Why Companies Should Measure “Share of Growth,” Not Just Market Share13 June, 2017 / Articles
Accelerating growth is on every CEO’s agenda. Each year business leaders commit to an overall revenue growth target, but the reality is that growth within a business is often very uneven. Some parts grow faster, and one hopes that they offset the other parts that may be declining. Dave Calhoun, former vice chair at General Electric and now senior managing director at Blackstone, says that it’s better to double down on your winners than to invest in fixing the losers. But many companies have a one-size-fits-all mindset toward metrics, which makes it hard to use that judgment when allocating resources from the top.
Similarly, there tends to be very little incentive for leaders below the C-suite to double down, even when they see a great opportunity. We personally know of three executives who were pivotal in launching $100 million-plus innovations. Despite the huge incremental value all three created for their corporations, their compensation plans failed to adequately reward them for creating such explosive growth. Yes, they received bonuses and public recognition, but they had to fight with HR to ensure their teams received just a tiny fraction of the value they’d created. Why? Again, it comes down to metrics and key performance indicators (KPIs) that don’t properly capture the subtleties of how a business is growing. Sadly, all three of these executives left their big companies to work in smaller, more entrepreneurial firms.
How do we fix the problems of properly measuring, allocating resources to, and compensating people for driving growth? Here are two ideas: First, companies should move beyond looking simply at market share, and instead focus on “share of growth” as the key metric when driving a business forward. Second, companies should find ways to exponentially reward leaders who drive share of growth.
Adding share of growth as a KPI solves for three drawbacks to market share.
The definition of “market” is likely outdated. Market share definitions are rarely updated, and the reality is many markets are blurring due to disruptive innovation. The basis of competition is now category versus category, as opposed to brand versus brand.
Market share is inherently backward looking. This is where a forward-looking share of growth is more valuable. Consider the market for single-serve coffee pods, such as those made by Keurig. If you looked at share of growth, you could have predicted the national scale of single serve about eight years earlier than when it actually occurred. Share of growth tells you where a market is going, not where it’s been.
Market share engenders less helpful emotions than share of growth. Share of market tends to create a static worldview where those with high market share are at risk of overconfidence, whereas those with low market share are at risk of fatalistic despair in their decision making. Share of growth creates curiosity. Leaders ask: “Why is this segment growing so fast, and what can I do about it?”
Importantly, share of growth must drive allocation of resources and rewards that are exponentially greater than typical programs. In the same way that a star athlete can make more money than the coach or general manager, the directors and vice presidents should have the ability to earn seven-figure incentives (and even make more money than the CEO) if they create such value.
This will not be a huge cost to the organization. Two of our colleagues looked at more than 27,000 brands, using Nielsen data. Only 3% of brands had share of growth higher than their share of market. Companies should reserve 5%–10% of budgets and incentive pools for brands and leaders that sign up to be measured on share of growth and believe they can grow faster than the category.
Consider a few examples. A major publishing company set out to create a new weekly magazine brand that would grow the celebrity news category. It created a special “phantom stock option” program that would share 10% of the profit created if this brand was successful. The new magazine was the first successful weekly-magazine launch in 10 years, and it became the fastest-growing subscription-based magazine in history. Years later, the publisher recounted that the magazine owed much of its success to the incentive plan, which enabled it to attract top talent from across the industry to a risky startup.
Another example is from an established paper products company with dominant market share. The company decided that for emerging, high-growth categories like adult diapers, focusing on market share was insufficient. By introducing share of growth alongside its more traditional market share measure, the company could increase the urgency of achieving a market-leading position as quickly as possible. Not only did the company succeed, it grew the category. The adult diaper category is forecast to grow 48% by 2020, according to Euromonitor, or nearly $1 billion.
The data suggests that brands with higher share of growth than share of market exist across brands of all sizes, with a particular sweet spot for brands between $100 million and $1 billion in sales. How much more growth could be created if fuel was added to these already growing fires?
Ultimately, one of the downsides of adding share of growth is that it’s not a straightforward metric. It requires careful consideration, especially if you’re going to measure and reward executives based on it. However, adding a bit of complexity and chaos to a crusty KPI like market share may be exactly what is necessary for executives to dig deeper to find growth.