What is Value?
Issue #45 December 16, 2019
Value can be defined in several ways and in today’s markets (financial, professional, enterprise, and societal) it seems like where we place “value” has recently shifted in unsettling ways to an unsustainable path. As we approach a new year, I think it’s important that investors, business leaders, and entrepreneurs look for value that can be sustained as both an offensive and defensive hedge against the inevitable correction whenever it may come.
VALUE \ (ˈval-(ˌ)yü) : relative worth, utility, or importance
Value in the investment and financial markets can be categorized as the current agreed market price (buyers and sellers) of an asset, but that is merely the perception of a moment in time and speaks nothing to the act of what creates value.
What creates value?
The Gartner team led by Johanna Robinson and Dennis Gannon have published their recent research findings looking at the Global S&P 1200 companies between 2010-2017. They found some very insightful stuff when it comes to creating sustainable value over time that it boils down to an ability to drive what they call Efficient Growth 2.0 and that only roughly 5% (61) of those companies across all industries and benchmarked against direct competitors (control group) utilized the three-pronged approach necessary to create enduring value.
I have summarized what these three key components to value-creation are and the associated questions you might ask yourself when reviewing investment opportunities or financial reports in the coming year before allocating your hard-earned capital.
Screenshot Source: https://www.gartner.com/en/insights/efficient-growth/capital-allocation
Gartner’s three criteria for Efficient Growth
1. Long-term revenue growth
When looking at the 61 alpha companies that outperformed all peers by a 7.02% premium in value a consistent ability to drive top-line revenue growth was inherent over the 2010-2017 lookback period. However, it is important to note that a nuance found that it was through a focus on the scale (not scope) of their core product offerings was a major driver of the right kind of top-line revenue (as it related to the other two critical criteria below.) In shorthand, the research found that companies that focused on driving operational efficiencies around the core products/solutions and in core geographic/demographic markets (versus trying to grow through additional geographies or skus) achieved a 20% delta in performance and value creation over their peer set.
2. Long-term cost reduction
Sustainable value creation comes from not just driving the top-line growth consistently over time, but also from mitigating the unrelenting force of increasing cost structures that have been the plague of all companies in the last decade. We can blame QE1-3 or the most recent “not QE4” liquidity (money printing) efforts at the Federal Reserve and other Central banks, but the reality is that despite record-low borrowing rates in the last decade, the inflationary impacts on fixed and variable costs have continued to erode profits in the bulk of growing organizations that have focused primarily on the top-line growth. The Efficient Growth all-star companies and their financial leaders in Gartner’s research specifically attacked the variable cost side of the equation (which is atypical) to find the sustainable value creation that the other 95% could not.
3. Simultaneous growth & margin expansion
The 61 companies that stood head and shoulders above the other 1159 studied between 2010-2017 were able to use a focus on operational scale (vs scope) to drive a reduction in their costs-of-goods-sold (variable costs) while facing these same rising cost headwinds, and this allowed them to out-earn their peers by over 9% (first slide) on each new dollar in revenue growth and were able to generate a 10.9% premium on their operational cost productivity (second slide).
We live in noisy times with the stock-market seemingly on unprecedented central bank open market operations and corporate debt levels on steroids and it may seem harder than ever to find “value” that will be there once the music stops on this 12-year (and still going) bull-market-rave. I believe that Gartner has once again delivered a sensible framework backed by research that investors and company leaders can center themselves around to find the focus that their time, effort, and capital deserves and will deliver the most sustainable ROI in the coming decade. Happy Monday. ~Chris
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