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A rising tide lifts all boats; the importance of market selection August 17, 2007

Posted 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!


1. Dave McClure - August 17, 2007

so if i interpret this correctly, smart entrepreneurs should choose startups thar are riding the wave(s) of these accelerating trends:
1) Google Adwords / Adsense
2) Apple iPod / iTunes / iPhone
3) Facebook Platform / Feed


2. jeremyliew - August 17, 2007


I think all these are certainly examples of growth areas. However, I define markets more by $ growth than by usage growth or platform growth. I also wouldn’t be quite as company specific as you have been. I think online video advertising for example is a growing market. I think certain segments of ecommerce are growing markets (especially in categories that have been later to move to the web such as specialty goods). I think lead gen in certain categories are growing markets. I think online advertising for certain verticals (e.g. auto, health, movies and others) are growing markets. This is by no means an exhaustive list.

3. lawrence - August 17, 2007

Great title. I see an awful lot of start ups building tools for bloggers. If you believe McKinsey, and you believe Gartner…


… this might not be a great call.

Here’s the full quote:

“Blogging and community contributors will peak in the first half of 2007. Given the trend in the average life span of a blogger and the current growth rate of blogs, there are already more than 200 million ex-bloggers. Consequently, the peak number of bloggers will be around 100 million at some point in the first half of 2007.”

4. Lafo - August 19, 2007

Another great post, Jeremy. The counterintuitive result that structural choices outweighing ‘good operations’ goes against the natural human bias that we make a difference through tactical excellence. Naturally operating well is still important. Great post!

5. james hong - August 20, 2007

so basically, right place right time trumps all 🙂

i believe it. i’d rather be lucky than smart too!

6. Jackson Fish Market - August 28, 2007

[…] “Simply put, a company’s choice of markets and M&A is four times more important than ou… Posted on August 28th, 2007 in Interesting […]

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