Tuesday, December 30, 2008

Too much of a good thing

We know companies can grow too fast; it gets out of hand, they lose control and, eventually, the whole thing comes tumbling down. My favourite examples are still the ancient case of People Express in the 1980s (one of the first, and initially most successful low-cost airlines ever) and, a few years ago, Dutch retailer Ahold.

However, companies can also try too hard to grow. Hence, it is not that there’s too much growth; there’s no growth at all and that’s precisely because they are trying to hard! Let me explain.

Pretty much everyone attempts to grow. And when we look at different “strategies for growth” – that is, where can growth come from – we usually get presented a list of options: You can diversify, innovate, add new products to your portfolio; partnerships can help you grow, etc. Do these well, and the resulting factor will be growth.

However, what we are often inclined to overlook is that growth in and of itself is simply a lot of work. That is, even when just doing more of the same thing – without adding company partnerships, innovations or diversifying into adjacent businesses – growth taxes a firm’s management capacity. For example, you have to find and manage new customer relationships, add distribution capacity, recruit and train new people and business leaders, develop management systems for a larger organisation and workforce, etc. Growing a firm is a heck of lot of work.

Yet, the options to bring about further growth (innovations, partnerships, etc.) tax your management capacity too. Finding and maintaining new collaborations is a lot of work and requires much attention. So does managing the process of innovation, and developing and commercialising its output. Diversification, internationalization and acquisitions equally are a lot of work; you have to get to know new markets, products and customers; you have to work on integration and a newly formed organisational structure, manage increasingly complex management processes, etc. Doing all of it might just be too much of a good thing.

In a recent research project I evaluated the growth rate of firms in the Chinese pharmaceutical industry. This industry is turbulent and fast-changing, with a lot of entry and exit into the market. There are large potential pay-offs, but the ongoing changes in the country’s economy, population and medical system also make it unpredictable. It’s a market with lots of opportunity for growth, but also quite a brutal one in terms of the uncertainty of how to do this.

I measured to what extent firms in this industry engaged in various strategic vehicles aimed at fostering growth: Diversification into adjacent markets, innovation, establishing partnerships and adding new product lines to one’s portfolio. The results showed that, in isolation, each of these initiatives indeed stimulated growth; yet when used excessively or in combination they actually had a negative impact and hampered a firm’s growth prospects.

Hence, stop trying so hard! You might do better...