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Mar 09
2015

Controlling Future Growth

Posted by: Steve Marr

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Most business owners want fast growth. However, fast growth may not be the best strategy. Why?  Because quick growth increases risk in several ways.

1.  Understand why you experience rapid growth.

King Solomon wrote, “I have seen something else under the sun: The race is not to the swift or the battle to the strong, nor does food come to the wise or wealth to the brilliant or favor to the learned; but time and chance happen to them all.” (Ecclesiastes 9:11, NIV)

Business often grows slower than desired; other times, rapid growth is more random than planned.  When growth outpaces your ability to service the customer, problems develop.

 

One example was the ill-fated launch of WebTV by MSN. The service targeted users who were not very technical.  The sales pitch was that WebTV would let you watch TV from your PC. Solid idea. Unfortunately they added customers quickly, and there was a rise in technical issues.  Some occurred because of product bugs; others because many of the targeted customers were not tech savvy and needed more help. This overwhelmed the customer service system, causing customers to depart faster than adding new ones. Slower growth would have allowed the service department to grow with customer demand.

2.  Rapid growth creates financial pressures.

If a business requires $60,000 of working capital to generate $600,000 of sales, they may need $180,000 in working capital to generate sales of $1.8 million. If you don’t have access to more working capital, you can run out of cash and go into bankruptcy at the same time sales are going through the roof.  You can grow faster than your capital will permit.

3.  Rapid growth makes it difficult to maintain operating margins.

When I was in the international trade business, our company went through a time when business was booming. The work grew faster than we could train people to do the work. The cost of training new people along with the significant overtime costs and the challenges of maintaining strong management started to reduce operating margins. Over time, we overcame the problem.

When I encounter a business with good growth but slipping operating margins, I generally recommend that the business needs to slow down and focus on correcting the issues before growing more.

Perhaps an advertisement for a new product creates high sales quickly.  However, the product may have a large number of defects requiring more customer support or generating a large number of returns. This overwhelms customer support.  The result is that the product gets a bad reputation in the marketplace, followed by a bad reputation for the company. This occurs even if other products are superior. It would have been better for the company if their initial sales had been lower, giving time to discover and address product defects. Or at least they could have prepared customer support.  Then, it would have affected fewer customers.

My advice to most technological businesses is to launch a new software product slowly. New launches will have some bugs.  It is much better to work these out with a smaller customer base than to let the problems overwhelm.

More Growth Reminders

A business grows best when the company pays attention to what customers want. Identify what your best customers like about the product and what led them to buy the product. Then emphasize this in your target marketing. Focus on what these people want because you want more customers like them.

Often, it is better to fine-tune the business as you go. Pay attention to the details. If you drive too fast in the fog you can’t see obstacles on the road until you hit them.  Results can be disastrous.  The Titanic sank primarily because the ship was moving too fast in uncertain seas and failed to spot an iceberg in time. When you know what drives profit, you can focus your attention on these factors; but not to the exclusion of your company’s ability to provide customer support. Returns and requests for customer support gives you an indication of what is going wrong.

A business growing 10-15% will be doing very well in a few years. This type of steady growth can be managed. A burst of 40% growth will likely overwhelm most.

Jesus said, "Suppose one of you wants to build a tower. Won't you first sit down and estimate the cost to see if you have enough money to complete it?” (Luke 14:28 NIV) At first, this verse seems to focus on the money needed for a project.  However, a building project of any kind requires that you manage the entire process. Do you have the right engineer? Do you have the skilled draftsmen and access to the materials needed for a successful product?

Understand this and you can manage your growth for long term success. Subscribe to the free Business Proverbs e-mail here: http://bit.ly/ncixc1

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