Dealing with unprofitable growth

Mar 31, 2011

In this series we’re looking at the most basic initial appraisal I make of every business I advise (whatever size it is). Yesterday we looked at the most difficult quadrant is to be in: no growth / no profitability. Today, let’s look at a somewhat less difficult quadrant (though still not perfect): growing, but not profitable:

growth, no profits

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Although a business can go through a phase of growth with low or no profits at any point (particularly if it’s aiming to break into a new market by deliberately undercutting the competition) there are two key stages at which growth with no profits is a highly important warning signal:

1. Finding your market during Early Struggle

There will be times during Early Struggle when you’re trying to establish precisely what your core profitable, sustainable market is when you will be tempted to take on business that is clearly unprofitable simply to pay the bills.

Frankly, you only need to read the words in the preceding paragraph to see what a delusion this is: the key to getting out of Early Struggle is finding a Whitewater

One of the first and most important indicators that a business is coming out Fun is that growth can continue for a while, but with rapidly dropping profitability.

This happens because the previously profitable business is now increasingly having to eat the cost of mistakes and errors. Unless it can discover how to deliver quality in the newly complex environment in which it is now operating (brought on by the very success that it generated in Fun), it will stick in Whitewater indefinitely, possibly stretching resources to a dangerous extent.