Here is a brief excerpt from an article written by Yuval Atsmon and Sven Smit for the McKinsey Quarterly, published by McKinsey & Company. They explain why, in a challenging environment, growth matters more than ever. 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 magic. It makes it easier to fund new investments, attract great talent, and acquire assets. But the environment for growth has been difficult since 2008, and while there are signs that the Great Recession is at last receding, significant challenges remain. Real-GDP growth in the United States remains below historical averages; the economies of most European countries are still sluggish; and growth in emerging markets, particularly the BRICS countries—Brazil, Russia, India, China, and South Africa—is slowing down.

For more than a decade, we’ve been building and mining a global-growth database containing hundreds of the largest US and European companies. Recently, we’ve been revisiting some of the core analyses in the 2008 book, The Granularity of Growth: How to Identify the Sources of Growth and Drive Enduring Company Performance, to see if the challenging environment of recent years has shifted the picture of fundamentals we painted before the financial crisis. The answer is no, though the economic context arguably has increased the importance of an effective growth strategy.

Survival rates

Healthy growth boosts corporate survival rates, which was true in 2008 and remains true in the United States and in other developed markets. From 1983 to 2013, for instance, roughly 60 percent of the nonfinancial companies then in the S&P 500 were acquired—it’s grow or go, and they have gone. Consider these findings over that period:

o Sixty of the 78 S&P 500 companies that generated top-line growth and improved or at least maintained their margins outperformed the S&P 500.

o Companies with deteriorating margins performed less well, even if these companies were growing; just 8 out of 30 outperformed the index.

o A higher percentage (56 percent) of companies that grew slowly, but also aggressively distributed cash to shareholders, outperformed the S&P 500.

As analysis of these companies’ total returns to shareholders (TRS) suggests (Exhibit 1), growth is only a means to the ultimate end: creating value. Not all growth opportunities are equal. Still, there’s no escaping the fact that growth is a critical driver of performance as measured by total returns to shareholders. And TRS underperformers are far more likely to be acquired.

Growth can be sustained, but that’s not easy

Growth must be actively and continually renewed. That may seem like common sense, but sometimes, as Voltaire aptly noted, “common sense is very rare.” When we looked at several economic cycles, we found that very few companies managed to maintain strong growth over time (Exhibit 2). Less than half of the S&P companies that increased their revenues faster than GDP from 1983 to 1993 managed to do so from 1993 to 2003. Fewer than 25 percent of the outperformers of 1983 to 1993 remained in that group through 2013. Similarly, in the eurozone, only about one-third of the nonfinancial companies whose revenue growth outpaced GDP in 1993 also outpaced it through 2013. Nonetheless, some evidence suggests that enduringly fast growth is not a fluke: the rate at which long-term survivors in the United States fell out of the growth-leader category actually decreased over the years. While 62 percent of the companies that outpaced GDP growth after one decade failed to do so after two, only 36 percent of the surviving companies fell away in the decade that followed.

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Here is a direct link to the complete article.

Yuval Atsmon is a principal in McKinsey’s London office, and Sven Smit is a director in the Amsterdam office.

The authors wish to thank McKinsey’s Kate Armstrong and Ankit Mishra for their contributions to this article.