Growth versus profitability: the business leader’s dilemma

“Our val­u­a­tion and size are much more based on our ener­gy and spir­i­tu­al­i­ty than [they are] on a mul­ti­ple of rev­enue,” Adam Neu­mann, co-founder of WeWork, told Forbes mag­a­zine in 2017. It was an uncon­ven­tion­al state­ment for a busi­ness leader to make, but then WeWork wasn’t pro­mot­ing itself as a con­ven­tion­al busi­ness. 

In its hey­day, the provider of co-work­ing office space expand­ed at break­neck speed. The num­ber of WeWork loca­tions increased from just over 400 in 2018 to about 750 in 2019. Dur­ing that peri­od, its mem­ber­ship grew from 400,000 to 650,000, while its annu­al rev­enue shot up from $1.82bn (£1.56bn) to $3.5bn.

But in 2019 – the year of Neumann’s con­tro­ver­sial depar­ture as CEO – it was also los­ing about $220,000 every hour. When WeWork final­ly float­ed on the New York Stock Exchange in 2021, it was val­ued at a mere $9bn, rather than the $47bn price tag it had attract­ed in 2019. In the sec­ond quar­ter of this year alone, the busi­ness still lost $635m.

WeWork has fol­lowed a clas­sic start­up strat­e­gy of seek­ing growth at all costs: grab as much mar­ket share as pos­si­ble and quick­ly estab­lish your­self as the biggest play­er. Only once you’ve scaled up to a posi­tion of pow­er do you start focus­ing on mak­ing prof­its. This sort of approach has worked for com­pa­nies such as Microsoft and Ama­zon, after all. 

Why didn’t it do the same for WeWork? The main rea­son, sev­er­al observers not­ed at the time, was that the firm was not a tech start­up. What­ev­er its mav­er­ick for­mer CEO might have claimed about the busi­ness, they said, fun­da­men­tal­ly it was just anoth­er com­mer­cial real-estate com­pa­ny.

For oth­er start­up lead­ers pur­su­ing an aggres­sive growth strat­e­gy, decid­ing when to pri­ori­tise prof­itabil­i­ty over mar­ket share can be a tricky mat­ter. 

“When you have big ideas and solve big prob­lems, some­times you need to scale up at a faster pace,” says Har­ry Hurst, CEO of Pipe, a flex­i­ble financ­ing plat­form that he co-found­ed in 2019. “It’s vital to grow quick­ly enough to have an impact and gain a foothold in your mar­ket, espe­cial­ly when you’re cre­at­ing a new cat­e­go­ry, but the key is not for­get­ting to build it sus­tain­ably along the way.” 

He con­tin­ues: “If you focus on grow­ing the impact, brand and val­ue of your busi­ness, not just its size, it’s very hard to go wrong. After that, you can con­cen­trate more on reduc­ing the cus­tomer-acqui­si­tion-cost pay­back peri­od and mak­ing a prof­it.”

Pipe has attract­ed a val­u­a­tion of $2bn, even though it employs only about 100 peo­ple. 

“What’s worked for us is main­tain­ing our focus on effi­cien­cy and exe­cu­tion to ensure that every­thing we do has an impact – fail fast and learn even faster,” Hurst explains. “One way we do that is by track­ing rev­enue per employ­ee.”

Maciej Workiewicz is asso­ciate pro­fes­sor of man­age­ment at the ESSEC Busi­ness School in Paris. He points out that, “in gen­er­al, prof­its trump rev­enues. A com­pa­ny can eas­i­ly increase its rev­enues sim­ply by pric­ing its prod­ucts below their pro­duc­tion costs. Such an approach is clear­ly unsus­tain­able. Set­ting sales rev­enue tar­gets with­out accom­pa­ny­ing prof­it goals is fool­ish, there­fore.”

But Workiewicz accepts that there are “legit­i­mate rea­sons for which a com­pa­ny may tem­porar­i­ly sac­ri­fice prof­its. For exam­ple, it may choose to secure a big­ger mar­ket share ini­tial­ly to reach a more effi­cient scale in pro­duc­tion, mar­ket­ing and dis­tri­b­u­tion. Hav­ing a larg­er man­u­fac­tur­ing capac­i­ty means that the aver­age cost of each prod­uct will be low­er, because the fixed costs are spread over a big­ger pro­duc­tion vol­ume.”

Even long-estab­lished busi­ness­es will change tack in this respect as their mar­kets evolve and con­sumers’ tastes change. Before he resigned as CEO of Volk­swa­gen in light of the emis­sions-test cheat­ing scan­dal in 2015, Mar­tin Win­terko­rn had set the firm on the path to becom­ing the industry’s biggest play­er as mea­sured by vehi­cles sold. This April, Dr Arno Antlitz, the group’s chief finan­cial offi­cer, announced that the busi­ness would be con­cen­trat­ing on prof­itabil­i­ty more than sales. 

“The key tar­get is not growth. We are more focused on qual­i­ty and on mar­gins, rather than on vol­ume and mar­ket share,” he told the FT, as the com­pa­ny revealed that it would be reduc­ing its range of petrol and diesel vehi­cles by up to 60% in Europe by 2030 to help it con­cen­trate on the more prof­itable pre­mi­um end of the mar­ket.

When Oliv­er North start­ed at Venari Group UK as CEO in Jan­u­ary 2020, the firm – the nation’s largest man­u­fac­tur­er of ambu­lances and fire engines – was under pri­vate equi­ty own­er­ship. It had a £30m turnover tar­get, but lit­tle focus on prof­itabil­i­ty, result­ing in a loss of £4.6m. Today, while still hit­ting this turnover fig­ure, Venari Group has record­ed a prof­it of £2m.

“Prof­itabil­i­ty was the only mech­a­nism that could renour­ish the com­pa­ny and bring it back to life,” North says. “Social, envi­ron­men­tal and eco­nom­ic fac­tors are always tak­en into con­sid­er­a­tion, togeth­er with my own think­ing about busi­ness strat­e­gy, but prof­itabil­i­ty is the fuel that keeps the engine run­ning. With­out it, it’s hard for any busi­ness to flour­ish in oth­er areas – for exam­ple, staff wel­fare and R&D.”

The growth-ver­sus-prof­it ques­tion is espe­cial­ly rel­e­vant in the cur­rent com­mer­cial envi­ron­ment. Giv­en the explo­sion of digi­ti­sa­tion, a high lev­el of uncer­tain­ty in many mar­kets and the increas­ing demand from con­sumers for cheap­er and more acces­si­ble goods and ser­vices, the oppor­tu­ni­ties for dis­rup­tion have nev­er been greater. Under such cir­cum­stances, many peo­ple in busi­ness would say that the need to gain mar­ket share out­weighs the need to make a prof­it, at least in the short term.

On the oth­er hand, in a fal­ter­ing econ­o­my, investors may well require com­pa­nies to demon­strate their prof­itabil­i­ty soon­er than might oth­er­wise be expect­ed. It’s a dilem­ma that will focus minds – and stim­u­late debate – over the next few years.