The Hindu Business Line : Shifts in business segments account for major growth in cos, says McKinsey

Return on invested capital
For top Indian companies rose from 15.6 per cent for the five years between 1996 and 2000, to 29.1 per cent for the following five years.
Similar figures for the US show a decline from 16.7 per cent to 14.6 per cent, and UK from 17.5 per cent to 12.2 per cent.
China, Brazil and South Korea have all shown increases in their median returns on capital, while Mexico stood still.

Our Bureau

Chennai, April 29 A McKinsey study of the history of 100 fastest growing companies in the world has shown that a big chunk of their growth came from shifts in business segments.

Growth through portfolio shifts, or by getting into new lines of business, accounted for 47 per cent of their growth, while market share gains in their original business accounted for only 23 per cent, said Mr Kuldeep Jain, Partner, McKinsey & Co Inc (USA).

He said the study also revealed that ‘inorganic activity’ contributed 30 per cent to growth. “If Mr (Sunil) Mittal had continued to make press-button telephone instruments, Bharti may have gained some market share in that business, but the Bharti group would not have been so big,” Mr Jain observed. Mr Jain was speaking on ‘The Emerging Global Trends in Economy’ at a ‘B2B seminar’ organised here by the Chennai chapter of the Jain International Trade Organisation.

“De-composing growth of large corporations suggests that M&A activity and product market choices like globalisation drive 75 per cent of the growth,” notes a slide in the power point presentation that Mr Jain made.

Over the years

Mr Jain began his presentation noting that the contribution of today’s developing economies to global GDP was on the upswing, just as it was a thousand years ago. He said that around 1000 AD, today’s developing economies accounted for 89 per cent of global GDP. This slid to 79 per cent over five centuries and further to 70 per cent in 1820. The drop continued over the next century to 40 per cent in 1950. But a reversal of trends has been seen in the last few years.

In 2005, developing economies accounted for half the world’s GDP. This is expected to grow to 62 per cent by 2025, Mr Jain said, quoting a study. India, Mr Jain said, has done well. The median of return on invested capital for top Indian companies rose from 15.6 per cent for the five years between 1996 and 2000, to 29.1 per cent for the following five years. Similar figures for the US show a decline from 16.7 per cent to 14.6 per cent, and UK from 17.5 per cent to 12.2 per cent. China, Brazil and South Korea have all shown increases in their median returns on capital, while Mexico stood still. “Large Indian companies have done well,” concluded Mr Jain.

Persistence pays

Speaking at the seminar, on the subject ‘How to take your business to the next level’, Mr Motilal Oswal, Chairman and Managing Director, Motilal Oswal Financial Services Ltd, said risk taking was an essential part of business.

“If you go looking for honey, you should expect some bee-stings,” he noted in a speech replete with quotes.

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