A sure sign of a successful company is when it has consistent and strong growth. After the global financial crisis, corporate growth slowed down a lot. The largest companies only grew at half the rate they did before 2008. Furthermore, capital investments outstripped revenue growth, making it harder to earn a profit. Now, with a slowing global economy, rising inflation, and geopolitical uncertainty, it may be even more difficult to achieve growth that leads to profits and shareholder value.
To buck these trends, business leaders need to have a clear plan that comprises a bold aspiration and accompanying mindset, the right enablers within the organization, and clear pathways in the form of organized growth initiatives. McKinsey&Company lists ten imperatives that will guide organizations seeking to outgrow and outearn their peers and achieve consistent and strong growth.
- Put your competitive advantage first
A high return on invested capital (ROIC) means that the company has a good business model that gives it a competitive advantage. Companies with high returns attract more investments, which makes them grow faster and earn even higher returns. Some businesses may choose to forgo profits in order to grow bigger. However, this is not the most common or practical choice. A more typical and practical choice is to establish a unique business model and then grow it.
- Go with the trend
According to McKinsey, in the past 15 years, companies that expanded their businesses to include new, profitable segments generated an average of 1-2% higher total shareholder return (TSR) than those that didn’t. This suggests that it’s important for companies to keep investing in attractive markets if they want to stay ahead of the competition. Companies that are finding it difficult to grow in the market may need to change what they’re doing to take advantage of more positive conditions. This might mean making big changes to how they operate.
- Don’t be a delayer
Being successful in your industry usually means that you have a strong business model. This is something that the capital markets will reward you for, whether your industry is growing quickly or slowly. Companies that manage to win market share away from their competitors are likely to do better than expected. This will lead to their stock prices going up and providing even better returns.
- Unlock growth in the core
Healthy core business is important for growth. You are unlikely to achieve strong growth if the core isn’t flourishing. According to McKinsey’s survey, only one out of six surveyed companies with core-segment growth rates lower than their industry median managed to achieve overall corporate growth rates higher than their peers. Therefore, it is important to find a way to unlock growth in the core. This may require a complete revamp of how your company operates. Other companies may only need to identify small pockets of growth potential in their current or new markets and shift resources to these areas from segments that are not growing as quickly.
- Explore beyond the core
McKinsey found that, on average, 80% of growth comes from a company’s core industry and the remaining comes from secondary industries or expansion into new ones. Companies that expanded into other industries on average had 1.5% more shareholder returns than their industry peers. For companies with fast-growing cores, expanding into new areas can help them stay ahead of future trends. Companies with slow-growing cores can offset slow growth by expanding into adjacent businesses.
- Similarity matters
Companies that are growing and have similar portfolios earn an extra one percentage point of TSR per year. If they expand into a new industry that is similar to their core, they can earn an extra two percentage points. Similarity matters as it is a good way to measure how well a company can own and operate a business. This value could come from synergies with other businesses the company owns, distinctive technical or managerial capabilities, proprietary insights, or privileged access to capital or talent.
- Win the local market
You can’t raise your growth trajectory if you don’t win in your local market. Fewer than one in five companies, as per McKinsey’s survey, had below-median growth rates in their local region and managed to outgrow their peers. Most of these companies are in slow-growing regions, like Japan, and they make up for it by being aggressive internationally.
- Expand globally after winning the local market
Companies that expanded internationally did better than their industry peers, with 1.9 percentage points more annual TSR. Companies that had healthy growth in their home markets did even better, with 2.6 percentage points more annual shareholder returns through geographic expansion. To do well in international expansion, it is very important to have a clear competitive advantage that works well in different regions. If you don’t have this, foreign companies will probably struggle to compete with companies that understand the local context better. This is why companies that do well domestically often benefit more from global expansion – they are more likely to have business models that work in new regions.
- Programmatic mergers and acquisitions (M&A)
McKinsey found that programmatic acquirers, those that did at least two small or medium-sized deals a year along the same theme, were able to outperform peers using other M&A approaches. Most companies with legacy business models are using programmatic M&A for digitizing and enlarging their businesses.
Programmatic M&A is powerful as,
- It builds organizational capabilities and establishes best practices at every stage of the M&A process.
- many small deals help companies get access to new markets or consolidate fragmented ones.
- large deals often need to overpay to get the asset and require successful integration of two businesses of a similar size which is difficult.
- Shrink to grow
Some companies feel pressure to have consistent growth. Companies that grew for 7 out of 10 years between 2010 and 2019 did much better than their peers. If you don’t have this consistent growth, the best thing to do is periodically trim your portfolio by selling off slow-growing parts and reinvesting the money into new areas. Companies that used such shrink-to-grow strategies divested assets in one or two years. However, they grew consistently during the other years and generated five percentage points more annual excess TSR than companies that are inconsistent growers and large-deal acquirers.
Suggested reading: Top priorities for CIOs and CEOs in 2022-23
All successful business leaders have cost benchmarks. CXOs now also need to have a growth benchmark. However, just knowing the ten rules of value-creating growth is not enough. Start by developing a clear ambition for how much growth you want–more than just the current momentum of your businesses. Then create a set of pathways that include as many of the rules as possible. Finally, make sure you have the capabilities and operating model to execute with excellence.
Image and source credits: McKinsey
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