Do Businesses need to Grow or Die?

Grow or Die

Do companies have to continually grow to avoid dying? The saying turns out, is only true some of the time. What is an absolute truth though, is all organizations must “do or die.” Doing nothing is not an option if you want to thrive as a business. There are choices other than growing which focus on improving efficiency, effectiveness and viability. These alternatives aim to improve the customer experience to strengthen the customer base, reduce costs and increase asset usage.

Surviving to Maturity

Companies that reach maturity can last several decades before experiencing decline. Figure 1 shows a generic maturity curve that a business will go through if it can manage through the many challenges of startup and growth. To avoid decline, there should be a constant focus on staying relevant. Sometimes it's necessary to reinvent the business. This often involves moving into an adjacent space to take advantage of a larger customer base. There are several companies today that are only the same in name. For example, Toyota hasn’t always made cars and Wells Fargo wasn’t always a bank.

In the beginning companies should strive for growth by understanding what value customers want. Startups should also ensure efficient processes are standardized along the way to keep costs in line with profit expectations. This is important because if costs are not kept in control, it will be very difficult to continually deliver a product or service profitably. Unfortunately, many try to escape inefficient processes by trying to out grow the problem. They end up growing themselves out of business. You may know of a few companies like this. They spend more time and money to attract new customers than keep the ones they already have. Do you feel like you must switch phone or internet services every couple of years to get a good deal?

Without continually improving processes, companies will experience a short maturity with an early decline. This is because productivity improvements enable growth, but growth does not enable productivity. In addition, all businesses are constantly fighting what Michael Porter calls the Five Competitive Forces [1]. With these five forces (New entrants, Competition, Substitutes, Suppliers, Customers) working against you, growing market share and maintaining a healthy net profit is very difficult.

The Effects of the Economy and Legislation

In addition to Porter’s five forces there are several other things to face. The overall economy and legislation can make or break companies. Sometimes companies do it to themselves by introducing a new product or service that “cannibalizes” existing sales. What most don’t realize is there are more ways to keep a business going than causing it to fail. Companies can market product/services by co-branding, private labeling, re-purposing the product/service to move into adjacent spaces or fulfill a need as a substitute. Productivity improvements can reduce lead-times placing the product/service as a substitute or provide an advantage over slower competitors. These improvements can also lower costs to offer multiple price points or increase capacity to service larger buyers.

  Figure 1: A Maturity Curve

Understanding the economics of your business and industry can help determine what the right size is for your company at each stage of maturity. There is the combination of fixed and variable costs within each industry that provides for just the right cost structure. This ensures the lowest possible costs while satisfying demand. This is important because there is such a thing as too much or too little capacity. Not having the right balance of capacity at the right time has played out in many industries with devastating consequences such as with the airlines, rental car agencies, and fiber optics. 

Economists refer to these business outcomes as taking advantage of economies of scale and scope. Economies of scale means having the right amount of assets to fill customers’ orders while at the same time not paying for idle resources. For example, if you rent on average 5 pieces of equipment a month but have 10 on hand then you’re paying for 5 without the benefit of the sales to cover that cost. Also, each industry has room for only so many businesses because there is only so much demand to go around.

It’s not easy to determine how many companies an industry can support at one time, but the limit is usually reached when the only gains come from someone else’s loss.  There are economies of scale external to a business that has to do with shared infrastructure, legislation or skills. Companies can influence external economies of scale by partnering with local community colleges to meet unfulfilled skills or support legislation that makes trade more advantages for their industry.

Should your Products or Service Stand Alone

Economies of scope are realized when two or more products/services are cheaper while sold or made together. It could be because materials are better utilized when making two or more similar products. It could also be because two or more products/services are complimentary, and customers prefer to purchase them together.

Berkshire Hathaway is a case in point that could someday provide a real-world example of longevity without growth on a very large scale. Berkshire is clearly growing in sales and net income every year based on a growth strategy of mainly acquiring or investing in well-established firms. As with most mature firms, organic growth doesn’t come easy. As published in Berkshire’s Annual reports a significant portion of their growth comes from acquisitions [2].

So, if Berkshire couldn’t find any more acquisition targets would they die? Warren Buffet doesn’t think so. He believes that the competitive nature of the subsidiaries, if no more acquisitions are possible, will allow them to maintain their market share and provide healthy cash flows for decades to come. Significant improvements could be made to any one of the subsidiaries, but Berkshire doesn’t seem to believe in interfering with a well-established brand. There will certainly be maintenance costs, but it appears no significant investment would be needed.

Look at Growth Every Year

There are many strategies organizations can adopt and growth is only one of them. Take the time to decide if growth is right for your company each year. First, determine how mature are your organization and industry. Next, decide if it makes sense to adopt a growth strategy. If so, find the right growth that makes sense to your business. If growth isn’t currently an option, then look at what you can do to stay relevant. Remember, it is either Do or Die.

[1] Harvard Business Review ‘The Five Competitive Forces That Shape Strategy’ by Michael E. Porter

[2] For example: Over half of the revenue increase from 2014 to 2015 of 8.3% is attributable to the acquisitions of the Van Tuyl Group and AltaLink L.P. Source: Pg 49 of the Berkshire Hathaway 2015 Annual Report.