The disadvantages of rapid growth for companies

Fast-growing companies often put themselves at risk

Not every company is ready for more growth. Often there is a lack of clear leadership and the necessary infrastructure to scale up quickly. In fact, growing too fast can put even great companies in trouble. In this article, we look at the biggest dangers a company faces when it grows too quickly

In an interview, Bill Hewlett and David Packard, the founders of HP, were asked what the most important piece of advice they would give to young entrepreneurs was. Their answer was:

“Don’t grow too fast”

Growth is probably the most widespread mantra in the entrepreneurial world. In business education institutions, growing a business is taught as one of the ultimate goals. To question this is probably equated with heresy in many of the world’s business schools. In reality, however, not every company is ready for rapid growth. Growing too big too fast overwhelms many organisations and often pushes them to their limits. Especially in a digitalised world, it can even be exponential growth, which is particularly difficult to control. In this article, you can find out what disadvantages a company can expect if it grows too quickly and how to deal with rapid growth properly.

The decision to grow quickly

“Half of all company failures occur one year after new sales records have been set.” (Quelle: Collins, Lazier, 2002)

Whether and how much a company grows should not depend on external market conditions, but should be a conscious decision by the company management. Entrepreneurial growth rarely occurs as a result of an external environmental influence, but is usually dependent on a series of targeted measures that need to be implemented. Growth in itself is not always automatically desirable. New challenges and tasks will arise in every phase of a company’s development. Every company size therefore entails necessary changes and the companies concerned are not always properly prepared for them.

The day-to-day work and the decisions that have to be made in a start-up are completely different from those in an SME. However, the day-to-day work and the decisions that have to be made in an SME are completely different from those in a corporate group.

There are therefore both advantages and disadvantages along the development path from a small to a large company. For example, a start-up can implement innovations, make decisions and test new product ideas much more quickly. A corporation, on the other hand, is cumbersome and bureaucratic at these levels. In order to implement new ideas in corporations, several departments have to give their blessing, a lot of internal politics are required to convince all decision-makers, the legal department wants to check the procedure, etc.

Therefore, a large company is not automatically better than a small one. It is important to understand that the different company sizes are definitely different and therefore a different way of working is necessary to be successful at the respective level. The size of the company therefore has a direct impact on the required type of corporate management, communication and the right choice of people. If you are a successful manager at international corporate level with large budgets, dozens of employees for each area of responsibility and long decision-making processes, you could end up with a crash landing in a start-up or SME with limited resources, where speed and flexibility in the tasks of the individual team members is required.

Growth in itself is therefore neither good nor bad for a company. It should therefore not automatically be seen as the ultimate goal in every case. Whether a company wants to grow quickly and thus change its internal structures should therefore be a strategic decision.

Do you even want to become a large company? A corresponding size not only brings advantages, but also disadvantages.

Risk of fast growth for companies
Risk of fast growth for companies – Source: David Schneider

The 10 disadvantages of rapid growth for companies

Although a fast-growing company is desirable in principle, it harbours a number of dangers. Here are some of the most common pitfalls companies face when growth is too fast and uncontrolled:

1. Neglecting core tasks

Rapid growth can make even gross inefficiencies in company processes seem unimportant for a short time. In order to keep taking on new orders, you neglect loyal existing customers or fail to devote yourself to the urgently needed solution of everyday problems. These initially minor mistakes add up over time. However, as soon as growth declines (often rapidly), these problems quickly become apparent and can become dangerous for the company, especially in times of crisis.

2. Cash flow problems

In order to fulfil a large number of new orders, the company purchases masses of materials and hires new employees. Investments are often also made in new locations, even though the infrastructure for such an expansion barely exists. If these expansions are successful, the materials, locations and employees are converted into products because the company expects sales to continue to rise rapidly. The company’s cash is converted into inventory and tied up. However, it often takes months for customer payments to be received. If the company then misses its growth targets and the expected sales are not achieved, there is a lack of liquidity. And without liquidity, there is a risk of insolvency.

3. Heavy strain on the company’s infrastructure

Can your factory produce twice as many products within a year? Can your customer service handle twice as many complaint enquiries? Are there enough technicians, vehicles, servers, workers, machines, fitters, etc. available to actually manufacture and deliver twice as many products – and with consistent quality? Rapid growth can lead not only to a doubling or tripling of turnover, but also to an increase in the amount of work and the necessary infrastructure. If the internal systems are not designed for rapid scaling, you can become a victim of your own success.

4. Change in the corporate culture

Rapid growth and a large number of new employees can significantly change the existing corporate culture. Departments grow or are newly formed, new hierarchical levels emerge. This also poses a major challenge for internal communication and management structures. Complexity and bureaucracy increase, leaving less room for individual development of employees and fun at work.

5. Falling profit margins

To achieve rapid growth, many companies are prepared to sell products with additional discounts and promotional prices. This very often triggers a price war in the market, which ultimately reduces the contribution margins and margins of all participants. Once customers have become accustomed to low prices, profit opportunities are correspondingly limited. The effect is irreversible.

6. Neglecting quality

Good things take time. If too many tasks have to be completed in too short a time, the tendency towards sloppy and inaccurate work increases. As a result, internal problems or customer complaints usually pile up, leaving even less time for the actual tasks.

7. Little time for learning and optimisation

With constant growth, there is no time to reflect on and optimise past performance and milestones achieved. If you grow too quickly, there is even a risk that you will simply rush past certain milestones or not even recognise them as such. This can result in gaps or blind spots in the company’s processes, which can become even larger with additional growth.

8. High workload for employees

Only a few companies have clear systems and processes in place that can automate and thus cushion additional work volumes, for example with the help of digitalisation. In most cases, this results in a considerable additional workload for individual key positions in the company. As a result, the employees affected have a lot more work to do, but it has to be done in the same number of working hours. Those affected rarely receive compensation for the additional stress and effort, which usually results in resignations. As a result, there is a shortage of staff in key positions, which makes the situation even worse for the remaining employees.

9. Blinkered thinking

If the company management focusses too much on growth, this can become a paradigm. As a result, those involved are inclined to make bad decisions just to continue the growth trend. Osborne Computers, for example, sold its products at prices below the cost of production just to maintain the trend of rapid growth. Of course, any organisation can sell a euro for 80 cents until the money runs out. Osborn Computers had record sales with this strategy – and filed for bankruptcy shortly afterwards.

10. Success is a bad teacher

Business success is not always down to superior intelligence and brilliant decisions. There are certainly cases in which a general economic upturn or a trend on the markets helps certain participants to achieve fabulous success. Examples of this include property companies in the last 10 years. If existing properties increase in value by 20-30% every year, you don’t have to be a genius to have made a fortune from them in recent years. Cases such as the bankruptcy of Signa Holding show impressively what happens when such houses of cards suddenly collapse due to a trend reversal. Very often, the decision-makers in such companies are blinded by success. Arrogance and big egos can cloud the decision-making ability of management.

How fast should a company grow?

Growth also brings dangers if you are not prepared for it. The speed at which a company grows should therefore be an active decision that is made consciously and not a result of conditions that are beyond the control of the people involved.

If someone wants to become one of the market leaders in a fast-growing and dynamic market environment such as digital technology, this will only work with a rapid growth strategy. If the market is growing strongly in an organic way, it would be unwise to deliberately hold back growth and leave the newly created market shares to competitors. Companies such as Apple or Compaq, for example, only had the option to grow quickly because the market for PCs was expanding so rapidly.

In most industries, however, exponential growth of the market will not be the case, making rapid growth of the company an option rather than a necessity.

How fast a company should grow therefore depends primarily on the company management and the underlying processes in the company. As a rule, companies that are sufficiently digitalised have a better starting point for faster growth than those in which many processes are still analogue. Thanks to the possibility of automation and process optimisation, digitalisation provides a basis for better scalability and therefore for rapid growth.

Conclusion on company growth

Jim Collins and his team at Stanford University have spent years conducting research to find out what differentiates the most successful companies from the less successful ones. In their book Great By Choice, the topic of growth was analysed in detail, and the most successful companies have maintained a deliberate growth rate of 10-20% per year. Consciously maintained means that even in years of economic upturn, growth was deliberately kept lower, while even in reviews, the 10-20% annual growth was rigidly maintained. In this area, company growth and the resulting challenges remain manageable and you can still increase turnover every year and maximise profits.

Do you really want to become a bigger company? This question is often not so easy to answer and must be decided individually for each situation. The agility and speed of an SME have their advantages, as do the market dominance and strong budgets of a group. Ultimately, growth is also a matter of taste and depends on the decision-makers involved.

David A. Schneider hat über 10 Jahre an vorderster Front im Vertrieb und im direkten Marketing verbracht. Sein erstes Unternehmen hat er mit 18 Jahren gegründet und war seither von den Möglichkeiten und Auswirkungen des Unternehmertums auf unsere Gesellschaft fasziniert. Seit Jahren hat er es sich zur Aufgabe gemacht, ein Buch pro Woche zu lesen und die Inhalte in der Praxis anzuwenden. In diversen Branchen hat er damit bereits überdurchschnittliche Ergebnisse erzielt, indem er seine Arbeitsweisen stets an die neuesten Technologien anpasst und orientiert. Derzeit hat er eine leitende Funktion in einem Familienunternehmen mit 150 Mitarbeitern und teilt sein Wissen als Autor, Blogger und Unternehmensberater mit seinen Kunden und Lesern.

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