All growth is good. Bigger is better. All businesses must either “grow or die.” If you’re a small business owner, you might have been nodding along as you read those business mantras, agreeing wholeheartedly with each one. After all, it’s what you’ve always been taught. And in fact, these popular business axioms are routinely lauded on Wall Street, at business schools, and by some of the most well-respected business consultants of the day. Few question their validity. But these “truths” are anything but.
At best those beliefs are half-truths and at worst they’re pure fiction. Growth can be good and growth can be bad. Bigger can be good and bigger can be bad.
“Grow or die” is a belief that has no basis in scientific research or in business reality. When not approached carefully, growth can destroy value as it outstrips a company’s managerial capacity, processes, quality, and financial controls, or substantially dilutes customer value propositions. The best way to illustrate the downside of growth is by looking at well-known public companies.
Between 2005 and 2007, Starbucks aggressively opened new store locations and made several operational changes that diluted its customer value proposition, diluted its high employee engagement culture, violated its real estate site selection controls, and weakened its high value-added “experience” business model. Toyota’s quality issues leading to multiple recalls resulted from too much growth too quickly.
I have spent much of my career studying how growth affects businesses. In a recent study of 54 high-growth private companies, I learned that several of the successful entrepreneurs in the study were repeat entrepreneurs who had “imploded” their first business by taking on too much growth too quickly. Growth overwhelmed them. They learned to respect growth’s destructive ability, and in their second venture they paced growth so that it did not overwhelm their people, processes, and controls.
That is what I call the “gas pedal” approach to managing growth. Let up on the growth gas pedal as needed to give your people, processes, and controls time to catch up.
Instead of grow or die, be motivated by this motto: “Improve or die.” Every business must continually improve its customer value proposition better than its competition in order to stay viable. That’s where real success lies.
If everything you know about growth is wrong, what’s right? Read on for my truths about growth:
Growth is change (and change isn’t easy). There are limits to an individual’s and an organization’s ability to process change. Growth requires the entrepreneur to install more processes, procedures, controls, and measurement systems. The right processes and controls must be put in place and taught to employees. In addition, the right information needs to reach the manager regarding variances from processes and controls so mistakes can be fixed quickly and not escalate into a larger problem.
Growth is evolutionary. Sometimes tough decisions are required if you’re going to keep up. Growth requires the evolution of the entrepreneur and the management team and more sophisticated processes and controls. Often, if not always, the business model and customer value proposition evolve, too. Furthermore, this evolution is continuous, and anticipating and responding to it can require making some fairly dramatic—and difficult—changes.
One surprising finding of my research was that companies frequently had to upgrade their management teams as they grew. Often managers who operated effectively at one revenue level of the business were unable to manage effectively at a much higher revenue level. The jobs simply outgrew their skills.
Growth requires continuous learning and constant improvement. The entrepreneur and employees must be constantly open to learning and adapting and improving in an incremental, iterative, and experimental manner. No matter how big you get or want to get, continuous improvement is required.
Growth requires disciplined focus and prioritization. The entrepreneur must strategically focus the business on a compelling differentiating customer value proposition and achieving daily operational excellence and consistency.
Every entrepreneur has limited resources and time. To be successful, businesses must prioritize their focus. This is critical because any growing business has resource constraints: limited people, time, and capital. So it is critical that the entrepreneur spend his or her time on the most important areas that can drive success. These priorities, however, may vary with the type of business or the phase of growth.
Growth is process intensive. Growth requires implementing processes, which include controls. Processes are like recipes for baking a cake. They are the step-by-step instructions for how to do a task. Processes are necessary to hire employees and train them, to minimize mistakes and institutionalize quality standards, and to deliver products and services on time, 99% defect-free. Controls are necessary to set boundaries on allowable behavior and also alert management to deviations from processes.
Processes are the “how” part of doing business. As businesses grow, the entrepreneur loses the ability to be hands-on with all aspects of the business. There is simply too much to do. So, the challenge is for the entrepreneur to increase the probability that others will do the tasks as he or she would like them done. To accomplish this goal, the entrepreneur implements processes.
Growth creates business risks that must be managed. Growth stresses people, processes, quality controls, and financial controls. Growth can dilute a business’s culture and customer value proposition and put the business in a different competitive space. Understanding these risks is critical to managing the pace of growth and preventing growth from overwhelming the business.
To get a better handle on growth risks, consider how your strategic space will change as you get bigger. You will probably enter a new competitive space, facing bigger and better competitors than you previously faced. Those new competitors may be better capitalized than you and be able to engage in price competition, driving down your margins.
The good news is that you can minimize this and other big risks by planning for growth, pacing growth, and prioritizing what controls and processes you need to put in place prior to taking on much growth.
I am not antigrowth. Growth can be good and growth can be bad—it depends. Aggressive, untimely, or poorly managed growth can hurt a business and even destroy value. And, in some cases, too much growth can lead to business failure. Don’t make growth for growth’s sake your business’s goal. Understand that growth, if not properly managed, can undermine the fundamental strengths of a business.
Respect growth. Carefully consider the timing and whether you have the right people, processes, and controls in place to manage the growth. When you approach growth carefully, you can take your business to greater and greater heights.