Corporate leaders at a financial services firm found that developing and disseminating a clear, concise language for organic growth made it easier to identify and pursue the best opportunities. Often it’s because their business models have run their course (Yahoo! View Details | Press Book. A study published in the Harvard Business Review suggests less than 8 % of a set of ~ 5,000 publicly traded companies achieved growth of 5% per year for 5 years. Respect those rules, and you will transform your company’s internal growth engine. And by not playing a more active role in organic growth, a CEO subtly discourages watchfulness on the part of the very people who might be in the best position to spot opportunities. Here’s why that has to change—and how CEOs can make sure it does. The corporate scholarship money, he said, occasionally let him research or test a promising opportunity. The best way to fight that tendency is for the corporate center to instill standards and practices that make transparent the scale and source of growth opportunities. The “aha” was that beer in a bottle would be less prone than beer in a glass to slosh around and spill when people were shoulder to shoulder. Sonnentor emphasizes socially and environmentally responsible behaviour in all its actions and has built its business on fair partnerships with employees, suppliers and other partners. For example, half of Starbucks’ customers buy only 40% of their coffee from Starbucks — they get the rest from places like Dunkin’ Donuts and McDonald’s. What would it take for them to switch? They either give up on it, in the belief that their companies will inevitably become low growth, or they cede responsibility for it to the operating units. Joseph Scalzo, who ran Gillette’s global business unit for personal care products, says he benefited from all three of Kilts’s practices. Check out this great listen on Audible.com. If companies have a clear language for organic growth, they will be less likely to overestimate growth potential, which wastes time and effort, and more likely to develop more targeted initiatives, fewer overlapping initiatives, and far more coherent and higher-performing pipelines of opportunities. He knew that could lead to all sorts of destructive behaviors.” Kilts’s ability to make trade-offs between expense reduction and investment allowed Scalzo to reinvest a portion of $70 million in savings he had identified in his unit. Although individual operating units should be charged with identifying organic growth opportunities and with executing a particular growth strategy, executive leadership should be in place to evaluate which growth initiatives should be pursued at any given time. Likewise, programs focused heavily on employees learning from each other and through shared experiences will flourish. Dow Jones again provides an example. World-class Harvard content, delivered at scale, over time. That was the case at a giant retailer struggling to squeeze more growth from its existing stores. By Harvard Business Review, $18.95. Your company’s ability to grow organically depends a lot on you and your corporate team. In an uncertain business environment, all corporate leaders need to be actively engaged in organic growth. Motivating People Digital Article. The contribution to organic growth of a given level of effort. “I’ve worked for other people who would have said, ‘I’ll take all $70 million on the bottom line,’” Scalzo noted. If a company invests time in developing sound concepts and articulating them with well-chosen words, the potential for muddle and confusion is greatly reduced. If you can’t answer yes to two of the questions in each category below, your company is not realizing its organic growth potential. But two-thirds of that opportunity is almost always found in only one third of the business. To buy multiple products and services from us because each provides superior value. But by amplifying the cycle in this way, leaders can do great harm to their operating units’ organic growth efforts. Some go for “game changers” — giant acquisitions that they hope will change their growth trajectory and how investors perceive them. Kilts was unrelenting in removing unnecessary costs. 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). Yes, it is theoretically possible to make acquisitions that are justified by cost synergies alone, and to do this forever. The problem is that these labels shape beliefs about growth, affect the operating units’ behavior, and ultimately become self-defeating. For example, the financial services firm mentioned above is organized around product groups, sales channels, and corporate functions such as marketing, operations, IT, and HR. By Harvard Business Review, $18.95. When he decided to break up the company, in 2006, his aim was to unlock the value of “high-growth” businesses such as cable networks VH1 and Nickelodeon, which he felt weren’t getting the valuation they deserved. Organic Growth at WalMart Case Study Solution & Analysis. By Richard Boyatzis, Melvin L. Smith, Ellen Van Oosten, $30.00. This three-piece series focuses on the future of leadership development and the ideology of learning through peer and mentor programs. His purpose was not to get managers at Gillette to rein in their ambition; it was to keep them from worrying about the wrong things at the wrong time, such as obsessing over growth at the top of the business cycle and then forgetting about it at the bottom. Multibillion-dollar companies with multiple divisions often fall prey to business typecasting. The goal GE has set for sustained organic growth—two to three times the growth of global GDP—translates to about 8% today. When corporate leaders created a database of organic growth initiatives, they found that the operating units were pursuing opportunities that had a great deal of overlap and so were requesting more investment than was actually needed. Without this executive role, individual operating units could invest resources in opportunities that do not align with organization-wide objectives or into opportunities where the level of risk taken on does not align with the potential benefit. “But he didn’t want you to try to perform heroically, either. Resist typecasting some units as “growth engines” and others as “cash cows.” Those labels shape beliefs about growth and affect the operating units’ behavior. The Harvard Business Review Manager's Handbook: The 17 Skills Leaders Need to Stand Out. This post is part of the HBR Insight Center Growing the Top Line. Second, a firm can quickly lose its focus when corporate leaders delegate the pursuit of organic growth. While each has particular needs in emerging markets, the two businesses face common challenges, such as understanding customs and governmental machinations. When Kilts joined Gillette, the company was stalled. Clients who use multiple providers or would switch if they found a provider with a better offering. View Details | HBR Issues. And yet, few firms achieve it with any consistency. Harvard Business Review (May): 96-106. Corporate leaders faced substantial resistance from the paper’s employees, however, who believed that they were already producing the world’s best newspaper. At the top of the cycle, the approach encourages unit managers to believe in overly optimistic business forecasts (who wants to be gloomy when things are going so well? Copyright © 2020 Harvard Business School Publishing. Others double down on their most loyal customers on the theory that they can build on an already strong market position and emotional connection. This means you can expand your potential organic business growth beyond just Google searches. And all too many try to work their way out of the problem by launching multiple growth initiatives with the hope that a few of them will stick. The best growth opportunities for both businesses are in emerging markets, where local expertise is critical and managerial talent is scarce. Favaro, K., T. Romberger and D. Meer. This term describes our clients’ behavior, whereas pushing additional products and services to clients—cross-selling—describes our behavior. If you leave organic growth to the front lines, they’ll tend to favor the projects they know they can do over the ones that represent the biggest opportunities. Procter & Gamble then bought the company at 5.5 times revenue and almost 19 times EBITDA—multiples normally reserved for high-growth companies. 9. In many companies we find that people use the word “opportunity” to describe an action, such as adding salespeople, building a new plant, increasing IT capacity, raising (or dropping) trade promotions, or installing a CRM system. They just need to help the operating units keep an eye on the big picture, lead the fight against the business cycle, resist typecasting, and establish a common, rigorous language for organic growth. To break the stalemate, the CEO introduced the term “relative customer value,” in which “customer” included readers and advertisers. Ron Carucci; Save; Share; Special Coverage Coronavirus. The big organic growth opportunity is with non-loyal customers who freely and frequently switch between competitors. Do we require operating units to find new ways to boost organic growth? Harvard Business Review, July/August 2017. Typecasting operating units is a little like typecasting children: This is the smart one, that’s the ambitious one, and that one over there—she can just sit there and be pretty. They’re the ones you should be looking to for growth. But resisting the drumbeat of business cycles is an essential role of the corporate center and one of the key tests of executive resolve, particularly for CEOs. Every business has the potential to create new benefits for current customers or to find new customers for the benefits it already provides. Its revenues had declined by 4% a year for five years, and its earnings had been flat during that period. 2. In an organic growth strategy, a business utilizes all of its resources – without the need to borrow – to expand its operations and grow the company. There are some good reasons for delegating organic growth to the operating units: They are closer to the front line and so are well positioned to spot opportunities. Although any one organic growth initiative may seem small from a corporate perspective, collectively such initiatives are essential to realizing a return on a company’s capital base. Thus, we often see units designated as “growth engines” that get the lion’s share of investment capital, while others are the “cash cows” that fund the growth engines. Organic growth allows for business owners to maintain control of their company whereas a merger or acquisition would dilute or strip away their control. The health claims for organic foods have been the most tenuous. Copyright © 2020 Harvard Business School Publishing. Consequently, growth by acquisition will no longer be propelled by macroeconomic tailwinds of the kind we’ve felt for the past 30 years, and organic growth through the usual incremental approach will be anemic at best—certainly not enough to impress anyone. The company’s Americas unit saw bottled Guinness as a growth opportunity, especially in the United States, where the increasing number of beer aficionados preferred bottled beer. George Orwell wrote that “the slovenliness of our language makes it easier to have foolish thoughts.” Like him, we believe that a tidy language for growth makes for a tidier, wiser pursuit of it. Marketing helps a firm in creating value by better understanding the needs of its customers and providing them with innovative products and services. Does that language enable my corporate team and me to help each operating unit identify its growth opportunities and decide how best to realize them? Instead, they let a small startup develop the first low-cost electric toothbrushes. 1. Many CEOs don’t seem to care about organic growth. A big reason is that they often focus their organic growth efforts on their most loyal customers. This is different from customer segmentation, which divides our clients into groups that often do not line up well with our market-facing operations. The latter questions are far more likely to help operating units realize their organic growth potential for the least amount of investment. The glossary included not only “headroom for growth,” “switchers,” and “needs-offer gap” but also “return on effort,” “cross-buy,” “operational segmentation,” and a precise definition of “organic growth opportunity.” This terminology is used throughout the company and has helped transform the corporate center’s dialogue with the operating units. Helping People Change: Coaching with Compassion for Lifelong Learning and Growth. In women’s apparel, for example, that meant offering greater size and fashion variety; in electronics, it meant offering more services for customers in rural areas. That practice, however, is rarely followed. Mightn’t it make more sense to hold all three to a high standard of achievement and see what happens? Instead, they become serial acquirers of smaller companies or seek a “transformative” acquisition of another large business, preferably a high-growth one. They soon find out that such initiatives not only generate returns that fall off rapidly but also vastly increase the company’s operational complexity. 11. We’ve never met a CEO who says organic growth is not a priority, but we’ve met many who limit their involvement to setting targets for the operating units—typically through the budgeting process—and then monitoring progress against those targets. Harvard Business Publishing is an affiliate of Harvard Business School. Managers would rather succeed conservatively than fail bravely, which might be good for their careers but does little for growth. The implicit message to Kilts was, Look at Duracell—man, did we overpay for that. Initially, the Wall Street Journal resisted the changes on the grounds that the paper could never be a growth engine; success, many argued, would be not allowing core circulation to fall too quickly. Sooner or later most companies find themselves struggling to produce growth. The dollar amount of headroom for growth that could become revenue if we closed a needs-offer gap for clients or potential clients who are the most likely switchers. And although the editorial staff had long thought putting advertising on the front page to be a crime, readers didn’t care. Those are big mistakes. Create a language for organic growth that helps the company clarify its priorities and develop a coherent, high-performing pipeline of opportunities. Creating an organic growth machine. Currently, 86 million people in the US listen to podcasts in 2019, and by 2022, the number of listeners will grow to 132 million people. But they don’t directly help the operating units grow organically. Typecasting units as growth businesses is equally dangerous. Look at Oral-B. All rights reserved. Do we maintain an enterprisewide database on the size, scope, and nature of organic growth opportunities? When the company was modernizing the Wall Street Journal, it wanted everyone—art directors, direct marketers, circulation managers, salespeople, and managers of the online edition—to focus on how changes would be received by readers and advertisers, and, by extension, how those changes would affect Dow Jones’s ability to grow organically and profitably. But a bottled version of Guinness required the development of a nitrogen capsule and changes to the distribution system; the numbers in the United States didn’t quite justify those investments. There are three ways to increase ROE: reduce effort but achieve the same level of organic growth, maintain effort but increase organic growth, and increase effort in ways that increase organic growth even more. The CEO and other corporate leaders can take four important actions to help the entire organization keep an eye on the big picture. Many CEOs accept that as an inevitable sign that their businesses have matured, and so they stop looking internally for big growth. It is often hidden in less loyal customers, in how customers behave (not in what they tell you), in value propositions that are not fully delivered, and in markets that cut across the internal boundaries of companies’ own organizations. Leaders who have applied these rules have uncovered opportunities for organic growth that were hiding in plain sight. Philipp Carlsson-Szlezak, Martin Reeves and Paul Swartz; Save; Share; How to Keep Your Team Motivated, Remotely. If companies don’t get the data right, they can also look for growth in the wrong places. Scott D . If a unit’s managers feel solely responsible for the parent company’s organic growth, they’ll take on more risks, investment, and costs than they should. In this short revision video we look at organic growth of businesses and some of the advantages and drawbacks of this approach. In 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). Fighting the business cycle takes a lot of fortitude. No one wants to hear about “investing for growth” in hard times or about “steady, measured growth” during a boom. But 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%. The clients we don’t currently have minus those we are unlikely to get; and the business we don’t currently have with existing clients minus that which we are unlikely to get. June 2011 Harvard Business Review 3 FO R ARTIC LE R EPRI NTS C ALL "##$%""$#""& OR &'($(")$(*## , O R VISIT H B R.OR … What can we eliminate? In addition, together the businesses give their parent company a bigger opportunity to present to authorities looking for direct investment in their countries. Companies can ill afford to make these mistakes. Do operating units constantly generate cost savings in order to fund their organic growth? The decision is made in the context of wider attempts to move the giant retailer slightly upscale and to focus on environmental sustainability. But CBS came out of the blocks reporting higher than expected growth, while Viacom immediately fell short of its growth expectations and has been struggling to meet them ever since. As another example, the financial services company whose “opportunity bar” we described earlier compiled a glossary of terms to make it easier to decide how best to drive organic growth throughout the company. 10. We’re not talking here about being countercyclical; that is something different. We know of one business that had both a dental hygiene and retail battery business but missed the opportunity to combine those technical capabilities. Other studies have found less than 25 % of companies succeed in their bid to grow consistently and profitably. 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.1 CEOs who give up on organic growth are making a big mistake.This article was first published in the May 2012 double issue of Harvard Business Review. The goal of his pervasive, intrusive, and continuous effort was zero overhead growth (ZOG, as he dubbed it). For example, when the company tested the relative customer value of a smaller, more profitable format, it found that, contrary to the belief of most editors, the majority of readers actually preferred it. Although such actions may enable a company to realize an opportunity, they are not themselves opportunities. This post is part of the HBR Insight Center Growing the Top Line. Does my company have distinctive enterprise-level capabilities that enable operating units to achieve more organic growth than our competitors do? The entrepreneur and founder of Sonnentor, an organic food production company, has grown his business by focusing on unusual strategic and operative choices. Executive leader… That information helps a company put time, effort, and resources where they can be most productive. Take, for example, Manitowoc, a midwestern U.S. company that owns one business in heavy-lifting cranes and another in commercial equipment for the food service industry. Focusing too much on traffic and cross-selling often goes nowhere for the same reason. Harvard Business Publishing is an affiliate of Harvard Business School. Marketing is critical for organic growth of a business and its central role is in creating, communicating, capturing and sustaining value for an organization. It also added a Saturday edition to increase circulation and advertising revenues. Managers like labels; they simplify the complex task of management. Tellock wants corporate leaders to own the continuing development and deployment of the emerging market capability, which offers economies of scale and scope to the company and a competitive advantage to each business. Summary Marketing is responsible for driving the organic growth of a business, and digital technologies have significantly changed the practice of marketing to become agile, data-driven, and measurable. CBS is a case in point. First, to make acquisitions successful, acquirers must be able to stimulate organic growth in the businesses they buy. Do we have a clear definition of “organic growth opportunity”? Leading and working through a pandemic. The problem was it was looking in many of the wrong places. But senior leaders can help their organizations invest in a way that is largely independent of the business cycle. More often than not, they were enough to double the company’s underlying growth rate. 2 Harvard Business Review June 2011 SPOTLIGHT ON PRODUCT INNOVATION Purchased by Robert Tucker (gscott@innovationresource.com) on June 22, 2011. By the end of Kilts’s tenure, Gillette’s top line was growing by 9% a year and its bottom line was increasing by 16% annually. An engaged CEO and corporate center should have an enterprisewide database of organic growth opportunities, both those specific to individual operating units and those that cross internal boundaries. It turned out that instead of focusing on increasing foot traffic and getting shoppers to make purchases in more categories, the best opportunity was to get those who were already in the store to buy more in the categories in which they were already purchasing. Fortunately, the corporate center did not let that typecasting prevail. People buy organic food for three main reasons: they believe they are safer, kinder to the environment, or healthier. Five rules for retailing in a recession. Meanwhile, the job of growing organically is relegated to the managers of those units, even in firms whose CEOs claim to take organic growth seriously. So why pursue them? Personalization and individualized learning will improve how organizations think about development and growth. 7. Major HBR cases concerns on a whole industry, a whole organization or some part of organization; profitable or non-profitable organizations. The emphasis was on increasing “foot traffic” in the store and “crossing the aisle.” It turned out that providing more value within categories — such as offering a greater variety of sizes or fashions in the women’s apparel aisle and more service for electronics customers in rural areas — offered greater opportunities for growth from existing customers, many of whom were also buying at other chains, did than increasing traffic or cross-selling. By Harvard Business Review, $29.99 - $50.00. Read the full article here. As part of Viacom, CBS was designated a “slow growth” business by Viacom’s chairman, Sumner Redstone. The U.S. Is Not Headed Toward a New Great Depression . Growth strategy Digital Article. Investors had been told that Viacom’s growth would accelerate once the company shed CBS. In 2005, an executive vice president at Wal-Mart must decide whether to expand the retailer's selection of organic food. Nurturing them is essential. Dow Jones could have bought into the conventional wisdom that newspapers were dying and managed the paper strictly for cash—by cutting costs and minimizing reinvestment—in order to fund the growth of other businesses. In the following pages, we’ll set out four organic growth rules that engaged corporate leaders can follow to kick-start and calibrate their companies’ internal growth engines. Corporate executives should not lead the implementation of individual initiatives in the operating units, but they should actively partner with the units to decide where and how to place organic growth bets. Organic growth and inorganic growth in business - Business/Marketing bibliographies - in Harvard style . Who are the most likely switchers? In most companies “corporate” works on the big stuff: doing M&A deals, dreaming up the next enterprise initiative, devising the company’s mission and vision, and assigning targets to the operating units. The pretty one might turn out to have more potential than the other two combined. Do I have a corporate account for funding initiatives in and across the operating units? ), or they’ve been overtaken by competition (Kmart), or they are being hit particularly hard by a stagnant economy (any durable […]. 2009. Just getting bigger is not enough to satisfy investors and shareholders. The difference between what would induce clients to switch and what they are getting from their current provider (or providers). A good example of this can be seen with Guinness’s very successful creation, in the late 1990s, of a bottled version of its popular draught beer. Just as the corporate center has M&A capabilities, it can have organic growth capabilities. Whereas the Irish had traditionally consumed Guinness when seated in pubs, younger people there increasingly drank beer while standing in livelier, more crowded venues. Organic growth stems naturally from your established business. The term gave everyone a way to discuss how best to modernize the paper and led to some changes that had long been impossible even to contemplate. Kilts used cost savings for what he called “corporate scholarships,” which funded, for example, the red razor: a simple packaging change, initially resisted by the Global Grooming unit, that ended up being a blowout success. All rights reserved. Where are our biggest needs-offer gaps? Most of the time, these efforts fail to reignite growth. The idea is to get unit managers to identify the highest-potential opportunities so that they will be less likely to propose investing in areas that would yield only small wins. Clarity around language also prevents companies from confusing ends and means, a common trap for managers. They certainly helped the financial services company reduce its investment constraints by eliminating duplicative efforts and gave leaders the confidence to raise their organic growth goal only 18 months after establishing the first target. 12. One explanation is that companies systematically underestimate opportunities for organic growth that are hiding in plain sight. The decision is made in the context of wider attempts to move the giant retailer slightly upscale and to focus on environmental sustainability. As Zannino says, “Having a common term for thinking and talking about growth really helped us all get on the same page and clarify what was most important as we looked for new and coherent ways to grow the business.”. In 2000 the paper was Dow Jones’s biggest and most profitable business, but it was in a downward slide because of the rise of online media and its inability to attract young readers, whom advertisers coveted. No company has ever achieved the kind of growth GE … At Gillette, for example, Kilts encountered resistance within the Global Grooming business unit to the idea that it needed to grow organically at all. At between $5 million and $15 million, the fund was not very large, and Kilts didn’t introduce a lot of process to allocate it; in fact, he made most of the decisions himself. Instead of asking only questions such as, How are you doing against your targets? I know of one giant retailer that was struggling to grow on a same-store basis. Bruce Brown is the chief technology o ! Podcasts are flexible so one can tune in on their morning commute or when they are engaged in other activities during the day. No one wants to hear about “investing for growth” in hard times or about “steady, measured growth” during a boom. It’s the MO of most big public companies: In the boom part of the business cycle, they invest aggressively in growth; in the bust part, they turn cost-conscious and zero in on profitability. 8. Tailored solutions targeting your unique needs at all levels. He would remind them and the company’s shareholders that in every industry, the winner over a five-year period is usually a company that has been in the top third for revenue growth and profitability each year. Investors can clearly distinguish between companies that have realized substantial organic growth from their acquisitions and those that have simply gotten bigger. How can we become more productive?, corporate leaders also ask, Where’s our headroom to grow? Why do companies so often miss out on these opportunities? Related Topics: Crowdfunding, Organizational culture, Venture capital, Entrepreneurship, Sales management, Rapid growth stage, Distribution, Newsletter Promo Summaries and excerpts of the latest books, special offers, and more from Harvard Business Review Press. Corporate leaders are best placed to create a company’s language for growth because they are the only ones who oversee the entire enterprise and have the responsibility to disseminate ideas and concepts across the organization. By contrast, being number one or two in a year, Kilts would say, is not necessarily correlated with long-term industry leadership, and the quest to occupy those top positions creates a yo-yo effect (a finding based on research Kilts had commissioned).