Corporate Growth: The Perils of Scale

Growth can be bad. To business leaders who came of age during the past several decades, that idea might seem anathema. Despite abundant evidence in both public and private companies of the perils of growth, what Edward Hess calls the "Growth Mental Model" is firmly entrenched, not only among executives but also on Wall Street, in the business press, among consultants, and in MBA classrooms. Hess, a Darden professor and Batten Executive—in—Residence, hopes to shift that mindset, from an obsession with ever—increasing quarterly earnings to a thoughtful focus on improvement.

In his book Smart Growth: Building an Enduring Business by Managing the Risks of Growth (Columbia University Press, forthcoming), Hess, who has spent seven years studying public and private high—growth companies in the United States, dissects the fixation on corporate growth, explores the risks of growth for public and private companies, and offers examples of companies that have approached growth not as a given but as an option.

The Growth Mental Model, Hess explains, is based on the notion that if you're not growing, then you're dying. It assumes that a successful public company is one that grows continuously, and it uses quarterly earnings as the primary measure of a company's health and prospects for the future. It's this thinking, Hess notes, that's behind many companies' attempts to create or manufacture noncore earnings, and has spawned an industry of accountants, bankers, and lawyers.

The idea that growth is the ultimate business goal has become axiomatic even though it has no quantitative or empirical data behind it. Hess writes, "In academic terms, the Growth Mental Model is severely flawed; in practitioner terms, it is unrealistic." Indeed, research shows that achieving continuous, uninterrupted business growth over long periods is tremendously difficult and that many highly successful companies do not conform to that pattern.

The Growth Mental Model also ignores the risks of scaling a business. Growth is a highly complex process that can stress a company's financial and quality control systems, threaten its culture, weaken its customer value proposition, distract senior management, and transform its competitive environment in ways the company may not be prepared to deal with. The result of poorly managed growth can be destruction—of companies, families, and communities.

Hess did not embark on his research in order to undo the corporate fixation on growth—a mindset that, ironically, served him well in his former work as a professional in investment banking, private equity, and strategy consulting. "I made my living helping finance and create growth companies," he writes. He is now a realist when it comes to growth. Pursuing growth may be the right move as part of a company's broader strategy of continuously improving the way it meets customers' needs. But it may be the wrong decision if the risks outweigh the benefits—and if the company is not prepared to manage those risks.

Smart Growth includes tools that help business leaders decide whether, when, and how to grow and case studies of companies, such as Costco and UPS, that have rejected the Growth Mental Model in favor of a more critical approach, which assumes that being better is more important than being bigger.