Understanding the research on organic growth in the digital age
“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.” - from "Mastering three strategies of organic growth," McKinsey & Company, August 2017.
Research conducted by McKinsey & Company and reported in “Mastering three strategies of organic growth” (August 2017) explores how companies around the world drive growth: both their strategic mindsets and the leadership it takes to effectively pursue a growth agenda.
Organic growth could not be more important to companies’ survival.
Why organic growth? “What the firm has found over time is that if you don’t deliver top-line growth, over time you’re either de-listed or bought—literally, growth is equated with survival.” Liz Hilton Segel leads McKinsey’s Marketing & Sales Practice in the Americas. She describes the firm’s research findings on successful growth strategies and discusses the attributes of the leadership teams who deploy them.
Survival in business depends on driving revenue and earnings, and according to Hilton Segel many companies still focus too heavily on cost-cutting to improve their results. “The pressure on earnings quarter to quarter can often lead to a company culture that is more cost-oriented or more margin-expansion oriented,” she warns. “But when you look at what drives shareholder value, organic revenue growth is critical. That’s why we spend so much time talking about growth.”
Driving growth in the digital age presents new and different challenges and opportunities. Companies must move faster than ever in response to shifting consumer trends and the rapid onslaught of competition. Hilton Segel looks at the impact and promise of digital in two ways. “First, digital is changing how companies interact with consumers and second, it’s changing internal company processes, for example the use of large data sets to make more intelligent decisions.”
According to Hilton Segel and her McKinsey colleagues “these trends have changed how companies should go after incremental organic growth, and that’s what led us to ask ourselves: what makes for a really great growth roadmap, and what makes for a great executive team that can drive organic growth better than the market?
The Three Growth Profiles
Through the research and working with clients, Hilton Segel and her colleagues began to recognize that companies and their executives trend toward different growth strategies that historically work for them: investing, performing and creating.
The investor “sees opportunity for organic growth by finding new sources of funding, and that person is creating growth as if putting gas on the accelerator of a car,” Hilton Segel says. The investing model involves squeezing money across the existing business and reallocating funding to high-growth areas of the business. For example, Hilton Segel describes an executive who “would go around each month, department by department, and cajole small increments of savings for reallocation. ‘You can give me a few dollars that I can invest and help us grow faster.’” That relentless investment strategy was hugely successful. “They produced unbelievable customer growth rates month over month for many, many years and ultimately ending up a market share leader.”
The performer focuses on optimization. “This executive type doesn’t need more investment, new products or new services; they can actually drive more growth through process improvement,” Hilton Segel says. For performers, incremental growth is created through optimizing sales, pricing, and marketing. And data analytics help performers make faster decisions with greater precision. For example, according to Hilton Segel, “If I’m a retailer, it’s perfectly reasonable for me to make a different pricing decision on every item either in the store or on the website, and a different decision can be made pretty much any minute of the day, every day.”
The third growth profile is the creator. Hilton Segel describes an executive who says, “No, I don’t need more money and I don’t need to improve the process, what I need is a new set of products and services.” Relying heavily on consumer data, creators are adept at identifying trends and unmet needs. They “invent the adjacency in the business they’ve never had before, enter a new product category, create a new business model or create a new service,” she says.
Companies engaged in multiple growth strategies are among the highest growers. Hilton Segel says, “The obvious benefit of diversification is that you have more than one avenue paying off for you.”
According to the research “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.”
Why isn't Everyone Doing It?
The barriers that stand in the way of adopting a diversified approach to growth are distinctly human. According to Hilton Segel, “The first thing that gets in people’s way is a mindset limitation.” Achieving competitive growth rates requires attention on growth. “I have seen such a stark difference between companies where the CEO and the CFO are single-mindedly focused on market expansion and cost-cutting, versus companies where the CEO and CFO are single-mindedly focused on organic growth.” She says, “Our view is that growth can be managed just like margins are managed, but it requires a very purposeful growth agenda driven from the top of the company.”
The second barrier to deploying diversified growth strategies is habit. Hilton Segel acknowledges, “People get married to the system that has worked for them in the past.” When executives only feel confident in their (and their company’s) ability to deliver a certain type of growth, they miss out on the opportunity to perform above-market. “What you realize is that if you don’t start to switch up the management team and bring in people who have different successive experiences, you can end up producing more of the same in terms of how the company approaches growth,” she says.
The Evolution of a Growth Strategy
One example of the evolution of a growth strategy provided by Hilton Segel is that of a company acquired by a private equity firm. “Typically, the new CEO comes in prepared to do whatever it takes to create incremental growth. They will look across the sources of funding and they’ll find insurance savings, they’ll get savings out of the manufacturing line or out of the support function costs. They’ll be prepared to make all kinds of change necessary to free up investment capital to invest behind growth, and that works.” That’s the investor profile.
But what happens when those investments have been made? Hilton Segel says, “Often, you then run out of runway, so the question a CEO may ask is ‘what do I do for my second act?’” She says, “The natural second act would be to go after the performer approach, and try to figure out a way to get greater organic growth without more investment.” And that approach may be coupled with a creator approach, addressing the question “what would it take to expand what we offer and to whom, so that we can create growth from new categories and new businesses?”
The McKinsey research shows growth strategies are evolving for many of the companies surveyed. 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.”
Often, changing or expanding strategy requires a catalyst. “It can be that someone comes in from the outside with a different competence base to draw on, or they see a competitor take an action they didn’t anticipate and react to it,” Hilton Segel observes. In her experience, “There needs to be some dislocation, whether that’s a person, a competitive action, or everything that’s happening today with digital analytics.”
Capabilities of Growth Leaders
Researchers identify a certain set of qualities or capabilities common among high-growth companies and leadership teams. “Mind sets and organizational culture” ranks first among those surveyed, and according to Hilton Segel focus, dexterity, data and analytics, and agility are elements of that winning capability.
One of the first things that Hilton Segel and her colleagues look for is the sense of focus and intent. Where is growth on the agenda? “You can read a company’s annual report and look at communication to shareholders to see how high growth is on the agenda. Are they talking about growth, or are they talking about capital productivity and margin expansion?”
Another important question is whether growth tops the agenda of the senior team. “Do they really have alignment across the entire executive team that they are trying to create organic growth?”
An executive who works with Hilton Segel gave her an example of role-modeling that level of focus. “He said to me that he would look at the sales reports across the company and if he saw something that was an anomaly relative to a goal, he would make a skip-level phone call—he would call somebody who was probably two, three levels below him and say ‘I noticed that in this geography, in this channel our sales numbers are not where I expect them to be’ and that got everybody’s attention! It meant that all the folks who report to him directly should know every number as well as he did.”
For Hilton Segel there is a difference between the executive who says growth is our objective versus the executive who says growth is one of many objectives. But could an executive leadership team with such a singular focus actually limit new ideas? Hilton Segel posits the alternative. “I think you might end up with a fair amount of natural tension.” For example, “you may have one person saying the key to our success is investing in building a stronger, more analytic pricing capability, and somebody else says no, we should invest in strengthening industry knowledge of our sales force, and a third person may say you guys are out to lunch—we should invest in diversifying our product portfolio in the part of the business that’s much more margin accretive.”
“Then if you’re the CEO, you’re looking at a whole series of choices, all of which are good in terms of creating growth. It can lead to productive tension, and it’s certainly more productive the more it is fact-driven and against the same objective, which is to help create incremental growth in the company.”
Dexterity also relates to the concept of diversified growth strategy. What does that mean in the context of executive leadership? Hilton Segel explains that dexterity is “the idea that I can, in one moment or with one breath, go from a conversation with the CFO about where investment dollars should be allocated and have a very detailed view of what the ROI might be, whether we invest in the sales force, marketing, or capital for new product development, and in the next breath I’m talking to somebody about the optimization of the commercial engine and what can be done to extract more growth than we had last year with the exact same resources. And in the third breath saying okay, what’s the new customer trend that we can capitalize on, and what are we doing to actually get into that part of the market.” She says, “That dexterity of leadership is something that makes a difference.”
DATA AND ANALYTICS
Across all strategic profiles, growth in the digital age relies heavily on data and analytics. For example investors use data to track growth and actively reallocate, performers optimize pricing in real time, and creators use data to leverage customer insights.
According to the research “some 75 percent more high-growth companies, in fact, have analytics and data capabilities, and 73 percent have analytics embedded in their processes.” Additionally, “across all dimensions, the most significant gaps between top growers and their peers were in data and analytics (81 percent of growers have them). And naturally, data and analytics factor in the quality of a company’s agility.
Companies report higher aspirations for organizational agility, with a growing recognition that such agility is a competitive advantage in the digital age.
“We’re seeing companies move very aggressively to agile, now,” Hilton Segel reports. The concept of agile organizations took hold initially in IT, and now a broad array of companies are nurturing agility within their organizations. In an agile organization “there’s a much more fluid relationship between a product manager and their technology organization, and even further up the chain into their marketing, sales, communications and their servicing organizations.”
Why is the transition to agile so important? Hilton Segel explains, “It’s the difference between being able to make real-time changes according to what’s happening in the market place, versus implementing something that was planned on a six or a twelve-month cycle and may be obsolete.” The need for agility is a product of digital transformation and data analytics. “Years ago, people would talk about a growth strategy for a business in terms of an annual plan, and I think what companies are looking for is the flexibility to learn from real-time data; to be able to really iterate, and the only way that’s done is with a cross-functional group operating in an agile dynamic.”
A key feature of agile companies is collaboration, which breaks down siloed behavior, improves understanding between business units, and enhances both creativity and speed in decision-making.
For example, Hilton Segel recently worked with a financial institution determined to be a more dynamic communicator. “The financial industry, like pharma and several other industries, is heavily regulated, and what they say to consumers requires multiple rounds of legal and compliance review.” Their solution was to “set up several agile teams to demonstrate they would be able to meet all the regulatory requirements and at the same time be running at the pace that you would expect of a digital native company.”
The Best of Both Worlds
A systemic approach to growth and agility may seem to pull in opposite directions, but Hilton Segel sees the benefit. “How do you have a systematic approach to grow while at the same time be agile? I think that’s achieved by choosing to have an agility-focused set of aspirations and a growth plan. In my mind, clarity of purpose and strategy around achieving a certain organic growth target combined with an agile operating model is the way you get the best of both worlds.”