The growth of a company and its products is associated with risk-bearing costs and liquidity expenses due to the actions required to prepare for growth initiatives, e.g. intensifying the penetration of current markets, developing new markets or target groups or launching new products. These expenses must be amortized with an entrepreneurially attractive return, otherwise the growth strategy does not meet the requirements of the Economic Principle of profit maximization. Therefore growth developments of markets, products and business units can only be considered successful, when the total cost of the growth initiative is fully recovered and at least a return above the cost of capital plus an entrepreneurial risk premium is achieved. Furthermore, the expected return must surpass the industry average to avoid falling behind competitors.
Studies show that on average value-optimized growth achieves the highest profitability in the following market positions:
- Competitive position: Ranked among the top three competitors.
- Market share target for specialized niche providers: Between 1% and 5%.
- Market share target for broad market generalists: Between 20% and 40%.
The described competitive positions must be achieved at a development stage, when markets maturing as only at this point an above-average value creation position can be securely assured:
- Internally, the cost and investment efforts required for superior growth in competition are flat
- Externally, competition typically consolidates to three market-leading companies with superior value creation and predictably stable revenues and above average margins; the risk of ousting by the rest of competition is low, since all the other rivals in the market work on the basis of higher cost and lower profitability.
Growth that solely expands business size without unlocking defendable value creation advantages is destroying value and tends to make companies vulnerable: “Too Big to Fail” is a myth. The case of Credit Suisse, one of the formerly largest banks in the world, in the spring of 2023 serves as a warning example