Wall Street and the Growth Challenge1

The lessons of Wall Street were harsh but very clear. Investors rewarded companies with
a track record of delivering earnings and revenue growth reliably and predictably in both up and
down economic cycles. That growth was rewarded by consistently superior total shareholder
returns (TSR).

Investors looked for both capital-efficient and profitable growth that was sustainable over
time. Return on investment (ROI) and revenue growth were key measures, particularly in the
chemical industry. ROI had two elements, profit margin and velocity:

ROI = (profit margin) (velocity)

ROI = (return on sales) (asset turnover)
ROI = (income/sales) (sales/assets)

Marrying an above-average profit margin or return on sales with good asset turnover
resulted in capital-efficient growth where ROI exceeded the cost of capital. When capital-
efficient growth occurred over time, a company’s stock price-to-earnings ratio (P/E) and total
shareholder return outperformed competitors. The critical P/E components were:

Figure 5. Critical Price-to-Earnings Ratio Components.

P/E Ratio Components

Top-line Gross Velocity Efficient Quality

revenue margin Asset turnover capital leadership
growth growth Working capital ratio investment

Successful companies found ways to grow regardless of how tough their markets were.
Again and again, companies had shown that there were no mature markets. There were not good
and bad industries, only good and bad companies. In the 1990s, the sport utility vehicle market
sparked fast growth for the auto companies that capitalized on it. Home Depot and Lowe’s
turned the do-it-yourself building products market into a fast-growth market. There were always
pockets of growth to be discovered, because customer needs were changing and evolving.

Growth was a mind-set for these successful companies. They believed that no markets
were fully penetrated. They used three approaches to find new growth opportunities:
1
Much of this content was extracted from Ram Charan and Noel M. Tichy, Every Business is a Growth
Business (New York: Times Books/Random House, 1998).
 1. Change the market definition: GE’s “10×” rule redefined markets until GE had less than
10% of the redefined market. This led GE into services for jet engines, greatly expanding
the market beyond the product.
2. Find or create growing market segments: Staples, Office Depot, and OfficeMax created
the warehouse office products market previously dominated by 6,000 local office
products stores.
3. Map your markets: A simple 2 × 2 matrix can define new, growing market segments to
enter and those to de-emphasize:

New
Market
Needs Existing

Existing New

Customers

Successful companies were particularly adept at building new competencies to exploit

emerging market opportunities. They focused on what was happening in their customer’s
markets, how needs were changing, what was causing these changes, what the resulting
opportunities were, and how they could uniquely fill those needs. Growth was hard-wired into
their culture. There were rewards and strong support for innovation as they knew that great ideas
came from all levels of the organization. They had successfully evolved their culture from a
focus on downsizing to a focus on growth. Growth occurred by growing revenue, continuing
productivity improvement, restructuring as needed, and intelligent reinvestment of capital.