CONFIDENTIAL
Grow or Die? Why growth is essential to companies and how to
achieve it
Lecture to the “Strategy and Strategic
Analysis” class
Brussels, November 22, 2012
This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organisation without prior written approval from
McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.
1
Why growth is important?
“Growth itself contains the
germ of happiness”
- Pearl S. Buck
“All growth is a leap in the dark, a
spontaneous, unpremeditated act
without benefit of experience”
- Henry Miller
“I did not have implants, I just
had a growth spurt”
- Britney Spears
“All growth depends upon activity. There is no
development physically or intellectually without effort,
and effort means work”
- Calvin Coolidge
“The growth and development of
people is the highest calling of
leadership”
- Harvey S. Firestone
“He who moves not forward,
goes backward”
- Goethe
“Intellectual growth should
commence at birth and cease
only at death”
- Albert Einstein
“Without continual growth and
progress, such words as
improvement, achievement, and
success have no meaning”
- Benjamin Franklin
“Ever since I was a
child I have had this
instinctive urge for
expansion and growth.”
- Bruce Lee
2
Why and How to Grow?
Performance 3
Risks 4
Value creation
Growth and Value 1
2 Survival
2
Limit 5
Success vs. Failure 6
3
Where should you invest?
High starting ROIC
Low starting ROIC
Improve ROIC Grow
aggressively
Strategy
1
We are in 1996 and you have just received USD 200,000 to invest in four types of
companies (minimum 2 types of companies – USD 100,000 in each):
• Companies with low Return on Invested Capital (ROIC<6%) having as strategy either
to grow or to improve margins
• Companies with high ROIC (>20%) having as strategy either to grow or to improve
margins
As you want to maximize the return on your investment in 2006, what should you have
done? (where do you place your money in the matrix)
4
By choosing the right strategies, you would have generated USD
310,000 more than with the other one USD1
High
starting
ROIC
Low
starting
ROIC
Improve ROIC Grow aggressively
Strategy
180,000 340,000
160,000 310,000
+160,000
+150,000
1
Main reason is that growth
creates value as long as
ROIC > WACC or Value =
(ROIC-WACC)/g
1: Total return for Shareholder in 2006 of USD 100,000 invested in 1996 in each strategy
5
Higher
TRS exhibited in high
growth companies
Growth is essential to value creation Percentage of US top 100 companies
Total Return to Shareholders (TRS) 1984-2004
Annual, percent
11
14
+28%
Below GDP
growth ’84-’941
(59)
Above GDP
growth ’84-’941
(35)
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
6
Why and How to Grow?
Performance 3
Risks 4
Value creation 1 1
Limit 5
Success vs. Failure 6
Survival 2 Grow or Go
7
Grow or go matrix: a 20 year view of large company growth First 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
33 27
2
8
Death rates2
6x higher in low
growth companies
Growth is essential to survival Percentage of US top 100 companies
Survival rate in 2004
Percent
63
94
+50%
Below GDP
growth ’84-’941
(59)
Above GDP
growth ’84-’941
(35)
2
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
9
Why and How to Grow?
Performance
Risks 4
Value creation
To Move or Not To Move
1
2 Survival
2
Limit 5
Success vs. Failure 6
3
10 Source: McKinsey Granularity of Growth
Intro question: What are the key sources of growth for a
large company and how does that compare with GDP
growth?
Growth
cylinders
Total revenue
growth
The revenue growth your company
achieves through growth of the segments
in your portfolio
Portfolio
momentum
Growth achieved through gaining
or losing share from competitors Share gain
Net revenue growth achieved when
making acquisitions or divestments M&A
3
Description
11
On average, large companies do not grow by gaining share Revenue CAGR breakdown (average), Percent, 1999–20051
0.4
3.1
6.6
10.1
3
Growth
cylinders
Total revenue
growth
Portfolio
momentum
Share gain
M&A
Large company average
To be
compared
with 3.9%
GDP growth
1: 416 fully decomposed companies
Source: McKinsey Large Company Growth Decomposition Database
12
21
33
46
It’s about “where to compete”: Holding or Acquiring
the right cards 4x as important as playing your hand well Percent M&A
Portfolio momentum
Share gain
Overall sample1 … … and by sector
3
37 40 22
Retail and wholesale 29 43 31 26
High Tech 38 48 16
Healthcare 32 47 37 16
Telecom 32 53 29 18
Financial Institutions 51 46 32 21
Consumer Goods 72
36
Media & Entertainment 24 32 56 11
EPNG 28 43 43 14
1: 416 fully decomposed companies
Source: McKinsey Large Company Growth Decomposition Database
13
Decision on where to compete to be taken at granular level
35
18
12
8776555544443332
-1-2
Δ =37%
U T S F E D C B A R Q P O N M L K J I H G
Telecommunication companies
2
-5
-3
3
5
8
9
Product 2 12
Product 1 32
Product 3
Product 4
Δ=46%
Product 10 -14
Product 9
Product 8
Product 7
Product 6
Product 5
3
Market momentum of Telecom industry
CAGR 1999-2005, Percent
Momentum spread within one
company’s portfolio
14
Why and How to Grow?
Performance
Risks 4
Value creation 1
2 Survival
2
Limit 5
Success vs. Failure 6
3
Beware of the leverage mirage
15
Growth (or decline) leverage
As in
• Debt leverage
• Backward integration
• Use of "invariable" labor
• …
Break-even point
Profits
Revenues
Costs
Volumes
∆ Profits > > ∆ Revenues
Watch the
true risk
EXAMPLE 4
16
Assessing "good" growth
From To
Only margin (growth) matters • Margin and capital growth 4
Positive sales leverage • Positive and negative sales
leverage
1
Building fixed costs • Flexibilizing down fixed costs 3
Volume and price increases • Favorable and unfavorable
price/volume correlations
2
Business as going concern • Continuity and disruptive thinking 5
4
17
Why and How to Grow?
Performance 3
Risks 4
Value creation 1
Culture and Sustainability
1
2 Survival
2
Limit 5
Success vs. Failure 6
Culture drives growth (or limits it)
Time with customers
Generation of leads and sales
Time on admini-strative process and credit applications
Bankers prefer administrati-ve tasks to selling
Admini-strative tasks in most bankers’ comfort zone
Less pressure when doing “visible” admini-strative and credit tasks
Most bankers have introvert perso-nalities
Most bankers are less skilled at sales
Managers act as supervisors rather than coaches
Managers pay attention to “paper trail”
Ability to acquire new customers
Performance initiation Causes of performance limitation Cultural causes
▪Disconnect between bankers’ identity as technical/ product experts and the selling
▪Sense that one cannot be both a technician and a salesperson
Time with customers
▪Development involves mastering technical processes, not coaching on interaction quality
▪Management by defined and supervised activities (vs. results) cascades into an absence of trust and empowerment
Why aren’t bankers spending more face time with customers?
Why so much time doing credit and administration?
Why too little time coaching?
Why customer-facing time uncomfortable?
EXAMPLE
18
5
Retail banking branch network expansion
Low
Primary customer
market share by
micromarket
Number of branches/€
economic activity
Branch share
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
5
Source: McKinsey analysis 19
Companies do have a natural limit to how fast they can
grow
Environment and company specific characteristics :
NON EXHAUSTIVE 5
• Historical/embedded cultural elements of the institution
that prevent/limit growth
• Increasing risks you face / need to take to grow faster
(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"
20
21
Why and How to Grow?
Performance 3
Risks 4
Value creation 1
Rigor in execution
1
2 Survival
2
Limit 5
Success vs. Failure 6
22
-1.7
1.3
2.0
2.0
Large Deal
Tactical
Organic
Selective
Programmatic 2.8
Global 1000, median excess TRS1, Dec 1999 – Dec 2010
Percent
High volume M&A yields higher returns with a
lower risk than relying exclusively on organic
growth or any other approach to M&A
M&A is a central element of the achieved growth
of the highest return companies
1 Outperformance against global industry index for each company
SOURCE: CPAT, Dealogic, TPSI database v73 2011
Average and
95 confidence
interval
23
Beating the odds takes not only luck, but execution effectiveness
in strategy, transaction and integration
Focus on 2-3 themes and address each theme
Invest in sourcing and clearly defined
screening process
Toolkit for relevant deal types with feedback
loop for learning
Clearly define roles, responsibilities and
decision-making
Size, structure and reflect the strategy
Early, early, early, plus role clarity and a
culture of accountability
Strategy 1
Sourcing and
screening 2
Tools and
learning 5
Governance 3
M&A
organization 4
Integration 6
SOURCE: Transactions service line
IBM’s Transformation and Growth Journey: M&A Strategy to Integration
24
Strategy 1
▪ Strategy to move from hardware to software and services business
▪ Divestitures and M&A used for this transformation & growth
▪ Over 125 transactions in 10 years drove strategic & financial objectives
▪ 2015 roadmap growth themes for M&A: Cloud, Analytics & Smarter Planet
Sourcing and
screening 2
▪ Corporate & Bus Units (BU) have specific targets to meet growth strategy
▪ Corporate & BU Sourcing & Selection are proactive to meet strategy GAPS
▪ SVP M&A Strategy Forum every 6 weeks to align senior leaders on M&A
Governance 3
▪ Corporate Deal Committee meets weekly all year and hosted by CFO
▪ Corporate & BU’s have clear roles & responsibilities in M&A process
▪ M&A delegation levels to Corporate and BU’s are issued by BoD
M&A
organization 4
▪ Corporate Development has three teams: Strategy, Execution, Integration
▪ Corporate Development an enabler to the BU’s with fudiciary responsibility
▪ BU’s have own BD organizations with clear roles & responsibilities in M&A
Tools and
learning 5
▪ Playbooks relevant for multiple deal types with feedback loop for learning
▪ Collaborative M&A end-to-end tool used globally by over 5,000 members
▪ Bootcamps for all Integration Leaders including Sales Fast Start
Integration 6
▪ Leadership focused on Integration Leader, Acquired Leaders & Alignment
▪ Execution focused on Value Driver Plans, Fast Start & Culture & Change
▪ Enablement invested in dedicated teams, global tools, lessons learned
▪ Performance process drives sponsor accountability, focus & results
SOURCE : Interviews
25
Wrap up
Value creation
Growth and Value 1
Survival 2 Grow or Go
Performance To Move or Not To Move
Risks Beware of the leverage mirage 4
Limit Culture and Sustainability
Success vs. Failure Rigor in Execution
3
6
5
Growth Remains an Art: More than one way to move
Beginning
"Virgin Tour"
Vogue
Evita
Pensive/Pop
Retro
"Sex"
Children
books
Var-
ious
Evita
Author
Model
Actress
Designer
Musician
Rolling
Stones (old)
Some solos
Rolling Stones
(reunified)
A few small
roles
Actor
Musician
Growth staircase – Mick Jagger Growth staircase - Madonna
Source: Wikipedia, Rob Verhoest photos, Morrisonhotelgallery.com, McKinsey 26