The granularity of growth

April 3, 2019

 

Here is a brief excerpt from a classic article written by Mehrdad Baghai, Sven Smit, and S. Patrick Viguerie for the McKinsey Quarterly, published by McKinsey & Company. 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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A fine-grained approach to growth is essential for making the right choices about where to compete.
What are the sources of corporate growth? If, like many executives, you take an average view of markets, the answers may surprise you: averaging out the different growth rates in an industry’s segments and subsegments can produce a misleading view of its growth prospects. Most so-called growth industries, such as high tech, include subindustries or segments that are not growing at all, while relatively mature industries, such as European telecommunications, often have segments that are growing rapidly. Broad terms such as “growth industry” and “mature industry,” while time honored and convenient, can prove imprecise or even downright wrong upon closer analysis.Our research on the revenue growth of large companies suggests that executives should “de-average” their view of markets and develop a granular perspective on trends, future growth rates, and market structures. Insights into subindustries, segments, categories, and micromarkets are the building blocks of portfolio choice. Companies will find this approach to growth indispensable in making the right decisions about where to compete.These decisions may be a matter of corporate life and death. When we studied the performance of 100 of the largest US corporations in 17 sectors during the two most recent business cycles, a pair of unexpected findings emerged.The first was that top-line growth is vital for survival. A company whose revenue increased more slowly than GDP was five times more likely to succumb in the next cycle, usually through acquisition, than a company that expanded more rapidly. The second, suggesting the importance of competing in the right places at the right times, was that many companies with strong revenue growth and high shareholder returns appeared to compete in favorable growth environments. In addition, many of these companies were active acquirers.1To probe deeper into the mysteries of what really drives revenue growth, we have since disaggregated, into three main components, the recent growth history of more than 200 large companies around the world. The results indicate that a company’s growth is driven largely by market growth in the industry segments where it competes and by the revenues it gains through mergers and acquisitions. These two elements explain nearly 80 percent of the growth differences among the companies we studied. Whether a company gains or loses market share—the third element of corporate growth—explains only some 20 percent of the differences.

At first blush, our findings seem counterintuitive. They demonstrate that although good execution is essential for defending market share in fiercely contested markets, and thus for capitalizing on the corporate portfolio’s full-market-growth potential, it is usually not the key differentiator between companies that are growing quickly and those that are growing slowly. These findings suggest that executives ought to complement the traditional focus on execution and market share with more attention to where a company is—and should be—competing.

Going beyond averages to adopt a granular perspective on the markets is essential for any company as it shifts its portfolio in search of strong growth, as this article will explain. It will also argue that a fine-grained knowledge of the drivers of the company’s past and present growth, and of how these drivers perform relative to competitors, is a useful basis for developing growth strategies. To that end we will present the findings of two diagnostic tools: one that enables companies to benchmark their growth performance on an apples-to-apples basis with that of their peers, and one that disaggregates growth at a segment level.

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The growth of segments within industries correlates closely with the differing profiles that emerge when we disaggregate the growth of large companies. This suggests that executives should make granular choices when they approach portfolio decisions and allocate resources toward businesses, countries, customers, and products that have plenty of headroom for growth.

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Here is a direct link to the complete article.

Mehrdad Baghai is an alumnus of McKinsey’s Toronto and Sydney offices, Sven Smit is a director in the Amsterdam office, and Patrick Viguerie is a director in the Atlanta office.The authors would like to thank their colleagues in McKinsey’s strategy practice—particularly Martijn Allessie, Angus Dawson, Giovanni Iachello, Mary Rachide, Namit Sharma, Carrie Thompson, and Ralph Wiechers—for their contributions to the research underlying this article.

 

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