Strategic Decision: Optimal Growth Rate

Key Insight

How fast a company grows should be an explicit strategic decision, directly tied to its vision, rather than an automatic pursuit of maximum growth. Rapid growth is not inherently good and can bring significant downsides. A common peril is a severe cash flow situation, as companies spend cash on materials and labor ahead of sales, leading to cash being tied up in inventory if forecasts are missed; roughly half of all bankruptcies occur after a year of record sales.

Other downsides of rapid growth include masking gross inefficiencies, straining infrastructure to breaking point, pressuring salesforces to cut margins, creating extreme stress on employees, increasing organizational complexity, reducing communications, and diluting company culture through the 'warm bodies syndrome,' where hiring standards are lowered to fill immediate needs. This often leads to a 'growth-for-growth's-sake' mentality, as seen with Osborne Computer, which priced products below cost to sustain growth, ultimately leading to bankruptcy. The example of Lightcraft, which declined after a forced rapid growth strategy by new owners, illustrates these pitfalls.

Furthermore, rapid growth can foster arrogance and a sense of invulnerability, leading to poor decisions and disaster, as evidenced by the French Army in 1812, the German Third Reich in 1941, and numerous corporate failures. However, slow growth can be a viable and even superior strategy. University National Bank, for example, achieved 45% higher return on assets than average U.S. banks and 0% teller turnover by pursuing a methodical slow-growth path, focusing on superior customer service and attracting talent with freedom and fun. While some rapid-growth markets necessitate quick expansion (e.g., Compaq and Apple in personal computers), the healthiest companies grow at rates consistent with their vision, allowing them to build greatness sustainably, rather than merely seeking the fastest possible expansion.