How CEOs Should Be Thinking About Growth
Matt Tortora
Investment Banker & M&A Advisor for Digital Transformation Consulting Firms
Almost every CEO or founder I've ever met who is running a high-growth B2B organization is a great strategic thinker, and they understand the levers they need to focus on in order to drive meaningful revenue growth. Not only do they understand what variables and levers to focus on, but they do so from more of a big-picture perspective.
There are five core levers that a company has at their disposal that when optimized will not only accelerate revenue growth but improve overall business performance and profitability. Those levers are:
If we look at the long-term trajectory of an organization, it's important to understand that all of these growth levers cannot and should not be implemented immediately, but over time as the organization grows and matures. A classic maturity model approach must be taken, whereby a company methodically begins utilizing these and increasing their investment in each of these areas as they mature.
Furthermore, there is a definite needs hierarchy for all of these levers. If a company doesn't get the foundational pieces right, the other variables will never be fully optimized or will sometimes outright fail.
Market Positioning & Competitive Differentiation
A company’s positioning strategy and points of competitive differentiation are its growth strategy. It truly is the foundation that acts as a force multiplier and when done right, significantly improves the effectiveness of a company's effort to grow. Strong points of differentiation and well-thought-out positioning in a market provide a myriad of benefits that include: a more frictionless customer acquisition process, the ability to charge higher prices, lower customer acquisition costs, and larger gross margins.
Unfortunately, for companies without a strong positioning and differentiation strategy and especially those who are playing in a mature and overcrowded market, growth is significantly more challenging. The inverse happens where customer acquisition becomes more difficult because companies are typically involved in a competitive bid process. The makeup of the market creates downward price pressure and subsequently decreases margins. Lower margins then equate to less of an ability to reinvest into growth. So, now a damaging cyclical process starts.
It's unrealistic and unfair to expect companies to come up with a perfect positioning and differentiation strategy out of the gate, or to simply retool their efforts and immediately pivot with a flawless strategy and a highly differentiated offering. However, it needs to be an almost constant top-of-mind initiative for CEOs and an iterative and ongoing conversation with key business leaders inside of the business.
Organizational Structure and Culture?
Most companies, especially smaller ones, are either product-first or sales-first organizations.? And the truth is, most smaller companies that sit in the upper end of SMB and within the lower middle market, are product-first organizations. There's a problem with that. Don't get me wrong, having a great product and offering is an absolutely critical element in long-term success. But when organizations place too much emphasis on their product or solution, sales and marketing efforts become a secondary priority.
It is absolutely imperative that CEOs create a growth-focused culture and implement the infrastructure needed in order to support that. That means continuously building and scaling a sales and marketing team as an organization grows. That also means creating a culture that is results-driven and holds everyone, especially those in a revenue-generating function, accountable quarter in and quarter out, and year in and year out. That culture and mindset is really what separates high-growth organizations from those who struggle to grow.
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Financial Components
The financial health of a company has a major impact on its ability to grow. In order to effectively reinvest into inorganic growth, it's imperative that a company is operating at or above industry benchmarks when it comes to gross profit margins. I wrote an article on this that dives into greater detail around the importance of gross profit margins in driving growth that can be viewed HERE. But for the sake of this article, understanding and grasping the fact that strong profit margins and a carefully planned reinvestment into growth-related resources and activities, absolutely must be a major component of a company's growth plan.
Secondly, how business leaders view financial tools such as debt also has a major impact on growth. There seems to be a common fear around the use of debt. It's certainly not ubiquitous, but I talk to a lot more CEOs who try to avoid debt at all costs than those who view debt as a valuable tool. That's not to say that the use of debt shouldn't be exercised with caution, because it absolutely should. But for financially healthy companies, the ability to leverage other people's money to reinvest into growth can yield a level of return and growth rate that could not have been normally achieved.
Organic Growth
Organic growth in the form of net new customer acquisition often does not receive the required investment in people and processes. This is especially true with early and growth-stage companies. More mature organizations that have reached a substantial revenue run rate have gotten there for a reason, and a big part of that is a well-constructed and well-run sales and marketing infrastructure.
As a rule of thumb, B2B companies should be spending anywhere between 3% and 5% of total revenue on sales and marketing. And if an organization does not have the financial wherewithal to invest this much into sales and marketing, then there are deeper financial issues at play.
Inorganic Growth
Inorganic growth in the form of acquisitions is the most overlooked growth mechanism for early and growth-stage companies. This is often because companies of this size simply don't think they are capable of successfully making acquisitions. That is a fallacy.
Carefully planned acquisitions not only produce sizable increases in revenue, but also open up growth synergies that previously did not exist and accelerate an organization's growth rate. By only focusing on organic customer acquisition, companies usually will never hit a growth rate they're capable of and are leaving market share on the table.
The well-known adage “Don't work IN your business, work ON your business” perfectly encapsulates the big-picture strategic mindset that CEOs must have to be successful.? And it's that mindset that must be taken when focusing on growth. By looking at all five of these levers and approaching each one with the mindset of utilizing them, optimizing their performance, and deploying the capital and resources required to do so, CEOs will enable themselves to largely step out of the day-to-day operations and drive real revenue growth.
I am the Founder and Managing Partner of Drive Equity Advisors. An investment bank focused on providing M&A advisory support to sellers and acquirers of IT and management consulting firms in the digital transformation space. You can learn more about the work we do at driveequityadvisors.com