Small Business Strategy: How Fast Should We Grow?

07-January-2013
07-January-2013 12:46
in Small Business Strategy
by Colin Smith

Here at Continuous Business Planning, we exist to help small business owners grow their businesses.  Whether they be the owners of pre-start up businesses looking to launch their ideas upon the world in a way that will make the largest possible splash or, at the other end of the spectrum, small business owners looking to maximise the sale potential of their businesses, our clients all have a desire to grow in common.  As I always tell our clients, small business growth is not something that just happens.  In the most recent BIS Small Business Survey, we see that only 17% of UK SME's actually experienced employment growth in 2011 whilst only 28% experienced growth in turnover.  In my experience, business growth is a deliberate choice rather than a happy accident and requires careful planning and consistent action.   

Growth is one of the most controversial and least understood strategic decisions that small business owners face.  Again, please notice that I called the growth of your small business a strategic decision.  Rapid growth is often looked upon as an automatically desirable business objective.  Here at Continuous Business Planning, we do not subscribe to that viewpoint.  I believe that probably the most important strategic decision that you will make as a small business owner is how fast you want your business to grow.  

Radical writer Edward Abbey once said that "growth for the sake of growth is the ideology of the cancer cell".  We believe that the growth of your small business ought to be, as should all important decsions within your business, tied back to your vision for the company.  Do you really want or need to be a big company?  Do you want the downsides that accompany growth or is retrenchment or slow growth a more appropriate strategic objective?

Some of our clients are surprised when we discuss the downsides of business growth.   We'll present some of them now for your consideration.  

Growth Creates Cash Flow Crises

 A common problem which I have witnessed time and time again with growth businesses is that cash is invested into inventory based upon an expectation of sales growth.  The sales come or perhaps fall slightly below expectation, but of course there is a lag of as much as sveral months between investing the money into inventory and getting paid.  Cash in a business is like blood or oxygen.  It doesn't take you long without it to die and growth eats up cash.  Many otherwise sound businesses fail this way.  In fact, recent research has shown that 47% of small businesses fail for this very reason of "overtrading".  

Growth Covers Operational Inefficiencies

Operational efficiency is traditionally defined and measured by examining the ratio of the output (i.e. your product or service) for a given amount of input (i.e. assets or employee work hours).  The higher the ratio, the more efficient your organisation is deemed to be.  When we talk about operational efficiency, we are really talking about your capability to execute your tactical plans which involves striking the right balance for your company between productivity and cost.  Any input that is not processed into useful output is waste.  In businesses scrambling for growth, we often see them throwing everything except the kitchen sink at achieving their growth targets.  Inevitably, some of these things don't work.  When the growth slows, many small companies find that they have been and continue to be hugely inefficient and wasteful.

Growth Puts Pressure On Price and Quality 

Growth puts pressure on your sales team to commit to prices that severely cut your margins.  This is because the market place for any product or service is made up of people that are prepared to buy it at a certain price and the quickest and easiest way to grow the number of customers is to drop the price to a level where more of them will buy rather than to prise customers away from your competitors at the existing price.  Eventually, this erosion of profit margins will need to be addressed either by putting the price back up or lowering the unit cost by compromising the quality of your product and service.  If it isn't addressed, it will ultimately lead to the decline and failure of your business.  Any fool can sell a pound for eighty pence and unfortunately there are many of these fools currently in business who are in a race to see who can go out of business first.

Growth Comes With A Human Cost 

The stress and strain that the team within a business are exposed to during a rapid growth phase can be extreme.  Human beings are not designed to tolerate sustained periods of high stress and inevitably, unless they take their foot off the pedal, will burn out, just as surely as a car engine being driven at 100 mph all day every day would in time do the same.

Growth Can Lead To Dilution of Company Culture 

 Rapid growth can quickly dilute the culture of your company through what Jim Collins calls "Warm Bodies Syndrome".  The push to grow can lead to the relaxation of hiring standards. Warm bodies do not necessarily share your values.  They might not live up to your standard of excellence.  Rapid growth puts pressure on you to be much less discerning in whom joins the team.  Hiring is one place where you definitely do not want to cut corners.

In pointing out some of the potential downsides of growth, we are not advocating against the pursuit of business growth as an objective.  We simply are pointing out that the growth rate in your business is something that you can influence and should be an important part of your strategy formulation process, with the pros and cons of various growth rates being carefully considered.  In my experience, the healthiest companies do grow, but at rates that allow them to put in place the pieces of greatness along the way.  In our mind, the question should not be "how fst should we grow?" but rather it ought to be "what growth rate is most consistent with our vision?".  If you are a ambitious company looking to grow, contact us today to discuss how we might help you formulate and execute the growth strategy that is most appropriate for your company and for your vision of the future.

 

 

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