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ON PROFITABLE GROWTH
The three pathways to profitable growth
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| Most executives wake up in the morning wanting to grow their companies. It’s more fun. It’s better for their employees. It’s what investors and shareholders want. And it’s more exciting than leading a company that’s being run for efficiency. But growth is hard to achieve. In the last ten years, only one in eight companies achieved more than 10 percent revenue growth annually. Profitable growth beyond top-line revenue growth is even harder. It’s an important distinction. Not many companies can achieve greater profitable growth more quickly than their peers over a sustained period of time. But with a changing landscape and new developments in technology and innovation, the opportunity for companies to grow right now is enormous.
There are three distinct pathways for growth. The first is maximizing the value of the core of a business today. That means getting the sales team tuned to the highest level of effectiveness, optimizing marketing spend, focusing on the products and services being offered, taking a customer- or client-backed view of everything, and allocating resources to the highest-growth opportunities.
The second pathway is thinking about adjacencies and how to move into areas to the left or the right of the current value chain. If I lead a food manufacturing company, is there another product in the same aisle that I should be producing? If I run a company that operates in one state in the US, should I add an adjacent state? Should I expand to a different country? There are risks associated with going into adjacent areas, but the risks can often be identified and managed.
The third area of growth is going into truly new business lines. It’s innovation in a much more material sense. The upside can be massive, but the risks are largely unknown. Companies take on a bigger and bolder bet when they move into innovative areas of growth. It doesn’t need to be an innovation that’s new to the world, but it may be innovative for an individual company.
For CEOs, the key to growth is to make bets across these pathways. Many leaders say they want to figure out the value of their core business first, then move into new things. That’s insufficient. It’s important to make sure that they’re doing things in parallel to become the growth outperformers they should be striving to be. We studied 4,000 companies around the world and across industries over a decade. We found that typically about 80 percent of growth comes from within a company’s core—that first pathway that I described—but 20 percent of growth comes from those other pathways. Leaders who want to get ahead of the competition in growing their companies invest significant dollars for adjacencies or innovations. Five years from now, half of their revenue may come from areas that they’re not in today. Companies that grow across multiple pathways are 97 percent more likely to outperform their peers.
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| | | “Around 80 percent of growth comes from maximizing the value of the core, but 20 percent of growth comes from other pathways.” | | | | |
| Growth success really varies across industries. One example of a sector that has really innovated is the energy industry, which is thinking about how to deliver energy in a very different way from before. Another example is banking, which has turned to financial technology companies to reach customers through new types of digital interactions. Think about the ability to deposit a check without going to the bank. That was a real innovation for customers.
Hoping for growth is not a strategy. Leaders of successful companies make a deliberate, active choice to grow with a through-cycle mentality. They innovate, put the right teams in place, and invest for the long term. During both the financial crisis of 2008 and the depths of COVID-19, companies that invested for the future experienced exponential growth as the crises abated, relative to those companies that did not.
This is not a hobby. Leaders need to have a growth aspiration and a strategy. It’s critical to translate growth mindsets into action. Carve out a portion of the budget and invest in the resources to test things. Rigorously track and monitor, and talk about it with the internal leadership team, employees, the board, and even publicly to Wall Street. Tell them what the company’s weekly or monthly targets are, not just quarterly or annually. Have the courage to stick with a growth plan, and also be willing to admit when things aren’t going to work.
Historically, leaders have waited for the conditions to be right to invest in growth. But disruptions to business cycles are becoming more frequent. Executives now realize they can’t wait for the sun to shine. I’m optimistic that many are taking a long-term view and acting boldly.
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| | | | Jill Zucker is a senior partner in McKinsey’s New York office. | | |
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