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The Size and Growth Impulse

post # 259 — December 12, 2006 — a Strategy post

In most companies and firms, it is taken as a matter of unexamined faith that the organization must grow. A related article of faith is that size matters — in marketing, in recruiting, in profitability.

The “growth and size” school of thought has some eminent supporters. Jack Welch of GE famously believed that to be a viable competitor an organization had to be number one or number two (measured by market share) in its industry. Many contortions of analysis have subsequently taken place by companies (or divisions within companies) trying to redefine their market so that they could claim to be the first or second biggest in that market.

Wall Street analysts seem to care about little else but growth when valuing share prices, and CEOs respond to this strong signal. Even if they can’t grow “organically” (or maybe especially if they cannot grow organically) CEOs eagerly seek out “deals” to expand their empire.

To this day, academic institutions teach the decades-old “Bermuda Triangle” theory of industry structure, which says that you can only survive by being either the biggest overall in your industry or be small and dominate a focused specialty. (The Bermuda triangle is the space between small and large where most firms disappear, apparently.)

I do understand the need for growth that derives from the fact that employees seek promotion opportunities, and that to hold on to good people the organization must grow in aggregate size (unless it is prepared to get rid of its senior people with enough frequency to make way for the juniors!)

In spite of all this, I have my reservations.

I worry that all these good reasons for seeking growth get turned into a mania for *ANY* growth, where the measure of success becomes growth at all costs, not **wise** growth. I don’t believe all growth is good.

For example, if two average quality firms of average size merge, is the bigger entity really more competitive? Do customers and clients REALLY re-allocate their business based on who’s the biggest firm?

And if you think growth is needed to provide opportunities for employees to advance their careers, what good does it do to grow by bringing in large numbers of senior lateral hires who then occupy the very positions that the juniors were aiming for? Or, how does it help to create opportunities for junior people by launching totally businesses involving totally new disciplines in totally different geographic areas? The given reason for growth (provide opportunity) is often a façade for other reasons (empire building, the belief that being big helps attract customers.)

My biggest concern is that most strategic plans place a greater emphasis on growth and size than they do on quality.

I have seen as many (perhaps more) companies get in to trouble by trying to grow too fast than by growing too slow. “Too-fast growth” can lead to a lack of discrimination in chasing business, unwieldy and unmanageable structures and a poor, low-quality “if it moves, shoot it” culture.

There’s a paradox that some really great firms understand: – If you really operate day-to-day by having the primary goal of “being the best” , then growth and size may indeed result since the marketplace will notice and reward your extra value. Quality LEADS to growth and size, but only if growth and size are secondary.

It’s pretty clear that firms (and individuals) that put growth and size AHEAD of quality (that would be most businesses) will end up with weaker reputations and will, in the long run, be likely to get **less** volume and growth. Putting volume and growth first may be self-defeating. Yet it is how most firms are actually run.

Let’s play fair here. It happens to us as individuals, too. It’s easier to measure our success on volume (did I get more work) as opposed to how fast we are building new skills. How many of us can honestly say we put getting better ahead of getting more?

What do you think of these questions:

(a) Do most companies place size and growth ahead of quality and getting better?

(b) Is this, ultimately, bad for them?

(c) What, if anything, can be done about that (or is it inevitable and irresistible)?

10 Comments

Eric Brown said:

(a)Do most companies place size and growth ahead of quality and getting better?

I think that there is an interest at quite a few companies to get ‘big’ and have multi-billion dollar revenue. It is very rare that I run across a mid-sized company that is happy being mid-sized.

Chris Anderson’s “Long Tail” idea seems to be the thing that is being discussed all the time these days…I wonder if this idea of stepping away from the mass market and focusing on the ‘niche’ will have any effect on the way organizations perceive the idea of ‘growing’?

(b) Is this, ultimately, bad for them?

Growth without constraint (including ensuring quality) is not a good thing.

One way that it can be good for a company is to ensure that all growth is performed in a manner that creates a sustainable and profitable organization while at the same time building a unique and enjoyable corporate culture for employees.

(c) What, if anything, can be done about that (or is it inevitable and irresistible)?

I haven’t had enough coffee to tackle this question fully :). However, upon first thought, the only real tangible thing that can be done is to educate boards and senior leadership that quantity is not always better than quality. I think this may actually be taking place in some areas of business with the rise of the Customer Evangelist movement.

posted on December 12, 2006

Sean Campbell said:

The point of going from trusted consultant to team of trusted consultants is perhaps one of the hardest decisions for a budding new business owner to make.

The belief that you can do more good, make more money, or simply have a bigger visibility by being larger is a powerful draw.

But the devil is in the details.

Do you have the right skills to manage a team as opposed to just being an individual contributor as a consultant. Can you work on your business as opposed to in it (to borrow something from Gerber’s series). And most importantly can you keep the quality up as you grow.

So far I’ve seen very few people who have been able to do this succesfully and fewer still who are larger firms who can do this succesfully especially when they expand into other geographies.

In the end many figure it out and continue to grow. But in the meantime a far amount of equity with existing clients can be lost and overall reputation suffers as a result.

I think the key thing to keep in mind is that if you are going to grow you will need to plan for an expect some changes to how you are percieved. How you react to that change in terms of pricing, service levels, hiring practices, mixture of offerings, willingness to engage in new practice areas, etc. is perhaps the key thing that will affect your succes or lack thereof.

Having lived the life of an independent consultant, having grown a firm to over 25 people, sold it, then gone to work for a firm who was growing a remote office after being very succesful in another geo, and then back to independent life in my career I think I’ve seen a few turns of the wheel on this and I agree it’s perhaps one of the hardest decisions the aspiring business owner will be faced with.

posted on December 12, 2006

Alexander Kjerulf said:

I’m delighted to see you raise this question David! The ultimate expression of the growth fetish is of course the maxim “Grow or Die” which is allowed to live a mostly uncontested existence.

I disagree – I’m more with Ricardo Semler on this one:

“There is no correlation between growth and ultimate success,” he says. “For a while growth seems very glamorous, but the sustainability of growth is so delicate that many of the mid-sized companies which just stayed where they were doing the same thing are much better off today than the ones that went crazy and came back to nothing. There are too many automobile plants, too many airplanes. Who is viable in the airline business?”

From this great interview.

posted on December 13, 2006

Charles H. Green said:

Great issue, David. As you note, it’s usually axiomatic that growth is good, and the stated reason is to give employees growth opportunities.

As you note, this reason is often given as a coverup for other motives. But I think the reason itself is flawed.

The way the world is moving, corporate growth is increasingly not a necessary source of growth.

Look at the “usual suspects” in any trend list: outsourcing, employee job-hopping, strategic alliances, plug and play processes, solo operators. The way the world is emerging, there is fabulously more opportunity for personal growth by moving across many organizations, as opposed to having to look only to one. From the perspective of the individual’s personal development, this is a largely beneficial trend.

This means, among other things, that the argument for growth is undercut at its essential core. The “point,” less and less, is corporate growth, or sustainable competitive advantage of one company.

The ‘point” of the future is more likely to be built around individuals, and a fluid collection of business units contracting with other fluid business units and with individuals. The emphasis is more and more on the commercial interaction, and less and less on the competitive interaction between fixed vertical corporate entities with non-porous boundaries.

Growth as a goal? Who needs it when you can go get your own?

posted on December 13, 2006

Tim Burrows said:

David,

Do you have any data on profitability of different sized businesses, per partner/share? Are there any general conclusions that can be drawn from this? For example, are small firms generally less profitable per partner/share than large firms?

posted on December 13, 2006

David (Maister) said:

I’ve done some statistical work on this, and seen that by others. (For example, law firm data from The American Lawyer, accounting firm data from Inside Public accounting.)

The general answer is that greater profitability primarily comes from being in the flow of more (inherently) more profitable work – the large scale, cutting edge, high-fee and high-leverage work. Large firms TEND to have more access to that kind of work, so they are more profitable in general, on a per partner basis.

However, you can show from the data that it’s not size itself which is creating the profits: if you’re a non-New York firm (ie not in a financial center) and your growth comes from adding more middle-market work (medium fee medium leverage) then greater size will not mean higher profit per partner.

posted on December 13, 2006

Tim Burrows said:

Interesting. Do “cutting-edge” and “high-leverage” coexist? Intuitively I would have thought that high leverage would lead to lower fees and “tried and true” (process driven) arrangements, which is how I perceive most large firms.

posted on December 13, 2006

Joseph Heyison said:

In a competitive market, a firm must grow, die or specialize. In a paper based on resource partitioning theory from ecology, Jonathan Jaffee noted ten years ago for law firms in Silicon Valley:

“As originally formulated, a market becomes “partitioned” into generalist and specialist resource segments, as generalist and specialist organizations find different viable locations in a market’s resource space, with generalists in the rich and lucrative market center and specialists in the more resource-depleted market periphery (Carroll, 1985). Increasing generalist market concentration improves specialist vital rates as smaller generalist organizations are out-competed by larger generalists, which opens up resources for specialists that tend to be in more peripheral locations in a market.”

J. Jaffee, “The Resource Partitioning of a Corporate Legal Market: The Proliferation of Specialist Law Firms in Silicon Valley, 1966-1997,” at 8, found at http://www-rcf.usc.edu/~jaffee/research/JJaffee 2000 ASA Paper _April 2001.pdf.

As long as a larger firm has economies of scope (one-stop shopping) or possibly scale, it will out-compete smaller generalists. Indeed, it may even swallow the larger firms in the most specialized niches — witness the devouring of almost every sizable IP specialist law firm in the U.S. by large generalists when IP became part of the “rich and lucrative market center” instead of a “resource-depleted periphery.”

Add to that the internal need to grow rapidly to hold talented juniors, as noted by David long ago, and the pressure to grow becomes hydraulic.

Specialize and prosper with a quality approach in niches that aren’t attractive to large generalists, or get out the golf clubs, market like mad and just do the work well enough to stay out of trouble at the large generalist.

posted on December 14, 2006

Robert M. Randall said:

What is the missing word from this sentence in your editorial above:

“Or, how does it help to create opportunities for junior people by launching totally[miising word] businesses involving totally new disciplines in totally different geographic areas?”

posted on February 11, 2007

David (Maister) said:

The missing word is “different”

posted on February 11, 2007