Professor Ram Charan, in his book What the CEO Wants You to Know, identifies four major ideas you need to internalise to understand the basics of business. One of these four ideas is the notion of good growth.
Charan points out that not growing is bad. In a dynamic, competitive environment — especially if you have no sustainable competitive advantage — Charan asserts that failing to grow means that your business is slowing dying. But growing badly is also terrible, and in fact, more likely to kill your business just the same. Anyone with business experience will know stories of companies that died from over-expansion. The cure, as they say, is sometimes worse than the disease.
Charan believes that good growth has four distinct properties. In our summary of the book, we write:
Charan proposes that good growth is profitable, organic, differentiated, and sustainable:
Profitable. Good growth not only generates profits but is also capital efficient. It needs to earn an amount greater than the company would receive by investing its money into something ultra-safe like a Treasury bill.
Organic. Good growth nearly always flows out of the company’s existing capabilities. A corollary: a company’s job is to systematically expand its set of capabilities.
Differentiated. Charan writes “you never want to provide a product or service that is seen as a commodity. Customers must prefer it. Otherwise, you will never make very much money”. A more nuanced take on this is that the growth must be defensible — and a differentiated product offering is merely one defensible strategy. There are others.
Sustainable. Growth should continue year after year, instead of providing a quick spike in revenue. Growth that triggers a price war is by definition not sustainable.
However, this is a little too neat. When you look at real cases of businesses that died from expansion, you realise there is an art to this, a skill to this — and it is not as clear-cut as Charan makes it out to be. In fact, in some cases, expansion kills the business due to factors completely outside the businessperson’s control.
The purpose of this concept sequence is to give you more cases so you can calibrate your pattern matching. Having the judgment to expand well is one of the markers of an experienced, capable operator.