When managers, board members, or even company owners are asked what they prefer between profitability or growth, a vast majority would almost automatically say that both, however, the answer is not obvious.
It depends on multiple variables and elements to consider on what is the best. Here are some thoughts on the correlation between the two concepts and how it applies depending on the type of business.
- Profitable growth
Profitable growth refers to the joint achievement of profitability and growth goals. This is the case of companies that achieve a balance between concentrated and diversified clients, with organic and inorganic growth models and exposure to high-margin, high-growth businesses. They are companies with business models in which the linearity between the new number of clients and the costs and expenses that are activated for their attention is broken. Very few companies manage to maintain sustained profitable growth.
- Growth first then profitability
For certain industries, high-growth companies are often more valuable than slower-growing companies, however, this situation is dangerous because growing at exotic rates can lead the company into a valley of death. Supergrowth with low or no profits induces organizations into danger zones due to lack of liquidity, high fixed costs and difficulties to operate on a day-to-day basis. Focusing not on profitability but on growth implies that enough capital will be required to finance growth operations, until the investment actually generates new returns.
While growth is one more variable, many associate it with vain metrics, as they try to impact and focus on growth, without paying attention to what is really “in the bank” after all the corporate effort. Income growth alone seldom creates the great success that entrepreneurs dream of and worse still, it is sometimes achieved through dangerous borrowing, high risk, or even sacrificing profits.
Indiscriminate strategies of growing just to grow have generated serious strategic mistakes with dire financial consequences. When organizations become obsessed with growing by excluding other objectives such as profitability from the analysis, they end up competing in markets where they do not have the required capabilities to gain an advantage and in the long run the organization ends up losing important value.
- First profitability then growth
When a company focuses on profitability by limiting expenses, it can lead to stagnation, a condition that cannot be maintained for long if it is to continue to maintain the value and importance of the company in the market. Unfortunately, many companies find over time that ensuring profitability can be much harder to hit than the numbers associated with growth.
Mature companies understand that making decisions to abandon customers, products or even markets can involve a painful process in the face of growth, but that it is necessary and is almost a healthy practice to safeguard profitability, especially when the ultimate objective of any organization is to create and To distribute value, companies must meet their ability to grow their profits and not simply their income.
- Profitability and growth objectives in conflict
When there is progress in one aspect, it generally produces a decrease in the other, it seems that under the conditions of certain types of business models, profitability and growth coexist under a conflictive and uncooperative relationship. Thus when a growth rate is set, it will affect the margin result and what is the same, when the organization strives to achieve a certain level of profitability, its ability to grow will be affected.
- Pendulum between growth and profitability
In highly difficult markets, meeting the two objectives simultaneously ends up being highly complex, therefore, there are companies that are honest about their capabilities and define annualized strategies swapped between growth and profitability, in order to concentrate efforts and organize resources. geared toward achieving one goal at a time. This logic makes it easier to concentrate efforts, but at the cost of losing continuity of objectives year after year.
Profitability and growth are important and necessary for a company to survive and remain attractive to investors. The imbalance between these two objectives leads to a misallocation of resources and eventually to a situation of competitive vulnerability due to the lack of growth and to financial vulnerability due to the absence of acceptable profitability. Profit is key to basic financial survival, while growth is key to profit and long-term success.
Of course, life would be much easier if it were not necessary to have to choose between one and the other, but more and more companies are faced with having to make a decision for one or the other or innovate to meet both. There is no magic formula for every organization, it all depends on the business model, strategy, corporate culture, leadership style, the market, the added value delivered to the customer, and many more elements. The only secret that enables profitable and sustained growth is increasing the organization’s competitive advantage.