Research Shows What Best-in-Class Business Growth Looks Like
How does your company growth compare to your peers? Many executives don't really know because they don't have the data. To help them do better, we captured company growth data as part of The Business Growth Report.
We then published the data along two dimensions.
First, the data was organized pursuant to the four business outcomes of annual revenue growth, EBITDA margin, market capitalization and revenue vitality. Each of these dimensions is described below.
Then we clustered the above outcomes to rank the respondents into three performance-based categories of Best-in-Class (the top 15%), Medians (the middle 50%) and Laggards (the lower 35%.)
So, consider the below data findings to understand what Best-in-Class business growth looks like.
Based on the most recent three-year average, the Best-in-Class companies achieved an average 15.9 percent annual revenue growth rate. That was 4.1 times higher than the combined average of the Laggards and Medians.
Many financial analysts suggest revenue growth is a backward-looking metric. That may be true, but it shouldn't suggest that it doesn't drive future company growth. Companies that demonstrate growth above their peers attract more capital, and invest more into their revenue engine, and that creates a virtuous cycle to generate even higher growth in the future.
When analyzing the data, one variable stood apart.
We found a significant performance difference among companies that apply predominantly organic or inorganic growth strategies. As shown in the bar chart below, companies with an inorganic growth strategy achieved significantly higher growth rates than their organic peers.
For respondents with an inorganic growth strategy, acquisitions accounted for an average of 28 percent of their company growth.
Also based on a three-year average, the Best-in-Class companies achieved an average 21.2 percent annual EBITDA margin. That was a whopping 101 percent higher than the combined average of the Laggards and Medians.
The EBITDA margin is a very common comparison metric among companies.
However, it's important to note that Generally Accepted Accounting Principles (GAAP) do not use EBITDA as a profitability measure. But investors and acquirers do as this margin reflects a company's short-term operational efficiency. It tells investors how much of the company's earnings are attributed to operations.
The data found EBITDA margin varies by company maturity, growth rate and industry. Consider the Johnny Grow industry-based Best-in-Class growth reports to see financial measures by sector.
Based on the prior three-year average, the Best-in-Class companies achieved a 1.8 times higher market capitalization growth rate than the combined average of Laggards and Medians.
Market cap is the total value of company shares. It's essentially a measure of the company's equity at a given point in time. Total revenue is the income measured over a period of time.
There is not a direct correlation between the revenue growth rate and market cap growth rate. But companies that generate an increasing market cap often do so because of their ability to produce increasing top line revenue and bottom-line EBITDA.
Vitality is a standout innovation measure that has a direct impact to company growth and financial margins. We calculated this measure as the percentage of current-year revenues attributed to new-to-market offerings launched in the past three years.
The data found that the Best-in-Class growth companies achieved a 67 percent higher vitality index than the combined average of Laggards and Medians.
For most industries, new products are no longer new after three years. Companies with less than 25 percent of annual sales from new products are likely to incur increasing commoditization and deteriorating business growth.
Creating new products or providing a significant step-up to existing products or services will counter commoditization, create differentiation, accelerate revenue, permit price premiums, and improve margins.
How to Achieve Best-in-Class Company Growth
Now that you know what Best-in-Class business growth looks like, the next question may be how to achieve that level of performance for your company.
The research answered that question by analyzing data that measured corporate strategies, operational processes and technology utilization. That analysis identified what the Best-in-Class leaders do differently than their lower performing peers.
Nine growth initiatives stood out. These 9 growth programs are referred to as evidence-based best practices and shown below.
- Growth Strategy
Don't confuse this with your annual plan. Instead, it's singularly focused on the actions that drive revenue improvement. It defines the best revenue strategy and roadmap to achieve targeted revenue results in the shortest time and least cost.
Only 16% of survey respondents had a centralized group with enterprise-wide revenue accountability. However, 89% of that small cohort was made up of the Best-in-Class archetype. Further, 76% of this cohort used Revenue Operations (RevOps) as their centralized revenue management program.
The biggest technology-related disparity among performance archetypes was the effectiveness of their AI program. The top performers ranked AI effectiveness 37% higher than the combined average of the Median and Laggard cohorts.
The average innovation investment among all respondents was 3 to 6%. However, the average for the highest growth companies was 7 to 10%. The data also showed a big difference in how the innovation budget was allocated. The highest growth companies invested about 40% of their budget into transformative innovation. That was different than the lower performers who allocated the bulk for their innovation budget toward marginal improvements of existing products.
- Corporate Culture
Survey respondents that cited an active and measured company culture as part of their growth strategy achieved an average of 41% higher revenue growth than those who did not.
- Customer Affinity
A high majority of the top growth companies applied a specific customer strategy to build customer affinity and measured the ROI of their customer strategy. The majority of lower performers did not.
- Performance Analytics
The majority of top performers cited different types of business intelligence tools and used predictive analytics about 3 times more than their lower performing peers.
- Mergers & Acquisitions
94 percent of the top performers cited M&A as an active growth strategy. That was 42 percent more than the combined Median and Laggard cohorts.
- Strategic Alliances
92 percent of the top performers actively use alliances as part of their expansion strategy. That was an overwhelming majority and 41 percent higher than the combined average of the Laggards and Medians.
Successfully replicating any one of these best practices will deliver an incremental benefit. That may be sufficient for some executives.
Others may seek more significant and sustained revenue growth. That requires a more holistic approach, which can be achieved by replicating a mix of the evidence-based best practices.
The research was conclusive in showing the growth leaders excelled in at least five, and on average, 7 or more of the nine best practices.
The More You Know, the Faster Your Grow
Most companies apply cost of sale and SG&A expense benchmarks to ensure their costs are managed. However, most don't apply revenue benchmarks. Mostly because they don't have them. Now you do.
Company growth recommendations without supporting data are just opinions. The 9 evidence-based best practices herein are born from research and show what the highest growth companies do differently than their lower performing peers.
When you start with research-based findings, learn from companies that have achieved success and apply their methods to repeat that performance, you eliminate guesswork, avoid trial and error, and pursue the straightest and shortest route to targeted outcomes.
One more thing.
Most respondents indicated they adopted all or most of the 9 best practices. However, there is a big difference between adoption which is often a casual participation and dedication which creates expertise.
Dedication requires programs with executive sponsorship, focused resources, enabling technology, performance analytics and continuous process improvements. Dedication goes from being a generalist to becoming a specialist.
And when the criteria for dedicated programs were considered, the majority of the Best-in-Class engaged in 7 or more of the best practices.