What Are the Foundations of My Growth Strategy?

Growth strategy is paramount because companies generate shareholder value through profitable growth. The market rewards companies that deliver profitable growth above the median of the S&P 500. However, corporate leaders are met with shrinking opportunities for growth in their highly competitive markets. As a result, growth is not always assured and only one company in ten is able to sustain profitable growth.

 

A COMPANY’S GROWTH OPTIONS

The pressure on corporate leaders can be intense as they confront the following issues:

  • How much are we on target to grow this year and next?
  • How much more growth do we need?
  • What type of growth should we target?

Fortunately, they have several options from which to choose. In general, there are two categories of growth. Organic growth is growth where a company aims to increase its number of customers, increase its number of products, enter a new market with a new product, develop new market channels, or refocus its business in line with the market.

Inorganic growth concerns growth through a partnership. This growth typically involves two companies coming together in a merger or a strategic alliance, a business moving downstream into distribution, moving upstream its supplier base, or consolidating the market.

Companies typically use one or more of these options to reach their business goals. Corporate leaders need to decide what is the best fit for the growth objectives of their companies. To decide which growth strategy to use, they’ll need to understand what each option has to offer.

 

Exhibit 1. The Two Types of Growth

Source: Great Prairie Group

 

ORGANIC GROWTH

The objective of organic growth is to gain market share. This growth strategy is used widely and usually regarded as the safest, lowest cost, least visible to the competition, and least risky to change adaptation.

However, organic growth can be extremely challenging, subject to the general growth conditions in the market. In mature markets, for instance, businesses that rely on organic growth to gain market share must use one of three levers:

  • Innovate products, i.e. develop new goods or services for current markets
  • Diversify, i.e. develop new goods or services for new markets
  • Adopt a new business model

All undertakings are complex, as each carries a particular set of challenges.

 

Exhibit 2. Organic Growth: Levers and Challenges

Source: Great Prairie Group

 

INORGANIC GROWTH

Inorganic growth aims to increase the size of the business and derive synergies. This strategy is viewed as the most ambitious and the riskiest form of growth. It is also seen as a faster way to grow compared with organic growth.

The potential for growth is substantial. With a merger, many businesses nearly double or triple their customer base, grow 1x to 2x in size, enter new markets or speed capability development. However, the problems with mergers and acquisitions are two: high upfront cost and risk of failed integration.

All levers of inorganic growth are complex, as each brings about its unique set of challenges.

 

Exhibit 3. Inorganic Growth: Levers and Challenges

Source: Great Prairie Group

 

THE FOUNDATIONS OF GROWTH STRATEGY

Organic growth and inorganic growth are suited to particular situations and raise distinct concerns.

  1. The objective of organic growth strategy is market share. As a result, the key concerns are market potential and the company’s ability to gain achievable market share. Management needs to answer the following questions to determine the feasibility of organic growth:
    • What is the size of the addressable market?
    • What is our achievable market share?
    • How much do we need to invest?
    • Is the resulting achievable market share sufficient to satisfy our growth objectives profitably?
  2. The aim of inorganic growth strategy is to increase the size of the company and extract synergies. The concern here is the strength of the company’s business core as a platform for acquisitions or strategic alliances. In this case, the fundamental questions that need to be answered include the following:
    • What are our company’s core strength and competitive advantage(s)?
    • Will an acquisition or a strategic alliance reinforce our company’s core strength and competitive advantage?
    • By how much?
    • Will the expected synergies be attractive enough to justify a deal?

A sound growth strategy formulation determines the proper balance between organic growth and inorganic growth that fits the context of the company. Leveraging this knowledge will put your business on the appropriate growth trajectory, in a position to deliver sustainable long-term growth beyond near-term incremental gains in your current market arena.

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To learn more about how we help our clients with their growth strategy, see our practice areas in Strategy & Finance and M&A and Private Equity Support.

For a confidential discussion of the growth strategy for your company, contact us directly.