August 25, 2011

It is not true that businesses should always grow

There is an interesting little video by Edward Hess, Professor of Business Administration, Darden School of Business entitled Everything You Know About Growing Your Business Is Wrong. In it he argues that there is no evidence whatsoever for some dominant beliefs about growth in business.

Those unsubstantiated dominant beliefs are:
  1. All growth is good
  2. Bigger is always better
  3. Businesses must grow or die
  4. In the public markets, public companies must grow continuously in a linear fashion with ever-increasing quarterly returns. Unfortunately, those four beliefs are not based in any science, any empirical data or business reality. They are at best half truths and some are pure fiction.
He replaces these beliefs by the following more realistic beliefs:
  1. Growth can stress a business: Too much growth can be bad 
  2. Bigger is not always better: The bigger you become, it puts you into different competitive spaces, and therefore you have bigger and better competition.
  3. What you have to do is constantly improve your customer value proposition better than the competition. 
  4. Growth is not a continuous linear function: research shows companies generally don't continuously grow for years in a row. 
Question: does this make sense? If it does, how should we change corporate governance, business education, and finance and business journalism? How can we achieve this?

8 comments:

  1. I agree. Yet, as growth is ubiquitous, when you don't grow, others will take that empty space. And today, something seen as not growing looks suspicious. Hence, by not growing, you face other challenges as well, due to growth of others.

    Now, when one considers local SMEs, they rarely grow and yet may be well and alive for years.

    I feel there's a different mentality between local and global. Those aiming at global are already infected by the growth virus and then enter a vicious circle.


    Oh, and I don't know how to change that, except with time and voluntarily actions (teaching, role modelling...)

    Shouldn't wizards that know how to change the present and the past by helping others build a better vision for themselves have the duty not to let others fool themselves? (see my blog post). It's also self-help on the long term.

    Is this ingerence? Is it good or bad?

    Nicolas Stampf

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  2. Hi Nicholas,
    Thanks for your comments. You say: "by not growing, you face other challenges as well". Interesting point. One reason is that people simply believe businesses should always growth so by definition loose their trust once a company does not grow. While this may be unjustified, it can still be a problem. I agree that the expectance of growth may be much stronger for global companies that for locals. I do believe that companies need to learn and change continuously. You might call this 'growth' too. But I don't think companies should become bigger all the time. Another matter is whether economic growth, on a macro level is needed and possible. I am optimistic about the possibility for world wide economic growth which goes hand in hand with environmental improvement. Having said this I think the need for economic growth is great in developing countries and to a much lesser extent in developed countries.
    But again, macro growth does not require (I think) that individual companies need to keep on growing.

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  3. Coert: I didn't go to the end of my argument. What I meant by other problems induce by not (economically) growing is that with your competitors growing, they're going to take most of the market and thus most of the mental space allocated for the product or service they're selling. Which means that when someone new will want to buy that kind of widget they sell, their mind will go to the bigger layers instead of the smaller company. Consequently, the smaller company will have less and less customers and eventually die.

    You can compete on quality with bigger players, but that means you usually increase your prices. Unless you miprove using Lean management (my field!) which mean that increasing your quality will instead allow you to lower your prices.

    Now you need to face the social pressure regarding growth AND you have the means to do so. Very hard to resist I guess. That's more or less what happened to Toyota (it took around 50 years).

    You need to have a corporate vision that's not about economic success but rather about contribution toward society and employees. Growing allows you to give job to people in need, but the bigger and faster you grow, the harder it is to maintain that kind of "sustainable" corporate culture. Also problems that occurred at Toyota: their growth having been too fast, they had a hard time matching their training needs regarding Lean management and maintaing their quality level and level of respect for their own people.

    Have a look at their company vision here:
    http://www.toyota-global.com/company/vision_philosophy/

    and mainly their Guiding Principles (first fox on the page above).

    how many companies have similar (applied!) statements?

    Nicolas Stampf

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  4. Hi Nicolas, it's a complex topic indeed. Perhaps I must read the book by Edward Hess. Maybe he adresses the issues you mention

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  5. Interesting. I know from my experience growing your business too fast can cause problems. It's very difficult, however, to turn business down when typically people work so hard to get it in the first place.

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  6. His ideas about business are quite different from the usual concepts. For me, building a business is taking a risk. It can only result in either of these two things: success or failure. The owner has control over the progress of the company - whether it expands by taking risks, or it maintains its current status and avoids failure. These are valid arguments.

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  7. Strikes me that how we define growth is the bad thing.
    There is the reality that everything degrades over time. So, business must fight degradation and the usual answer or antidote is ‘let’s grow!’
    Then there’s the modern dilemma of measurement. Now that we can measure almost everything we assume that when we see negative growth numbers we call a meeting to examine the problem and resolve the unpleasant situation.

    Hence, I tell all my clients,
    - Be thoughtful about what you measure. Your people will likely achieve the measures, but with unintended consequences.
    - Be thoughtful about what you want to grow. If it’s simply the bottom line, there will be many unintended consequences.

    A fascinating example of this is Apple’s fight with Samsung/Google. Of late Apple seems to be measuring success by beating off the competition with lawsuits. Previously, they measured themselves as ‘idiosyncratic artisans producing beautiful products for smart people’, the outcome of which was huge profit (which never seemed to drive Steve Jobs).

    On a global scale, it seems to me that the former economic powers, the US and Europe now have to share economic growth with other nations. The US and Europe are now in a grand struggle to regain the growth they once took for granted. It’s not going to happen, so what do they want to grow instead?

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  8. Hi Alan,

    Thanks for your thoughts. I agree that how we define growth is important. While I neither think that economic growth is always required nor that is inherently a bad thing (it can often be a great thing) it is important to recognize that growth does not always have to refer to money related things (sales, profit, market share, etc).

    While I think it may, in certain circumstances, wise to not choose for economic growth I think business should always work at reinventing themselves and what they do. So, while I don't think growth (expansion) is always necessary, I am not arguing for conservatism or stagnation. A business which chooses to not grow can still be very dynamic and evolving.

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