I recently had the opportunity of working with Margaret Exley of SCT consultants and we started talking about the characteristics of hyper-growth companies and how they differed from others.
Margaret's client list is the who's who of giant British business - a decent chunk of the FTSE100. She advises them on improving board effectiveness generally and specifically on increasing their strategic focus.
She has conducted a very interesting piece of research which has many lessons for the slow growing giants as well as those early stage companies aspiring to becoming hyper-growth businesses.
The paper, entitled Designed to grow has not been made public before and is reproduced below by kind permission.
Thank you Margaret.
How growth champions differ from
other business and what it takes to become one
Summary of research
The research surveyed 214 companies across the USA and Europe to
identify high growth companies, and what makes them different. The overwhelming
majority of senior executives said organic growth was a primary goal for them
and their organisations. However, only 12% had exceeded their organic growth
objectives in the last three years. Barely half rated themselves as having been
effective in achieving growth in the same period and a majority believed that
creating growth from within will become harder in the next three years.
We identified 23 companies who are growth champions. All had consistent
year on year growth as a distinguishing feature. Most had consistently
delivered growth in revenue, net operating income and share price over a period
of five years, at twice the rate of the rest.
The growth champions have six practises or types of behaviour which
clearly distinguish them from the rest. Differences between the growth
champions and the rest are clear, marked and statistically significant.
These practices do not include some of the things which have been said
to be important by consultants and others in the past, eg creating radically new
products and services, risk taking, having an internal venture capital process,
or financial incentivisation.
The growth champions transcend sectors, geography, size and business
model. There is a mixture of public and privately owned businesses and the
growth practices are key differentiators. They work together to give a
distinctive footprint. Practices include: creating clarity on sources of growth
and well articulated profit models, combined with disciplined execution of
those strategies backed up with strong measurement and feedback to the
team.
Growth champions focus on a few things and make clear trade-off
decisions. They are able to grow because they have few management levels,
develop their own leaders and create a culture of continuous adaptability. They
are disciplined, focused and minimalist rather than risk-taking opportunist or
complex. Not only are the practices mutually reinforcing, but they reflect a
clear difference in priorities between growth champions and other businesses. They
put companies at a significant competitive advantage. They can be measured and
they can be learned.
As a result we are now able to assess companies against the high growth
practices, identify where they are weak and focus on the specifics needed to
drive organic growth.
Our starting point
Profitable growth is central to the creation of any company’s economic
value, providing the cornerstone for ongoing competitiveness. In turn,
successful company growth fuels the wider economy and therefore has broader benefits
for society. But in the Conference Board’s recent study of the top priorities
for CEOs (the CEO Challenge Survey, 2006) over 650 CEOs rated sustained and
steady top line and profit growth as the top two challenges for them in 2006.
We have been looking at the characteristics of companies who achieve
high ratios of organic growth, ie growth which does not rely on acquisition. Whilst
much has been written about the key to organic growth, most of the previous
work is prescriptive, ie it suggests a particular strategy or solution to the
problem of growth.
We set off in our study with a more open mind.
The questions we sought to answer were: are there common practices between high
growth companies that transcend sectors, business size, positioning in the
business cycle and history? And can such
practices or behaviours be clearly detected and therefore potentially learned?
Much has been written about mergers and acquisitions, and about
inorganic growth as a key to success. Less has been published on organic
growth.
In a 2004 ‘Industry Week’ article, James McNerney, Chief Executive of
3M, was quoted as saying “In today’s world, our overall business objectives are
to be simultaneously strong in operating excellence and unusually strong in
organic growth”.
In a 2002 survey of 120 British firms, Edengene found that organic
growth topped executive agendas, though few companies were succeeding in
achieving it. A subsequent study by Marakon in 2004 showed that for 59% of
senior managers worldwide, organic growth is their key issue.
Many of the books written on organic growth focus on the reasons why
organic growth fails to take root in companies. Problems range, for example,
from the absence of entrepreneurial leadership to poor incentive systems that
don’t support growth goals and include the inability to capitalise on the
synergies which exist across a company. Those management theorists who have a
point of view about how to grow companies, usually promote one or two
initiatives with little detail about what they are actually doing. Some talk
about innovation, others advise focusing on cultural transformation.
The study set out to:
1.
Learn what organisational
practices best support organic growth, how they relate to one another and what
types of companies are employing them;
2.
Determine which practices can be
tied to actual financial growth;
3.
Develop guidance for executive teams who are trying
to grow from within, so that they can most cost effectively focus their time,
energy and creativity in the right ways.
Distinguishing exceptional financial performance
In launching this work, a team assembled data from a literature review,
and from our own experience which was distilled into a set of 35 practices that
purport to create organic growth.
In addition to questions about the 35 organic practices, a small number
of questions were included to characterise the role and importance of organic
growth in the participating companies and their industries. Three financial
criteria were assessed: the extent to which participating companies are falling
short, meeting or beating their organic growth goals for:
·
sales;
·
earnings;
·
cashflow.
The sample included CEOs, CFOs, and other members of the executive team
and data was gathered by a combination of face to face interviews and
questionnaire completion.
In some cases participation was delegated to one level below the
executive team. All the respondents in this study are senior executives in
prime positions who know what their companies are doing to grow from within,
how those actions are supporting organic growth, and what is actually being
achieved.
The data was collected in 2005 and 2006. From the data given and as a
first screen we created a pool of growth champions, ie those who reported that
they were beating expectations for the last three years on all three dimensions.
Once the database was complied, published financial information for the
publicly traded companies was reviewed as a second screen.
In this way we were able to corroborate the financial performance of the
companies in our sample over the period. Furthermore we examined revenue, net
operating income and share price over the previous five years. By doing a
further check in this way, we reduced by two the number of companies who we
identified as growth champions, ie those who had grown consistently over the
period, giving us an identifiable group of 23 such companies.
A majority of organisations in the total sample (56%) believe that
creating organic growth will become harder in the next three years. However a similar
proportion (50%) believe their own company’s capabilities to drive organic
growth are not getting any stronger. So not only is growth important, not only
is it a struggle to achieve, but it is predicted to get harder.
It is not surprising therefore that given the right conditions, many
large businesses choose to grow inorganically through acquisition rather than
building their core business. The bad news is that many of these acquisitions
then do not deliver good financial performance and therefore may not be the
solution to underlying financial growth that companies hope for.
A large proportion of the sample (59%) had articulated specific,
quantifiable goals for organic growth for which senior leaders were being held
to account. A further 30% reported that they had tasked their managers to grow
the business organically. It is not that companies do not seek to grow, or task
their leaders to focus on growth, but some are inherently incapable of
delivering growth. Most companies have strategies for growth and task their
leaders to deliver them. However the challenge is to ensure that delivery.
Profile of participating companies
We surveyed a total of 214 companies across the USA and Europe. We
believe this to be the largest investigation into organic growth to date. Participating
companies included some of the world’s largest and most successful businesses,
eg. Procter & Gamble, as well as some of the smallest, eg Piatkus Books (a
small publishing firm with a turnover of $15 million).
Further checks were undertaken, having identified the growth champions,
to see whether there was any revenue size or industry bias among the 23 in
relation to the rest of the sample.
No revenue size or industry bias was found. Growth champions can be
large or small companies, and can come from almost any sector as can be
demonstrated by the charts following.
Participating
companies – industry breakdown
Ninety-three percent of companies in the total sample indicated that organic growth is critical to the success of their companies, even though only half report that organic growth is the dominant growth strategy in their industry. Only 51% of companies rated themselves as having been effective in achieving organic growth in the last years on all three criteria (sales, earnings and cashflow).
The growth champions
Only 23 of the 214 companies had consistently exceeded their organic
growth objectives. For these companies who answered the questionnaire in 2005,
we covered the five year period leading up to that year. For those who answered
the questionnaire in 2006, we covered the five year period leading up to 2006.
Therefore we were able to select those companies who had shown
consistent growth over five years in all three dimensions, ie revenue, net
operating income (profit after tax and interest), and share price. The
performances for each are shown below in the following tables. They show that
the growth champions on average hit more than twice the growth rate of the
other companies over the period, for all three dimensions.
Five year revenue performance (annual increase)
Year
1-2 Year 2-3 Year 3-4 Year
4-5 5-year av.
Growth
champions
|
10%
|
77%
|
37%
|
21%
|
38%
|
Other companies
|
8%
|
6%
|
22%
|
14%
|
10%
|
Five year
net operating income performance (annual increase)
Year
1-2 Year 2-3 Year 3-4 Year
4-5 5-year av.
Growth
champions
|
49%
|
162%
|
68%
|
42%
|
83%
|
Other companies
|
8%
|
48%
|
24%
|
32%
|
26%
|
Five year
share price performance (annual increase)
Year
1-2 Year 2-3 Year 3-4 Year
4-5 5-year av.
Growth champions
|
12%
|
42%
|
21%
|
29%
|
25%
|
Other companies
|
8%
|
9%
|
6%
|
26%
|
12%
|
This data therefore supports the self-reported financial performance of
the companies concerned.
The growth champions not only have tremendous revenue growth
performance, but they also accomplish it without compromising net operating
income. This should also put to rest the argument that a company has to
sacrifice profitability in order to grow.
Furthermore the market rewarded the publicly traded growth champions,
compared with those in the other companies, for their performance. In this way
financial performance feeds through directly to share price.
Size doesn’t matter
One could speculate that very large companies may be more severely
challenged than smaller companies in implementing certain practices due simply
to their organisational complexity. An alternative hypothesis is that the
larger the company, the more financially able it may be to deploy particular
practices to grow from within. Neither case is true.
Executives were asked to rate the extent to which their companies are
engaging effectively in each of the 35 practices. The statistical correlation
between their deployment of each of these practices and company annual revenues
was close to zero. One important conclusion therefore is that the size of the
company is irrelevant to its ability to act in a way that supports organic
growth.
Therefore, based on the self reported scores for growth, the demographic
comparisons with the balance of the sample, and most importantly the comparative
financial results among the publicly traded companies, the label ‘growth
champions’ is more than reasonable.
Having identified this pool of high growth companies, we then examined
the best practices for organic growth.
Best practices for growing from within
The
executives rated each of the 35 organic growth practices on a five point scale
in terms of the extent to which their company is deploying the practice. The
questions asked included the strategic direction and deployment of resources,
the basic work patterns and how people work together, culture and commonly well
regarded behaviours such as innovation, and team working, as well as people
aspects, ie the characteristics of those who are responsible for organic
growth.
For each of these factors we compared the scores of the growth champions
against the rest. There were a small number of growth practices which were
consistently highly rated, and when tested the differences between the growth
champions and the rest were statistically significant.
There were six practices which were statistically different at the 98%
level of confidence. That is to say it is almost impossible that the
differences occurred by chance. The chart which follows shows the results for
the growth champions and the rest of the sample.
Key practices of growth champions
The growth champions have clear and well articulated profit models which
are linked with strong metrics and feedback. They are very clear on their
sources of growth and make effective trade-off decisions about where to invest
for growth.
These businesses focus on a few things and this focus is amplified by a
capability to engage in disciplined execution at all levels. These practices
are noticeably much less present in the remaining 189 companies, who put effort
into a variety of other practices.
It is also worth noting the practices the growth champions do not pursue.
Very few of them focus on building radically new products or services. They
stick to what they know. They do not support multiple business models
simultaneously, preferring instead to operate a single clear business model. Just
over half report that they foster innovation, but this is not significantly
different from the non-growth champions. Few of them have an internal venture
capital process or share resources across the organisation to fund initiatives.
The top six key practices
The four enablers
There are also a series of enabling practices which support the six high
growth practices identified above which are statistically significant at the
95% level of confidence. These are four further practices which are
statistically different between the growth champions and the rest and which
relate to the way the companies are organised and led.
1.
The first of these is that the growth champions
build leaders to grow from within. They put considerable effort into building
leadership capability which will focus on organic growth.
2.
A significantly larger number of them also have
fewer levels of management.
3.
They engage in cross-cutting forums to drive
innovation.
4.
Finally, the growth champions have developed a
culture of adaptability. They actively encourage their employees to be
adaptable and flexible to a changing environment.
The ten distinguishing practices of the high growth companies, which are
statistically different in those companies from the remaining lower growth
businesses, are set out below.
The growth practices
Growth champions
% practiced
|
Non-growth champions
% practiced
|
|
Top six practices
|
||
1. Create
clarity on sources of growth
|
96%
|
74%
|
2. Clearly
articulate and have well understood profit models
|
91%
|
56%
|
3. Engage
in disciplined execution at all levels and promote excellence in execution
|
78%
|
44%
|
4. Make
effective trade-off decisions about which opportunities to invest in
|
70%
|
45%
|
5. Have strong
metrics and feedback loops
|
70%
|
38%
|
6. Focus
the business on a few initiatives
|
70%
|
44%
|
The four enablers
|
||
7. Build
leaders’ capabilities to grow from within
|
70%
|
49%
|
8. Develop
a culture in which people readily adapt to change
|
70%
|
48%
|
9. Maintain
fewer levels of management to enable faster decisions
|
61%
|
49%
|
10. Engage
in formal, cross-functional or regional forums to drive innovation
|
61%
|
35%
|
A further analysis was performed to examine the average
inter-correlation of the ratings of these ten best organic growth practices. The
inter-correlation was high and statistically significant. This supports the
premise that these practices are contingent upon one another.
They go hand-in-hand, and are mutually reinforcing and supportive.
In CB Richard Ellis, a worldwide real estate business, for example,
every year the company examines which businesses to enter and exit. They avoid
getting into what might appear on the surface to be related business lines (eg
maintenance services) because they recognise they are not expert in those
businesses. They are clear on their sources for growth and they steadfastly
refuse to invest in businesses unless both can work synergistically with
existing CBRE businesses. They also strive to keep things simple.
Brett White, the CEO, explained “We don’t spend weeks in seclusion
working on strategic plans because the business changes faster than we plan”. Brett
and his colleagues have focused their management team on six key objectives
which have remained consistent for many years. People understand the sources of
growth and the financial metrics that count. Furthermore, they focus on
building leaders. Every year thousands of people (employees and customers),
attend their in-house university for up to a week.
However CBRE does not spend a lot of time investing in new products or
going on management retreats. Instead, CBRE executives focus their business
meetings on tactical initiatives with a goal of keeping things practical and
action oriented. Brett reports that “We are very empirical. We’ve cut out the
nonsense and focuses on what makes money. The question is always “How does the
action you are taking today tie to revenue margin and EBITDA?”.
The final component of CBRE’s success is the disciplined approach to
measuring business performance. The company has an established comprehensive
set of financial metrics which track the growth performance of each manager and
which are visible to all. People are measured on top line as well as bottom
line growth.
The growth blueprint
The diagram below summarises the growth champion ‘blueprint’, ie the
distinctive footprint of the 23 companies which exhibited outstanding growth. These
companies are focused and very selective, and not radically innovative. They
execute very effectively because they are so focused and have simple structures
and move quickly to respond to their environment. The culture is disciplined
and adaptable. These are not organisations that ‘let a thousand flowers bloom’,
but they do expect people to continually adapt. The various elements of the
distinctive blueprint are mutually supportive and together fuel organic growth.
The elements are inter-correlated – ie they move together and are
inter-dependent.
The growth champion blueprint
The $60 billion Procter & Gamble company (P&G), now the world’s
largest consumer goods company, is a good example of this. Its health, beauty
care, household and food products are used an estimated two billion times a day
by consumers around the world.
Its success in sustaining growth is based on continuous attention to
detail, sound processes and conservative decision making. Disciplined
leadership, disciplined execution and remaining faithful to the consumer is the
key to P&G’s success.
Amongst the growth champions, the organisation arrangements are simple, have
few management levels, and strong metrics and feedback loops. P&G has
reorganised from five divisions into three to simplify its operations and is
quick to eliminate brands that aren’t profitable and growing.
P&G is remarkably centralised and aligned towards a set of shared
goals. Divisions don’t head off on their own. Shared processes have a lot to do
with this, as does the fact that P&G executives are grown from within; they
know each other and they understand the procedures that need to be followed. While
some companies would find this centralisation a barrier to creativity and
innovation, P&G uses its structure to do just the opposite: force
innovation where it is required and cut off unsuccessful investments early on
before they drag the division or company down.
Similarly, if you understand your profit model and focus on a few key
initiatives, this gives a solid basis for having strong measures and feedback
loops.
Texas Capital Bank was founded in 1998, and targets small to mid-size
businesses, providing the full gamut of banking services. Its revenues grew 22%
from 2002 to 2003 and another 29% between 2003 and 2004. In the same period,
operating income grew 16% and 49% respectively.
Texas Capital takes a P&L view of all its work: each customer
relationship has the full P&L. Each person controls and bills his or her
own business and this creates a real sense of ownership and an incentive for
individual initiative. Each month everyone sees their performance and that of
their colleagues. Texas Capital has not lost anyone in the top 80% of
performers, and the bottom 20% of performers get the message and weed
themselves out of the organisation. The bankers’ relationships however focus
not on short-term revenue production but on long-term profitability. Because of
this long-term measure, a banker’s incomes may drop, but over the first few
years of their time with the bank their income will exceed that of competitors.
The relationship between sales, earnings and cash
growth
We looked at the organic growth practices to see the extent to which
statistical modelling might show how combinations of the ten best organic
growth practices correlate with the three financial performance outcomes
against which executives rated their companies.
We looked at the extent to which the participating companies are falling short, meeting or
beating their growth objectives for sales, earnings and cashflow, and explored
whether there was a specific link between any particular practices and these
aspects of financial performance. The regression analysis identified subsets of
the ten best organic growth practices that have statistically significant
correlations with different financial outcomes. The results were interesting
and are shown in the table below.
This analysis shows that sales growth is associated with disciplined
execution and a culture of adaptability. Earnings growth is linked with good
decision making and focus, whilst cash flow growth is strongly related to
measurement and promoting excellence in execution.
These findings provide insights for organisations who are interested in
launching internal efforts to grow particular financial outcomes. However,
while different practices correlate more strongly with one outcome than another
it is important to remember that the practices themselves are contingent on one
another. Leaders who focus their
companies on growth and who pay attention to the ten growth practices are
likely to see the needle move on all three dimensions.
The key practices which drive financial outcomes
Practices that best support growth in sales
|
Practices that best support growth in earnings
|
Practices that best support growth in cashflow
|
Disciplined execution at all levels
|
Focus whole business on a few initiatives
|
Maintain strong metric/feedback loops
|
Develop a culture in which people readily adapt to change
|
Make effective trade-off decisions about investment opportunities
|
Promote excellence in execution
|
Conclusions
In summary, there are clear and distinctive practices which
differentiate growing companies and which are mutually reinforcing. These
exclude many which the literature says should fuel growth. They transcend size,
sector, and history, but the growth is consistent year on year.
The practices are characterised by focus, simplicity and discipline and
dispel some misunderstandings about the importance of, for example, risk
taking, radical innovation and involvement of high potential leaders in growth
opportunities. Not only are they mutually reinforcing, but they reflect a clear
difference in priorities between growth champions and other businesses.
In short: these companies have deliberately chosen this set of practices
and have become good at them. The practices put them at a significant
competitive advantage. They can be measured and they can be learned.
