That phew! you’re hearing is the sound of investors exhaling. Recent quarterly reports suggest that corporate profits rose for a 10th consecutive quarter, defying predictions that U.S. companies would show no earnings growth in the early part of this year. This preserved one of the indicators that have consistently pointed north since the economy emerged from recession in 2009.
But CEOs can’t rely on cost-cutting to keep their profit momentum going — it’s gone about as far as it can at most companies. Nor can they rely on macroeconomic growth. In fact, we are now experiencing the lowest-growth recovery on record, including the Great Depression. Today’s business leaders must be able to boost their organic growth another way. Here are four ideas:
1: Have a method. I am often amazed at the helter-skelter way that companies pursue organic growth. Many chase market share they’ll never get. Others focus too much on their most loyal customers or, worse, on their competitors’ most loyal customers. A lot of companies throw money at the problem — more R&D, more marketing, more sales people. Some senior leaders simply lean harder on their operating units, increasing their targets and demanding more growth.
All of these approaches lead to initiatives that will never pay off — sometimes a multitude of them. A few years ago, one of the world’s largest retailers had literally hundreds of initiatives going after same-store sales growth. Its focus was to get more people into the store (“foot traffic”) and, once in the store, to get them to shop more categories (“cross the aisle”). But when the retailer took a more careful look, it found that its best opportunity was to get people to buy more in the categories they were already shopping (such as apparel or electronics or groceries). This realization — which came from a headroom analysis, just one method companies can use — made the retailer more focused and dramatically reduced the number of initiatives its managers had to support. Its “return on effort” skyrocketed.
2: Make growth “net free.” The problem with investing in organic growth is that the costs hit the books before the revenues do, creating a tension between short-term profitability and long-term growth. Encouraging companies to be more “long term” is not the answer. Better to recognize that no company is 100% efficient and that there is always a chance to fund organic growth through savings generated by efficiency gains.
This was essential to Jim Kilts’ turnaround of Gillette a few years ago. He instituted a policy of continuous productivity improvement, but also allowed — even encouraged — his operating units to use the savings to fuel future growth. By the time Gillette sold itself to Procter & Gamble, Kilts had turned Gillette into an organic growth machine with far higher margins than before he took over.
3: Make your company growth-friendly. Companies sometimes have practices that subtly – but powerfully – discourage organic growth. One is surrendering to the business cycle — under-investing in the down part and over-investing in the up part. Another is senior leaders typecasting their portfolio, referring to this unit as a “cash cow” and that one as a “growth engine” — unhelpful labels that result in missed opportunities (in the first case) or overly aggressive behaviors (in the second). I’ve even seen situations where a company’s language gets in the way, such as defining an “organic growth opportunity” not in terms of ends but of means (more sales people, a new CRM system, or a new product introduction, for example).
If you want your operating units to be good at growing organically, you need to create an environment that encourages it. The right language can help. So can having a corporate reserve fund to help the operating units pay for organic growth. The best way is to design the right dialogs and data into the management process that governs your company’s strategy and execution.
4: Make growth fun. The daily business of growing organically can be a grind. The good news is that it’s a lot more fun than cost-cutting and — unlike M&A — it is everyone’s business.
There are many ways to get the broader organization involved. Some people like to teach, so have them (for instance) teach your company’s method for organic growth. Other workers like a friendly competition, so set up ways to enable that — and to recognize even small achievements. I know of one media company that put a giant gong in its sales department. When revenue targets were hit, a manager would emerge and give that gong a wallop. It was a signal — audible to everyone — that the company was winning.
Organic growth is infectious. Celebrate it. Get everyone on board.
My experience suggests that growing organically is a skill companies can develop, not an advantage they temporarily gain as a result of a hot product or successful business model. When companies put their minds to it, organic growth is the daily, weekly, monthly, and yearly outcome of finding, funding, and acting on opportunities that are often hiding in plain sight.
Ken Favaro is co-author, with David Meer and Samrat Sharma, of “Creating an Organic Growth Machine” (HBR, May 2012), as well as “Organic Growth is the Underestimated Opportunity,” on the HBR Blog Network.