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Escaping the Growth Curse
The Path to Stronger Corporate Strategy
Yves Doz (Author) | Keeley Wilson (Author) | Jill Ader (Foreword by)
Publication date: 06/11/2024
As companies mature, their underlying growth naturally slows—this is called the 'growth curse'. It's a pervasive problem that plagues companies, CEOs, and board members alike. In order to safeguard a company's future, a strategic form of governance in which the board plays a more active role on behalf of all stakeholders, must be activated.
This book is comprised of 3 parts. First it shows companies how to identify the traditional traps that hinder growth. The second part provides companies with a blueprint for building their board, defining long-term strategy, and adjustments necessary to serve continued growth. The final part delves into the specific ways that the board and executives must collaborate in relation to strategic renewal.
Reimagining the limits of growth and how companies are run as a consequence provides an escape from the 'growth curse' at last.
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As companies mature, their underlying growth naturally slows—this is called the 'growth curse'. It's a pervasive problem that plagues companies, CEOs, and board members alike. In order to safeguard a company's future, a strategic form of governance in which the board plays a more active role on behalf of all stakeholders, must be activated.
This book is comprised of 3 parts. First it shows companies how to identify the traditional traps that hinder growth. The second part provides companies with a blueprint for building their board, defining long-term strategy, and adjustments necessary to serve continued growth. The final part delves into the specific ways that the board and executives must collaborate in relation to strategic renewal.
Reimagining the limits of growth and how companies are run as a consequence provides an escape from the 'growth curse' at last.
1 ◼ The Growth Conundrum
Crises in corporate governance come in many shapes and sizes. Regardless of whether they are triggered by weak risk management practices, failing strategies, or outright fraud, the root cause of many of these governance troubles is ultimately the same—stalling growth. And as companies mature, this type of slowdown in growth will be a fact of life.
Yet stalling growth seems to be anathema to most CEOs and executive managers. Otherwise, how do you explain why they continue to commit to delivering unrealistic short-term growth—by which we mean bottom-line, net income growth—in the face of what they know to be challenging underlying conditions? Why do corporate leaders in large mature companies seem intent on squeezing every last drop out of their core business in an effort to deliver short-term growth (when these businesses have clearly plateaued) rather than investing in new growth businesses for the longer term? Why is the pretense of continued growth seemingly preferable to issuing a profit warning, especially when missed consecutive quarterly growth forecasts lead management, investors, analysts, the media, and even boards to panic? And why do boards continue to approve strategies designed to favor short-term expediency over longer-term sustainability?
It would be easy to answer these questions by pointing out the obvious: Many influential investors have come to expect (and indeed demand) short-term quarterly growth, and so CEOs and senior executives focus much of their energy on trying to meet this expectation, with the implicit support of their boards. Corporate leaders are afraid of missing quarterly targets; if growth forecasts are lowered or missed, investors don’t react well. A company’s share price falls on such news, and both the CEO and board are seen to have failed in their fiduciary duty to shareholders. In addition, being pegged to the share price and growth targets, the remuneration of the company’s leaders will be adversely affected. So, is it all about loss of esteem and personal financial gain, then? Well, not quite. The growth imperative is highly ingrained in us as humans and cannot be explained away solely by the four Ps—power, prestige, pay, and perks—of a select few.
The pursuit of growth has been vital at both the individual and broader economic levels for human development. It is vital to human inquiry, learning, and creativity. At the individual level, physiological growth aside, humans strive for growth and improvement—whether in education, athletic prowess, artistic and creative skills, wisdom, or spiritually. We grow and improve as parents, in the hobbies and leisure activities we pursue, in the economic security we seek for ourselves and our families, and in our careers. And this career growth imperative is even stronger in many corporate leaders whose success has been based on them continually realizing (and exceeding) their business units’ and company’s growth objectives.
The orthodoxy of continual and strong corporate growth, which CEOs and senior executives have been imbued with, has in many ways translated into a force for good at the broader economic level, where increased gross domestic product has had an astonishing impact, lifting billions of people out of abject poverty: Since 1950, we have seen the average life expectancy across the world increase by 60 percent to age 72.8.1 Over the same period, literacy rates increased from just over 50 percent to 87 percent.2
But despite the benefits, historically, the pursuit of growth has always had its murkier side—think of colonialism, territorial wars, and the exploitation of natural resources and people on a grand scale. And in recent decades, the relentless commitment to achieving short-term corporate growth based on meeting quarterly targets can be associated with a new set of problems:
A chimera—A focus on short-term quarterly growth rarely delivers sustainable growth but more often the illusion of growth. Leaders can be so fixated on short-termism that meeting quarterly targets becomes sacrosanct at the cost of their own integrity as well as ethical business practice. As we will discuss in detail in chapter 3, delivering the illusion of growth is achieved in a variety of ways, from accounting sleights of hand to outright accounting fraud, as well as by employing handy mechanisms such as share buybacks and waves of acquisitions. Whatever the method, this is not real sustainable growth.
Value destruction—Far from creating value, the scourge of short-termism actually has a detrimental effect on companies in the medium to long term and ultimately hurts shareholders, too (which does not bode well for anyone with investments or a pension fund). A 2017 study by the McKinsey Global Institute of 615 listed companies in the United States, conducted over a 15-year period starting from 2001, found that companies that were managed for the long term (defined as those making consistent investments even in difficult times, whose earnings reflected cash flow not accounting decisions, and those less likely to grow margins to meet short-term targets) outperformed their short-term-oriented peers on many levels. Over the period studied, the revenue of long-term companies was almost 50 percent higher while their net income was, on average, 36 percent higher than the firms with a short-term focus. Additionally, their market capitalization grew more, their shareholder returns were higher, and they created significantly more jobs.3 This, of course, begs the question: Exactly who benefits from short-termism? Clearly, the executives who enrich themselves while hollowing out the companies they work for benefit. But while the shareholders who put so much pressure on executives to meet quarterly targets gain in the near term, over the relatively short period of 15 years, they are shown to lose out.
Hidden external costs of growth—In general, the external costs of corporate activity (environmental damage, pollution, waste, water and land use, for instance) are not accounted for—although since German sports brand PUMA published the world’s first environmental profit and loss in 2011, a small number of companies are beginning to put a financial figure on the environmental costs of their business activities. For companies focused on short-termism, the very idea of stepping up to acknowledge the cost of externalities is anathema, and so the hidden costs of their growth are unlikely to be divulged. In addition, when two common behaviors of short-term-focused companies are taken into account—a lack of investment and “gaming the system”—this points even more strongly to growth being at the cost of the environment and society. Just think back to the Volkswagen emissions scandal and the fact that executives chose to install software that could cheat emissions tests on diesel cars in order to sell more cars, regardless of the damage these engines would have on people’s health and the environment more widely.
Despite the ultimate futility of short-termism, the day of reckoning has yet to come. And in the meantime, many boards sit back and allow the circus of conflating corporate progress with increased quarterly results to continue unabated.
The Corporate Growth Trap
Although the world is rapidly changing (and in many respects, such as the calamity of climate change, not for the better), most of today’s corporate leaders are products of a time of plenty and opportunity. They belong to an optimistic postwar generation that believes deeply in individualism, progress, and growth. Financially, the baby-boomer generation has been the most successful ever—some would argue thanks to irresponsibly borrowing from the future and living beyond its means, both financially (national public debt levels have exploded) and environmentally. And though this is the context in which corporate growth has been framed for decades, it’s worth reminding ourselves of the major drivers that have supported corporate growth over the years.
The unrelenting pressure for continual and accelerated corporate growth began in earnest in the 1970s with globalization and the “race for the world” as companies sought both scale and arbitrage advantages that only international markets could satisfy. Today, we would argue globalization is a less relevant driver of corporate growth. Advances in flexible and additive manufacturing, which decreases the amount of labor-intensive work needed to make many products, hand-in-hand with wage convergence, is leading to the reshoring of production activities. The beginnings of a similar reshoring of customer service centers is underway, thanks to advances in artificial intelligence and chat-bots. Geopolitical and environmental changes are putting global supply chains in jeopardy (think of trade barriers, the Russian invasion of Ukraine, and the increased incidence of flooding resulting from climate change). And we are all only too aware of the COVID pandemic’s impact on global trade through lockdowns and restrictions to control the spread of the disease.
The industry convergence we saw take hold almost two decades later in the 1990s added more pressure for rapid growth. To avoid becoming victims of larger firms in converging industries, companies had to become big and strong, either through acquisitions or critical alliances. Although the acceleration of collaboration, alliances, and ecosystems opened new growth opportunities for many companies, partners in these alliances and ecosystems don’t reap equal benefits, either in terms of growth or value capture, and so entering into these relationships as a way to spur growth has always been a risky strategy.
Most recently, the emergence of digital platform industries with their natural monopoly characteristics, exploiting increasing returns to adoption4 and leading to a “winner takes all” outcome, has triggered a fresh round of pressure for rapid growth—helped, of course, by the buzz from social media. With competition becoming more volatile, even companies in the most traditional of industries are pressured to have digital strategies aimed at transforming one-time sales into additional revenues from support and services. But these companies need to tread carefully, because pursuing digital platform growth in a bid to emulate the large internet companies is a fool’s errand that delivers little to no real advantage in most industries. But unless regulation and trade barriers curtail the power and dominance of the digital platform companies, digital transformation is likely to continue being a powerful driver of corporate growth across all industries.
It is no wonder, given the many forces that drive the growth imperative (from our natural human instincts to the advantages accrued from aggregate-level economic growth to the changes and trends in the competitive business landscape), that CEOs, senior executives, and managers are addicted to growth, believing that bigger is better. And because of this, leaders find it incredibly difficult to accept and adapt to the reality of slower or stalling growth when their companies reach maturity—or, to put it another way, reach the plateau at the top of an S-curve.
Managing a mature company on the plateau goes against the growth instinct. It calls for a new set of competencies and behaviors that have to be learned. And it requires a board prepared to manage investor expectations while supporting the CEO and executive team in the strategy process to find the next genuine growth opportunities. Without the competencies, processes, and structures to manage a business on the maturity plateau, CEOs and executives become victims of the growth trap. Their very raison d’être is to deliver continuous growth (this is what they are rewarded for, and it is what most investors expect), but no matter how hard they look, major new growth opportunities are very difficult to find.
The Difficulty of Finding New Growth Opportunities
The most obvious response to slowing growth is to look for new growth opportunities that build on a company’s existing strengths and capabilities, but this approach is not without risk. New business domains, markets, and ecosystems all require management time, patience, and determination. Take Philips, for instance. Facing a slowdown in many of its mature, legacy business units as a result of severe competition from lower-cost Asian producers, the Dutch firm used its expertise in medical devices as a springboard to transform itself into an integrated healthcare technology firm—divesting its consumer electronics, semiconductor, and lighting businesses in the process.
After initial success (in the first five years after the transformation began, group net income increased around 169 percent), a series of events took their toll on the refocused group, beginning with the recall of sleep apnea machines in 2021, combined with supply chain issues in China and then rising inflation. The board appointed a new CEO who shortly after confirmed the group’s commitment to the growth area of integrated healthcare while also announcing that a more nimble and streamlined structure was called for (with a loss of 10,000 jobs by 2025). A transformation of this scale was never going to be easy. But the challenges that Philips has faced in pursuing a major renewal path are undoubtedly less damaging to the long-term survival of the firm than the option of doing nothing when growth was slowing, as this would have eventually brought the company to crisis point.
The list of once-great companies that gradually faded into oblivion is much longer than the list of their peers that have continually prospered by seeking out and developing new growth areas because finding new growth opportunities is very difficult. Although we will explore this in more detail in part III of this book, it is nonetheless worth outlining here a few of the challenges that companies face.
In the example we have just described, Philips was able to pursue a transformation to enter new growth segments because it had a set of strong strategic assets that it was able to leverage in the new businesses it entered; these assets included its capabilities in medical devices, research and development (R&D) and innovation, management systems, and brand. To a large extent, renewal is dependent on transferring existing strategic assets. For companies with weak strategic assets, the search for new growth opportunities becomes much harder and more limited (we discuss the impact of strategic assets on renewal options in detail in chapter 9).
When companies are at their zenith, long before the emergence of any troubling signs that growth might be slowing, finding significant new areas of growth will often fail simply because of the disparity in size between any new growth opportunity and a large core business. Unless they are openly supported by the board and there are very positive signals from the market, CEOs and executive managers will find it difficult to sustain commitment to a relatively small new growth area in the face of a dominant existing business.
Nokia provides a good case in point. As far back as 1995, fearing that the mobile phone market would reach saturation point in the future, Nokia’s senior executives began looking for what they called the “third leg” to balance the group’s mobile phone and networks businesses. Over the next decade, numerous new venture programs and initiatives all failed to produce that elusive third leg. They were either too far out to be of interest to the business groups or were unable meet the ambitious and unrealistic growth targets imposed by Nokia’s leaders.5 But had Nokia been more sensitive and grounded with its expectations for new venture growth, perhaps it could have found a third leg business.
For companies whose success has been built on a particular technology, no matter how innovative and valuable, over time it becomes increasingly difficult to keep finding new opportunities to leverage this technology. Take W. L. Gore, for example. Since discovering expanded polytetrafluoroethylene in 1969, the company has successfully pioneered its use in a wide range of applications, from waterproof fabrics to medical implants. Yet, according to Bloomberg BusinessWeek, this much-lauded company is now vulnerable to the challenges of maturity and needs to find new growth areas6 at a time when, like its competitors, its core technologies are under ever-greater pressure from increasingly tough environmental regulations.
Another hurdle to finding new growth areas can simply be that they have a very different logic or business model than the core business. For example, going from a single-product business model to complex platforms or ecosystem models can make leaders very reticent about pursuing them. Intel, for example, had long excelled with a simple business model of designing and manufacturing microprocessors that both increased in performance while reducing in cost, which allowed Intel to dominate the market for PCs, laptops, and servers. This model has slowly been running out of steam, though. It has become more difficult, costly, and time-consuming to keep increasing chip performance; at the same time, new demand is shifting to smartphones and gaming consoles.
Although Intel is reacting to these market changes (it has increased R&D spending on gaming chips and made acquisitions to gain a foothold in new areas such as chips for autonomous vehicles), moving from a highly successful monolithic business logic to a wider range of more diversified products across different segments is proving to be quite challenging. A general lack of management skills needed for a more diversified set of businesses is a key barrier; in addition, Intel does not have a good track record for either value-creating acquisitions or renewal efforts.
In some instances, it may not be the difficulty of moving from a simple to a more complicated business model that presents the challenge. Rather, the nature of the business model itself may prevent leaders from seeking out new growth opportunities. Both Kodak and Polaroid famously fell victim to the “razor blade” business models in which the high-margin photographic film they sold brought in such huge profits that any new growth opportunity that could threaten this golden goose was dismissed. And so, despite both companies having developed the necessary technologies to shift to digital photography ahead of many of their global competitors, neither was prepared to cannibalize their highly profitable film-based business model to do so.
But a failure to recognize the potential of a new opportunity, too great a reliance on a single technology, or too divergent a business model are not the only challenges to mature companies finding new growth avenues. Behavior and culture can also play a debilitating role. As successful companies mature, they naturally become strategically myopic (viewing the world through the dominant logic of the core business) and organizationally rigid, meaning their leaders are less likely to see the need for renewal as their time and energy is spent on managing the mature core business. Even if they did, this would call for a massive change in skills and culture away from a focus on operational performance (i.e., running a business efficiently) to creative strategy making (i.e., developing and nurturing new opportunities). And without the processes in place to redeploy resources to foster and monitor new growth opportunities, the core business will continue to dominate internal resource allocation decisions, starving new initiatives of resources. It is clearly easier to focus on what exists than on innovation and renewal.
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To summarize, the end of growth creates an unprecedented adaptive challenge, with many possible roads to take and no known outcomes. Pursuing new business opportunities is inherently risky, and the payoffs are uncertain and long term. For every success, there will be many that have fallen by the wayside, being too small, too complex, or too late. Perhaps finding new growth opportunities that will move the needle enough to make a significant material difference for a large, mature, and successful company is an illusory hope. What is certain is that given the intense quarterly earnings pressures the leaders of these companies are under, it is not so surprising that few have the time, energy, or inclination to think beyond the short to medium term.
