When Growth is Bad

If you’re trying to grow your business, Ed Hess asks that you think about it first.  Most business owners believe that all growth is good, that bigger is better, and that the healthy vital signs for a business include growth that is continuous and smooth, says Hess, a professor at the University of Virginia’s Darden Graduate School of Business.  Based on his research, however, Hess has found that above-average, long-term growth (five years or more) is the exception, rather than the rule, and occurs in less than 1 in 10 of the companies he studied.

“For the vast majority of companies I looked at, growth is often pursued in a way that brings with it as many risks of failure as chances of success,” says Hess. “Combine unquestioned strategic presumptions with bad judgment — and sometimes a fair share of greed and arrogance as well — and the results can be serious or fatal to the viability of a business.”

Here are some of the self-inflicted wounds that premature growth can leave on your business:

  • Growth can create new business risks. Growth is a business strategy that can require investments in people, equipment, raw materials, space, and supplies. As these cash outlays occur before new revenues kick in, many small and mid-sized businesses find themselves exhausting their cash reserves, and that’s a risky tightrope to walk.
  • Growth can force you into the big leagues before you are really ready. Growth can match smaller companies up against larger and more experienced players before they truly know how to handle that kind of competition.
  • Growth can strain your operations. Growth can pose huge challenges for your people, processes, controls and your own management capabilities, resulting in quality problems and the increased potential for damaged customer relationships.

Try these moves for smart growth:

1. Plan for growth before kicking a strategy into gear. Think about how growth will change what both you and your business will need to do. What new processes, controls, financing, technology and people will you need to achieve growth, and sustain a new level?  And what will it all cost?

2. Prioritize the changes required to accommodate growth. This is a way to lower the risk by making only essential investments first, so you don’t deplete your cash before new income starts rolling in.

3. Establish new financial controls. These are like dams on a river: If the water starts flowing faster and with more volume, the dams need to be re-engineered to handle it.  But these are also things many small business owners have trouble with because they come from an entrepreneurial mindset and tend to react rather than plan ahead.

4. Pace your growth so you aren’t overwhelmed. Growth can be exciting, but it’s also stressful. If you underestimate the need for effective change management, and for a phased approach, you increase chances of failure.

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Filed Under: ManagingSmart


About the Author: Daniel Kehrer, Founder and Chief Content Officer of BizBest Media, is a senior-level leader in digital media, content development and online marketing with special expertise in startups, SMB, social media and generating traffic, engagement and leads. He holds an MBA from UCLA/Anderson and is a passionate entrepreneur (started 4 businesses), syndicated columnist, blogger, thought leader and author of 7 business and financial books.

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