The nature of the challenge

The purpose of this book is to answer that question by exploring the particular challenges faced by large corporations in driving and sustaining growth.

The first of these is a basic numbers problem: the bigger you are, the harder it is to drive the next quantum of growth. Take the median Fortune Global 500 company with roughly US$25 billion in revenue. To sustain growth at just the rate of global GDP growth (say, roughly 6.2 percent), it needs to find about US$1.6 billion in incremental revenue every year. As Procter & Gamble’s CEO said recently, his company’s growth challenge is to add a business the size of its entire UK operation or a brand the size of Tide every single year!¹

The second challenge facing large companies has to do with longevity: the longer you’ve been in business and the larger you are, the more likely it is that your business is maturing. As it does so, it will almost inevitably encounter the problems of aging: innovation starts to slow and returns gradually decline. What’s more, the sheer size of a mature organization can produce inertia. As the organization becomes ever more attuned to its operating metrics, it can easily lose touch with evolving customer needs, new competitors, and new business models.

Although this book focuses on growth in large companies, many of its insights apply to smaller companies too. Its central theme is a call for senior executives to develop a broad yet fine-grained vision about where their companies’ growth will come from, and then to design strategies and organizations that reflect the texture of the markets in which they compete. We aim to provide a sound analytic and conceptual foundation, rich in practical insights, for CEOs and management teams wrestling with their growth strategy.

A definition of terms

But first, a question: what exactly do we mean by “growth”? Some business commentators define growth narrowly, focusing exclusively on organic growth or confining the discussion to new business building. In this book we define growth more broadly, as an increase in top-line revenues obtained either organically or through acquisition, either within or outside the core business.

We have chosen this broader definition for several reasons. As we will demonstrate, revenue and its development trajectory provide, over time, a good (though not perfect) indication of a company’s role, influence, leadership, and standing in its markets. In the long term, sustained positive revenue growth is highly correlated with superior profits and value creation.² That said, the decision to grow is by no means a trivial undertaking, and it isn’t the right course for every corporation. Growth poses multiple challenges, and whether a company should pursue it will depend largely on the economic and market conditions facing its businesses.

And what exactly do we mean by “granularity,” and why have we made it the central theme of this book? Granularity is not a term traditionally used in business. It is, however, used frequently in scientific and engineering circles to refer to the size of the components within a larger system. A description of a system is more granular (or “fine-grained”) if the description involves a larger number of components. For example, planet Earth could be described in terms of continents, countries, states and provinces, cities, towns, and villages, in order of increasing granularity.

Over time, we’ve become convinced that there is a problem with the broad-brush way that many companies describe their business opportunities. Large companies in particular suffer from the tyranny of the average view: “China is where the action is.” “Pharmaceuticals is a high-growth industry.” “Aging will generate increased demand for healthcare.” The list goes on. Popular though these generalizations are, they are of very little help to executives looking for meaningful opportunities for growth.

In this book, we argue that real winning plays can emerge only from a much finer understanding of market segments, their needs, and the capabilities required to serve them well. To uncover pockets of opportunity, executives need to dig down to deeper levels of their businesses and organizations—something that many of them have been unwilling or unable to do. Companies may well have worked out how to manage their operations in minute detail, yet they still handle strategic choices at a high level. The challenge is to find a way to make these choices at a more granular level without losing focus or drowning in a sea of complexity.

Understanding growth better

Growth has long been a focus for McKinsey & Company. Ten years ago, we invested in a special research initiative to study the challenges of sustaining growth in large companies. The results of that study were published in a book, The Alchemy of Growth,³ which revealed the importance of simultaneously managing the short-term performance imperative of the market and building a pipeline of growth initiatives for the future. The “three horizons” model used to illustrate this concept has since been widely adopted. It argues that companies that wish to sustain profitable growth should adopt a balanced set of initiatives across three horizons at once: extending and defending the profitability of the core business (horizon 1), building new engines of growth (horizon 2), and creating viable options for future growth (horizon 3).

In the years that have followed, we have advised many large companies on their growth efforts and launched another major research initiative. We have carried out extensive studies of growth in large companies by using proprietary databases to profile the performance of hundreds of the world’s most important corporations, a process that has yielded valuable new insights.

First, our new methods for breaking growth down into its constituent elements produce a much richer description of the growth opportunities facing a company and, hence, provide an even stronger basis for formulating a growth direction. This has enabled us to enhance our three horizons model, which now incorporates a far more robust and granular understanding of the sources of revenue growth.

Second, over the past decade we have observed the spectacular growth of specially designed growth companies. Private-equity firms and special-purpose acquisition companies now own more than 6 percent of the entire global economy. Their success can’t be explained solely by their strategies; their efficacy is in no small measure due to their unique organization design and management processes, or what we call “architecture.”

Third, the internet boom and bust, as well as the accelerating growth of China and India, have acted as a reminder that growth leaders in supplyconstrained markets may face unfamiliar challenges. With this new world come new and very different growth opportunities.⁴

The Granularity of Growth provides a rigorous analytical foundation for understanding growth and an architecture for managing it. While complementary to The Alchemy of Growth, it is, nonetheless, a very different book, written in a different context to address a different set of challenges.

How this book is organized

In the Introduction, we make the case for growth. We look at large companies’ track record in driving top-line growth and generating shareholder returns over two economic cycles and show that growth is a superior predictor of future shareholder returns and increases a company’s chance of survival by a factor of five.

The main body of the book is written in three parts, each devoted to a big step on the path to growth: first deciding on your ambition for growth, then choosing a direction for growth, and, finally, designing an architecture for growth. Together these three parts describe the journey you make in defining your growth strategy and creating the organization you need to carry it out. Let’s take a quick look at the themes covered in each part.

Part I: Your growth ambition

Our research revealed a striking fact: nearly 80 percent of the growth differences between large companies have to do with choices about where to compete, that is, which market segments to participate in and how much M&A activity to pursue. Just as markets are granular, so too are pockets of potential growth—which means you need to make your “where to compete” choices at a granular level.

To help with these choices, you can benchmark your growth performance against that of your peers using a methodology that is as robust as those used to analyze and compare costs and execution. It involves breaking down your revenue growth performance into three elements: portfolio momentum, inorganic activity, and organic share gain.

Part II: Your growth direction

Shaping the growth trajectory of a large company is a long-term proposition. It’s not about pushing and shoving the front line to reach the next level of performance, but about giving your units the resources they need to deliver growth—or, alternatively, deciding to look for that growth elsewhere. Instead of beating up people for missing a target, not running fast enough, or not working hard enough, you either scale up to provide a unit with more talent, capital, and resources, or scale down to release it from a battle it can never win.

Companies seeking to scale up should be aware of the opportunities for inorganic growth. Another surprising insight generated by our research was the magnitude of the contribution made by M&A to top-line growth: it accounts for 30 percent of the revenue growth at an average large company.

To help you make the transition from a granular analysis to an overall growth direction, we offer a new tool, the growth map, that provides a rigorous basis for deciding on growth initiatives in the short, medium, and long term.

Part III: Your growth architecture

Most organizations would probably describe themselves as designed to drive the performance of their current businesses; fewer would claim that they are also designed for growth. To grow successfully, you need not only a clear direction but also a design that enables you to make granular choices at scale. At the lowest level, your organization needs to reflect the texture of the market and the set of opportunities it presents. At the highest level, your organization needs to take advantage of its scale in a way that reinforces both the strategies of the individual units and the direction of the overall portfolio.

We believe that the leaders of large institutions need to avoid taking an averaged view of all their businesses; instead, they should manage them with greater focus at a more detailed level, while continuing to take advantage of their scale. The approach we describe will help you do just that without drowning in a sea of reports or getting lost in a fog of complexity.

We hope this book will reveal why growth is so important, what enables certain companies to grow so spectacularly, how they are able to take both a broad and a granular view of their markets, why they are careful to ensure that their growth comes from multiple sources, and how they choose the markets in which they compete.

This book is primarily about corporate strategy and growth in large companies. It deals less with strategy at the business-unit level.⁵ We are trying to shape your thinking about the three choices we’ve mentioned: deciding what growth ambition would be appropriate for your corporation, setting your growth direction, and developing the architecture to enable you to manage growth effectively.

By the end of the book we should have gone some way toward demystifying the secrets of growth and revealing what it is that makes a few companies so very successful at achieving it. We hope this will help you make your own personal choices on whether and how to lead the growth journey.

NOTES

1 A. G. Lafley, Procter & Gamble 2004 annual report.

2 The metric we use in this book for shareholder value creation is total return to shareholders (TRS), which reflects both movements in stock prices and value created through the distribution of dividends.

3 M. Baghai, S. Coley, and D. White, The Alchemy of Growth (Orion Business, London, 1999).

4 We explore some of these challenges in depth in the companion volume to this book, The Granularity of Growth: Asia (Cyan, London, 2007).

5 We don’t offer ideas about how to introduce new products or cross-sell to existing customers. Nor do we discuss the kinds of advantage that a particular business should or shouldn’t seek to exploit. That territory is extensively mapped by other management books.