Achieving profitable growth brutally hard

By Anil K. Gupta

As central as growth is to 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 about $ 500 million to over $ 30 billion – an explosive growth rate of over 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 $ 2 trillion by 2010 – an impossibility, given that the GDP of the entire world adds up to less than $ 80 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 1-2 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 the US discount retailing industry had crossed the 50% mark. Even for a company as capable as Walmart, growing the 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 Shultz’ leadership, Starbucks has strived hard to sustain an entrepreneurial culture and to treat its employees as part of the 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 Shultz 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 grandmaster 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 utilise to solve the puzzle of how to keep growing profitably, irrespective of whether they are small or large.