Why Grow?

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Business Growth Strategy

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University of Virginia

Business Growth Strategy

327 ratings

Course 3 of 5 in the Specialization Business Strategy

Get the tools you need to analyze, evaluate and recommend specific actions organizations can take to grow their value and avoid common growth pitfalls. Learn to determine how best to build value, whether by scaling existing markets, entering established markets or creating new markets through innovation and acquisitions. Apply these concepts in case studies of industry leaders JetBlue, Starbucks, Intel Corporate Venturing and Tata Motors.

From the lesson

Growth through Scaling

Strategic growth is intentional, proactive, and consistent with a company's purpose. Taking advantage of economies of scale--growing a business by doing more of what it's already doing--is a conceptually easy but operationally complex approach to business growth. In this module, you will learn the Scenario Planning tool to identify and evaluate opportunities to scale an organization. With this tool, you'll have an effective means to understand when and where to grow and how to get there. The Starbucks case provides an opportunity for you to practice this tool and apply key concepts.

Growth Strategy5:18

Strategy and Growth3:39

Growth Alternatives7:12

Growth Risks7:00

Meet the Instructors

Michael Lenox
Senior Associate Dean and Chief Strategy Officer
Darden School of Business
Jared Harris
Samuel L. Slover Research Chair in Business Administration
Darden School of Business

A moment ago I introduced the idea of growth as a component

of a business's strategy.

So of course there are questions about which strategic growth

avenue should we pursue.

And remember, in this discussion we're gonna focus primarily

on growth through scaling existing business activities.

But before we get to that I think it's useful to take a step back and

ask a more fundamental question.

Why grow?

Why should a business grow?

This is a question I often ask my students.

And I think their initial response often times is to be a little bit dumbfounded.

Like why is Professor Harris asking such a silly question?

Isn't the answer obvious?

Businesses must grow.

We read the Wall Street Journal and the Financial Times and they tell us,

thou shalt grow.

And so it's as if it's some sort of law of nature, right?

But then they realize that I'm serious and

I want them to articulate their best answer to this question.

And so I want you to do that as well.

I want to articulate your best answer to the question

of why should a business grow?

Is it important for a business to grow and why?

So you might come up with an initial answer that's the same one that my

students often first think of which is there's pressure to grow.

The market is gonna punish you if you don't grow, right.

So look in a global inter-connected marketplace there is absolutely

pressure to grow.

Take for instance a publicly traded company.

I mean they are under constant pressure from the media,

from market analysis, that want to be able to understand and

predict particular businesses growth trajectory into the future and

there's a lot of analysis on whether they met those expectations or not.

So look, that pressure is there, but it's easy to forget that that pressure to grow

is essentially the pressure of non-affiliated third parties analyzing

a potential menu of different investments that they might participate in.

Right? They're trying to guess whether your

business is the right horse to bet on in their race.

So while that pressure is real, it's not really a strategic reason for you to grow.

That that pressure is there, and

I'm not suggesting that it's wise to ignore that pressure.

I'm not sure you can ignore it completely.

But what I want us to think about, in the context of understanding strategic growth,

is you know, why grow?

Pressure is not really a sufficiently strategic answer to that question.

So, what's a better answer?

You might say that we want to grow because that's going to make us more profitable.

Let's talk about that one for a second.

Is it obvious?

Is it a law of nature so

to speak, that firms that are bigger are always more profitable.

Of course not.

The economy is filled with lots of large firms who might not be profitable.

They might even go in and out of bankruptcy.

They might have all sorts of problems,

and being large hasn't been an obvious solution to those problems.

Right? So it's not clear that growing,

becoming larger will necessarily will automatically lead to more profitability.

So I think we have to keep digging.

Are we sure?

How is it that growth will lead to more profitability?

Maybe that's the next question is, is how will we produce profits through growth?

So you might have come up with a slightly more sophisticated answer to the question

that involves, hey we're gonna try to achieve some economies of scale or

some sort of efficiencies that come with a larger scope.

And that will enable us to be more profitable.

Now, is that possible?

Yes, it is, of course it's possible.

It's absolutely possible to achieve some scale economy and

that might make your margins better, and this is based on economic theory and

last time I checked I think the theory is pretty sound.

And so how it would go is that, let's say, you're a manufacturing business,

and maybe you have a little excess capacity in your manufacturing plant.

If you can sell a few more units, and therefore manufacture a few more units,

your fixed costs might remain largely the same.

And you get to spread those over more units.

And that's what we mean by things like economies of scale.

On the other hand,

maybe through growth we might be able to eliminate some redundancies, and general,

and administrative tasks, and that sort of thing.

And maybe that's how we think we might achieve some more efficiency, right?

So this is absolutely possible.

It's based on economic theory.

This is entirely consistent with your experience, right?

That as businesses become larger they become more efficient.

Right?

Hm, so maybe this is a little trickier than it seems as well.

So again, it's possible to achieve more profitability through

economies of scale or efficiencies.

But it is certainly not automatic.

And if your experience is like mine, you might have the feeling that, well,

oftentimes as businesses become larger they may in fact become less efficient.

Right?

It might be more difficult for

them to operate operationally in an efficient manner.

So while it's theoretically possible to achieve this, it's difficult.

And we better be clear on how that's gonna be achieved.

So, so far we haven't come up with a very satisfactory answer

to the question yet, have we?

Maybe you came up with another answer altogether,

that doesn't involve scale efficiencies and what not.

Maybe it involves market share.

Maybe your idea is that we want to grow our market share, and that

that might be sort of an avenue towards greater profitability down the road.

And again, it's entirely possible.

But it's important to remember that, again,

based on the theory, think about your supply and demand curves.

Often times things like market share units sold,

that's something that often times is in direct contrast with per unit margin.

So in other words let's take the example of Coca-Cola let's say.

If you're Coca-Cola, the easiest way to achieve greater market share might be

to just lower the price of your cans of soda, so if we cut the price in half, and

we're Coke, are we going to sell more cans of soda?

Of course we are.

But what's going to happen to our margins?

The margins on each of those cans of soda are gonna go down.

They might disappear completely depending on how we priced it, right?

So, even things like market share and profits are often times,

they can eventually, in the long run, be complimentary and

maybe there are strategic reasons to get less profits now to grow one's market

share because we think that will equate to more profit potential in the future, but

again all of these reasons to grow,

I'm going to suggest, are sort of insufficiently strategic.

I think often times when a business attempts to grow,

it has this vague sense that growth is going to lead to a better situation.

It's going to make it more profitable.

But having this vague sense that growth will lead to profits isn't enough.

So what am I doing here?

I'm kinda playing devil's advocate, and I'm just trying to push you

to think about some of these common answers to the question of why grow,

because I want you to understand that while achieving greater profitability

through growth is certainly possible, it's not automatic.

Getting bigger does not automatically result

in greater profitability as if by magic or some law of nature, right?

So that's the first lesson here.

It's more difficult to achieve profitability through growth

than it appears, right?

And therefore, I think, there's a second lesson here.

And the second lesson is if none of these answers are sufficiently

satisfactory or sufficiently strategic what does constitute

a good answer from a strategy standpoint on the question of why grow?

I think that you better understand, whatever your answer is, it better have

something to do with how that growth is going to enable you to create more value.

And it's not enough to just say it.

You need to be clear on how that value is going to get created.

So for example, if you're convinced

that growth is going to help you achieve greater economies of scale or

efficiencies for example, could that lead to more profits?

Of course it could.

But are you clear about how you're going to actually achieve those efficiencies.

Do you have a plan for how, as you grow you're going to become more efficient,

not less?

It's possible to achieve it, but it's harder than it appears.

So again, achieving good outcomes through growth is much more difficult

than I think we give it credit for a lot of times.

And you need to have some sort of a strategic answer to the question

of why grow.

And it better involve how that growth is going to help you create more value for

someone, for customers you aren't currently serving or for employees who

are then going to produce in a more efficient manner for you or something.

So, let's take a step back and think carefully about the reasons to grow and

let's make sure that we have a good, strategic answer to that question.

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