Download - Growth Granularity 3755931894
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 1/27
CONFIDENTIAL
Grow or Die? Why growth is essential to companies and how
to achieve it
Lecture to the “Strategy and StrategicAnalysis” class
Brussels, November 25, 2010
This report is solely for the use of c lient personnel. No part of it may be c irculated, quoted, or reproduced for distribution outside the client organisation without priorwritten approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a c omplete record of the discussion.
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 2/27
1
Why growth is important?
“Growth itself containsthe germ of happiness”
- Pearl S. Buck
“All growth is a leap in the dark,a spontaneous, unpremeditatedact without benefit ofexperience”
- Henry Miller
“I did not have implants, I just
had a growth spurt” - Britney Spears
“All growth depends upon activity. There is nodevelopment physically or intellectually withouteffort, and effort means work”
- Calvin Coolidge
“The growth and developmentof people is the highest callingof leadership”
- Harvey S. Firestone
“He who moves notforward, goes backward”
- Goethe
“Intellectual growth shouldcommence at birth and ceaseonly at death”
- Albert Einstein
“Without continual growthand progress, such words asimprovement, achievement,and success have nomeaning”
- Benjamin Franklin
“Ever since I was achild I have had thisinstinctive urge forexpansion andgrowth.”
- Bruce Lee
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 3/27
2
Why and How to Grow?
Performance
3
Risks4
Value creation1
Growth and Value
1
2Survival
2
Limit5
Architecture6
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 4/273
Where should you invest?
High starting ROIC
Low starting ROIC
Improve ROIC Growaggressively
Strategy
1
We are in 1996 and you have just received USD 200,000 to invest infour types of companies (minimum 2 types of companies – USD
100,000 in each):
•Companies with low Return on Invested Capital (ROIC<6%) having asstrategy either to grow or to improve margins
•Companies with high ROIC (>20%) having as strategy either to growor to improve margins
As you want to maximize the return on your investment in 2006, whatshould you have done? (where do you place your money in the
hereunder matrix)
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 5/274
Higher
TRS exhibited in highgrowth companies
Total Return to Shareholders (TRS) 1984-2004
Annual, percent
11
14
+28%
Below GDPgrowth ’84-’941 (59)
Above GDPgrowth ’84-’941
(35)
Growth is essential to value creationPercentage of US top 100 companies
1
1: US gross output growth ’84-’94: 5.5% CAGR 2: I.e. failed to survive independently due to bankruptcy or M&A
Source: Global Vantage, Datastream, McKinsey analysis
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 6/275
Why and How to Grow?
Performance
3
Risks4
Value creation11
Limit5
Architecture6
2Survival
2 Grow or Go
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 7/27
6
Grow or go matrix: a 20 year view of large company growthFirst decade performance distribution 1984-1994, 100 Largest US Companies
High
Low
Revenue
Low High
TRS
S&P 500
GDP
Unrewarded Growth giants
Challenged TRS performers
11 29
3327
2
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 8/27
7
How many “Growth Giants” survived in the 90s and howmany remained “Growth Giants”? Largest U.S. companies, 1984
EXIT
TRS growth
Low High
R e v e n u e g r o w
t h
Low
High “Growth Giants”
“Challenged”
“Unrewarded”
“TRS Performers” GDP
S&P 500
2
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 9/27
8
How many “TRS Performers” survived in the 90s and howmany did still beat the S&P 500?Largest U.S. companies, 1984
EXIT
GDP
2
TRS growth
Low High
R e v e n u e g r o w
t h
Low
High “Growth Giants”
“Challenged”
“Unrewarded”
“TRS Performers”
S&P 500
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 10/27
9
Death rates2
6x higher in lowgrowth companies
Survival rate in 2004
Percent
63
94
+50%
Below GDPgrowth ’84-’941 (59)
Above GDPgrowth ’84-’941
(35)
Growth is essential to survivalPercentage of US top 100 companies
2
1: US gross output growth ’84-’94: 5.5% CAGR 2: I.e. failed to survive independently due to bankruptcy or M&ASource: Global Vantage, Datastream, McKinsey analysis
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 11/27
10
Why and How to Grow?
Performance
Risks4
Value creation11
Limit5
Architecture6
2Survival
2
To Move or Not To Move3
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 12/27
11Source: McKinsey Granularity of Growth
Intro question: What are the key sources of growth for a largecompany and how does that compare with GDP growth?
Growth
cylinders
Total revenue
growth
The revenue growth your company
achieves through growth of thesegments in your portfolio
Portfoliomomentum
Growth achieved through gainingor losing share from competitors
Share gain
Net revenue growth achieved whenmaking acquisitions or divestments
M&A
3
Description
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 13/27
12
On average, large companies do not grow by gaining shareRevenue CAGR breakdown (average), percent, 1999–20051
0.4
3.1
6.6
10.1
3
Growthcylinders
Total revenuegrowth
Portfoliomomentum
Share gain
M&A
Large company average
To becompared
with 3.9%GDP growth
1: 416 fully decomposed companiesSource: McKinsey Large Company Growth Decomposition Database
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 14/27
13
21
33
46
It’s about ‘where to compete’: Holding or Acquiring theright cards 4x as important as playing your hand wellPercent M&A
Portfoliomomentum
Share again
Overall sample1 … … and by sector
3
224037
51
32
21
Media & Entertainment
EPNG
Healthcare
Telecom
Financial Institutions
Consumer Goods
Retail and wholesale
High Tech
29
72
32
361648
28
263143
24
144343
115632
38
3246
182953
163747
1: 416 fully decomposed companiesSource: McKinsey Large Company Growth Decomposition Database
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 15/27
14
Decision on “where to compete” should be taken atgranular level
Less granular(“Coarse-grained”)
More granular(“Fine-grained”)
3
GRANULARITY
•Not commonly used in business yet … but widely used inscientific and engineering circles
•Refers to the size of the components of a larger system
•Cuts through the tyranny of the “averaged view”
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 16/27
15
35
18
12
8776
55554444
3332
-1
-2
UTSRQPONMLK JIHGFEDCBA
Δ =37%
Markets and companies are granular
Telecommunication companies
2
-5
-3
3
5
8
9
32
-14Product 10
Product 9
Product 8
Product 7
Product 6
Product 5
Product 4
Product 3
Product 2 12
Product 1
Δ=46%
3
Market momentum of Telecom industry
CAGR 1999-2005, Percent
Momentum spread within one
company’s portfolio
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 17/27
16
Why and How to Grow?
Performance
Risks
Value creation11
Limit5
Architecture6
2Survival
2
3
Beware of the leverage mirage4
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 18/27
17
Growth (or decline) leverage
EXAMPLE
As in•Debt leverage
•Backward integration
•Use of "invariable"labor
•…
Break-evenpoint
Profits
Revenues
Costs
Volumes
∆ Profits > > ∆ Revenues
Watch the
true risk
" d" h
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 19/27
18
Assessing "good" growth
From To
•Only margin (growth) matters •Margin and capital growth4
•Positive sales leverage •Positive and negative salesleverage
1
•Building fixed costs •Flexibilizing down fixed costs3
•Volume and price increases •Favorable and unfavorableprice/volume correlations
2
•Business as going concern •Continuity and disruptivethinking
5
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 20/27
19
Why and How to Grow?
Performance
Risks
Value creation11
Limit
Architecture6
2Survival
2
Growth and Sustainability
3
4
5
R t il b ki b h t k i4
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 21/27
20
Retail banking branch network expansion
Low
Prim ary cus tomer
marke t
share by m icromarket
Number of branches/ €
economic activity
Branch sh are
Number of bank’s branches/total branches
High
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.0 0.1 0.2 0.3 0.4 0.5
4
Source: McKinsey analysis
Companies do ha e a nat ral limit to ho fast the co ld4
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 22/27
21
Companies do have a natural limit to how fast they couldgrow
Companies’ growth speed limits are determined by the
environment in which the company operates as well as some
company specific characteristics :
NON EXHAUSTIVE
4
•Increasing risks you face / need to take to growfaster (e.g., Insurance, banking) – “Things you don’t
know that you don’t know”
•Price elasticity in specific markets
•Investments required (long lead time in capital
intensive industries)
•Ability to manage large-scale or multiple smaller
scale acquisitions
•Development of talent and resources – the"learning pyramid" in service industry
•Ability to generate cash-flows – the "EBITDA trap"
Wh d H G ?
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 23/27
22
Why and How to Grow?
Performance
Risks
Value creation11
Limit
Architecture
2Survival
2
Granularity and Scale
3
4
5
6
Applying the ideas of granular growth at scale to5
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 24/27
23
Applying the ideas of granular growth at scale toorganizational work
5
First set the direction and the pace at which the companywants to grow
Clearly identify what success is and implement ways to
track it
Develop a plan across multiple time horizon – see nextpage
Implement an organizational model that supports growth
Attract the different talents that are required to drivegrowth
I
II
III
IV
V
The Growth mapTM maps the strategic direction and5
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 25/27
24
The Growth mapTM maps the strategic direction anddetermines the actions and capabilities required forsuccess
Share gain
Portfoliomomentum
M&A
Commercial and
operationalexcellence
Refresh value
proposition
Disrupt business
model
Shift resources White spacesNew markets
Fill-in acquisitionsand divest
Bolt on M&ALearning
acquisitions
Horizon 1Extend and defendcore businesses
Horizon 2Build emerging
businesses
Horizon 3Create viableoptions
ILLUSTRATIVE
5
•Profit•ROIC
•Business
maintainers
•Revenue•NPV
•Business
builders
•Option value
•Champions and
visionaries
Metrics
TalentSource: McKinsey analysis
Growth Remains an Art: More than one way to move
5
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 26/27
25
Growth Remains an Art: More than one way to move
Beginning
"Virgin Tour"
VogueEvita
Pensive/Pop
Retro
"Sex"
Children
books
Var-ious
Evita
Author
Model
Actress
Designer
Musician
RollingStones (old)
Some solos
Rolling Stones(reunified)
A few small
roles
Actor
Musician
5
Growth staircase– Mick Jagger Growth staircase - Madonna
Source: Wikipedia, Rob Verhoest photos, Morrisonhotelgallery.com, McKinsey
Wrap up
7/26/2019 Growth Granularity 3755931894
http://slidepdf.com/reader/full/growth-granularity-3755931894 27/27
26
Wrap up
Value creation1
Growth and Value 1
2Survival
2 Grow or Go
Performance
To Move or Not To Move3
RisksBeware of the leverage mirage4
LimitGrowth and Sustainability5
ArchitectureGranularity and Scale6