3 growth risks that are harmful to your business's health

Posted by Mark Brousseau

What do Lehman Brothers, AIG, Merrill Lynch, Washington Mutual Savings, Arthur Andersen, Starbucks, and Toyota all have in common? All went gunning for business growth but instead ended up with self-inflicted wounds. Each of these companies pursued the wrong kind of growth for the wrong reasons. If you are considering trying to grow your business to beat the economic pressures of the down economy or are caving to the popular "grow or die" influence of Wall Street, Ed Hess asks that you think before you grow.

"Most business executives accept without question the belief that growth is always good, that bigger is always better, and that the healthy vital signs for a public company include growth that is continuous, smooth, and linear," says Hess, a professor at the University of Virginia's Darden Graduate School of Business and author of the new book Smart Growth: Building an Enduring Business by Managing the Risks of Growth. "The problem with those presumptions is that there is no scientific or business basis for them."

Hess, a leading authority on business growth, knows this to be true because he's conducted extensive research of his own with both public and private companies. Based on his research, Hess has found that the hard data shows that above-average, long-term growth (five years or more) by public companies is an exception, not the rule, occurring in less than 10 percent of the companies studied.

"For the vast majority of companies, growth is often pursued in a way that brings with it as many risks of failure as chances of success," notes Hess. "Combine unquestioned strategic presumptions with bad judgment—and sometimes a fair share of greed and arrogance—and the results can be serious or fatal to the viability of a business."

What are some of the self-inflicted wounds premature growth can leave on your company? Hess outlines a few:

Growth can create new business risks. Growth is a business strategy that can require investments in people, equipment, raw materials, space, and supplies. As these cash outlays occur before new revenues kick in, many businesses find themselves exhausting their cash reserves—a risky tightrope to walk.

"Starbucks is a great example of a company that learned this lesson the hard way," says Hess. "Previously the poster child of a successful, well-respected business, a new executive team decided that continuous, quarterly store expansion was necessary to prove to Wall Street how committed the company was to growth. Aggressive plans did indeed increase the number of new stores being opened each month, but many were in unprofitable locations that eventually had to be closed. The result was bad press, a diluted customer value proposition, and, equally troublesome, the sudden need to take on massive and unprecedented short-term debt. A change in senior management and a public mea culpa showed that, in the pursuit of growth, Starbucks had instead weakened itself as a business, at least for a time."

Growth can force you into the big leagues before you are ready. Growth can match companies up against more experienced players before they truly know how to handle the competition.

Growth can strain your operations. Growth can pose huge challenges for your people, processes, controls, and management capacities, resulting in quality problems and the increased potential for damaged customer relationships and diminished brand perceptions.

"Toyota learned this lesson the hard way," says Hess. "The company maintained an unbridled pursuit of growth over the past decade or so even though it was already a market leader in quality and dependability. It wanted more—to be #1 in sales. That shift in mindset set Toyota down a path where controls were stretched beyond capacity. The results: massive recalls, hundreds of lawsuits, and a damaged brand. Even Toyota's current CEO has acknowledged that the company's problems can be traced to growing too quickly."

Hess's solution for overcoming the risks associated with growth is a concept he calls Smart Growth. Smart Growth accounts for the complexity of growth from the perspective of organization, process, change, leadership, cognition, risk management, employee engagement, and human dynamics. It recognizes that authentic growth is a process characterized by complex change, entrepreneurial action, experimental learning, and the management of risk. It is a strategy that requires companies of all sizes to follow what Hess calls the "4Ps of Growth":

Plan for growth before kicking the strategy into gear. Think about how growth will change what you need to do. What new processes, controls, and people will be needed at what cost?

Prioritize what changes or additions to the business have to be made to accommodate the growth. This is a way to make the essential investments first, so as not to deplete cash reserves before new income starts rolling in.

Processes must be put in place to ensure there are adequate financial, operational, personnel, and quality controls for a bigger business. These are like dams on a river: if the water starts flowing faster and with more volume, those dams need to be reengineered to handle it.

Pace growth so as not to overwhelm yourself, your people, and your processes. Growth can be exciting, but it is also almost always stressful. If you underestimate the need for effective change management, and for a phased approach to implementation, you increase chances for failure.

The tools and rigorous governance methods outlined in Smart Growth can help companies along all four parts of the process. For example, Hess's Growth Decision Template can help leaders analyze, illuminate, and devise a plan to manage their growth risks.

Hess also advises all public companies to conduct an annual Growth Risks Audit to review the stresses that growth is placing on the organization, its people, and its processes. Avoiding conflict of interests and striving for objectivity are critical. This annual Audit should be conducted by a senior multi-disciplinary team made up of members who are not rewarded for producing growth results but are rewarded instead for preventing growth risks from creating serious damage to the business.

"CEOs and Boards of Directors face a unique kind of challenge when it comes to planning for smart growth," says Hess. "Sometimes the right decision when it comes to growth is not to pursue it, but it takes a special kind of team to make that decision when shareholders and analysts are clamoring for higher returns each quarter. But smart growth is possible. Successful high-growth companies—such as Best Buy, SYSCO, Walgreens, and Tiffany & Company—have grown through constant improvement in their organizations' DNA, executed by a highly engaged workforce in a positive learning and performance environment.

"What's important to remember is that the goal is not necessarily growth," concludes Hess. "The goal is continuously making your organization better. When you achieve that, growth will happen naturally in due course. That's the way to achieve smart growth."