Scale as a primary strategy?

 

Christine Haskell, researcher and consultant, questions the mentality behind leaders that are obsessed with scaling their organizations.

 

Growth is naturally appealing. When we are young, we want to be older. When we have some, we always want more. We all feel better when we are making and selling more than we used to. We view it as a sign of overall health, often referring to slow growth as ‘anemic.’ When an organization grows, there are generally more opportunities for people to learn new things and gain promotions. Growing is more fun. It is more fun to hire people and start projects than it is to make them redundant or kill off loss-making ventures.

But the problem is, most leaders get caught up in growth. To earn interest and confidence of investors, entrepreneurs want fast growth. Paul Graham once said that, “A startup is a company designed to grow fast.” In fact, Graham went on to say that “if you get growth, everything else tends to fall into place.” Likewise, executives of Fortune 500s seek to outperform the natural rate of growth in their markets. ‘Double digit growth’ is a commonly-heard goal. And this is where things become interesting, because faster-than-market growth means you are either taking share away from competitors, or you are moving into new market areas – both of which are pretty risky things to do. So why do leaders do this?

THE NEED FOR VARIATION

Consider a well-known example. McDonald’s was a growth company for about fifty years, from its origins in postwar America through to its position as the global leader in fast-food restaurants in the late 1990s. But things took a turn for the worse. It suffered from pressures from the healthy-food lobby. It was spread thin by too many new stores. In the fast-food market that McDonald’s had helped define, there was no natural growth left.

After making its first ever job cuts and closing some loss-making restaurants, McDonald’s started to grow through acquisition: Chipotle, Aroma Café, Donotas Pizza, and Boston Market, as well as a 33 per cent stake in Pret a Manger. But this strategy did not work.

McDonald’s reported its first-ever quarterly loss in 2002. With a new team in place, campaigns such as ‘I’m Loving It’ were launched to refocus on the core business. This effort helped it return to profitability. McDonald’s went back to basics, gradually selling off non-core businesses.

Why did McDonald’s leaders chase other fast-food areas? Essentially, they were incentivized to do it. Many leaders succumb to short-term thinking when they feel the strong pull of market expectations. Shareholders value growth stocks. It was in these leaders’ best interests to continue to push for growth even though their market was fully developed and becoming increasingly crowded. Another powerful force in play is self-belief. Executives truly believe they will succeed, that’s why they are in leadership roles. However, over-confidence bias would show up when executives remaining confident they could beat the odds as they diversified into related business areas, even if many before them had failed.  So what is the alternative?

STICK TO BASICS

A much better approach is to value and continue to invest in what you do well and to keep on doing it better than anyone else. Consider the McDonald’s shareholders for a minute: they didn’t want the management team to take a left turn in new business areas in 1999; they wanted McDonald’s to be known for the best burgers in the world, and to make lots of money doing it. The best burger isn’t as shiny a strategy as offering a 24-hour breakfast, or and acquiring companies that might extend the brand, but it’s a much smarter long-term bet. The bottom line is that scale as a primary strategy is often followed for the wrong reasons. There is a delicate tension between what shareholders really want from their CEOs and what CEOs find interesting and appealing. Executives claim that they only push for growth to satisfy the demands of shareholders demands, but that is actually not the case.

Shareholders are very good at differentiating between the shares they buy for growth, and the ones they buy for dividends. McDonald’s is an established, well-run company, generating good cash flows. Shareholders don’t want their management teams to take unnecessary risks. They want steady and predictable performance in line with the market.

 

 

Christine Haskell, PhD

Behavioral researcher, executive coach and consultant. Currently working on what master craftsmen can teach us about how we learn. Look to Craftsmen, pending publication in 2017. 

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