In The Granularity of Growth, we used insights from a proprietary database of large companies to argue that executives need to pursue growth in multiple ways. We disaggregated growth into three drivers: portfolio momentum, or the market growth of the segments in a company’s portfolio; M&A; and market share gains. The exercise showed us that companies outperforming their peers on two or three of these drivers grow faster and achieve better returns than those that outperform on just one. Now, three years later, we can reiterate our advice with more assurance because it’s clear that these multi-faceted growers have withstood the test of the financial crisis and the economic downturn—and continued to outperform.
That’s the first of three findings we share in this research update, which reflects the growth of our database from some 400 companies in 2007 to more than 700 today, as well as the addition of a significant set of smaller companies with annual revenues of less than $3 billion. The second finding is that companies from emerging markets are outgrowing competitors from developed ones at a startling pace. The third is that the smallest companies in our database, with revenues of less than $1 billion, are growing by increasing their market share to a much greater extent than larger companies are. For the latter, the role of share gain is marginal or even negative.
Companies that fared better in the downturn grew in multiple ways
The downturn had a dramatic effect on the global GDP growth rate, which swung from 10 percent in 2007–08 to –5 percent in 2008–09. The global corporations in our database had an even gloomier experience: their average topline growth nosedived from 15 percent in 2007–08 to –11 percent in 2008–09. Corporate growth was harder hit than GDP growth, in part because government spending increased, dampening the effects of falling private investment and consumption on GDP.
Amid the gloom and doom, the top-quartile companies in our database on two or more of the three drivers of growth—portfolio momentum, M&A, and market share gain—stood out as relative winners. Before the downturn, they enjoyed a 24-percentage-point differential in their compound annual growth rate (CAGR) against the poor performers. During the downturn, outperformers boasted a more than 3-point advantage (Exhibit 1).
For companies defining their growth ambitions, this consistent outperformance underscores the importance of examining how they are doing on all three sources of growth and how they can raise their game.
Companies from emerging markets are growing much faster
Revenues are increasing much more quickly for companies that have their headquarters in emerging economies than for their counterparts from developed economies—overall, at home, in advanced economies, and in other emerging markets (Exhibit 2). The difference in growth rates is most startling in emerging economies where both categories of companies are off their home turf—30.7 percent growth for business units of those based in emerging markets, compared with 12.6 percent for their counterparts from the developed world. This wide gap suggests that its companies should ask themselves whether they are paying enough attention to emerging markets and allocating sufficient financial and human resources to them. Chances are the answer is no.
It’s less surprising that companies based in advanced economies are being outgrown by those in developing economies in their own home market segments. Growth is, after all, stronger in emerging markets. And in advanced economies—where companies from emerging markets are growing twice as fast as those from the advanced economies themselves—these are often attackers starting from a small base and taking market share.
Indeed, across segments, part of the outperformance may well reflect the fact that companies based in emerging markets are starting from a smaller base. In our database, the average revenue of business units from companies headquartered in developed economies was $5.9 billion, three times larger than the units from emerging economies. This relative size difference held true in emerging markets where both categories of companies compete off their own turf. Still, it’s clear in the numbers that players from emerging markets are serious competitors everywhere; their continued improvement will accentuate the growth challenge for their rivals from developed countries.
Smaller companies exhibit different growth patterns
In The Granularity of Growth, we emphasized that portfolio momentum, coupled with M&A, was much more important for corporate growth than winning market share. This advice still holds for large companies, which usually have significant share positions in reasonably mature markets. For the smallest of the new companies in our database (those with less than $1 billion in revenue), a different growth pattern emerges (Exhibit 3). Share gain represents almost four percentage points of annual growth for them, compared with a very small or negative role for the growth of larger companies.
Intuitively, this should not come as a big surprise. Smaller companies usually grow faster than their industries because they are not constrained by size, and their growth is often based on a new business model they can pursue without fear of cannibalizing revenues. Still, there may be a lesson for large corporations: study the action among smaller companies and consider whether they might be the right peer set for benchmarking the growth drivers of your smaller divisions. Looking through this new lens may help leaders set targets that stretch their ambitions yet are still realistic.