McKinsey advice: India Inc must get more competitive on growth

That profitability could stumble on nothing scarier than a flat revenue curve may sound odd in a static setting, but in a dynamic market, it could reflect being left behind by rivals.
That profitability could stumble on nothing scarier than a flat revenue curve may sound odd in a static setting, but in a dynamic market, it could reflect being left behind by rivals.

Summary

  • A McKinsey study spotlights the corporate growth imperative: businesses must compete on this score within their industry, not just aim to outpace GDP. It’s what competitive markets demand.

A study by McKinsey & Company offers empirical evidence of why growth matters for a business. And its findings have led the global consultancy to advocate that businesses should set top-line growth targets not in relation to nominal GDP expansion, beating which often finds mention in corporate annual reports, but against the pace of the industry they operate in, ideally aiming to grow at twice or thrice that rate. Looking to outpace an economy is neither ambitious nor relevant in a rivalrous context. McKinsey’s analysis of 837 listed firms in India with revenues of over 750 crore in 2021-22 found that over the decade till 2022, the fastest fifth’s annual revenues grew 1.5 times the 10% pace of our average nominal GDP over that period. But most fared poorly, with the slowest quintile’s revenues shrinking 16% annually. It’s clear that Indian companies must get more ambitious on top-line expansion and compete with peers in their own field. Staying ahead within the markets they address is also what should interest shareholders more.

The core pursuit, of course, is profit. On this, McKinsey’s study has an argument clincher in favour of a growth-focus. Companies do not face a trade-off between profitability and their rate of revenue enlargement, it found. Hence a choice of either churning profits or re-investing capital would be a false dichotomy, given that the two metrics are observed to be correlated closely. Notably, the data reveals that firms growing their top-line too slowly saw their bottom-lines weaken over the decade under review. As the causation arrow here is most plausibly explained as weak revenues cramping profits, the report can be taken as McKinsey’s nudge to invest more, so as to enlarge inflows for a larger-sized business to make enlarged profits. That profitability could stumble on nothing scarier than a flat revenue curve may sound odd in a static setting, but in a dynamic market, it could reflect being left behind by rivals. As for growth acceleration, McKinsey recommends seven ‘levers’ to be deployed. The most effective is resource allocation, which adaptive firms actively seek to optimize, though they could also leverage the pursuit of adjacent opportunities, mergers and acquisitions, a digital embrace, the incubation of breakout ideas, an export thrust and enhanced leadership.

Much of the report conforms with what most business gurus said after India’s economy was thrown open to competition as part of our ‘big bang’ reforms in 1991. Indeed, reams have been written on how a competitive business environment is a hard task-master, with survival of the fittest writ large. “Grow or perish," for example, graduated from B-school slogan to CEO-speak shortly after opening up. The growth tools needed then, as now, converge on becoming broadly competitive as an enterprise. A revenue benchmark by industry instead of GDP growth fits this frame. Policy-wise, empowering market competition has been a key objective for over three decades. Its rationale is clear: Pushed to perform better than rivals not just to reward owners, but also stay afloat amid choppy waves of demand and supply, India Inc would get into shape rather than risk getting shipped out. Yet, our markets vary widely in terms of competitive intensity today, with low dispersal of market power in several sectors, including some which can boast of high wealth creation. Even so, all our businesses should get more competitive and aspire higher. It’ll serve the economy well.

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