Looking at Growth and Growth Opportunities

Growth fuels innovation, creates jobs, improves productivity, and attracts talent. As global growth investors, our strategy is to identify, invest in, and provide value-added support for superior growth companies worldwide. To better identify areas of sustained future growth, we take a disciplined approach to evaluating trends on a global basis and their impact on specific industries and sub-sectors by region. Our methodology for market mapping sectors and the resulting theses we develop provide a basis for prospecting for those companies that are best positioned to take advantage of these broader growth trends. Equally important, our approach serves as a helpful guide to our portfolio companies as they assess their individual growth strategies.

GA's investment strategies are developed around themes by industry and sector which result from our study of major trends. Several factors have and will continue to shape the broader mega-trends. These include continued globalization, which we believe will impact all aspects of business (as the global economy becomes more closely integrated); rapid advances in technology (permitting global communications, networking, and knowledge sharing); the increasing importance of information integration; improved access to a global labor talent pool; population growth and demographic changes; increased focus on environmental issues and resource use; the impact of a growing middle class in developing economies (e.g. India and China); and geopolitical developments, some of which (such as protectionist trends) may run counter to our broad global theses.

Each of these mega-trends can be disaggregated for implications and specifications by industry and country. Over nearly three decades, we have developed deep expertise in certain sectors and regional areas, as well as an understanding of major growth drivers within companies: those elements that can change or accelerate a company’s growth profile, such as global expansion, m&a, technology, human capital, and personal networks, among others. Evaluating sectors and sub-sectors across regions helps us target our efforts in identifying the most attractive companies with the highest growth potential, and also greatly assists our companies as they consider their growth strategies.

A few, very brief examples of themes we are focused on include the following:

Financial Services – the electronification, consolidation, and increasing sophistication of capital markets globally;

Media & Consumer – the massive shift from off-line to online media transforming advertising, marketing, and information flow;

Healthcare – the increased need to apply technology for cost containment and better health-related outcomes;

Enterprise Solutions – the need to improve the quality, cost, and efficiency of broad as well as highly specialized business processes;

Communications & Electronics – the continued broad global demand for networking and communication; the increasing integration of software in hardware devices.

We overlay our sector-specific work with our key regional markets - the developed economies of the U.S. and Europe and several emerging markets, especially India and China - and we determine investment potential and effectiveness by sector within these major regions. We then compile very detailed market maps of the major companies by sub-segment within our major regional sector areas. A more detailed granular approach leads to a greater understanding of where the pockets of growth are, who the key players are, and who is best positioned for continued growth and productivity.

Perhaps the most critical decision for any executive is determining the right ponds in which to fish. As successful young companies increase their revenues, continued rapid growth becomes more challenging. The key issue for CEOs and their boards at this stage of development is understanding their positioning and what has driven past and current growth in the competitive environment. This requires an understanding of performance characteristics of the company’s portfolio of products/services, and raises several questions. How can we leverage our core strengths and capabilities to seek continued growth while maintaining profitability? Where is additional growth coming from? Is it possible to generate growth internally, within current regions and markets? Are other growth drivers, such as m&a and global expansion, warranted and appropriate? Companies at this stage are ones for whom GA has made a maximum impact.

Frequently continued growth does not necessitate relocation to a totally new market, but rather moving to adjacent markets, expanding to new territories, or considering strategic acquisitions that could leverage existing knowledge and resources. We think of the following as drivers of revenue growth and spend significant time discussing these options with management teams as part of overall strategy development:

The core business / adjacent markets – How do we further mine our current client base, and what product/service extensions can provide profitable growth?

Regional/global expansion – How well does our current business transfer to other markets? What changes are needed by these markets? What partnerships are required?

M&A – Does a targeted acquisition support product extension or a regional expansion strategy? Does it support the core business or does it take us to a new area? We urge our companies to be very careful about jumping into totally new businesses.

Human capital – Do we have the right executives in place? Is there sufficient depth in the management team, and is that team provided the right incentives for profitable growth?

Technology – Is technology scalable to support the growth plan, and can it be used to change our business model and/or industry dynamics?

Financial structure – Do we have the financial resources to support our growth strategy? How much balance sheet flexibility do we have for future growth and/or acquisitions?

Personal networks – Do we have access to those who can help transform our business (e.g. clients, influencers, partners, experts)? Does the board provide the expertise we need to grow?

Those who have worked with us know that most of our conversations relate to supporting management with growth opportunities and strategies. While this CEO Topic barely scratches the surface, we want to emphasize the importance of understanding growth drivers in the context of major global trends. In subsequent issues, we hope to share some high-level thoughts about each key growth driver. If you have a particular area of interest, please let us know.

Notes:

Mehrdad Baghai, Sven Smit, and S. Patrick Viguerie, "The Granularity of Growth," The McKinsey Quarterly, 2007 Number 2.
Tim Breene and Michael R. Sutcliff, "Strategy II: A Winning Playbook for Profitable Growth” Outlook Journal, January 2007.
Sven Smit, Caroline M. Thompson, and S. Patrick Viguerie, “The do-or-die struggle for growth,” The McKinsey Quarterly, 2005 Number 3.