When Growth is Not Good

4256 reads

Is revenue growth a sure blessing? Unfortunately, no. Growth and risk go hand in hand and can cause a firm considerable harm unless effectively managed. 

Wooing new customers, entering new markets, launching new products, or diversifying in unrelated areas entails risk. It arises from complexity - new forces and variables. Different growth strategies have varying levels of risk. 

Diversification: The highest risk 
Market penetration has relatively low risk because the firm is attempting to sell an existing product to a known customer segment. Nonetheless there is a finite risk. Launching a new product for an existing market, or entering a new market with an existing product poses higher risk. 

These strategies deal with one unknown: how customers will respond to a new offering, or how buyers in the new segment will react to a product the firm sells elsewhere. Diversification entails the highest risk because both the product and the customer-market are new. 

Managers, however, routinely ignore these risks. There are two main reasons for it. 

1. Overconfidence Bias 

We naturally overestimate - individually as well as collectively - our ability to succeed. We underestimate risks and consequences of failure. Leaders, also susceptible to bias, rarely ask for rigorous assessment of risks and cost of failure. 

2. The Myth of Topline Growth 
The second reason is the belief that top line growth will necessarily improve profits. People assume fixed costs will remain unchanged and higher volumes will directly improve bottom line. 

This is often fallacious. When revenue growth is attempted by tactical means - price cuts, promotions, deals with large buyers, a bigger sales force, or larger advertising and marketing expenditure - competition follows suit and the initiative is quickly neutralised. Costs rise even as the promise of growth remains unfulfilled. 

The Case of Nike 

Nike doesn’t make these mistakes. By 2011 they had grown their profit to $ 2.84 billion (on net sales $ 21 billion), from $ 164 million in 1987.

They follow a simple formula. They enter a sport with shoes and sign up a leading athlete as brand ambassador. Once shoes have established leadership, they launch apparel for that sport. 

Later they introduce hardware such as basketball, football, or golf clubs. By following a disciplined approach to growth they reduce complexity to a variable of one at a time.

Competitive Advantage = Growth 

There is no question that growth is vital but it is not for reasons managers like to believe. Firms should pursue faster growth because leadership strengthens customer preference, increases bargaining leverage, and improves profits. 

If a Company were to eschew growth, over time it would result in competitive weakness and poor financial performance. 

Growth is a strategic imperative. It is a consequence of competitive advantage that stems from superior value delivery to existing or new customers. It fuels growth because customers prefer to do business with the firm. 

Growth that flows from sustained

competitive advantage generates above average economic surplus. 

Offer Compelling Value 

While chasing growth, therefore, managers must remember to offer customers compelling value. Or growth will remain a chimera and hurt those who chase it. 

V.N. Bhattacharya

Business & Corporate Strategy 


cryptocurrency's picture

YouToken Disrupts FinTech and Crowdfunding at 2018 Global Blockchain Forum

YouToken (YTN) presented their innovative blockchain-based crowdfunding platform to over 1,400 attendees at the 2018 Global Blockchain Forum in Santa Clara, California.Dozens of promising startups attended the event with YouToken leading the way in
Ron Kaufman's picture

The Six Disruptors of Customer Experience

UP! Your Service is a global education and consulting company. We help leaders and companies all over the world achieve two primary outcomes: First, improve your customer’s experience – to help you attract customers, keep customers, generate
businessstandard's picture

Programmatic is transparent, but post-delivery: Vertoz CEO Ashish Shah

 Start-ups take faster to programmatic than regular consumer product firms, Ashish Shah tells Vanita Kohli-KhandekarIs programmatic useful from a brand building perspective?If you have to buy space in Business Standard or Times of India for 30
davecrenshaw's picture

Why “ASAP” isn’t clear communication—and what to use instead

Recently, I found myself saying the very word I’ve cautioned others against using many times. Here’s what happened. I noticed something was wrong on my website, so I reached out to my project manager, John. John’s a reliable guy and I knew he could
vsquare's picture

10 Steps for Business to be successful | Startup Success Formula | Dr Vivek Bindra

From: youtube.com By Dr. Vivek Bindra: Motivational SpeakerRecommended by: vsquare10 steps tor creating a successful business. You can use these steps to be successful. In this video, Dr Vivek Bindra outlines 10 revolutionary steps for business
jackcanfield's picture

Activating the Power of the Subconscious Mind

The untapped power of the subconscious mind can lead you to new success in your personal life and business life. Discovering how to turn your thoughts into positive and implementing the law of attraction into your daily life can take you to new
pradyumnanag's picture

How is it cheaper for Google to buy Groupon than internally build something like it?

 May be covered in some answers already by some fantastic answers.Just elucidating instead of replying on each of the posts. Though I may have my own personal reservations on the business model per se, they have been able to achieve something
changethis's picture

Willpower Is an Outdated Model of Success: Here’s the Future of Self-improvement

“It’s no wonder willpower has been placed under the media spotlight as essential to success. In a negative environment, willpower’s all we have left. It’s the life-raft, the backup parachute. And we’re depending on it to save our skins. It takes a
harvardbusinessreview's picture

How to Use Employee Referrals Without Giving Up Workplace Diversity

Incentivize employees to refer more women and people of color.