Mastering
three strategies of organic growth
Organic
growth is key to companies’ futures. According to survey results, the best
firms follow more than one path to achieve it and also are better at developing
the right capabilities to support it.
There’s no single formula for
delivering organic growth. In fact, the results from a new McKinsey Global
Survey on the topic suggest that the companies that see the most growth follow
diverse paths.
That insight has
significant implications for a company’s health and performance. Organic growth
could not be more important to companies’ survival. A look at the share-price performance of 550 US and European companies over 15 years revealed
that, for all levels of revenue growth, companies with more organic growth
generated higher shareholder returns than those whose growth relied more
heavily on acquisitions.
We wanted to understand
better how businesses consider and pursue growth along three strategies:
investing in existing high-growth activities by reallocating funds from a
variety of sources; creating new products, services, or business models; and
performing better by constantly optimizing their core commercial capabilities,
such as sales, pricing, and marketing.
According to
respondents, most companies pursue just one of these strategies as their
primary source of organic growth. But the executives reporting above-market
growth at their companies—our “top-growth” firms—are more likely than others to
say they are pursuing a diversified approach to growth. Compared with the others,
respondents at the top-growth companies also report much stronger capabilities
in several areas, such as analytics and product development.
A diversified approach to organic growth
Growth is top of mind
at many companies, according to respondents: 93 percent say theirs have pursued
at least one strategy to generate organic growth in the past three years, and
nearly two-thirds agree or strongly agree that organic growth is at the top of
their executive teams’ agendas. But regarding the three strategies of growth we
explored (investing, creating, and performing), the responses suggest that
there is no one-size-fits-all approach.
Nearly 60 percent of
executives identify one primary strategy for generating organic growth, while
the rest of those pursuing organic growth say their companies follow more than
one. According to respondents, a diversified approach is more common at larger
companies than at smaller ones. It is also reported more often in developed
markets than in emerging markets, where reliance on the creating strategy is
most common.
Looking ahead, though,
the results suggest that companies must evolve how they grow. Of the three
strategies, respondents say the largest share of their past growth came from
investing in existing activities that are proven winners. Even at companies
using multiple strategies, respondents say they have relied most on investing
in recent years. But when asked which primary strategy their companies will
pursue in the next three years to generate organic growth, just over half of
respondents cite the creation of new products, services, or business models,
while only 19 percent choose investing. In both developed and emerging markets,
respondents are most likely to say that creating new products, services, or
business models is where their companies will focus.
The impulse to create
makes good sense, given the current challenges to faster growth that executives
identify. The most commonly cited obstacle is a lack of growth in their primary
markets (thus the need to seek new markets or customer segments), followed by
growing competition from new businesses and business models, product or service
offerings that aren’t sufficiently different from those of competitors, and
lower prices and better promotions offered by competitors.
Identifying top-growth companies
Just as there are
multiple strategies for growth, there are multiple ways that companies can
outperform others. We identified a group of top-growth companies, and
respondents at the top report different strategies for how they got there.
On the whole, the
results suggest that high growth is most often associated with strategies based
on the creating and performing dimensions. But the companies pursuing multiple
approaches are the most likely to succeed at driving organic growth: 44 percent
of top-growth respondents report the use of more than one growth strategy. Not
all multidimensional companies, though, drive growth equally through each
strategy. At companies that are dominant in investing but follow at least one
other strategy, 35 percent are top-growth firms. The respondents whose
companies pursue multiple strategies but focus on creating new products,
services, or business models are the most likely to report success at driving
growth, with 43 percent of them saying they work at top-growth firms. But when
companies follow a creator strategy alone, only 31 percent of respondents
report high growth.
The capabilities that drive growth in the digital age
According to the survey
results, there are some core skills that the most successful companies seem to
have mastered, regardless of the growth strategy they are pursuing. We asked
about nine types of business capabilities and companies’ respective skills in
each one. The two capabilities that top-growth respondents cite most often, in
all three paths to growth, are branding and developing the right mind-sets
and organizational culture. For companies following the investing and performing
strategies as their primary paths to organic growth, resource allocation also
is a table-stakes capability that they need just to be in the game. For
“creators,” perhaps unsurprisingly, respondents say that developing products
and services is one of their companies’ strongest capabilities. And among
“performers,” the top-growth companies are much better than their peers at
sales and pricing.
Beyond these core
capabilities, other responses highlight which skills set apart the top-growth
companies. Among companies focused on investing and creating, top-growth
respondents are at least 70 percent more likely than their peers to report strong
data and analytics skills. For example, among top-growth respondents at creator
companies, 40 percent agree or strongly agree that their analytics-generated
insights are easy to act upon; only 13 percent at other companies focused on
creating say the same.
Looking ahead
In response to the
challenges that the survey results revealed, here are some steps executives and
their companies can take to drive organic growth in the digital age:
·
Focus C-level attention on
growth. Any growth program must start with prioritizing organic growth specifically, not just growth in general. Although
C-suite leaders are contending with significant pressures and priorities, from
cost concerns to regulatory issues, boards and CEOs that put organic growth at
the top of the leadership agenda and hold senior executives accountable for
delivering it can put their businesses on a better growth trajectory. That
leadership alignment around organic growth creates the necessary intent to
drive successful growth strategies. An organic-growth program also requires a
clear understanding of how each strategy (investing, creating, and performing)
can change a business’s growth trajectory.
·
Set clear goals for
analytics. Advanced
analytics plays a decisive role in driving
growth, according to the survey. But few respondents report analytics
capabilities at their organizations, perhaps due to a lack of recognition of
analytics’ value, or a lack of willingness to invest in it. While it is
important that companies develop their analytics capabilities quickly, it is
not efficient simply to charge ahead with expensive, time-consuming IT
investments. Any approach to better analytics should begin with a clear set of
goals that are meaningful to the business, such as acquiring more customers or
converting customers to bigger-ticket items. That way, there are clear
deliverables for the company’s advanced-analytics investments and a greater
degree of accountability. This clarity can also help businesses move more
quickly to meet their analytics-related revenue targets.
·
Build agile muscles. While technology plays an important role in
improving business capabilities, companies cannot overlook the ways their
people work—namely, encouraging employees to work in more
agile ways. Several agile methods can enable companies
to reconfigure their strategy, resources, and organizations quickly, so they
can succeed in a rapidly changing environment. In a hackathon, for example, small teams work to develop prototypes
of products and solutions with real-life applications for solving a business
problem. These ways of working have a bias for action and favor testing good
ideas, rather than developing perfect solutions. Companies can foster agile ways of
working, supported by a culture of continuous
learning and improvement, by establishing performance metrics (for example,
time to market or number of pilots sent to market) that are action oriented and
give employees incentives to work quickly.
August2017
http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/mastering-three-strategies-of-organic-growth?cid=other-eml-alt-mip-mck-oth-1708&hlkid=30f08099f8cf4826a24c20c2fa356877&hctky=1627601&hdpid=b79bce38-fb90-433c-bae4-c7770a0ced63
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