The Importance of Business Growth

Overview

That heading title seems self-evident, right? 

By: John Barrett, President, CEO, Priority Metrics

 

That heading title seems self-evident, right?  Of course, a business owner wants to generate as much revenue as he or she can, which will, hopefully, lead to higher profit.  Moreover, our capitalistic system practically demands growth.   The objective is always to make more money - especially since companies typically invest ahead of growth, in terms of supplies, equipment, facilities, personnel and so forth.   

 

When that investment fails to pay off, when growth does not occur, the beginnings of a death spiral quickly become apparent.  Low growth means that rising costs eat into constant levels of revenue and that profits decline. Less profit means less capital available to reinvest, which, in turn, means less product innovation and expansion.  Generally, the operation continues to contract, unless the company is bought or infused with more outside cash in an attempt to keep it operating.

 

Growth, however, isn’t just important for the above reasons.  In fact, I would argue, that financial considerations are the second most important reason that a company should keep expanding.  

 

The most important reason?  Growth keeps the company culture energized.

 

Yes, it’s an intangible, but it’s a critical intangible.  Growth creates jobs, generates excitement, and confirms the vision and the passion with which the company was created in the first place.    When a company is on the upswing,   it gives everyone in the organization a sense and an understanding that the company has merit and worth.   Everyone loves being part of a winning operation – it creates an overall affirmative mindset.  That mindset causes employees to believe they can make things happen – and they generally do.

 

On the other hand, a company that’s struggling for growth can make you feel as if you’re attending a funeral that’s only lacking a corpse.   The difference is like night and day – I know, because I’ve seen it for myself. I’m sure you’ve seen the same contrast.  I’ll go into a meeting and be met with a “what’s-the-use” attitude that can instantly negates any constructive advice and reachable goals we’re ready to provide.    The management seems to be going through the motions, because they feel obligated to try and do something - but the real motivation to turn things around left the building a long time before we entered it.

 

And let’s face it, for almost any business operating today, there are plenty of reasons to be concerned about the future.   Information is widely shared and available, causing competition to be even fiercer to the point of being cut-throat, and to come from a wider geography. At the same time, because of the difficult economy, customers are trying every which way to limit any price increases.  The competitive base keeps growing and provides cheaper alternatives to domestic products.  And mature industries in this country suddenly find themselves competing against every other country in the world – most of which have fewer costly regulations, flexible or illegal trade policies and much cheaper labor pools.  

 

These challenges, however, can be met and overcome.  That’s the service we provide to our clients; researching and recommending alternative paths to maintain profitability.   As an outside voice, however, we can only do so much.   Company management is obviously behind the wheel and must steer the business in the correct direction.   That the company ends up not on the road to success, but, instead, stuck in a ditch by the side of that road, is mainly due to an imbalance between strategy and execution as well as ineptness.

 

THREAT TO GROWTH #1:  STRONG STRATEGY, WEAK EXECUTION

 

There’s a popular expression to describe a company that focuses on strategic management without giving proper weight to thinking through the operational execution of that strategy – “Big Hat, No Cattle” (it’s even the title of a Randy Newman song).  The term refers to someone who acts as if they’re the biggest thing going, even though they actually have very little going for them.

 

Acquisitions can be a major culprit in this arena.   When a company is cash-rich, it becomes like an overeager bidder at an auction, spending foolishly and not really thinking about whether he can use what he’s buying.  The business will say that buying another company will provide incredible synergy, as well as adding marketing and operational firepower – and then, after they make this heavily-hyped purchase, they’ll end up with a disaster on their hands.

 

Announcing a constant stream of new products, new markets and new acquisitions may look good in press releases in which the CEO can brag about all of his or her wonderful plans – or in wonderful, colorful charts and PowerPoint presentations to analysts and investors.  But, in reality, none of these over-ambitious projects ever gets the follow-through attention it needs to succeed.  In the meantime, the company’s resources are spread too thin while attempting to do too many things at once, taking away vital focus on the core business. 

 

Harvard Business School Professor Michael Porter once studied the acquisition history over three decades of thirty-three high-level companies that all resided in the top half of the Fortune 500.   The results of that study weren’t encouraging to those that like to embark on buying binges.  Companies who made acquisitions whose businesses were related to the buyers’ ended up divesting 50 to 60% of those acquisitions because the fit didn’t work.   That’s over half. 

 

Even when you think you’ve done your homework on the company you’re after and the acquisition should be a no-brainer, you can still get burnt.   An anonymous case study from my company discusses one of our client’s strategic decisions to buy another company.   On paper, it looked like an incredibly good fit and the acquisition, at the time, was doing quite well; so well, in fact, that the buyer decided to let the company continue to operate as autonomously as possible.  The thinking was, why mess with success?

 

Well, in this case, some serious messing should have been done.  The newly acquired company ended up losing 40% of their sales; they knew the dip was coming; they artificially boosted their sales through discounts and other short-term devices, and made themselves look a lot better on paper than they actually were - so they would be a prime takeover target.     

 

(As a side note, it’s never a good idea to let a new acquisition continue to operate as it did before the takeover.  The acquiring company should put their stamp on it right away and put their own processes into place.   Even if it’s just a holding company making the buy, they should still bring in a high-end system to drive efficiency and assure profitability.)  

 

THREAT TO GROWTH #2:   STRONG EXECUTION, WEAK STRATEGY

 

A company with a strong execution, weak strategy style knows how to execute, change direction and make things happen.  Unfortunately, it may change direction as often as somebody might change their socks - and it also may make so many different things happen at once that it can’t keep track of any of them.

 

When a bottle rocket goes off, it can make an impressive display.  Unfortunately, it shoots every which way without any lasting impact.  A business that has poor strategic management but excellent operational execution is much like that bottle rocket – it looks great to the untrained eye, but it’s razzle-dazzle is soon spent and all that’s left is smoke slowly dissipating in the air.

 

Think about the cost of everything you buy today versus twenty-five years ago.  You’d probably say everything is a lot more expensive today than it was in 1987.  That’s not true of many manufactured goods, especially apparel.  The cost of a dress shirt, for example, has declined dramatically in inflation-adjusted terms over the last few decades – because of the low cost of making them overseas.   American designers are still making their margins, but the US manufacturing side of the business is virtually dead and buried for all but a few specialty brands.

 

So why would a company continue to focus on manufacturing when the writing has been on the wall for quite some time?   Why would they spend time on a strategy that just leads to a dead end?

 

Simple.  They are unwilling to leave their comfort zone.  Doing what they’ve always done is convenient.  It’s what they know how to do and, up until now, it’s what’s worked for them.   Frankly, they don’t know how to do things any differently - and that’s not a crime.  What is a crime is not putting resources into rethinking the company’s vision and creating products that will continue to be economically viable.

 

Imagine a comedian who keeps doing the same tired jokes long after they stopped being funny.  He’s still trying to get away with, “Take my wife – please.”  He gets less and less laughs, less and less people come to his shows and, finally, it hits him in the wallet;  he gets fewer and fewer bookings.   The kicker is he doesn’t look at himself and what he’s doing to create these increasingly difficult career circumstances.  Instead, he blames the audiences for not “getting” him.  For not having a sense of humor.  For not appreciating his “talent.”

 

After a while, it should become glaringly obvious that he can’t blame the people he’s supposed to be entertaining for not being entertained by him.  When you’re no longer delivering something people want, it’s not their fault, it’s yours.  Obviously, the solution  for this particular performer is to freshen up his act.  

 

And that’s exactly the same process that would have saved the all-too-real example of  the manufacturing company we looked at earlier.  By “freshening up” their approach, and researching what products they could produce with their enormous resources that would still be competitive,  the company could take their proven ability to execute and combine it with a strategy that would ensure long-term survival.

 

The real fatal flaw of Weak Strategy/Strong Execution is when a company is intent on taking as much action as possible without any real coherent vision behind it.   A company is only capable of carrying through one or, at the most, two big mandates at a time.   If management is trying to introduce a completely new product line and launching a major safety effort in its operation and pursuing an aggressive acquisition drive and  taking the company public….well, something’s going to give. 

 

This can even happen at the plant level.  If bonuses are dependent on productivity, and you’ve set up a major safety initiative that ends up slowing down workers, you’ve pitted two major forces against each other.   You can’t expect two mandates to succeed if they can’t happily co-exist.   

 

THREAT TO GROWTH #3:  INEPTNESS

 

Okay, this final threat has nothing to do at all with any matrixes or quadrants.  And it has everything to do with, forgive my bluntness, just being plain stupid.   There’s not a lot of excuse for what happens in this arena. 

 

Here’s another anonymous case study:  we did work for a company that actually thought it was a good idea for everyone to take a fifteen minute smoke break.  Nothing wrong with that.  Except the policy was to take that fifteen minute break every single hour. 

 

That’s 25% of each and every work day, willfully evaporated by management.  Words almost failed me when I heard about this, but then, finally, a few managed to work their way to the front of my brain – words like, “crazy,” “ludicrous” and “suicidal.” 

 

Other forms of ineptness are more easily-understood; for example, when a company misreads what they should be selling and to whom.  This is a wrong turn that happens on a regular basis.  A lot of the info about the marketplace comes from the sales force – but, as we just discussed in the last section of this chapter, that sales force can be incredibly biased towards their own self-interest, which doesn’t necessarily match up with the company’s best interests.  

 

Even the dynamics of a management meeting can alter the perception of the market in a negative way.  Whoever argues the loudest or most eloquently can easily dominate an important discussion and cause the wrong decision to be made.  Or someone may have just read an article in The Wall Street Journal that motivates a sudden inexplicable push for a major company policy revision, even though the current policy may be what serves the company the best. 

 

And frankly that kind of anecdotal evidence – a newspaper article, a TV report or even a stray remark by a business associate – is frequently the basis for really wrong-headed decisions.  In these cases, company management doesn’t take the time to do the necessary research to make an informed decision.  In one case I remember, our client’s management suddenly ordered their plant manager to reconfigure everything in order to make a new product.   That came about because the CEO happened to be walking through the production facility of another firm that used them as a supplier and overheard someone say they needed this particular product.  Based on that random remark, and on nothing else, my client was suddenly going to a lot of time and expense to supply this product. 

 

The other side of that same coin is that you can receive good data and completely misread it.  The challenge is always separating true change from random noise. A company might interpret a short-term growth in sales and see it as a trend – when, in reality, it’s a blip.  Another company might manufacture products meant for elderly consumers, see that the number of elderly people is growing rapidly and assume they have made a wise decision – when, in reality, they haven’t done their homework and a new advance in technology is about to make their products obsolete.    

There is never just one question to be answered – there are dozens.  When an outside research firm is retained, their mandate must be to look at their challenges from every perspective.  Good news should be challenged, bad news should be analyzed for the upside and future projections should be bounded by all appropriate considerations. 

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