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