Tan Wei Ming
Smart Growth
By Edward Hess
Columbia Business School Publishing, 230 pages, $30.95
Most company executives fervently believe their firm must grow or die.
So did Edward Hess, a professor of business at the University of Virginia, who had previously made his living as an investment banker and strategy consultant helping to finance growth companies. But when he started studying corporate growth in 2002, he was surprised to find that much of what he believed about the purity of growth - and what you probably still believe - was wrong.
"In reality, for both public and private companies, growth can be good or growth can be bad. In many cases, it is just as likely that growth can harm a business as it is likely that growth can enhance its survivability," he writes in Smart Growth.
Most of us instead instinctively subscribe to the model on growth hallowed by Wall Street: Public companies should continuously grow; growth should be smooth and linear; and it should occur predictably every quarter.
But the reality, his research found, is that companies don't naturally grow in this fashion. He reports on six major studies which show that, for public companies, smooth and continuous growth is the exception rather than the rule.
In a 2004 study, for example, Rita McGrath of Columbia University Business School could find only 248 U.S. companies that were able to build their revenues by 5 per cent for five consecutive years. Of those, 93 per cent achieved their growth by acquisitions or mergers. So only 7 per cent managed the feat by core growth.
That final group included companies that managed what Professor Hess calls "authentic growth," selling more goods or services to more customers or operating more efficiently. Because it is difficult to meet Wall Street's demands through authentic growth, companies instead play the earnings game.
They resort to legal or accounting gimmicks, manage the timing of earnings and sell assets or engage in other non-operating financial transactions to meet the quarter-by-quarter numbers the market demands. Not incidentally, he notes, this leads to big bucks being earned by accounting, legal and investment banks that help feed the prevailing Wall Street "rules."
Rather than using the Wall Street nostrum of constant growth, he substitutes six questions business leaders should continually ask themselves:
Why should we grow?
How much should we grow?
Are we ready to grow?
What are the best ways for us to grow?
What are the risks of growth?
How can we manage those risks?
He calls this measured approach "smart growth." We have seen lots of dumb growth, of course: Companies that crashed and burn because they were hell-bent on growth, and expanded beyond their capability or succumbed to financial foibles. He reminds us that growth requires conscious thought about its value and the risks involved.
"It is important to acknowledge that growth can be good or growth can be bad for a company depending on the circumstances. Growth is a complex change process that changes an organization, the people in it, and the myriad relationships both within a company and its business environment. Growth should never be an assumed goal," he argues.
He also suggests that perhaps we need a second stock market for smart-growth firms trying to build enduring companies for multiple stakeholders, funded by long-term investors rather than today's short-term stock market participants.
The book has many case studies of companies that had smart growth and not-so-smart growth. It is not a manual for achieving growth, although it does highlight companies such as Costco and Sysco that pay more attention to their employees and their customers than to Wall Street. His analysis is eye-opening, but the book suffers because the case studies are written dully.
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Special to The Globe and Mail