Why grow?

Why grow?

Growth is a component of a business’s strategy. So of course there are questions about which strategic growth avenue should we pursue. In this article I’m gonna focus primarily on growth through scaling existing business activities. But before we get to that I think it’s useful to take a step back and ask a more fundamental question. Why grow? Why should a business grow?

This is a question I often ask my clients. And I think their initial response often times is to be a little bit naïve. Like why is he asking such a silly question? Isn’t the answer obvious? Businesses must grow. We read the Wall Street Journal and the Financial Times and they tell us, you should grow. And so it’s as if it’s some sort of law of nature, right? But then they realize that I’m serious and I want them to articulate their best answer to this question. And so I want you to do that as well. I want to articulate your best answer to the question of why should a business grow? Is it important for a business to grow and why? So you might come up with an initial answer that’s the same one that my clients often first think of which is there’s pressure to grow.

The market is going to punish you if you don’t grow, right. So look in a global inter-connected marketplace there is absolutely pressure to grow. Take for instance a publicly traded company. I mean they are under constant pressure from the media, from market analysts, that want to be able to understand and predict particular businesses growth trajectory into the future and there’s a lot of analysis on whether they met those expectations or not. So look, that pressure is there, but it’s easy to forget that that pressure to grow is essentially the pressure of third parties analyzing a potential menu of different investments that they might participate in. Right? They’re trying to guess whether your business is the right horse to bet on in their race. So while that pressure is real, it’s not really a strategic reason for you to grow. That that pressure is there, and I’m not suggesting that it’s wise to ignore that pressure. I’m not sure you can ignore it completely. But what I want us to think about, in the context of understanding strategic growth, is you know, why grow? Pressure is not really a sufficiently strategic answer to that question.

So, what’s a better answer? You might say that we want to grow because that’s going to make us more profitable. Let’s talk about that one for a second. Is it obvious? Is it a law of nature so to speak, that firms that are bigger are always more profitable. Of course not. The market is filled with lots of large firms who might not be profitable. They might even go in and out of bankruptcy. They might have all sorts of problems, and being large hasn’t been an obvious solution to those problems. Right? So it’s not clear that growing, becoming larger will necessarily will automatically lead to more profitability. So I think we have to keep digging. Are we sure? How is it that growth will lead to more profitability? Maybe that’s the next question is, is how will we produce profits through growth? So you might have come up with a slightly more sophisticated answer to the question that involves, hey we’re gonna try to achieve some economies of scale or some sort of efficiencies that come with a larger scope. And that will enable us to be more profitable. Now, is that possible? Yes, it is, of course it’s possible. It’s absolutely possible to achieve some scale economy and that might make your margins better, and this is based on economic theory and last time I checked I think the theory is pretty sound. And so how it would go is that, let’s say, you’re a manufacturing business, and maybe you have a little excess capacity in your manufacturing plant. If you can sell a few more units, and therefore manufacture a few more units, your fixed costs might remain largely the same. And you get to spread those over more units. And that’s what we mean by things like economies of scale. On the other hand, maybe through growth we might be able to eliminate some redundancies, and general, and administrative tasks, and that sort of thing. And maybe that’s how we think we might achieve some more efficiency, right? So this is absolutely possible. It’s based on economic theory. This is entirely consistent with your experience, right? That as businesses become larger they become more efficient. Right? Hm, so maybe this is a little trickier than it seems as well. So again, it’s possible to achieve more profitability through economies of scale or efficiencies. But it is certainly not automatic. And if your experience is like mine, you might have the feeling that, well, quite often as businesses become larger they may in fact become less efficient. Right? It might be more difficult for them to operate in an efficient manner. So while it’s theoretically possible to achieve this, it’s difficult. And we better be clear on how that’s going to be achieved. So, so far we haven’t come up with a very satisfactory answer to the question yet, have we? Maybe you came up with another answer altogether, that doesn’t involve scale efficiencies and what not.

Maybe it involves market share. Maybe your idea is that we want to grow our market share, and that that might be sort of an avenue towards greater profitability down the road. And again, it’s entirely possible. But it’s important to remember that, again, based on the theory, think about your supply and demand curves. Often times things like market share or units sold, that’s something that often times is in direct contrast with per unit margin. So in other words let’s take the example of Coca-Cola let’s say. If you’re Coca-Cola, the easiest way to achieve greater market share might be to just lower the price of your cans of soda, so if we cut the price in half, and we’re Coke, are we going to sell more cans of soda? Of course we are. But what’s going to happen to our margins? The margins on each of those cans of soda are gonna go down. They might disappear completely depending on how we priced it, right? So, even things like market share and profits are often times, in the long run, be complimentary and maybe there are strategic reasons to get less profits now to grow one’s market share because we think that will equate to more profit potential in the future, but again all of these reasons to grow, I’m going to suggest, are sort of insufficiently strategic.

I think often when a business attempts to grow, it has this vague sense that growth is going to lead to a better situation. It’s going to make it more profitable. But having this vague sense that growth will lead to profits isn’t enough. So what am I doing here? I’m kind playing devil’s advocate, and I’m just trying to push you to think about some of these common answers to the question of why grow, because I want you to understand that while achieving greater profitability through growth is certainly possible, it’s not automatic. Getting bigger does not automatically result in greater profitability as if by magic or some law of nature, right? So that’s the first point here. It’s more difficult to achieve profitability through growth than it appears, right? And therefore, I think, there’s a second point here. And the second point is if none of these answers are sufficiently satisfactory or sufficiently strategic what does constitute a good answer from a strategy standpoint on the question of why grow? I think that you better understand, whatever your answer is, it better have something to do with how that growth is going to enable you to create more value. And it’s not enough to just say it. You need to be clear on how that value is going to get created. So for example, if you’re convinced that growth is going to help you achieve greater economies of scale or efficiencies for example, could that lead to more profits? Of course it could. But are you clear about how you’re going to actually achieve those efficiencies. Do you have a plan for how, as you grow you’re going to become more efficient, not less? It’s possible to achieve it, but it’s harder than it appears. So again, achieving good outcomes through growth is much more difficult than I think we give it credit for a lot of times. And you need to have some sort of a strategic answer to the question of why grow. And it better involve how that growth is going to help you create more value for someone, for customers you aren’t currently serving or for employees who are then going to produce in a more efficient manner for you or something. So, let’s take a step back and think carefully about the reasons to grow. Can you come up with some other reasons?

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