06 December, 2006

Growth: Cure-all or Camouflage?

In some business circles, it is believed that sales growth can cure all operational or organizational ills.

With more money, (the thinking goes,) organizational gaps can be plugged, capital equipment needs can be addressed and the overall company attitude increases, which can lead to a productivity uptick since labor feels it may also benefit from the extra cash flow. This fallacy persists even despite many examples to the contrary.

Even a cursory perusal of business news from 2000-2001 will provide ample evidence of firms that had huge sales, but anemic or negative profit growth.

So, what does Microsoft's track record look like in this area?

Year over year profit growth, derived from the percentage of net income to total revenue, looked like this for the past eight years:

1999: 10%
2000: 2%
2001: -12%
2002: -10%
2003: 5%
2004: -1%
2005: 9%
2006: -2%

(Microsoft's fiscal year runs from July 1 - June 30. Data derived from Microsoft annual reports.)

By my calculations, and I'm no Investment Banker, this is a cumulative profit growth rate of -1.33% for the 1999-2006 period. Pulling in the time horizon a bit, from 2003-2006 it looks much better, producing an overall 11.4% growth rate.

How about the competition? Apple: 14.49% profit growth from 2003-2005. Google: 49.92% from 2003-2005. Yahoo!: 92.61% from 2003-2005. (Hopefully some kind soul will set me straight if I've bungled the math here.)

Is is any wonder why there is such emphasis on controlling spending and hitting budget targets at Microsoft today? Profit growth has been lagging our competitors, competition is more vigorous and our stock is underperforming the market.

The double-speak from leadership and management is starting to come into focus for me.

The stakes on our long-term big bets get higher every quarter, because we're doubling down on each one of these bets in the hope of scoring a pot. And our competitors are calling our bluffs because they've learned our tells after years of taking earlier pots from them.

What I and my colleagues are left to wonder is why we keep getting mixed messages on competition. We keep hearing how strong it is, but the ramifications of losing to them is never articulated. Only vague statements of lost potential future revenue.

Good leadership tells followers what the real hazards are. It fosters trust among the rank-and-file and forces those who are about to endure hardship to focus on avoiding the hazards or at least mitigate them as much as possible. Our growth is starting to look like camouflage for future ills.

Because the vibe in the trenches right now is that we're all about to land on the beaches of Gallopoli in the next few years, and our leaders are not courageous enough to tell us so.

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