Growth and the Business Life Cycle

By Kevin Cope, author of Seeing the Big Picture

 

You should approach growth not as an assumption, but as a well-thought-out decision. —Edward D. Hess

Start-up, growth, maturity, decline: These are the classic stages of a business’s life, although management gurus of various stripes and colors have put their own spin on the idea of the business life cycle. While this is a useful way to think about how a company develops and grows, it’s also misleading, because having one stage labeled ìgrowthî implies that the company isn’t growing the rest of the time. Of course it is—until it’s declining. And while we use the term life cycle, businesses rarely progress from one stage to another in a step-by-step fashion. A company might move back and forth between growth and maturity as new markets or technologies become available. Or a new division within a mature company might exhibit all of the behaviors of a start-up.

Still, the growth of a company changes over time, and using the stages of the life cycle helps us anticipate what type of growth we might expect in a company. For instance, a start-up might struggle along for a while with little growth, just enough to keep it alive as it attracts customers or clients. But then it hits its stride and takes off. This is the growth stage and it can take a company from a small operation to a global organization. Growth is often very high in this period. Just look at the Inc. 500, Inc. magazine’s ranking of companies with high revenue growth over a three-year period. In 2010, AtTask, which was number 500 on the list, had grown 604 percent during the previous three years. The companies on this list are fast-growth organizations, but that level of growth isn’t uncommon when a business takes off. Going from $50,000 in revenue to $100,000 in revenue may not be all that difficult, but that’s a 100 percent growth rate. Going from $50 million to $100 million? That’s not so easy to do in one year—or even five. Unless you’re Jeff Bezos, apparently, who took Amazon from $0 to $1.6 billion in a bit less than five years. In 2010 Amazon had a five-year average annual growth rate of about 37 percent for revenue and 40 percent for earnings per share. Although its rate of growth has slowed, its recent results are not too shabby.

Rapid growth is often unsustainable as a business increases in size and complexity. At almost $400 billion in revenue, Chevron would have to add $20 billion in sales to grow a mere 5 percent! Fast-growing companies eventually top out and enter maturity, attaining a growth rate that is more steady and sustainable. For Start-up, growth, maturity, decline: These are the classic stages of a business’s life, although management gurus of various stripes and colors have put their own spin on the idea of the business life cycle. While this is a useful way to think about how a company develops and grows, it’s also misleading, because having one stage labeled ìgrowthî implies that the company isn’t growing the rest of the time. Of course it is—until it’s declining. And while we use the term life cycle, businesses rarely progress from one stage to another in a step-by-step fashion. A company might move back and forth between growth and maturity as new markets or technologies become available. Or a new division within a mature company might exhibit all of the behaviors of a start-up.

Still, the growth of a company changes over time, and using the stages of the life cycle helps us anticipate what type of growth we might expect in a company. For instance, a start-up might struggle along for a while with little growth, just enough to keep it alive as it attracts customers or clients. But then it hits its stride and takes off. This is the growth stage and it can take a company from a small operation to a global organization. Growth is often very high in this period. Just look at the Inc. 500, Inc. magazine’s ranking of companies with high revenue growth over a three-year period. In 2010, AtTask, which was number 500 on the list, had grown 604 percent during the previous three years. The companies on this list are fast-growth organizations, but that level of growth isn’t uncommon when a business takes off. Going from $50,000 in revenue to $100,000 in revenue may not be all that difficult, but that’s a 100 percent growth rate. Going from $50 million to $100 million? That’s not so easy to do in one year—or even five. Unless you’re Jeff Bezos, apparently, who took Amazon from $0 to $1.6 billion in a bit less than five years. In 2010 Amazon had a five-year average annual growth rate of about 37 percent for revenue and 40 percent for earnings per share. Although its rate of growth has slowed, its recent results are not too shabby.

Rapid growth is often unsustainable as a business increases in size and complexity. At almost $400 billion in revenue, Chevron would have to add $20 billion in sales to grow a mere 5 percent! Fast-growing companies eventually top out and enter maturity, attaining a growth rate that is more steady and sustainable. For instance, the five-year average sales revenue growth rate from 2007 through 2011 for the S&P 500 (large, publicly traded companies) was around 8 percent, and the earnings per share (EPS) growth rate was 7 percent. (In the last couple of years, the downturn in the economy has lowered these percentages.) Still, a mature company could move back into a high-growth period because of new products or other market expansion. Apple was one of Fortune’s one hundred fastest-growing companies in 2011 even though it has been around for more than thirty years.

Of course, what we hope to see throughout all of these stages is growth in both the top line and the bottom line. That’s a good indicator that the growth is sustainable and that the company is less likely to suddenly crash and burn. Companies that have strong cash positions, good profit margins, and asset strength have the foundation to support growth both in the short and long term.

Companies of all sizes, industries, and product-service mixes can grow both revenues and profits consistently, but sometimes they fail to do so. Shown here is a chart of Wal-Mart’s impressive revenue-growth record over nineteen years compared to that of Sears Holding, two competitors in the same industry. One creates spectacular revenue growth; the other doesn’t. The difference is management’s approach to vision and execution.

For its fiscal year ending January 2011, Wal-Mart grew its revenues to $421.8 billion, more than 3 percent over prior year sales of $408 billion. Although the growth rate has slowed for Wal-Mart during 2010 and 2011, it still grew by more than $13 billion in a struggling economy. That increase is almost equal to the current size—in terms of total revenue—of Toys R Us.

 

 

 

While fast growth can be a wonderful thing, it can often require risky investments. Lots of companies never make it past the start-up stage, and of those that make it into the growth phase, many don’t make it to maturity. To grow, every company has to take some risks, and if the leaders miscalculate, those risks can result in the demise of the company. What makes all the difference is the skill of the leaders in establishing a vision for the company, creating sound strategy based on that vision, and then executing the strategy successfully. Steve Jobs retirement as CEO of Apple in August of 2011 and his subsequent passing two months later received a lot of attention because he exhibited such an amazing combination of vision, strategy, and execution.

The execution of growth strategies is where every person in the organization plays an important role. Every function can contribute to reducing costs to improve profits, to driving quality improvement, and to improving customer service, all of which contribute to either top-line or bottom-line growth.

INSIGHTS INTO GROWTH

  • Companies either continue to grow or risk dying. Companies growing profitably tend to be more energized, innovate products and services, expand market share, and attract motivated top talent.
  • Your CEO’s most important job is to ensure sustainable, profitable growth in order to create value for owners/shareholders.
  • Companies not growing can enter a downward decline and die cycle of higher costs, lower sales, lost market share, lower share price, cost cutting, reduction in force, demoralized employees, lost productivity, lost customers, more loss of market share, and so on. The competition will take over their markets, customers, brand positioning, and even their best people.
  • The investment community looks primarily at the sales and earnings growth of a company when valuing its stock price.
  • Growth is reflected primarily on a company’s income statement. Both top-line growth (increasing revenue), and bottom-line growth (increasing profits) are essential over time. Top-line growth in sales does not necessarily mean bottom-line growth in profits. Over time, growth in profits is more important than growth in revenue.
  • Organic growth means internal expansion opening new stores, selling more products, and entering new demographic or geographic markets. Inorganic growth means merging with or acquiring new businesses to increase revenue.
  • Growth expectations may change based on a company’s stage of development. High growth may be realistic in the early years but may be less sustainable as the company matures and becomes larger and more complex.
  • Risks of high growth include expenses that grow faster than sales revenue, a decline in quality, and burnout among employees. Many companies grow sales rapidly but lose money and go out of business.

 

 

Kevin Cope is not only a successful executive, he is also a trusted resource and confidant to business leaders from around the world, a sought-after keynote speaker, and author of Seeing the Big Picture, Business Acumen to Build Your Credibility, Career and Company (Greenleaf Book Group, March 2012).

For over twenty-five years, Kevin has promoted the idea that the brightest minds in business understand the essence of how a company makes money, and they use this knowledge to drive their decisions. These people have been described as having business acumen, and you’ll find them everywhere from the factory floor to the corner office.

Recognizing that business acumen is about seeing the big picture and not just about financial literacy, Kevin founded Acumen Learning in 2002, a training company that has gone on to teach Kevin’s 5 Drivers business model to some of the world’s most respected and successful companies. Kevin’s specialty is teaching employees and leaders how to speak the language of business as fluently as they speak the language of their department or function. Kevin believes that businesspeople who exercise their business acumen execute better, smarter, and faster business decisions that drive sustainable and profitable growth.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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