The 12-Week MBA Chapter 3: Growth - How Businesses Get Bigger

Everyone wants their business to grow. But what does growth actually mean, and where does it come from? Chapter 3 of The 12-Week MBA breaks this down in a way that makes you rethink everything.

This is post 3 in my 12-Week MBA retelling series.

Why Growth Matters (And Who Cares Most)

In the previous chapter we talked about profitability. You might think, “If the company is profitable, why bother growing?” Fair question. But here is the thing. You can only cut costs so much. You can only raise prices so much before customers walk away. At some point, the only realistic way to keep increasing profits is to sell more stuff.

Now, not every investor cares equally about growth. Banks and creditors just want their money back with interest. They lend you cash, you pay them on schedule, everybody is happy. Growth is nice but not their main worry.

Shareholders are different. Nobody promises shareholders a fixed payout. They get what is left over after the company pays everyone else. That leftover is called dividends, and it only shows up when there is surplus cash. Shareholders accept this bigger risk because they hope the company will not just pay dividends, but pay growing dividends over time. And growing dividends come from growing profits.

So growth is not some abstract business school concept. It is what keeps shareholders invested and interested.

The Three Levers of Growth

The authors use their food truck example again. Imagine your grilled cheese truck is doing great. How do you sell even more sandwiches? There are basically three paths.

1. Market Growth - The Rising Tide

Sometimes your market just gets bigger on its own. The authors moved to Austin, Texas in the 1990s when it had about half a million people. Since then, it more than doubled. If you had a food truck there, you would sell more sandwiches just because more people live nearby. You did not do anything special. The market grew around you.

Markets grow for a few reasons. Population goes up. Customer tastes change in your favor. The economy does well and people have more money to spend. But here is the honest truth: you as a business owner have very little control over any of these. You cannot make more people move to your city. You cannot control the economy. At best, you can choose to be in markets that are growing and try to influence customer behavior through your product and marketing.

2. Market Share - The Zero-Sum Game

The second path is taking customers from your competitors. Your food truck is parked in an office park. There is a convenience store with sad pre-packed sandwiches, a smoothie place, and a Tex-Mex restaurant with cheap margaritas. You could try to steal their customers.

How? You can lower prices. But that cuts into your profit per sandwich. And your competitors will probably lower their prices too. Now everybody makes less money and market shares end up roughly where they started. This is called a price war, and nobody wins except the customers.

You can also compete by being better. Tastier recipes, friendlier service, faster orders. But that costs money too, and your competitors are not sitting around doing nothing. They will fight back.

This is why the authors call market share a zero-sum game. For you to win a bigger slice, someone else has to lose theirs. It is like a pie that does not get bigger. You are just fighting over who gets which piece.

Often, the most realistic goal with market share is simply not losing it. Just holding your ground against competitors is a win in many industries.

Because market share is so hard to gain organically, companies often just buy their competitors. Mergers and acquisitions let you “buy” market share. But even that has trade-offs. The money you spend on buying a competitor could have gone into building something new. And your remaining competitors can do the same thing.

3. New Markets - The Real Growth Engine

This is where the exciting stuff happens. Instead of fighting over the same customers, you find entirely new ones.

Sometimes technology creates a brand new market. Think about personal computers, the internet, or AI. These were not improvements to existing products. They created demand that did not exist before.

Sometimes it is about reaching underserved communities. A lot of global growth in the past fifty years came from companies expanding into developing countries. New geography, new customers, new market.

And sometimes, someone just invents a need. The authors share a great story about the Pet Rock from 1975. A guy named Gary Dahl got tired of friends complaining about pet care. So he boxed up rocks from a Mexican beach, included a funny instruction manual, and sold them for four dollars each. Over a million times. That is a new market created out of thin air.

The MBA degree itself is another example. Someone had to come up with the idea that management skills could be taught in a school, certified, and that certified people deserved higher salaries. A multi-billion-dollar market was born from a sociological idea, not a technological one.

Disruption: When All Three Collide

The authors use Tesla as an example of something interesting. Is Tesla in a “new market” for electric vehicles? Or is it just grabbing market share in the existing personal transportation market? The answer is kind of both.

When a company recognizes an underserved market, changes customer behavior, and grabs market share all at the same time, the business world calls it disruption. It is a three-pronged attack that remakes the entire playing field.

The Nokia Lesson

Here is a story that stuck with me. In 2004, Nokia’s research labs created a touchscreen, internet-ready phone. Nokia was already the biggest phone maker in the world. But they looked at their invention and thought: this thing is expensive to make, nobody will pay a thousand dollars for a phone, and it might eat into sales of our existing phones.

That last worry is called cannibalization. When your new product steals customers from your old product instead of bringing in new ones.

Nokia decided the touchscreen phone was not worth it. They killed the project. Three years later, Apple launched the iPhone and the rest is history.

The lesson is brutal. Nokia had the technology first. They had the market position. But they were so worried about protecting what they already had that they missed what was coming. Sometimes the biggest risk in business is not taking one.

Growth Stories: Fairy Tales or Histories?

The second half of this chapter is about something equally important. How do companies talk about growth? Because growth is always about the future, and the future is uncertain.

The authors look at Holcim, a Swiss cement company. Yes, cement. Not the most exciting business. But the CEO told a compelling growth story in their 2020 annual report. He pointed to three things: government stimulus spending on infrastructure, urbanization driving demand for more buildings and roads, and a new market in sustainable building materials.

It sounds convincing. But the authors warn us: take these stories with a grain of salt. CEOs are naturally biased toward optimism. If a CEO told investors everything was going to be terrible, the stock price would tank and employees would lose motivation. So they err on the positive side.

At the same time, they cannot overpromise. Nothing destroys investor trust faster than saying “great things are coming” and then delivering nothing. It is a balancing act, not that different from when your boss asks you how long a project will take and you have to give an estimate that is honest but not demoralizing.

How to Spot Real Growth Plans

The authors give a practical tip here. Look at what a company is actually spending money on. If the CEO is promising big growth, the financial statements should show increased spending on sales, marketing, research and development, or new equipment.

If the CEO talks about rainbows and unicorns but the company is cutting costs everywhere, your alarm bells should go off. Actions need to match words. The CEO should be putting their money where their mouth is.

Key Takeaway

Growth comes from three places: market growth (which you mostly cannot control), market share (a zero-sum fight with competitors), and new markets (the biggest opportunity but hardest to create). All growth is a projection about the future, not a guaranteed outcome. Smart investors and managers look beyond the growth story to see if the company is actually investing in making it happen.

The most important thing I took from this chapter: growth is not about getting bigger for the sake of it. It is about finding sustainable ways to increase profits, and that means making trade-offs at every turn.

Book: The 12-Week MBA by Nathan Kracklauer & Bjorn Billhardt | ISBN: 978-0-306-83236-9

Previous: Chapter 2 - Profitability

Next up: Chapter 4 - Risk - Why investors care about predictability.

Part of the 12-Week MBA retelling series