Marketers talk about brands as vehicles for growth. But does that mean they should just keep growing – or is there a point when they reach critical mass?
It may seem an heretical question in a time when public companies are under so much pressure to keep pulling bigger and bigger performance numbers out of the results hat. But re-reading Ron Ashkenas’ excellent HBR article Why Successful Companies Stop Growing, a number of the points he raises are directly applicable to the decision on when or whether your brand should stop pursuing further “gains”.
What goal are you chasing?
It’s tempting to believe that growth is a race for an abstract goal called “first”, and therefore it’s fine to chase the same things as everyone else, as long as your brand gets there before them. The alternate temptation is to believe that growth is best achieved using a broad-brush approach, in which case your brand should pursue every opportunity it can without critically evaluating the merits or otherwise of each course of action. By contrast, say Cesare Mainardi and Paul Leinward, the areas you should be focusing on are those where you have distinctive capability advantages. So you should not be going after the same things as everyone else and you should not be tail-gating every “market opportunity” you see in the hope that it leads somewhere. Neither approach works. However, companies that successfully apply a distinctive capability strategy, they say, are three times as likely to report above-average growth and twice as likely to report above-average profitability.
Growth is less a goal in itself and more a sign that you are on task.
In other words, just as differentiation is necessary for your brand, it’s also critical for your goal-setting. Setting distinctive targets and knowing why you have the capability to achieve them over others is vital. Growth is not so much a goal in itself. Rather, it is a sign that you are on task. Set goals for growth therefore on the basis of increasing your distinctive advantages. By doing this, you make best use of what you are inherently better at, and you almost certainly will generate barriers to entry that are higher and stronger for any others looking to enter and capitalise on your success.
What are you growing?
The abiding assumption for many of us is that growth is paired with performance. But for quite a number of ‘digital economy’ brands, growth is not aligned to returns at all. Instead these brands measure their success on potential; on their social media numbers or the market valuations that they or others have accorded them. When you measure growth by these criteria, the numbers are often heady but the realisable value of those numbers is far less certain. In 2015, for example, Airbnb accorded itself a valuation of $24 billion, but predicted actual revenue for that year of $900 million, up from $250 million two years before. That meant, that in valuation terms, Airbnb was more valuable than the whole Marriott hotel chain which has 4000 hotels and had made $13.8 billion in actual revenues the previous year.
To me, growth based on physical returns is a more substantial indicator of whether you have bankable distinctive capability. Others will disagree, arguing that whilst Airbnb continues to attract funding based on its growing valuation rates, then it can legitimately lay claim to being a growth company. Time will tell who is right about what constitutes growth.
At what size are you most profitable?
I’ve watched many companies continue to grow their top-lines and footprint even as their bottom-lines turn south. It happens when scale and profitability become an inverse equation – or when the pursuit of scale becomes the core focus at the expense of the brand’s core competitiveness.
Wise words on this from Investopedia: “Eventually every fast-growth industry becomes a slow-growth industry”. They cite the example of McDonald’s which for years shrugged off shrinking profits because it was unwilling to admit that it had saturated its market. Instead, the corporate accelerated its restaurant openings and advertising spending, eroding profits as it did so and eating up large chunks of cash flow. “CEOs and managers have a duty to put the brakes on growth when it is unsustainable or incapable of creating value. That can be tough since CEOs normally want to build empires rather than maintain them.”
I’m a huge believer in identifying the point where the brand is at the right size to attract the best returns it can for the market conditions it is in and that it believes lie ahead. In some markets of course, that’s all about scale. In others, it’s about recognising that the cost to take on the biggest players will be too high and take too long – in which case, the future may well lie in scaling back your ambitions to a focused part of the market where you are strong and where there are good margins for those that can cater to more specific needs.
What market are you looking to grow?
Obsolescence and convergence shift the profitability of markets from under the feet of brands every day. Chasing growth in the wrong place is the fastest way to dig your brand into a bigger and bigger hole. While market authority and leadership are reassuring statuses to have in what you perceive as your core area of strength, they mean nothing if the area itself is dwindling. Sometimes, brands comfort themselves that they are winning greater and greater market share when, in fact, they are simply becoming monarchs of nothing as the market itself plateaus and then starts to decline, and commoditising forces push up the number of bargain hunters and decrease the real returns that your brands are achieving for you. Critical factors to watch here are organic growth, competitor activity, sector investment and of course net profit.
What expectations have you set yourselves?
Percentages may look reasonable on paper, but according to Ron Ashkenas, it’s easy to overlook the law of large numbers: “the larger a company becomes, the more the entire engine has to work harder”. If your growth target percentages have not shifted in some time, you are, in effect, placing your brands under more and more stress as you grow. The risk is that your people will pursue top-line objectives at the expense of sustainable competitiveness or reputation in order to hit what they’ve been told are reasonable targets. The key to avoiding this is performance metrics that appraise gains through a range of lenses to ensure you are achieving quality growth, not superficial growth at the wider expense of your brand.
Note: A version of this post has been published elsewhere under the title 5 Questions Brands Must Ask About Growth