Howard Schultz of Starbucks in a recent interview with McKinsey Quarterly:
When you look at growth as a strategy, it becomes somewhat seductive, addictive. But growth should not be—and is not—a strategy; it’s a tactic. The primary lesson I’ve learned over the years is that growth and success can cover up a lot of mistakes. We’re going to make more mistakes. But we’ve learned a great lesson. And as we return the company to growth, it’ll be disciplined, profitable growth for the right reasons—a different kind of growth.
Recently, I’ve been baffled by the addiction with growth in companies. It becomes an internal and external motivator. Stockholders demand it and management places that requirement on employees.
The thing is, profit growth is not a means to an end, it’s the result of many other things going right. Peter Drucker, in Management: Tasks, Responsibilities, Practices, gave us some outstanding advice on what the focus should be:
Profit […] is the result of doing things right rather than the purpose of business activity. It is, above all, determined by what is necessary to attain company objectives. Profitability is a measurement of how well the business discharges its functions in serving market and customer.
The thing is, most business people are taught to start with a business plan where you make some guesses to project the potential opportunity. Once enough people sign off that it’s viable, you get down to building a product that will fulfill the profit promise.
Don’t get me wrong – the planning is important to make sure you’re not chasing empty goals. The business plan forces you to consider how you’ll make money, which is a necessary requirement for a viable business. But shouldn’t part of that initial proposal be what’s awesome about the product? What sets it apart? What is going to be amazing about what you’re doing? “What is the right reason for your profitable growth?” as Howard Schultz puts it.
So back to my original question – why are companies so addicted to growth? Why aren’t companies happy with a consistent revenue and profit stream versus a growing one?
A few answers I can think of are:
- They are small. Without market share, you can’t grow revenue and profits. Valid, but you can be small and profitable.
- Becoming complacent. A growth goal encourages a company to innovate. This is the wrong solution for that problem.
- Shareholders demand revenue growth.
For a large, established company, number 3 is the only viable reason. Unfortunately, shareholders (and most people) tend to be short-sighted. They want profit now, but aren’t always willing to make the short-term concessions to get there. That’s why companies like Apple are wonderful. They choose to eschew shareholder opinions and focus on building insanely great products. They know a great product will lead to great profit.
Fred Wilson recently explained how Etsy does it as a mission-based company:
What comes first at Etsy is the problem/mission. Etsy wants to make life easier and better for people who make things and who want to make money from doing that, either part time or full time. Etsy is about commerce between two people, one who makes something and one who wants to buy it. Rob even says in the article that trying to maximize shareholder value is “ridiculous,” adding, “I couldn’t run a company where you had to use that as an excuse for why it was doing things.”
And yet the shares our firm bought in Etsy back in 2006 have gone up in value more than 10x based on the last stock purchased in the company (last summer). One of the things I’ve learned over the years by working with special people like Rob is that you can create shareholder value as “exhaust” by focusing on an alternative mission, one that is closer to real problems faced by real people.
It’s all about incentives, and we have to change them.
In venture capital, an idea I read a long time ago is that investors should be entitled to a percentage of all lifetime profits instead of only getting their cash out in an IPO or company sale1.
In stocks, I’m a fan of the dividend model that more well-established, low growth companies use. Shareholders should be paid out a portion of the profits earned. No profits? No payout. This would put less emphasis on the growth and more on cultivating long-term profit.
Will Shipley recently wrote an amazing article on strategy, Success, and Farming vs Mining:
The people who really change the world are farmers. Steve Jobs works constantly on his products, every waking minute of every day. He lives and sleeps and breathes them.
Farmers must cultivate and work on the land. Shareholders must be partners in that farming. Focus on building an insanely great and profitable product. Create a customer. That is the means to the end. That is the purpose of business.
- If anyone has the link to this, I’d appreciate it! I didn’t seem to file this article away [↩]