Have You Earned the Right to Grow?

I’ve thought about this question a lot. My realization surprised me.

I’m guilty. I use it all the time. The ubiquitous phrase, “You’ve earned the right to grow!” But what does that even mean? What is my mental decision tree for making this assertion? I use it as loosely as I tell my five-year-old that he’s “special,” and we all know that if everything is special, then nothing can truly be special.

Often, I find myself making this conclusion based on a company’s financial results. For example: your manufacturing business has an EBITDA margin of 30%—great job! You’ve earned the right to grow because you’ve demonstrated an ability to commercialize a differentiated product, command a premium price, and execute efficiently. Full speed ahead.

My go-to financial-focused approach is profoundly flawed.

But what about all the attributes of a business that aren’t on the P&L? Do they matter? Or, is earning the right to grow purely a financial assessment? I’ve been reflecting on this question a lot, and I’ve realized that my go-to financial-focused approach is profoundly flawed. The question is not a financial one. At least not primarily.

A stage-gate approach for determining if a company has earned the right to grow

1/ Do we provide a safe work environment?

In 2024, the U.S. Department of Labor reported 826 on-the-job deaths. This is simply unacceptable. No job is so important that we can't take the time to do it perfectly safely. Nothing kills a company faster and more completely than poor safety. Plus, the commitment to safety has far-reaching effects. Just Ask Paul O'Neill who transformed Alcoa by focusing on worker safety. He declared, "We're going to focus on safety over profits." He increased Alcoa's market value from $3 billion to $27.53 billion, while net income increased from $200 million to $1.484 billion.

If our employees are getting hurt (or worse) on the job, then we have not earned the right to grow. Human lives over growth, full stop.

Focus: Health and safety

2/ Can we effectively serve our current stakeholders?

If we’re missing deadlines for quotes, extending lead times, delivering late, screwing up invoices, canceling employee performance reviews because we’re too busy, paying vendors late, forgetting birthdays, missing soccer games, etc., then we have not earned the right to grow. If we can’t honor our commitments to our current stakeholders – both at work and at home – what makes us think we will be able to adequately serve new stakeholders?

Focus: Honor our existing commitments

3/ Are our 80s all Raving Fans?

You didn’t think you would read a Strategex article without an 80/20 reference, did you? Our 80s – the top 20% of our customers that generate 80% of our revenue and virtually all of our EBITDA – must all be Raving Fans. If they aren’t, we haven’t earned the right to grow, and our focus should exclusively be on securing these key relationships and mitigating any risk of churn. If we lose an 80, it is going to hurt.

Focus: Best-in-class Net Promoter Score with all of our 80s (top accounts) being Promoters

4/ Have we maximized wallet share with our current 80s?

If our average 80 customer isn’t giving us a majority of their wallet, then we haven’t earned the right to grow. The fastest, easiest, most profitable way to grow is to sell more to the 80s we already have. Harvest this low-hanging fruit first.

Focus: Account-based sales strategy to maximize wallet share

5/ What is our Key Ratio?

If our Key Ratio – a metric that determines how effectively we are leveraging our human capital – is below 2.0 then we have not earned the right to grow. This is because any material margin dollars we generate will be consumed by overhead costs, resulting in a bottom-line impact that is not accretive to the P&L.

Focus: Margin improvement

6/ What is our cost of capital?

Investments in growth do not come cheap and if, like many companies, we need to finance these investments then our cost of capital is an often overlooked consideration. In addition to external factors like interest rates, we also need to be mindful of our debt-to-equity ratio, debt service coverage ratio, credit rating, etc. If the expected returns from growth investments are less than our cost of capital, we have not earned the right to grow.

Focus: Balance sheet and capital structure optimization

Get Good at Making Money. Get Better at Keeping Money.

On first read, this framework might seem too aspirational; however, if you think about it, this approach is the most pragmatic way to determine if you’ve earned the right to grow. If we don’t have happy and healthy employees, if we’re not honoring our commitments, if we can’t generate Raving Fans, if our capital structure isn’t optimized, etc., what makes us think investment in growth will meet our IRR thresholds? We must check these boxes first; otherwise, we’re just setting ourselves up to fail.

I get it. The pressure to grow is immense. I feel it, too. But at Strategex, we come across far too many companies with impressive topline growth and flat or declining EBITDA and free cash flow. Growth alone does not guarantee success; profitable growth wins the game. If we don’t check the boxes above, then we might get good at making money, but we’ll be really bad at keeping the money we make.

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