Is growth always the key to success?
“To be a great company, you must have an upper bound on growth and have the discipline to leave some growth on the table,” says Jim Collins, best-selling author of Good to Great and How the Mighty Fall.
Jim Collins posed a growth quiz to hundreds of CEOs of gazelles, or fast-growing firms, at the recent Fortune Small Business Growth Summit in Dallas, Texas.
You have the option of investing in either Firm A or Firm B. They are both in the same technology-driven growth industry as early stage entrepreneurial ventures with equivalent products and markets with good long-term potential. A has an average net income growth rate of 25 percent; B’s is 48 percent.
Should you invest in A or B?
Growth constraints? Does your firm have limitations on growth? Jim Collins recommends that the firm set a minimum performance expectation to hit no matter what. What is the performance hurdle that you will always hold even if it requires you to limit growth?
Perhaps you will maintain core values, ensure quality, not risk more than you can manage to lose in the worst of times, have so much profit per year, sustain your culture, or not lose control of the company and how you manage it.
Is growth the most important success factor? The story of A and B continues. A has a standard deviation (s.d.) on its average growth rate of +/- 7 and B has a s.d. of +/- 323. Additionally the range of A’s growth rate is 20 to 44, while B’s range is -397 to 1288.
Eventually firm A was trading at $290 and B at $14; additionally B had lost control over its destiny. This real example, with the firm’s identity hidden, shows that growth is not the most crucial factor.
“If your firm goes into turbulent times strong, you have the chance to shine,” Collins says. “The difficulties will expose your strengths relative to others. If you go into challenging times weak, it will show your weaknesses. It is more important what you do BEFORE the storm comes, than WHEN the storm comes. A storm holds great opportunities and it is something you do not want to waste.”
Determine what type of company you have now: I – a strong company (such as Intel), II – not as strong a company, or III – already weak (such as General Motors).
Ask what can and must you do to not waste these opportunities from the storm? Take this as an assignment: Establish two to three things that you must do differently so that you never go into a storm other than as a level I strong firm.
Establish shock absorbers. Another Jim Collins’ suggestion is to build in shock absorbers to protect your firm. For example, reach a point where you can run your company for an entire year even if you did not receive one penny of revenue.
Revise your strategy and then act. Gather your executive team, business coach, and advisors together for a strategy session.
• Determine your constraints on growth. What is the performance huddle that you will always maintain even if it limits growth?
• Establish two to three things to do differently so that you never go into a storm other than as a level I strong firm.
• Identify and install shock absorbers to protect your firm.