CHAPTER FIFTEEN
Good Growth and Bad Growth
ALMOST EVERY BUSINESS DESIRES to grow. And most proclaim that they will grow. But only a handful have a growth policy, let alone a growth strategy. And even fewer know whether they are really growing or whether they are merely getting obese.
Growth does not, however, happen because business desires it. By itself, there is no virtue in business growth. A company is not necessarily better because it is bigger, any more than the elephant is better because it is bigger than the honeybee. A business has to be the right size for its market, its economy, and its technology; and the right size is whatever produces the optimal yield from productive resources.
But business is always the wrong size, no matter how small or how big it is, if it is marginal in its market. That the market leader enjoys disproportionate profitability—as the now popular theory of the Boston Consulting Group asserts—does not hold true for every industry and every market. Book publishing, for instance, is a clear exception.
But the marginal business, no matter how large, suffers disproportionate lack of profitability, and—even more dangerous—tends to fall behind further and further with every turn of the business cycle. No business can afford to slide for lack of adequate growth into the marginal position into which Chrysler deteriorated in the world’s automobile markets.
The first question to ask in a growth policy is, therefore, not “How much growth do we want?” It is “How much growth do we need so as not to become marginal as our market grows?” The answer is by no means easy, and it is always controversial. It depends on how a management defines its company’s market. It also depends on industry structure. An adequate, if not a leadership, position in one industry is marginal in another. And market definition and industry structure have a habit of changing, often quite fast and drastically, as the size of the market or the appropriate technologies change.
Still, unless a business knows its minimum growth goal, it has no growth policy. And in all probability, until it knows its minimum growth goal it will not have much real growth either.
But a business then needs to think through its growth strategy. The first step in a growth strategy is not to decide where and how to grow. It is to decide what to abandon. In order to grow, a business must have a systematic policy to get rid of the outgrown, the obsolete, the unproductive. The foundation of a growth strategy is the freeing of resources for new opportunities. This requires withdrawing resources from the areas, products, services, markets, and technologies where results can no longer be obtained or where the returns on efforts are rapidly diminishing. A growth strategy begins with asking every two or three years, “If we did not already produce this product line or did not already serve this market, would we now, knowing what we know now, go into it?”
If the answer is “no,” one does not say, “Let’s make another study.” One says, “How can we get out or at least stop throwing additional resources in?”
Growth comes from exploiting opportunity. One cannot exploit opportunity if productive resources, and especially the scarce resource of performing people, are committed to keeping yesterday alive a little longer, to defending the obsolete, and to making alibis for the unproductive and the things that should have worked but did not. Strategic planning of the most successful companies—an IBM, a Xerox, a GE, for instance—starts with the assumption that the most successful products of today are the ones which are likely to obsolete the fastest tomorrow—and it is a realistic assumption.
A growth strategy further requires concentration. The greatest mistake in a growth strategy, and the most common one, is to try to grow in too many areas. A growth strategy has to center on the targets of opportunity—that is, the areas in which a specific company’s strength are most likely to produce extraordinary results. First, a look should be taken at markets, population, economy, society, and technology—to identify the most probable changes and their direction. In fact, one best starts out by asking, “What changes have already occurred that are most likely to have long-range impact?”
Changes in demographics are, of course, always the most reliable index, for the lead times of population changes are both thoroughly known and inexorable. Nearly everyone in the American labor force of the year 2000, whether American-born or born elsewhere, is alive by now, for instance. Changes in knowledge, perception, and the application of new science or insight also have fairly well-known and predictable lead times.
More important perhaps than the ability to anticipate changes is the realization that change creates opportunity and that businessmen are being paid to convert social, economic, and technological change into profitable business opportunities. The last step in formulating a growth strategy is to think through what the specific strengths of our business are, the specific contributions customers pay our business for, the specific things we do well—and then focus them on the anticipated changes to identify a company’s priority opportunities. It is only too common for a business to define “opportunity” as something that happens on the outside. Opportunities are what a specific business makes happen—and this means fitting a company’s specific excellence to the changes in marketplace, population, economy, society, technology, and values.
Finally, a growth policy needs to be able to distinguish between healthy growth, fat, and cancer—all three are “growth,” but surely all three are not equally desirable. The ability to distinguish between healthy growth and deleterious, if not degenerative, growth is particularly important in an inflationary time such as ours. Inflation distorts. And it distorts, above all, the meaning of volume figures and of growth statistics. A lot of growth in an inflationary period is pure fat. But some of it is also precancerous.
Volume by itself, in other words, is no indication of growth. It first needs to be adjusted for inflation. And then it needs to be analyzed as to its quality. Growth that is pure volume is not “growth” at all—it is simply so much delusion. Larger volume is healthy only if it produces higher overall productivity of all productive resources combined—capital, key physical resources, time, and people. And if growth brings about greater overall productivity, if in other words it is healthy growth, it is the duty of management to support it.
If growth does not improve the productivity of resources overall, but also does not downgrade it, it is fat. It then needs to be watched carefully. It often is necessary to support volume that does not lead to increased productivity for a short time. But if, after two or three years, additional volume is just volume without improved productivity, it should be considered fat. It should be sloughed off, lest it become a burden on the system. And growth that results in a decrease in the total productivity of a company’s resources, except for the shortest of start-up periods, should be considered as precancerous and treated through radical surgery.
In the late sixties at the height of the go-go frenzy, any business was expected to grow forever. This was inane; nothing can grow forever. Then, in the early seventies, zero growth became fashionable. Of course, there is a very real possibility of a worldwide depression resulting from more than fifteen years of worldwide inflation.
Actually the years of the zero growth trend of the seventies were years of very real and fast growth. But the growth in these years was largely in new areas, both in respect to technology and products, and in respect to geography. It was not, as a whole, a continuation of the growth of the twenty-five years since 1948, that is, after the Marshall Plan had ushered in the world’s longest and largest economic growth period.
It is, in other words, irrational not to plan for growth. But to plan, as do so many of our businesses, on continuation of the growth of the post-World War II period may be even more irrational still. Today every business needs a growth goal, a growth strategy, and ways to distinguish healthy growth from fat and cancer.
(1979)