Capital Markets Turbulence Puts Premium on Corporate Strategy

During the past five years, companies have enjoyed robust average annual returns in global capital markets, according to a new report by The Boston Consulting Group (BCG). But in order to continue that performance in today's much tougher economic environment, they will need to redesign their corporate-strategy process to focus more explicitly on value creation.

This conclusion is the core finding of Missing Link: Focusing Corporate Strategy on Value Creation, the tenth annual report in BCG's Value Creators series. The series, which began in 1999, shares BCG's insights about value creation with the firm's clients and the broader corporate community.

Starting from a database of more than 5,000 global companies, this year's report presents detailed analyses of total shareholder return (TSR) at 644 companies across 14 major industries for the five-year period from 2003 through 2007. It also identifies the top ten value creators worldwide and in each of the industries studied. Among the key findings:

-- The average annual return for the 2003-2007 period was an extremely healthy 17.1 percent. This return reflects the strong rebound of the global economy after the bursting of the late-1990s financial bubble and the 2001 recession. Given the recent downturn in global capital markets, however, future TSR is unlikely to be so robust. Most of the top ten companies in each industry had negative -- and often substantially negative -- TSR for the first half of 2008.

-- The arrival of companies from rapidly developing economies (RDEs) on the global value-creation stage has been dramatic in recent years. Fully half of the companies in the global top ten come from either China or India. By contrast, only one is from the United States. And the sole European representative, the global steel company ArcelorMittal (based in the Netherlands), is the product of India steelmaker Mittal's 2006 acquisition of the European steel company Arcelor. RDE-based companies are present in many of the individual industry top-ten lists as well.

-- The most successful industries were traditional old-economy sectors such as mining and materials, machinery and construction, and chemicals, in large part reflecting the recent boom in commodity prices. The worst-performing industries were previously highflying sectors such as media and publishing, and pharmaceuticals and medical technology, which are suffering from severe declines in company valuation multiples.

-- In every industry, however, the top ten companies not only substantially outperformed their industry average but also beat the overall sample average -- by at least eight percentage points of TSR.

"The lesson for executives is clear," said coauthor Frank Plaschke, a partner in BCG's Munich office. "Coming from a sector with below-average market performance is no excuse. No matter how bad an industry's average performance is relative to other sectors and to the market as a whole, it is still possible for companies in that industry to deliver superior shareholder returns."

Redefining Corporate Strategy

The key to generating superior shareholder value in the future, according to the report, is to repair what it describes as a "pervasive disconnect" between corporate strategy and value creation at many companies.
"Corporate strategy and value creation exist in a symbiotic relationship," said coauthor Daniel Stelter, a senior partner in BCG's Berlin office and global leader of the firm's Corporate Development practice. "And yet the necessary connection between the two is a critical missing link in many companies' corporate-strategy process. Establishing that link doesn't necessarily mean privileging shareholder value creation over all other strategic goals -- let alone always maximizing shareholder value in the short term. But it does mean understanding how a company's strategy actually generates value and how capital markets monetize it."

The report introduces a broader and more comprehensive approach to corporate strategy than companies typically employ today. In particular, it supplements the traditional focus on business strategy with a new strategic focus on a company's financial policies and its investors' priorities and goals.

w"Business strategy, financial strategy, and investor strategy ought to be three equal parts of a company's corporate strategy and should be addressed in a holistic fashion," said coauthor Eric Olsen, a senior partner in BCG's Chicago office. "An integrated approach is necessary because decisions in each of these areas can have a positive -- or negative -- impact on the others."