Monthly Archives: December 2016

Strategic and organizational on business

t’s no secret: innovation is difficult for well-established companies. By and large, they are better executors than innovators, and most succeed less through game-changing creativity than by optimizing their existing businesses.

Yet hard as it is for such organizations to innovate, large ones as diverse as Alcoa, the Discovery Group, and NASA’s Ames Research Center are actually doing so. What can other companies learn from their approaches and attributes? That question formed the core of a multiyear study comprising in-depth interviews, workshops, and surveys of more than 2,500 executives in over 300 companies, including both performance leaders and laggards, in a broad set of industries and countries (Exhibit 1). What we found were a set of eight essential attributes that are present, either in part or in full, at every big company that’s a high performer in product, process, or business-model innovation.

Since innovation is a complex, company-wide endeavor, it requires a set of crosscutting practices and processes to structure, organize, and encourage it. Taken together, the essentials described in this article constitute just such an operating system, as seen in Exhibit 2. These often overlapping, iterative, and nonsequential practices resist systematic categorization but can nonetheless be thought of in two groups. The first four, which are strategic and creative in nature, help set and prioritize the terms and conditions under which innovation is more likely to thrive. The next four essentials deal with how to deliver and organize for innovation repeatedly over time and with enough value to contribute meaningfully to overall performance.

Grow fast on your business

Our latest research on growth in software and online-services companies has some surprising findings about the benefits and risks of buying growth.

Acquisitions, done well, can be a powerful tool to accelerate revenue growth. And pushing for gains is vital in software and online services, where the rate of growth typically determines whether a company thrives, survives, or dies. While 20 percent revenue growth is enviable in most industries, companies in software and online services are expected to deliver numbers that are markedly higher. In fact, we’ve found that software and online-services companies with revenue that grows by more than 60 percent annually when they hit $100 million in sales are eight times more likely to eventually pass $1 billion in annual revenue than players with revenue that grows by less than 20 percent annually.1

However, acquisitions, done episodically, can also stifle growth. Our research shows that acquiring companies infrequently may actually disrupt organic growth and slow overall revenue gains. We examined the acquisition activity of 578 software and online-services companies that surpassed $100 million in annual revenue2and identified three lessons:

  • Low-volume acquisition programs disrupt growth; high-volume programs accelerate growth. The software and online-services companies whose revenue grew most rapidly had high-volume acquisition programs.
  • Successful acquisition programs complement organic growth. Among software and online-services companies that reached $1 billion in annual revenue, acquisition efforts preserved or accelerated organic growth. These companies completed more deals, squeezed more growth out of each deal, and managed to preserve high organic growth while investing energy in finding and incorporating acquisitions.
  • Successful acquisitions align with growth strategy. Companies that accelerate revenue growth through acquisitions don’t treat deals as an opportunistic event to capture cost synergies. They use several different deal archetypes—all linked to their fundamental growth strategy.

Growth matters more than ever

Growth is magic. It makes it easier to fund new investments, attract great talent, and acquire assets. But the environment for growth has been difficult since 2008, and while there are signs that the Great Recession is at last receding, significant challenges remain. Real-GDP growth in the United States remains below historical averages; the economies of most European countries are still sluggish; and growth in emerging markets, particularly the BRICS countries—Brazil, Russia, India, China, and South Africa—is slowing down.

For more than a decade, we’ve been building and mining a global-growth database containing hundreds of the largest US and European companies. Recently, we’ve been revisiting some of the core analyses in the 2008 book, The Granularity of Growth,1to see if the challenging environment of recent years has shifted the picture of fundamentals we painted before the financial crisis. The answer is no, though the economic context arguably has increased the importance of an effective growth strategy.

Healthy growth boosts corporate survival rates, which was true in 2008 and remains true in the United States and in other developed markets. From 1983 to 2013, for instance, roughly 60 percent of the nonfinancial companies then in the S&P 500 were acquired—it’s grow or go, and they have gone. Consider these findings over that period:

  • Sixty of the 78 S&P 500 companies that generated top-line growth and improved or at least maintained their margins outperformed the S&P 500.
  • Companies with deteriorating margins performed less well, even if these companies were growing; just 8 out of 30 outperformed the index.
  • A higher percentage (56 percent) of companies that grew slowly, but also aggressively distributed cash to shareholders, outperformed the S&P 500.

As analysis of these companies’ total returns to shareholders (TRS) suggests (Exhibit 1), growth is only a means to the ultimate end: creating value. Not all growth opportunities are equal. Still, there’s no escaping the fact that growth is a critical driver of performance as measured by total returns to shareholders. And TRS underperformers are far more likely to be acquired.

New global competition

A new McKinsey Global Institute report finds that a 30-year period of unprecedented corporate-profit growth could be drawing to a close. Competition is intensifying as emerging-market companies go global and technology and technology-enabled firms make rapid moves into new sectors.

The world’s biggest corporations have been riding a three-decade wave of profit growth, market expansion, and declining costs. Yet this unprecedented run may be coming to an end. Our new McKinsey Global Institute report, Playing to win: The new global competition for corporate profits, projects that the global corporate-profit pool, which currently stands at almost 10 percent of world GDP, could shrink to less than 8 percent by 2025—undoing in a single decade nearly all of the corporate gains achieved relative to the world economy during the past 30 years (exhibit).

From 1980 to 2013, vast markets opened around the world while corporate-tax rates, borrowing costs, and the price of labor, equipment, and technology all fell. The net profits posted by the world’s largest companies more than tripled in real terms from $2 trillion in 1980 to $7.2 trillion by 2013,1pushing corporate profits as a share of global GDP from 7.6 percent to almost 10 percent. Today, companies from advanced economies still earn more than two-thirds of global profits, and Western firms are the world’s most profitable. Multinationals have benefited from rising consumption and industrial investment, the availability of low-cost labor, and more globalized supply chains.

But there are indications of a very significant change in the nature of global competition and the economic environment. While global revenue could increase by some 40 percent, reaching $185 trillion by 2025, profit growth is coming under pressure. This could cause the real-growth rate for the corporate-profit pool to fall from around 5 percent to 1 percent, practically the same share as in 1980, before the boom began. (For more, see sidebar, “The future and how to survive it,” an excerpt from a companion article in the October 2015 issue of Harvard Business Review.)

Part of the slowdown in profit growth will stem from the competitive forces unleashed by two groups of hard-charging competitors. On one side is an enormous wave of companies based in emerging economies. The most prominent have been operating as industrial giants for decades, but over the past 10 to 15 years, they have reached massive scale in their home markets. Now they are expanding globally, just as their predecessors from Japan and South Korea did before them. On the other side, high-tech companies are introducing new business models and striking into new sectors. And the tech giants themselves are not the only threat. Powerful digital platforms such as Alibaba and Amazon serve as launching pads for thousands of small and midsize enterprises, giving them the reach and resources to challenge larger companies.