Here is a brief excerpt from a “classic” article written by Sven Smit, Caroline M. Thompson, and S. Patrick Viguerie for the McKinsey Quarterly (2005), published by McKinsey & Company. They discuss an enduring reality: The largest corporations rarely sustain strong growth unless they compete in the right places at the right times. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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Growth is once again top of mind for business executives. As they turn their attention from improving the operational performance of their companies to making those companies grow again, many of them will follow the standard message: consistently strong, value-creating revenue growth lies within reach of major corporations that pursue best practice in strategy, marketing, operations, and organization.

Or does it? Execution and fundamentals are certainly vital, but growth, particularly for the largest companies, requires more than best practice. At the median annual revenue level of today’s Fortune 100 — about $30 billion — a corporation would in effect have to create a $2 billion company each year to sustain 6 percent top-line growth. Can investors and capital markets reasonably expect that kind of performance? How do some companies achieve it?

To explore the particular challenges of revenue growth in big corporations, we studied the performance of about 100 of the largest ones in the United States, in 17 sectors, over the two most recent business cycles. Almost a third of the companies managed to increase their revenues at a rate faster than the growth of GDP over the second cycle, from 1994 to 2003, while at the same time delivering shareholder returns above those of the S&P 500 index. The relatively large number of high performers here might indicate that the odds for companies aspiring to grow are decent, if not for a sobering fact: 90 percent of these companies were concentrated in just four sectors—financial services, health care, high tech, and retailing.

It isn’t surprising that they are overrepresented. These sectors as a whole, or markets and segments within them, offer favorable growth environments supported by established trends: aging populations, rapid product or format innovation, deregulation, and consolidation. What’s striking for large growth-minded corporations is just how crucial it is to have this kind of favorable wind at their backs when they try to achieve strong growth.

Looking across the two economic cycles also revealed the critical role of top-line growth. Large companies that trailed GDP for an entire business cycle were five times more likely to be acquired or otherwise go out of business than were faster growers. Eventually, companies that don’t increase their revenues run out of ways to drive earnings and shareholder returns. Even if a company finds a way to create shareholder value, slow-growing companies remain attractive acquisition targets.

These findings have broad implications for management. The first is that large companies need to pay at least as much attention to top-line growth as to increasing the bottom line. While cost improvements can drive earnings and shareholder value in the near term, companies that raise their total returns to shareholders (TRS) without achieving top-line growth have the worst long-term odds of survival. Many companies that struggle to grow do indeed face a “grow-or-go” situation.

Second, where to compete is just as important as how. The choices a large company makes today about its portfolio mix and where to place its bets will shape its growth trajectory over the next five to ten years. Unless the company enjoys the advantages of fast-growing pools of revenues and profits or has ample opportunity to consolidate, growth that just keeps pace with GDP will be difficult to sustain, even if execution is great.

That vital top-line growth

Our research focused on 102 US public companies: the top 75 in 1994 revenues and the top 75 in 1994 market capitalization. We tracked these companies over the 1994–2003 business cycle and segmented their growth performance by revenues (including acquisitions and divestitures) and TRS, which encompasses both share prices and dividends. The median compound annual growth rate (CAGR) for revenues was around 5 percent, corresponding to nominal GDP growth over the period. At 11 percent, the median annual growth rate of TRS was roughly equal to that of TRS for the S&P 500 index.

[See Exhibit 1: Growth rate of 100 largest US companies, 1994–2003 in article.]

We labeled companies whose top-line growth outpaced GDP and whose TRS outperformed the S&P 500 as growth giants and those that achieved above-average TRS growth but trailed in revenues as TRS performers. The unrewarded companies increased their revenues at a rate faster than the median but weren’t rewarded with corresponding TRS growth. The challenged companies underperformed on both measures.

Thirty-two companies occupy our growth giants category, and most of them—20 percent of the overall sample—achieved double-digit revenue growth over the period while outperforming the S&P 500 on TRS (Exhibit 1). That accomplishment struck us as particularly impressive, even if more than half of these companies used acquisitions extensively1 to drive top-line growth.

Although we found a positive relationship between the growth of revenues and of TRS over the ten-year period, exceptions abounded. Companies that increased their revenues at a rate faster than the growth of GDP were 60 percent more likely to outperform the S&P 500 index. But nearly 20 percent outperformed it despite sluggish top-line growth. In fact, the median TRS performer increased its revenue by only 3 percent but, like the growth giants, boasted average TRS growth of 16 percent.

As might be expected, the TRS performers compete mostly in slower-growth industries, such as consumer goods, engineering and construction, and utilities. The keys to their ability to create value were good execution, cost controls, and savvy portfolio management—all of which generated strong earnings growth. Many of these companies sold or exited lower-margin businesses and bought or entered higher-margin ones. Half of the TRS performers increased their earnings at a rate at least twice that of their revenues, and 37 percent pursued major divestiture programs.

Next we asked what might happen over the longer term. How would the TRS performers and the growth giants cope in a subsequent business cycle? Could they maintain their momentum for an additional five or ten years? And what of the challenged and unrewarded companies—could they turn their TRS around, or did another outcome await them?

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Here is direct link to the complete article and Exhibits therein.

Sven Smit is a director in McKinsey’s Amsterdam office; Caroline Thompson is a consultant and Patrick Viguerie is a director in the Atlanta office.