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:
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?
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.
There are scores of frameworks, tools, transaction models, and organizational structures for evaluating revenue growth, and most of them suffer from the same weakness: They drive companies to pursue random avenues of growth without assessing the inherent growth potential of these new businesses (or the company’s existing business line). In our view, that’s akin to the blind leading the blind. Only by first identifying actual and inherent growth rates can a company have enough insight to know where and how to grow.
To identify growth rates, start by analyzing the limits to inherent growth for your company’s portfolio. What are the individual growth rates for your company’s products and services, given the geographies in which you operate? How is the population expanding (or contracting)? What is the potential impact of inflation or other pricing pressures on the revenues you would expect?
With a more specific and precise analysis, you may discover, as many companies do, that you’re actually doing better than you think. That is, you have realized more growth than predicted given your portfolio’s limits. Or perhaps you’ll discover the opposite — that the relatively high growth you’ve achieved is not living up to the inherent growth of your business. In either case, understanding how your existing portfolio can be adjusted or better managed is a clear priority before pursuing more “desperate measures” that might diminish your profitability.
What can the executive team do to improve your company’s ability to reach and surpass its potential? Are acquisitions, chancy as they may be, the only answer? Or can you improve your portfolio by reprioritizing, expanding the geographic reach of successful products, improving the performance of lagging brands, or deemphasizing money-losing businesses? These are the questions that must be the focus of a solid growth plan grounded in a better understanding of the true growth potential of your business.
Paul Leinwand ([email protected]) is a principal with Booz Allen Hamilton in the Chicago office. Mr. Leinwand’s primary area of focus is strategy development for consumer packaged-goods companies.
John Loehr ([email protected]) is a senior associate with Booz Allen Hamilton in Chicago. He specializes in product strategy and innovation for automotive, aerospace, and other manufacturing companies.
Kolinjuwa Shriram ([email protected]) is a senior associate with Booz Allen Hamilton in Chicago. He focuses on strategy development and innovation in consumer-focused industries.