by David Youland, Senior Consultant

Luminas Strategy Organic vs. Inorganic GrowthYou may be asking how you should be thinking differently about organic growth now, in this post-pandemic, inflationary era?

According to Investopedia, organic growth is the growth a company achieves by increasing output and enhancing sales internally. This does not include profits or growth attributable to mergers and acquisitions but rather an increase in sales and expansion through the company’s own resources.

Growth has been a perennial management concern for as long as I can remember. If businesses have a primal urge, it is the need for profitable, consistent growth. The issue of growth was first highlighted by the late Harvard Business School Professor Dr. Ted Levitt in his classic 1960 Harvard Business Review article Marketing Myopia and it has never gone away1. Consistent organic growth is the lifeblood of any organization, and the goal of every business, regardless of size, age or ambition. Growth is what every CEO desires; yet, for most organizations growth is elusive. Despite this, managers keep searching for growth much like intrepid explorers searching for El Dorado, the mythical lost city of gold.

All corporations crave growth the likes of Apple, Google, Amazon or Tesla. Yet for each of these companies, there are failed counterparts, familiar brands such as Osborne Computer, Ask Jeeves, Sears and American Motors. While corporations may be legal entities, they can be disturbingly mortal. Most of us — especially in B2B — compete in mature or established markets that are growing at or below GDP levels. This makes the quest for growth even more challenging. In response to this slow growth environment, companies often resort to using the “blunt instrument” of price in an attempt to gain increased market share, this inevitably reduces profits for all players and leads to a commoditization death-spiral.

While growth has always been an important issue, today’s business environment is fundamentally different. We are emerging from a post-pandemic world that has undergone radical change, the speed and magnitude of which is creating the need for increased innovation and growth. The impact is creating long-term consequences and  has permanently altered established business models for years to come. In addition, the COVID-19-induced lockdowns wreaked havoc on fragile supply-chains which were already stretched thin and ultimately led to product shortages. Once demand unsurprisingly increased, it resulted in our current inflationary environment. Leaders can view this as an insurmountable challenge and accept it as the “new normal” or look for silver-linings upon which to build stronger, more sustainable enterprises.

In an attempt to drive growth, many companies turn to mergers and acquisitions. Study after study have found that the results of mergers or inorganic growth initiatives tend to disappoint, estimating that at least half and as many as 80% fail to create value2. According to one global CEO, “70% of acquisitions fail and 70% of that is because of culture.”3 Many of us have seen celebrated and highly-praised acquisitions that were later quietly sold to other entities for much less than the initial purchase price. This often occurs because many of the promised synergies failed to materialize, much-lauded capabilities were oversold, touted new offerings didn’t create meaningful customer value and supposed high-growth markets evaporated upon closer examination, much like a mirage on the desert horizon.  All of this is destructive to shareholder value; in many cases shareholders would have been better served with increased stock buy-backs and quarterly dividends.

With this as context, you can see why, organic growth is essential for the survival and viability of every organization and the people who work there. But, for just a minute let’s pause to acknowledge that change – even good change – can be hard. Employees and leaders alike often lament that they don’t like change and wish that things could just stay the same. However, it is important to note that companies that fail to initiate fresh thinking and new processes will fail to grow and thrive, and will likely be forced to merge with another entity or close up shop all together. Meanwhile, those that  focus on organic growth often benefit employees by providing enhanced and new employment opportunities. Truth is, organic growth typically

  • enhances an organization’s culture,
  • provides funding for future business investments and facilities,
  • secures a hedge against inevitable down cycles,
  • and counteracts customer churn

While this is hard work and doesn’t take place overnight, the good news is that organizations that invest in building a robust organic growth engine, develop a durable competitive advantage that is repeatable over time.

In this series, we will discuss why organic growth is preferable to inorganic growth, what capabilities are needed to achieve organic growth and where to find potential sources of organic growth.

Did you know that at Luminas, we specialize in helping companies to build organic growth capabilities by first helping you understand the differential value that you bring to your customers? Through the Customer Value Xcelerator (CVX) We find that companies that put their customer’s business at the center of their business experience profitability and are able to sustain organic growth.

References
1 Levitt, T, “Marketing Myopia”, Harvard Business Review, July – August 1960.
2 Selden L, Colvin G, “Mergers and Acquisitions Needn’t Be a Losers Game.”, Harvard Business Review, June 2003
3 Chang R, “A Chinese Farewell to Six Sigma”, Bloomberg Business Week, February 11, 2019.
4 Cooper, R, Product Leadership, Pathways to Profitable Innovation, Toronto, Stage-Gate International, 2005.