By Edward D. Hess,
Distinguished Executive in Residence and
Adjunct Professor of Management, Goizueta Graduate School of Business
The business world is a believer – a believer in growth. With sayings like, “grow or die“, and “eat or be eaten“, the growth mantra implies that you must keep growing or bad things will happen to you. Growth is the goal. Expand! Acquire! Go! Go! Go!
Very few people – consultants, writers, stock analysts, academics – challenge the underlying growth assumption and few assert that maybe, yes, maybe growth is not a clear cut issue. Just maybe growth can be bad for you.
When should you stop growing? When the risks of growth outweigh the benefits. Risks can be of two types – risks inherent or internal to the business and risks external to the business. Internal risks can be lack of management expertise or depth, increased capital needs due to increased fixed overhead, people needs, low tolerance for bureaucracy, controls, and accountability. External risks can be changing market conditions, reliance on too few customers, and increased competition from bigger and better players.
Every growth decision should be a risk/reward analysis along with an analysis of the risks to you of not growing.
Not growing is not a steady state analysis – in other words, things will not stay the same – stuff happens – what are the risks of not growing? What are the risks of growing? Which risks are more palatable for you? Let’s explore.
The issue of whether to grow raises the issue as to what size is optimum for the owner’s risk profile or risk tolerance. How much income is enough? How reliable is your income? How replaceable is your income? When will the financial risks or quality control risks, or people risks be too much? At what point does growth require a new level of bureaucracy, technology, and maybe even new management? When does growth push the business beyond current management’s capabilities? When does growth change the culture from being fun to being a job?
Most companies can tolerate incremental growth or growth to replace unprofitable customers fairly easily over time. Successive years of high growth challenge the competencies and risk tolerances of most companies. So the issue of growth is really two issues: 1) At what pace or rate should you grow and 2) what is your capacity and risk tolerance for growth?
As a small home builder said to me recently, “I make a good living building four houses a year – why should I stretch and build eight a year?”
That home builder is comfortable with himself, what he makes, and has ability to make it in good times and in bad times. He has a tolerance which he understands only for so much overhead – personal and business.
What is the costs side of growth? New people? More expensive people? New systems? New controls? Can you tolerate psychologically the economic risk of the growth? And likewise, can you tolerate the risk of not growing?
Most business people look at growth with an optimistic framework. Maybe to counterbalance that approach a different framework is needed. Maybe you should grow when the risks to you of not growing clearly are higher than the risks of growing. Maybe the decision is not what is the most upside but rather what is the best downside protection.
By growing at high rates for several years – yes, you will capture market share but also you rise on the business food chain and come into the sights of very big, well-capitalized, highly-efficient and well-managed competitors. As you grow, your competition changes. As you grow, you become both a threat and a target. Growth reminds me of three sayings I heard over and over growing up in rural Georgia:
1) A sports analogy – “Remember – there are always many people faster and bigger than you are”;
2) “Honey attracts bees – your profits will attract competitors”; and
3) “The elephant will wake up – the big player who can exist far longer than you on selling at very low prices will attack you at some point.”
Most industries have two or three giant competitors who control a huge market share. Your chances of taking them on head-to-head and winning are very small. Remember that all business is probability theory. At some point as you grow, you will pass the stage of being unnoticed by bigger competitors, or even pass the stage of being a nuisance or annoyance, and then the big competitor will want to darwinally destroy your livelihood.
At some point, growth will change the competitive landscape for your company.
No, I am not against growth. But like everything else in life, it comes with risks and costs. What I am advocating is a risk management approach to growth – first, understand the internal and external risks, and secondly, do not accept the mantra that all growth is good. It is not.
The bigger you become, the more you have to manage risks – risks of disruptions, supply risks, fixed overhead costs, competitive risks, and customer risks. The bigger you become, the more working capital, key man life insurance, legal protection, and financial and quality controls you will need. The bigger you are, the more personal liability you will have with your banks.
And remember – growth will change your business and you. And growth will change the players you will be competing against. Be aware.