18.09.2002 – 15:34

Roland Berger Strategy Consultants

Roland Berger Strategy Consultants: International study shows seven strategic priorities for "outperformers" to boost growth, profit, and company value

Munich (ots)

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When the economy is in poor shape, forward-looking
corporate strategies naturally have to apply selected, intelligent
cost-cutting measures. However, a global study by Roland Berger
Strategy Consultants found that it is also important to focus on
creative growth. Why? Because only strong corporate growth goes hand
in hand with sustainable, above-average profit and value growth. The
study examined 1'700 companies worldwide. Of these, 441 form the top
tier, the "outperformers", who increased their profit and value at
above-average rates. During the period analyzed (1996-2001), this
group saw sales leap by an average of 33.8 percent p.a., compared to
the average of just 11.8 percent annual sales growth among the entire
group of companies surveyed. Pre-tax profits for the leading group
rose by 37.3 percent annually; the corresponding figure for the
entire group of 1'700 companies was a mere 8.5 percent. At 23.6
percent p.a., the total shareholder return (the increase in stock
price plus dividends) likewise easily outstripped the overall group
average of just 17.3 percent p.a.

According to a statement made today by Roland Berger, Chairman and
Global Managing Partner of Roland Berger Strategy Consultants, "Seven
strategic priorities - which can be mixed and matched depending on
the industry and the competitive environment - are of critical
importance to above-average growth in sales, profit, and company
value."

In its study, the international strategy consultancy analyzed 900
top-ranking European companies, the S&P 500, and the Nikkei 300.

This group of top-tier companies had outstanding results in other
performance indicators, as well, thus further distinguishing itself
from the other companies. The number of new jobs created each year
increased annually by an average of 26.9 percent, for example, while
other firms managed just 2.0 percent. The productivity of the top
group rose by an average of 13.5 percent per year, compared to 3.3
percent among the other firms surveyed. All stakeholders profit from
the significantly better performance of leading companies: customers,
employees, investors, and society as a whole - through more taxes,
investment, and additional jobs.

Seven strategic priorities for outperformers

"It takes rule-breaking growth strategies to create sustainable
increases in a company's operating result and value. Top companies
understand this," says Roland Berger. "We proved that their excellent
growth in sales, profit, and company value was based on seven
strategic priorities that can be fine-tuned according to the specific
industry and competitive environment."

1. Innovation and Branding

Innovation is the most important growth strategy, as it keeps
competitors at a distance. Companies need to master the "3S process".
The innovation phase should be as short as possible (speed), gain
high market share through "first mover effects", which then make it
possible to achieve low unit costs and high margins through economies
of scale.

Innovation leadership is based on both new products and new
services. The Roland Berger analysis shows that focusing innovation
projects and budgets on promising solutions is the key to coming up
with the best idea in the context of global competition.

Innovation should also be secured through consistent branding.
Only good ideas and strong brands create lasting competitive barriers
and lead to sustained increases in earnings and value.

Nokia is a particularly successful example of top innovation
performance. A strong customer focus in products and services helped
the company become the market leader. Intel secured its long-term
growth by driving faster innovations in the chip market. German
premium automotive manufacturers succeeded in securing their leading
position in the world through short innovation cycles combined with
consistent branding.

2. Forcing new rules on others

"Introducing a new game" that competitors join later in order not
to be crowded out of the market; this is a strategy many
outperformers use effectively. Individual companies use these tactics
to drive the market forward by interpreting existing strategic rules
in a new way. The Internet, for example, gave rise to many innovative
business models. However, successful examples can also be found in
more traditional industries, such as no-frills airlines or innovative
retail models like discounters or specialist retail chains.

This strategy can significantly boost growth and company value -
if the "new game" can establish itself on the market and its inventor
can reap and secure the first-mover advantage.

One such successful example is the VHS video standard introduced
by JVC in the late 70s, which asserted itself in the market thanks to
a smart licensing strategy and its user-friendly technology. Dell
forced the international market for PC hardware to buy into its
innovative business model: customized built-to-order PCs with very
short delivery times at competitive prices. And, to cite a more
recent example, Ryanair: much like its US counterpart South West
Airlines, the low-cost carrier is beginning to aggressively change
the European market with its cheap offers.

3. Globalization

Globalization offers companies the opportunity to participate in
the world market, which offers much faster growth than national GDPs:
the sum of all global GDPs has risen some 60 percent since 1985,
exports tripled, and foreign investment even increased eightfold.
Players in this market face excellent prospects for above-average
growth in revenues, profit, and shareholder value.

Companies that actively pursue globalization retain their
customers by following them when they expand their operations to
other countries, and win new customers in volume and growth markets.
They achieve unit cost advantages by using the global differences
between factor and locational costs, and improve their logistics
positions. These companies also gain access to international know-how
and are thus able to achieve innovative leads. Business formats are
known to change when demand and competition move from a national
level to the global stage.

Examples of companies that have successfully boosted growth
through globalization are Ahold and Carrefour, the undisputed leaders
in European retail, or Citigroup, the only retail bank that is
successful on a global scale. These companies show how strategies for
overcoming stagnating markets can be implemented with entrepreneurial
spirit. Pursuing a global expansion strategy devised for long-term
growth has made Vodafone the only truly global mobile operator.

4. A focused portfolio

Successful companies restructure and focus their portfolios to
become global market leaders in target business segments. Non-core
activities that do not offer the potential for reaching a leading
position in the market are sold.

Only market leadership enables companies to achieve superior cost
positions (economies of scale and scope) and realize optimum margins
for investment and profit growth. From a leadership position, it is
also possible to raise barriers to effectively fend off the
competition. In the last decade, a number of companies in the US and
Europe have shown how a cleverly focused portfolio can help overcome
growth barriers and create new value.

RWE and e.on have consistently focused their portfolio on the
international multi-utility business, while TUI is successfully
concentrating on the tourism and logistics growth sectors.

5. Reducing vertical integration through outsourcing

Reducing vertical integration by focusing on core competencies
creates, on the one hand, advantages in terms of specialization and
experience, and on the other hand, superior unit cost positions and
profit margins. Outsourcing - when coupled with organizational or
virtual integration of all partners in the value chain - maximizes
available capital and reduces unit costs. This frees up additional
cashflow for innovation and growth.

"Outperformers" have recognized that the previously common
practice of comprehensively integrating all stages of a company's
value chain is not a path to growth. The future belongs to
specialized product and service suppliers. This will fundamentally
change the face of entire sectors, such as financial services
providers. Roland Berger forecasts a reduction of vertical
integration at banks in the next 10 years, from its current 80
percent down to 30 percent.

As an outsourcing partner in chip production for hardware
manufacturers, Flextronics managed to increase its sales 100-fold
within 7 years. Porsche has the least vertical integration of all
automotive manufacturers, and thus achieved maximum profit.

6. Market presence and consolidation through M&As

Mergers and acquisitions ensure greater market shares, presence in
new, usually global markets, and industry consolidation. This makes
them major value drivers. Generally speaking, market consolidation is
the basis for reducing capacity and, through better capacity
utilization, optimizing costs for products and services. Those who
gain leadership positions in this area achieve superior growth rates
in sales, profit, and shareholder value.

Total Fina Elf's successful M&A earned it the unique standing of
being the only continental European company in the
Anglo-Saxon-dominated top tier of oil producers. Nestlé, too, made
its way to a successful global position through M&As.

7. Networks, partnerships, and virtualization

Product and service-based networks and partnerships - with plenty
of opportunities for virtual integration at a global level as a
result of technological advances - enable outperformers to maximize
available capital, access global expertise, and thus create
additional growth resources. A global network allows all participants
to benefit from a larger customer base.

In addition to creating partnerships in research and development
(co-inventing) or along the value chain (advantages through better
specialization), networks can also be used to bundle complementary
and attractive offers. This boosts the partners' marketing and
earnings power - as the Star Alliance clearly shows.

Puma offers a prime example of how to take optimum advantage of
local competencies in a global, virtual network. SAP has created a
unique network of services surrounding its software applications,
thus safeguarding its position as market leader.

Companies set themselves apart from the global average only when
they take targeted action to improve their growth position. Even in
today's strained economic situation, it is advisable to rigorously
pursue a dual strategy of intelligently cutting costs and focusing on
creative growth. One of the key findings of the study was that merely
cutting costs can boost profit and company value in the short term
only. It takes rule-breaking growth strategies to generate
sustainable increases in profit and value - even in times when the
economy is weak.

"One rule for strategies, structures, and operations applies to
all outperformers in all industries," says Roland Berger. "A
company's ability to adapt must always be greater than the speed of
changes in its environment. That is the basis of strategic and
operational excellence and ensures the company's ability to survive
the future."

Contact:

Ralph Driever
Roland Berger Strategy Consultants
Tel. +49/89/923'083'18
Fax +49/89/923'085'99
mailto:ralph_driever@de.rolandberger.com

Susanne Horstmann
Roland Berger Strategy Consultants
Tel. +49/89/923'083'49
Fax: +49/89/923'085'99
mailto:susanne_horstmann@de.rolandberger.com