Thinking differently about growth: financial executives should understand the complexity, difficulty and riskiness of growth. They should approach growth both as an opportunity and as a risk management challenge. Growth can be either good or bad--depending on circumstances.

• Author: Hess, Edward D.
• Position: SPECIAL FEATURE: GROWTH

Many executives believe that growth is always good, that a business either grows or dies and that being bigger is always better. Further, Wall Street's "rule" is that public companies should grow continuously in a linear fashion, as evidenced by ever-increasing quarterly earnings.

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On the other hand, research consistently finds that there is no empirical data in any science or in any business discipline that supports those beliefs. The reality is that growth can be good and growth can be bad. Moreover, sometimes growth makes it more likely that a business will actually die. Bigger is not always better, and a company's continuous, linear growth is the exception rather than the rule.

The 'Truth' About Growth

What is known is that growth is a complex change process that does not occur in a mechanistic or linear way. Business growth, in most cases, is dependent upon the actions and interactions of many people--suppliers, employees, customers and competitors. Not surprisingly, human beings are not always efficient, rational actors. This "humanness" causes mistakes and creates misunderstandings.

Research shows that good growth companies have internal growth system alignment, iterative experimental growth learning, highly engaged employees and consistent, execution of a differentiating, continuously improving customer value proposition. Research also has shown that few companies demonstrate any predictable patterns of growth over the long term and that growth is weakly correlated to profits.

From such studies, it's apparent that the number of public companies able to grow for four years or more above either industry average growth rates or average gross domestic product (GDP) is less than 10 percent of those studied. Extending the term to seven years or more, the percentage drops to 3 percent or less.

In addition to the many external factors affecting growth, an organization's ability to grow is conditioned upon the business having in place managerial capabilities, processes and controls that can manage growth. Having these capabilities in place is important because if not managed, growth can create serious business risks that can lead to quality, regulatory, safety, financial, brand reputation and people problems.

Among current examples of public companies that destroyed shareholder value by pursuing ambitious growth without managing the associated risks are Starbucks Coffee Co., The Toyota Motor Corp., The British Petroleum Co., Washington Mutual Inc., Merrill Lynch Corp., Lehman Brothers Inc., Harley-Davidson Motor Co. and American International Group Inc.

In reality, growth comprises complexity and risk. Consider:

* Growth should not be an assumption; rather, it should be a strategic decision made only after weighing the pros and cons of growing versus the pros and cons of not growing; and

* Since growth can stress people, processes and controls and create business risks that need to be managed, businesses need to conduct a Growth Risks Audit, put in place early warning growth risks alarms and have prepared growth-risk mitigation plans.

Growth: A Strategic Decision

An example of the...