Tuesday, May 8, 2012

Are You Growing Backwards?

Question: If your business / division grew by 10% but overall market in which your product / service operates grew by 50%, did you in fact grow?  Let's look at this in a little more detail, as outlined in the tables below.

(Folks: Please do not write to me and say I am using ridiculous numbers. I am using exaggerated numbers to illustrate the point succinctly).

Growth rate
As you can see, this very simple example shows your business / division growing its' revenue by 10%. At the same time the rest of the market grew by 50%.

Therefore when assessing the growth of your business / division, you can see that you actually went backwards relative to the market.

So why is this important? Most managers would be ecstatic with 10% year-on-year growth. However the issue is not whether the business has grown. That is a given. The issue is that, in this scenario, competitors are growing faster and you are being left behind.

To illustrate this point further lets extrapolate the exact same growth rates (10% and 50%) over a five year period.

On the one hand, congratulations. Over the five year period you grew by 46%.  However on the other hand, commiserations. Over the same period of time you went from having 10% market share to only 3%. Quite simply all your competitors are roaring away and leaving you behind.

Think about what this now means for your business. For example:
  1. As a supplier to various companies are you becoming to be seen as a niche player within the market?
  2. Do potential customers worry about where your business is headed as they are continually bombarded by the success of your competitors?
  3. Are your competitors achieving scale benefits not available to you?
  4. Do these scale benefits provide a price benefit to your competitors that make it more and more difficult to compete?
Before we continue, it is important that I clarify that I do not advocate growth for growth sake. We have all witnessed countless numbers of large companies becoming financially crippled due to excessive debt through aggressive acquisition growth strategies that appeared great on paper but where, for whatever reason, the benefits (often couched in the term 'synergies') never materialized. However I do advocate having a clear understanding of the relativity of your business' growth versus your competitors (your market). 

Understanding how you are performing relative to your competition will give you improved clarity on your business' true performance and market positioning. This will help develop your growth strategy / plan and the execution required to achieve the plan's objectives. Defining your growth strategy is not simple. If it was every business would be growing. However where you want your business to be in five years is reflective of many inputs, including the competitive / market environment. Planning to grow at 10% may not be acceptable when everyone around you is growing at 50%. After all no one wants to be grown out of existence.

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