This paper examines organic growth and its impact on shareholder value creation. At a conceptual level, organic and external growth are readily defined; yet, at a practical level, decomposing revenue growth into its constituent elements presents methodological challenges. We develop a method to decompose revenue growth into organic growth, external growth, exchange rate effects, and under- or outperformance. Using extensive data from three insurance companies, AXA, Generali and ING, we analyzed the period from 1995 to 2005. Exchange rate effects were of minor importance, unless companies entered markets at inopportune times. Primarily, the findings indicate that only organic revenue growth enhanced shareholder value. Therefore, managers should focus on marketing as a key driver of organic growth to create value.
The realization of superior growth is of paramount importance to managers and shareholders (Srivastava et al., 1999 and Stremersch and Tellis, 2004). Growth strategies fall into two broad categories: organic, or core, growth and non-organic, or external, growth (Dalton and Dalton, 2006 and Pecotich et al., 1985). Effective marketing can contribute to a firm's organic growth through better anticipation of market opportunities and calibration of risks, a tighter linkage of technological possibilities with market concepts, faster adjustments to shifting market needs and competitive moves, and winning and retaining customers (Day, 2003 and Day and Fahey, 1988). Defining and decomposing revenue growth is the first critical step in assessing marketing's contribution to growth and value creation. At a conceptual level, it is possible to clearly define organic and external growth; however, at present there is no widely accepted method of delineating between the medium- and long-term impacts of organic and external growth strategies or a methodology to decompose revenue growth (Hess, 2006).
This paper fills a gap in the literature by developing a method to decompose revenue growth into three components: organic revenue growth, external revenue growth (due to mergers, acquisitions and divestitures), and exchange rate effects. After identifying the components of revenue growth, the impact on shareholder value can be assessed. As marketing is one of the main drivers of organic revenue growth, determining organic revenue growth and its impact on shareholder value is an indirect approach to measuring the relevance of marketing. The study focuses on the insurance industry due to the good access to market- and firm-specific data on revenue growth. The method of decomposing revenue growth can be applied to any industry, and the persistence modeling could be extended by inserting marketing-related variables to obtain a direct measure of the impact of marketing on organic growth and value creation.1 We analyzed the revenue growth of three leading European insurance companies, namely AXA, ING and Generali, and addressed two research questions: (1) Do insurance companies rely primarily on organic or external revenue growth? (2) Does organic or external revenue growth enhance shareholder value?
The paper is structured as follows. First, following Srinivasan and Hanssens, 2009 and Srivastava et al., 1999, who analyzed the relation between marketing and shareholder value creation, the conceptual framework is established. Second, a methodological discussion follows, highlighting the sample selection and the approach to defining and decomposing revenue growth. Third, the empirical analysis shows the importance of organic revenue growth in the insurance industry and assesses the impact of revenue growth on value creation. The concluding remarks stress the main contributions and limitations of this research and identify directions for future research.
Our main contributions are a definition of organic growth and developing a method to decompose revenues. The revenue decomposition can isolate organic revenue growth, which is of particular interest because of the central role of marketing in fostering organic growth. Based on the decomposed revenues, persistence modeling uncovers the impact of external and organic revenue growth on shareholder value. The model could be extended by adding one additional equation that relates marketing assets and metrics to the components of growth and stock performance. Consequently, the study provides a framework that could be applied to other industries and time periods.
Referring to the three insurance companies analyzed, the findings indicate that external growth accounted for 82% of the total growth of ING and 70% of AXA's growth, yet only 44% for Generali. Apart from isolating organic and external revenue growth, we detected that exchange rate effects played a minor role in the long term as currency fluctuations offset previous movements. Nevertheless, market timing is crucial, as ING suffered from entering the US market in 2000 at the peak of the market.
Finally, the persistence model quantifies the impact of organic and external revenue growth on shareholder value creation. Interestingly, only organic revenue growth has a significant and pronounced effect on shareholder value. Adding 1% more organic revenue growth increases shareholder value by 2.3% in the long run. In contrast, external revenue growth fails to contribute to value creation. This finding underlines the importance of organic growth and marketing for shareholder value creation.
Restricting our analysis to three companies in the insurance industry is an important limitation. Apart from providing findings for the insurance industry, which stresses the dominance of external growth but also the positive impact of organic growth on shareholder value creation, our method could be applied to other industries. Hopefully, future research will use the growth decomposition technique described here over a broad sample of firms and economic conditions to isolate external and organic growth and their impacts on value creation.
