Ways To Cure Business Growth Risks
“Too big to fail” has already failed some of the country’s top mortgage banks, and it should mean the "grow or die" strategy that historically has had a strong hold in Wall Street needs some reconsidering.
What do Lehman Brothers, AIG, Merrill Lynch, Washington Mutual Savings, Arthur Andersen, Starbucks and Toyota all have in common? According to business finance analyst Edward Hess, “they all went gunning for business growth but instead ended up with self-inflicted wounds” because they pursued the wrong kind of growth for the wrong reasons.
Being thorough when considering how to grow one’s business to beat the economic pressures of the down economy or tempted by the "grow or die" philosophy, Hess says business executives need to remember that growth is not always good, that bigger is not always better. He argues, however, that “continuous, smooth and linear" growth is healthy for a public company.
A professor at the University of Virginia's Darden Graduate School of Business and author of “Smart Growth: Building an Enduring Business by Managing the Risks of Growth,” Hess finds the problem with presuming growth is always good is that there is neither scientific nor business proof for them.
His public and private company research hard data show that above-average, long-term growth of five years or more by public companies is an exception, not the rule, because it occurred in less than 10% of the companies studied.
The common growth denominator “for the vast majority of companies” is that growth brings with it as many risks of failure as chances of success, he writes. If unquestioned strategic presumptions are combined with bad judgment, or the occasional “fair share of greed and arrogance,” the impact of premature growth on the business can be fatal.
Hess outlines some of the self-inflicted wounds of premature business growth starting with the potential to create new business risks.
Exhausting cash reserves tops the list of the riskiest “tightrope to walk on” since growth requires investments in people, equipment, raw materials, space and supplies before new revenue starts to come in.
Starbucks, "previously the poster child of a successful, well-respected business,” is a great example of a company that learned this lesson the hard way, says Hess. Its new executive team opted for continuous, quarterly store expansion implementing aggressive plans that indeed increased the number of new stores being opened each month, “but many were in unprofitable locations that eventually had to be closed.” The result was bad press and eventually the sudden need to take on massive and unprecedented short-term debt. “In the pursuit of growth, Starbucks had instead weakened itself as a business, at least for a time."
Dangerous business growth moves include joining “the big leagues before you are ready” to compete against more experienced players in that market.
Growth also poses the risk of straining staff, processes, controls and management capacities that result in quality problems “and the increased potential” to damage customer relationships and brand perceptions. In such cases the problem is “growing too quickly."
His solution for overcoming the aforementioned risks is “smart growth.” It accounts for the complexity of growth-related changes of the organization, its processes, leadership, risk management, employee engagement and human dynamics, and recognizes that “authentic growth” entails complex change, entrepreneurial action, experimental learning and careful risk management.
Such growth is applicable to companies of all sizes—if they follow the “4 P’s of Growth” Hess describes as planning, prioritizing, processing and pacing.
For example, processes must be put in place “like dams on a river” whose water may flow in unpredictable ways, to ensure there are adequate financial, operational, personnel and quality controls for a bigger business. Growth can be exciting, but it is also almost always stressful, making “a phased approach to implementation” the best way to minimize chances for failure.
Also, all public companies need to conduct an annual growth risks audit to review the stresses that growth is placing on the organization, its people and its processes.
"CEOs and boards of directors face a unique kind of challenge when it comes to planning for smart growth," says Hess, despite outside pressure for higher returns each quarter.
The goal, concludes Hess, is to continuously make the organization better. “When you achieve that, growth will happen naturally in due course. That's the way to achieve smart growth."