The growth code: Shrink before you grow

Consistent growth is elusive. When we studied the growth patterns of the 3,000 largest companies by revenue, we found that only one in ten was able to grow its revenues for at least seven of the past ten years. These consistent growers developed the mindsets, pathways, and capabilities necessary to achieve sustained and profitable growth and, not surprisingly, outperformed their industries—by 7 points of excess TSR on average.

But what if you lack a consistent growth engine? The best approach may be to first trim off businesses that are a drag on performance—good portfolio management practice regardless of your growth profile. This frees up capital for investment in initiatives with higher growth and profitability potential. Among the ten rules of growth we described in our recent article, Rule #10 advocates using that very pathway.

While it may be tempting to vault into a high-growth segment with a “big bang” acquisition, such deals come with numerous risks and challenges that companies need to carefully address and, empirically, those who pursue them tend to underperform (exhibit). Periodically pruning back and then generating growth from the new base has a much better record. In our study, these “shrink to grow” companies divested parts of their portfolios in one or two years out of the decade but grew consistently in other years. As a result, they delivered median excess TSR of 4 percentage points.

The growth code: Go global if you can beat local

This finding reinforces the importance of dynamic portfolio management. Leading companies tend to regularly rotate their portfolios, stepping out of the way of headwinds and positioning themselves to take advantage of tailwinds. Dynamic portfolio managers continuously ask themselves if they are still the best owners of a given business by objectively assessing the industry’s attractiveness, their competitive position, and the business’s performance. Can you extract long-term value by leveraging your unique capabilities or links to other business units? If the answer is no, it is probably time to consider divestiture.

One emerging-market industrial company has consistently refreshed its portfolio over more than 100 years, exiting businesses that didn’t meet thresholds set for their performance and reallocating resources to new growth segments. In recent years, the management opted to divest two business units—one whose small scale made it unable to compete with larger rivals and another that was performing well but leaders saw limited additional upside and expected better returns from redeploying that capital. In parallel with the divestments, the company made acquisitions to beef up existing business and launch new ones—including in a sector with strong tailwinds where it could leverage its continuous improvement methodology. The moves led to lower total revenues but doubled the company’s share price over three years as the market rewarded the higher returns on capital and a better growth outlook for the refreshed portfolio.

A European multinational similarly used divestitures to reinvent itself over time. The company, which started in mining more than a century ago, shifted into chemicals early in the millennium. However, concerns about environmental sustainability and competitive disadvantages led it to undertake another series of divestments. Between 2001 and 2015, it sold ten core chemicals operations and used the funds to venture into nutrition, buying 25 life and materials sciences businesses to build a specialty nutrition platform. The divestments combined with the bold programmatic M&A campaign resulted in 20 percent growth between 2017 and 2022.

Selling off legacy businesses or shutting down initiatives that are not meeting expectations can be psychologically difficult for owners and managers—it is hard to let go of something into which you invested time, energy, and emotion. However, our analysis strongly suggests that selective and continual pruning of the portfolio can help not only avoid performance declines but promote a renewed focus on growth. By overcoming the common roadblocks to divestitures, you can free up financial and human capital for new strategic priorities that deliver consistent growth.

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