Grow or Die

There are only two kinds of problems in business: (1) growth problems; and (2) liquidation problems.   I read that a quarter century ago, and ever since then, I’ve never found a single exception to that truism.  Every problem I’ve encountered in business falls under one of those two headings.  And I can now add another tidbit of wisdom: Without exception, solving the growth problems is a lot more fun. 

Grow or die.  Expand or liquidate.  Or, as Red reminded himself (after leaving Shawshank):

Get busy livin’—or get busy dyin’.

Early in my career, I was extremely fortunate to have joined a company that, as the leader in its industry, was growing its market share—in a market that was growing rapidly.  A growing share of a growing market; it doesn’t get much better than that.  We had growth problems galore; we were profitable, we were working hard to keep up with the growth, and we were having hectic fun. 

Costs were growing rapidly—but that was good news, because revenues were growing even more rapidly, and it takes money to make money.  Sure, we found ways to improve the cost structure, but that, too, was a lot more fun because of the growth problem.  Bottom line: The stockholders loved the revenue-driven profit growth we delivered, year in and year out. 

There’s one thing about stockholders, though: they keep demanding profit growth, whether or not revenue is growing.  They have a real funny thing about that.  And guess how profit growth is delivered when revenue is stagnant (or worse, shrinking): cost-cutting, that’s how.  In a no-growth environment, cost-cutting problems tend to become more than “productivity” programs; they tend to be liquidation problems.  Cutting fat is always a good idea; cutting meat and bone is hardly ever a good idea.  In a no-growth environment, though, it’s easy for management to mistake investments in the future for discretionary costs—and sometimes the "solution" to the liquidation problem only accelerates the downward spiral.  Liquidation problems must be solved, but that doesn’t make them as fun as growth problems.

In any case, stockholders demand growing profits no matter what; it’s management’s job to deliver that; and, of the two ways to deliver profit growth—growing revenues or cutting costs—the only sustainable strategy in the long run is to grow revenues.  Here are two charts that illustrate the difference.  Profit growth through revenue growth is open-ended; profit growth through cost-cutting eventually runs into a dead end.  (That’s why most successful companies place significant emphasis on developing new products and services.)

I hope those are self-explanatory.  Those two pictures are a condensed summary of hundreds of individual experiences on both the “growth problem” and “liquidation problem” sides of the business management coin.  They are the microeconomic examples illustrating the principle of “Grow or Die.”

I have one last chart depicting how the “growth problem” scenario works for our economy as a whole.  As I’ve said before, a growing economy causes federal tax revenues to grow; the green and blue lines below show that relationship.  Another thing I’ve said before is that a measured, prudently managed deficit is also sustainable indefinitely.  (See this article, in which I suggest how to define “fiscal responsibility”—something the doom peddlers consistently shy away from doing.) 

Growth solves a lot of problems.  Not only is it the seldom-mentioned third alternative to the false-dilemma of cutting spending or raising tax rates, growth is an imperative for our macroeconomy, too. 

Wouldn't it be nice to hear some growth ideas from our politicians and doom peddlers for once? 

Red said it best: Get busy livin’—or get busy dyin’.

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[And if you haven't watched The Shawshank Redemption recently, I strongly recommend writing that in at the top of your "to do" list.]

Comments

[Bob]

Yep. You can't shrink your way to success.

I ran a remote profit center for a company. Was classified as a cash cow and starved. Guess what. The cow and the cash died due to a lack of investment.

I see this in a number of large companies today. Not possible to consistently grow the bottom line faster than the top line once all the fat has been cut. Yeah, yeah. Six Sigma and all that. Process cures everything. Stock buybacks.

BS.! Innovate or die, says I.

[muirgeo]

But your debt to GDP clock is going up and up. What gives? And the OMB reports show it continuing to go up and UP.....in spite of massive tax cuts that should be paying for themselves.

[Steve]

muirgeo:

There is a lag between the Treasury's numbers (spending and tax receipt growth rates) and their effect on the ratio of debt to GDP. Eventually the debt to GDP ratio should track in the same direction. Another factor is that tax receipts are growing faster than GDP, and that causes some of the difference. New GDP numbers are due out soon; we'll see if that reverses the clock.

[a Duoist]

In the retail industry we always said, "Volume cures all ills." However, in the most successful operation in the retail industry, we led with the motto, "Go to WAR, everyday!"

Growing an economy, like growing profits, is not simply cutting costs or spurring revenue; it is attitude, especially attitude toward innovation and employees, that is decisive.

In that "attitude," one finds the critical difference between 'managing' and 'leading': Managers manage numbers; leaders lead people. A Harvard MBA is a gilt-edge degree in managing, not in leading.

'Be free.'