Debunking four myths of organic growth

Here is a brief excerpt from an article written by Kabir Ahuja, Abhinav Goel, and Kate Siegel for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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While organic growth is crucial to a company’s survival, many executives underestimate its value. In past research, we found that fewer than 30 percent of businesses systematically scan for and evaluate new growth opportunities.1 The reasons for this vary from reliance on cost-cutting efforts to difficulty overcoming short-term pressures.To better understand how the best-growing companies achieve their success, we asked respondents to our newest McKinsey Global Survey on growth how their companies develop proficiency and expertise along three dimensions, or lenses, of organic growth.2 Companies can Invest, or identify pockets of growth and reallocate resources to them; they can Create, or innovate products, services, and business models; and they can Perform, or excel at commercial functions and operations.3 The results from our top-growth companies—that is, the companies where respondents report revenue growth four or more percentage points higher than the industry growth rate—appear to debunk some commonly held myths about organic growth and what it takes to do it well.[Here is the first of four myths.]

Myth 1: Creating new products, services, and businesses is the best way to grow

It’s easy for executives to get swept up in the excitement of launching a new product or service, and it’s tempting for companies to focus only on developing new products, services, or business models (Create) as the primary way to grow organically. But the data suggest that top-growth companies tend to follow a different approach.

In fact, a majority of respondents at top-growth companies say they grow primarily through the other two lenses, with 44 percent reporting a primary focus on identifying and reallocating resources (Invest) toward growth (Exhibit 1).4 It makes sense that top-growth companies adopt this lens more often than the other two, given that the most common best practices for investing all relate to how a company fundamentally focuses its resources and organizational attention on growth. These practices include establishing goals for growth that set the agenda throughout the organization, making investment decisions based on systematic evaluations of returns, and leadership alignment on market strategy. 

Furthermore, the results suggest that organizations are better positioned for growth when they develop a broad set of complementary capabilities. Building sets of capabilities that reinforce each other—that is, adopting best practices in two or three lenses—is associated with dramatically higher odds of being a top-growth company (Exhibit 2).

But organizations should exercise caution before pursuing all three lenses at once. Only 12 percent of respondents say their companies have successfully mastered all three,5 suggesting that mastery of these lenses requires a level of organizational attention and investment that few companies are currently able to meet.6

Corning’s two-decade transformation into an innovation powerhouse illustrates the effectiveness of a dual-pronged Invest/Create approach. In 2002, the company was in crisis: the dot-com bubble had burst, sapping demand for the fiber-optic cabling that had been the source of nearly all its profits. In 2001, Corning posted a $5.5 billion net loss, nearly equal to their revenues.

To come back from the brink, the company pulled Invest levers. It squeezed the business to preserve cash, slashing payrolls by half, and pivoted the remaining cash toward the budding LCD market to create near-term profitable growth. Freeing up that capital let the company start investing in R&D (Create)—reaching 11 percent of sales in 2004—to capture new opportunities such as ceramic filters for diesel engines. That Create competency positioned them, in 2007, to answer Steve Jobs’ call to develop millions of square feet of 1.3-mm, ultrastrong glass within six months. Revenues from the resulting Gorilla Glass skyrocketed to $700 million by 2012. In 2015, Corning codified this virtuous Invest/Create cycle as the Strategy and Capital Allocation framework, which is still functioning today.

The company has continued to focus on this model. From 2011–16 (the last dates for which we have figures), it slated $10 billion, equivalent to a full year’s revenue, for investment in R&D, capital spending, and strategic acquisitions.

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Here is a direct link to the complete article.

Kabir Ahuja is a partner in McKinsey’s Stamford office, Abhinav Goel is an associate partner in the Cleveland office; and Kate Siegel is an associate partner in the Detroit office.

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