Quality or Growth. Why Choose Just One?

Fast growing businesses often have lapses in quality, but it doesn’t have to be that way.

If we have learned anything in the last few years, it is that once admired companies can fall out of grace so precipitously that a bout of vertigo is virtually assured for anyone trying to track their trajectory. From iconic financial giants to revered automakers, the reason for failure has been consistent and unsurprising – the quest for profit through growth. As Toyota CEO Ashiro Toyoda summed it up recently: “We pursued growth over the speed at which we were able to develop our people and our organization, and we should sincerely be mindful of that.”

In fact, growth, however rapid, is not necessarily dangerous. The danger lies in the propensity of people to get complacent and dismiss the little things – safety, risk, quality, the letter of the law, ethics, repute – all the usual suspects that get in the way when the going is good.

Take the story of financial risk managers, for example. These folks are not exactly shrinking violets and can stand their ground, but who would want to listen to a senior quant’s warnings when the party is so wild and the firm’s accounts are growing at an unseen rate. Who would … oops, too late… there goes Lehman Brothers.

The problem with compromised quality in particular is that it often does not blow up in your face, but rather sits there, festering for a while. When you finally realize that you have to do something, it is already too late. And compromised quality can be much more severe for highly successful companies with highly desirable product.

Here is why:

Imagine two companies. One is a manufacturer of copper pipe. This is a commodity product that requires customer service (delivery, ordering, etc.) just to be competitive. Client affinity is low, as is the profit margin. This position may not appear desirable, but it is sustainable.

The other is a market leader with a highly desirable product and customer service to match. Think of companies like Apple. Great products and outstanding service are not cheap to furnish, but the premium, which the clients are happy to pay, covers it and leaves a nice profit. This position is also sustainable as long as the company maintains its product and service leadership.

Now, consider what happens if the quality of product or attendant service decreases.

For the copper pipe manufacturer, there will be a temporary erosion of profits, but once the quality issue is resolved, price-conscious customers can be easily reeled back through attractive pricing.

For the market leader, however, this can be nothing short of catastrophic. One cannot command high margins without quality. And even if that quality is eventually restored to its original greatness, winning the clients back can be exceedingly difficult. For an organization with the habits and the cost structure of a market leader, this will demand a major adjustment, and a return ticket is not guaranteed.

I mentioned Apple as an example for a good reason. The company continues to surprise me. Apple has this aura of a niche leader with a cool but odd product and a bunch of diehard followers, yet it is the 4th largest U.S. company when measured by market capitalization (nearly $200 billion), just behind Wal-Mart. Apple’s revenues tripled in the last five years, but it continues to deliver on quality.

Can growth harm quality? If a company disregards warnings and concerns, absolutely. It pays to remember at all times that a market leader’s position at the top is not guaranteed and getting back there after a fall is no easy feat.