The ten rules of growth was one of McKinsey’s most popular articles last year—not surprisingly, perhaps, given how difficult it has been to generate consistent growth over the past decade.1 In this episode of the Inside the Strategy Room podcast, senior partners Chris Bradley and Rebecca Doherty, coauthors of the article, explain how each rule helps executives calibrate their companies’ growth and inform expansion decisions. This is an edited transcript of their discussion. For more conversations on the strategy issues that matter, follow the series on your preferred podcast platform.
Sean Brown: What sparked your interest in analyzing growth patterns?
Chris Bradley: It’s deep in the DNA of our practice to look for empirical rules of growth, starting with our bestselling book, The Granularity of Growth. We wanted to continue that tradition, given that growth is getting harder. We also got data that allowed us to carve corporate revenues quite precisely into 130 industries, which allowed us to better distinguish between the effects of a company’s momentum and its industry.
We wanted to look at a long enough period to correct for any blips, so we chose ten years, but we also adjusted for any variants around the start and end points. So we took the average growth rate between 2005 and 2009 and compared it with the average for 2015 to 2019, then compared the growth rate of the two time periods, trying to see through short-term fluctuations to a company’s long-term rate of growth.
Sean Brown: Most CEOs are dealing with extreme volatility these days. Should growth be a priority?
Rebecca Doherty: In other research we did, we found that those who pursue growth through a downturn and early recovery outperform their peers over the long run. These companies have the dry powder and capacity to grow, and they stick to their strategies even as the economy declines. They get so far ahead of their peers during the downturn that the peers can’t catch up. These players have long-term aspirations, and when the context changes, they may pull back in certain areas, such as administrative costs, but they double down in the areas that matter, be they digital capabilities, sales, or new growth markets. They have the financial flexibility to lean in and make things happen.
Chris Bradley: There is a quote by the late race car driver Ayrton Senna going around our firm that we’re finding inspirational, “You can’t overtake 15 cars in sunny weather, but you can when it’s raining.” These are the times when the pecking order of industries changes.
Sean Brown: So heavy volatility is a time when you can establish distance on the pack. Your research covers the global financial crisis. How do the challenges during that period compare to today?
Chris Bradley: The interesting thing for this analysis is not so much the short-term effects of that crisis but that it represents the moment when corporate growth rates slowed. In other words, the prior decade was a time of much faster growth than the subsequent decade for the average large company. Since the global financial crisis, companies’ balance sheets have been growing faster than the top line, which has led to a suppression of returns.
Companies often think that growth is sacrificial—you have to endure long periods of low profit to generate growth. That is not true. The order is not growth followed by profit; it’s high returns followed by growth.
There are many possible reasons for the secular slowing of corporate growth. My sense is that much of it has to do with industry transitions and disruption—the march of digitization, globalization, and now the race to net zero—which make it harder for incumbents to grow, and many companies that do achieve strong growth are doing so in a winner-takes-all way.
Rebecca Doherty: While no two downturns are alike, we can take lessons from the financial crisis around using this time to accelerate and think through the nuances of your strategy in deciding which of the ten rules to lean into.
Sean Brown: Is growth a requirement for outperformance?
Chris Bradley: Growth is a sure sign that a company is doing something right. It’s no surprise, then, that revenue growth is a critical driver of corporate outperformance. In fact, it’s almost impossible to outperform in shareholder returns over the long term without being a good grower. We found that an extra five points of revenue per year results in three to four more points of shareholder returns, so if you want to maximize your company’s value, you have to find ways to grow. That’s where our ten rules come in [see sidebar, “The ten rules of growth”]: What’s the science of that? What’s the engineering of a robust growth plan that’s well calibrated?
Rebecca Doherty: And that growth needs to be profitable growth. Growth for growth’s sake is not fruitful. Growing faster and more profitably than your peers is what leads to higher shareholder returns.
Chris Bradley: That’s right. The dependent variable we were testing was what led to outperformance in total shareholder returns. Rebecca’s point is a great segue into our first rule, which is put competitive advantage first. Oftentimes, companies think that growth is sacrificial—you have to endure long periods of low profit to generate growth. That is not true. The order is not growth followed by profit; it’s high returns followed by growth. In fact, companies that begin with returns on capital higher than the cost of capital go on to grow at double the rate of those that don’t start out that way. The big idea is that the best way to grow is to have a business that generates great returns, then scale it.
Sean Brown: What role do industry trends play, which are the subject of the second rule?
Rebecca Doherty: The rule about making the trend your friend is about positioning yourself so you can benefit from tailwinds. During the COVID-19 pandemic, did you find ways to connect with consumers while they were at home and thus position yourself for growth? Or were you merely fighting headwinds? To combine this with the first rule, if you are following the trend and have a competitive advantage, that’s the beginning of a successful growth formula. If the trend is not your friend, there may be subsectors or adjacent sectors you can move into that are experiencing growth—you could find pockets of outperformance based on your competitive advantage.
Sean Brown: The third rule is about the need to outgrow your peers. Why is that so important?
Chris Bradley: It’s another riff on the notion that growth is about excellence. It’s great to be in a fast-growing industry, but when it comes to a choice between being an outperformer in a slow industry or an underperformer in a fast industry, you will do much better every time being an outperformer in the slower industry. In other words, while it’s good to follow the trend, the rule of excellence comes first. If you go into a fast-growing market but you can’t keep up with competitors, you will destroy a ton of value, whereas if you can find a winning formula and a way of gaining share in your market, that tends to be rewarded.
If you are following the trend and have a competitive advantage, that’s the beginning of a successful growth formula.
Sean Brown: Another point you make in the article is about the importance of focusing on growth in your core industry. How do you turbocharge that?
Rebecca Doherty: Our research tells us that 80 percent of the average company’s growth comes from its core industry, and this rule accentuates the need to do well in your core business. That may look different depending on where you are on your S-curve of growth. If you’re near the bottom, your core is probably more than 80 percent at your focus. If you’re near the top of the S-curve, you are trying to squeeze whatever growth you can out of the core but need to look at other sources as well. But your core business is what you know best and where your competitive advantage is, so nailing that and even expanding your definition of core is important.
Chris Bradley: One reason we created these rules of growth is to help executives calibrate what they should expect based on norms. Let me put it this way: the probability of growing at more than 5 percent a year is 2 percent, or one in 50, if your core business is growing slowly, but the probability is 41 percent if your core business is growing quickly. A fast-growing core business creates a 20-fold probability improvement of growing at 5 percent annually.
Of course, some businesses don’t have a fast-growing core, but if that’s the case, you have to ask what it will take to do a one in 50. What big move can I make outside the core? As I mentioned, these rules don’t deliver a magic potion but a level of calibration around setting your growth goals that allows you to match the ends to the means.
Sean Brown: Turbocharging your core business was Rule #4, and the next one is to look beyond your core. How do you best nurture growth in adjacent segments?
Rebecca Doherty: This is the flip side of the point that 80 percent of your growth should come from your core. That means 20 percent comes from outside, which is a substantial amount. Rule #1 comes back into play again, because companies that go into adjacencies, whether organically or inorganically, need to build on something they’re good at. That’s the point of Rule #6: “Grow where you know.” You need what we call “a right to play” in the new market. To Chris’s earlier point, it could be a fast-growing market but if you have no business being there, entering it won’t be beneficial. Contrarily, if you find a niche that is a good fit with your capabilities or other strengths, and you develop a good strategy to enter the arena, that will often breed success.
Chris Bradley: About 15 percent of our sample made a big play to grow outside the core, where the new business became more than 20 percent of the company, and these companies outperformed on average by about 1.5 points. If your core is growing slowly, you have to try even harder to get that outperformance outside the core.
Sean Brown: Your next rule has a colorful name: “Be a local hero,” meaning commit to growing on the home front. How does that differ from turbocharging your core?
Rebecca Doherty: We talked about growth in terms of industries—your core and adjacencies. The other axis is geography. Your core business is composed of your industry segment and your geography. We found that only one in five companies with below-median growth in their home market manage to outgrow their peers, proving that you need to be strong in your local geography. The exception is if you are in a slowing-growing region, such as Japan, in which case you need to go outside your geography to find more growth, but generally you need to win at home and then expand out from there.
A fast-growing core business creates a 20-fold probability improvement of growing at 5 percent annually.
Sean Brown: To that point, your next rule is “Go global if you can beat local,” which is about international expansion. Do you see any differences between developed and developing economies on that front?
Chris Bradley: A little. The critical thing is that 50 percent of all corporate growth during the period we studied came from outside local markets, so foreign markets really matter. But, again, it’s a reflection of excellence. If you can grow internationally, it says something about your capabilities, so that gives you about two points in additional TSR. But those gains are undone if you are not doing well in your local market. This tells you that ideally you should have a great platform that you export into other markets.
We did find a big benefit to being US-focused, either by being based in the US or, if you are a European or Asian company, growing into the US. Going to China tended to not produce profitable or successful growth, and staying solely in Europe or Japan didn’t deliver great results.
Sean Brown: Let’s talk about programmatic M&A, which is one of your rules of growth. Why is this M&A strategy beneficial to growth?
Rebecca Doherty: For a quick definition, programmatic M&A is making a series of acquisitions to support a single business theme or strategy. You might do one or two larger anchor acquisitions, then you would follow up with smaller ones to build out the business. The idea is that you develop capabilities to both identify acquisition targets and integrate them, so M&A is a capability in the same way that sales and marketing are. Our research shows time and time again that a programmatic approach on balance produces the higher excess return to shareholders.
We crossed this logic with growth and found that companies pursuing programmatic M&A had higher growth rates than those growing purely organically or doing selective or large deals. For example, among companies that grew more than 5 percent over the ten-year period, those that had a programmatic strategy delivered more than 5 percent in shareholder returns versus 1.5 percent for the median company pursuing an organic growth strategy.
Chris Bradley: This research shows that even when you control for high growth, programmatic is a better way to go than organic because you get shareholder returns. This is likely because programmatic M&A is a cheaper and faster way to achieve your growth goals and less risky than doing it organically.
Sean Brown: Sometimes you need to free up dry powder for those acquisitions, so what role do divestitures play?
Chris Bradley: If you can achieve consistent growth, that’s the surest ticket to outperformance, but only 10 percent of companies manage to do that over a decade. Those that can’t should consider a strategy we call “shrink to grow.” This is like pruning back and then growing from there. Over a ten-year period, you may have one or two major dips in your growth that represent large divestitures, but in the other years, you grow. Fourteen percent of companies in our sample did that and they posted 4 percent TSR outperformance. This rule goes against the idea that growth and scale are synonymous. They are not. A CEO’s objective should be for the company to grow, which is not the same as remaining a big company.
Companies can use the funds from divestitures, spin-offs, or carve-outs to invest behind some of the other rules, such as “Grow where you know” and “Make the trend your friend.” An example of that is an Australian company that divested a division which represented half of its revenue. The company is now worth more than it was before the divestiture because instead of one company that is OK at growth, it is now two value-creating companies.
If you master only one of the rules, both your growth and excess shareholder returns will likely be negative. If you master eight or more rules, you are looking at median growth of almost 7 percent and median excess TSR of almost 6 percent.
Rebecca Doherty: Aside from financial benefits, divesting to grow also frees up human capital and management bandwidth. The calories that senior management were spending trying to manage the divested business they can now spend on other areas, and likewise talent can be redeployed to work on other priorities.
Sean Brown: Is the order for the ten rules significant?
Chris Bradley: The order was driven by logical progression. You have to start with excellence in your business, outperformance, and high returns, then move on from there. But it’s not a step-by-step recipe.
Rebecca Doherty: Having a competitive advantage you can build on is key for all the other rules, so that needs to come first. We did find that if you master only one of the rules, both your growth and your excess shareholder return will likely be negative. That was the case with the median company we studied. If you master eight or more rules, you are looking at median growth of almost 7 percent and median excess TSR of almost 6 percent. So there is a linear relationship: the more rules you master, the higher the growth and shareholder returns you are likely to generate.
Sean Brown: How tough is it to master all ten?
Chris Bradley: Fewer than 10 percent of the companies we studied mastered more than six rules, and fewer than 1 percent mastered more than eight, so it’s hard. But the good news is that by the time you check off four or five rules, which is attainable, you are in strong territory for growth and TSR outperformance. And you don’t always need to go for every rule. If, for example, your core business is pumping and your local market is growing quickly, you shouldn’t explore other types of growth—you should be harvesting as hard as you can.
Sean Brown: Do companies struggle with any one of these rules more than others?
Chris Bradley: It’s situation-specific and that’s why we feel a bit brave publishing an article that lays out ten rules for growth, as though we have some grand prescription. It’s meant to be a helpful set of calibrations to help you understand where you are on the growth curve.
That said, we have found a handful of combinations that seem to be successful. One is to have a great core business in a great local market and just execute it well; we call that “ultra focus.” Another is that when you have a healthy, fast-growing core and manage to internationalize it, which one in five companies does, it’s a very successful formula.