Managing Growth of the firm

Many businesses are caught off guard by the challenges involved with grow- ing their companies. One would think that if a business got off to a good start, steadily increased its sales, and started making money, it would get progressively easier to manage the growth of a firm. In many instances, just the opposite happens. As a business increases its sales, its pace of activ- ity quickens, its resource needs increase, and the founders often find that they’re busier than ever. Major challenges can also occur.22  For example, a business might project its next year’s sales and realize it will need more people and additional equipment to handle the increased workload. The new equipment might need to be purchased and the new people hired and trained before the increased business generates additional income. It’s easy to imag- ine serious discussions among the members of a new venture’s management team trying to figure out how that will all work out.

The reality is that a company must actively and carefully manage its growth for it to expand in a healthy and profitable manner. As a business grows and becomes better known, there are normally more opportunities that present them- selves, but there are more things that can go wrong too. Many potential problems and heartaches can be avoided by prudently managing the growth process. This section focuses on knowing and managing the stages of growth. The final section in this chapter focuses on a related topic—the challenges of growth.

1. Knowing and Managing the stages of growth

The majority of businesses go through a discernable set of stages referred to as the organizational life cycle.23 The stages, pictured in Figure 13.2, include introduction, early growth, continuous growth, maturity, and decline. Each stage must be managed differently. It’s important for an entrepreneur to be familiar with these stages, along with the unique opportunities and challenges that each stage entails.

introduction Stage This is the start-up phase where a business deter- mines what its strengths and core capabilities are and starts selling its initial product or service. It’s a very “hands-on” phase for the founder or founders, who are normally involved in every aspect of the day-to-day life of the busi- ness. The business is typically very nonbureaucratic with no (or few) written rules or procedures. The main goal of the business is to get off to a good start and to try to gain momentum in the marketplace.

The main challenges for a business in the introduction stage are to make sure the initial product or service is right and to start laying the groundwork for building a larger organization. It’s important to not rush things. This senti- ment is affirmed by April Singer, the founder of Rufus, a company that orgin- ally only made high-end shirts for men. Before growing her business beyond the introduction stage, Singer made sure that her unique approach for making men’s shirts worked and that it resonated in the marketplace:

Before growing too much too fast, I wanted to spend two seasons making sure that the concept worked, that I shipped well, and that consumers liked the prod- uct. They did.24

This affirmation gave Singer the confidence to expand her business, add addi- tional product lines, and move into a more aggressive growth mode. In regard to laying the groundwork to build a larger organization, many businesses use the introduction stage to try different concepts to see what works and what doesn’t, recognizing that trial and error gets harder as a business grows. It’s important to document what works and start thinking about how the com- pany’s success can be replicated when the owner isn’t present or when the business expands beyond its original location.

Early Growth Stage A business’s early growth stage is generally character- ized by increasing sales and heightened complexity. The business is normally still focused on its initial product or service but is trying to increase its market share and might have related products in the works. The initial formation of policies and procedures takes place, and the process of running the business will start to consume more of the founder’s or founders’ time and attention.

For a business to be successful in this stage, two important things must take place. First, the founder or owner of the business must start transition- ing from his or her role as the hands-on supervisor of every aspect of the business to a more managerial role. As articulated by Michael E. Gerber in his excellent book The E-Myth Revisited, the owner must start working “on the business” rather than “in the business.”25 The basic idea is that early in the life of a business, the owner typically is directly involved in building the product or delivering the service that the business provides. As the business moves into the early growth stage, the owner must let go of that role and spend more time learning how to manage and build the business. If the owner isn’t willing to make this transition or doesn’t know it needs to be made, the business will never grow beyond the owner’s ability to directly supervise ev- erything that takes place, and the business’s growth will eventually stall.

The second thing that must take place for a business to be successful in the early growth stage is that increased formalization must take place. The business has to start developing policies and procedures that tell employees how to run it when the founders or other top managers aren’t present. This is how franchise restaurants run so well when they’re staffed by what appears to be a group of teenagers. The employees are simply following well-documented policies and procedures. This task was clearly on the mind of Emily Levy, the founder of EBL Coaching, a tutoring service for children who are struggling in school or trying to overcome disabilities, when she was asked by Ladies Who Launch (a support network for female entrepreneurs) early in the life of her business about her growth plans:

My future goals include continuing to spread EBL Coaching’s programs nationally, using our proprietary materials and self-contained multisensory methods. I have already developed a series of workbooks, called “Strategies for Success,” addressing specific study skills strategies, that are being used in a number of schools across the country. The real challenge will be figuring out how to replicate our programs while maintaining our high quality of teaching and personalized approach.26

Continuous Growth Stage The need for structure and more formal re- lationships increases as a business moves beyond its early growth stage and its pace of growth accelerates. The resource requirements of the business are usually a major concern, along with the ability of the owner and manager to take the firm to the next level. Often the business will start developing new products and services and will expand to new markets. Smaller firms may be acquired, and the business might start more aggressively partnering with other firms. When handled correctly, the business’s expansion will be in areas that are related to its strengths and core capabilities, or it will develop new strengths and capabilities to complement its activities.

The toughest decisions are typically made in the continuous growth stage. One tough decision is whether the owner of the business and the current management team have the experience and ability to take the firm any fur- ther. This scenario played out for Rachel Ashwell, the founder of Shabby Chic, a home furnishing business. Ashwell expanded her company to five separate locations, inked a licensing deal with Target, wrote five how-to books related to her business, and hosted her own television show on the Style Network before concluding that her business had stalled. Her choice was to continue running the business or find more experienced management to grow it fur- ther. She opted for the latter, which reignited the company’s growth.27

The importance of developing policies and procedures increases during the continuous growth stage. It’s also important for a business to develop a formal organizational structure and determine clear lines of delegation throughout the business. Well-developed policies and procedures lead to or- der, which typically makes the process of growing a business more organized and successful.

Maturity Stage A business enters the maturity stage when its growth slows. At this point, the firm typically focuses more intently on efficiently managing the products and services it has rather than expanding in new areas. Innovation slows. Formal policies and procedures, although important, can become an im- pediment if they are too rigid and strict.28 It’s important that the firm continues to adapt and that the founders, managers, and employees remain passionate about the products and services that are being sold. If this doesn’t happen, a firm can easily slip into a no-growth situation.

A well-managed firm that finds its products and services are mature often looks for partnering or acquisition opportunities to breathe new life into the firm. For example, Coca-Cola, a firm in the maturity stage of its life cycle, has a long history of acquisitions. It acquired Minute Made in 1960, the Indian cola brand Thums Up in 1993, the Odwalla brand of fruit juices, smoothies, and bars in 2001, and Fuze Beverages in 2007. In August, 2014, Coca-Cola paid $2.15 billion to take a 16.7 percent ownership stake in Monster Beverage, the energy drink company.

If a company does grow organically while in the maturity stage, it normally focuses on the “next generation” of products it already sells rather than invest- ing in new or related products or services.

Decline Stage It is not inevitable that a business enter the decline stage and either deteriorate or die. Many American businesses have long histories and have thrived by adapting to environmental change and by selling products that remain important to customers. Eventually all businesses’ products or services will be threatened by more relevant and innovative products. When this happens, a business’s ability to avoid decline depends on the strength of its leadership and its ability to appropriately respond.

A firm can also enter the decline stage if it loses its sense of purpose or spreads itself so thin that it no longer has a competitive advantage in any of its markets. A firm’s management team should be aware of these potential pitfalls and guard against allowing them to happen.

A framework that is similar to the organizational life cycle is the technol- ogy adoption life cycle, which is suited primarily for technology firms that are introducing disruptive innovations to the market. The technology life cycle is associated with the concept of “crossing the chasm,” which explains why  some  technology  products  reach  mainstream  markets  while  others don’t. An explanation of the technology life cycle, the concept of “crossing the chasm,” and an example of a start-up that successfully crossed the chasm and reached mainstream markets is provided in the nearby “Savvy Entrepreneurial Firm” feature.

Source: Barringer Bruce R, Ireland R Duane (2015), Entrepreneurship: successfully launching new ventures, Pearson; 5th edition.

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