Healthy growth has also been hard to sustain. When we compared our sample’s performance in the first half of the last decade with the second half, only one in three companies that were in the top quartile of growth between 2009 and 2014 managed to maintain that rate in the subsequent five-year period. Among companies that grew predominantly organically, the rate was even lower, at one in four. This suggests a strong tendency for growth to revert to the mean.

Ten rules of value-creating growth

To understand how organizations can try to overcome these obstacles, we studied the growth patterns of the sample companies through various lenses. Our findings suggest ten imperatives that should guide organizations seeking to outgrow and outearn their peers.

1. Put competitive advantage first. Start with a winning, scalable formula.
2. Make the trend your friend. Prioritize profitable, fast-growing markets.
3. Don’t be a laggard. It’s not enough to go with the flow—you need to outgrow your peers.
4. Turbocharge your core. Focus on growth in your core industry—you can’t win without it.
5. Look beyond the core. Nurture growth in adjacent business areas.
6. Grow where you know. Focus on growing where you have an ownership advantage.
7. Be a local hero. Commit to winning on the home front.
8. Go global if you can beat local. Expand internationally if you have a transferable advantage.
9. Acquire programmatically. Combine healthy organic growth with serial acquisitions.
10. It’s OK to shrink to grow. Ruthlessly prune your portfolio if you need to.

We have quantified what it takes to master each rule, as well as the extent to which excelling at each improves corporate performance. The resulting “growth code” allows you to benchmark your growth performance and set the bar for your next strategy. The more rules you master, the higher your reward. But the bar is high—fewer than half of the companies in our sample excelled at more than three of the ten rules, and only 8 percent mastered more than five (Exhibit 2).

Put competitive advantage first

A high return on invested capital (ROIC) indicates a business model powered by a competitive advantage. Companies that generate stronger returns attract and deploy more capital, a virtuous cycle that enables them to grow faster and generate still higher returns (Exhibit 3). While some firms forgo profits for a time in pursuit of growth (with Amazon being perhaps the best known), the far more typical, and practical, approach is to establish a distinctive business model and then scale it.

For example, a department store chain had a business model—brand-name bargains in stores with low inventories and costs—that in 2007 delivered 5 percent higher ROIC than its cost of capital. The management team used this advantage to expand the store network from approximately 900 locations that year to more than 1,500 in 2019. As a result, revenue grew by 9 percent per year and the company generated an impressive 29 percent in annual shareholder returns.

Make the trend your friend

This age-old axiom holds especially true today as the acceleration of pre-COVID-19 trends widens the gap between corporate winners and laggards. Over the past 15 years, companies that expanded in ways that maintained or increased their exposure to fast-growing, profitable segments generated one to two percentage points of additional TSR annually. This suggests that organizations already in attractive markets should keep investing to stay ahead of the pack. Firms facing market headwinds, on the other hand, may need to aggressively reallocate their resources toward tailwinds, potentially staging large-scale pivots.

The selection of markets needs to be precise, however. In their best-selling book, The Granularity of Growth, our colleagues observed that many “growth” sectors have sluggish subindustries, while relatively “mature” sectors include rapidly growing segments. Take the telecommunications services industry, which grew at 1.6 percent per year over the period of our analysis. The fastest-growing company in the sector increased its revenues by 21 percent annually, while the slowest contracted by 9 percent per year. This dichotomy reflects the influence of acquisitions and divestitures, as well as portfolio choices—that is, varying degrees of exposure to segments with different rates of growth. The cloud services category is growing faster than voice services, for example, and the growth rates of each category vary widely by country.

Don’t be a laggard

Outgrowing your industry implies a strong business model—an advantage rewarded by capital markets whether you’re in a fast- or slow-growing industry. Furthermore, companies that manage to win market share away from competitors are likely to beat the growth expectations reflected in their share price, unlocking even stronger returns.

Consider this tale of two retail companies, both of which grew at 4 percent a year between 2007 and 2017 but in different segments. A home improvement retailer achieved its growth in a category that grew at 3 percent annually, and the company generated annual TSR of 17 percent. A sports apparel company, in contrast, was outpaced in growth by its segment peers by one percentage point annually, and its shareholder returns were more lackluster at 1 percent per annum. While many factors could have affected these two companies’ stock price aside from their growth rates, our analysis suggests that outgrowing your industry is worth, on average, an additional five percentage points of shareholder returns per year. Among companies that managed to achieve this while being more profitable than their peers, this figure was one percentage point higher still.

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