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 / Winter 2005 / Issue 41(originally published by Booz & Company)


Pay Attention to Revenue Growth. But How?

Identify the growth rate for any given portfolio of businesses, and measure how your company stacks up.

Growth is back on the agenda. It’s the increasingly prominent topic of discussion at board meetings, executive sessions, and corporate retreats. Executives recognize that, with cost savings intrinsically limited, long-term financial performance hinges on improving the top line.

But although companies find it more advantageous to pay attention to revenue growth, very few do it well — mostly because they are not confident about what initiatives will drive successful and profitable growth. Many companies find it difficult to deliver and sustain growth in the face of greater competition and commoditization. In fact, in the long term, few companies have outpaced the growth inherent in inflation and population increases. Because of this, they’re often driven to seek growth in risky, and usually disappointing, acquisitions.

But what if the problem — the stagnation that leads businesses to attempt desperate measures — was partly a matter of misunderstanding? What if there was a known inherent growth rate for any given portfolio of businesses? If so, then companies could achieve profitability, and outsiders could evaluate companies more accurately, by developing a clearer awareness of a company’s real-world potential.

To pursue a successful growth strategy, companies must ask two critical questions:

  1. What is the inherent growth rate of our portfolio of businesses? In other words, what is the growth rate that demographics and inflation would predict for our particular set of geographic markets and product categories?
  2. Measured against that inherent growth rate, how well does our company perform?

Answering the first question requires an honest and unconditional evaluation of your company’s business structure. The goal is to produce accurate forecasts of geographically based growth rates for each market and category you compete in. In other words, understand “the cards you were dealt.”

Booz Allen Hamilton ran this analysis for leading companies in the automotive and consumer goods industries. (See Exhibit 1.) Companies that had “positive” inherent portfolios and, thus, high expected growth rates — Chrysler, Toyota, Heinz, and Wrigley — lie to the right on both charts. Those with a potentially weaker growth mix — Honda, Nissan, Clorox, and Kimberly-Clark — are at the left.

Many of the potentially weaker companies outperformed their seemingly stronger competitors, with actual growth outpacing their inherent growth rates.

Next, we plotted actual growth rates. This tells the company how well it has “played its hand.” Did actual growth outperform the company’s inherent growth expectations? We found that when a company exceeded its forecasts (the dots above the shaded area) or underperformed them (the dots in the shaded area), there was always a logically robust explanation.

For example, Honda had a negative expected growth rate because for most of the 1980s and 1990s, the automaker’s portfolio was heavily weighted toward small and midsized sedans — which were losing sales industry-wide to minivans and SUVs. Nevertheless, Honda was able to far outpace its potential by increasing market share in its existing lines through vast improvements in quality and value.

In consumer goods, Wrigley and Alberto-Culver came out winners by adopting new channel strategies. Wrigley relied on innovation, such as the introduction of sugar-free Orbit in the U.S. and radical new flavorings for aging popular brands like Juicy Fruit, to increase sales in convenience stores. Alberto-Culver drove growth in part through the expansion of its own Sally Beauty retail outlets.

Heinz represents the other end of the spectrum. Despite an excellent product portfolio, led by ketchup and other sauces, the company failed to deliver because of a weak competitive position in Europe; sales of its Ore-Ida frozen potatoes line also slipped badly after private labels precipitated a price war.

In our analysis of the automotive and consumer goods industries, companies that exceeded the inherent growth rates of their portfolio always produced superior returns on equity. Meanwhile, a large majority of companies that underperformed saw their share prices sink.

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