Building Organizational Organic Growth Capabilities

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.


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Leading in Uncertain Times

One of the biggest challenges facing business leaders today is making the right decisions that will ensure their organizations succeed, survive, and remain competitive in an increasingly uncertain and complex environment.

A recent post, The best way to lead in uncertain times may be to throw out the playbook, by Strategy+Business has several good points.

The article is about the COVID-19 pandemic, how global companies navigated through the crisis, and how best to prepare for future disruptions. Here are some key points and my comments.

  • Rather than follow a rigid blueprint, executives must help organizations focus on sensing and responding to unpredictable market conditions.
    • Comment: Senior leaders play a vital role in providing clarity about the organization’s strategic direction, creating alignment on key priorities to ensure the achievement of enterprise objectives, and ensuring the business model is continuously evolving to create and capture value in the face of uncertainty. They must not rest on their laurels and stick to the beliefs and paradigms that got them to where they are today and hope they will carry them through tomorrow. Regulatory changes, new products, competition, markets, technologies, and shifts in customer behavior are upending many outdated assumptions about business success. Thus, the businesses you have today are different from the ones you will need in the future hence the importance of continuously sensing changes in the global economy. Employees and teams often feed off the energy of their leaders and tend to focus their attention where the leader focuses attention. If the leader is comfortable with current business practices and rarely embraces the future or challenges the status quo, then the team is highly likely to follow suit.
  • When it became clear that supply chains and other operations would fracture, organizations began scenario planning to shift production sources, relocate employees, and secure key supplies.
    • Comment: Instead of using scenario planning to anticipate the future and prepare for different outcomes, it seems most of the surveyed organizations used scenario planning as a reactionary tool. Don’t wait for a crisis or a shift in the market to start thinking about the future. The world is always changing. As I wrote in The Resilient Organization, acknowledge that the future is a range of possible outcomes, learn and develop capabilities to map out multiple future scenarios, develop an optimal strategy for each of those scenarios, then continually test the effectiveness of these strategies. This does not necessarily mean that every change in the market will impact your business. Identify early warnings of what might be important and pay closer attention to those signals. In other words, learn to separate the signals from the noise.
  • The pandemic forced the organization’s senior management team to re-examine how all decisions were made.
    • Comment: Bureaucracy has for a very long time stood in the way of innovation and agility. To remain innovative and adapt quickly in a fast-changing world, the organization must have nimble leadership and an empowered workforce where employees at all levels can dream up new ideas and bring them to life. Identifying and acting on emerging threats and potential opportunities is not the job of the leader alone but every team member. To quote Rita McGrath, in her book Seeing Around Corners, she writes, “Being able to detect weak signals that things are changing requires more eyes and ears throughout the organization. The critical information that informs decision-making is often locked in individual brains.” In addition to the internal environment, the leader must also connect with the external environment (customers, competitors, regulators, and other stakeholders), looking for what is changing and how.
  • It’s worthwhile for leaders of any team to absorb the lessons of sense-respond-adapt, even if there is no emergency at hand.
  • Sensing: Treat the far-flung parts of your enterprise as listening stations. The question leaders must ask is, “What are we learning from our interactions beyond the usual information about costs and sales?” Train your people to listen for potentially significant anomalies and ensure that important information is not trapped in organizational silos.
    • Comment: Cost and sales data are lagging indicators that reveal the consequences or outcomes of past activities and decisions. Although this information can help leaders spot trends by looking at patterns over time, it doesn’t help understand the future and inform what needs to be done for the numbers to tell a different story. In addition to lagging indicators, pay attention to current and leading indicators and understand the relationship between these indicators and outcomes.
  • Responding: Improve communication across intra- and inter-organizational boundaries. Leaders should view business continuity as an essential function that acts as connective tissue for the enterprise.
    • Comment: In addition to creating mechanisms that allow the free flow of information both inside and outside the organization, decision-makers should also be comfortable receiving information that challenges their personal view of the world, even if it’s not what they want to hear. Create a culture of psychological safety where people are not afraid to share bad news for fear of getting punished, but rather are acknowledged and rewarded for speaking up. Leveraging the diversity of thought enables leaders to anticipate the future as an organization, decide what to do about it collectively, and then mobilize the organization to do what’s necessary.
  • Adapting: Challenge assumptions, and question orthodoxies. There’s always the temptation to mitigate threats simply by applying existing practices harder and faster. One way to get at those deeper issues and encourage double-loop learning is to ask, “What needs to be true for this to be the right approach?”
    • Comment: In an increasingly uncertain environment, it’s difficult to survive and thrive with an old business model or outdated technologies. Many businesses fail because they continue doing the same thing for too long, and they don’t respond quickly enough and effectively when conditions change. As a leader, stay curious and connected to the external environment, look for market shifts, understand what needs to be regularly refreshed and reimagined, adopt new technologies and capabilities, and adapt in ordinary times but also during times of transition. Unfortunately for many leaders, it’s just more convenient for them to continually downplay the fact that conditions are changing than take the appropriate course of action that drives business success.

How are you preparing your organization for potential future disruptions?

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The Collaborative Organization

These days the term collaboration has become synonymous with organizational culture, creativity, innovation, increased productivity, and success.

Let’s look at the COVID-19 pandemic as an example. At the peak of the crisis, several companies instructed their workers to adopt remote working as a health and safety precautionary measure.

Two years into the pandemic, they are now asking their employees back to the office full time or are planning to adopt a hybrid model.

The need to preserve our collaborative culture and accelerate innovation are two of the top benefits being cited by organizational and team leaders for bringing workers back.

Collaboration is indeed essential for the achievement of team goals, functional objectives, and the overall success of the organization.

Today’s breakthrough innovations are emerging from many interacting teams and collaborative relationships.

When teams, functions, and organizations collaborate, the whole is greater than the sum of its parts; group genius emerges, and creativity unfolds.

But, what makes a successful collaboration? What are the key enabling conditions?

  • It extends beyond the boundaries of the organization. Business success is a function of internal and external relationships. Instead of viewing your business in vacuo, understand that you are part of an ecosystem. External to your organization, who do you need to partner with to enhance your value creation processes, achieve/exceed your objectives, or successfully execute your strategy?
  • Ensure the objectives are clear and there is shared understanding by everyone. Unclear objectives are one of the topmost barriers to team and organizational performance.
  • Foster a culture that encourages opinions and ideas that challenge the consensus. People should feel free to share their ideas and not hold back for fear of others penalizing them or thinking less of them. Collaboration is hindered when one or two people dominate the discussion, are arrogant, or don’t think they can learn anything from others.
  • Groups perform more effective under certain circumstances, and less effective under others. There is a tendency to fixate on certain topics of discussion amongst groups which often leaves members distracted from their ideas. To reduce the negative effects of topic fixation, members of the group should be given periods to work alone and switch constantly between individual activity and group interaction.
  • Effective collaboration can happen if the people involved come from diverse backgrounds and possess complementary skills to prevent conformity. The best collective decisions or creative ideas are often a product of different bodies of knowledge, multiple opinions, disagreement, and divergent thought processes, not consensus or compromise.
  • New technologies are making collaboration easier than ever, enabling us to increase our reach and broaden our network. Although new technology helps, it will not make your organization collaborative without the right culture and values in place. First, define what you want to achieve through collaboration then use these tools to promote creative collaboration.

How else are you championing collaboration within your organization to create value and succeed?

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Preparing for Geopolitical Shocks

Geopolitical instability has steadily increased over the past years, and uncertainty in the global economy is at an all-time high. Thanks to globalization and advances in technologies, we now live and work in a tightly interconnected world, one in which the boundaries that previously separated domestic from global issues have disappeared.

Threats are no longer confined to traditional political borders, social structures, and geographic boundaries. Geopolitical shifts have dramatically altered the global economic landscape and brought politics and business together.

The rise of China as an economic and politically influential power has threatened the dominance of the United States as the world’s largest economy. Although the opening of China and a market of 1.4 billion people have benefited both countries, it has also intensified competition and sparked U.S. economic and technological espionage accusations against China, leading to strained relations between the two giants.

U.S. companies operating from China have felt the impact of this tense relationship. The opposite is true for Chinese companies in the U.S.

Across Europe, national populism is on the rise and now a serious force. In 2016, the United Kingdom shocked the world when it voted to leave the European Union, generating reverberating effects across markets.

Banks and financial services companies that once benefited from the EU passporting system have had their cross-border banking and investment services to customers and counterparties in the many EU Member States impacted, causing them to reimagine their value proposition models.

The recent invasion of Ukraine by Russia is another example of a geopolitical event that has had devastating effects on human livelihood and businesses. Although the conflict between the two countries has risen over the years, I think it’s fair to say that few political analysts, governments, and businesses predicted a war to happen.

The war has created a humanitarian crisis, rattled global commodity and energy markets, caused prices to soar, and forced many international companies to temporarily suspend their Russian activities or completely cut ties with the country.

Global supply chains which are already fragile and sensitive due to the COVID-19 pandemic are now facing new challenges in the aftermath of the Russia-Ukraine crisis. Multilateral economic sanctions have been imposed on Russia. A state of affairs that was unthinkable months ago and is now threatening to derail the nascent global economic recovery from the COVID-19 pandemic.

Given the global domino effect of geopolitical events and the shrinking of the distance between markets and politics, the need to better understand and more effectively mitigate geopolitical risk has become more urgent. The business impacts, whether direct or indirect, vary by company type and industry sector.

Your company may not be able to prevent wars between nations, but you can anticipate and better prepare for geopolitical shocks:

  • Integrate strategy, risk, and performance decision-making. Consideration of risks to business success is an important part of the strategy selection and execution process, not an afterthought.
  • Develop a better understanding of geopolitical trends and how they are changing. For example, what are the megatrends in business, politics, and technology that are making geopolitical risks more diverse, prevalent, and consequential?
  • Assess the links between these geopolitical events and business performance. What are the events that matter most to your business? For example, how might current global political trends pose physical, business, and reputational risks to your parent organization?
  • Anticipate how these trends are likely to play out in the short, medium, and long terms, and develop mitigation strategies for each geopolitical scenario. Proactively anticipate and plan for radically different worlds, instead of reacting to problems as they arise
  • Review your mitigation strategies as the world changes. Are they effective enough in case of a major shock?
  • Develop capabilities for continuous learning to anticipate, address, and recover from geopolitical crises.

What do you think?

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