Jumpstarting and sustaining growth

In a recent poll conducted in 2009 by Ernst & Young and The Economist Intelligence Unit, 90% of companies indicated that they planned at least one reshaping activity within the year in response to the recent economic downturn. Some of these activities included:

1. Cutting working capital to boost cash
2. Investing in shared service centers to cut costs or build scale
3. Moving operations to lower cost locations
4. Increasing the use of outsourcing or co-sourcing

During this same period, while many organizations were focused on ways to cut costs and mitigate loses, a handful of organizations enjoyed significant growth.

1. For the fiscal year 2009, Sysco, a marketer and distributer of food products to restaurants, healthcare and educational facilities, reported net earnings of $1.1 billion, the company’s second most profitable year in its 40 year history.
2. In May of 2010, Southwest Airlines declared a quarterly dividend to its investors…the 135th consecutive quarterly dividend in the company’s history. Southwest is one of only a few U.S. carriers to report growth during the previous year.
3. In 2009, Walgreens achieved its 35th consecutive year of record sales and raised its quarterly dividend for the 34th consecutive year.  What’s more, Walgreens has paid quarterly dividends every quarter since 1933.

These companies are in different categories, yet all have experienced growth in an unfavorable economic climate. So what do they have in common? How do they continue to smash the ceiling in earnings and sustain growth year after year? The difference is a focus on growth from within.

Achieving sustainable growth from within

A company that emphasizes growth from within (also known as organic growth) does just that; they start building the business from the inside out.

Edward Hess, Professor of Business Administration at the University of Virginia’s Darden School of Business, conducted extensive studies of public companies. After examining 800 companies, Hess found that just 22 consistently created significant economic value for their shareholders and excelled in their industry through organic growth. Rather than relying on smart acquisitions or clever marketing, these companies grew from within by focusing on building their customer base, creating new products, and operational efficiencies.

Based on his research, Hess defines six characteristics of companies that grow from within:

1. They relentlessly pursue a simple, easy-to-understand business model – Employees at all levels can easily understand and explain the mission of the organization. What’s more, employees understand how their job helps the company to execute that mission and are committed to achieving it.
2. The “soul” of the organization is entrepreneurial – The organization provides employees with an environment that focuses on entrepreneurship. Each person is accountable for the success of the organization and shares in its rewards, resulting in high employee satisfaction.  When employees are highly satisfied, customers will be highly satisfied, leading to greater profits.
3. Measurement is king – Performance measurement is essential. It helps track the organization’s financial results as well as operational and behavioral objectives in a way that is open and objective, providing everyone in the organization with a common dashboard.
4. They build talent from within – Employees of organic growth companies are evangelists for the organization. As a result, turnover is typically low because employees are passionate about positively impacting the goals and objectives of the organization.
5. Leaders are committed to engaging employees and customers – CEO’s understand that business operates “through and with people.”  Leaders of organic growth organizations devote a significant amount of time and energy to communicating with and engaging employees and customers.
6. They focus on execution excellence – Most organic growth organizations do not provide uncommon products or services. What they do offer is consistently good performance. By utilizing technology to provide up-to-the-minute measurements, they quickly and effectively keep the company on course.

QVC is one company that instinctively understands the value of growth from within. As one of the largest multimedia retailers in the world, QVC has enjoyed sustained growth ever since it went on the air in 1986.  The only exception was in 2008. That year, while other retailers were taking heavy loses, QVC had zero growth year over year.

So what makes QVC different from its competitors? According to Steve Valin, Manager of Culture and Brand Development, the difference is “…relentless execution of one really, really good idea…serving the customer and providing an incredible shopping experience. We are absolutely passionate about that in all levels within the company.” For QVC, building the customer base means clearly identifying and executing on that “one really, really good idea.” “Once you’ve identified that as a company…you have your grounding point as a brand for how you can deliver upon that and be bold and obvious that’s what your potent point of view is.”  QVC makes sure they consistently deliver on that grounding point by actively listening to customers and engaging employees in continually finding better ways to meet customer’s needs. “For long term growth, I think more people have to be motivated by the long term proposition of what the brand is, what they represent and how the work they do contributes to that piece.”

Organic growth vs. growth by mergers and acquisitions

So if an organic approach provides sustainable growth, why isn’t every company choosing to grow from within? The answer may lie in the general perception that mergers and acquisitions quickly generate synergies and economies of scale, expanding operations and cutting costs. While this may be true for many M&A’s, a recent study by A.T. Kearney analyzed 175 mergers and found that, while return on sales increased slightly, sales growth actually slowed by 6 percent.

A second study by Business Finance magazine examined trends in mergers and acquisitions from 33 large M&A transactions in Europe, Canada, and the United States from 2002 to 2007. According to the study, these large deals reduced value over 60% of the time.

James Kenefick, Co-founder and Managing Director of Working Excellence, an investment/private equity firm, believes many mergers and acquisitions fail to produce sustainable growth because cultures aren’t effectively integrated together. For Kenefick, successful mergers require that an organization has the right people, the right strategy, good execution and plenty of cash. This can be especially challenging for small and mid-sized companies. “A lot of small and mid-sized companies don’t necessarily have the cash or don’t have the stock price. So they are forced to grow organically to become attractive enough to become an acquisition candidate or if they have some unique value proposition or technology that’s so compelling that….they would be valuable.” In order to achieve that growth from within, Kenefick believes that small to mid-sized companies must follow a clear progression:  first, get the right people in place, then define the right strategy and then implement the right execution.

The advantages of growth from within

A recent article in the PEO Insider, the official newsletter of the National Association of Professional Employer Organizations, outlined some of the advantages of a strategy that relies on growth from within.

Is a growth from within strategy right for any organization?

As defined so far, a strategy that emphasizes growth from within clearly impacts long term growth. So if an organization is experiencing zero or negative growth, is an organic growth strategy the answer?

Allen Schiffenbauer, Chief Research Officer at The Brand Consultancy believes that it may be, if the organization is willing to examine two key issues. “One is to assert an objective understanding of why there is no growth…the next thing is establishing a true understanding of the capabilities of the organization, capabilities from a branding perspective…and then focus on using those capabilities.”

From Schiffenbauer’s experience, companies sustain growth either through expanded distribution or product innovation. While expanded distribution often results in more steady growth than product innovation, it may not always be a viable option. Instead, growth comes as new products are introduced to the marketplace. These introductions result in growth “spurts.” To achieve long term growth, companies must continually introduce new products…an approach that requires high levels of flexibility and discipline. “If you’re going to try new things and you have to be prepared for back-ups…not all things work. So there has to be a tolerance for acceptable failure and there has to be a process in place that controls investment.”

Building growth from within

In order to successfully build an organization organically, senior management must start by taking an honest, in-depth assessment of the people and strategies of the organization. While a few organizations are able to do that internally, Kenefick believes that many find it to be an uphill battle. “Senior management has got to get the right people in place. The only way to break through that is to have somebody come in, like a corporate strategic firm, in order to assess the people, the strategy and then help leverage the opportunity to execute with the amount of cash that they have.”

The advantage of this approach is that an outside company can help facilitate organizational change and shifting cultures through effective communications plans. That helps employees at all levels of the organization understand the new direction of the company, so that they can become part of the process of change. “…you see how some people say, ‘Oh, I work out,’ but those that work out with a trainer produce phenomenal results in a short period of time. And there are other people that spend hours toiling at the gym…with mediocre results. So I think, any professional athlete, any professional organization, employs somebody who is going to advise them with strategies on how to become the best in their game.”