Tuesday, September 28, 2004

The Growth Habit

What's with this growth imperative that all companies seem to follow?
Why is it mandatory to consume? You know: shop till you drop. Bloat till you burst.
'Cos that's what happens in the end: you kill off and gobble the competition, outgrow your available market, and then where are you?


Semler muses on this topic in 'The Seven Day Weekend'. He was specifically concerned about the impact on Semco culture: growth -> more jobs -> more people -> cultural dilution. Since Semco culture appears to be unique, vibrant, and overall a very precious asset, you can see his concern.

So, I got to wondering: why can't a company just putter along with a steady income? Why does it have to grow? What are the forces that drive company growth? For a publicly listed company, the answer is likely the ongoing need to give the shareholders a regular income: they want an ongoing return on their static investment.
But what about proprietary companies? The answer I came up with has to do with Risk Management.

I think there is a 'sweet' spot for company size where it can optimise the service and support it can provide its customers, and the level of nimbleness it can display in providing that service in a changing environment:
  • Too small, and you risk being wiped out by random fluctuations in your market opportunities, inconvenient invoices, lapses in your available skillset.
  • Too big, and you start to consume more resources to sustain your corporate structure than you can provide to the market.
For the standard business model applied to companies, that sweet spot would seem to be unstable: in astrodynamical terms, it's at L1 or 2, rather than L4 or5.

(Semler actually identifies a few examples that have managed to achieve an equilibrium: one of them is a small Amsterdam restaurant that had been in the family, pretty much as is, for 200 years or so!)

Since a newly hatched company tends to be on the small side, it clearly needs to grow to avoid being 'swamped by the waves'. So, it tries to put a bit of fat on and get more product out. In order to increase production, it hires more staff to handle the production requirements, and identify the market.

Now we start to see at work the forces that define productivity*:
  • overhead: what needs to be spent in order to produce the product
  • inventory: the investment in the actual product on the shelf (but *not* sold)
  • throughput: the income derived from placing product into a customer's hands
  • productivity = throughput - inventory - overhead
To replay the last sentence using these terms:
'In order to increase production (throughput - inventory - overhead), it hires more staff (increases overhead**) to handle the production requirements (increase inventory), and identify the market (hopefully, to increase the throughput)'.
Put like that, it isn't immediately clear that overall productivity has been increased, since the increased throughput is offset by the increased overhead and inventory. Furthermore, bear in mind that throughput is a lag indicator: unlikely to turn up on the balance sheet until the end of the month, or next. No such luck with the bills, eh?!

A manager's life become one of juggling these values so that productivity stays positive, and a very bumpy ride it can be too.

Positive? Why not just zero (to return to the original argument)? Well, the problem is that productivity can fluctuate wildly from month to month. If one is prudent, one will aim to have a bit stashed away for a rainy day, no? Just in case the next months figures aren't as good. Or really terrible. This prudence becomes a habit.

And so it grows.
* See 'The Goal' by Goldratt for a discussion of measuring productivity. It's presented in novel form (!). While it won't win the Booker prize; it makes for a fair read.
** Folks, don't take being referred to as overhead too personally. It's a purely technical term. I'm sure your company loves its organic assets ;-)


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