When Growth is Not Good

4357 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 


adamgrant's picture

Most Personality Quizzes Are Junk Science. I Found One That Isn’t.

Most Personality Quizzes Are Junk Science. I Found One That Isn't."The MBTI is astrology for nerds." Say it with me again: personality types are a myth, traits are on a continuum, and the major dimensions include extravert-introvert, agreeable-
changethis's picture

What If Sellers Behaved as Leaders?

“It is time we start making a shift. Research shows you can make more sales by abandoning sales-y behaviors buyers resist and replacing them with leadership behaviors buyers desire. Sellers do extraordinary things when they stop pushing people to
adamgrant's picture

Is Curiosity As Good at Predicting Children’s Reading, Math Success as Self-Control? Study Says Yes

The joy of discovery matters as much as self-control, and matters even more for low-income children. We need to encourage kids to ask novel questions, not just give familiar answers.Ever since the landmark "marshmallow test" highlighted the
danielhpink's picture

PINKCAST: This is when to quit your job

Should you stay or should you go? After a few years at the same job, many of us begin asking that question.In the latest Pinkcast, former Wall Street analyst and venture capitalist Whitney Johnson offers the answer. You can watch the 136-second
changethis's picture

The Speed Trap: When Taking Your Time (Really) Matters

“Speed-for-speed’s-sake is about the most counterproductive* approach imaginable. (*I use counterproductive because it’s impolite to use “stupid”—which is what I really believe.)While we must indeed evolve and experiment rapidly, the process of
adamgrant's picture

How to Pick a Career (That Actually Fits You)

This is a post about something I’ve been wanting to write about forever: careers. Society tells us a lot of things about what we should want in a career and what the possibilities are—which is weird because I’m pretty sure society knows very little
danielhpink's picture

WHAT TO LISTEN TO: Some audiobooks are more equal than others

“Mr. Jones, of the Manor Farm, had locked the hen-houses for the night, but was too drunk to remember to shut the popholes.”So begins Animal Farm, George Orwell’s classic novella. I’ve read Animal Farm many times. But now, for the first time, I’m
changethis's picture

Beyond Business Results: Achieving Sustainable Success

“For most of my career, I focused on my next professional opportunity rather than on my present situation. I was committed to serving patients and to helping my company meet its goals; I was always looking down the line to what was coming next. What
danielhpink's picture

WHAT TO WATCH: The Happiest Guy in the World

Two decades ago, Mario Salcedo retired from his job and went on a cruise. He never came back. Mario wasn’t lost at sea. For more than 20 years, he's been a permanent resident on Royal Caribbean Cruises. You read that right. “Super Mario” has