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.

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 (Exhibit 1). 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 (Exhibit 2).

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 (Exhibit 3). 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 (Exhibit 4). 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 (Exhibit 5). 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.

About the author(s)
The contributors to the development and analysis of this survey include Kabir Ahuja, a partner in McKinsey’s Stamford office; Liz Hilton Segel, a senior partner in the New York office; and Jesko Perrey, a senior partner in the Düsseldorf office.