When Should Your Business Stop
Growing?
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By Edward D. Hess,
Distinguished Executive in Residence and
Adjunct Professor of Management, Goizueta Graduate School of Business
Emory University
Atlanta, Georgia
edward_hess@bus.emory.edu
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.
Internal Factors
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.
External Factors
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.
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Copyright © 2004
