In a market hungry for immediate results, there is always pressure to grow quickly. But is that always the right thing for the company’s overall strategy and long-term prospects?
Here are four situations where rapid growth can backfire.
1. Unscalable business model
If your business is not prepared to handle extra demand, growth can actually result in a decrease in net profits, as well as potentially irreparable damage to reputation.
As you prepare to expand into new markets, launch a new product, or begin an aggressive marketing campaign to gain a larger market share, you must first evaluate your infrastructure, the scalability of your technology platform (if relevant), your manufacturing capacity (if relevant), and all supply chain dependencies. All parts of your business ecosystem, including those that you don’t directly control, must be ready for increased demand and be able to deliver the same level of service within the same time frame as before.
Inability to scale operations is one of the leading reasons businesses fail in their growth phase.
2. Insufficient capital
Failure to properly estimate and secure capital resources required to execute a growth strategy can eat up too much of your capital before it starts generating profit. In the extreme case, it can even lead to the company’s downfall, when you are unable to raise additional funding and liquidity dries out.
In addition to increased marketing and infrastructure expenses, a company in the growth stage is also expected to have greater working capital requirements. Working capital refers to the capital tied into the company’s operations which may be spent and recouped within a short period of time. Inability to properly estimate it is one of the most common reasons why companies fail to deliver on their growth objectives.
3. Integration issues
When a company is in a mature industry, it is often forced to pursue a merger & acquisition growth strategy. While it may initially seem like an easy and logical way to grow the company’s brand, market share, and capacity, the reality is far from rosy. As they say, the devil is in the details, and executing a merger successfully is an art few have mastered.
Studies by Bain & Company, Hay Group and La Sorbonne, and other leading consultancies show that the percentage of mergers that failed to achieve their objectives range from 50% to a whopping 90%, depending on country and industry.
Before a company decides to merge with or acquire another company, it should not only focus on the combined revenue streams and how much money can be saved by optimizing operations.
The company also needs to consider whether it will be able to serve its combined customer base better or at least as well as before. It should formulate retention and brand transition strategies for the acquired company’s customers. It must anticipate and plan for internal changes ranging from technology integration to merging two labor forces with different cultures and expectations, while hopefully avoiding painful and demoralizing dissolution of one or the other company’s departments due to incompatibility.
4. Strategic incompatibility
Growth for the sake of growth is never a good idea. Any action a company takes must be in line with its long-term vision.
At any given point in time, a company has many options it can pursue in order to grow. Should it develop new products? Should it expand into new markets? Should it capture a bigger market share in existing markets? Should it diversify into new products completely? Can it do it all? To ensure your choices will not sacrifice the future of your company to achieve short-term goals, you must evaluate each option for consistency with the company’s long-term vision, in addition to its immediate near-term goals, available capital resources, and in-house expertise required to execute it.
Pursuing a strategy that does not meet the above requirements usually produces a negative return on investment for the company’s shareholders.
In conclusion, remember that slow and steady wins the race, and careful evaluation and planning is important to avoid fixating on just the potential benefits of any growth strategy.
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