Business leaders must approach the growth process with caution. It involves increasing an organization’s size - its market share, revenue, and headcount. However, it's crucial to remember that bigger is not always better. Growing a business is a journey fraught with risks. It's possible to grow too quickly, diversify into too many service areas, and overstretch. Such actions can strain the organization’s operations and finances, create inefficiencies, and even jeopardize the company's future. While striving to achieve maximum growth potential is important, it must be balanced with careful planning and sustainable practices.
As a business leader, you need to grow without the grind. But what are the secrets of successful growth, and what risks must you avoid?
Why growth is important in business?
Business growth is traditionally one of the surest indicators of a robust and thriving enterprise. However, over the last 15 years, the global financial crisis, rising inflation, slow global economy, and geopolitical uncertainty have made that growth hard to come by.
A global study by McKinsey found that over the last 15 years, 5,000 of the world’s largest public companies grew by an average of just 2.8% per year, with only one in eight achieving growth rates that exceeded 10% per year.
Although the study found that growth during this time was slow, it did reveal its importance as a measure of organizational performance. It found that revenue growth of 5% per year led to an average increase in shareholder returns between 3 and 4%. Organizations that grew faster generated shareholder returns six times higher than the industry average.
Although business growth is paramount to an organization’s fortunes, the research suggests that grand ambitions for unparalleled business growth are unrealistic for many businesses. For some, they could even prove fatal.
How to grow your business - Evaluate the risks first
Organizations can grow in different ways. They can expand organically by increasing their sales volumes or boosting their market share and service offerings through mergers and acquisitions. However you grow your business, it brings a range of predictable risks, and your ability to identify and manage those risks will determine your success. It's crucial to be cautious and aware of these risks.
Straining operations: Many companies experience growing pains when scaling their operations. For example, if you grow through a merger or acquisition, combining different systems and processes that may have worked well individually can create bottlenecks and inefficiencies.
Overwhelming staff: You may also ask your staff to take on more tasks, which can affect the level of service you offer to customers and damage the motivation and well-being of employees, potentially increasing staff turnover rates.
Squeezing capital: At a more fundamental level, increasing your sales can strain your cash flow and leave you without the working capital you need to manage the business effectively on a day-to-day basis.
Every business is unique, and the challenges one faces during growth could be another company’s competitive advantage. With careful planning and strategic decision-making, businesses can avoid growing too quickly and ensure they have the necessary resources and infrastructure to support their growth. Investing in staff training, capacity building, and recognition is also essential to maintain motivation and well-being.
Examples of companies that grew too fast
Over the past decade, many businesses have fallen victim to the challenges and pitfalls of market expansion. The stories of companies that grew too quickly often show that they needed to focus more on learning along the way. The failures of companies such as Homejoy, Zynga, and 180s illustrate the importance of balancing fast execution with a continuous learning mindset for sustainable and successful business growth.
The common pitfalls to avoid when scaling a business
It's not unusual for businesses eager to expand to take on or even create challenges that they are unprepared to handle.
The challenges that pose a problem could involve:
- Accepting new clients, even if you don't have the resources to meet their needs.
- Introducing a product to the market before it's fully ready.
- Releasing a product that operations cannot sustainably produce
- Entering a volatile market.
- Taking on a loan without a clear repayment plan.
- Hiring more staff than needed (and can realistically afford to pay).
- Obtaining facilities that are larger (and more expensive) than necessary.
- Expanding into unfamiliar territories.
- Failing to anticipate and manage overhead costs.
The typical outcomes are cash flow shortages and lasting harm to your brand and customer relationships. Premature growth can also lead to unnecessary stress for you and your employees and potentially result in layoffs. In short, it can be detrimental to your staff, your customers, and your business.
How can you grow your business sustainably?
Growth opportunities differ from one company to the next. Whatever opportunities you are presented with, by being courageous and identifying and managing the risks, there are several strategies you can use to unlock value-creating and sustainable growth opportunities that not only give you a competitive edge but also promise significant rewards.
Focus on your core
When developing a growth strategy, many business leaders look to differentiate into new markets to generate additional sources of revenue. However, before looking elsewhere, make sure your core is flourishing. This focus will reassure you and keep you on track.
A McKinsey study found that 80% of growth comes from an organization’s core industry, with just 20% originating from secondary or new markets. You can grow your core by changing your operational model to deliver an improved or more efficient service. There may also be areas in your existing market with untapped growth potential or stagnant market segments that you can breathe new life into.
Grow into areas you know
Although most growth comes from a business’s core, diversifying into adjacent industries can also be valuable. Research shows that organizations that grow into linked industries generate 1.5% more shareholder returns than their industry peers.
Diversifying into similar areas also helps to reduce the risks. The organization can benefit from synergies or have managerial capabilities and proprietary insights that give it a head start in the new market. There may also be many of the same assets and competencies that can help to reduce the costs associated with growth.
Futureproof your growth
Many organizations are in such a rush to achieve growth that they focus on their ability to increase their product or service offering now without spending time or money on developing the operational infrastructure they need to sustain that initial growth going forward.
Growth cannot happen in isolation. To support it, you must create new work procedures, communication channels, rules and policies, training and development programs, and rewards and recognition schemes. While some business leaders see the investment in infrastructure as an avoidable cost, it’s vital if the organization is to grow in a sustainable and repeatable way.
Dominate local before going global
International expansion can bring tremendous challenges and costs that can destabilize a business and threaten its financials. Before expanding into new territories, anchor your organization by winning the local market first. Beating the domestic competition will give you a solid foundation to expand your operations internationally.
Research shows that organizations with healthy growth in their domestic markets benefit more from international expansion, with total shareholder returns increasing by 2.6% compared to just 1.3% for businesses that are only treading water locally.
Don’t solely focus on the financials
Environmental, societal, and governance goals might not feel like a priority when you’re striving for business growth, but research shows that organizations that focus on improving their ESG scores also outperform other companies when it comes to optimizing their financial performance.
The study found that from 2017 to 2021 when only one in four companies grew by more than 10% annually, half of the firms that prioritized ESG issues reached or exceeded that benchmark. That shows that doing good is also beneficial for business.
Brand building and customer service are two other areas business leaders must not neglect for financial reasons. In today’s uncertain and competitive business environment, implementing marketing plans based on economic data and guardrails is more critical than ever.
Business growth requires bold choices
To grow a business, you have to make brave choices and take risks; after all, growth does not come to those who sit still. However, careful planning, strategic decision-making, and ongoing risk assessments must support your bold decisions. Even when the broader economic outlook is uncertain, these fundamentals can help C-suite leaders guide their companies to sustainable growth performance.
