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:
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.
External 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. Different Growth Paths
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:
All undertakings are complex, as each carries a particular set of challenges.
Exhibit 2. Organic Growth: Levers and Challenges
External 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 external growth are complex, as each brings about its unique set of challenges.
Exhibit 3. External Growth: Levers and Challenges
THE FOUNDATIONS OF GROWTH STRATEGY
Organic growth and external growth are suited to particular situations and raise distinct concerns.
A sound growth strategy formulation determines the proper balance between organic growth and external 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.
For a confidential discussion of the growth strategy for your company, contact us directly.