A rising tide lifts all boats; the importance of market selection August 17, 2007Posted by jeremyliew in business models, growth, start-up, startups.
The McKinsey Quarterly recently published an interesting article titled The Granularity of Growth ($150 subscription required) that analyzed the drivers of growth at 100 large companies in 17 different industries. A free podcast of the article is available here as well.
Within industries, there was very high variability in the growth rates of competitors. For example, ten European telcos saw compound annual growth rates of between 1 and 25% between 1999 and 2005 – a very wide range.
McKinsey found that there were three key drivers of the variance in growth:
1. Portfolio momentum: organic revenue growth from the market growth of segments where they compete
2. M&A: inorganic growth from acquisition or divestiture
3. Market share performance: organic growth from gaining share in a market
Interestingly, market share performance was found to explain just 22% of the variability in growth rates. Portfolio momentum explained 43% of the differences in growth rates, and M&A explained 35%. McKinsey concludes:
Simply put, a company’s choice of markets and M&A is four times more important than outperforming in its markets. This finding comes as something of a surprise, since many management teams focus on gaining share organically through superior execution and often factor that goal into their business plans.
Startups can also learn a lesson from this. Riding market growth in a fast growing market is a lot easier than trying to take market share in a slow growth market.
Its important to look at markets in a very granular way as you do this analysis. Clay Christensen observes in the Innovator’s Dilemma that disruptive technology shifts can create fast growth submarkets in industries. Often incumbents fail to make the transition across these technology shifts because they continue to focus on their dominant position in their existing markets which may be seeing slowing or declining growth. They miss the portfolio momentum that is such a key driver of growth.
Make sure that your startup doesn’t make the same mistake!