When Cisco Systems Chief Executive John Chambers told employees this month that the networking equipment maker had lost its focus, it was an acknowledgment that yet another corporate giant had been seduced—and set back—by the tantalizing prospect of unremitting growth.
"They're realizing that growth for growth's sake is not working for them," Brian Modoff, a Deutsche Bank Securities analyst, said after Chambers issued a memo calling for more internal discipline at Cisco (CSCO).
Starbucks (SBUX), of course, succumbed to the same siren song. "Growth became a virus inside the company," the coffee chain's founder and CEO, Howard Schultz, declared recently, as he described his efforts to recapture the spirit that Starbucks had when it was less expansive. And Toyota (TM) similarly lost its way—a subject that I first explored in this column in 2007, when I suggested that Peter Drucker would have strongly advised the carmaker to start rededicating itself to quality over quantity.
"There are few exceptions to the rule that today's growth company is tomorrow's problem," Drucker wrote in his 1973 classic, Management: Tasks, Responsibilities, Practices.
Managers' Main Focus
Given these cautionary examples—and Drucker's feelings on the matter—I was a bit surprised by the latest CEO survey from the Conference Board, which revealed "business growth" to be the No. 1 challenge that executives say they're looking to tackle. "Companies are revving their engines for growth," the Conference Board noted in its accompanying research report. For the more than 700 CEOs polled, "it's all about reorienting their organizations toward growth after years of hunkering down to combat the effects of the global recession and, in some cases, to fight for survival," the report said.
"Customer relationships," something that Drucker always put front and center, came in at No. 7 on the list. "Innovation," which Drucker believed was the lifeblood of every organization, ranked just fourth. (Rounding out the Top 10 challenges that the CEOs identified were "talent," "cost optimization," "government regulation," "corporate brand and reputation," "sustainability," "international expansion," and "investor relations.")
And yet as worrisome as this may seem on its face, it's crucial to understand that Drucker wasn't anti-growth. "Growth," he wrote, "will continue to be a desirable and indeed a necessary business objective."
Without sufficient growth, after all, it can become impossible for a company to bring in skilled employees looking for opportunity and excitement. "Once a company … ceases to attract and to hold competent people, dry rot has set in," Drucker warned in The Frontiers of Management.
The key is to ensure that the growth is healthy. To achieve this, "a management needs a rational growth policy," Drucker explained. "A management needs objectives that are based on more solid grounds than the desire to grow or the promise to grow."
Different Perspective on Growth
The process begins with a question, according to Drucker: What is the minimum growth the company requires without which it "would actually lose strength, vigor, and the ability to perform, if not to survive?" The answer, he said, should tie into the growth rate of the market or markets in which the enterprise competes. "A company needs viable market standing," Drucker wrote. "Otherwise it soon becomes marginal. It becomes the wrong size." It may eventually become extinct.
Another consideration: Growth in volume is, in and of itself, pointless. "To use up more wood each year may be a rational objective for the gypsy moth," Drucker wrote. "It is an inane objective for a paper company." The standard, instead, must be economic performance "as measured by contribution to economy and society, by productivity of resources … and by profitability."
After a company decides on its minimum growth requirement, the next question to ask is: What is the optimum level of growth? Or, as Drucker put it, "What is the combination of activities, products, and businesses that promises to produce the best balance between risk and return on resources?"
"It is this optimum point, rather than a maximum, which determines the upper range of a company's growth goals," Drucker asserted.
Given the importance of this balance, the ideal way to grow is often to shrink first, shedding those products and processes that aren't delivering the desired results. "A business actually grows if it sloughs off activities which do not contribute," Drucker wrote. "Such activities only drain. They impede the true growth potential."
Returning to Its Core
Cisco, for one, seems to be taking this path. In the wake of Chambers's admission, the company announced that it would stop making the popular Flip camcorder as part of a bid to concentrate on its core businesses. Drucker would surely have praised the move.
As technology evolves, "it creates more and more diversified products with different markets," as well as "different objectives for innovation," Drucker wrote in his 1954 landmark, The Practice of Management. "The point is finally reached where top management cannot know or understand what the diversified businesses require—or even what they are. The point may be reached where objectives that fit one business (or group of businesses) endanger another."
In his memo, Chambers sought to reassure his employees by saying, "We understand that our customers want to stay and grow with Cisco." Underlying that vision seems to be a very Drucker-like insight learned the hard way: Growth is vital. But only smart growth is sustainable.