We recently studied 200 companies around the world and 100 of the largest U.S. corporations in 17 sectors in hopes of discovering what determines superior growth. Is an outperforming growth rate the result of executing healthy mergers and acquisitions? Is it the result of organic growth through innovation? Or is it a simple matter of better execution in existing portfolio markets?
The answer is definitely yes to all three -- but the caveat is that none of these approaches alone will yield above-average returns if you take a macro rather than micro view of markets in making-where-to-compete decisions. Our studies find that most companies fall short of their growth targets because they don't examine themselves and their markets granularly enough, and this failure creates two infinitely solvable problems.
The first problem is that a sweeping and macro view creates perceived headroom for growth in large industry groups (sized about $3.5 trillion on average, such as energy, telecommunications, capital goods and semiconductors). While the Global Industry Classification Standard (GICS) designates industry groups along these lines, they are too broad to be meaningful when it comes to making decisions on the battlefield for capturing customers and growing revenue.
The second problem is that most corporations tend to view themselves along the lines of these macro categories (industry groups and industries), so they characterize their business portfolios in similar terms and base their strategic plans on such broad market categories. Meanwhile, real corporate growth is a function of adopting a business portfolio that is segmented to a much finer degree of granularity, because the bailiwick of growth in broad industry sectors comes largely from a minority of sub-industries within that sector.
Let's take the food, beverage and tobacco industry grouping as an example. At its next lower level of granularity, the group is broken down into its three smaller component industry segments -- food, beverages and tobacco. At this level, the GICS breaks markets down into 151 industries sized around $500 billion on average.
But then we can look at smaller GICS categories within the food segment, such as frozen foods, savories, edible oils and dressings. It is these sub-markets, worth between $1 billion and $20 billion, that are granular enough to hide pockets of opportunity that provide real leverage in configuring a portfolio that grows.
In fact, our studies show that capturing the momentum of these sub-industries in your portfolio accounts for nearly 50% of a typical company?s growth. So it is at this sub-industry level where the granular game begins -- and where portfolio configuration becomes more important than one's ability to beat the market through innovation or simply better execution alone. To note, market share gains only account for 21% of the average large company?s growth with M&A activity explaining only 33%.
But we can still dig deeper into the market soil. If you have the data, you can explore still smaller slivers within subindustries, such as ice cream (within frozen packaged foods), or low-calorie snacks (within snacks). At this level of granularity the world economy has millions of growth pockets that range in value from $50 million to $200 million.
It's undoubtedly much better to be in the right subindustry or micro niche in the first place than to try and outdo all the others rushing into the same macro market space. The key is positioning yourself in a forward manner by thinking in terms of micro markets, and then orienting yourself to perform in those that show exceptional overall growth. Doing so can have you riding the momentum of real, not perceived, headroom for growth.
Essentially, the more granularity with which a corporation can assess markets and the way it allocates its own resources to take advantage of them, the greater its chance of finding real growth opportunity within and beyond its existing business portfolio. This opportunity then aggregates into success that is very significant at the level of corporate earnings.
Finding Growth Pockets
The exhibit below demonstrates the direct value of a granular approach for GoodsCo, a disguised multinational consumer goods corporation. Note the segmentation of performance along the lines of product category as well as region. Note also the color-coding scheme of characterizing in which granular segments the company performs in an exceptional, great, good or poor manner. Finally, note that the performance assessment is based on the three key growth drivers: segment momentum, M&A and market-share gains.
With all the granular portfolio cards on the table, it becomes much easier for GoodsCo to assess and make decisions about where to develop new products and businesses, what companies to divest or acquire and in which segments to focus operational excellence or expansion initiatives.
In the case of GoodsCo, it can't claim exceptional performance in any of the 47 segments in which it competes, and it performs poorly in 27 segments that account for 87% of sales. Also, GoodsCo is underperforming in its core European and North American segments. On the positive side, the company is outperforming in Latin America and it performs good or great in 20 of the 47 segments -- but these make up only the remaining 13% of sales. GoodsCo has a portfolio problem.
Knowing this and having this granular view enables GoodsCo to rationally consider the pros and cons of acquiring businesses or expanding organically in growth niches. It also provides a basis for seizing divestment opportunities in segments where the company may be losing market share but its portfolio momentum is good. Finally, GoodsCo could acquire companies (and so build portfolio momentum) in lackluster segments where it expects market growth to improve significantly.
Sometimes cashing in on a segment requires a series of ascending steps toward growth -- a deliberate and distinctive staircase pattern instead of a more typical chaotic zigzag of actions. Johnson & Johnson's Acuvue contact lens business implemented a staircase pattern when it acquired Frontier Contact Lenses, which represented five percent of the U.S. $1 billion lens market at the time. Then through a series of steps -- including the acquisition of new lens technology and development of an advanced manufacturing process -- J&J introduced the Surevue two-week lenses in the late 80s, and, a few years later, daily disposable lenses. The step from two-week lenses to daily lenses grew Acuvue's worldwide revenues from $225 million to $600 million by 1995.
One point is for sure, as we discovered in our research: there is a difference between real headroom for growth and perceived headroom for growth, and the only way to uncover the truth of opportunity is to drill into industry micro-segments. If the view is too broad, a company will struggle to find portfolio traction. But if executives cultivate a granular understanding of where to compete, then faster-growing micro-segments can be tapped with the right capabilities, assets and market insights.
Patrick Viguerie is a McKinsey & Company director in the Atlanta office, Sven Smit is a director in the Amsterdam office and Mehrdad Baghai is an alumnus of the Toronto and Sydney offices. All are authors of the book The Granularity of Growth: How to Identify the Sources of Growth and Drive Enduring Company Performance.