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Graveyard for growth giants

Graveyard for growth giants
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First Published: Thu, Dec 02 2010. 09 43 PM IST
Updated: Thu, Dec 02 2010. 09 43 PM IST
India’s gross domestic product (GDP) growth has accelerated in the last decade, and in our rapidly evolving market, sustaining the growth momentum is crucial. But are India’s largest companies successful at maintaining long-term growth? A 2010 assessment of the top 100 “growth giants” in the country, in terms of revenue and market share across industries, shows that about 60% of the leaders of 1996-2003—those that outperformed the GDP growth rate in terms of revenue growth and the BSE Sensex in terms of total shareholder returns—have underperformed in the 2003-10 cycle. What’s more, more than half of the current cycle’s growth giants are new entrants to the category. As industry sectors see rapid change, leadership is up for grabs.
A similar global assessment has shown that only half of the global “growth giants” of the 1990s and 2000s—companies that outperformed both the GDP growth rate in revenue growth and the S&P 500 in total returns to shareholders —were able to maintain their unrivalled status. The death rates of former giants were six times higher among those that grew slower than the nominal GDP growth rate, and both winners and losers found it hard to maintain shareholder returns in the absence of growth.
We assessed 400 companies worldwide, and found a strong relationship between shareholder value creation and three key growth components: portfolio momentum, mergers and acquisitions (M&As), and market share gain. On average globally, 46% of growth comes through portfolio momentum—choosing the right industry, market segment and geography—with major contributions from M&As and market share gain. Moreover, companies with top-quartile performance in at least one component show better shareholder value than those that do ordinarily in all three, and companies that leverage all three show 75% higher revenue growth than those that do not leverage any. In applying this learning to Indian companies, the challenge to sustain growth requires simultaneously extending and defending the core business, building emerging businesses in fast-growing areas, and creating viable future alternatives by leveraging these growth components.
In the Indian context, portfolio momentum has been the biggest driver of growth for successful companies—much more so than anywhere else in the world—contributing as much as 80% to the growth of the largest Indian companies. Companies that leveraged portfolio momentum either innovated on their business models for opportunities facilitated by deregulation or were “fast followers” in capturing a market innovator’s momentum. As a result, market leadership has often changed between these categories of companies. The remainder of growth among these firms comes from M&As; however, while it has been a growth driver within India, 65% of India-linked M&As are actually fuelled by globalization. The biggest surprise in our analysis was that market share increase was a negative growth contributor over the last two decades for the largest firms in India. These have grown rapidly while losing market share, a sure sign that industries are expanding, but not consolidating.
Looking forward, any Indian growth strategy story will have to reflect the country’s new realities: First, India is now a fiercely competitive ground due to a ramp up in the number of players. Second, consumers have become more discerning, even as they move from necessary to discretionary spending with their growing incomes. And finally, proactive regulatory changes in industry are fundamentally affecting the basis of winning. So what will tomorrow’s Indian growth giants need to do today?
Get granular about growth
With many competitors in the market, merely being a broad-based “fast follower” might pay, but not enough. Instead, choose consumer segments, products and geographies to grow in. Understand where the markets of tomorrow will be, and how to differentiate growth strategies across them. For instance, by 2030, India’s top 34 cities will account for over half the urban GDP, but each will vary in need, behaviour, culture, language, age and other characteristics. Granularity will mean adopting a tailored, cluster-based approach for select metro regions (whose GDPs may soon equal that of some developed nations today), versus a broad national approach as is currently done, and could lead to resource misallocation.
Innovate or abdicate
In the face of competition from peers and “fast followers”, leaders will have to constantly innovate or risk giving up their positions. To complicate matters, there is no single successful model for innovation—each company must find its own model for success, move to innovate needs to be fully integrated with top-team processes through appropriate targets, budgets and incentives, and company leaders must set the direction and fully support it without necessarily dictating outcomes. On the positive side, breakthrough innovation does not always have to be expensive or high tech to be successful.
Globalize, merge, acquire
Today, about 30% of the revenues of India’s top 100 companies come from international sources. In the decade to come, this contribution will be even larger, thanks to the increase in M&As and globalization. The challenge of globalization, however, lies in dealing with linguistic and cultural differences, understanding local customs, and managing businesses across countries and time zones—a situation not dissimilar to the regional and geographic differences within India itself. Tackling these challenges will require clarity on key decisions such as the rationale for going global, with a granular approach to choice of markets and thus, the path to globalization.
In the face of India’s new competitive realities, market leadership will be distinguished by visionary captaincy within organizations and the ability to stay one step ahead of the game.
Comments are welcome at theirview@livemint.com
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First Published: Thu, Dec 02 2010. 09 43 PM IST