Peter Drucker was the first to raise concerns about growth as a strategy. In The Practice of Management, he expressed his concerns about the ability of management and boards to manage growth from increased demand for the company’s products and services. And this was in 1954, well before acquisitions and franchising became the popular way to grow!
We want to explore why the growth strategy can become so problematic.
Growth is one strategy of eight in all companies
Let’s start first with growth as a strategy. The growth strategy is about choices to be made on the type and rate of an organization’s growth. The basic choices are internal growth fueled by increased demand for the products and services of the business or through external growth, such as acquisitions and franchising.
Let’s couple the thinking on the basic choices for a growth strategy with one other concept in order to make our point on why companies get into trouble pursuing growth.
We think growth is just one of eight strategies that are common to all companies. When we study any company, for-profit or nonprofit, we look at its strategy system of 8 strategies, which are always configured into 3 types of strategy.
The 3 types of strategy start with the Alpha or dominant strategy, being the one strategy that leads the remaining seven. Then there are the Influencers, being three of the remaining seven that exert the most guidance and constraint on the implementation of the Alpha and on the remaining four strategies, which we call the Enablers.
The eight strategies common to all for-profit and nonprofit organizations are Marketing/Sales (known as Communications in most nonprofits); Financial Management; Risk; Growth; Business Definition (known as Mandate in nonprofits); R&D/Technology; Organization Management; and Service Delivery, known also as Production or Manufacturing depending on the nature of the organization<s business.
Growth = Trouble when the strategy system isn't understood
We think companies get into trouble with the growth strategy when they fail to understand how the strategy system is configured in their company. In other words, they don’t understand how strategy works in their company! They don't understand and are therefore unable to monitor the impact the focus on growth will have on the other strategies of the strategy system!
Take banks, for example. Banks have provided an appalling example of the damage a focus on growth can have in the absence of an understanding of a bank’s strategy system.
We think the dominant strategy for a bank can only be financial management; being the sourcing, allocation, and management of capital and associated revenues. The Influencers for a typical bank are usually Risk (the focus on the unacceptable), R&D/Technology, (the creation and/or use of intellectual property, in this case, information systems) and Marketing/Sales, (the identification and capture of customers). Growth is not the dominant strategy or even an Influencer. It is an Enabler, a supporting strategy within a bank’s strategy system.
That’s because they are not equipped to handle growth as the dominant strategy, which is how they behave when they pursue growth at the expense of of other strategies.
The demands of the growth strategy compromise the implementation of the financial management and risk strategies.
Consider the list of banks caught in 2008 global financial meltdown by their focus on growth. Or consider a more recent horror story, such as that of Co-op Bank, in England, now under investigation by British regulatory authorities for its spectacular capital shortfalls brought on by too rapid growth.
Growth as the dominant strategy is not typical
The fact is that growth as dominant strategy is not nearly as commonplace as it is thought to be. It takes a long time to put the growth strategy into place.
That's because growth is never the dominant strategy when a company is first started. Moving growth to Alpha requires changing the culture and the priorities of the company to be driven by the needs of growth, something not a lot of businesses are inclined to do. Why not? Because many business can enjoy terrific growth without making the strategy the Alpha.
Let's look at some companies that do not have growth as the dominant strategy but have enjoyed exceptional growth because of the demand for their products and services and their ability to exploit and manage the resulting growth.
These companies include Apple, Facebook, Goldman Sachs, IBM, General Electric, and Stanley Black & Decker. The dominant strategies for each are: Apple: Marketing/Sales; Facebook: R&D/Technology; Goldman Sachs: Risk; IBM: Business Definition; GE: Financial Management; and Stanley Black & Decker: Manufacturing. This listing also demonstrates that any of the eight strategies can be dominant strategy. Successful growth does not have to come from having growth as dominant strategy.
Then there are those companies that do have growth as dominant strategy. These would include Walmart, McDonald’s, Stantec Consulting, and Starbucks. These are examples of companies that understand and have proven they know how to manage growth as their dominant strategy without allowing it to detract from their management of the other seven strategies of their strategy systems.
Growth should never be a search for the Holy Grail
The reality is that growth should never be a search for the Holy Grail. A focus on growth for the sake of growth will be the road to ruin because it implies that there is no regard for the impact of this focus on the strategy system as a whole. Any growth strategy must be the result of informed decision-making and management.
Boards, owners, and management should know what strategies are being implemented within each of the 8 strategy categories of their company. And they need to know how the company's strategy system is configured. At the very least, they should understand which strategy of the eight is the Alpha for the company.
So the question we leave the reader is:
“Do you understand the 8 strategy system of your company well enough
to understand how the growth strategy is being managed?”
For more on strategy as a system, see The Alpha Strategies, Understanding Strategy, Risk, and Values in Any Organization