The secret to growth is feedback, just not the type of feedback you think.

On self-reinforcing competitive advantages

What do economies of scale, network effects, and growth loops have in common? These are all examples of self-reinforcing competitive advantages. Companies that exhibit accelerating growth rates owe much of that growth to a competitive advantage that grows stronger as the company grows in size. As they scale, these competitive advantages become stronger through the increased efficiency created by economies of scale, improvements in product value due to network effects, or the virtuous cycle created by product virality and word-of-mouth. The successful implementation of a self-reinforcing competitive advantage can mean the difference between building a multi-million-dollar business and a multi-billion-dollar business.

Business as usual

When this type of competitive advantage is absent, growth can only happen linearly, and often with diminishing efficiency factors such as conversion rates. This means that overall cost per acquisition increases over time. This may perhaps be acceptable since, as the company grows, it often gains access to cheaper and more abundant capital. However, it’s important to recognize that in these circumstances, accelerating revenue growth requires a corresponding acceleration in expenses. Modern growth professionals aim to mitigate this by pursuing greater efficiency through experimentation.

Strategy must match reality

That said, a self-reinforcing competitive advantage isn’t a requirement to build a great business, and not every business will be able to implement one. For CEOs and senior leaders, it’s important to ensure that vision matches reality. If a business doesn’t enjoy a self-reinforcing competitive advantage, chasing exponential growth is unlikely to be a successful strategy. Instead, leadership should either focus on finding a competitive advantage that will become stronger as the business grows, or otherwise focus on profitability and fiscally responsible growth. Lastly, if your business scales linearly, avoid the temptation to ask the marketing team to start “growth hacking”. A self-reinforcing competitive advantage in production, distribution, or elsewhere in the business is built from the inside out, not bolted on as an afterthought. The business strategy is built around the competitive advantage, not the other way around.