CHAPTER 13
Preparing for and Evaluating the Challenges of Growth

Preparing for Growth

Most entrepreneurial firms want to grow. Especially in the short term, growth in sales revenue is an important indicator of an entrepreneurial venture’s potential 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.

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 preparation, good management, and an appreciation of the issues involved. The following 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.

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. 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. 

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 individualized 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.

Staying Committed to a Core Strategy

The second thing that a business can do to prepare for growth is to stay committed to a core strategy. A firm’s core strategy is largely determined by its core competencies, or what it does particularly well. 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.

Planning for Growth

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

Reasons for Growth

Although sustained, profitable growth is almost always the result of deliberate intentions and careful planning, firms cannot always choose their pace of growth. A firm’s pace of growth is the rate at which it is growing on an annual basis. Sometimes firms are forced into a high-growth mode sooner than they would like. This section examines the six primary reasons firms try to grow to increase their profitability and valuation

Managing Growth

Many businesses are caught off guard by the challenges involved with growing 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 activity quickens, its resource needs increase, and the founders often find that they’re busier than ever. Major challenges can also occur.

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. The stages, pictured below, 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.

Challenges of Growth

There is a consistent set of challenges that affect all stages of a firm’s growth. The challenges typically become more acute as a business grows, but a business’s founder or founders and managers also become more savvy and experienced with the passage of time. The challenges illustrate that no firm grows in a competitive vacuum. This section is divided into two parts. The first part focuses on the managerial capacity problem, which is a framework for thinking about the overall challenge of growing a firm. The second part focuses on the four most common day-to-day challenges of growing a business.

Managerial Capacity

As an administrative framework, the primary purpose of a firm is to package its resources together with resources acquired outside the firm as a foundation for being able to produce products and services at a profit. As a firm goes about its routine activities, the management team becomes better acquainted with the firm’s resources and its markets.

Day-to-Day Challenges of Growing a Firm

Along with the overarching challenges imposed by the managerial capacity problem, there are a number of day-to-day challenges involved with growing a firm. The following is a discussion of the four most common challenges.

Cash Flow Management

As a firm grows, it requires an increasing amount of cash to service its customers. In addition, a firm must carefully manage its cash on hand to make sure it maintains sufficient liquidity to meet its payroll and cover its other short-term obligations.

Price Stability

If firm growth comes at the expense of a competitor’s market share, price competition can set in. The best thing for a small firm to do is to avoid price competition by serving a different market and by serving that market particularly well.

Quality Control

One of the most difficult challenges that businesses encounter as they grow is maintaining high levels of quality and customer service. As a firm grows, it handles more service requests and paperwork and contends with an increasing number of prospects, customers, vendors, and other stakeholders. If a business can’t build its infrastructure fast enough to handle the increased activity, quality and customer service will usually suffer.

Capital Constraints

Although many businesses are started fairly inexpensively, the need for capital is typically the most prevalent in the early growth and continuous growth stages of the organizational life cycle. The amount of capital required varies widely among businesses. Some businesses, like restaurant chains, might need considerable capital to hire employees, construct buildings, and purchase equipment. If they can’t raise the capital they need, their growth will be stymied.

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