Growth is once again top of mind for business executives. As they turn their attention from improving the operational performance of their companies to making those companies grow again, many of them will follow the standard message: consistently strong, value-creating revenue growth lies within reach of major corporations that pursue best practice in strategy, marketing, operations, and organization.
Or does it? Execution and fundamentals are certainly vital, but growth, particularly for the largest companies, requires more than best practice. At the median annual revenue level of today's Fortune 100—about $30 billion—a corporation would in effect have to create a $2 billion company each year to sustain 6 percent top-line growth. Can investors and capital markets reasonably expect that kind of performance? How do some companies achieve it?
To explore the particular challenges of revenue growth in big corporations, we studied the performance of about 100 of the largest ones in the United States, in 17 sectors, over the two most recent business cycles. Almost a third of the companies managed to increase their revenues at a rate faster than the growth of GDP over the second cycle, from 1994 to 2003, while at the same time delivering shareholder returns above those of the S&P 500 index. The relatively large number of high performers here might indicate that the odds for companies aspiring to grow are decent, if not for a sobering fact: 90 percent of these companies were concentrated in just four sectors—financial services, health care, high tech, and retailing.
It isn't surprising that they are overrepresented. These sectors as a whole, or markets and segments within them, offer favorable growth environments supported by established trends: aging populations, rapid product or format innovation, deregulation, and consolidation. What's striking for large growth-minded corporations is just how crucial it is to have this kind of favorable wind at their backs when they try to achieve strong growth.
Looking across the two economic cycles also revealed the critical role of top-line growth. Large companies that trailed GDP for an entire business cycle were five times more likely to be acquired or otherwise go out of business than were faster growers. Eventually, companies that don't increase their revenues run out of ways to drive earnings and shareholder returns. Even if a company finds a way to create shareholder value, slow-growing companies remain attractive acquisition targets.
These findings have broad implications for management. The first is that large companies need to pay at least as much attention to top-line growth as to increasing the bottom line. While cost improvements can drive earnings and shareholder value in the near term, companies that raise their total returns to shareholders (TRS) without achieving top-line growth have the worst long-term odds of survival. Many companies that struggle to grow do indeed face a "grow-or-go" situation.
Second, where to compete is just as important as how. The choices a large company makes today about its portfolio mix and where to place its bets will shape its growth trajectory over the next five to ten years. Unless the company enjoys the advantages of fast-growing pools of revenues and profits or has ample opportunity to consolidate, growth that just keeps pace with GDP will be difficult to sustain, even if execution is great.