IS BIGGER REALLY BETTER?

“All growth is good.”

“Bigger is better.”

“All businesses must either grow or die.”

If you’re a business owner all these mantras are true, because this is what you have always been taught. And in fact, these popular business mantras are routinely published in the Wall Street, at business schools, and by some of the most well-respected business consultants. But according to Professor Ed Hess, these “truths” are anything but.

“At best those beliefs are half-truths and at worst they’re pure fiction,” says Hess, author of the new book Grow to Greatness: Smart Growth for Entrepreneurial Businesses. “Growth can be good and growth can be bad. Bigger can be good and bigger can be bad.”

Grow or Die is a belief that has no basis in business reality. In fact when not carefully managed, growth can destroy value as it outstrips a company’s managerial capacity, processes, quality, and financial controls, financial resources (cash flow), or dilutes your customer value proposition.

The best example of this was between 2005 and 2007, when Starbucks aggressively opened new store locations and made several operational changes that diluted its customer value proposition, diluted its high employee engagement culture, violated its real estate site selection controls, and weakened its’ high value-added ‘experience’ business model.

Improve or Die

Instead of grow or die, the mantra should be changed to: Improve or Die. Every business and business owner must continually improve its’ customer value proposition (or Unique Sales Proposition) better than the competition in order to stay viable.  Understand that this is where truly successful and profitable business operate.

Understand that growth is change (and change isn’t always easy). However, there are limits to an individual’s and an organization’s ability to process change. Growth requires the entrepreneur to install more processes, procedures, controls, and measurement systems. The right processes and controls must be put in place and taught to employees. In addition, the right information needs to reach the manager regarding variances from processes and controls so mistakes can be fixed quickly and do not escalate into a larger problem.

Evolution

Growth requires the evolution of the entrepreneur and the management team and more sophisticated processes and controls. Often, if not always, the business model and customer value proposition evolve, too. Furthermore, this evolution is continuous, and anticipating and responding to it can require making some fairly dramatic (and difficult) changes.

“One surprising finding of my research was that companies frequently had to upgrade their management teams as they grew,” explains Hess. “Often managers who operated effectively at one revenue level of the business were unable to manage effectively at a much higher revenue level. The jobs simply outgrew their skills.”

Learning

Therefore, growth also requires continuous learning and constant improvement. The entrepreneur and employees must be constantly open to learning and adapting and improving in an incremental manner. No matter how big you get or want to get, continuous improvement is required.

Resources

Every entrepreneur has limited resources and time, to be successful, therefore businesses must prioritize their focus. This is critical because any growing business has resource constraints: limited people, time, and capital. So it is critical that the entrepreneur spend his or her time focused on the most important areas that can drive success.

Control

Growth requires implementing processes, which include controls. Processes are like recipes for baking a cake. They are the step-by-step instructions for how to do a task. Processes are necessary to hire employees and train them, to minimize mistakes and institutionalize quality standards, and to deliver products and services on time, 99 percent defect-free. Controls are necessary to set boundaries on allowable behavior and also alert management to deviations from processes.

Space

To get a better handle on growth risks, consider how your strategic space will change as you get bigger. You will probably enter a new competitive space, facing bigger and better competitors than you previously faced. Those new competitors may be better capitalized than you and be able to engage in price competition, driving down your margins.

Conclusion

Respect growth, carefully consider the timing and whether you have the right people, processes, and controls in place to manage the growth. When you approach growth carefully, you can take your business to greater and greater heights.