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When is growth not good?

Todd Ordal //July 18, 2011//

When is growth not good?

Todd Ordal //July 18, 2011//

When Is Growth Not Good?
Sometimes it’s in the bag …

A recent article in the Wall Street Journal (“At Vuitton, Growth in Small Batches,” June 27, 2011) highlighted an interesting question that awaits successful businesses: What’s the cost of growth?

My luggage selection doesn’t attract gawkers and mostly comes from Costco. I love my nice briefcase, but I buy other luggage for function and, given how much I travel, I replace luggage more frequently than some change their oil.

Louis Vuitton luggage, in contrast, is high-quality but bought for the appeal of the brand. Its strategy is about exclusivity (not utilitarianism), low availability, high quality and high mark up. The beauty of this is that the company has significant pricing elasticity with a cost of goods that’s probably not much higher than the luggage I use. As the Louis Vuitton CEO said, “Our paradox is how to grow without diluting our image.”

Is more growth always good? No. Sometimes growth comes at a high price. Brand dilution would be the concern at Vuitton should it decide to sell luggage through additional channels at lower prices. You can almost hear the argument that would ensue when a new business analyst attended a lunch with the CEO (probably noshing on foie gras, escargot and truffles) and excitedly pronounced, “Excuse me, monsieur, but I’ve analyzed our market and studied our pricing, and I believe that with the increase in volume that we can anticipate, we should sell our trunks, bags and shoes at Wal-Mart because we could double our profits in a single year!”

I’ve had clients in multiple industries who’ve faced this problem as well. Fortunately, they took the long-term view, and the first screen that they put the opportunity through was, “Does this fit our strategy?” Too often, the only screen is short-term revenue. Sometimes an opportunity that offers nonstrategic revenue can be captured by creating another brand. I have a client who effectively services both the high and low end of an industry with two separate brands. He had to use great restraint to separate management functions, and even physical space, so both teams could focus on their respective customer groups, which had different buying behaviors and needs.

Unlike Louis Vuitton, which has had periods where demand outstripped its production capability, we’re most often challenged by not enough demand. Regardless, I believe there are six questions that any company should ask about opportunities being considered:

1. Does this fit our strategy? (Better have one!)
2. What are our objectives?
3. What is the long-term return on invested capital? (There are many financial returns that can be calculated, but make sure you consider the time frame and cost of capital. Maximize the return and minimize the required resources to meet your objective.)
4. Do we have the cash to grow? (You can be profitable and grow yourself broke!)
5. What are the alternative growth vehicles that we might pursue?
6. What are the risks associated with this avenue of growth?

The biggest challenge to strategic growth is enthusiasm outstripping reasoned thought. Do your investors, salespeople, product development people and the public understand who you are and what your brand stands for? There’s a reason that Dom Pérignon isn’t sold in six-packs at 7-Eleven.
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