McKinsey study: Organic growth remains key to long-term success

Companies that leverage organic growth perform better in terms of total shareholder return, finds a new study. The 35% of firms who used multifaceted expansion strategies were meanwhile found to outperform their single strategy peers.

In recent years organic growth has become more challenging to realise, as demographic changes and lower global economic growth have held back opportunities, while relatively low-cost credit has fuelled increased inorganic growth strategies. In the UK particularly, this may be about to change, as the Bank of England announced its first increase in interest rates in a decade, making borrowing for acquisitions more expensive.

On the global scale, a new McKinsey & Company study titled ‘Mastering three strategies of organic growth’, has examined the effects of organic growth strategies on the total shareholder returns on 550 US and European companies over a fifteen year period. The report considers the effect of strategies on the long-term ability for companies to generate above average growth.

To better understand the effect of organic growth on companies’ results, the firm looked at three key strategies for organic growth: investing in products, services and/or commercial activities with the end of organic growth; creating new products, services and/or business models aimed at growth opportunities; and improving core commercial capabilities.

The research found that the majority of respondents have, over the past three years, leveraged only one of these strategies. Creating came out on top, leveraged by 27% of respondents, followed by investing, at 17%, and performance improvements, at 14%

Around 35% of respondents said that they leveraged multiple strategies to achieve growth. The majority of which, tended to be larger companies, operating in more developed global markets.

While the vast majority of companies surveyed had at least one organic growth strategy, 93% in developed markets and 91% in emerging markets during the past three years, differences were noted in relation to strategies for the coming three years between the different markets.

Emerging market players are the most firmly focused on growth strategies that involve creating new product, services or business models (57% of respondents), compared to developed market players (51% of respondents). The study also found a ten percent difference between markets in terms of investment as a means of organic growth, at 23% in developed and 13% in emerging markets.

In terms of growth from the three strategies employed by firms, the research found that various different strategies produced a variety of results at self-proclaimed ‘top growth’ companies. The criteria for top growth is that, over the past three years, the respondents have improved their rate of organic growth, have done so by at least 4% above market rates, while growth reflected market performance over market conditions. Only North American and European companies were included among ‘top-growth’ companies (65%) of the market.

19% of companies, in the single strategy group, that used just investment as a strategy, considered themselves ‘top growth’, compared to 36% for whom investment strategy was part of additional strategies. 31% of firms with a single strategy said that they were top-growth, compared to 43% that used the strategy as part of their wider strategies. Performance was noted as a strategy among 36% of companies that said they are top performing in the single strategy segment, compared to 34% in the multi-strategy segment.

Of the top-growth organisations, the strategy consulting firm notes various capabilities that, aside from the organic growth strategy, are shared. The most common capability, across almost all investment strategies is mind-sets, organisational culture, followed by branding and resource allocation. Each of these were noted among top three most common in all bar creating, where the number three spot goes to capability in developing product / services.

The authors of the report stated, “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.”