10 RULES OF GROWTH 

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Revenue growth that is strong and consistent is one of the best indicators of a successful business. Over the past 15 years, that has not been an easy task to complete. After the global financial crisis, corporate growth sharply slowed, with the largest corporations in the world increasing at half the rate they did before 2008. Additionally, as revenue growth lagged behind increases in capital spending, returns were compressed. Now that the global economy is weakening, inflation is increasing, and geopolitical unpredictability is present, growth that generates profits and shareholder value may become much harder to achieve.

Business leaders must adhere to a comprehensive growth blueprint with three key components in order to counter these trends: a big vision and corresponding mentality, the correct enablers ingrained in the organization, and clear pathways in the form of a cogent set of growth projects. We undertook an extensive analysis of the growth trends and performance of the 5,000 largest public firms in the world during the previous 15 years to assist our clients in identifying these pathways.

The study confirmed that revenue growth is an important factor in determining how well a company performs. Total shareholder returns (TSR) increase by three to four percentage points for every additional five percentage points of revenue per year, which equates to a 10-year market capitalization increase of 33 to 45 percent. a ten-year decline of 33 to 45 percent in market capitalization. Companies who outperformed their counterparts in terms of growth and profitability during our study period performed even better, with shareholder returns six percentage points higher than the average for their industry.

However, only a small number of businesses could boast such outcomes. During the ten years before COVID-19, the average company only grew by 2.8 percent annually, and only one in eight of those companies had growth rates of more than 10 percent annually.

It has also proven challenging to maintain healthy growth. Only one in three of the companies in the top quartile of growth between 2009 and 2014 were able to maintain that rate over the subsequent five years when we compared the performance of our sample in the first half of the previous decade with that in the second half. The incidence was significantly lower, at one in four, for businesses that expanded primarily organically. This shows that growth has a significant propensity to regress to the mean.

Prioritize competitive advantage

A business model with a high return on invested capital (ROIC) is one that is driven by competitive advantage. Stronger returns on investment help businesses grow quickly and provide even better returns by attracting and using more money. While some businesses temporarily sacrifice revenues in order to grow (Amazon is probably the best known), the more common and useful strategy is to develop a unique business model before scaling it.

Make the trend your friend

This ancient adage is particularly applicable now as the gap between corporate leaders and laggards expands due to the acceleration of pre-COVID-19 trends. Companies that expanded in ways that kept or extended their exposure to quickly expanding, lucrative segments produced one to two percentage points more TSR yearly over the previous 15 years. This means that businesses already operating in lucrative industries should continue to make investments to stay ahead of the competition. On the other hand, businesses suffering market headwinds may need to actively reallocate their resources toward tailwinds, possibly staging significant pivots.

Don’t be a laggard

Whether your industry is growing quickly or slowly, financial markets will reward you for having a robust company plan that can outgrow it. Additionally, businesses that are successful in stealing market share from rivals are likely to outperform the growth projections indicated in their share price, generating even higher profits.

Turbocharge your core

Where should that growth come from is frequently the first thought that crosses a CEO’s mind when establishing a growth strategy. We divided the revenue growth among our sample companies into three categories to help us find the answer: growth in the primary industries (their largest industry segments at the start of the study period), growth in secondary industries (smaller but still important revenue contributors in the first year of our time frame), and growth in new industries (segments where the companies did not initially have a presence).

This breakdown emphasized how crucial it is to have a strong core business. In other words, it is unlikely that you can see substantial development if the core isn’t thriving. Only one out of every six businesses in our data set with core-segment growth rates below the industry median were able to surpass their peers’ average corporate growth rates. Finding a strategy to enable growth in the core should therefore be a major focus. This can necessitate a complete operational model revision for some firms. Others may need to seek niche markets or new ones with growth potential and reallocate resources from more stagnant sectors to them. 

look past the core

According to a McKinsey study, secondary industries or the company’s development into new ones account for 20% of growth on average, with the remaining 80% coming from a company’s primary business. Nevertheless, over the study period, these numbers differed amongst sectors. For instance, industrial enterprises accounted for a third of their growth from new industries, whereas utilities concentrated more than other sectors in their core business areas.

Expanding into new markets can help organizations with rapidly expanding core operations position their portfolios ahead of emerging trends. On the other side, those with slow-growing cores can use nearby firms to make up for slow growth elsewhere.

Where you know, grow

As we’ve seen, diversifying into related markets can be an effective growth tactic. However, how similar should these markets be to the core and to one another? We employed a basic test: If two industries frequently occur together in business portfolios

According to our data, businesses that expand in a way that makes their portfolios more comparable earn an extra one percentage point in TSR annually. If the new industry is similar to its core, those who expand into it can anticipate an additional two percentage points.

Become a hero in your community

The industry is merely one facet of the “where to grow” problem, along with shifts up and down the value chain. Geopolitics is the other. Similar to how it might be challenging to see general growth if your core business is struggling, it is doubtful that you can improve your growth trajectory if you are not successful in your immediate market. 

In fact, fewer than one in five of the McKinsey sample companies who saw below-median growth rates in their particular location were able to outperform their competitors.

If you can beat local, go global

The majority of the growth experienced by the businesses in our sample—roughly 50% of it—came from markets outside of their home countries, thanks in large part to Japanese and European businesses that turned to export markets to make up for weak domestic growth. International regions accounted for close to 30% of the overall increase in faster-growing regions like China and North America.

Companies that grew globally created 1.9 percentage points more annual TSR than their industry counterparts, while those that saw robust domestic growth fared better than those that were only maintaining their current levels of business. International regions accounted for close to 30% of the overall increase in faster-growing regions like China and North America. The former category increased yearly shareholder returns by 2.6 percentage points through geographic growth, whereas the latter category suffered domestically and only gained 1.3 percentage points—insufficient to make up for the performance drag caused by the weak home market.

programmatically purchase

Approximately one-third of the revenue increase across the enterprises in the data set is attributed to mergers and acquisitions. It has been confirmed by McKinsey’s study into M&A strategies that deal patterns—rather than transaction values—are what determine shareholder profits. Following the division of businesses into four categories, McKinsey discovered that programmatic acquirers—those who completed at least two purchases of this size annually—performed better than their counterparts who used other M&A strategies.

To “shrink to grow” is acceptable

It makes sense that many management teams feel pressure to provide steady growth, as the 10% of McKinsey’s sample companies that had seven consecutive years of growth between 2010 and the end of 2019 outperformed their competitors. What if you didn’t have this reliable growth engine? Statistically speaking, trying to acquire growth through a “big bang” acquisition is the worst thing you can do. The ideal course of action for you is to regularly trim back by selling off slow-growing portions of your portfolio and reinvesting the money in fresh markets.

summary

Cost benchmarks are common among corporate leaders. You now also have a growth benchmark. The ten principles of value-creating growth must be mastered, but this is only one ingredient in the holistic growth formula. Create a distinct growth ambition to begin with: a growth rate that goes beyond the momentum of your existing operations. Then create a set of growth routes that make sense and incorporate as many of the rules as you can. Lastly, develop the skills and operating system necessary for excellent execution.

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