The easy delusion of profits without growth

Apr 1, 2011

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

Today we look at the third of the ‘sub-optimal’ positions to be in: profitable, but not growing:

growth, no profits

 

Note: If you’re viewing this in your RSS reader and cannot see the image above, please click here to view it online

As before, while a business can go through a phase of profitability with little or no growth at any point (particularly if it’s trying to mine a particularly rich market segment, or is ‘resting’ from strong growth in earlier years) there are two key stages at which growth with no profits is a highly important warning signal:

1. As the business approaches (late) Treadmill

A business in Treadmill is often (though not always) a larger organization with a mature market and a recent history (while in Predictable Success) of above-average growth and profitability.

One result of this is that senior management begins to focus on return on investment (ROI) as a key metric instead of absolute profitability – asking itself, in other words, “What’s the best return we can get from these assets we’ve accumulated?”.

This, coupled with the increasing cost of compliance with systems and processes (a major preoccupation for organizations in Treadmill) drags the profitability of the business down to stagnant or non-existent levels.

The key here is for senior management to re-inject creativity, initiative and controlled risk-taking into the organization using the techniques described in chapters 6 and 10 of Predictable Success.

2. When the business slides into The Big Rut

If senior management does not take the steps described above the organization will eventually slip into The Big Rut – at which point the organization has lost the ability to self-diagnose, welcomes bureaucracy, and is destined to quickly lose growth (as well as profitability) and slide eventually into Death Rattle – from which there is no recovery.

The one exception…

3. In conscious, focussed Fun

There is one stage at which profitability without growth is just fine: when the owner/manager group has consciously decided to constrict growth, and to keep the business in Fun. This is an entirely valid decision, and is one which many Mom and Pop businesses make – there’s nothing wrong with deciding you don’t want to scale your business indefinitely.