As tight expense control runs out of steam as a means of generating earnings, financial services executives are wondering how best to achieve growth. To help provide an answer, we set out to identify the growth stars of the last decade in terms of revenue, net income, and value creation, and to discover how they achieved their success.

The results of the analysis are surprising (Exhibit 1). Many of the companies commonly regarded as high performers do not feature on the winners’ list. Several generated substantial income growth and shareholder returns (for example, through superior expense management) but achieved only low revenue growth. Others achieved substantial growth, often through acquisition, but failed to create shareholder value.

Interestingly, no big banks were steady winners, a fact that highlights the problems that large institutions—especially banks—face in generating the hundreds of millions of dollars in incremental revenue they need to reach winning growth rates. Even so, the greatest difference in revenue performance between winners and the industry as a whole between 1989 and 1994 occurred in banking, which generated the lowest overall revenue growth (Exhibit 2).

Winners in insurance, the industry with the lowest income growth, generated the largest income growth margin over their industry peers. Nonbank winners achieved the greatest shareholder growth margin over their industry: these companies generated shareholder returns of more than twice the average, exceeding 50 percent for the five years to 1994.

Winning strategies

The winners employed four distinct strategies, distinguished by the extent to which they maintained or expanded their customer reach, product array, and delivery options. These companies:

• built and employed superior skills and execution in their core business, for example in risk management or sales productivity
• took traditional products and distribution methods to customers in new geographic locations
• introduced new products or delivery channels
• sought growth on several fronts, for example by building new product businesses and entering new geographic regions.

1. Mining the core franchise

Companies that concentrate their efforts on traditional customer segments or geographies and sell through existing delivery channels rely more on superior execution than on the creation of innovative new value propositions (Exhibit 3).

This strategy has been the most efficient means of generating shareholder value in recent years: from 1989 to 1994, winning companies that pursued it generated shareholder returns one-third higher than those of all other winners, yet saw top-line growth of only about two-thirds that achieved by the others.

Core franchise management skills are likely to remain important in the current competitive environment as new approaches such as customer information marketing gain prominence. It is less certain, however, that they will fuel adequate growth in industries where overall market growth is slow and competition intensifying.

Progressive Corporation, a property and casualty insurer specializing in nonstandard (high-risk) private passenger automobile coverage, is an example of a company that has managed its core franchise with great success. In the five years to 1994, the company achieved annual revenue growth of 23 percent, annual income growth of 35 percent, and annual shareholder returns of 22 percent. Its traditional target customer segment accounts for 95 percent of current net premiums, its product line is predominantly auto insurance, and 90 percent of premiums stem from independent agents, the company’s traditional delivery channel.

Many factors account for Progressive’s success in its core franchise. Most important, however, is its ability to identify better risks from among a seemingly homogenous pool of poor risk and price accordingly, enabling it to offer a price to every licensed driver. The company has also maintained competitive pricing by managing costs aggressively, fostered an aggressive sales culture among its independent agents, and instilled an intense performance management system.

Progressive is now seeking to grow by winning new customers and establishing new delivery channels. It has recently entered the preferred and standard auto insurance market, where its high-resolution risk disaggregation skills are likely to make it a powerful player. And though committed to agent delivery, the company is also experimenting with two new channels: its Community Marketing system uses consumer advertising, telephone quoting, and fulfillment via phone or mail to sell insurance, while its Express Quote service provides rapid pricing and other information on both its own and competing products via the telephone.

2. Expanding the product array

Winning companies that pursued this strategy generated average revenue and shareholder growth, but above-average income growth (Exhibit 4).

This approach has proved especially useful to small and medium-sized institutions. However, for large companies it is much more difficult: companies the size of BancOne, Allstate, or Merrill Lynch would have to launch a new product the size of Charles Schwab every couple of years to achieve winning rates of growth.

Green Tree Financial Corporation, based in St Paul, Minnesota, began business 20 years ago exclusively in manufactured home finance. But by capitalizing on its customer base and institutional credit skills to sell new products, and on its financial skills to create new funding mechanisms, the company has achieved substantial growth and extraordinary increases in market valuation.

Green Tree now provides direct and indirect financing for manufactured housing and home improvement, consumer finance, insurance, and commercial finance, and also services manufactured home loans originated by other players. The company’s innovative funding strategy makes it a low-cost player. Between 1989 and 1994, it generated annual revenue growth of 20 percent, net annual income growth of 23 percent, and annual shareholder returns of 64 percent. Over 30 percent of revenue growth stemmed from home improvement and other consumer finance.

3. Building new delivery channels

New delivery channels designed to meet changing customer needs and improve economics are critical for growth, typically improving both revenues and cost performance (Exhibit 5).

Charles Schwab, the largest US discount broker, has been among the industry’s leaders in developing new channels to deliver its products. In the five years to 1994, the company generated annual growth of 17 percent in revenue and 40 percent in net income. It achieved this growth primarily by serving self-directed, low-assistance individual investors via remote channels—and by serving these customers efficiently: in recent years its expense base has grown at about one-third of the pace of asset growth.

Schwab’s two automated delivery channels—telephone and PC—handle over half of all customer transactions. However, the company believes that most investors want both high-tech and high-touch service. Therefore, in addition to sharpening its remote delivery capabilities (for example, using faxes and beepers to alert investors to market changes), it is aggressively adding branch locations.

Through Schwab Link, it is also attracting entirely different customers who want independent advice on mutual fund investments. Schwab Link is a network of independent financial advisers who can use Schwab’s OneSource mutual fund product and take advantage of the company’s administrative automation to serve their customers. Mutual fund accounts linked to the company through OneSource represent over $33 billion in assets.

Attractive though new channels can be, the transition from current channels will not be easy. Banks wishing to introduce automated banking facilities, for example, need to deal with the cost legacy of existing bricks and mortar and to decide how long they will overlap physical and non-physical delivery (and thus incur redundant costs). Securities firms and insurers also have the opportunity to differentiate their delivery and improve the economics of underperforming product lines and customer segments, although they could be held hostage to existing salesforces and agency networks.

Of all personal financial services providers, nonbanks like Schwab may be the best positioned to take advantage of new delivery methods, being largely unencumbered by expensive existing channels.

4. Multiple-front expansion

Winners that employed this strategy generated the highest growth in revenue, income, and shareholder value (Exhibit 6). But although this is probably the most powerful approach, it is also the most complex and difficult. Painfully few players, particularly among incumbents, have achieved winning success even on one front. To move from the current approach to try and grow on several fronts without destroying value is a tall order.

Norwest Corporation, a bank holding company with its headquarters in Minneapolis, serves as an example of a company that has built superior skills in a core business, then used them to launch new products and acquire new customers, creating high-return revenue growth.

Norwest is the thirteenth largest bank holding company in the United States, with $59 billion in assets. In the five years to 1994, it generated annual growth of 9 percent in revenue, 28 percent in net income, and 25 percent in shareholder returns.

Its success in its core franchise stems in part from high sales productivity. But Norwest has also expanded geographically to reach new customers. Since 1989, it has extended its commercial banking activities from 10 to 15 states, and in 1994 it bought Island Finance from ITT Financial, giving it 82 outlets in the Caribbean and Central America.

The company has generated a substantial share of its growth through specialized product businesses. Norwest Financial now contributes over a quarter and Norwest Mortgage some 10 percent of total net income. By managing both the ongoing needs of existing businesses and the complexity of new ones, Norwest has achieved the most profitable and highly valued growth of any large US bank.

The way forward

Not all institutions should strive for aggressive growth. Profitable growth must begin with profitability, which for some companies will mean improving their core business rather than expanding, particularly into businesses they know less about. But if growth is determined to be the right path, how should companies proceed? Understanding the platforms for growth is easy compared with the task of implementing a successful growth strategy—a transformation that will take years. Executives need to address some key questions before attempting to launch such a process:

Which growth platform is best for my company? The answer will depend upon hard-nosed analysis of market opportunity, current position in relation to competitors, and profit potential.

What demands will this strategy make of my company? Companies must realistically assess the capabilities they will need if their strategy is to work. A good understanding of the executional requirements is particularly important, as success often depends less on what is done than on how it is done.

Given these demands, how large is the gap between where my company is today and where it needs to be? An objective assessment will help form a management agenda for putting in place real growth capabilities.

Does my company have the culture to support a growth strategy? Attributes of a culture that can conceive and execute growth initiatives include:

• Demanding, passionate, and sustained leadership
• The ability to attract and retain the best employees
• Flexible organizational structures, allowing people to work efectively across functions and businesses
• Organizational skills in project management, acquisitions and partnering, and geographic expansion and risk management; rened project management processes
• Risk-taking and entrepreneurial values.