Grow or Die. It's probably the most common business axiom, and the least accurate, according to the new book "Smart Growth: Building an Enduring Business by Managing the Risks of Growth" (Columbia Business School Publishing). To better understand the book's implications, Consulting's One-on-One sat down with the book's author, Ed Hess, a former Arthur Andersen strategy consultant and current professor at the University of Virginia's Darden Graduate School of Business.
Consulting: What's wrong with the concept of 'grow or die'?
Hess: As a business practice, I don't think it's ever been true. It became a popular concept after appearing in a Time magazine article in 1957, but it doesn't bare out when you research business finances. There's just no empirical data to support the idea that businesses have to grow or die. It's pure fiction. What companies have to do is constantly improve their customer value proposition more than their competition. This may result in growth, but it doesn't necessarily do so.
Consulting: Why isn't growth, in and of itself, a good goal?
Hess: There's this ideas that growth is always good. It's a common belief. But my research finds no such link. I think people strive for growth for reasons that have nothing to do with good business practices. I think the phrase 'grow or die' is catchy and plays to the American entrepreneurial spirit. I think it's a business concept that's been promulgated by investment bankers and consultants. Just like all publicity isn't necessarily good publicity, not all growth is smart growth. If you lead by the mantra 'grow or die' you're just as likely to grow and die. If you do not manage the growth, it can create too much stress on your organization. Growth can just as likely kill you as it can make you better. I think the primary rule of business should be 'improve or die'. Instead of asking 'how fast should I grow?', I suggest asking questions like: 'How big do I want to be?' and 'What profit margins am I aiming for?'
Consulting: Are public companies forced to adopt a 'grow or die' mentality because of the Wall Street mentality that demands ever-increasing growth every quarter?
Hess: Absolutely. Companies are certainly influenced by the Wall Street mentality that says you have to grow on a continues basis. I think this leads to an unfortunate focus on short-term compensation goals that are based on delivering short-term results. This is the driver of a lot of the problems we have today. Companies play accounting games to look good in the short-term. The problem is that this defers needed investments.
Consulting: But somehow companies have learned to manage through these short-term pressures, right? Don't most good companies grow consistently?
Hess: Six research studies, including my own, found that less than 10 percent of companies grow their revenue at a rate faster than the nation's GDP average for four consecutive years. Continuous linear growth is rare; it's the exception, not the rule. And yet, companies abide by the premise of 'grow and die' and, in the process, make bad business decisions. Quarterly linear growth is a rare, unobtainable goal. Wall Street has created an expectation that's impossible to meet.
Consulting: Is the problem that compensation, tied to short-term results, are exacerbating the problem?
Hess: It's worse than just compensation plans that incentivize the wrong behavior. My research shows that today, the average CEO tenure is less than six years— limiting any desire to think longer-term. Moreover, industrial holders own the vast majority of stock held in big companies for less than 12 months. In other words, the concept of institutional holders is a misnomer; we have institutional renters. And the expectation of a short-term ROI on an investor's holdings only serves to reinforce the 'grow or die' attitude. So, the heart of the matter is that no one looks at the quality of growth. The SEC has no disclosures of good growth—there's no transparency of non-core transactions. And inadequate disclosures make it difficult for investors to evaluate the quality of a company's earnings.
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