158  Growth To understand markets in this fine-grained way and the differences in com- panies’ revenue growth, Baghai, Smit, and Viguerie analyzed market growth at the level of individual product and geographical segments with around $50 million to $200 million in sales, rather than at the company, divisional, or business unit level.4 Their example of a large European manufacturer of per- sonal-care products shows why such analysis is revealing. The company has three divisions with apparently low prospective growth rates ranging from 1.6 percent to 7.5 percent a year. However, the range of forecast growth rates for individual product lines within the divisions is much wider. For instance, the division with the lowest expected growth rate has one product line grow- ing at 24 percent, one of the company’s best growth opportunities. At the same time, the division with the highest growth rate has several product lines that are shrinking fast and may warrant divestment. Growth and Value Creation While managers typically strive for high growth, the highest growth will not necessarily create the most value. The reason is that the three drivers of growth (portfolio momentum, acquisitions, and market share gains) do not all create value in equal measure. To understand why not, consider who loses under alternative scenarios for revenue growth and how effectively losers can retaliate: • Growth from increases in market share, particularly in slow- and ­moderate-growth markets, rarely creates much value for long, because established competitors typically retaliate to protect their market shares. Lasting value creation could only occur in situations where smaller competitors are pushed out of the market entirely or where the com- pany introduces differentiated products or services that are hard for competitors to copy. • Growth driven by price increases comes at the expense of customers, who are likely to react by reducing consumption and seeking substi- tute products, so new value created by price increases may not last long either. • Growth driven by general market expansion comes at the expense of companies in other industries, which may not even know to whom they are losing market share. This category of victim is the least able to retali- ate, which makes product market growth the driver likely to create the most value. 4 See M. Baghai, S. Smit, and P. Viguerie, “Is Your Growth Strategy Flying Blind?” Harvard Business Review (May 2009): 86–96. Growth and Value Creation  159 • The value of growth from acquisitions is harder to characterize, be- cause it depends so much on the price of the acquisition (as discussed in Chapter 31). However, as shown in Exhibit 9.2, a sample of 550 U.S. and European companies reveals that, in general, growth from acquisi- tions creates less value than organic growth.5 The main reason is that companies don’t have to invest as much up front for organic growth. In growing through acquisitions, companies typically must pay for the stand-alone value of an acquired business plus a takeover premium. This results in a lower return on invested capital and lower value cre- ation compared with growing organically. A Hierarchy of Growth Scenarios It is possible to rank different growth scenarios that fall within the three overall growth strategies according to their potential for creating value (see Exhibit 9.3). This ranking may not be exactly the same for all industries, but it works well as a starting point. The scenarios with the highest potential to create value are all variations on entering fast-growing product markets that take revenues from distant companies, rather than from direct competitors or customers via price increases. Exhibit 9.2  Value Creation from Organic Growth Higher Than from Acquisitions Annualized excess shareholder returns relative to the S&P 500,1 1999–2013, % Total revenue growth, % 3.5 3.9 6.3 8.1 11.5 8.4 Least organic Most organic Bottom third Middle third Top third 1 Excludes banks, insurance companies, extraction companies, and cyclical commodities. 5 See M. Goedhart and T. Koller, “The Value Premium of Organic Growth,” McKinsey on Finance, no. 61 (Autumn 2017): 14–15.