Chapter 13. Preparing for and Evaluating the Challenges of Growth

Preparing For Growth

Most entrepreneurial firms want to grow. Especially in the short term, growth in the sales revenue is an important indicator of an entrepreneurial venture's potential to survive today and be successful tomorrow. Growth is exciting and, for most businesses, is an indication of success.

While there is some trial and error involved in starting and growing any business, the degree to which a firm prepares for its future growth has a direct bearing on its level of success.

Here are the three most important this a business can do to prepare for growth:

Appreciating the Nature of Business Growth

Growing a business successfully requires preparation, good management, and an appreciation if the issues involved. The following are issues about business growth that entrepreneurs should appreciate:

• 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 if time are ones that solve a significant problem or have a major impact on their customers' productivity or lives.
•  A business can grow too fast → Many businesses start fast and never let up, which stresses a business financially and can leave its owners emotionally drained.
•  Business success doesn't always scale  → Unfortunately, the very thing that makes a business experts often mean when they say growth is a "two-edged sword." 

There is also a category of businesses that sell high-end or specialty products that earn high margins. These businesses typically sell their products through venues where customers prioritize quality over price. These business can grow, but only at a measured pace. If they grow too quickly, they can lose the "exclusivity" they are trying to project, or can damage their special appeal.

Staying Committed to a Core Strategy

An important part of a firm's business model is its core strategy, which defines how it competes relative to its rivals. A firm's core strategy is largely determined by its core competencies, or what it does particularly well. If a business becomes distracted or starts pursuing every opportunity for growth that presents itself, the business can easily stray into areas where it finds itself at a competitive disadvantage.

Planning for Growth

The third thing that a firm can do to prepare for growth is to establish growth-related plans. The task involves a firm thinking ahead and anticipating the type and amount of growth it wants to achieve. A business plan normally includes a detailed forecast of a firm's first three to five years of sales, along with an operations plan that described the resources the business will need to meet its projections. Its also important for a business to determine, as early as possible, the strategies it will choose to employ as a means of pursuing growth.

On a more personal level, a business owner should step back and measure the company's growth plans against his or her personal goals aspirations.

Reasons for Growth

Although sustained, profitable growth is almost always the result of deliberate intentions and careful planning, firms cannot always choose their pace of 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. Here are the appropriate reasons for firm growth:

Capturing Economies of Scale

Economies of scale are generated when increasing production lowers the average cost of each unit produced. Economies of scale can be created in service firm 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. Variable costs are the costs a company incurs as it generates sales. Second, by increasing production, a company can spread its fixed costs over a greater number of units. Fixed costs are costs that a company incurs whether it sells something or not. A related reason firms can grow is to make use of unused resources such as labor capacity and a host of others.

Capturing Economies of Scope

With economies of scope, the advantage a firm accrues comes through the scope (or range) of a firm's operations rather than from its scale of production.

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 value. Being the market leader also permits firm to use slogans in its promotions, helping it wins customers and attract talented employees as well as business partners.

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. As a firm grows and adds employees, it's normally not as vulnerable to lose a single person or a small group of people's participation or passion for the business.

Need to Accommodate the Growth of Key Customers

Sometimes firms are compelled to grow to accommodate the growth of a key customer.

Ability to Attract and Retain Talented Employees

It is natural for talented employees to want to work for a firm that can offer opportunities for promotions, higher salaries, and increased levels of responsibility. Growth is a firm's primary mechanism to generate promotional opportunities for employees, while falling to retain key employees can be very damaging to a firm's growth efforts. 

Managing Growth

Many businesses are caught off guard by the challenges involved with growing their companies. One would think that if a business got off to a good start, steadily increased its sales, and started making money, it would get progressively easier to manage the growth of a firm. The reality is that a company must actively and carefully manage its growth for it to expand in a healthy and profitable manner.

Knowing and Managing the Stages of Growth

The majority of businesses go through a discernable set of stages referred to as the organizational life cycle. It's important for an entrepreneur to be familiar with the stages of organizational life cycle, along with the unique opportunities and challenges that each stage entails.

• Introduction stage → The start-up phase where a business determines what its strengths and core capabilities are and starts selling its initial production or service.
• Early growth stage → Increasing sales and heightened complexity.
• Continuous growth stage → Start developing a new product and services and will expand to new markets.
• Maturity stage → Focuses more intently on efficiently managing the products and services it has rather than expanding in new areas.
• Decline stage → A firm can enter the decline stage if it loses its sense of purpose or spreads itself so thin that it no longer has a comparative advantage in any of its markets. A firm's management teams should be aware of these potential pitfalls and guard against allowing them to happen.

Challenges of Growth

There is a consistent set of challenges that affect all stages of a firm's growth. The challenges illustrate that no firm grows in rival firms, there will be a certain amount of retaliation that takes place. This is an aspect of competition that a business owner needs to be aware of and plan for. Competitive retaliation normally increases as a business grows and becomes a larger threat to its rivals.

Managerial Capacity

As a firm goes about its routine activities, the management team becomes better acquainted with the firm's resources and its markets. This knowledge leads to the expansion of a firm's productive opportunity set, which is the set of opportunities the firm feels it's capable of pursuing. 

Entrepreneurial service generate new market, product, and services ideas, while managerial services administer the routine functions of the firm and facilitate the profitable execution of new opportunities. When a firm's managerial resources are insufficient to take advantage of its new product and service opportunities, the subsequent bottleneck is referred to as the managerial capacity problem.

Day-to-Day Challenges of Growing a Firm

Along with the overarching challenges imposed by the managerial capacity problem, there are a number of day-to-day challenges involved with growing a firm.

• Cash flow management → A firm must carefully manage its cash on hand to make sure it maintains sufficient liquidity to meet its payroll and cover its other short-term obligations.
• Price stability → If firm growth comes at the expense of a competitor's market share, price competition can set in. There is no good way for a small firm to compete head-to-head against a much  larger rival on price. 
• Quality control → As the firm grows, it handles more service requests and paperwork and contends with an increasing number of prospects, customers, vendors, and other stakeholders.
• Capital constraints → Some business need capital from time to time to invest in growth-enabling projects. Their ability to raise capital, whether it's through internally generated funds, through a bank, or from investors, will determine in part whether their growth plans proceed.