The degree to which a firm prepares for its future growth has a direct bearing on its level of success.
A. Appreciating the Nature of Business Growth
Growing a business successfully requires preparation, good management, and an appreciation of the issues involved.
1. Not All Businesses Have the Potential to Be Aggressive Growth Firms
The businesses that have the potential to grow the fastest over a sustained period of time are ones that solve a significant problem or have a major impact on their customers’ productivity or lives.
2. A Business Can Grow Too Fast
10 Warning Signs That a Business Is Growing Too Fast:
- Borrowing money to pay for routine operating expenses
- Extremely tight profit margins
- Over-stretched staff
- Declining product quality
- E-mail and text messages start going unanswered
- Customer complaints are up
- Employees dread coming to work
- Productivity is falling
- Operating in a “crisis” mode becomes the norm rather than the exception
- Those working with the business’s financial structure are starting to worry
The very thing that makes a business successful might suffer as a result of growth.
B. Staying Committed to a Core Strategy
A firm’s core strategy is largely determined by its core competencies. The way most businesses typically evolve is to start by selling a product or service that is consistent with their core strategy and then increase sales by incrementally moving into areas that are different from, but are related to, their strengths and core capabilities.
C. Planning for Growth
Prepare for growth is to establish growth-related plans. This task involves a firm thinking ahead and anticipating the type and amount of growth it wants to achieve. It’s also important for a business to determine the strategies it will choose to employ as a means of pursuing growth.
A firm’s pace of growth is the rate at which it is growing on an annual basis. Sometimes firms are forced into a high-growth mode sooner than they would like.
Economies of scale are generated when increasing production lowers the average cost of each unit produced. Economies of scale can be created in service firms as well as traditional manufacturing companies. This phenomenon occurs for two reasons.
First, if a company can get a discount by buying component parts in bulk, it can lower its variable costs per unit as it grows larger.
Second, by increasing production, a company can spread its fixed costs over a greater number of units.
B. Capturing Economies of Scope
The advantage a firm accrues comes through the range of a firm’s operations rather than from its scale of production.
C. Market Leadership
Market leadership occurs when a firm holds the number one or the number two position in an industry or niche market in terms of sales volume.
D. Influence, Power, and Survivability
Larger businesses usually have more influence and power than smaller firms in regard to setting standards for an industry, getting a “foot in the door” with major customers and suppliers, and garnering prestige. In addition, larger businesses can typically make a mistake yet survive more easily than entrepreneurial ventures.
E. Need to Accommodate the Growth of Key Customers
Sometimes firms are compelled to grow to accommodate the growth of a key customer.
F. Ability to Attract and Retain Talented Employees
The final reason that firms grow is to attract and retain high-quality personnel. It is natural for talented employees to want to work for a firm that can offer opportunities for promotion, higher salaries, and increased levels of responsibility.
Managing Growth
As business increases its sales, its pace of activity quickens, its resource needs increase, and the founders often find that they’re busier than ever.
The majority of businesses go through a discernable set of stages referred to as the organizational life cycle.
1. Introduction Stage
This is the start-up phase where a business determines what its strengths and core capabilities are and starts selling its initial product or service.
The main challenges for a business in the introduction stage are to make sure the initial product or service is right and to start laying the groundwork for building a larger organization. It’s important to not rush things.
2. Early Growth Stage
A business’s early growth stage is generally characterized by increasing sales and heightened complexity.
For a business to be successful in this stage, two important things must take place.
First, the founder or owner of the business must start transitioning from his or her role as the hands-on supervisor of every aspect of the business to a more managerial role. Second, increased formalization must take place.
3. Continuous Growth Stage
The importance of developing policies and procedures increases during the continuous growth stage. It’s also important for a business to develop a formal organizational structure and determine clear lines of delegation throughout the business. Well-developed policies and procedures lead to order, which typically makes the process of growing business more organized and successful.
4. Maturity Stage
If a company does grow organically while in the maturity stage, it normally focuses on the “next generation” of products it already sells rather than investing in new or related products or services.
5. Decline Stage
Eventually, all businesses’ products or services will be threatened by more relevant and innovative products. When this happens, a business’s ability to avoid decline depends on the strength of its leadership and its ability to appropriately respond.
Challenges of Growth
There is a consistent set of challenges that affect all stages of a firm’s growth.
The firm’s administrative framework consists of two kinds of services that are important to a firm’s growth:
- Entrepreneurial services generate new market, product, and service ideas.
- Managerial services administer the routine functions of the firm and facilitate the profitable execution of new opportunities.
- Socialization of new managers
- Managerial motivation
- Adverse selection
- Moral hazard
1. Cash Flow Management
The challenge of continuously verifying that the firm has sufficient cash on hand to meet its needs.
2. Price Stability
This challenge surfaces when a firm competes successfully against larger competitors who respond by making the new venture compete on the basis of price, a competitive dimension on which it is at a disadvantage compared to large, established competitors.
3. Quality Control
With growth, the entrepreneurial venture may find it increasingly difficult to maintain the quality of its product or service as demanded by customers.
4. Capital Constraints
The challenge is to find the financial capital needed to support early and hopefully continuous firm growth.
