“Growth for the sake of growth is the ideology of the cancer cell.”
― Edward Abbey
Rank Growth: growing with excessive luxuriance; vigorous and tall of growth. tall rank weeds.
I knew this day would come. My son is intensely interested in weight training. Recently, he asked me about supplementation for faster gains. I get it. After all, I went through the same thing, seeking a way to maximise visible growth. All growth plateaus it is part of a cycle. To jump-start further gains, some people resort to anabolic steroid use. While anabolic steroids encourage further muscle development, they weaken tendons, which connect muscles to bones. Steroids can result in tendon injury or complete tear. While it is less visible and less measurable, the foundational strengthening of ligaments, tendons and surrounding tissues takes longer to achieve, but this slow, less perceptible work is essential for muscles to function effectively over time.
If you cheat the process with steroids, you will experience rapid muscle growth, and the outcome looks aesthetically pleasing, but the muscles are at risk of tearing. In some cases, the ligament tears right off the bone. All that vanity work for apparent growth is destroyed in an instant. As we learn more about how the body works, we understand that you must do the fundamental core work regularly. We have all skipped the warm-up exercises and taken shortcuts with the rehabilitation exercises, but they pave the way for sustainable growth.
This Thursday Thought highlights the imperative for growth imposed on organisations that have become slaves to stock analysts. When an incumbent, established organisation has enjoyed growth, they experience a challenge similar to the bodybuilder. They do not want to invest in the foundations but would instead focus on the visible growth, the vanity exercises. Investing in and developing disruptive innovation markets is akin to maintaining the ligament, tendon and muscle sheath work. By its very nature, the market size of a new opportunity is small, so the returns also look small. To make matters worse, they are slow, and when compared to the might and muscle of maturity, they look puny.
“The New always looks so small, so puny, so unpromising next to the size and performance of maturity.” – Peter Drucker
This is when a slight tweak in mindset is useful. I don’t go to the gym to train; instead, going to the gym is part of my life. Similarly, organisational reinvention is not a project but a mindset. In the weightlifting analogy, growth and foundational work happen in parallel; by caring for the foundations, the muscle remains functional and healthy. It does indeed grow slower, but it won’t experience disruption through tears or ruptures.
Organisations should continually invest in new-growth initiatives while the core business is healthy. However, in many cases, organisations only focus on visible growth that satisfies the market and neglect future opportunities. Most organisations wait until some crisis to start exploring new growth opportunities. In such situations, the pipeline for growth suddenly becomes vital, and new-growth initiatives must suddenly grow very fast. This pressure prevents the innovators from taking the time to iterate over their strategy’ to discover and nurture disruptive innovations. In addition, they pass over many opportunities deeming their potential growth too slow.
Chances are you know someone impacted by a stock market miss? Swathes of employees are laid off to meet market expectations, projects are abandoned just as they were making progress and innovation initiatives are put on hold or cancelled, all in a bid to display cost-cutting. (At what actual cost?)
While equity markets brutally punish companies that allow their growth to stall and reward companies that don’t just achieve growth but show possible future growth paths. I don’t envy executives who become slaves to the stock. Rapid growth happens fast and looks magnificent but masks foundational problems; we see this with startups who “buy” customers onto their platforms just to satisfy vanity metrics that will appease shareholders, but it is never real growth nor is it sustainable. It is rank growth.
We were joined on The Innovation Show this week by the co-author of “The Innovators Solution”, Michael Raynor, in our tribute series to the work of Clayton Christensen. In the book, he writes, “Growth is important because companies create shareholder value through profitable growth. Yet there is powerful evidence that once a company’s core business has matured, the pursuit of new platforms for growth entails daunting risks. Roughly one company in ten can sustain the kind of growth that translates into an above-average increase in shareholder returns over more than a few years. Too often, the very attempt to grow causes the entire corporation to crash. Consequently, most executives are in a no-win situation: equity markets demand that they grow, but it’s hard to know how to grow. Pursuing growth the wrong way can be worse than no growth at all.”
In the book, Raynor shares the story of AT&T, who, in a little over ten years, wasted about $50 billion and destroyed even more shareholder value— hoping to create shareholder value through growth. The pressure from the analysts drove them to make terrible calls. The worst thing is that they undoubtedly overlook much slower growth, sustainable ideas that employees surely supported, but higher-level executives killed because the projected increase would not satisfy shareholder expectations.
In the wake of the government-mandated divestiture of its local telephony services in 1984, AT&T primarily became a long-distance telecommunications services provider. The break-up agreement allowed the company to invest in new businesses, so management immediately began seeking avenues for growth and the shareholder value that growth creates.
The first such attempt arose from a widely shared view that computer systems and telephone networks would converge. AT&T first tried to build its computer division to position itself at that intersection but could do no better than annual losses of $200 million. Rather than retreat from a business that had proved unassailable from the outside, the company decided in 1991 to bet more significantly still, acquiring NCR – at the time – the world’s fifth-largest computer maker, for $7.4 billion. That proved only to be a down payment: AT&T lost another $2 billion trying to ensure the acquisition would work. AT&T finally abandoned this growth vision in 1996, selling NCR for $3.4 billion, about a third of its investment in the opportunity.
But the company had to grow.
So even as the NCR acquisition was failing, AT&T was seeking growth opportunities in technologies closer to its core. In light of the success of the wireless services that several of its spun-off local telephone companies had achieved, in 1994, the company bought McCaw Cellular, at the time the largest national wireless carrier in the United States, for $11.6 billion, eventually spending $15 billion in total on its own wireless business. When Wall Street analysts subsequently complained that they were unable to properly value the combined higher-growth wireless business within the lower-growth wireline company, AT&T decided to create a separately traded stock for the wireless business in 2000. This valued the business at $10.6 billion, about two-thirds of the investment AT&T had made in the venture.
But that move left the AT&T wireline stock right where it had started, and the company had to grow.
So in 1998, it embarked upon a strategy to enter and reinvent the local telephony business with broadband technology. Acquiring TCI and MediaOne for a combined price of $112 billion made AT&T Broadband the largest cable operator in the United States. Then, more quickly than anyone could have foreseen, the difficulties in implementation and integration proved insurmountable. In 2000, AT&T agreed to sell its cable assets to Com- cast for $72 billion.
The bad news is that AT&T is not a special case.
Even expanding firms face a variant of the growth imperative. No matter how fast the growth treadmill is going, it is not fast enough. This is a heavy, omnipresent burden on every executive sensitive to enhancing shareholder value. Why would you focus on slow, sustainable growth when you are measured on visible muscle?
Be Patient for Growth and Impatient for Profit
I like Clayton Christensen’s maxim, which Michael Raynor reiterated on The Innovation Show. Companies need to be “impatient for profit but patient for growth.” You want to build a business model that generates real value for customers. You can buy growth and fake that, but you can’t fake profits.
In a Gartner talk in November 2010, Christensen said, “What we’ve done in America is to define profitability in terms of percentages. So if you can get the percentage up, we feel more profitable. There is a pernicious methodology for calculating the internal rate of return on investment. It causes you to focus on smaller and smaller wins. Because if you ever use your money for something that doesn’t pay off for years, the IRR is so crummy that people who focus on IRR focus their capital on shorter and shorter term wins.”
GDP growth, per capita income growth, and even sector-specific statistics offer a high-level view of what’s happening in the economy. Still, they don’t capture new, slow, sustainable growth effectively. Changing the metric changes the lens and thus changes what we see and inevitably, how we act.
THANKS FOR READING.
The Clayton Christensen Series is available on YouTube below, and I also include a relevant episode with Alexandre (Alex) Lazarow