At some point, high-growth companies become low-growth companies. The engine for growth stops running and new organic growth capabilities are then required to reignite the growth. When their organic growth has reached tipping points, big corporations switch to inorganic growth.
They go on the hunt for new acquisitions with the hope that the new acquired companies will drive the required organic growth. However, as many companies have learnt, inorganic growth is not always the answer. What many corporate leaders have found out is that for an acquisition to succeed, the acquiring company must be able to stimulate growth in the business they buy. Many research findings have revealed that only 36% of acquisitions deliver cost savings to cover the premium paid. The remaining 64% of acquisitions have delivered negative total shareholder returns.
Since the beginning of the global financial crisis in 2008 and the following Eurozone and global economic meltdown, the levels of Mergers & Acquisition (M&A) deals have significantly gone down. Companies are not spending more on acquisitions compared to the period prior the year 2007. Governments are highly indebted and simply cannot afford to finance and support meaningful business and economic growth hence the global economy will not experience a dramatic turnaround anytime soon. Because of this, companies have to rely heavily on organic growth.
In order to successfully grow organically, company leaders have to be engaged. They have to set the tone from the top and kick-start organic growth initiatives. The problem arises when senior leaders delegate all the pursuits of organic growth to unit managers. Although they claim to take organic growth seriously, these leaders are not involved as they should be. Unit managers have the tendency to look only for quick fixes that generate low investment returns and also increase the company’s operational complexity. As a result, units end up operating independently leading to duplication of efforts and investments. This will ultimately result in increasingly incoherent portfolio of businesses, product lines and capabilities. Creating organic growth capabilities requires the company leaders to:
Focus on the big picture: When delegating the pursuit of organic growth to operating units, senior leaders must ensure that the operating units pursue growth in the right places. Unit managers should look for opportunities that cross internal boundaries and build enterprise-level capabilities. Operating units are closer to the front-line and so are best positioned to spot opportunities. Though one organic growth initiative may appear small from a corporate perspective, combined together, such initiatives are crucial for realizing return on investments.
Corporate leaders can help the entire organization focus on the big picture by:
- Setting the opportunity bar: This ensures that managers will not focus only on the projects that are easy to achieve but also on the ones that represent the biggest opportunities. Standards and practices that make transparent the scale and source of growth opportunities must be set. This helps unit managers identify the highest potential opportunities so that they will less likely propose in areas that would yield only small gains.
- Getting the data right: There must be an organization-wide database for organic growth opportunities specific to both individual operating units and those that cross internal boundaries. Through this, the company will be able to focus time, efforts and resources only on productive activities. Getting the data wrong automatically means you will also get growth in the wrong places.
- Building enterprise-wide growth capabilities: Managers must own the continual accountability and development of organic growth capabilities that offer economies of scale and scope to the company as well as competitive advantage.
- Looking across business and markets: Managers must always be alert and be able to identify small opportunities that make no sense by themselves and bundle them together to create one big opportunity.
Intelligently deal with the business cycle pressures: During economic boom periods, most companies invest heavily on growth. For example, unit managers tend to believe in overly optimistic business forecasts, which makes it easy for them to justify adding unnecessary head count or to pay too much for assets they believe, are important to acquire. During economic bust periods, these managers enter into the reverse mode. They become reluctant to fund new products, upgrade important aspects of customer service or invest in market building. In this regards of the ups and downs of the business cycles, senior leaders should help their organizations invest in a way that is largely independent of the business cycles by:
- Establishing the right performance standards: This keeps managers away from worrying about the wrong things at the wrong time, for example, obsessing over growth at the top of business cycles and then forgetting about it at the bottom.
- Continuously pursuing cost savings to propel local investments: To grow organically, your company should aim for zero overhead growth. Removing unnecessary costs is crucial for releasing additional funds from operations that can then be reinvested into the business for organic growth.
- Creating a corporate organic growth fund: Additional funds from this pool can be used to test promising opportunities.
Resist typecasting by avoiding the use of self-defeating labels: How often do we hear the terms “growth engines” or “cash cows” being used by managers? Units designated growth engines often receive the lion’s share of the investment capital whereas cash cows fund the growth engines. The problem with using such terms is that they shape beliefs about growth, affect the operating units’ behaviour and ultimately become self-defeating. For example, unit managers who feel solely responsible for the company’s organic growth will take on more risks, investments and costs than they should. It is therefore imperative that corporate leaders hold all business units to a high standard of achievement and see what happens.
Create a common language for growth: Corporate leaders possess the responsibility to share ideas and concepts across the organization. As such, being the overseers of the entire organization, they are best positioned to create a company’s language for growth. Through having a common term of thinking and talking about growth, the entire organization will be able to get on the same page and clarify what constitutes new and coherent ways of growing the business. A clear language of growth also helps managers to develop more targeted initiatives, fewer overlapping initiatives and far more coherent and higher-performing pathways for opportunities. Managers will in turn less likely to overestimate growth potential.
Concluding Thoughts: Regardless of the size, industry, location etc. all companies can become more skilled at growing organically with the business models they already have. All that is required is having active, engaged leadership. However, this does not mean that the senior leaders should impose a number of new processes or exercise a heavy hand. They just need to assist the operating units focus on the big picture, lead the fight against the business cycle, do away with typecasting and establish a common, rigorous language for growth. Following these rules will successfully result in the organization achieving its organic growth initiatives.