"To be a great company, you must have an upper bound on growth and have the discipline to leave some growth on the table," says Jim Collins, best-selling author of Good to Great and How the Mighty Fall. This may seem like a strange recommendation given that so many companies today are struggling to grow.
To make his point, Jim Collins posed a growth quiz to the hundreds of CEOs of Gazelles (those firms growing more than 20% per year for 4 years or more) at the recent Fortune Small Business Growth Summit in Dallas. You have the option of investing in either Firm A or Firm B. They are both in the same technology driven growth industry as early-stage entrepreneurial ventures having equivalent products and markets with good long-term potential. Firm A has an average net income growth rate of 25%; B's is 48%. Should you invest in A or B?
GROWTH CONSTRAINTS? Does your firm have limitations on growth? Jim Collins recommends that you set a minimum performance expectation to hit no matter what. What's the performance hurdle that you'll always hold even if it requires you to limit growth? In terms of performance, you may choose to maintain core values, ensure quality, not risk more than you can manage to lose in the worst of times, have a certain profit per year, sustain your culture, or not lose control of the company and how you manage it.
IS GROWTH THE MOST IMPORTANT SUCCESS FACTOR? In the example of firms A and B, firm A has a standard deviation (s.d.) on its average growth rate of +/- 7 and B has a s.d. of +/- 323. Additionally the range of A's growth rate is 20 to 44, while B's range is -397 to 1288. Eventually firm A was trading at $290 and B at $14. Furthermore, B had lost control of its destiny. This real example, with the identities hidden, shows that growth is not the most crucial factor.
Jim Collins further remarks on taking advantage of tough situations, "If your firm goes into turbulent times strong, you have the chance to shine. The difficulties will expose your strengths relative to others. If you go into challenging times weak, it will show your weaknesses. It is more important what you do BEFORE the storm comes, than WHEN the storm comes. A storm holds great opportunities and it is something you do not want to waste."
DETERMINE WHAT TYPE OF COMPANY YOU HAVE NOW: Level I - a strong company (such as Intel), Level II - not as strong, or Level III - already weak (such as General Motors). Ask what you can and must do so as not to waste the opportunities from the storm. Take this as an assignment: establish two or three things you must do differently so that you'll never go into a storm other than as a Level I strong firm.
ESTABLISH SHOCK ABSORBERS. Another Jim Collins' suggestion is to build in shock absorbers to protect your firm. For example, reach a point where you could run your company for an entire year even if you would not receive one penny of revenue.REVISE YOUR STRATEGY AND THEN ACT. Gather together your executive team, business coach, and advisors for a strategy session. This is the perfect time to revise your plan for the next year. Consider the following:
|Determine your constraints on growth. What is the performance hurdle that you'll always maintain even if it limits growth?|
|Establish two or three things to do differently so that you'll never go into a storm other than as a Level I strong firm.|
|Identify and install shock absorbers to protect your firm.|