Where to Find Growth Opportunities Within Your Company

Despite record-high stock prices and at least some rosy analyst estimates for the second half of 2014, many American businesses are struggling with fundamental growth challenges. In fact, analysts have overestimated earnings growth in three of the past four years. Of 108 S&P 500 companies that have issued 2Q guidance, for 81 companies, that guidance has been negative. So while share buybacks, de-leveraging and other corporate initiatives have pumped up stock prices, they also pose the question of whether U.S. companies can deliver strong, reliable revenue growth.

How will businesses create value for shareholders three or five years from now, once the financial leaning-out of corporate America has run its course? Most companies expect to continue growing faster than the overall economy, but our recent research suggests otherwise.

Even if a CEO has a growth strategy, our research points to the fact that the organization often isn’t ready to deliver on it. In one survey, 55% of respondents reported that their companies were not focused on executing their strategy, while 42% said their companies weren’t aligned behind their strategies. In a second survey, 83% of respondents said their business strategy wasn’t well understood across the company. And less than a quarter believed their company’s strategy translated into concrete operational objectives and initiatives.

That said, some companies are able to establish bold strategies and execute on them effectively. How? These companies know what they can do better than anyone else. And they identify ways to leverage those capabilities to grow their markets. Think of Amazon’s key capabilities in retail interface design, supply chain management and customer analytics. Those distinctive capabilities allow Amazon to outcompete its rivals.

Most successful companies approach growth in the following four ways, prioritized according to their benefit-to-risk ratio:

1. Growing the core of the business is generally the most rewarding and reliable path. Indeed, the grass isn’t greener on the other side.We found that median shareholder returns differ very little across industries (only a 16% difference between the “best” and “worst” industries). But top companies within any given industry deliver 72% higher total shareholder return, on average, compared to the worst companies. Growing your core business requires being clear about the market share you can take and the capability building (innovation, new investment, etc.) required to do so.

2. Expanding into adjacent markets may look appealing, but approach this strategy with caution. Listerine’s PocketPaks was one of Time magazine’s best inventions of 2002. But within a year, competitors with better-suited capabilities (e.g., front-of-store merchandising) took over the market for breath strips. When growing in adjacent markets, forget about closeness of SIC codes. Instead, identify the key things you do better than anyone else and understand how to transfer those unique skills to other businesses—like Apple applied its interface and design capabilities to industries as diverse as computers, music and communications.

3. Expanding geographically makes sense only when your capabilities confer a right to win in those markets—e.g., Frito Lay’s capabilities in direct-store-delivery, flavor innovation and marketing, powered a global expansion of its core business from the U.S. to Mexico, and now the rest of the world.

4. Building new capabilities to enter a market in disruption isn’t impossible, but it’s the riskiest move and needs careful investigation of the capabilities needed and strong evidence that you’ll be able to build those capabilities before others do. Like JCI in the mid-1990s, when they realized they had an edge in offering full auto seat solutions (instead of individual components). They embarked on a dedicated program to build the missing capabilities (e.g., solutions selling, shelf technology) and enjoyed a first-mover advantage, revolutionizing their industry. Or carriage makers like Studebaker and Timken that made the leap to automobiles by supplementing their expertise around seats, doors, and wheel springs with the missing capabilities required to thrive with this new technology. But you should exhaust all three other options first; be sure the new opportunity is of sufficient size and that you are well positioned to outcompete your new rivals.

Your company has amazing growth opportunities in front of it—the question for every CEO is putting the organization’s energy behind the ones where your capabilities give you a right to win.

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