HANNAH BATES: Welcome to HBR On Strategy—case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business.
I bet you have a friend who, during the pandemic, developed an interest in house plants. And it was great… at first! But I’m guessing they couldn’t keep up with caring for them for long. Some plants probably died, some probably grew out of control, and some are still somewhere in between. Your friend didn’t consider how to sustainably grow their plant collection. They grew too fast.
Harvard Business School professor Gary Pisano says this type of rapid growth is a default goal of a lot of companies. And as a result, he says, they often end up—like your friend with the plants—under-resourced and over-invested. In this episode you’ll learn why slow growth is often more sustainable AND profitable, and how to consider the three elements of growth: rate, direction, and method.
This episode originally aired on HBR IdeaCast in February, 2024. Here it is.
ALISON BEARD: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Alison Beard.
How do you measure success at your company? I bet that a lot of you, if not all of you, will say “growth.” Whether you’re an entrepreneur, store manager, team leader, business unit head, or CEO, the goal is to increase revenues by as much and as quickly as the market will allow. But is that realistic? Is it sustainable?
Our guest today has studied the performance of nearly 11,000 public US companies over two and a half decades, and found that for most businesses the answer is no. Three-quarters of firms showed little to no growth after adjusting for inflation, and even those in the top quartile of growth in a certain year weren’t able to keep that performance up for more than a few. So, what is the key to steady sustained growth?
Gary Pisano is a professor at Harvard Business School who’s done deep dives into the strategies of organizations that both succeed and fail at this. He says that leaders need to be much more thoughtful about the way they set growth targets, focusing on not just market demand, but also their capacity to meet it, and how they map out plans for achieving them. Gary wrote the HBR article, How Fast Should Your Company Really Grow? Hi, Gary.
GARY PISANO: Hi, Alison. Thank you. Great to be here.
ALISON BEARD: Let’s start with the problem. Has this obsession with rapid growth always been a feature of investor-led capitalism, or has it become more pronounced in recent years or decades?
GARY PISANO: I think it’s always been an obsession of companies, at least as long as – throughout my professional life, which is now close to somewhere between 36 and 40 years, depending on how you measure it. I mean companies I’ve been coming across throughout my career, a steady stream of them, report wanting to grow, and growth as a goal, and almost as a natural thing to be trying to grow as fast as they can.
And whenever I speak to CEOs, what’s always top of their mind, it’s growth. Particularly publicly held companies are thinking a lot about growth. That’s what their investors are demanding. And I think that is just kind of part of what these companies and managers have come to learn as normal. Grow as fast as you can.
ALISON BEARD: And if the data show that most companies grow modestly or stay flat, but they’re still operating, they’re still employing people, they’re still serving customers, they’re still contributing tax revenues, should we be fundamentally rethinking growth as a goal?
GARY PISANO: Look, there’s nothing wrong with growth as a goal. I’m very interested in profitable growth. If you can grow profitably, you’re going to make your shareholders happy, you’re going to create more opportunities for employees, you’re going to be able to pay better wages, you’re going to have a bigger tax base. What I want folks to take away from the article is, growth is a strategic goal. You have to think about how fast to grow, how fast you can grow, and you want to maximize what you can do within the constraints. And if you try to get past that, you will actually make things worse. It’s learning how to do it appropriately, so you can sustain the profitability of it over time, and not just be a flash in the pan.
You don’t want growth to kill the company. I’ve seen too many organizations where growth, in and of itself, is what damages the very things that made the company special, and actually contributed to its initial growth. I guess, it’s the classic story of killing the goose that lays the golden eggs.
ALISON BEARD: You talk about that segment, that quartile of companies, that did grow nicely for a time. I think it was something like between 11% and 12% on average, but they aren’t able to sustain it. Obviously, each company is different, but is that a function of shifting market dynamics? Or do you see some clear common mistakes that they’re all making?
GARY PISANO: I do think there’s common challenges, and there’s common traps, that organizations fall into. I do think as you go back to that data, I’ve done the analysis with the most up-to-date data, and I’ve done previous studies with other authors that are a little bit older data, but very long timeframes, 40-, 50-year periods, and many other scholars have done work just trying to characterize the patterns of growth. And the data is pretty consistent across all these studies. And some of these have been done, by the way, not just in the U.S., European firms, Asian firms, even some studies in Africa.
It’s a pretty robust set of findings that very few companies grow at all. Everyone’s excited about growth. And it turns out that’s really, really hard, that if you look at the data, most companies don’t grow, or don’t grow very fast. If you look at the top quartile, they have reasonable growth rates, pretty good. It’s double-digit. Once you go to the next three quartiles down, it’s basically close to zero, and the bottom quartiles in a slight negative.
So, organizations, as they set growth goals, have to face some of the reality that very few companies grow very fast. And then, of those that do grow fast, very few sustain it for very long.
And I think there are mistakes organizations make. One is to think that you can outgrow your resources in the short term and catch up. A lot of times when organizations have opportunities, today, to capture a market, or they have opportunities to hire people, they may outstrip certain resources that they have, certain capabilities. And there’s often a view inside companies, “Well, that’s okay. We’ll catch up. It’s okay if we’re short of people today. Customers are arriving. We’ll figure out how to make it work.” Or, “Yeah, I know our supplier base isn’t strong enough, and it’s really straining our supply chain, but you know what, we’re just going to work at it, and we’ll catch up. So yeah, we’ll delay deliveries for now, but next year it’ll be better.” And that is often not the case.
So you know, you can borrow money. If you’re short on cash, if you’ve got reasonable financial prospects and a good balance sheet, you can borrow cash – a lot of other resources you can’t really borrow. If you’re short on them, there’s no way to make them up. And when you’re short on them, they can cause damage. If you’re short-staffed, you could damage your reputation for, say, service. Or sometimes, what we see happen is, they throw tons of money and resources at trying to grow, spend a ton of money, build out factories. It’s almost brute force. And that can leave them with really badly designed supply chains, badly designed processes or no process. They’re holding everything together with duct tape. Really bad cost structure. And then they can’t compete at that level. And their finances don’t work right. That’s a mistake.
They get very excited about the prospect of growth, but they don’t think about, or maybe they underestimate, the difficulty of building up the organization to do it. And that’s why I talk about in the article, growth is about both the demand side, which is the market, and the supply side, what are we capable of doing? And if you break that supply side, you may not be able to recover very quickly.
ALISON BEARD: It sounds like you’re describing, one side of the problem is being under-resourced for skyrocketing demand, and another problem is expecting sky-high demand, and acquiring too many resources, and not being able to deploy them effectively.
GARY PISANO: Yeah. It’s this idea that, if demand is growing today, it’s going to keep growing. We saw that during the pandemic. There were certain markets where demand was skyrocketing, and yet that’s a pretty special set of circumstances. Part of the thinking can be, “Well, let’s make hay while the sun shines.” It’s an opportunity. It’s maybe a once-in-a-lifetime opportunity to build an installed base.
So, strategically it kind of makes sense, but at another level, and it was well-publicized that Peloton had a lot of difficulties, because their supply chain just wasn’t capable of meeting that demand. And then, they threw a lot of resources at it to do it. They built up a lot of capacity. And of course, that stuff all takes time. By the time you get there, then the market is cooling back off. And it’s not that the market goes away, but suddenly you’ve built a cost structure for a much, much bigger company.
ALISON BEARD: Besides existing and potential market demand, what are the other specific factors regarding capacity that leaders need to consider when they’re setting their growth rate targets at a more realistic way?
GARY PISANO: Literally, it’s almost working backward to think about the organization, think about the resources, and think about the bottlenecks to growth. Identify what are the bottleneck resources. A competent CFO will make sure that cash is not a bottleneck, that you don’t run out of cash. They’ll make sure you don’t overspend and wind up bankrupt.
But you have to apply that same logic to every other resource in the company. So if you think about – is it people, is it frontline workforce, is it managers, is it mid-level managers, is it senior managers, is it a certain kind of supplier, really almost systematically go through and ask yourself, “What are the resources here that are constraining our growth? And what is the growth rate that we can have, based what that resource is capable of providing?” And then set your growth based on that.
Now, that doesn’t mean you can’t, over the long-term, grow faster, but then it’s a strategically, that’s the resource you attack to increase its productivity or find more of it.
There’s a company I talk about in the article, Pal’s, it’s a fast food chain, and they had a really interesting approach to growth. They have a very special operating system. They’re a small fast food chain that does very well. And that’s a business, by the way, where it’s hard to do well when you’re small, because it’s a very scale-intensive business. At some level, they have no right to be doing well, and yet they do very, very well financially.
They’ve built the model around speed, but more importantly, they’ve built a very unusual model around quality, so that they can serve customers really fast, mistake-free. And that actually contributes to a better cost structure. But the core of it is, they have fostered a very, very unusual culture that allows them to really get something fairly close to zero defects. That culture really depends on the store managers. They have these owner-operators. And their belief is, it takes a few years to become an owner-operator, and an owner-operator is a really special person. And they invest a lot of time in hiring them, recruiting, and developing them. It’s like three to five years of development before you get your own store. But the way they decide when to add a new store is when they have a graduate of their internal development program and say, “Okay, here’s somebody. They’re ready for a store. Let’s go open a store.”
Most companies do it the other way around. They say, “How many stores do we want to create? We want to create five stores next year,” or 10 stores, whatever the number is. And then they say, “Okay, let’s go find people to run them.” And Pal’s just turns the logic on its head. And that’s a good example of driving growth off your bottleneck. It can seem slower, but it can be much more sustainable and profitable, and you can, over time, if you expand your capability to develop that resource, in this case, the store managers, then you could grow faster if you wanted to.
ALISON BEARD: It’s interesting, because culture is sort of what enables them to grow, but it’s also this constraint, so they have to think very carefully about that trade-off.
GARY PISANO: Culture is a huge part of what breaks when companies grow quickly. That is probably one of the single most fragile parts of organizations as they grow. Because every time you add people, you’re bringing in new cultural DNA, and organizations will talk about, “Well, we have to keep the culture,” but they often don’t recognize what’s needed to do it, and what parts of the culture have to change, and not change, to sustain the growth.
ALISON BEARD: Yeah. And interestingly, Pal’s was your positive example, and then your cautionary tale came from the same industry, another fast casual restaurant chain called B.GOOD, that I’m very familiar with because it’s founded in Boston actually by a friend of mine before it was taken over by private equity, and became a cautionary tale. So, talk a little bit about the contrast between those two. Where did B.GOOD go wrong in contrast to how Pal’s did it right?
GARY PISANO: And I will say I love B.GOOD, but the cautionary tale was, early on, I think their model was really nicely aligned. They were trying to do something different in the quick serve business, the idea of healthier food, local ingredients, cooked in a more normal or non-industrial way –
ALISON BEARD: And this was pre-Chipotle, pre-Sweetgreen. Yeah.
GARY PISANO: They were an early mover in it. Their founders had a terrific vision. And they also said, ” We think this requires different culture. We’re going to be a more family-oriented culture. We’re going to hire locally, like you’ve walked into a local place, not a fast food chain, but a place where, hey, they know your name.” And I think their founders recognized early on that, that was a real constraint on how they could grow. Typically, the way chains like that grow quickly is by franchising, but I think they recognized there were few constraints.
One is franchising does make it harder to control the culture. The second thing was, just supply chain. You had to keep this pretty localized around leveraging local supply chains. That was part of the promise to customers that it was going to be local, so it would constrain your geographic growth. But early on, they had all their stores in the Boston area. Then they decided, and the case on them has a quote from one of the founders about, “Someday we want to be as big as McDonald’s.” And they start this fairly rapid growth. They start opening new stores. They start franchising more.
And you just get this lack of congruence between the elements of what they needed to sustain themselves. It’s just harder to maintain the culture. It’s harder to deal with the supply chain issues. They could have grown more quickly, but they would have then changed their model. It’s okay to grow faster, but then recognize you may need to change your model to make it more scalable.
ALISON BEARD: So in the article, you give labels to these things that we’re talking about – you talk about the rate of growth but then also the direction of growth and the method of growth. Talk a little bit more about what you mean in terms of how companies need to think about these three elements of growth in concert?
GARY PISANO: My argument is that, really, companies need growth strategies. And a growth strategy is composed of three interrelated sets of choices. One is, how fast should we grow? The second is direction, which is, in which direction? And by that I mean, what markets do we go after? Are we going to get broader? Are we going to expand geographically? Are we going to diversify to new markets? Are we going to try to penetrate a particular market?
The third element is method of growth, which is, how do we obtain the resources to grow? If again, you’re a fast food chain, do we franchise? Are these company stores? If you’re a different kind of business where you don’t have franchising, do you use vertical integration? Are you partnering? Do you do acquisition? A classic method choice is organic growth versus growth by acquisition.
What I try to point out is, like any strategy, there’s no one right answer. There’s no one magical growth formula of rate, direction, and method that everyone should use, but there are trade-offs between them. And you have to understand those trade-offs. You may make some choices on rate that are going to have implications for direction and method.
Really, what I hope folks take away from the article is, if you’re running a company, hey, we need a growth strategy, and that growth strategy is three things, rate, direction, and method. We need to evaluate our growth strategy based on that. And then, we need to think about those choices, and the implications of the choices we’re making there. Do they fit together and are they consistent with our goals?
ALISON BEARD: So what are some practical ways that team, division and company leaders can better recognize their limitations without being too conservative? How do you begin to be
