All growth is good. Bigger is better. All businesses must either “grow or die.” 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 actually, these “truths” are anything but. At best, those beliefs are half-truths; at worst, they’re pure fiction.
“Grow or die” is a belief that has no basis in scientific research or in business reality. Growth can be good and growth can be bad. Bigger can be good and bigger can be bad. 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.
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. For Toyota, too much growth too quickly resulted in quality issues that led to multiple recalls.
In a recent study I conducted among high-growth private companies, several of the successful entrepreneurs showed as 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, paced growth so that it did not overwhelm their people, processes and controls.
That is the “gas pedal” approach to managing growth. Let up on the growth gas pedal as needed to give the company’s people, processes and controls time to catch up.
Instead of “Grow or die,” be motivated by the 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.
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 also requires that the entrepreneur change what he or she does. Successful and sustainable growth requires the right kind of leadership, the right environment (culture) and the right processes.
Growth is evolutionary. Sometimes, tough decisions are required in order 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.
The need to upgrade managers to fit the expanding job demands was gut-wrenching for many entrepreneurs because the now-ineffective managers had often had a successful history with the business but were now in over their head. This is yet another important factor that entrepreneurs must be prepared to deal with as they think about growing their business.
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 a company gets, continuous improvement is required.
My research of high-organic-growth companies highlighted one factor they all share: a “be better” DNA. Their “be better” focus was the underpinning of every growth initiative, whether it was top-line, bottom-line or developing new concepts. Continuous improvement is the DNA of growth. The good news is that continuous improvements lead to more loyal customers who can be the company’s best advertising.
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. 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 may vary with the type of business or the phase of growth.
To set priorities, entrepreneurs must have concrete and useful data about their business, communicate the priorities to their personnel, and implement processes to ensure that these priorities are carried out. One entrepreneur whom I interviewed prioritized his focus simply as customers, quality and cash flow. For him, if an issue did not impact directly and materially one of those three areas, it could wait.
Growth is process intensive. Growth requires implementing processes, which include controls. These 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 percent 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.
There are two basic types of processes. The first type are the directions, instructions and standards for how to do specific tasks. These include rules or controls for mitigating financial and quality risks. Most processes are designed to instruct an employee how to do something or what not to do. The second type has a goal of producing reliable, timely data or feedback that will reveal variances or mistakes. These data-collecting processes are designed to get the key data in the hands of the entrepreneur quickly as the business grows.
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, the business owner needs to consider how strategic space will change as the company gets bigger. It will probably enter a new competitive space, facing bigger and better competitors. Those new competitors may be better capitalized and be able to engage in price competition, driving down the company’s margins.
A company can minimize this and other big risks by planning for growth, pacing growth and prioritizing what controls and processes it needs to have in place prior to taking on much growth. By carefully considering the timing and whether the right people, processes and controls are in place to manage the growth, entrepreneurs can take their business to greater and greater heights.
Edward D. Hess (www.EDHLTD.com), author of Grow to Greatness: Smart Growth for Entrepreneurial Businesses, is a professor of business administration and Batten Executive-in-Residence at Darden School of Business, University of Virginia. He has authored nine other books, including Smart Growth: Building an Enduring Business by Managing the Risks of Growth, which was named a 2010 Top 25 Business Book for Business Owners by Inc. magazine, plus numerous articles that have appeared in more than 200 media outlets around the world.