Business growth in a cold climate

gigcmo
13/09/2022

As a report by McKinsey explores the 10 rules of value-creating business growth, based on empirical evidence since the 2008 global financial crisis, we reflect on their findings for achieving business growth in challenging economic climates.

McKinsey noted that: "business leaders need to follow a holistic growth blueprint", citing three core elements:

  • A bold aspiration and accompanying mindset
  • The right enablers embedded in the organiSation
  • A coherent set of growth initiatives

The challenge of business growth

Growth might be the ultimate goal for most businesses, but it’s not an easy thing to achieve. "A typical company grew at a measly 2.8% per year during the 10 years preceding COVID-19, and only one in eight recorded growth rates of more than 10% per year (Exhibit 1)." However, those that did achieve revenue growth generated shareholder returns above industry averages.

The challenge for businesses is that not only is growth hard to achieve but healthy, growth is hard to sustain, and that sustainability is essential. McKinsey said: "only one in three companies that were in the top quartile of growth between 2009 and 2014 managed to maintain that rate in the subsequent five-year period."

The 'rules' for business growth

Amongst McKinsey's 10 'rules' for growth, particular ones stood out to us:

  • Start with a winning, scalable formula: know your market and the secret formula to your business. Lots of organisations have a 'secret sauce' and aren't truly aware of what makes it special.
  • Focus on growth in your core industry first: it's the foundation your business is built on.
  • Then look beyond it and nurture adjacent business areas.
  • Expand internationally if you have a transferable advantage.
  • Combine healthy organic growth with serial acquisitions.
  • Ruthlessly prune your portfolio if you need to.

A winning, scalable formula for business growth

Putting competitive advantage first was high on McKinsey's priority list when looking at companies that had successfully achieved business growth. It is a virtuous circle - if you generate strong returns, you attract more capital and so on. Though some organisations forego profit in favour of growth for a strategic time frame, a more practical approach is to establish a business model and then scale it. In times of economic uncertainty, that more conservative approach to growth broadly proves to be more sustainable.

Grow in your core industry to drive revenue

McKinsey's study found that, on average, 80% of growth comes from a company’s core industry and the remaining 20% from secondary industries or expansion into new ones. That said, there were industry variables, particularly with many organisations looking towards a transition to net-zero carbon emissions, which presents opportunities to diversify into sustainable substitutes and alternatives. For companies with slow-growing cores, adjacent businesses can also offset slow growth.

Expand internationally

It's essential for businesses to know their local market and to maximise potential there. However, the next phase in strategic growth, or in slow-growing regions, international expansion offers immense opportunities when done well. McKinsey said: "An air-conditioning and refrigeration manufacturer, for example, managed to offset slow growth in Japan by successfully expanding to North America and China." They also noted that:

  • In faster-growing areas, such as China and North America, international regions accounted for closer to 30% of total growth.
  • Companies that expanded internationally generated 1.9 percentage points more annual total shareholder returns (TSR) than their industry peers.
  • However those with healthy growth in their home markets benefited more than those merely treading water at home.

Organic growth and acquisitions

Mergers and acquisitions are a well known way to increase revenue growth, however McKinsey found that the key to this is in the deal pattern. They found that programmatic acquirers outperformed their organic peers.

The sage advice seemed to be combining organic growth with programmatic acquisitions created the greatest returns and business strength. Instead of aiming to buy large businesses and integrating them with existing ones, doing many small deals "enables companies to gain access to new markets or consolidate fragmented ones without the risk of 'betting the house.'"

On a wider note, this can be linked to the need for businesses to create a healthy ecosystem around themselves. That correlates to the structural parts of the organisation, its team, its access to talent and its portfolio and capabilities. In an article from MIT Management Sloan School, Joanna Rotenberg, President of Personal Investing at Fidelity, likened a company's ecosystem to baking a cake, saying: “If you don't have the right ingredients, it’s not going to be great, and it doesn’t matter what kind of icing you put on it.”

Pruning your business portfolio

Perhaps contrary to gut instinct for most business leaders, the final takeaway from McKinsey’s research was that it's ok to shrink if needed. Particularly in challenging times - either generally or for your organisation, a willingness to periodically "prune back by divesting slow-growing parts of your portfolio and reinvesting the proceeds into new areas" was a healthy part of sustainable businesses that achieved optimal growth and revenue. McKinsey said: "The key is not to confuse increasing scale with value-creating growth."

Knowing when and how to do this in part comes from an understanding of the financials, but it’s also highly informed by data and market knowledge. In broad terms, that comes down to knowing the right metrics to measure, and having a deep understanding of the market including competitors. For example, MIT Management Sloan School said: "Fidelity measures success and performance metrics in a variety of rigorous ways. One of them is thinking about a customer’s lifetime value and staying patient; gains might not always be immediate when acquiring customers."

For businesses seeking to grow in the current climate, there are lots of challenges - the running costs of operations in face of inflation and energy prices, the staffing shortages and political upheaval. However, there are also opportunities to be had. There is a collective willingness for businesses to succeed, remote working and digitisation continue to present opportunities to streamline organisations, and where seismic market change ensues there are opportunities for acquisition and taking advantage of gaps in the market. In short, for those who actively seek growth, with the right strategic guidance and clarity of thought, it is entirely possible to achieve.

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