Sustaining high growth over time

By John Kelleher , Peeyush Karnani , and Vartika Gupta, CFA , with Aya Benlakhder

In this newsletter’s previous edition, we explored the dynamics of ROIC sustainability over time, focusing on the strategic and competitive challenges that determine a company's ability to maintain high returns. Building on that foundation, we now shift our focus to long-term growth sustainability, the other key driver of value creation. In this edition, we will explore the unique hurdles companies encounter in sustaining growth, how these differ from the challenges tied to ROIC, and which of the two ultimately presents a greater difficulty to sustain over the long term.

Growth is much more difficult to sustain at a high level compared to ROIC, especially for large companies. It’s very tough work for most companies to achieve and sustain aggressive organic growth targets far exceeding GDP growth. Previous McKinsey research found that only one in ten companies maintained above-GDP growth and remained in the S&P 500 over 30 years. Consider a company with $10 billion in revenue growing its core at 5 percent annually, similar to nominal GDP growth. In ten years, revenues would be $16.3 billion. However, if the company aspires to 8 percent organic growth, revenues need to reach $21.6 billion in a decade, a $5.3 billion gap. Adjusting for 1 to 2 percent inflation, the gap is $4.3 billion to $4.8 billion in today’s dollars. Effectively, the company must create revenues equal to half its current size, which is similar to inventing a new business close to a Fortune 500 company in size. With world economic growth typically below 4 percent and increasing competition, it is extremely difficult to organically deliver consistent outsized growth.

Growth sustainability is challenging due to the natural life cycle of products. A product's life cycle starts by gaining early adopters, and growth accelerates as demand expands until hitting maximum penetration. Post-maturity, sales either stabilize at broader economic growth rates or shrink for some products. While most products follow this general pattern, timelines and scale vary. For example, Walmart grew over 10 percent for 35 years whereas eBay declined to less than 10 percent after only 12 years, reflecting differences in addressable market size. Additionally, eBay’s online model allowed faster growth, reaching maturity sooner than Walmart's physical retail model, which constrained growth with the need to add new stores (Exhibit 1).

Sustaining high growth requires entering new product markets or even creating new markets at the right time to capitalize on the high-growth phase. A company launching identical new products yearly sees aggregate sales growth decline as offerings mature. Overall expansion remains constrained by total addressable market opportunity across the product portfolio, despite successful individual product launches. New market entry counters maturation, but growth is ultimately limited by market size and growth rates.

To view this trend from an empirical evidence lens, we analyzed the decay rates of a sample of nonfinancial companies in the United States for 15 years between 2006 and 2021. We grouped companies based on their real revenue growth in the year the portfolio was formed. Exhibit 2 shows that growth across the different groups rapidly converges to 5 percent in the long run, showcasing the difficulty of sustaining high growth over long periods.

Ultimately, sustainable growth represents a far greater challenge than perpetuating returns. While high ROIC can be maintained by optimizing and maintaining current competitive strengths in established markets, growth demands that leaders continually disrupt the status quo and reinvent the business to shape future trends in a limited addressable market. That takes courage, dedication, and discipline. Sustaining high growth is no less a challenge than initiating it is. Not surprisingly, growth rates for large companies decay much faster than do returns on invested capital.

Key questions remain:

• How can leaders balance optimizing current core businesses while expanding into new frontiers?
• How can firms expand addressable market size rather than just compete for share?
• How can companies maximize product lifetime before the decline stages?
• How should companies balance capital allocation between new growth initiatives versus maximizing returns in the current core business?

What are your thoughts on these questions? We’re interested to hear them.

John Kelleher is a senior partner in McKinsey & Company's Toronto office, Peeyush Karnani is an associate partner in our New York Office, where Vartika Gupta, CFA is a solution manager. Aya Benlakhder is a consultant in our Lisbon Office.