The appetite for growth
by Rocio Summers
Growth is a natural instinct in human beings. We are meant to grow since we are born until we reach maturity. And even way after our bodies are fully developed, we want to keep growing as persons, as professionals, keep learning, keep understanding and increasing our wisdom until we die.
In business and organizations, I see the appetite for growth as a common factor. No matter how big or small the organization is, no matter whether it is a not for profit or a big global company, no matter whether private or publicly traded. All of them have growth among their goals, in a written or not strategy.
And this is precisely also the main frustration in organizations and the main failure: not achieving the level of growth they had planned. However, sometimes, growing too fast is extremely dangerous. Let's go step by step.
The first question I would ask is why growth. Don’t say no to growth, but first ask yourself why you want to grow, how, where and what for? All these questions seem obvious, and precisely because of that sometimes they get unanswered and lead to wrong actions.
At the end of the day, what we are questioning is what our strategy is and how our actions are leading us to achieve the mission of the organization. Invariably, in order to achieve our goals we need to be solvent, and intuitively we tend to think that bigger is better, but before we try to achieve our goals we should really need to consider how big we want to be, how we want to get there and what the risks are.
How big do we want to be - and is it realistic?
I read yesterday and article in HBR about how to establish realistic goals. It explained a methodology combining the timing factor, that dismantled the linear projections of a business and cautioned us: beware of the spreadsheets. In the example, the writer recalculated with the company's own assumptions, a 5-year projection, that went from $640M to $180M in revenue. Significant gap that unfortunately happens too often in long term plans. In its conclusion the author stated:
"Take the time to assess what your growth gap potential is. It’s all too easy to assume that your current business will deliver the growth that your investors, employees, and other stakeholders are expecting. The process is not that complex: Simply look at the growth trends of your existing lines of business and compare them to where you think your strategy needs to be at some point in the future. Usually, there will be a gap.
While it seems astonishing that leaders wouldn’t do this (and boards wouldn’t insist on it), we see it all the time. Sometimes, it is because leaders just won’t take the time away from day-to-day operations. Sometimes, it is because, oddly, it is no one’s job. And sometimes, there are simply too few people with the vantage point to see the trends across the entire enterprise. And unfortunately, executives in some companies are rewarded for essentially gaming their numbers rather than being realistic".
How are we going to get there? And what are the risks?
From a financial point of view, no matter what the chosen way to grow is, the main risks are always the same: profitability and cash flow.
Too many times, there is a temptation to drop prices in order to achieve volume. We overstate the power of loss leaders, and inflate our projections (as in the example above) and very soon we find our gross margin decrease and our EBITDA become unhealthy. We are scarifying profitability in favor of volume and we are forgetting that solvency was part of the equation.
And speaking of solvency, what about that paradox that the more we sell, the less money we have? Listen to your CFO and manage your working capital. Otherwise, that invisible investment will absorb all your resources, and you'll find yourself struggling to get the funds you need to move on. Go lean on inventory, look for quality sales, that are profitable and with clients that respect your credit and collections policy, manage your suppliers and again, don't establish unreasonable goals. If the nature of your business makes it intense in working capital, look for tools to finance it, and take the cost into consideration in your growth evaluation.
Finally, most of the time, though, the main risk is related with culture.
In his book, "The founders’ mentality", Chris Zook defines the paradox of growth. Growth creates complexity and complexity is the silent killer of growth. Chris leads us again to Steve Jobs' premise of simplicity as the way to succeed. And gives us other examples like Facebook (vs. myspace), amazon, the eternal startup, or Michael Dell bringing the company back to private in order to keep it close to its core and loyal to its strategy.
Whether you choose international growth, diversification of your portfolio, looking for a new partner or IPO, establishing strategic alliances or even M&A, be ready to work deeply and seriously in how this affects your culture and your core business. Stick to your mission and values. Embrace diversity and understand it. Understand the dynamics of the market where you decide to be in.
Be ready for the challenges, keep a clear mind of why you want to do it, and where you want to arrive. Analyze it with a challenging point of view. And then, if it still makes sense, go for it, do it, because at the end of the day, growth is evolution and the process is fascinating.
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