Why Everything You Think You Know About Business Growth Is Wrong
“At best those beliefs are half-truths and at worst they’re pure fiction,” said Hess, author of the new book Grow to Greatness: Smart Growth for Entrepreneurial Businesses published by Stanford University Press. “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 scientific research or in business reality,” he said. “When not approached carefully, growth can destroy value as it outstrips a company’s managerial capacity, processes, quality, and financial controls, or substantially dilutes customer value propositions.”
In Grow to Greatness, Hess explains how such myths came to define the way growth is approached by entrepreneurs — often to their detriment. The book lays out a framework for how to approach business development — and how to manage its risks and pace. It then takes readers through chapters that explore when the time is right to grow, how to do it, and how to manage the reality that growth requires the right leadership, culture, processes, controls, and people. The book aims to prepare readers for the day-to-day reality of growth, offering up the real-life experiences of 12 entrepreneurs.
The best way to illustrate the downside of growth, said Hess, is by looking at well-known public companies.
“Between 2005 and 2007, 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,” noted Hess. “Toyota’s quality issues leading to multiple recalls resulted from too much growth too quickly.”
Hess has spent much of his career studying how growth affects businesses. In a recent study of 54 high-growth private companies, he learned that several of the successful entrepreneurs in the study were repeat entrepreneurs who had “imploded” their first business by taking on too much growth too quickly. Growth overwhelmed them. They learned to respect growth’s destructive ability, and in their second venture they paced growth so that it did not overwhelm their people, processes, and controls.
“That is what I call the ‘gas pedal’ approach to managing growth,” said Hess. “Let up on the growth gas pedal as needed to give your people, processes, and controls time to catch up.
“Instead of grow or die, be motivated by this motto: ‘Improve or die,’” he said. “Every business must continually improve its customer value proposition better than its competition in order to stay viable. That’s where real success lies.”
If everything you know about growth is wrong, what’s right? Here are Hess’s truths about growth:
Growth is change (and change isn’t easy). 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.
“Growth also requires that the entrepreneur change what he or she does,” said Hess. “Successful and sustainable growth requires the right kind of leadership, the right environment (culture), and the right processes.”
Growth is evolutionary. Sometimes tough decisions are required if you’re going to keep up. 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,” explained 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.
“The need to upgrade managers to fit the expanding job demands was gut wrenching for many entrepreneurs because the now-ineffective manager had often had a successful history with the business but was now in over his or her head,” he said. “This is yet another important factor that you must be prepared to deal with as you think about growing your business.”
Growth requires continuous learning and constant improvement. The entrepreneur and employees must be constantly open to learning and adapting and improving in an incremental, iterative, and experimental manner. No matter how big you get or want to get, continuous improvement is required.
“In my research of high organic growth companies, I found that one factor they all share is a ‘be better’ DNA,” said Hess. “Their ‘be better’ focus was the underpinning of every growth initiative whether it was top-line, bottom-line, or developing new concepts. Continuous improvement is the DNA of growth. Improving your product or service, how you deliver it to your customers, and every customer touch point is necessary to stay in business and to grow your business. The good news is that continuous improvements lead to more loyal customers who can be your best advertising.”
Growth requires disciplined focus and prioritization. The entrepreneur must strategically focus the business on a compelling differentiating customer value proposition and achieve daily operational excellence and consistency. Hess writes that one CEO provided the following description for the concept of strategic business focus: “Be two inches wide and two miles deep.”
“Every entrepreneur has limited resources and time,” said Hess. “To be successful, 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 on the most important areas that can drive success. These priorities, however, may vary with the type of business or the phase of growth.
“To set priorities, entrepreneurs must have concrete and useful data about their business, communicate the priorities to their personnel, and implement processes to ensure that these priorities are carried out. One entrepreneur who I interviewed prioritized his focus simply as customers, quality, and cash flow. He stated that if an issue did not impact directly and materially one of those three areas, it could wait.”
Growth is process intensive. 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.
“Processes are the ‘how’ part of doing business,” Hess said. “As businesses grow, the entrepreneur loses the ability to be hands-on with all aspects of the business. There is simply too much to do. So, the challenge is for the entrepreneur to increase the probability that others will do the tasks as he or she would like them done. To accomplish this goal, the entrepreneur implements processes.
“There are two basic types of processes,” he added. “The first type includes directions, recipes, instructions, and standards for how to do specific tasks. These include rules or controls for mitigating financial and quality risks. Most processes are designed to instruct an employee how to do something or what not to do. The second type has a goal of producing reliable, timely data or feedback that will reveal variances or mistakes. These data collecting processes are designed to get the key data in the hands of the entrepreneur quickly as the business grows.”
Growth creates business risks that must be managed. Growth stresses people, processes, quality controls, and financial controls. Growth can dilute a business’s culture and customer value proposition and put the business in a different competitive space. Understanding these risks is critical to managing the pace of growth and preventing growth from overwhelming the business.
“To get a better handle on growth risks, consider how your strategic space will change as you get bigger,” said Hess. “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.
“The good news is that you can minimize this and other big risks by planning for growth, pacing growth, and prioritizing what controls and processes you need to put in place prior to taking on much growth,” he added. “I call it ‘what can go wrong’ thinking, and entrepreneurs can’t indulge in too much of it.
“I am not anti-growth,” Hess stated. “Growth can be good and growth can be bad — it depends. Aggressive, untimely, or poorly managed growth can hurt a business and even destroy value. And, in some cases, too much growth can lead to business failure. Don’t make growth for growth’s sake your business’s goal. Understand that growth, if not properly managed, can undermine the fundamental strengths of a business.
“Respect growth,” he concluded. “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.”
Edward D. Hess is professor of business administration and Batten Executive-in-Residence at the Darden Graduate School of Business, University of Virginia. His book, Grow to Greatness: Smart Growth for Entrepreneurial Businesses (Stanford University Press, 2012) is available at Amazon.com. For more information, visit www.edhltd.com.
Publication date: 6/4/2012