In praise of organic growth vs. financial engineering

Research shows that mergers & acquisitions don’t produce the expected financial bonanza. But “organic growth” does.

The Batten Institute, part of the University of Virginia’s Darden School of Business, has released the latest results of a decade-long study of corporate earnings, establishing a correlation between organic growth and outperforming stocks. Using an Organic Growth Index (OGI), Darden professor Ed Hess compiled a list of “Organic Growth All-Stars” for the period 2003-2006. The conclusions:

In addition to consistent growth in underlying earnings, as measured by the OGI, the all-star companies’ share prices have outperformed the S&P 500 by a factor of 10 over the past 10 years.

Actual 10-year returns (1996-2006) for the OGI All-Stars were over 1,368% vs. approximately 130% for the S&P 500 Index and 144% for the Dow Jones Industrial Average.

“These companies have shown that they can grow in good times and bad. It’s not about the economic cycle. It’s about the business model,” Hess says. “Organic growth is growth the old-fashioned way: more customers, more products, better operating efficiencies,” he says. Not financial engineering or manipulation.

Hess identifies four key attributes of strong organic-growth companies:

  • Simple, focused business strategies, implemented by managers who are are “execution champions”;
  • Top management is home-grown and made up of “humble, passionate operators”;
  • A highly-engaged workforce characterized by a strong degree of loyalty and productivity; and
  • A “seamless, self-reinforcing internal growth system”

The study — and the list of 27 All-Stars — is available at this link. For some reason, the all-star list includes a couple of “dollar stores,” a couple of casual restaurant chains, a couple of big-box retailers, and the maker of Spam.

Top HR challenges (hint: they include acquiring, retaining and grooming key talent)

Ranked list of the top HR challenges (in North American business)

  1. Acquiring key talent/lack of available talent
  2. Building leadership capability
  3. Driving cultural and behavioral change in the organization
  4. Retaining key talent
  5. Increasing line manager capability to handle people-management responsibilities
  6. Succession planning
  7. Constraints on headcount (“making do with less”)
  8. Increasing workforce productivity
  9. Lack of consensus about the organization’s strategy/direction
  10. Encouraging organizational innovation
  11. Resourcing and managing HR issues in “new geographies” for the company
  12. Managing human capital during and after an acquisition or merger
  13. Implementing people changes resulting from changes due to operational performance
  14. Workforce planning
  15. Measuring the contribution of human capital to business performance
  16. Reducing overall human capital costs
  17. Coping with an aging workforce

———
Base: Survey of 154 senior HR professionals in the U.S. and Canada
Source: “The State of HR Transformation,” North America, Mercer Human Resource Consulting, 2006
Discovered via Workforce Management (10 September 2007)

Education > innovation > productivity > higher living standards

Reading the economic news can be confusing. Is the economy in good shape or bad? One way to cut through the clutter is to focus on productivity — the goods and services Americans produce for each hour of work. Productivity growth is the key to improving the standard of living (e.g., higher wages for workers). But Wall Street Journal columnist David Wessel sees troubling signs. He cites evidence that productivity grew at a disappointing 1.5% annual rate in the past three years.

These small differences add up over time: At 1.5%, average living standards double in 47 years, nearly two generations; at 2.5%, they double in 28 years, closer to one generation.

Is this just a lull, or is it the end of the technology-fueled productivity boom of the late 1990s and early 2000s? The pessimistic view is that productivity growth is unlikely to exceed 2% in the next few years. Wessel concludes:

But the outlook for productivity ultimately depends on whether the U.S. keeps innovating, whether it keeps applying those innovations in new ways and in industries (think health care and education) that have yet to fully exploit technology, whether less-productive organizations catch up or are shoved aside by more-productive ones, and whether American politicians and the public understand the importance of repairing the education system to better equip workers.

In that light, the future looks a bit brighter than the recent numbers imply.

Looking at this analysis in a different way, we could say that: Education begets innovation which begets productivity growth which begets a higher standard of living.

Policies needed to soften the blows of globalization

The natives, literally, are restless. Great in theory, globalization isn’t turning out to be all it’s cracked up to be, for those who are losing their jobs. The Organisation for Economic Co-operation and Development (OECD) recently acknowledged growing unease about globalization in its annual labor report and worried about a popular backlash, according to press reports.

Now, the businesses that benefit most from free trade are acknowledging the problem, too. A paper commissioned by the Financial Services Forum sets out several policy options “aimed at cushioning the blow from job losses and other dislocations caused by global trade.” The thinking is that, by helping those on the losing end of globalization, businesses can diffuse growing protectionist sentiment, according to The Wall Street Journal (26 June 2007).

The Financial Services Forum report concludes that:

The aggregate gains from global engagement, large though they are, are not evenly shared and do not directly benefit every worker, firm, and community.

  • From the mid-to-late 1970s to the mid-to-late 1990s, the real and relative earnings of less-skilled Americans was poor relative to both economy-wide average productivity gains and also the earnings of their more-skilled counterparts.
  • Since around 2000, the large majority of American workers has seen poor income growth.
  • Global engagement fosters high productivity in American industries, but typically with substantial churn at the level of individual firms, with pervasive shut-down of inefficient plants and even entire companies.
  • Because economic activity tends to be concentrated across American communities, this uneven distribution of globalization’s pressures across workers and firms also means uneven pressures across communities as well.

The bottom line is that today, many American workers feel anxious — about change and about their paychecks. Their concerns are real, widespread, and legitimate.

POLICIES
The typical policy response — retraining — isn’t enough because the relief isn’t fast enough. The report’s new policy ideas include:

  • insuring communities against “sudden economic dislocation” caused by a factory closing
  • merging all worker-assistance programs (e.g., unemployment insurance and trade-adjustment assistance) into one
  • eliminating the payroll tax on incomes less than $32,140

SURVEY
A new survey conducted by the Financial Services Forum and RT Strategies shows that public attitudes towards globalization have dimmed slightly since last year. The most recent poll shows that 49% have a favorable view of globalization, compared with 54% in May of 2006.

However, the survey also found that 67% would have a more favorable view of globalization if policymakers “put in place programs specifically designed to better equip American workers, communities, and firms to participate in, and benefit from, the 21st century global economy, and to help those negatively affected by globalization find new jobs.”