Rethinking Growth at All Costs

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Welcome to the hbr ideacast from harvard business review, I'm alison beard. How do you measure success at your company? I bet that a lot of you, if not all of you, will say growth. Whether you're an entrepreneur, store manager, team leader, business unit head, or CEO, the goal is to increase revenues by as much and as quickly as the market will allow. But is that realistic? Is it sustainable? Our guest today has studied the performance of nearly 11,000 public US companies over two and a half decades and found that for most businesses, the answer is no. 3/4 of firms showed little to no growth after adjusting for inflation, and even those in the top quartile of growth in a certain year weren't able to keep that performance up for more than a few. So what is the key to steady, sustained growth? Gary Bazzano is a professor at Harvard Business School who's done deep dives into the strategies of organizations that both succeed and fail at at this he says that leaders need to be much more thoughtful about the way they set growth targets, focusing on not just market demand, but also their capacity to meet it and how they map out plans for achieving them. Gary wrote the HBR article How fast should you'd company really grow? Hi Gary.

Hi Alison. Thank you. Great to be here.

So let's start with the problem. Has this obsession with rapid growth always been a feature of investor led capitalism or has it become more pronounced in recent years or decades?

I think it's always been an obsession of companies, at least as long as, you know, throughout my professional life, which is now, you know, close to somewhere between 36 and 40 years, depending on how you measure it. I mean, companies I've been coming across throughout my career, a steady stream of them, you know, report wanting to grow and growth as a goal and almost as a kind of natural thing to be trying to grow as fast as they can. And whenever I speak to CEOs, what's always top of their mind, it's growth. Particularly publicly held companies are thinking a lot about growth. That's what their investors are demanding. And I think that is just kind of part of what these companies and managers have come to learn as normal grow as fast as you can.

And if the data show that most companies grow modestly or stay flat, but they're still operating, they're still employing people, they're still serving customers, they're still contributing, contributing tax revenues. Should we be fundamentally rethinking growth as a goal?

Look, there's nothing wrong with growth as a goal. I'm very interested in profitable growth. So if you can grow profitably, you're going to make your shareholders happy, you're going to create more opportunities for employees, you're going to be able to pay better wages, you're going to have a bigger tax base. What I want folks to take away from the article is growth is a strategic goal. You have to think about how fast to grow, how fast you can grow, and you want to maximize what you can do within the constraints. And if you try to get past that, you will actually make things worse. It's learning how to do it appropriately so you can sustain the profitability of it over time and not just be a flash in the pan. Yeah, you don't want growth to kill the company. So I've seen too many organizations where growth in and of itself is what damages the very things that made the company special and actually contributed to its initial growth. I guess it's the classic story of Killig, the goose that lays the golden eggs.

You talk about that segment, that quartile of companies that did grow nicely for a time. You know, I, I think it was something like between 11 and 12% on average, but they aren't able to sustain it. Obviously each company is different, but is that a function of shifting market dynamics or do you see some clear common mistakes that they're all making?

I mean, I do think there's common challenges and there's common traps that organizations fall into. I do think as you kind of go back to that data, I mean, I've done the analysis with the most up to date data and I've done previous studies with other authors that are a little bit older data, but very long timeframes, you know, 40, 50 year periods. And many other scholars have done work just trying to characterize the patterns of growth. And the data is pretty consistent across all these studies. And some of these have been done by the way, not just in the U.S. you know, European firms, Asian firms, even some studies in Africa. It's pretty robust set of findings that very few companies grow at all. I mean, so everyone's excited about growth. And it turns out that's like really, really hard that if you look at the data, most companies don't grow or don't grow very fast. And if you look at the top quartile, they have reasonable growth rates pretty good. It's like double digits. Once you go to the next three quartiles down, it's basically close to zero. And the bottom quartile's in a slight negative. So organizations, as they set growth goals, have to face some of the reality that very few companies grow very fast. And then of those that do grow fast, very few sustain it for very long. And I think there are mistakes organizations make. One is to think that you can outgrow your resources in the short term and catch up. So a lot of times when organizations have opportunities today to capture a market or they have opportunities to hire people, they may outstrip certain resources, that they have certain capabilities. And there's often a view inside companies, well, that's okay, we'll catch up. It's okay if we're short of people today, customers are arriving, we'll figure out how to make it work. Or yeah, I know our supplier base isn't strong enough and it's really straining our supply chain. But you know what, we're just going to work at it and we'll catch up. We'll delay deliveries for now, but next year it'll be better. And that is often not the case. So, you know, you can borrow money if you're short on cash. If you've got reasonable financial prospects and, you know, a good balance sheet, you can borrow cash. A lot of other resources, you can't really borrow. If you're short on them, there's no way to make them up. And when you're short on them, they can cause damage. You know, if you're short staffed, you can damage your reputation for, say, service. Or sometimes what we see happen is, you know, they just throw tons of money and resources at trying to grow, spend a ton of money, build out factories. It's almost brute force. And that can leave them with really badly designed supply chains, badly designed processes or no process. You know, they're kind of holding everything together with duct tape, really bad cost structure, and then they can't compete at that level. And you know, their finances don't work right, and you know that's a mistake. So they get very excited about the prospect of growth, but they don't think about, or maybe they underestimate the difficulty of building up the organization to do it. And that's why I talk about in the article, growth is about both the demand side, what's the market, and the supply side, what are we capable of doing? And if you break that supply side, you may not be able to recover very quickly.

So it sounds like you're describing, you know, one side of the Problem is being under resourced for skyrocketing demand. And another problem is expecting sky high demand and sort of acquiring too many resources and not being able to deploy them effectively.

Yeah, I mean, it's this idea that if demand is growing today, it's going to keep growing. I mean, we saw that during the pandemic, right. There were certain markets where demand was skyrocketing. And yet that's a pretty special set of circumstances. Part of the thinking can be, well, let's make hay while the sun shines. It's an opportunity, it's maybe a once in a lifetime opportunity to build an installed base. So strategically it kind of makes sense. But at another level, if you and it was well publicized, that peloton had a lot of difficulties because their supply chain just wasn't capable of meeting that demand. And then they threw a lot of resources at it to do it. They built up a lot of capacity. And of course that stuff all takes time. So by the time you get there, then the market is cooling back off. And it's not that the market goes away, but suddenly you've built a cost structure for a much, much bigger company.

Besides existing and potential market demand, what are the other specific factors regarding capacity that leaders need to consider when they're setting their growth rate targets at a more realistic way?

Yeah, it is literally, it's almost working backward to think about the organization, think about the resources and think about the bottlenecks to growth. Identify what are the bottleneck resources. And a competent CFO will make sure that cash is not a bottleneck, that you don't run out of cash. They'll make sure you don't overspend and wind up bankrupt. But you have to apply that same logic to every other resource in the company. So if you think about is it people, is it frontline workforce, is it managers, is it mid level managers, is it senior managers, is it a certain kind of supplier, really almost systematically go through and ask yourself what are the resources here that are constraining our growth and what is the growth rate that we can have based on what that resource is capable of providing and then set your growth based on that. Now that doesn't mean you can't over the long term grow faster. But then it's a strategically, that's the resource you attack to increase its productivity or find more of it. So there's a company I talk about in the article, Pals, it's a fast food chain and they had a really interesting approach to growth. They have a very special operating system. They're a small fast food chain that does very well. And that's a business, by the way, where it's hard to do well when you're small because it's a very scale intensive business. At some level they have no right to be doing well and yet they do very, very well financially. They built the model around speed, but more importantly, they've built a very unusual model around quality so that they can serve customers really fast, mistake free. And that actually contributes to a better cost structure. But the core of it is they have fostered a very, very unusual culture that allows them to really get something fairly close to zero defects. That culture really depends on the store managers. They have these owner operators and their belief is it takes a few years to become an owner operator. And an owner operator is a really special person. And they invest a lot of time in hiring them, recruiting them and developing them. It's like three to five years of development before you get your own store. But the way they decide when to add a new store is when they have kind of a graduate of their internal development program and say, okay, here's somebody, they're ready for a store, let's go open a store. Most companies do it the other way around. They say, how many stores do we want to create? We want to create five stores next year or 10 stores, whatever the number is. And then they say, okay, let's go find people to run them.

Right.

And PALS just turns the logic on its head. And that's a good example of driving growth off your bottleneck. So it can seem slower, but it can be much more sustainable and profitable. And you can over time, you know, if you expand your capability to develop that resource, in this case the store managers, then you could grow faster if you wanted to.

It's interesting because culture is sort of what enables them to grow, but it's also this constraint. So they have to think very carefully about that trade off.

Culture is a huge part of what breaks when companies grow quickly. That is probably one of the single most fragile parts of organizations as they grow. Because every time you add people, you're bringing in new cultural DNA. And organizations will talk about, well, we have to keep the culture, but they often don't recognize what's needed to do it and what parts of the culture have to change and not change to sustain the growth.

Yeah, and interestingly, Pals was your positive example. And then your sort of cautionary tale came from the same industry. Another fast casual restaurant Jane called Be Good, that I'm very familiar with because it's, you know, founded in Boston actually by a friend of mine before it was taken over by private equity and became a cautionary tale. So talk a little bit about the contrast between those two. Where did Be Good go wrong in contrast to how Pals did it? Right.

And I will say I love Be Good and I love the company. But the cautionary tale was early on, I think their model was really nicely aligned. They were trying to do something different in the quickserv business. The idea of, you know, healthier food, you know, local ingredients cooked in a more normal or non industrial way.

And this was pre Chipotle, you know, pre sweet green.

Yeah, they were an early mover in it. Their founders had a terrific vision. And they also said, we think this requires a different culture. We're gonna be a more family oriented culture. We're gonna hire locally. Like you've walked into a local place that not a fast food chain, but a place where, hey, they know your name. And I think their founders recognized early on that that was a real constraint. So typically the way chains like that grow quickly is by franchising. But I think they recognized there were a few constraints. One is franchising does make it harder to control the culture. The second thing was just supply chain. You had to keep this pretty localized around leveraging local supply chains. That was part of the promise to customers that it was going to be local so it would constrain your geographic growth. But early on they had all their stores in the Boston area, the vast majority in the Boston area. Then they decided, and the case on them has a quote from one of the founders about someday we want to be as big as McDonald's and they start this fairly rapid growth. They start opening new stores, they start franchising more. And you just get this lack of congruence between the elements of what they needed to sustain themselves. It's just harder to maintain the culture. It's harder to deal with the supply chain issues. They could have grown more quickly, but they would have them change their model. So it's like it's okay to grow faster, but then recognize you may need to change your model to make it more scalable.

So in the article, you give labels to these things that we're talking about. You talk about the rate of growth, but then also the direction of growth and the method of growth. Talk a little bit more about what you mean in terms of how companies need to think about these three elements of growth.

And in concert, my argument is that really companies need growth strategies and a Growth strategy is composed of three interrelated sets of choices. One is how fast should we grow? The second is direction, which is in which direction? And by that I mean what markets do we go after? Are we going to get broader? Are we going to expand geographically? Are we going to diversify to new markets? Are we going to try to penetrate a particular market? The third element is method of growth, which is how do we attain the resources to grow? So do we, you know, do we franchise? Are these company stores? If you're a different kind of business where you don't have franchising, do you use vertical integration? Are you partnering? Do you do acquisition? A classic method choice is organic growth versus growth by acquisition. And what I try to point out is like any strategy, there's no one right answer. There's no one magical growth formula of rate, direction and method that everyone should use. But there are trade offs between them and you have to understand those trade offs. So you may make some choices on rate that are going to have implications for direction and method. Really what I hope folks take away from the article is if you're running a company, hey, we need a growth strategy. And that growth strategy is three things. Rate, direction, and method. We need to evaluate our growth strategy based on that and then we need to think about those choices and the implications of the choices we're making there. Do they fit together and are they consistent with our, with our goals?

So what are some practical ways that team, division and company leaders can better recognize their limitations without being too conservative? You know, how do you begin to be more realistic about what's attainable?

So again, I think the rigor that is often imposed by a CFO in terms of finances, we have growth plans. If those growth plans are going to cause us to run out of cash, the most basically competent CFO will let you will be able to identify that. We need to apply that same rigor to thinking about the other resources. People, do we have enough people? Are we planning ahead? Are we planning to develop and hire? Do we have the right, even middle managers if they're store managers or service technicians? I find that companies that are really good with sustaining growth really take seriously their human resources. They don't pay at lip service. They really think about developing talent. They want to make sure they've got the right talent in the right positions. And an excellent growth strategist is not thinking about slower growth. They're thinking about how to build the capabilities of the organization to enable faster growth.

On the human resources front, it does seem like so Many organizations either say, okay, everyone here just needs to work a little bit harder, or the opposite approach is let's just put more bodies in the building. More bodies, more bodies. And you can see how neither of those would be successful strategies.

Does not work. In fact, it's a vicious circle because you start hiring people and their productivity is initially lower and then you're sometimes creating more confusion and your quality standards might go down. Bodies in the building is just not the right way to think about it. So we look at companies that grow. If you look in the airline industry is really interesting because Southwest Airlines, until recently they had some issues last year, but they've been really quite a remarkable story of sustained, profitable growth over a very long period of time. They never grew particularly fast in any given year. They grew faster than the market for a long, long time. In fact, they helped expand the market. But more importantly, if you look at their long term data on growth, they never have sort of explosive years of growth. I mean, their variance is pretty low. It's a bit of the slower and steady if you're growing 6 to 8% a year, but you do that consistently well through compounding, you grow a lot over 20, 30, 40 years. And I do think there's a pattern there. In the companies that grow sustainably, there's a bit of patience in their growth, of do it right, make sure you have the capabilities, make sure you're going after the right markets. But keep doing it, keep doing it, keep improving. And it's not glamorous. It often doesn't get you on the COVID of Fortune or the latest website reporting on company businesses. But I think it's probably more effective to grow that way.

When leaders do see growth opportunities, but they don't have the capacity at the current moment to seize them, how do they quickly get up to speed? Or do they just say we're going to sacrifice that opportunity for a little bit until we can do this in a responsible way.

What companies should be trying to do, investing in, I wouldn't say so much capacity, but it's capability in advance. That is, by the time you see the opportunity, if you don't have the capability or the capacity, it might be too late to get it. And again, the temptation is, well, we'll figure out a way. This is a once in a lifetime opportunity. We've got to do it now, but then really breaking something with much bigger costs. So it's building the capabilities in advance that you think you're going to need to grow. And sometimes it's building Options because you don't always know where the opportunities are going to be so that you're ready to pounce on these. We've been talking until now a lot about younger companies who seem to have plenty of demand but lack the supply side, lack capability, lack the organizational infrastructure. There's another set of companies who are much larger, who have the opposite problem. They kind of know how to be big, they have a lot of capabilities, a lot of resources. But the markets they're in are not growing quickly and they're stagnating. And if we look at some big, well known companies who have stagnated over long periods of time, ge, IBM, others that don't grow very fast, they shrink over time. You know, the challenge for them is they're trying to restart their growth and they see opportunities and they want to dive into those markets. Let's say markets are shifting, there's a technology shift and they want to jump into it. But if they don't have the capabilities to do it, it's not going to work well. And that's why we see so much variance in growth rates within industries. So another point I make in the article is growing quickly is not just about being in the right industry. If you look at any given industry, the variance in growth rates is really high. It'd be like watching a race where some people are way out in front, but then there's a lot of the pack is way behind. And the reason some companies are way out in front really does have to do with their capabilities. And those capabilities didn't just come out of the blue. They were investing in developing them. And then when opportunities arose, they knew where to deploy them. Look at Nvidia today, it's the fastest growing semiconductor company because their kind of chips are really well suited for doing the heavy duty computing required for machine learning and artificial intelligence. But those aren't capabilities that just came out of the blue. That's a company that, because they were a graphics processing company, building really strong capabilities in that kind of computationally intensive chip for quite a long time. If you don't have the capabilities, you can't play the game.

I do want to ask, given that investors, employees, suppliers, customers want to get behind the growth companies, how do you communicate it as a leader if you are going to be more thoughtful and not chase every opportunity and make sure you're building capacity in a way that allows for sustained growth rather than extraordinary growth over a short period of time?

Well, I think it's articulating exactly that. You need a credible story. And again, it's got to be strategic. It's got to have a strategic rationale around. Here's the rate we're going to grow, here's the rate we think we can grow and grow profitably. And the way we achieve that growth is through these kind of markets, that is this direction. And here's the method we're going to use, whether it's acquisition or organic partnering. And this is how it all fits together. So you have to have a credible story. And I do think credibility matters a lot with growth. Leaders often sort of blame investors or analysts or Wall street for saying, well, we get pressured to grow quickly, but what you really get pressured to is to grow credibly. And companies who announce these really aspirational growth goals for a short while. Yeah, when they announce them, sometimes their stock price goes up. It's like, wow, those guys are going to grow really fast. But then once they disappoint, the markets are pretty unforgiving. So I think you're much better off with a credible story about the growth that you're going to be able to achieve and root it in something that you can be confident about.

If you are not in the C suite, you know, you're a store manager, a project lead, a division head, and your leaders aren't thinking strategically in this way. So you're in the position of trying to make the case for less ambitious targets or more alignment between growth rate, direction and method. How do you do that? How do you make that case?

Yeah, and again, I would probably not start out by saying less ambitious. It's probably the wrong way to start the discussion. But even that, it may be that a lot of times what leaders of organizations are doing by broaching the possibility of any goal, any stretch goal, is to get you to think about alternative ways that you can achieve it. So the mistake. Let me run the counter argument here. If I see an organization that said we want to grow going to make up a number 10% a year, which would be a very fast growth rate. Actually, if you look at the that's upper quartile growth rate consistently and your part of the organization has been growing 3%, well, the first thing you should ask yourself is, well, what would it take to grow 10%? Not, oh, I can't do it, that's unrealistic. But what do I have to change? Maybe I have to radically overhaul my business. So again, I want to be really careful here. I don't want to squash ambition at all. Sometimes I want really innovative thinking. And by the way there may be many companies that are growing at 5% that could grow at 10%. They're just not thinking strategically about their growth. They're not thinking, they're not reworking what's our method of growth? With a different method of growth, we could go more quickly, we could grow more profitably, there's different markets, we could be in innovation, all those other things that can contribute to more growth. Again, the takeaway from this article shouldn't be be, oh, always lower your growth rate. The normal view is more growth is better. And the point of the article is, well, not so fast. It's not always better. It can sometimes be worse. But sometimes organizations, more growth can be better and they should be trying it. So if you're in a division and you're hearing a higher growth rate, the first question I ask yourself is, well, let's assume for a moment that's possible. Let's assume 10% is possible. How could I make it possible? And then look at all the things you could do differently and then have the discussion about what you think is realistic and maybe you can do 10%, maybe you could do 12%, maybe you can only do 5%. But ground it in the reality of what are the critical resources we need? How do we get those? How long will they take to build up? What do the markets look like? What's the right method for us? Do we have to do an acquisition? Are we doing this organically? Do we have to get better leverage through partnerships? You've got a whole bunch of tools and the article encourages you to look at the whole toolbox there to figure out, are there ways that you can grow more quickly, sustainably and profitably?

Well, thank you so much for that framework. It was great talking to you.

Thank you very much. I enjoyed it.

That's Gary Pisano, professor at Harvard Business School and author of the HBR article how fast should your company really grow? You can also hear him in episode 664 of this show talking about innovative companies. And we have more episodes and more podcasts to help you manage your team, your organization and your career. Find them at hbr.org podcasts or search HBR and Apple podcasts, Spotify or wherever you listen. Thanks to our team, Senior producer Mary Du, Associate Producer Hannah Bates, audio Product Manager Ian Fox, and senior Production Specialist Rob Eckhart. And thanks for listening to the HBR IdeaCast. We'll be back with a new episode on Tuesday. I'm Alison Beard.