Growth, sure. But growth of what?

In a board meeting, one of the directors asks, in a tone that mixes restrained pride with a certain weariness: “We’re growing, aren’t we?”

Nobody says a thing. Everyone knows quarterly revenue was up 14%. Nobody could say whether that was the kind of growth the company was actually chasing, or simply the natural result of selling more stuff, to more people, at a price that was eating into margin month after month.

This scene repeats itself with a frequency that ought to bother more people than it does. The word “growth” has settled into boardrooms like a guest nobody formally invited, but who’s already claimed the chair at the head of the table and has an opinion on everything. It turns up in quarterly reports, bonus targets, investor decks, almost always without anyone spelling out the obvious question: growth of what, exactly, and at the expense of what else.

Read: Growth can kill your business.

Michael Porter labelled this confusion, back in 1996, the growth trap. His observation was simple and, three decades on, still uncomfortable: of all the pressures a company faces, the desire to grow is the one that most erodes a strategic position, because it pushes the organisation to extend product lines, copy competitors, and buy companies that dissolve the very thing that made it distinctive. He used Neutrogena as an example, a brand that gave up the narrow positioning that defined it in order to fit on bigger shelves. It grew. And it ended up looking like any other soap.

What Porter described as a trap, Roger Martin describes as a category mix-up. For the former dean of the Rotman School, most of what’s called “strategy” in businesses is actually planning: a list of initiatives with a deadline and a budget, something comfortable because it deals with what the company controls. Growing revenue by 12% is a planning target. Winning a specific competitive position, one that makes a group of customers prefer the company over any other, is strategy. Both use the word growth, except one depends on you and the other depends on the customer. And that’s where the confusion turns dangerous: the board approves the planning target thinking it’s approved a strategy.

Read: Cash Flow Management: Securing Cash for Growing Operational Costs.

There’s a third mix-up too, more subtle, between growing revenue and growing margin, and it rarely gets mentioned in the same breath as the first two. Alex Edmans, a finance professor at London Business School, has spent much of the last decade gathering evidence that companies which pursue purpose, not profit, as their direct objective end up delivering more profit in the long run than those that take the opposite approach. He calls this growing the pie, as opposed to simply fighting over slices of it with suppliers, employees or customers. The practical difference is that growing the pie tends to require investment that doesn’t show up in next quarter’s revenue, which makes this form of growth the easiest to sacrifice when someone’s asking for a quick result to show the board.

None of these three ways of growing is wrong. The problem is treating them as synonyms. Approving a budget with one in mind and reporting results using another, hoping margin, market share and relevance will all follow revenue upward like carriages on the same train.

Sometimes they do. Often they don’t.

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Growth without a definition is just motion. Before you set next year’s targets, it’s worth asking which kind of growth you’re actually building toward – revenue, margin, market position, or all three at once. Our Corporate Advisory team helps you translate that answer into a financial model you can plan against, budget for and hold the business accountable to. If you’re not sure which train your carriages are attached to, let’s have a coffee.