The ten rules of growth
One of the surest signs of a thriving enterprise is robust and consistent revenue growth. That has not been easy to accomplish over the past 15 years. Corporate growth slowed dramatically after the global financial crisis, with the world’s largest companies growing at half the rate they did before 2008. Furthermore, increases in capital investments outstripped revenue expansion, compressing returns. Now, with a slowing global economy, rising inflation, and geopolitical uncertainty, growth that delivers profits and shareholder value may become more elusive still.
To buck these trends, business leaders need to follow a holistic growth blueprint consisting of three core elements: a bold aspiration and accompanying mindset, the right enablers embedded in the organization, and clear pathways in the form of a coherent set of growth initiatives. To help our clients identify these pathways, we conducted an in-depth study of the growth patterns and performance of the world’s 5,000 largest public companies over the past 15 years.
A typical company grew at a measly 2.8 percent per year during the ten years preceding COVID-19, and only one in eight recorded growth rates of more than 10 percent per year.
The research reaffirmed that revenue growth is a critical driver of corporate performance. An extra five percentage points of revenue per year correlates with an additional three to four percentage points of total shareholder returns (TSR)—the equivalent of increasing market capitalization by 33 to 45 percent over a decade. Firms that managed to grow faster and more profitably than their peers during our study period did even better, generating shareholder returns six percentage points above their industry averages.
However, relatively few companies could boast such results. A typical company grew at a measly 2.8 percent per year during the ten years preceding COVID-19, and only one in eight recorded growth rates of more than 10 percent per year (Exhibit 1).
Healthy growth has also been hard to sustain. When we compared our sample’s performance in the first half of the last decade with the second half, only one in three companies that were in the top quartile of growth between 2009 and 2014 managed to maintain that rate in the subsequent five-year period. Among companies that grew predominantly organically, the rate was even lower, at one in four. This suggests a strong tendency for growth to revert to the mean.
Ten rules of value-creating growth
To understand how organizations can try to overcome these obstacles, we studied the growth patterns of the sample companies through various lenses. Our findings suggest ten imperatives that should guide organizations seeking to outgrow and outearn their peers.
Put competitive advantage first. Start with a winning, scalable formula.
Make the trend your friend. Prioritize profitable, fast-growing markets.
Don’t be a laggard. It’s not enough to go with the flow—you need to outgrow your peers.
Turbocharge your core. Focus on growth in your core industry—you can’t win without it.
Look beyond the core. Nurture growth in adjacent business areas.
Grow where you know. Focus on growing where you have an ownership advantage.
Be a local hero. Commit to winning on the home front.
Go global if you can beat local. Expand internationally if you have a transferable advantage.
Acquire programmatically. Combine healthy organic growth with serial acquisitions.
It’s OK to shrink to grow. Ruthlessly prune your portfolio if you need to.
We have quantified what it takes to master each rule, as well as the extent to which excelling at each improves corporate performance. The resulting “growth code” allows you to benchmark your growth performance and set the bar for your next strategy. The more rules you master, the higher your reward. But the bar is high—fewer than half of the companies in our sample excelled at more than three of the ten rules, and only 8 percent mastered more than five (Exhibit 2).
Put competitive advantage first
A high return on invested capital (ROIC) indicates a business model powered by a competitive advantage. Companies that generate stronger returns attract and deploy more capital, a virtuous cycle that enables them to grow faster and generate still higher returns (Exhibit 3). While some firms forgo profits for a time in pursuit of growth (with Amazon being perhaps the best known), the far more typical, and practical, approach is to establish a distinctive business model and then scale it.
Read More at https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-ten-rules-of-growth