“Opportunity is missed by most people because it is dressed in overalls and looks like work. It is astonishing how many people have difficulty putting their brains definitely and systematically to work…” —Thomas Edison

Assuming favorable market conditions and a sound balance sheet structure, companies have a choice to either “buy” corporate growth through acquisitions, or to grow organically by nurturing existing assets. Organic growth, put simply, is growing the top line of the business without acquiring major assets. It is not to be thought of as a one-time deal, but rather a continuous effort.

Although it seems obvious, a successful organic growth strategy not only results in increases in the top line, but also similar or greater percentage increases in the bottom line. Top line growth at the expense of the bottom line is not a sustainable strategy as it eventually leads to the destruction of shareholder value. Four factors determine a company's predisposition to organic growth.

1. Market Setting

The first factor that can contribute to successful organic growth is the market itself. A company must know the nuances of the market in which it competes. Factors such as market growth rates, differentiable market segments, entry barriers and switching costs can contribute to a Company’s ability to sustain top-line growth. Other factors that support growth are products that are central to customers’ success, a lack of substitute products, and innovative customers with strong growth rates of their own.

Yet, favorable market conditions are not always bestowed upon a company. On the contrary, companies must work hard to create a favorable market position. Clorox bleach, for example, is chemically identical to every other bleach on the shelf in that alll bleaches function, behave, and work the same. Nevertheless, Clorox has successfully used marketing and promotion as a differentiation factor. As a result, Clorox can demand a premium for its product and has generated growth in a mature market. Understanding the market, anticipating customer demands, and possessing the tools to successfully manipulate the market are essential for a company to realize its organic growth strategy.

2. Business Strategy

The second factor supporting organic growth is a viable shareholder value strategy, which encompasses new products, relative quality improvements, targeted R&D and marketing expenditures, and an improved relative cost structure. That being said there is no “right” way to do each of the above actions. What might be successful for one company could be catastrophic for another and a company’s current relative position in the marketplace is likely to affect what type of action results in success and which doesn’t. (See Exhibits 1 and 2.)

Exhibit 1 – Starting from Relative Strength

Source: The PIMS Principles: Linking Strategy to Performance. The Free Press, 1987

Exhibit 2 – Starting from Relative Weakness

Source: The PIMS Principles: Linking Strategy to Performance. The Free Press, 1987

3. Organizational Design and Culture

The third and most determining factor for a company’s ability to grow organically is organizational structure and culture. A company’s core values (the unchanging philosophies and beliefs that form the foundation of what the Company stands for) dictate its ability to generate organic growth. For instance, a Company’s risk tolerance or aversion to risk can help or hamper the Company’s ability to innovate and change. Furthermore, the functional area, i.e. sales, engineering, R&D, finance, that dominates the Company has a direct impact on organic growth since some functions promote organic growth better than others.

Are the right people in the right places? Ultimately, it’s the Company’s available talent and resources that drive the Company’s ability to experience organic growth. Not only does the Company have to adequately fill the different roles in the innovation process (see Exhibit 3) and allocate sufficient resources to all facets of the innovation process (e.g. new program identification, priority setting, project management, senior management sponsorship, risk quantification, etc.), it must also be understood that failure or temporary setbacks are part of the innovation process. Not all creative ideas will turn into innovation.¹

Exhibit 3 - Roles in the Innovation Process

4. Old vs. New Conflicts

Finally, the fourth factor that affects organic growth strategies is a company’s ability to balance old and new conflicts. Since every company is different, the various levels and degrees of a company’s conflicts are unique to that organization. Some possible areas of conflict include: manufacturing engineering overshadowing new product development, overwhelming day-to-day sales activities not allowing for true marketing, overburdened top talent, incentive plans not rewarding sustainable growth (or efforts focused on innovation), clinging on to traditional product lines at all costs while in pursuit of new products. Whatever the conflicts that exist in a company, in order for organic growth to be successful, management must carefully balance and prioritize each of them.

Organic Growth as Business Philosophy

Organic growth is not easy; it requires work. It is a challenge that every company faces and must overcome. Some companies do it better than others. Those who do it best embrace organic growth as their business philosophy.

At times when capital markets are flush with cash and eager to support growth through acquisition at a relatively low cost of capital to the acquirer, organic growth seems all too cumbersome. But let’s not forget the lessons we learned during the early years of this millennium, when capital was scarce and organic growth was for many the only opportunity to create shareholder value. (See Exhibit 4)

Exhibit 4 – Generation of Shareholder Value

¹Innovation is defined as the successful commercialization of new ideas.