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A P R I L 2 0 11

s t r a t e g y

p r a c t i c e

Drawing a new road map for growth Sumit Dora, Sven Smit, and Patrick Viguerie

New findings show how large and small companies grow—and reveal the startling performance of emerging-market players.

In The Granularity of Growth,1 we used insights from a proprietary database of large companies to argue that executives need to pursue growth in multiple ways. We disaggregated growth into three drivers: portfolio momentum, or the market growth of the segments in a company’s portfolio; M&A; and market share gains. The exercise showed us that companies outperforming their peers on two or three of these drivers grow faster and achieve better returns than those that outperform on just one. Now, three years later, we can reiterate our advice with more assurance because it’s clear that these multi-

faceted growers have withstood the test of the financial crisis and the economic downturn—and continued to outperform. That’s the first of three findings we share in this research update, which reflects the growth of our database from some 400 companies in 2007 to more than 700 today, as well as the addition of a significant set of smaller companies with annual revenues of less than $3 billion. The second finding is that companies from emerging markets are outgrowing competitors from developed ones at a startling pace. The third is that the smallest


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companies in our database, with revenues of less than $1 billion, are growing by increasing their market share to a much greater extent than larger companies are. For the latter, the role of share gain is marginal or even negative.

Before the downturn, they enjoyed a 24-percentage-point differential in their compound annual growth rate (CAGR) against the poor performers. During the downturn, outperformers boasted a more than 3-point advantage.

Companies that fared better in the downturn grew in multiple ways The downturn had a dramatic effect on the global GDP growth rate, which swung from 10 percent in 2007–08 to –5 percent in 2008–09. The global corporations in our database had an even gloomier experience: their average topline growth nosedived from 15 percent in 2007–08 to –11 percent in 2008–09. Corporate growth was harder hit than GDP growth, in part because government spending increased, dampening the effects of falling private investment and consumption on GDP.

For companies defining their growth ambitions, this consistent outperformance underscores the importance of examining how they are doing on all three sources of growth and how they can raise their game.

Amid the gloom and doom, the top-quartile companies in our database on two or more of the three drivers of growth—portfolio momentum, M&A, and market share gain— stood out as relative winners.

Companies from emerging markets are growing much faster Revenues are increasing much more quickly for companies that have their headquarters in emerging economies than for their counterparts from developed economies—overall, at home, in advanced economies, and in other emerging markets. The difference in growth rates is most startling in emerging economies where both categories of companies are off their home turf—30.7 percent growth for business units of those based in emerging markets, compared with 12.6 percent for


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Q2 2011 GoG Exhibit 1 of 3

Having multiple avenues to growth pays off during good times and bad. Having multiple avenues to growth pays off during downturns. Companies’ performance1 on 3 drivers of growth (portfolio momentum, M&A, and market share gain)

Revenue growth, compound annual growth rate (CAGR), % 1999–2007

2007–08

Executed well on 2 or 3 (n = 66)

30.7

Executed well on 1 (n = 135)

Difference between top and bottom performers, percentage points

20.3

16.9

Did not execute well on any and/or executed poorly on 1 to 3 (n = 391)

6.5

+24.2

2008–09

14.9

3.8

+16.5

2.9

1.3

–0.2

+3.1

1Based on growth decomposition analysis of 592 companies. Analysis spanned different time frames for some companies between

1999 and 2007. Data for 2010 not yet available for majority of companies analyzed. Source: Bloomberg; McKinsey analysis

their counterparts from the developed world. This wide gap suggests that its companies should ask themselves whether they are paying enough attention to emerging markets and allocating sufficient financial and human resources to them. Chances are the answer is no. It’s less surprising that companies based in advanced economies are being outgrown by those in developing economies in their own home market segments. Growth is, after all, stronger in emerging markets. And in advanced economies— where companies from emerging markets are growing twice as

fast as those from the advanced economies themselves—these are often attackers starting from a small base and taking market share. Indeed, across segments, part of the outperformance may well reflect the fact that companies based in emerging markets are starting from a smaller base. In our database, the average revenue of business units from companies headquartered in developed economies was $5.9 billion, three times larger than the units from emerging economies. This relative size difference held true in emerging markets where both categories of companies


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Q2 2011 GoG Exhibit 2 of 3

Across the board, emerging-market companies grow faster than those from developed economies. Across the board, emerging-market companies grow faster than those from developed economies. Revenue growth rates segmented by geographic market,1 compound annual growth rate (CAGR)

Overall growth By location of company headquarters Emerging-market companies

Growth in home market

Growth in developed Growth in emerging markets (for developed, markets (for emerging, other than home) other than home)

23.9%

17.9%

22.4%

30.7%

10.7%

7.5%

11.7%

12.6%

13.2%

10.4%

10.7%

18.1%

– Developed-economy companies

= Growth-rate advantage in emerging markets

1 Based on growth-decomposition analysis of 2,229 market segments for 720 companies, spanning a number of time frames

between 1999 and 2008.

compete off their own turf. Still, it’s clear in the numbers that players from emerging markets are serious competitors everywhere; their continued improvement will accentuate the growth challenge for their rivals from developed countries. Smaller companies exhibit different growth patterns In The Granularity of Growth, we emphasized that portfolio momentum, coupled with M&A, was much more important for corporate growth than winning market share. This advice still holds for large companies, which usually have significant share positions in reasonably mature

markets. For the smallest of the new companies in our database (those with less than $1 billion in revenue), a different growth pattern emerges. Share gain represents almost four percentage points of annual growth for them, compared with a very small or negative role for the growth of larger companies. Intuitively, this should not come as a big surprise. Smaller companies usually grow faster than their industries because they are not constrained by size, and their growth is often based on a new business model they can pursue without fear of cannibalizing


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Q2 2011 GoG Exhibit 3 of 3

Smaller companies rely on market share gains and momentum for growth. Smaller companies rely on market share gains and momentum for growth. Average compound annual growth rate (CAGR), 1999–2008,1 % Performance by size of annual revenues,2 $ billion Smaller

<1 (n = 133)

Inorganic growth 19.4

1–2.9 (n = 157) 3–4.9 (n = 75)

Larger

Revenue growth3

13.2 10.7

Portfolio momentum

4.1

Organic market share gain

11.6

4.8

8.3

3.6

7.3

5–9.9 (n = 109)

8.7

2.7

5.8

10–20 (n = 111)

7.6

2.7

5.4

>20 (n = 122)

8.4

2.1

6.2

3.7 0.2 –0.2 0.2 –0.5 0.1

1Includes companies analyzed between 1999 and 2008, spanning a number of time frames. 2Based on 2002 revenues in dollars.

3Based on 707 companies for which starting year of growth-decomposition analysis is 2002 or earlier.

revenues. Still, there may be a lesson for large corporations: study the action among smaller companies and consider whether they might be the right peer set for benchmarking the growth drivers of your smaller divisions. Looking through this new lens may help leaders set targets that stretch their ambitions yet are still realistic.

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 ehrdad Baghai, Sven Smit, and Patrick M Viguerie, The Granularity of Growth, first published in 2007, by Cyan Books, and in 2008, by Wiley.

Sumit Dora is a consultant in McKinsey’s Gurgaon Knowledge Center, Sven Smit is a director in the Amsterdam office, and Patrick Viguerie is a director in the Atlanta office. Copyright © 2011 McKinsey & Company. All rights reserved. We welcome your comments on this article. Please send them to quarterly_comments@mckinsey.com.


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