies than others. In the sample we
studied, successful growers recorded twice as many acquisitions over the decade
as other companies.

Our research suggests that companies that build M&A skills can successfully
leverage acquisitions to drive their growth agenda. Why did we conclude this?
While M&A was not the focus of this study, we do have two hypotheses worth examining
further. First, some M&A studies take a short-term, typically one-year, view
of results. This study takes a longer, 10-year view. For energy and utility
companies, some would even say a decade is short-term planning.) Considering
the pains of integration, acquisitions may yield better results over the long
term than they do in the first few years.

Second, it appears from our research that a successful minority of companies
makes more acquisitions. They are able to find better deals and execute them
more effectively. This suggests that M&A is a game of skill, not chance. We
also noted that the successful growers made acquisitions that seemed to stay
closer to their core. For example, they made fewer (about half as many) international
acquisitions than other companies. They were also about 50 percent more likely
to acquire entire companies rather than business lines, brands, assets or partial
shares of a company.

Cisco Systems is one such company. Over the years, Cisco has built a repeatable
capability to leverage M&A. Its first acquisition, Crescendo Communications,
was met with skepticism when it was announced in 1993. As it turned out, however,
the move was based on a sound strategy, and Cisco’s revenue skyrocketed in the
wake of the deal. The head of Cisco’s acquisition program during the 1990s noted
that the initial Crescendo success made the company’s subsequent acquisitions

With the Crescendo deal as a foundation, Cisco embarked on a strategy of acquisition
as a growth engine. From 1994 to 2003, it executed over 80 deals, while recording
an annual growth rate of 40 percent per year and a TSR growth of 30 percent
per year. Noting the scrutiny the strategy had to endure from Cisco’s shareholders,
one analyst quipped that the company had “done it backwards in high heels with
the whole world watching.”[3],[4] How was Cisco able to defy the odds? It maintained
clarity on its objectives, built sustaining capability and stayed disciplined
in its execution. Cisco’s deals have consistently focused on acquiring technology
capabilities rather than established revenue streams or an existing customer
base. It has also limited its deals to a manageable size. Since 1994, only one
acquisition exceeded 5 percent of the company’s market capitalization at the
time of the deal, and nearly all were less than 2 percent.

While Cisco’s approach reflects a carefully laid out strategy, during the M&A
explosion of the dot-com years, some of its peers fell into the trap of pursuing
acquisitions “at any cost for any reason.” Between 1998 and 2000, for example,
one of Cisco’s major competitors invested billions of dollars in acquisitions
that proved to be failures. In the end, these acquisitions were either shut
down or sold for a fraction of their purchase price.

Is a Bad Year the Beginning of the End?

Successful growth is sometimes portrayed in the business press as the result
of strategic genius or uncanny foresight. In practice, the vast majority of
companies – even successful growers – stumble at some point. Of the companies
that outgrew their industry median over the 10-year study period, only 6 percent
did so every year of the decade. Fully 94 percent of successful growers experienced
at least one year of below-median growth; 72 percent fell below the median for
three years or more. What distinguishes successful growers is not perfection,
but the courage and conviction to recover from imperfections.

The case of the Wrigley Company provides one example of such resilience. Through
the 1990s, the company drove its growth via steady geographic expansion. But
by the late 1990s, its results were flagging.[5] In 1999, as company leadership
transitioned from one Wrigley generation to the next, the company outlined a
plan to take bold steps into new product markets through innovation and acquisition.
Like all transitions of its scope, Wrigley’s strategic shift was not entirely
seamless and, for a while, its results lagged those of its peers.[6] But by
2001, the company had restored market momentum and confidence. Though the elder
and younger Wrigleys followed markedly different strategic paths as CEO, the
company’s resilience in making changes gave the Wrigley Company the ability
to bounce back and beat its industry peers in growth and value creation over
the entire decade.

Turning Growth Into Shareholder Value

For an individual company, growth is neither risk free, nor a guarantee of
value creation. For the S&P 1200, several companies with above-median growth
delivered below-median value creation. These “unsuccessful growers” saw above-median
revenue increases while delivering belowmedian, or even negative, shareholder

However, on average, growth is strongly correlated with higher value. We found
that the slowest growth quartile grew its TSR by under 1 percent a year over
the decade. At the other end of the spectrum, the companies in the highest-growth
quartile delivered more than 16 percent TSR growth annually (see Figure 3).

Our research showed that roughly one-third of companies with CAGR below the
median rate sustained above-median growth in shareholder value, while more than
two-thirds with above-median CAGR were able to sustain that high level of shareholder
value growth. A similar growth study conducted in 1998 found the same relationship
– clearly the relationship between growth and value creation is a firm and stable
one. The implications are clear – superior growth doubles the odds of superior
shareholder value creation. Winners understand that over the long haul, growth
– rather than cost cutting – is the lower-risk path. Indeed, the greatest risk
is not to bet on growth enough.

Our conclusions show that attaining success requires excellence in several
key disciplines, similar to competing in a triathlon, where excelling in a single
event is not enough. Utilities that wish to embark on a new growth agenda must
begin to ensure they can excel in every one of the following areas of growth

Course: The identification and selection of opportunities, the development
of a winning model and the creation and funding of initiatives sufficient for
sustaining growth. The key questions are: Where is the industry headed? Where
do we play in this future? How will we win and keep winning?

Capability: The activities, skills and assets that support the operational
model and enable the successful execution of the growth strategy. Here, executives
must ask: What do we need to win?

Conviction: The creation of organizational belief, momentum and resilience
in moving toward growth goals. The key question here is: How will we generate
action, maintain momentum and bounce back from failure?

While U.S. athletes Lance Armstrong (six-time winner of the Tour de France),
Michael Phelps (winner of 6 gold medals in swimming at the 2004 Athens Olympics)
and Allyson Felix (silver medalist in the 200-meter sprint at the 2004 Athens
Olympics) are among the best at their individual sport, none have the training
in the other sports to excel in a triathlon the way they do in their specialties.
The message to executives here is that strong and sustained growth is within
your grasp – but you must excel in each of the three areas mentioned above.
Read more on the importance of the 3C’s on page 11.


  1. “Your Turn: The Global CEO Study 2004,” IBM Business Consulting Services.
  2. Paulson, Ed. Inside Cisco: The Real Story of Sustained M&A Growth. John
    Wiley and Sons. 2001.
  3. Cisco Systems. “Acquisition Summary.”
  4. Paulson, Ed., op cit.
  5. “Wrigley Gives Rivals News to Chew On,” Financial Times (U.K.), Oct. 16,
  6. “Wrigley Rebounds with $70B for 3 Brands,” Brandweek, April 21, 2003.