The Granularity of Growth

1. Granularity is key to understanding and driving growth

"There's no such thing as a growth industry; most so-called growth industries have mature segments, and most mature industries have granular growth pockets."

Growth is not monolithic. It varies significantly at more granular levels within industries, geographies, and product categories. To identify true growth opportunities, companies must look beyond broad industry trends and examine markets at a much finer level of detail - what the authors call "granularity."

Key aspects of granularity:

• G0-G5 levels of granularity, from global economy to individual transactions
• G3 (sub-industry/market level) explains over 60% of company growth
• G4 (product categories, customer segments) is ideal for resource allocation

By adopting a granular perspective, companies can:

• Uncover hidden pockets of growth in seemingly mature markets
• Make more informed decisions about where to compete
• Allocate resources more effectively to capture growth opportunities

2. Growth performance can be broken down into three "cylinders"

"Nearly 80 percent of the growth differences between large companies have to do with choices about where to compete, that is, which market segments to participate in and how much M&A activity to pursue."

Three growth cylinders drive performance: portfolio momentum, M&A, and market share gain. Understanding these components allows companies to analyze their growth more systematically and make better strategic choices.

Breakdown of average large company growth:

• Portfolio momentum: 6.6% (65% of total growth)
• M&A: 3.1% (31% of total growth)
• Market share gain: 0.4% (4% of total growth)

This analysis reveals that:

• Where a company competes matters more than how well it executes
• M&A plays a larger role in growth than many realize
• Market share gains are difficult to achieve and sustain

3. Firing on multiple cylinders leads to exceptional growth

"Firing on at least one cylinder is associated with boosting growth and driving value, provided you don't misfire on both the others at the same time."

Cylinder firing patterns predict performance. Companies that fire on multiple cylinders - achieving top-quartile performance in portfolio momentum, M&A, or market share gain - consistently outperform their peers in both revenue growth and total shareholder returns (TRS).

Growth performance categories:

• Exceptional: Firing on all three cylinders (rare)
• Great: Firing on two cylinders or top-decile on one
• Good: Firing on one cylinder without misfiring on more than one
• Poor: Not firing on any cylinder or misfiring on two or more

Companies should strive to fire on more cylinders over time, but recognize that different parts of the business may fire on different combinations of cylinders.

4. M&A is a crucial but often misunderstood growth driver

"More than 50 percent of acquirers are rewarded in the long term even after paying a premium to the seller."

M&A is more valuable than commonly believed. While many studies suggest M&A destroys value, a closer examination reveals that most acquisitions create value for shareholders in the long run. M&A contributes significantly to growth and can be a powerful tool for portfolio reshaping.

Key M&A insights:

• Average large company gets 31% of revenue growth from M&A
• Successful acquirers use M&A to build new platforms and consolidate industries
• Divestments are underutilized but can create substantial value
• Private equity firms offer valuable lessons in M&A execution

To improve M&A performance, companies should:

• Develop a systematic M&A capability or "engine"
• Balance acquisitions with timely divestments
• Focus on strategic fit and synergies, not just financial metrics
• Involve business units early in the M&A process

5. Market share gains are difficult but can be transformative

"To do it, you need either an advantage that stands out a mile or the ability to change the rules of the game."

Substantial market share gains are rare but powerful. While market share contributes less to overall growth than portfolio momentum or M&A, companies that achieve significant share gains can transform their markets and create tremendous value.

Characteristics of successful share gainers:

• Make big, bold choices based on unique insights or advantages
• Develop distinctive business models or capabilities
• Focus on large segments for maximum impact
• Combine short-term tactical moves with long-term strategic shifts

Examples of transformative share gain:

• Dell's direct-to-customer model in PC manufacturing
• Toyota's lean production system in automotive
• Samsung's fast-integrator model in consumer electronics

6. Growth direction should be mapped across three time horizons

"A compelling growth strategy is one that is clear about which cylinders will drive growth in each time horizon."

The growth map aligns strategy across time. By combining the three growth cylinders with the three horizons framework (short, medium, and long-term), companies can create a comprehensive growth strategy that balances current performance with future opportunities.

Growth map components:

• Horizon 1: Extend and defend core businesses
• Horizon 2: Build emerging businesses
• Horizon 3: Create viable options for future growth

For each horizon, companies should identify:

• Which cylinders will drive growth
• Specific strategies and initiatives to pursue
• Required capabilities and resources

The growth map helps companies avoid overemphasizing short-term results at the expense of long-term value creation.

7. A granular blueprint and scale platforms enable sustained growth

"Scale and granularity are not opposed: scale enables granularity, and granularity doesn't necessarily inhibit scale."

Effective growth architecture combines granularity and scale. To pursue granular growth opportunities while maintaining the benefits of size, companies need two key organizational elements: a granular blueprint and scale platforms.

Granular blueprint:

• Matches organization structure to market texture
• Enables decision-making at the right level of granularity
• Balances local responsiveness with global scale

Scale platforms:

• Leverage size and capabilities across multiple business units
• Examples: insight engines, M&A engines, talent engines
• Enable more effective pursuit of granular opportunities

By combining these elements, companies can create an architecture that supports sustained, profitable growth across diverse markets and businesses.

8. Cluster-based growth management optimizes performance

"Cluster-based growth can help you manage growth at a granular level without losing the benefits of big-company scale."

Cluster-based management balances granularity and simplicity. This approach allows companies to manage a large number of granular business units without overwhelming complexity, while still leveraging scale advantages.

Key principles of cluster-based growth:

1. Segment the company into granular growth clusters
2. Articulate strategies for clusters using growth staircases
3. Hardwire performance management through progressive KPIs
4. Actively manage the portfolio at the cluster level

Benefits of cluster-based growth:

• Increased transparency and accountability
• More effective resource allocation
• Better alignment between corporate strategy and local execution
• Improved ability to identify and scale successful business models

The cluster-based approach can be adapted to various industries and organizational structures, providing a flexible framework for managing granular growth at scale.

Last updated: September 6, 2024