An equation with different factors
The growth equation is determined by a number of factors. On the one hand, it involves systemic variables like market development, the competitive environment, company maturity and the innovation cycles of products and services. On the other hand, growth is shaped by the owners’ expectations. The weighting of short-term versus long-term aspects varies depending on the investor configuration, and may be eclipsed by specific exit plans. Short-term and profit-oriented demands don’t always foster the development steps that a company needs to achieve solid, long-term growth.
Many good reasons to grow
Growth is usually at the top of the strategic agenda. But both the targeted goals and the expected benefits can vary. Companies with a new business model want to be in a position to implement it through growth. They expand their customer structure quickly so that they can capitalise on it at a later stage.
Those who want to become cost leaders aim for economies of scale in volume, production capacities and other key factors. This kind of growth target is mostly seen in areas where there’s little difference between products, for example in consumer electronics.
Growth brings further value-adding benefits like higher investment opportunities, broader access to the market and the potential for further diversification. In addition, the more a company grows, the more exciting and varied the tasks and development opportunities become for current and potential employees.
Beware of growth traps!
With extreme growth targets and a fast pace, there’s a risk that structures and systems for quality, compliance, safety and generally efficient processes might not be able to keep up. As a result, they may become more vulnerable and less resilient. An organisation needs a certain amount of time to absorb growth. Particularly in the case of inorganic growth – through acquiring specific competencies or capacities, for example – it takes time to integrate the new elements and use them effectively. Even if organic growth happens very quickly, the company’s risk profile can increase if levels of investment are high and the share of fixed costs goes up. If a lot of capital is tied up in structures and systems, this can threaten the flexibility of the company in the event of economic downturns or other crisis scenarios.
Consolidating and cleaning up is a must
When a company is at an advanced stage of maturity, depending on the market situation it may be advisable to pursue strategies that aren’t growth-oriented, for example reducing complexity, simplifying and standardising processes, streamlining portfolios, creating synergies and thus restoring or strengthening profitability. Anyone who knows about tree care knows that for a tree to deliver maximum yield, it must be pruned back regularly and according to a plan. Even consciously trying not to grow in certain situations is by all means sustainable. Cyclical industries like the semiconductor or textile industry use downward cycles to consolidate and prepare for the next growth phase.
Short and sweet
Growth is relative – to the market, to segments, to competitors, to the economy and much more. To achieve sustainable and scaled growth, a company needs to take account of the situation and make conscious decisions about which elements and strategies will ensure its long-term success. Good coordination between the owners, the board of directors and management is crucial for success. Companies should take a step back to see the bigger picture, to refuel and digest before tackling the next growth sprint.