What are the financial metrics that drive shareholder value?
The result of this multi-year effort is a product that we refer to as the Winners Analysis. It provides a diagnostic framework to understand historical performance as well as a blueprint for future corporate strategy development and execution. The main goal of publicly traded companies is to create value for shareholders in the form of share price appreciation and dividends. According to financial theory, shareholder value is driven by investor expectations of future financial performance. Although share prices tend to change with earnings announcements and one-off events in the short term, we find that they are primarily driven by the net present value of investor expectations of long-term financial performance, particularly in mature exchanges like those found in North America and Europe.
Who wins in the packaging industry?
In this study, we looked at 60 packaging processors and converters headquartered in North America and Europe. We plotted the two dimensions described above: growth and risk-adjusted profitability for the past five years, creating the Winners Matrix.
Half of the Winners from the most recent 5-year timeframe were also Winners from the previous 5-year timeframe, and only 2 of the 18 Winners were previously Underperformers. This consistency suggests that the Winners did not simply get lucky over the past 5 years. They are companies that have been executing winning strategies for years, leading to long-term success. Knowing that certain companies perform better than others, by itself, is not very useful.
Four common denominators for the packaging industry Winners
- Winners are industry leaders
Winners own businesses that are leaders in their fields of play: they can set the agenda across their entire portfolio of businesses. In each of them, they possess a true competitive advantage enabling them to define the price-setting mechanism, and often set pricing in their chosen market segments of participation.
Winners drive business leadership by combining three elements. Firstly, they possess a comprehensive understanding of the core competencies in each business. Secondly, they develop a unique business model that leverages these competencies to both create value for their customers and capture and defend this value for them. Thirdly, they focus their participation in customer segments in which this business model is advantaged, with the total size of the customer segments large enough to allow for business unit scale, i.e. the business is viable even by focusing exclusively on these segments.
For Winners, business leadership manifests itself in the financial performance of their reporting segments, which achieve leading market shares or the highest level of risk-adjusted profitability in the broadly defined markets for the products that they sell.
- Winners have strategic coherence
Winners articulate a clear vision that describes what they want to be, supported by a distinct, overarching value proposition that captures what they stand for as a company. Once a company has defined its strategic intent, it then needs to focus on building a portfolio of businesses that matches this intent. We believe a disproportionate amount of attention is given to the synergy potential of businesses within a portfolio rather than the coherence of these businesses to the strategic intent. In our view, synergies help maximize the value of a strategically coherent portfolio or enable a buyer to ascribe value to an acquisition target but should not be paramount to the strategic rationale behind a combination or a divestiture. Winners tend to promptly divest businesses that are neither coherent nor have such a cash generation or efficiency role to play in the transition towards the strategic end state.
- Winners have financial scale
500 and the Dow Jones Industrial Average in the US, the FTSE 100 in the UK, or the German DAX. Inclusion in such indices generally enables companies to achieve greater relevance to investors: it projects trust and implies that the company’s stock will be actively traded by investors trying to replicate or exceed the performance of the index.
- Winners have a proven ability to execute
Winners deliver superior results by developing and implementing strategies to drive business leadership, strategic coherence, and financial scale. We believe there are four key facets to execution: i) clear communication of the strategic intent, ii) disciplined approach to achieve a competitive advantage, iii) active portfolio management, and iv) systematic standardization of functions and processes. More on the topic of adaptive operations can be read here.