Business leaders have responded to past economic challenges by reducing costs through aggressive layoffs, divestitures, and a methodical approach to efficiency building. While these disciplines have been effective in delivering quick operating margin improvements, many companies have found that these efforts have had a diminishing impact on their stock prices. To understand why, Treacy & Company has analyzed the drivers of shareholder value for nearly 500 companies representing all sectors of the U.S. economy. Our objective was to understand the nature of the relationship between operating efficiency improvements and shareholder value creation.

Our research revealed that, across all sectors, operating margin improvement has only a modest correlation with stock returns. The most influential financial driver of shareholder value delivery is not cost or efficiency, but organic revenue growth.