Growth is a common objective for both small and large companies. Each organization has its own understanding of growth and the strategies required to attain it. The fundamental question remains: how can a company effectively manage and adjust to growth?
PHASES OF GROWTH
Various scholars and management theorists, such as Larry E. Greiner from the University of Southern California, have created models to clarify the growth and development of organizations. In a 1998 article titled “Evolution and Revolution as Organizations Grow” published in Harvard Business Review, Greiner outlined five stages of growth that were periodically disrupted by “revolutions.” These revolutions caused disruptions within the organization and facilitated the transition into the subsequent stage. Greiner based his phases on an analysis of historical patterns observed in companies.
- Creative phase—when a company or subunit of a company is first formed, most attention and activity is focused on developing a product and reaching its market.
- Direction phase—when the company begins to formalize business management methods and “professionalize” its practices, usually including centralizing power in the organization.
- Delegation phase—when centralization proves too cumbersome for a large organization, it begins to delegate power and decision-making in various ways, such as by creating semi-autonomous business units/divisions and moving the reward/risk paradigm down to lower level managers and employees in general.
- Coordination phase—when decentralization becomes seen as excessive or inefficient, management attempts to rein in the organization by merging or coordinating the activities of various fragmented parts of the company, demanding more accountability and creating unifying incentives such as profit sharing.
- Collaboration phase—when central coordination efforts prove bureaucratic and inflexible, management adopts a team-based, cross-functional structure and more fluid policies that empower workers and promote dialog, experimentation, and negotiation.
Greiner’s belief is that organizations often become stagnant at certain points due to management’s inability or resistance to changing their organizational mindset. This is particularly true when individuals in positions of authority are reluctant to relinquish power.
Besides qualitative concepts of organizational growth, there are several quantifiable parameters that a company can utilize to assess its growth. The most significant benchmark is one that demonstrates advancement in relation to the organization’s stated objectives, as illustrated in the subsequent examples.
NUMBER OF EMPLOYEES
While some businesspeople boast about the size of their workforce, it is important to recognize that employees come at a cost. Instead, a better way to gauge growth based on employees is by evaluating the change in revenue or profit generated per employee within the company or department. This measure provides valuable insights into improvements or declines in productivity, rather than solely focusing on labor and salary expenses.
The size of a company is often described in terms of revenue, commonly known as a “X million dollar company”, according to business magazines and newspapers. However, this measurement overlooks the expenses required to generate those revenues. Merely having higher revenues does not guarantee greater profitability. When a company experiences rapid growth, expenses can rise dramatically and become difficult to manage, leading to financial constraints and an uncertain future. Therefore, it is more meaningful to assess growth by examining changes in net profit or net margins, which are directly connected to revenue.
These methods analyze the costs associated with generating revenue for the company and determine the portion that contributes to overall profits. Additional assessments of profit margins involve calculating the return on investment (ROI) for the entire company or specific units or product lines. ROI allows management to determine if the generated profits adequately compensate for opportunity costs, risks, and the time value of the invested money.
Another metric that is related is return on assets (ROA), which assesses profits in relation to the value of all the assets (capital, plant, equipment, etc.) utilized by the company to generate its income. The creation of wealth for owners/investors is often seen as the ultimate measure of growth, particularly for publicly held companies.
The net profits of a company are a sign of wealth generation. However, the company or its observers may analyze their finances to ascertain if they are actually generating an economic profit. An economic profit is a profit that surpasses the implicit cost of the capital invested in the company. Only when the cost of capital is covered can the company be considered as creating new wealth. Alternatively, this growth can be measured by market value added, which directly measures the creation of shareholder wealth.
Despite the existence of numerous academic models illustrating the stages a company goes through in terms of growth, Tom Peters, a management expert, emphasizes several practical approaches that companies of all sizes can adopt to achieve organizational growth. These recommendations are frequently observed in the business press when covering the practices of companies implementing them.
JOINT VENTURE/ALLIANCE
This approach is especially beneficial for smaller companies that have limited resources. However, even in a business environment where demand, supply, and manufacturing or service conditions frequently change, forming partnerships is a sensible choice for larger organizations too. By creating joint ventures or alliances, all companies involved have the ability to easily transition to new projects after completing the first one or adapt their agreements to continue collaborating. Subcontracting, for instance, enables firms to focus on the aspects of their business that they excel at.
Joint ventures and alliances offer partners the benefits of fresh ideas, new technologies, innovative strategies, and untapped markets, all of which can greatly contribute to the growth of participating firms. Collaborating with emerging or international companies might provide the most favorable prospects for achieving these advantages.
According to Tom Peters, it is recommended to license your most advanced technology. The reasoning behind this is that in today’s world, no technologies can truly be proprietary anymore. Any technology a company develops will soon be copied by a competitor or an outsider. By selling current technology, a company can avoid the hassle of copying and instead profit from it. This not only generates cash flow for the company to invest in future research and development but also creates switching costs by making others reliant on the firm’s applications.
SELL OFF OLD WINNERS
Organizations may opt to discontinue their cash cow operations to focus on the development of newer enterprises. Although this may seem contradictory at first, there is a strong market demand and profitability for this type of business. Furthermore, the capital generated from these operations can be utilized to drive the growth of other ventures.
The responsibility of managing a declining profitable business is passed on to the new owner. Simultaneously, new business ventures that were in their early stages during the time of the sale could now be highly profitable opportunities. Another point to consider is the divestment of outdated technology or products. Companies have favored emerging markets like Latin America and Eastern Europe to dispose of obsolete goods or technology. Although these markets cannot afford the most advanced products, they can still benefit from older models.
NEW MARKETS
Expanding a company can be achieved by entering new markets, which is an evident strategy. Growing enterprises greatly desire the experience of creating additional demand for their product or service, particularly in markets with limited competition. As an increasing number of U.S. companies move their operations offshore, this generates more opportunity and awareness for other companies to cater to these foreign markets.
Some of the strategies suggested here benefit the firm in generating cash. One smart way to use that cash is through product or service development in order to create future growth. Numerous companies reinvest a portion of their profits into developing new products, either entirely new products or extensions or adaptations of existing ones. For certain companies like pharmaceutical manufacturers, maintaining a strong new product pipeline is crucial for long-term growth (and even basic stability), as their drug patents will eventually expire and they will encounter formidable competition from producers of generic and copycat drugs.
Other companies, like toy and clothing manufacturers, deal with unpredictable and ever-changing markets where a continuous stream of fresh products is required. Although not all research and development efforts result in significant product launches, new products often become crucial assets for a company in the long term.
VENTURE CAPITAL/IPO
Companies of all sizes need funding for growth. While large public firms can issue stock or debt to raise money, smaller private firms rely on banks, private investors, or venture capital firms for capital. Venture capital firms provide funds to firms with high growth potential and expect significant returns upon the company’s initial public offering (IPO), when it issues public stock.
Both small and large firms grow in size by acquiring other companies. The business world has a periodic trend of merger-mania, as it is seen as a preferable way to increase a company’s size, revenues, product or service offering, and more. The takeover frenzy witnessed in the 1980s has made a comeback in Western markets. Successful mergers and acquisitions involve combining resources to create a synergy while enhancing existing core competencies. For any company that has achieved growth, managing and sustaining that growth is crucial to ensure that the initial progress brings lasting positive results for the company.
