Due Diligence

In financial and strategic disciplines, “growth” denotes the rate at which a company’s profits, revenues, dividends, or overall enterprise value are expected to increase over time. Growth is a central theme in corporate valuation, capital allocation, and competitive positioning, with foundational financial models and strategic frameworks prioritising a granular understanding of its drivers, sustainability, and impact.

Financial Theories Relating to Growth

Value = Profit × (1 – Reinvestment Rate) / (Cost of Capital – Growth)

This advanced valuation expression, as presented by David Wessels, Marc Goedhart, and Timothy Koller in Valuation: Measuring and Managing the Value of Companies (McKinsey & Co.), formalises the interplay between profitability, reinvestment, and growth. Here:

• Reinvestment Rate = Growth / ROIC, quantifies how much of generated profit must be reinvested to achieve a given growth rate, where ROIC is Return on Invested Capital. The formula demonstrates that value is maximised not simply by growth, but by growth achieved with high capital efficiency and without excessive reinvestment.

Gordon Growth Model (GGM) / Dividend Discount Model (DDM)
The Gordon Growth Model, developed by Myron J. Gordon and Eli Shapiro, is a foundational method for valuing equity based on the present value of an infinite stream of future dividends growing at a constant rate. Its formula is:

Intrinsic Value = Next Period DPS ÷ (Required Rate of Return – Dividend Growth Rate).

This model is widely used for established, dividend-paying businesses and illustrates how even modest changes in growth (g) can have an outsized effect on equity valuation, due to its presence in the denominator of the formula.

Aswath Damodaran’s Contributions

Aswath Damodaran, a leading academic on valuation, argues that sustainable growth must be underpinned by a firm’s investment returns exceeding its cost of capital. He emphasises that aggressive revenue growth without returns above the cost of capital destroys value, a critical principle for both analysts and executives.

Strategic Frameworks Involving Growth

Growth-Share Matrix (BCG Matrix)
A seminal business tool, the Growth-Share Matrix—developed by the Boston Consulting Group—categorises business units or products by market growth rate and relative market share. The framework, popularised by strategy theorist Bruce Henderson, divides assets into four quadrants:

• Stars (high growth, high share)
• Question Marks (high growth, low share)
• Cash Cows (low growth, high share)
• Dogs (low growth, low share)

This framework links growth directly to expected cash flow needs and capital allocation, guiding portfolio management, investment decisions, and exit strategies.

Richard Koch’s Insights
Richard Koch, strategy theorist and author, is best known for popularising the Pareto Principle (80/20 Rule) in business. Koch has demonstrated that a focus on fast-growing 20% of activities, customers, or products can disproportionately drive overall company growth and profitability, reinforcing the importance of targeted rather than uniform growth efforts.

Leading Strategy Theorist: Bruce Henderson

Bruce D. Henderson (1915–1992) was the founder of the Boston Consulting Group (BCG) and a seminal figure in the evolution of corporate strategy. Henderson introduced the Growth-Share Matrix in the early 1970s, giving managers a visual, analytic tool to allocate resources based on market growth’s effect on competitive dynamics and future cash requirements. His insight was that growth, when paired with relative market strength, dictates an organisation’s future capital needs and investment rationales—making disciplined analysis of growth rates central to effective strategy.

Henderson’s wider intellectual legacy includes the principles of the experience curve, which postulates that costs decline as output increases—a direct link between growth, scale, and operational efficiency. He founded BCG in 1963 and led it to become one of the world’s most influential strategy consultancies, shaping both practical and academic approaches to long-term value creation, competitive advantage, and business portfolio strategy. His contributions permanently altered how leaders assess and operationalise growth within their organisations.

Conclusion

“Growth” embodies far more than expansion; it is a core parameter in both the financial valuation of firms and their strategic management. Modern frameworks—from the value formulae of leading financial economists to the matrix-based guidance of strategic pioneers—underscore that not all growth is positive and that sustainable, value-accretive growth is predicated on return discipline, resource allocation, and market context. The work of thinkers such as Wessels, Goedhart, Koller, Damodaran, Koch, and Henderson ensures that growth remains the subject of rigorous, multidimensional analysis across finance and strategy.