Growth strategies in an uncertain world: A conversation with Martin Hirt, Senior Partner Emeritus, McKinsey & Company

One question that tops the agenda of nearly every business leader I speak with in China these days is growth. With China finally relaxing it’s “zero-Covid” policy, and the excitement and anxiety that has generated throughout the country, executives are trying to figure out how this will impact the Chinese economy, their industry, and their business in 2023. Above all, they’re struggling with the question of growth: where to find it, and how to capture it.

To help shed light on this topic, I spoke with Martin Hirt, who was a Senior Partner of McKinsey & Company. Martin has been based in our Greater China region for the past 25 years, advising multinational and domestic clients in the technology industry. For the past 8 years, he has served as the global leader of McKinsey’s Strategy and Corporate Finance Practice. In 2018, he co-authored a bestselling book, “Strategy Beyond the Hockey Stick: People, Probabilities, and Big Moves to Beat the Odds.”

After a successful 30-year career at McKinsey, Martin retired in September to pursue his next chapter. I was fortunate to catch-up with him during one of my recent trips to Taipei, and I’m pleased to share an edited version of the conversation we had about the topic of growth in an uncertain world. I’ve also included a video clip with some excerpts from our conversation.

Joe: We're very pleased today, on this edition of “Inside the Chinese Boardroom”, to have Martin Hirt, who is probably one of the smartest strategists in McKinsey of the past 30 years.

So, Martin, welcome. I know that these are very uncertain times. The most common theme I hear is, “I don't know what's going to happen. What world are we living in today? What kind of world are we going into?”

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Martin: Thanks for having me, Joe. The last eight years in which I led McKinsey’s Strategy and Corporate Finance Practice have actually been a blessing in a sense, because for strategists, uncertainty is when they flourish. That's when thinking about different scenarios is needed. That's when it’s important to figure out how to build robust strategies under uncertainty, so that depending on, or independent of, how things turn out, you still are going to do well.

During COVID-19, uncertainty spiked dramatically and didn't come down that much for a long time, and then it got another boost. I believe that uncertainty is going to stay with us for a long time. Part of it has to do with disruptions we already know. Part of it has to do with the fact that the network of global economic relations has become strained for various reasons that have to do with asymmetries in supply chains, with geopolitics, with all sorts of factors that are influencing them.

And it's extremely unlikely that they're just going to come back into kilter and balance out in a way that they were from 2013 to 2017, where we saw a lot of momentum. Everybody was growing. With a few global exceptions, it was sort of a free for all.

Joe: If we live in a world of growing uncertainty, the question for people is, where will growth ?come from, and how do I invest ahead of that to get growth?

Martin: First of all, growth is always there. The question is, where is it? The most important factor determining the future success of companies based on five years of massive data analysis has turned out to be growth trends in an industry.

If you're not in an industry that's growing, you have two choices. Either you change your industry so it starts growing, or you have to change your industry by going somewhere else. Those are the only two options. If you're in an industry that's not growing, it is incredibly hard to be successful.

To give you an example: of the 600 companies that were in the middle quintile of companies that we investigated over a ten-year period, 37 managed to go from the middle quintile to the top quintile of top performers. Of the 37, 34 of them did it on the back of a big industry trend and only three against an industry trend.

So the first priority is to figure out where is future growth. If you look at growth, 80 percent of the variance in growth in companies is explained through the choice of where they play. And M&A, only 20 percent is explained by outcompeting the companies in your sector.

We found that in order to outperform and to get ahead of the pack in terms of value creation, companies need to reallocate roughly half of their capex over a ten-year period to new growth fields, and that means something like five or 6 percent a year. It's not that.

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Joe: A lot of people say that it's very difficult to teach a dog new tricks. Have you seen companies that have been successful in doing this reallocation with the same management and the same company? Or have you seen this much more in other forms of acquisitions and investments?

Martin: M&A is a critical lever in order to achieve that. And I think for most companies, in order to actually step out, that is the way to go. We have looked at companies in Asia, multiple-business companies, conglomerates in Asia, and they enter new businesses on average every one and a half years.

So it is a typical thing to do for companies in Asia and it's mostly through M&A. I have also seen companies achieve growth transformations internally, but they were companies that actually brought innovation to how they grow.

They brought innovation to how they built new capabilities. They hired new teams, which also helped. But it’s also about being very digitized, and how you really get your team to change their mindsets, to change their knowledge, to change their experiences. With traditional means it's very hard to do.

Joe: One of the things that is important in deciding where to play is international markets. We’ve seen many multinationals in the last 10 or 20 years going to emerging markets. But if I look at Chinese companies, globalization has not been a success story for most of them. Why is it so hard for a one-country company to become a multinational?

Martin: When you look at successful multinationals, they have very diverse management teams. When you look at many of the early Japanese experiments, they actually also failed. They started being successful once they understood they just got to have a bunch of Americans run their manufacturing operations in America. And they can't just have workers, they also need to integrate them in their management teams. Now, a lot of Japanese companies in Japan have international talent in their top ranks. In many other emerging countries, that's not the case yet. They're very, very local in that sense.

So that's one factor. The second factor is that when you look at how they grow through M&A. The orphan for a whole host of reasons. Do not buy super-performing star companies. They buy companies that are about to go bankrupt or that are just underperforming and for sale.

Superstar companies rarely are for sale. So they buy these low-performing companies. And then comes the biggest mistake. The biggest mistake is they do some sort of post-merger integration type. How do we run this thing approach, which is the wrong approach?

What you need is a complete turnaround. You need to have a transformation of that asset in order to make it perform again in the context of being integrated.

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Joe: If you look for growth, you cannot avoid tech, artificial intelligence, the latest in robotics, etc. How big of a role do you think technology and tech is going to play in the growth themes and grow from capacities of companies?

Martin: On the question of tech and AI, I think the most important thing for everybody who is leading a company responsibly today is to spend time to understand the impact that it’s going to have on their business, and to envision what they could do with their company. I've seen this in so many industries, whether it's traditional industries like mining, where artificial intelligence can be a huge factor in reducing cost, to tech companies themselves, where artificial intelligence accelerates the development of circuits on a semiconductor and makes it more robust, or allows them to cut the testing time down to a fraction.

Every industry is different, but unless you really understand the potential and you interact with companies and individuals who help you understand what the impact can be, I think it's negligent what you then do, how much you invest. ?

Something that many executives underestimate is that, when you actually get on with the digital transformation, when you do it the right way, when your business starts performing, your industry is watching you, and the talent in your industry is watching you. And I see in a number of industries that also I have served that once people see that somebody is moving on technology in a way that's much faster, more deliberate than others, they tend to gravitate towards that. So it becomes a magnet for talent.

So my prediction is that people who move deliberately and quickly on artificial intelligence and digital will actually become winners in the long-term because they will attract the best talent.

Joe: One of the themes that we've been talking about at McKinsey is around sustainable, inclusive growth. But as we talk about tech trends and AI, and investing ahead of time and building capacity, how do we ensure that this growth is actually inclusive? How do we ensure that wealth is spread across a much wider swath of the population.

Martin: I think this is a question that touches all of us. And the solution is not just in business. I think the call to businesses is that business leaders become more integrated to society. In many societies, business is being viewed as something actually slightly evil and self enriching and self-interested, while the reality is that business generates growth. Business generates GDP, and GDP growth is the biggest trend in history, which has lifted literally millions out of poverty. In 1820, 95 percent of the world's population lived in absolute squalor. Today it's ten.

And in terms of absolute terms of what's a billion people, now it's 700 million people, although the world population is much larger. So I think that business has implicitly made a huge contribution to prosperity for everybody and is going to continue to do so.

The question is what business leaders accept. It's their challenge to actually become more active in playing that role. How things, how profits, all of that are being distributed in the end of the day will also depend on the geography.

It’s very clear that the one thing that actually has made all of this prosperity happen is growth. So the one thing I will never support is this notion that there's a limit to growth and we need to stop growing.

I think that's the end of the world, essentially, because we will stop progress and will fall back into the stone ages. We have innovative minds that can always figure out solutions to environmental challenges, social challenges, governance challenges, all these topics we need to push ourselves to be more innovative.

The right answer is to tackle these challenges in the context of growth and more prosperity for everybody.

Joe: When young people look at their careers and look toward the future today, why do they feel more pessimistic than their parents were? Do you have any words of wisdom for them as they embark on this volatile world?

Martin: What I believe is still true is that young people should go out and understand that there is no entitlement to be fed, and there is no entitlement to have housing. It's something that you need to earn yourself, and you need to put in the effort.

And most importantly, in order to be successful, you need to have a value proposition. It is competitive out there, and unless you have something that's differentiated to offer, it's very hard. So figure out what it is.

What I told my kids is, I can't force you to work hard in school, that's all your choice. But I can tell you that when you leave school and you have good grades, you have options. The one thing I learned about strategy is that having options means you have a good strategy. So I think kids today should try to think what are the moves they can make to create more options for themselves.

What do you think? Please share your thoughts in the comments.

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