In the following McKinsey article, the authors make it crystal clear that if you are not growing you are going to lose market share and profits. The one tool that leaders have in their arsenal is scaling revenues through online engagement and analytics. If you have not embarked in a serious way about a digital transformation – run don’t walk to get that process going.
In a challenging environment, growth matters more than ever.
October 2015 | by Yuval Atsmon and Sven Smit
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,1 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.
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.
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.
A consistent finding in our research is that about 75 percent of all growth is a function of the markets in which businesses compete—portfolio momentum—and the acquisitions they initiate. In other words, just 25 percent of a company’s growth typically comes at the expense of competitors. We highlighted this analysis before the market downturn in 2008, and it has continued to hold true since then.
Making good choices about where to compete requires a truly granular understanding of market dynamics and of a company’s business performance. Opportunities will not always come in traditional or even familiar locales; indeed, from 2010 to 2025, almost 50 percent of global GDP growth will take place in approximately 440 small- and medium-size cities in emerging markets.
Nor do overall averages reliably indicate where the opportunities lie. One company we know had a three-year growth rate that averaged 13 percent across 12 key business units. A closer inspection, however, revealed that their median growth rate was only 2.5 percent. The top-performing unit had been growing at a 62.4 percent clip, but only two others topped the company-wide average of 13 percent. In fact, five of the business units were growing at around 1 percent or less over the three-year period, and the worst performer had been contracting at a rate of close to 5 percent.
Companies can predict their growth momentum by identifying the unique factors that drive their sales and how these factors connect to broader economic developments. To that end, another company we know employs a robust set of tools that go beyond reporting where growth exists at present—it aims to forecast where opportunities will probably arise over the coming quarters. This company starts by feeding its data to econometric models and time-tested algorithms to predict its momentum. Disaggregating the data exposes its market momentum and financial outcomes in the past. Analyzing the data to look for patterns helps to identify shifts, opportunities, and threats indicating potential opportunities in the future.
Even the smartest “where to compete” strategy will fail to bring results unless the company that develops it follows through with the strong resolve that can bring it to life. This is among the most challenging aspects of growing in a slow-growth environment. In such times, companies don’t have the benefit of a rising tide to generate surpluses for new initiatives—pushing into new markets, acquiring existing businesses, or focusing on promising products or services.
But while it’s easy to agree that growth is imperative, it’s not always clear how to achieve it. Managers are often uncertain whether the answer lies in expanding beyond the core. When we surveyed more than 600 executives from developed markets, fully 75 percent believed that the share prices of their organizations would increase over the next five years if they pursued a new activity outside their core business. At the same time, though, more than half of the respondents assumed that growth would result from refining the corporate focus. When we asked them what would happen if their companies divested a current noncore activity, for example, 54 percent predicted that share prices would rise over the next five years.
There’s an element of truth to both perspectives. Businesses decay, and yesterday’s core may not be today’s or tomorrow’s. Getting free from a decaying business is different from investing in one with a strong potential. But the two perspectives may become linked through the reallocation of scarce financial and human resources. Companies must often let go of businesses that were once important and focus on up-and-comers. But it can be hard to jettison businesses that management grew up with or to accept that they can’t be turned around enough to justify further investments.
Hard but important. A leading global industrial manufacturer we know assessed the profitability, growth, market attractiveness, competitive positioning, and other dimensions of the products and components produced by its largest business group. This analysis revealed opportunities to reallocate tens of millions of dollars to business areas that could deliver significantly better returns than existing priorities did. It also highlighted ways to raise the bottom line quickly and thus to overcome initial misgivings that these moves might sabotage the company’s short-term performance.
Capital-market pressures and organizational dynamics can make it difficult for companies to place big, long-term bets on the growth opportunities of tomorrow. And the bigger you are, the harder it is to grow. That said, outperforming the competition remains possible in all industries, even in sluggish economic times. But this takes discipline and a relentlessly granular analysis, as well as a commitment to seek the kind of growth that generates real and sustainable value—the most important objective of all.
About the Authors
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.