growth granularity 3755931894

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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.



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



2

Why and How to Grow?

Performance

3

Risks4

Value creation1

Growth and Value

1

2Survival

2

Limit5

Architecture6



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)



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




Performance

3

Risks4

Value creation11

Limit5

Architecture6

2Survival

2 Grow or Go



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

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

http://web.brandsoftheworld.com/brands/0000/2335/Merck.eps

http://www.chrysler.com/index.html

http://www.motorola.com/

http://www.fordvehicles.com/

http://www.altria.com/default.asp

http://www.saralee.com/

http://www.walmart.com/

http://www.jnj.com/home.htm

http://lilly.com/index.html



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

http://images.google.com/imgres?imgurl=http://www.trinetcom.net/pix/SBC_Logo.jpg&imgrefurl=http://www.trinetcom.net/test_repair.html&h=191&w=300&sz=37&tbnid=oA2s8nemlPAJ:&tbnh=70&tbnw=110&start=3&prev=/images%3Fq%3Dsbc%2Bcommunications%2Blogo%26hl%3Den%26lr%3D

http://images.google.com/imgres?imgurl=http://iceee.ie.cinvestav.mx/imagenes/Logo%20AT%26T.jpg&imgrefurl=http://iceee.ie.cinvestav.mx/&h=706&w=1385&sz=69&tbnid=b46GmEZn-AAJ:&tbnh=76&tbnw=149&start=1&prev=/images%3Fq%3DAT%26T%2Blogo%26hl%3Den%26lr%3D

http://www.kroger.com/index.htm

http://images.google.com/imgres?imgurl=http://www.ambientcorp.com/images/coned_logo.gif&imgrefurl=http://www.ambientcorp.com/partners.html&h=125&w=154&sz=2&tbnid=lLxVPtJNX5EJ:&tbnh=73&tbnw=90&start=6&prev=/images%3Fq%3Dconsolidated%2Bedison%2Blogo%26hl%3Den%26lr%3D

http://images.google.com/imgres?imgurl=http://www.kctcs.net/foundation/gala/2002/sponsorlogos/aep.jpg&imgrefurl=http://www.kctcs.net/foundation/gala/2002/goldsponsors.html&h=199&w=239&sz=7&tbnid=v91zVuUnNK0J:&tbnh=86&tbnw=103&start=1&prev=/images%3Fq%3Damerican%2Belectric%2Bpower%2Blogo%26hl%3Den%26lr%3D

http://images.google.com/imgres?imgurl=http://www.vtk.be/activiteiten/kwis/logo_exxon.gif&imgrefurl=http://www.vtk.be/activiteiten/kwis/&h=158&w=234&sz=9&tbnid=_ob7Kz2BGQsJ:&tbnh=70&tbnw=104&start=4&prev=/images%3Fq%3Dexxon%2Bmobil%2Blogo%26hl%3Den%26lr%3D

http://images.google.com/imgres?imgurl=http://www.jamestown2007.org/library/websoaringNameUnder(Rgb).jpg&imgrefurl=http://www.jamestown2007.org/sponsors.cfm&h=52&w=200&sz=19&tbnid=cC0ljYnop80J:&tbnh=25&tbnw=96&start=26&prev=/images%3Fq%3Dnorfolk%2Bsouthern%2Blogo%26start%3D20%26hl%3Den%26lr%3D%26sa%3DN

http://images.google.com/imgres?imgurl=http://www.americancoalcouncil.org/events/images/Copy%20of%20CSX%20Logo%20-%20black.jpg&imgrefurl=http://www.americancoalcouncil.org/events/event102004.html&h=387&w=771&sz=77&tbnid=bYm5qWF6wtoJ:&tbnh=70&tbnw=139&start=2&prev=/images%3Fq%3Dcsx%2Blogo%26hl%3Den%26lr%3D

http://images.google.com/imgres?imgurl=http://admin.pmai.org/newsline/images/19137/JC%20Penney%20Logo.jpg&imgrefurl=http://www.photomarketing.com/dailynews/wklynews.asp%3Fdt%3D4/7/2004&h=49&w=192&sz=3&tbnid=lza8olht4UkJ:&tbnh=25&tbnw=98&start=16&prev=/images%3Fq%3Djc%2Bpenney%2Blogo%26hl%3Den%26lr%3D

http://images.google.com/imgres?imgurl=http://www.portalautomotriz.com/reportajes/expoforo2004/goodyear/images/logo.gif&imgrefurl=http://www.portalautomotriz.com/reportajes/expoforo2004/goodyear/&h=200&w=200&sz=3&tbnid=jfY0bKNnSnUJ:&tbnh=99&tbnw=99&start=3&prev=/images%3Fq%3Dgoodyear%2Blogo%26hl%3Den%26lr%3D

http://images.google.com/imgres?imgurl=http://www.tx.ncsu.edu/organizations/student/ttsc/dupont_logo.jpg&imgrefurl=http://www.tx.ncsu.edu/organizations/student/ttsc/industry.html&h=275&w=423&sz=19&tbnid=1nK74cStGT4J:&tbnh=79&tbnw=122&start=6&prev=/images%3Fq%3Ddupont%2Blogo%26hl%3Den%26lr%3D



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



10


Performance

Risks4

Value creation11

Limit5

Architecture6

2Survival

2

To Move or Not To Move3



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



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



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



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”



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



16


Performance

Risks

Value creation11

Limit5

Architecture6

2Survival

2

3

Beware of the leverage mirage4



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



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



19


Performance

Risks

Value creation11

Limit

Architecture6

2Survival

2

Growth and Sustainability

3

4

5

R t il b ki b h t k i4



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



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 ?



22


Performance

Risks

Value creation11

Limit

Architecture

2Survival

2

Granularity and Scale

3

4

5

6

Applying the ideas of granular growth at scale to5



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



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



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

http://en.wikipedia.org/wiki/Image:Voguem.jpeg

http://en.wikipedia.org/wiki/Image:Hungupm.jpeg

http://en.wikipedia.org/wiki/Image:Evita_Screencap1.jpg

http://en.wikipedia.org/wiki/Image:Voguem.jpeg

http://en.wikipedia.org/wiki/Image:Likeavirginm.jpeg



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

growth granularity 3755931894

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