Today's high-growth startup can often become tomorrow's stagnant middle-market stepchild, and the vicissitudes of a fickle economy can turn any company's growth trajectory upside down in an instant. After all, there's a reason why public companies are obligated to remind potential investors that past growth achievements serve as a very limited indicator of future growth potential.
In this context, we should be asking ourselves: Is there a better way to evaluate and recognize companies that have put the right strategies, systems and processes in place to build and sustain growth? Can we identify businesses that are achieving growth not just through brute force or economic good fortune, but also due to flexible, yet powerful, revenue generation strategies?
The answer is yes, and the secret lies in understanding the difference between a growing business and a growth-driven business.
What is a Growing Business?
The most common indicator used to identify growing businesses is the percentage increase in annual revenue on a year-over-year basis. Simply put, a growing business is one that consistently charts significant revenue increases each year (commonly examined on the basis of a 2-, 3- or 5-year trajectory). Some evaluations go into further depth and consider either gross profit (revenue minus cost of goods sold) or EBITDA (earnings before interest, taxes, depreciation, and amortization).
Another way to look for growing businesses in many markets is to identify an increase in headcount -- the number of new employees added to the company each year. We can also look for growing businesses in some sectors by examining changes in a company's percentage of marketshare (for example, ChickFilA recently became the largest quick-serve chicken restaurant in the U.S., toppling Kentucky Fried Chicken for the first time), or in how bellwether customers migrate from incumbent players to an emerging one (such as the rapid shift by many Fortune 100 companies from Microsoft Office to Google Apps). Finally, in some industries market capitalization (for public companies) or business valuation (for private firms) can indicate the emergence of a growing business as well.
All of these factors suggest momentum, which is one of the intangible things that are important to consider when looking for growing businesses. Momentum is the ability of a company to sustain its trajectory of success over time. This is why most formal programs for identifying growing companies look at a multi-year period when determining which firms truly merit recognition.
Identifying Growing Businesses: Art or Science?
There are many downsides to our collective focus on the concept of a "growing business". For one, the indicators used are all economic rear-view mirrors. That is to say that they look at the past and reward success achieved, rather than looking at the present or future and recognizing steps taken to drive ongoing growth.
One unique challenge with identifying growing businesses is that historic revenue jumps can hide ticking time-bombs that will implode future expansion. Actually, it's worse than that: Many companies that achieve stellar growth do so through dangerous or unsustainable pathways. That means we may actually be recognizing (and emulating) growth strategies that are unwise…or worse.
Some examples of dangerous or misleading growth practices include:
- Building volume on prices so low that new revenues can't support expansion
- Suddenly securing one or a few enormous contracts with corporate or government customers
- Achieving revenue jumps primarily through leveraged acquisitions
- Driving product sales well beyond a company's capacity to execute
- Buying an existing 'book of business' and counting that toward new sales
- Unfocused spending on sales and marketing that assumes infinite future returns
- Relying on special designations that enable you to win 'sole-source' or 'no-bid' contracts
- Over-diversifying the company's range of services to chase any and every piece of business
When you consider how many award-winning companies have employed one or more of these risky and potentially deadly tactics, it becomes clear very quickly that we should exercise great caution in emulating the strategies of "growing companies" without hesitation.
What is a Growth-Driven Business?
With these cautionary tales in mind, we should certainly take a serious look at what separates a growing business from a growth-driven business. Here are five essential attributes of a growth-driven business:
1. The business strategy is market-focused and market-responsive.
The myth of the entrepreneur-savant is still alive and well. You know this myth: it's the one that combines the caricature of the 'crazy inventor' with the stick-to-itiveness of an unrelenting used car salesman. In short, the message is simple: If you believe in your product or service with the passion of a cult leader and you push it on other people with the fervor of a door-to-door salesman, you're bound to succeed.
Many growing companies push, push and push some more, and certainly the trait of passionate commitment is important for success in business. But what you need to be passionate about is not just your business…it's your customers.
A growth-driven business is one that is fully engaged in evaluating, examining and understanding its market: the community of customers and potential customers it serves. In addition, a growth-driven business is responsive to changes in this community (and may even anticipate future shifts so it can respond to the market proactively).
2. Sales and marketing are truly aligned.
Studies show that nearly 80% of full-time sales professionals take a dim view of their marketing colleagues, thanks largely to the perception that marketers have no idea what the "real world" is like for salespeople. Meanwhile, marketers observe salespeople using brute force techniques to close a deal when leveraging knowledge resources and new marketing content could have been so much more effective.
The good news is that, today, we can measure the effectiveness and integration of marketing and sales, through digital and non-digital metrics alike. In a growth-driven company, sales and marketing are built and managed as two parts of one, unified organization: the revenue-generation department.
3. Systems and processes are built for growth.
Growth-driven companies consistently plan and build proactively, ahead of their growth curve. Growing companies often do the opposite -- either because they put all of their money into unfocused, traditional sales and marketing investments (such as hiring new salespeople without market-testing messages first), or because they don't understand how quickly they will need new infrastructure until a crisis hits.
A growth-driven business also recognizes that it needs to have clearly planned technology commitments on the revenue-generation side (customer relationship management or CRM, and of course web/digital and marketing automation) as well as on the customer-service side (enterprise resource planning or ERP, not to mention distribution and customer support).
Finally, a growth-driven company is process-obsessed and can answer numerous questions with clarity. What constitutes a qualified sales lead? What are the key levers to profitability? How are customer concerns handled and resolved? Who is responsible for defining and delivering key metrics for performance?
4. Customer awareness, acquisition, retention and leveraging are integrated.
Often, growing companies are in a short-term battle for numbers. More sales! More deals made! More products shipped! In contrast, growth-driven companies are in a long-term war for customers. We all recognize that monthly and quarterly targets are essential to managing performance, but these targets need to work in the interests of our strategic goals.
If we serve a niche market of, say, a thousand target companies, we can't afford to sell 500 of them over five years, only to have 50% of them churn to our competitors by the time those five years are over. After all, that means we've just semi-permanently shut ourselves out of 25% of the market.
Instead, growth-driven companies engage customers strategically at all stages of the journey, from awareness and acquisition to retention and, of course, leveraging customers into evangelists for the business. They recognize that winning a few battles isn't the goal - winning the war is.
5. The company is committed to defining its brand, and delivering its promise.
Finally, a growth-driven business is one that understands and adapts to ensure that its two halves equal one whole. The first half is clear definition of the company's brand: what it stands for, where, how, and for whom in the marketplace. And the second half is delivering the company's promise: ensuring that the brand promise comes to life and stays intact throughout the customer lifecycle.
Why Growing Well is Better Than Just Growing Fast
It's important to note that, while both a growing business and a growth-driven business will post regular increases in sales, oftentimes a growth-driven business may actually increase its top-line revenue more slowly than a growing business. That's for two reasons:
First, it takes time and money to build the infrastructure necessary to maintain each stage of growth, and a growth-driven company takes the time to do this.
And second, a growth-driven company wants to find, build and effectively sustain its position in clearly identified market segments. Doing this not only requires time, but it also demands rigorous iteration and pivoting to find the best formula for success.
Note: For more information on pivoting strategy, read The Evolution of Hubspot and the Power of the Pivot for Business Growth).
Identifying the Attributes of a Growth-Driven Business
By evaluating businesses with these five factors in mind, you can effectively identify the companies most likely to build and sustain successful growth in the future. Coupling this with a focus on the financial fundamentals can empower CEOs to examine other companies and their own with an eye toward achieving the essential long-term objective of consistent, repeatable, sustainable growth. And in doing so, you'll be well on your way toward building a powerful, market-leading enterprise.