Is Bigger Always Better? Exploring the Growth Trap

I’m Andy Temte and welcome to the Saturday Morning Muse! Start to your weekend with me by exploring topics that span leadership, business management, education, and other musings designed to support your journey of personal and professional continuous improvement. Today is August 31, 2024.

Over the past few years, I’ve been doing a bit of gardening—trying my hand at zucchini, acorn squash, and potatoes. As a novice with zucchini, I was ecstatic when I discovered the first fruits of my labors and they were HUGE! And yes, zucchini is botanically classified as fruit.

I brought my first harvest into the house with a gleeful smile on my face where I was met with a look of “oh, honey, that’s nice—good for you—but those are only good in making bread.” Apparently, an outsized zucchini tastes like cardboard.

The question today is this. Is bigger always better? In zucchini, the answer is a resounding no. In business, the answer is a bit more nuanced, but bigger is certainly not always better.

As leaders, we routinely fall into what I like to call the growth trap. The growth trap shows up in various forms, but it can be a huge morale killer and represent significant risk to the business.

One way the growth trap evidences itself is in your business’s annual budgeting process. Some companies take a thoughtful bottom-up tack in which each functional area of the business submits forecasts for the upcoming year based on inputs from marketing, sales, product management, operations and other client/customer-facing parts of the business. These forecasts are then “rolled up” by financial analysts and forecasting professionals in the finance department and cross-checked against macroeconomic and industry factors that may have been missed by individual teams. Senior management then pressure-tests the resulting budget by asking probing questions to ensure nothing was missed. The budget is then approved or sent back for a round of refinement.

Unfortunately, many companies take a top-down approach to budgeting. Under real or perceived pressure to grow the business year-over-year from boards and investors, many leaders will say to themselves: “we did $x in operating income last year, so we should be able to increase that by y% next year. The percent y is typically not connected to current state operational cadence or recent trends in the performance of the business, but may instead be connected to overall industry performance trends, high level macroeconomic growth projections, or in the worst case, gut feel about what the business should be able to do if everything goes right. In this case, leaders are chasing growth for the sake of growth.

In top down budgeting, senior leadership tells functional area leaders what their number should be and that they need to move heaven and earth to get there. Current state operational challenges are swept under the rug and recent performance trends are ignored. Magical thinking dominates these types of budgeting discussions and teams are set up for failure because everyone intellectually understands that meeting the budget demands of senior leadership is highly unlikely to transpire. Everyone keeps quiet and doesn’t want to rock the boat, but mutters under their breath at the water cooler about how unfair the budget is and how unachievable it is.

One of the most likely outcomes when budgeting is not connected to reality is that functional area leaders will take the path of least resistance in an attempt to please senior leadership and keep their jobs. Since revenue growth is maddeningly difficult in many business settings, the path of least resistance to operating income growth is through the middle of the profit and loss statement. Speaking simply, the path of least resistance is to cut costs.

Cost cutting to drive operating income growth seldom results in long-term business sustainability and serves to limit future growth opportunities because resources that are needed to reconfigure tired products, build new technologies, or dream up new ways to please customers are removed from the business to support a near-term goal. So the magical thinking of senior leadership gets translated into short-term tactical decisions that are detrimental to future growth. Senior leadership then sits around scratching their heads wondering why actual results aren’t living up to their magical thinking expectations and why morale is terrible and the organization culture is stuck in a fear-based orientation.

With all that said, there are times when senior leaders need to push their teams and people to strive for stretch goals and to grow the organization to remain relevant and healthy within the context of the competitive environment. Sometimes functional leaders need to be pushed out of their comfort zones to think critically about new ways of working and driving better results. It is true that complacency and downright laziness needs to be challenged.

The point today is that growth for the sake of growth should be avoided. As should any kind of magical thinking. Great leaders know the difference.

Next week, we’re going to continue the conversation about the growth trap and how it shows up in mergers and acquisitions. Until then, enjoy your weekend as you recharge for the week ahead.