PoS Mar 2013 | When Growth is Not Good

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 Strategy Consultant

For more on growth, read Top Line Growth Can Be Dangerous.