Study by Roland Berger Strategy Consultants shows how companies can manage for successful growth

• Surprising: inspiring managers are key to growth
• Decisive: 30 percent prefer decentralized structures
• Disappointing: culture of trust rarely gets beyond the mission statement
• Alarming: around 30 percent of companies are downshifting into consolidation

Growth is down to good management. Leadership is a far bigger factor in boosting a company's growth than, say, operating procedures or brand development. Above all managers must have clear visions, motivate their people and set consistent targets to drive forward growth and innovation. This is revealed by Roland Berger Strategy Consultants' latest study, presented today in Düsseldorf. Thirty percent of the managers interviewed in the study see decentralized organization as vital to creating a culture of growth by encouraging entrepreneurial activity throughout the company. Even though managers emphasize the importance of cardinal virtues like honesty, respect or open and direct communication, many companies have trouble making them a reality – with negative impact on growth. What is more, a third of companies in German-speaking countries are down-shifting – opting for slower growth and greater consolidation.

The study draws on an analysis of growth factors in the biggest 1,700 companies in Asia, Europe and North America from 1991 to 2003. It also involves a cross-industry survey of managers' own views on growth factors. Conducted in spring 2004, interviews were made with executives from some 150 medium-sized and large companies based in Germany, Austria and Switzerland.

How well are top companies performing?

Profitable growth is understood by managers as the primary condition for lifting the value of their company. Yet the figures show that from 1991 to 2003 only 26 percent of top corporations worldwide achieved above-average increases in sales and profits. Almost half (43 percent) had to face shrinking sales and profits. As for the growth and profit leaders, these "outperformers" also demonstrate significantly above-average numbers for the other indicators: productivity rising from 1996 to 2003 by an average of 13.4 percent per year (world average: 5.8 percent), workforce growing by 26.5 percent (7.9 percent), and cashflow expanding by 31.9 percent (15.3 percent).

Corporate culture driving growth

In Germany, Austria and Switzerland most companies explain their sluggish growth by internal friction. Cultural factors are seen as a particular problem: 31 percent cite a fear of risk-taking, poor motivation or inflexibility.

"The classic alternating sequence of restructuring and growth throws international companies off their growth trajectory. What counts above all is having the right corporate culture," explains Stefan Bötzel, Partner in the Corporate Development Competence Center at Roland Berger Strategy Consultants. "More than half of the managers interviewed stressed the importance of openness, trust, loyalty and a strong focus on the people in the company. And the majority believe that a culture of trust is needed to keep on growing. Yet unfortunately many managers are failing to put these insights into practice."

According to the study there are plenty of companies that neglect the "soft" growth factors in practice, although 51 percent of managers know that they are a central engine of growth. In many companies there is a lack of clear decision-making structures and trust. Information flows tend to be restrictive and the pace of change sluggish. All too often managers lack the driving force of vision in their everyday business dealings. They fail to motivate their people by setting clear goals (management by objectives, MbO) and insisting on direct communication.

Decentralization: a necessary condition for growth

Some 30 percent of the managers interviewed regard decentralized organization as the most important condition for growth. Decentralized organizations delegate responsibility, encourage entrepreneurial initiative, enhance communication and facilitate prompt decision-making. Most managers favor decentralized structures built around customers or products, while matrix organizations or functional structures are seen as less conducive to growth.

Managing for growth – through MbO

Many companies manage their growth by setting performance targets (MbO). 40 percent of all the companies interviewed use an analytical and structured approach to setting their objectives (e.g. based on market and competition surveys). But the top companies focus more on personal experience, healthy risk-taking and creativity. The outperformers prefer to set targets within flexible ranges, while over 70 percent of all the companies surveyed use rigid numbers.

The top companies set ambitious but realistic targets which they mostly achieve or exceed. By contrast 46 percent of all the businesses questioned say they like to agree objectives that tend to be "overambitious". Indeed, only 22 percent actually meet the targets.

Top companies are lenient when their people fall short of the targets. That is not the case with the majority of companies surveyed: 51 percent impose, in the main, very strong sanctions for underperformance. But profit trends show that the outperformers have the right idea. As the study demonstrates: the harder the sanctions, the bigger the fall in profits (EBIT). Put the other way round, excessive penalties push down corporate performance.

Marketing innovations successfully

Of all companies surveyed, 57 percent pursue an explicit innovation strategy. But outperformers go beyond product innovation and continually modernize their operating processes, customer management or business models.

They are also "quick followers" of innovations that the markets like, preferring not to thrust ahead of their competitors as "first movers". By shortening the path from the idea to the finished product, they raise the efficiency of their innovations.

Moreover, the way the top companies manage innovations parallels their overall organizational approach: decentralized, with flexible budgets, fast-moving and pragmatic. This is the key to rapid roll-out of innovation strategies.