Why is Growth So Elusive?

Growth – why is growth so important?

Growth is the yardstick that tends to be used to measure success and performance in most organisations. It attracts more leadership attention than any other issue. Notwithstanding this almost universal focus on growth, it continues to be out of reach for many. In recent studies in the US, it appears that most companies experienced little or no growth at all after adjusting for inflation and only those in the top quartile experienced growth in real terms. Even amongst those top quartile businesses there was little evidence that they were able to sustain this growth for more than a few years. Below we will explore why sustained and profitable growth is so elusive.

Leaderships obsession with growth is perhaps understandable as fast-growing companies seem to find it easier to attract talent and negotiate better terms with suppliers who are also attracted by the opportunity to participate in the growth story. In many cases the growth also enables organisations to invest further in sales and marketing activities to sustain or accelerate the growth.?

In our experience many organisations (particularly SME’s and owner managed businesses) find it difficult to select the metric that is most appropriate to their circumstances. The most common metrics are likely to be based on revenues, profits, margins, headcount / FTE, market share, number of clients, units of production etc. Within those metrics many organisations will get more granular and measure revenue growth, for example, by reference to existing / new clients, existing / new products, markets, sales team, distribution channel etc etc. Some organisations will measure and monitor all of those metrics in the hope of stumbling over the right one or may “flip flop” between them.

The management challenge is not only to identify the metric(s) that is / are most appropriate but then to understand the drivers of that outcome. If you choose growth in revenues as one of your key indicators, you will want to drill down to understand what drives the change in that metric. This could be multi-faceted but may be linked to the number of sales calls, e mails, paid for advertisements, specific marketing campaigns, discounts, special offers etc. The problem with using “revenues” is that it is a “trailing” metric in most cases which means that we get the information too late to gain any real insights about the future. Ideally we need to identify the “leading” metrics that may enable us to predict future revenues eg sales calls, leads etc.

In our experience many leadership teams approach growth in a very opportunistic and reactive way. Our recommended approach is much more strategic and long term and is designed to make sure that all aspects of the business can handle the challenges and deliver sustained profitable growth.

Why is sustained and profitable growth so elusive?

There are very few businesses that are able to deliver consistent and rapid growth year on year. This has been particularly true given the disruption and uncertain economic environment since 2020.

It is interesting to note that some businesses outperformed their own expectations during the years impacted by COVID; this may have been because they were able to put differentiated solutions in the hands of their clients quickly. In the post COVID environment some of those businesses have seen their growth flatten out.

As noted above many SME’s and owner managed businesses approach growth in an opportunistic and reactive way. This may involve rapid recruitment or spending on developing short term capacity to meet the growing demand. Other businesses may see growth as a sales and marketing challenge and throw resources and / or capital at this aspect. This approach may be successful in the short term but is likely to test the systems and processes if the demand continues to grow rapidly. Equally if demand stalls this may also put pressure on profitability and the business model.?

Many leadership teams will appreciate that growth can have an adverse impact on operating systems and processes and may anticipate that some change is necessary to manage the growth. However, there is evidence that the difficulty in attracting talent and maintaining corporate culture are underestimated. As a result, some of the unique characteristics of the business that helped create the growth including great client service, innovation, agility may be impaired.

In order to sustain profitable growth, the leadership team will need to balance the pursuit of market opportunities (demand driven) and the need to enhance the capabilities and capacity to take advantage of such opportunities (supply driven). This will require a balanced growth strategy that addresses 3 core questions:

How fast should we grow? (the target rate of growth)

Where will we find the growth opportunities? (the direction of growth)

How do we create the financial, human and organisational resources to support the growth? (the method of growth)

Each of these decisions need to be considered in the context of the organisations overall business strategy and should recognise the existing culture and capabilities of the organisation as well as the external market dynamics.?(Pisano, 2024)?

In practice it seems that many organisations fail to sustain their growth over time in a profitable manner as a result of making the above decisions separately. For many SME’s the decision to create capacity and recruit talent in anticipation of future growth is challenging and the “wait and see” approach is very common. Where this is the case the resources of the organisation are often stretched to their limits and in some cases to the point of failure. In the case of financial capital this can be where the business grows rapidly and lacks the working capital necessary to support the growth and this can give rise to cashflow difficulties. In the case of human capital the key employees may experience burnout as a result of the constant pressure to perform at high levels over long periods of time. Our recommended approach is to design and build a balanced growth strategy.

How can we design and build a balanced growth strategy?

In the section above we identified the 3 core questions and decisions to be considered to create a balanced growth strategy; these are explored below.

How fast should we grow?

For most SME’s. owner managers and entrepreneurs the answer is likely to be as fast as possible and many find it difficult to turn away new business. Many business owners start their business with the belief that winning clients will be the limiting factor in their growth. In practice many find that this is relatively easy but supply side constraints like finding talent and / or resources is the real growth limiting factor. Systems, processes, talent and culture can all become bottlenecks that can constrain growth. It is crucial that the growth target selected recognises these constraints. In the short term these gaps in the delivery are described as “growing pains” but in the longer term that can be destructive. “Burnout” and attrition are common where key members of the team must run too fast for too long.

The right strategy may well be to reject rapid growth if it threatens the firms’ values with respect to quality, consistency, culture and wellness. Where new talent is recruited rapidly, or new systems and processes are implemented it is important that there is sufficient investment in training and sharing the culture and values of the firm.

High demand potential does not translate into profitable growth unless the organisation has (or can develop) the resources needed to meet that demand.

What is the direction of our growth?

A crucial part of the growth strategy is to prioritise which opportunities to pursue. For many this will mean scaling in their existing core market whereas others may seek to change their scope and extend into adjacent products and services. Others may choose to diversify into totally unrelated areas.

The following factors may help determine whether to scale, scope or diversify. Ideally the organisation should consider where their unique competencies (eg client relationships, brand, reputation) will create the greatest competitive advantage.

A scale-based strategy is likely to be based upon deep market specific competencies. Successful scope strategies will require broader generalist competencies and resources that can be used across market segments and product / service lines.

What is the best method to grow?

All growth is likely to require access to new resources which may be talent, capital, distribution etc. A choice that many face is whether to deliver growth organically or via acquisition. Although organic growth is likely to be slower it may be easier to integrate such growth within the organisations existing systems, processes and culture. Whereas growth by acquisition can be fast but it tends to be more difficult to integrate and align with the value proposition. These method decisions are closely linked to the choices with respect to the rate and direction of growth.

What makes a great growth strategy?

Good growth strategies recognise that non-financial factors (eg talent, systems, processes and culture) have a significant impact on the growth rate that can be supported. Whilst growing faster than the organisations combined resources can support may be possible in the short term it will eventually result in long term damage to the organisations reputation and culture. It is difficult to grow fast now and fix the problems later.

Such strategies understand the impact of compounding with more modest growth for an extended period leading to better financial outcomes. In addition, the most effective strategies will explore ways to build capacity to enable future growth and create resilience.

The most important factors in determining the organisations growth potential are the quality, talent and mindset of the people. Long term, profitable growth is never easy to achieve but without the right human capital it will be impossible. Furthermore, the growth strategy has to be cohesive and recognise the demands on all aspects of the business. The strategy must be aligned with the value proposition and culture of the business.

According to research by PWC the highest performing organisations invest in a growth system which is an integrated collection of capabilities and competences to support both short term and longer-term growth. This approach seems to be very different from that taken by most businesses who are opportunistic and reacting to circumstances. Whilst there is something to be admired about this type of agility it is unlikely to endure in the long term. The PWC research also suggests that these businesses experience growth where they have no competitive advantage and, in some cases, may even be at a disadvantage. Whilst this approach may grow revenues it is unlikely to be profitable. Some businesses become obsessive about delivering on their growth targets and attract new revenues at any cost. This may involve price cuts, discounts, promotions, aggressive commission structures to sales and marketing teams. They are effectively buying new revenues or market share. There may well be situations where this strategy may make sense and we will explore this in a future post.

In order to deliver more sustainable and consistent growth (and maintain profitability) it is likely that there will need to be a mindset shift and a focus on designing and building a set of capabilities to drive long term growth.

Many other studies have suggested that private and family controlled businesses are much more likely to be able to take a long term view compared with larger public companies where there is greater short term pressure to deliver results.

What are the essential elements of a growth system?

One of the key elements is a well-articulated client proposition which clearly defines what you will deliver and to whom. This will go on to explain the client journey and how to create service solutions to deliver the anticipated client outcomes.

This will also require insights as to how market trends will shape client needs into the future. This is likely to be more successful where the trends are not generic but very specific to the target clients based on high levels of engagement with that client group. This will often involve exploring opportunities to enhance the client experience and fine tune service models. High levels of engagement creates value that drives loyalty and fuels growth. In the next section we will examine the economics of loyalty in greater depth.

The most successful firms can deliver differentiated client outcomes which in turn deliver superior performance and enables the firm to reinvest in client engagement. This creates the so called “virtuous circle” of self sustaining growth and momentum that enables a business to scale rapidly but in a controlled and sustainable manner.?

What are the economics of loyalty?

It is probably more than 25 years since I first read Frank Reicheld’s book “The Loyalty Effect – The hidden force behind growth, profits and lasting value”; much has changed in that time. ?I remember thinking how insightful the book was then and I have to say it is every bit as relevant today. Without realising it I suspect that the book may have shaped the way that we have managed “Libra” over the last 20 years. The key concepts also provide the backbone of our strategy for the next 5 years too.

Reichheld’s "economics of loyalty" provides a framework where the "soft" elements of business, loyalty and learning, are linked to the hard science of cash flows and cost/benefit analysis. The author argues that there is enormous potential for improving a company's performance by increasing customer, investor, and employee loyalty. The research demonstrates that loyalty drives profits in direct and quantifiable ways through its impact on growth, learning, and productivity. In addition, loyalty generates an energy that drives the value creation process that in turn drives at sustainable success and momentum.

The framework detailed in?The Loyalty Effect?not only has withstood the challenges of the digital transformation era, but its relevance seems to have been magnified. Advanced analytics has uncovered the powerful loyalty economics at work in more and more industries.

In the next post we will look at considerations for preparing your business to scale or preparing it for sale.

If you would like more information about any of the concepts discussed above or if you would like to speak to an advisor about growth strategies for your own business please call Amber, Bill or Cameron at “Libra” on 01732 897900 or e mail [email protected] [email protected] or [email protected]