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 / Summer 2014 / Issue 75


Growing When Your Industry Doesn’t

Success and profits flow to companies with uniquely valuable market propositions—regardless of their sector.

If we had a nickel for every executive who appeared on CNBC and blamed his or her company’s inability to grow on a weakness in the market, we’d be richer than Croesus. Of course, there’s a reason this explanation for uninspiring performance is so common: It’s readily available. At any given time, roughly half of all industries are growing below the level of GDP. And it’s only natural to blame something external for one’s problems.

The trouble is, a weak market isn’t a valid excuse. Plenty of companies that achieve above-average shareholder returns compete in average or below-average industries. Consider Polaris Industries, a maker of snowmobiles, whose revenues and shares have both surged in a sector (leisure equipment and products) that is not exactly “hot.” On average, a dollar invested in Polaris’s shares has risen 24 percent per year for the last 10 years, while the average stock in the global leisure segment returned just 9 percent annually. Or think of Tupperware Brands, which achieved a 22.4 percent average annual gain in the last 10 years, versus the 3.6 percent average annual gain of household durables companies worldwide.

There are always some companies that find a formula for growth and success in industries that aren’t doing anything special—that are just bumping along with the economy, or underperforming it. If you’re an executive in one of these industries, it’s your job to ignore the excuses and figure out how to join the ranks of overachievers.

In our analysis of shareholder returns over the last few decades, we found the phenomenon of superior performance to hold true in every industry, in every part of the world, and over every time period that was long enough to allow the leaders to become apparent. Between 2003 and 2013, for instance, 30 percent of companies with top-quartile shareholder returns (our proxy for success) were in industries growing at or below the rate of GDP. Even industries at the bottom of the heap produced their share of top performers (see Exhibit).

How do the winners in low-growth industries do it? By taking market share from others. And not only do they take market share, but they take it profitably, often without reducing prices. When companies successfully get these two things going together—market share and profitability gains—they in effect create their own growth cycle, one that is independent of the industry cycle. A sort of disequilibrium takes hold, allowing the companies that created it to become dominant in their sectors.

We all know what equilibrium looks like. Equilibrium is the state that exists when a set of companies with fundamentally similar offerings compete within a market, getting similar returns and amassing market shares within a few points of one another. Not to put too fine a point on it, but equilibrium isn’t all that interesting. When markets are in equilibrium, competing players (and sometimes there are only a few worth talking about) battle for minuscule amounts of market share. However well developed these companies’ operational abilities, or however talented their executives, no one studies them for ideas about how to achieve off-the-charts business success.

Disequilibrium is much more dynamic. The companies that create the conditions for it generally don’t follow a template, but discover a particular advantage they can use to tilt the market in their direction and keep it that way. These enterprises often become a source of fascination (and envy) among competitors because they offer proof that in business, true advantage can be created and sustained for years, or even for decades, when companies are especially shrewd—no matter the overall state of the industry.

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