Preparing for Growth of the firm

Most entrepreneurial firms want to grow. Especially in the short term, growth in sales revenue is an important indicator of an entrepreneurial venture’s po- tential to survive today and be successful tomorrow. Growth is exciting and, for most businesses, is an indication of success. Many entrepreneurial firms have grown quickly, producing impressive results for their employees and owners as a result of doing so; consider Google, Dropbox, and Warby Parker, among others, as examples of this.

While there is some trial and error involved in starting and growing any business, the degree to which a firm prepares for its future growth has a direct bearing on its level of success.6 This section focuses on three important things a business can do to prepare for growth.

1. Appreciating the nature of Business growth

The first thing that a business can do to prepare for growth is to appreciate the nature of business growth. Growing a business successfully requires prepara- tion, good management, and an appreciation of the issues involved. The follow- ing are issues about business growth that entrepreneurs should appreciate.

Not All Businesses Have the Potential to Be Aggressive Growth Firms The businesses that have the potential to grow the fastest over a sustained period of time are ones that solve a significant problem or have a major impact on their customers’ productivity or lives. This is why the lists of fast-growing firms are often dominated by health care, technology, social media, and entertainment companies. These companies can potentially have the most significant impact on their customers’ businesses or lives. This point is affirmed by contrasting the women’s clothing store industry with the biotechnology industry. From 2009 to 2014, the average women’s clothing store in the United States grew by 2.0 percent while the average biotechnol- ogy company grew by 5.5 percent.7 While there is nothing wrong with starting and owning a women’s clothing store, it’s important to have a realistic outlook of how fast the business will likely grow. Even though an individual women’s clothing store might get off to a fast start, as its gets larger, its annual growth will normally start to reflect its industry norm.8

A Business Can Grow Too Fast Many businesses start fast and never let up, which stresses a business financially and can leave its owners emotionally drained. This sentiment is affirmed by Vipin Jain, the CEO of Retrevo, a con- sumer electronics company. Jain has started several companies. When asked what lessons he’s learned as a serial entrepreneur, Jain replied:

I think one thing (I’ve) learned is to not get carried away. Building a startup not only takes a good vision and a good market that you want to go after, but it also requires systematic execution. You can only run at a certain pace. Don’t try to overrun yourself. Be conservative in your spending. Don’t burn all the cash you have, because you need that. You need to be very, very conscientious about how your business grows and what kind of expenses you have to support your growth.9

Sometimes businesses grow at a measured pace and then experience a sudden upswing in orders and have difficulty keeping up. This scenario can transform a business with satisfied customers and employees into a chaotic workplace with people scrambling to push the business’s product out the door as quickly as possible. The way to prevent this from happening is to recognize when to put the brakes on and have the courage to do it. This set of circumstances played out early in the life of The Pampered Chef, a com- pany that sells kitchen utensils through home parties. Just about the time the company was gaining serious momentum, it realized that it didn’t have a sufficient quantity of products in its inventory to serve the busy Christmas season. This reality posed a serious dilemma. The Pampered Chef couldn’t instantly increase its inventory (its vendors were all low in their own invento- ries and the company was small, so it couldn’t make extraordinary demands on its vendors), yet it didn’t want to discourage its home consultants from making sales or signing up new consultants. One option was to institute a recruiting freeze (on new home consultants), which would slow the rate of sales. Doris Christopher, the company’s founder, remembers asking others for advice. Most advised against instituting a recruiting freeze, arguing that the lifeblood of any direct sales organization is to sign up new recruits. In the end, the company decided to institute the freeze and slowed its sales enough to fill all orders on time during the holiday season. The freeze was lifted the following January, and the number of The Pampered Chef recruits soared. Reflecting on the decision, Doris Christopher later wrote:

Looking back, the recruiting freeze augmented our reputation with our sales force, customers, and vendors. People saw us as an honest company that was trying to do the right thing and not overestimating our capabilities.10

Other businesses have faced similar dilemmas and have sometimes made the right call, and other times haven’t. The overarching point is that growth must be handled carefully. As we emphasize throughout this chapter, a business can only grow as fast as its infrastructure allows. Table 13.1 provides a list of 10 warning signs that a business is growing too fast.

One company that almost succumbed to the challenges of rapid growth is Threadless, as chronicled in the nearby “Partnering for Success” feature. At one point early in its life, Threadless was growing so quickly that it’s back-end opera- tions couldn’t keep up, and it was experiencing multiple problems. Fortunately, the company brought on a strategic partner at just the right time to help correct the problems. The feature is a vivid illustration of how vulnerable even the most seemingly successful firms are to the rigors of rapid growth.

Business Success Doesn’t Always Scale Unfortunately, the very thing that makes a business successful might suffer as the result of growth. This is what business experts often mean when they say growth is a “two-edged sword.” For example, businesses that are based on providing high levels of in- dividualized service often don’t grow or scale well. For example, an investment brokerage service that initially provided high levels of personalized attention can quickly evolve into providing standard or even substandard service as it adds customers and starts automating its services. Its initial customers might find it harder to get individualized service than it once was and start viewing the company as just another ordinary business.

There is also a category of businesses that sell high-end or specialty prod- ucts that earn high margins. These businesses typically sell their products through venues where customers prioritize quality over price. These businesses can grow, but only at a measured pace. If they grow too quickly, they can lose the “exclusivity” they are trying to project, or can damage their special appeal. Fashion clothing boutiques often limit the number of garments they sell in a certain size or color for a similar reason. Even though they know they could sell more of a particular blouse or dress, they deliberately limit their sales so their customers don’t see each other wearing identical items.

2. Staying committed to a core strategy

The second thing that a business can do to prepare for growth is to stay commit- ted to a core strategy. As discussed in Chapter 4, an important part of a firm’s business model is its core strategy, which defines how it competes relative to its rivals. A firm’s core strategy is largely determined by its core competencies, or what it does particularly well.11 While this insight might seem self-evident, it’s important that a business not lose sight of its core strategy as it prepares for growth. If a business becomes distracted or starts pursuing every opportunity for growth that presents itself, the business can easily stray into areas where it finds itself at a competitive disadvantage. For example, eBags, an online mer- chant that specializes in selling handbags, luggage, and backpacks, at one point acquired a website that sells shoes. After three years, it sold the site (Shoedini. com) to Zappos after concluding that the shoe business was too far of a stretch from the company’s core strategy and its core competencies.

The way most businesses typically evolve is to start by selling a product or service that is consistent with their core strategy and then increase sales by incrementally moving into areas that are different from, but are related to, their strengths and core capabilities. This is how Zappos opeerates. The com- pany started by selling shoes and has gradually expanded into clothing, bags, housewares, and many other products. The success of its new product lines will be determined largely by whether the company’s existing core competen- cies are sufficient to profitably sell these items. If they aren’t, then Zappos will have to develop or acquire additional core competencies, or it is likely to struggle to effectively manage its growth.

A parable that helps affirm why sticking to a core strategy is so important is provided by Jim Collins in his book Good to Great. In the book, Collins re- tells the fable of the fox and the hedgehog, which was originally told by Isaiah Berlin. According to the fable, because he is sly, cunning, and strong, everyone thinks the fox is better than the hedgehog. All the lowly hedgehog knows how to do is one thing—curl up in a ball, with its spikes out, to deter intruders. The ironic thing is that whatever the fox does, and no matter how many of its 100 tricks it tries to use, the hedgehog always wins, because it knows how to do one thing well—roll up and stick its spikes out. In Good to Great, Collins says businesses that are successful over the long haul are more like hedgehogs than foxes. Rather than moving swiftly in all directions, like foxes, successful businesses keep their heads down and do one thing particularly well. Like the hedgehog, they see what is essential and ignore the rest.12

3. Planning for growth

The third thing that a firm can do to prepare for growth is to establish growth- related plans.13 This task involves a firm thinking ahead and anticipating the type and amount of growth it wants to achieve.

The process of writing a business plan, covered in Chapter 6, greatly as- sists in developing growth-related plans. A business plan normally includes a detailed forecast of a firm’s first three to five years of sales, along with an operations plan that describes the resources the business will need to meet its projections. Even though a business will undoubtedly change during its first three to five years, it’s still good to have a plan. Many businesses periodically revise their business plans as a foundation for helping them guide their growth- related decisions.

It’s also important for a business to determine, as early as possible, the strategies it will choose to employ as a means of pursuing growth. For ex- ample, Proactiv, the acne medicine company, is a single-product company and has grown by steadily increasing its domestic sales, introducing its prod- ucts into foreign countries, and by encouraging nontraditional users of acne medicine, like adult males, to use its product. Proactiv’s decision to stick with one product and to avoid growing through initiatives such as acquisitions and licensing has allowed the company to focus on marketing and building its brand. In contrast, uShip, the subject of Case 13.2, has expanded into a number of new product lines since it launched in 2003. It is still primarily an online marketplace for shipping services, but has grown through a variety of avenues. For example, in 2011 eBay Motors began incorporating uShip’s Shipping Price Estimator as a vehicle shipping option within all of its U.S. car, motorcycle, and power sports listings.14

On a more personal level, a business owner should step back and measure the company’s growth plans against his or her personal goals and aspirations. The old adage, “Be careful what you wish for,” is as true in business as it is in other areas of life. For example, if a business has the potential to grow rapidly, the owner should know what to expect if the fast-growth route is chosen. Fast growth normally implies a quick pace of activity, a rapidly rising overhead, and a total commitment in terms of time and attention on the part of the business owners. The upside is that if the business is successful, the owner will nor- mally do very well financially. The downside is long hours and time away from family. Commenting on the balancing act that many fast-growth entrepreneurs experience, Felix Lluberes, president and co-founder of Position Logic, a GPS tracking software company, said:

“The biggest challenge (in growing a company) is keeping your family happy and constantly deciding when to miss important family events because work demands it. Working hard is not a sacrifice as long as you achieve your ultimate objective.”15

The trade-offs implied by this scenario are acceptable to some business owners and aren’t to others.

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

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