11
Growth
The business world is obsessed with growth. There's a sense that to thrive, a company has to grow—and there's some truth to this. For example, slower-growth companies may generate fewer opportunities for people and may, therefore, have difficulty attracting and retaining talent. Slow growing companies are much more likely to be acquired than faster growing companies. Over the past 25 years, 340 companies have left the S&P 500 index, most because they were swallowed up by larger companies.
But growth doesn't lead to higher value creation, as we discussed in Chapter 2, unless returns on capital are adequate. For example, among 64 companies with low ROIC, those that grew at above-average rates but didn't improve their ROIC, earned 4 percent lower shareholder returns per year over 10 years than companies that grew below average but improved their ROIC.1
Growth is undeniably a critical driver of value creation, but different types of growth come with different returns on capital and, therefore, create different amounts of value. For example, growth from creating whole new product categories tends to create more value than growth from pricing and promotion tactics to gain market share from peers. Just as executives need to understand whether their strategies will lead to high returns on capital, as we discussed in Chapter 10, they also need to know which growth opportunities will create the highest value.
DIFFERENT GROWTH CREATES DIFFERENT VALUE
Revenue growth comes in four ...
