Why do we believe that long-term profitable growth is important to business leaders?
Board agendas have been dominated over the past few years by restructuring, cost-reduction, risk management and governance, but the ultimate challenge will always be the achievement of long-term profitable growth. This challenge unites the interests of committed shareholders, talented employees, valued customers and the best business partners.
PA believes that many business leaders are turning their attention back to growth as a greater priority. A key conclusion from our survey was that 97% of respondents agreed that long-term profitable growth is their overarching objective. Our report aims to provide practical and thought-provoking guidance for senior management.
What do we mean by long-term profitable growth?
By 'profitable', we mean economically profitable, whereby a capital charge has been applied to after-tax profit. Many of our respondents use discounted free cash flow as a measure of profitability, a method that also takes account of the capital charge. We are comfortable with any approach to decision-making that fully allocates imputed shareholders' costs to an investment return. For shorthand, we use the generic term 'value-based'.
We do not wish to be too prescriptive about 'long-term' either, but we believe that the time period, over which most of the return is expected, should be shorter than the average asset depreciation period for a given industry and should account conservatively not only for the time value of money but also for investor impatience.
How have we sourced the data for this report?
PA’s conclusions are drawn from four key sources. First, we investigated the analysis and perspectives of academics, business gurus, consultants and colleagues. Second, we carried out our international long-term profitable growth survey, in which we tested 64 assertions about growth and profit, grouped according to principles, alignment, and outcomes. We completed the survey in July 2003, by which time we had received over 150 responses internationally from CEOs, MDs, strategy directors and other executive directors.
Third, we analyzed the survey responses against individual company business performance, formed early hypotheses and tested them with some of the respondents. Fourth, we verified the survey analysis and respondent feedback against our own collective and extensive client experience, drawn from our work in a variety of industries and in a number of countries over the last decade.
