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Leadership and the Quest for the Virtuous Cycle

Growth is the oxygen of any business.

As explained in the book “Double Digit Growth” by Michael Treacy, there are two types of cycles that companies experience: one of growth—the virtuous cycle and one of decline—the vicious cycle.

The virtuous cycle is when the company is growing at a fast rate. In this cycle, there are three key reasons to focus on maintaining vigorous top line growth.

  1. There is the economic factor for top line growth. Double-digit, profitable growth typically leads to higher earnings and a higher company value from an investor perspective. A higher valued company can then borrow money at a less expensive rate. More capital at a lower interest rate provides the opportunity for more investment. More investment drives additional growth. But the need for high growth is not limited to economic reasons.

  2. The momentum factor. The fact is that most clients want to be associated with winners—that’s the American way! Faster growth gets the attention of various stakeholders essential for a company’s success, including clients, prospects and prospective employees. This momentum boosts confidence in the high growth company and enhances the company’s reputation, as well as improving the company’s value. Your existing clients speak about the company with confidence to their peers, which, in turn drives higher demand, referrals, and higher growth rates.

  3. The opportunity factor. High growth leads to new opportunities for employees which leads to higher employee engagement. Higher employee engagement leads to higher innovation and higher productivity which fuels stronger client relationships and ultimately, higher client value. A stronger, more innovative value proposition for clients and prospects drives faster growth. These are just a few of the reasons why profitable growth is so important.

The polar opposite of the virtuous cycle is the vicious cycle. Let’s look at how the same three factors impact a company when revenue decline is prevalent.

  1. First, there are the economic drivers of the vicious cycle. Because everything starts with revenue, slower growth and/or sales declines lead to less net income or EBITDA. Lower earnings leads to lower company value and lower company value leads to a higher cost of capital to invest. Higher cost of capital results in less investment and less investment drives less growth.

  2. In the momentum factor of the vicious cycle, poor financial performance gets the attention of customers—both current and prospective. Just as we all want to be with a winner, nobody wants to be associated with a loser. The poor financial performance hurts the company’s reputation with both clients and prospects. Lack of confidence in turn drives higher defection to the competition. Higher defection accelerates declining revenue.

  3. Finally, the opportunity factor of the vicious cycle. Since there is a lack of growth, downsizing is likely to occur. Downsizing usually leads to lower employee engagement and a lack of trust. Low trust leads to less innovation by employees and lower productivity. It also fuels higher defection of key employees. Loss of key employees creates doubt in other employees, causing them to leave for greener pastures. The resultant high turnover leads to degradation of service and the loss of more clients and talent. And so goes the vicious cycle.

The foundation of double-digit top-line growth and profitability starts and ends with developing your leaders. Finely-tuned leaders can ensure the development of your people in their quest for retention of and expansion of the existing customer base while simultaneously acquiring new customers. Training your frontline leaders is THE MOST IMPORTANT INVESTMENT you can make to drive breakthrough performance.

At Butler Street, we have recognized by HR Tech Magazine as one of the Top 10 Leadership Development Training Companies in the U.S. We would be happy to help you develop your leaders in your quest for the virtuous cycle. Contact us to start the process.

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