Organic Growth Opportunities

Organic growth is the main driver of a firm’s market value because it reveals how well the management of a company is utilizing its internal resources to increase sales and output. There is no reason to accept low organic growth for your company regardless of its maturity.

Bigger is Not the Same as Value

Although mergers and acquisitions can provide a boost to a company’s sales and revenue figures, ultimately for these acquisitions to succeed, acquirers must be able to stimulate organic growth in the businesses they buy.

Harvard Business School research suggests that in only 36% of acquisitions do companies realize enough cost savings to cover the premium they’ve paid; in the other 64%, annual total shareholder returns are, on average, negative 2%. Just getting bigger is not enough to satisfy investors and shareholders.

In a Harvard Business Review study using a sample of 3,000 acquisitions by U.S. companies from 2001 to 2011, only the companies that generated robust organic growth from their acquisitions also created value, as measured by total shareholder returns (TSR).

13% Average annual TSR of companies whose acquisitions led to organic growth that was higher than GDP growth

-3% Average annual TSR of companies whose acquisitions led to organic growth that was lower than GDP growth

Focus on Organic Growth Regardless of the Economic Cycle

During downturns and busts it is common for companies to become cost-conscious. If they are not careful, this can become the way the company operates even in upturns and booms. At the bottom, growth suffers because organizations are reluctant to invest in new products or market development. The lack of action during the downtimes makes it hard to mobilize the organization in time to take advantage of the upswing.

Various studies have found that market winners are usually those companies that have been in the top third for revenue growth and profitability over a five year period. The implication: stay focused on growth regardless of the business cycle.

This doesn’t mean you aren’t concerned about costs, but smart companies invest these savings in growth rather than hoarding cash. Organic growth requires the leadership team to keep an eye on the big picture and resist being short-sighted when the business cycle goes south.

Organic growth falls within the domain of Marketing

Marketing Should Take the Lead for Organic Growth

While corporate leaders need to drive the organic growth initiative, Marketing plays a critical role in achieving the organic growth targets. Setting the growth targets takes good data.

One of the first and most important data is where to look for growth. Identifying markets and customers to pursue falls squarely in Marketing’s domain. It is Marketing who can provide the insight and guidance that answers questions such as whether the opportunity is to grow share of wallet among existing customers by offering more ancillary products or whether the opportunity is to develop a new offering to penetrate a new market and attract new customers.

As value-creating marketers, you are in the business of creating new benefits for current customers, finding new customers for existing products, and driving innovations that will keep your business ahead of the competition.

I believe the pressure for companies to improve organic growth is going to increase. This presents an ideal opportunity for Marketing to step up and take the lead by developing and orchestrating a disciplined process for selecting the best organic growth initiatives.

Here are five steps Marketing should help the organization take to identify and select the best options for organic growth:

1. Begin with a realistic assessment of the gap between the goals for growth and the current rate of growth based on your current strategy plus the projects already in the portfolio of growth initiatives.
2. Set achievable performance targets for each source of future growth.
3. Evaluate how your company could achieve organic growth from these efforts:
   • Deeper market penetration
   • Expansion into adjacent markets, and exploration beyond adjacencies. Often adjacent markets offer the best combination of revenue and profit growth with a tolerable level of risk.

4. Establish a set of criteria for evaluating each option.
5. Screen each option using the criteria to identify points of weakness and flawed assumptions, and the risks that have to be contained. The screening criteria should include questions that address at least these five areas:
   1. Is there a real market and a real product?
   2. Can we win?
   3. How much is the opportunity worth?
   4. What is the level of risk?
   5. What innovation strategies and conditions will we need to create that will contribute greatest long-term financial value for the organization?
   6. Assess the long-term economic value of each option and select the option that meets the criteria and provides the greatest economic value.

With this approach, every company can become more skilled at growing organically, but this will require an ongoing commitment and a disciplined process which we can help you with. Please feel free to Contact Us to discuss the ways in which we can help you and your company grow. Discover how VEM helped Northwest Federal Credit Union  create a Marketing strategy and a measurable marketing plan to accelerate growth.

Comments are closed.