Home Strategy What’s the Bad News About Growth? (The answer(s) may surprise you…)

What’s the Bad News About Growth? (The answer(s) may surprise you…)

by John Myrna

At this year’s strategic planning meeting, the CEO of a small automotive parts supplier was feeling optimistic. “We’re on a path to double revenues within five years,” said Jane. “Finally, we’ll have the resources to do things right.” She and the team had been struggling to keep their demanding customers satisfied on a shoestring budget. Jeff, the manufacturing VP, wasn’t as excited. “In my experience, growth creates nothing but problems. Why can’t we just stay the size we are?”

Jeff and Jane’s differing attitudes arose from an incomplete understanding of growth and its challenges. Too many executives automatically assume that all growth is good — or bad. The truth? Growth has its good and bad aspects, with surprising limits to sustainability and performance.

Growth changes everything, and if you embrace it, change isn’t automatically bad. All change creates short-term winners and losers. For example, employee skill sets must change along with the company, sometimes requiring the replacement of hardworking, loyal people.

Growth promotes unhealthy concentrations. Growth is subject to a natural law that increases concentrations. One manufacturing client got 80% of their revenue from one major customer purchasing one product, supported by one salesman in one niche market. Growth was easy — until the client went bankrupt. Only then did they realize that their business model was no longer viable. Warren Buffet says it best: “You don’t know who’s swimming naked until the tide goes out.”

Priorities change as a company grows. Most founders, for example, enjoy applying their operational skills to operating in the business in its early years. With growth, the CEO’s focus must switch to working on the business and three non-delegatable tasks: championing the strategic planning process, developing the management team, and making the “bet the company” decisions.

Growth requires managing profit. In a company’s early days, focus on revenue and profit takes care of itself. Expenses always seem to lag revenue, with the gap filled by growing productivity. Then the company hits a point where you must manage profit. It’s not enough to focus on revenue, because growth is non-linear and revenue just doesn’t grow by a fixed percentage monthly. Companies operate within a recurring two-step cycle. Investments in business development lead to a jump in sales one to three years later. Revenue growth leads to a mix of business with uneven profitability and pressure on capacity. Rationalizing the business and increasing capacity then becomes the focus. These investments increase costs while creating excess capacity, which drives the company’s focus back to business development.

There is a fleeting sweet spot when business exactly matches capacity — and it’s the most dangerous period for a company. Profit margins are exceptional, leading to hubris with fancier company cars, unsustainable benefits, and above-market compensation.

Lingering “legacies” cause problems. Growth leaves a wake of “legacy” customers, products, and employees. As you grow, you’ll find some customers are no longer large enough to warrant the company resources they consume. Some products aren’t strategic enough to warrant the investments to keep them competitive. Some employees won’t have grown their competence quickly enough. Healthy, successful companies “rationalize” their employee, customer, and product bases regularly and facilitate the transition of their “legacies” to other companies that can better serve them.

Risks change with growth. When a company is growing rapidly, expenses like new facilities and computer systems come in ever-larger dollar chunks and multi-year commitments. Cutting back incurs larger short-term expenses. When you make such decisions, ask yourself, “what’s the worst that could happen?” As you grow, the “worst” gets larger and requires a greater ability to manage risks and realize profitable growth.

The secret of sustainable growth. I attended grad school in Bozeman, Montana, skiing at Bridger Bowl whenever I could. Some skiers would fall every 10 yards, even when moving slowly down the beginner or “bunny” slope. Other skiers could navigate the black diamond slopes at blinding speed, handling moguls without stumbling. The difference in performance wasn’t due to how fast they moved, but that the proficient skiers moved only as fast as their ability to remain in control.

So too do high-growth companies reap the rewards that come from making investments in improvement. No company grows by cutting expenses or staying on the “bunny slope.” Companies grow by improving their productivity, business acumen, and overall ability to manage risk. All things being equal, the higher the risk you can effectively manage, the higher the ultimate gain you can realize.

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