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The nitty gritty of growth

That companies must grow to succeed is perhaps not surprising. But, according
to consultancy group McKinsey, large public companies must be more intelligent
about how they do it.

The group examined relative performance at hundreds of the largest US
companies, the results of which are analysed in a new book, The Granularity
of Growth

“To uncover pockets of opportunity, executives need to dig to a deeper level
of their market and their organisation – something that many of them
historically have been unwilling or unable to do,” the book claims.

Before doing so, however, it’s vital that companies understand where their
growth focus should be. The authors broke down total growth into three areas:
portfolio momentum (growth that can be attributed to the underlying growth of
the main sector a company operates in); M&A; and share gain (growth through
gaining market share from rivals).

What the authors found was that virtually all the growth of the average
company can be explained by the underlying growth of a market sector and M&
A, with the former being twice as important as the latter. As such: “historical
decisions about which markets to be in are key to driving future growth”.
Stealing market share is a relatively unsuccessful strategy.

By combining this knowledge of where the most growth within a company is
achievable with McKinsey’s idea of granularity, the firm developed a tool for
conducting growth analytics, something it calls the Growth MRI.

This provides a detailed view of a company, down to the success of a
particular product in a particular geographical region. This allows directors to
recognise where growth is and, more importantly, isn’t being achieved in small
pockets of company activity. In fact, Mehrdad Baghai, one of the book’s authors,
claims that the ideal is to concentrate on pockets of business activity of
between $50m and $100m in revenue. For the size of company the study looked at,
this represents about 0.5% of their total revenues.

One finding from the study, was that companies in search of growth would do
well to shift their portfolio – something that McKinsey insists is “more common
and less risky” than many company directors might think. “As a natural
consequence of these where-to-compete choices, your portfolio will shift over
time towards higher growth segments.”

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