Join Anil Gupta for an in-depth discussion in this video Why profitable growth is hard, part of Designing Growth Strategies.
- As central as growth is, the corporate survival and vitality sustaining growth is brutally hard. The first of four big challenges emanates from what I call the Law of Large Numbers. Growing a larger company is simply much harder than growing a smaller one. Look at Dell Computer. From 1990 to 2000, Dell's revenues went from $500 million to over $30 billion.
An explosive growth at about 50% a year. Over the next decade, Dell's revenues grew at, relatively speaking, a snail's pace. Only 7% a year. The Law of Large Numbers is clearly at work here. If Dell were to keep growing at 50% a year, from 2000 onwards, its revenues would reach almost two trillion by 2010.
An impossibility, given that the GDP of the entire world added up to less than $70 trillion. The second factor that makes it very difficult to sustain historical growth rates is limits to market dominance. Look at Walmart. Founded in 1962, Walmart expanded within the United States by entering one to two new states each year.
During the 1980s, the company's revenues grew at faster than 25% annually. Walmart's growth came from a rapid expansion in the company's market share. Some estimates suggest that by 1990, its share of U.S. discount retailing had crossed the 50% mark. Even for a company as capable as Walmart, growing market share from 50% to 60% is much harder than growing it from 30% to 40%.
As the battle for market share becomes bloodier, it is almost impossible to do so without sacrificing profitability. The third factor that gets in the way of sustaining historically high growth rates is the challenge of maintaining the company's cultural strengths. As these strengths dissipate, the company can lose its competitive advantage. Take Starbucks.
Under founder and CEO, Howard Schultz, Starbucks has strived hard to sustain an entrepreneurial culture and to treat its employees as part of corporate family. However, as Starbucks transformed into a global giant with thousands of outlets, many observers became concerned that the company's culture was becoming overly bureaucratic and its perspective towards employees, too transactional.
These concerns are part of the reason why Schultz decided to return back to the CEO role in 2008, after having given it up in 2000. The fourth challenge derives from needing to sustain a high growth rate by making bigger and bigger acquisitions. As a company gets bigger, smaller acquisitions do not have a meaningful impact on the overall size or growth rate of the company.
On the other hand, the problem with bigger acquisitions is that they require a larger pool of capital and are harder to integrate. Cisco Systems, the network equipment giant, faces exactly this type of challenge. Cisco has been a grand master at acquiring small technology companies and integrating them well. However, as it has become larger, Cisco has been forced to acquire larger companies.
These have been harder to integrate as effectively, as was the case with smaller companies. To sum up, other than small, family-run businesses, every company faces the imperatives to grow. Yet, it is extremely hard to sustain profitable growth on an ongoing basis. In the segments that follow, we look at the strategic logic that companies can utilize to solve the puzzle of how to keep growing profitably, irrespective of whether they are small or large.
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- The growth imperative
- Identifying opportunities for growth
- Assessing and choosing among the growth options
- Implementing the chosen growth strategy
- Organizing and leading for growth