While growth is a common business objective, business growth is neither easy nor cheap for the company to achieve as there are many problems linked to business growth.
It is mainly because business growth requires access to substantial finance as well as non-financial resources such as land, labor and enterprise.
While businesses grow, some of the firms may overtrade (take too many orders than what the company can handle), overborrow (have too much debt impeding the company’s ability to make principal and interest payments), or even expand in the wrong direction (take the company away from its core business activities). Also, entering the new countries and markets where a company lacks local expertise can be dangerous.
If the problems resulting from business growth are not effectively tackled, they can lead to cutting back on business activities, or even mean business failure.
Major problems linked to business growth
It is not true that businesses only benefit from business growth. Here are a few examples of the issues to be aware of. If the managers can solve these problems successfully, it will be more likely for the firm to achieve the success as the larger business.
1. GROWTH SPEED TOO SLOW
The pace of growth is very significant. Internal Growth is too slow while External Growth is too fast. If the company chooses to grow internally using its own resources, there is a risk that other businesses on the market that use External Growth strategy will grow much faster. Failure to expand in a market that is growing (means that other firms are growing) will lead to decreased market share, or in other words, shrinking in the relative business size. When other dynamic firms that manage to grow faster, they will dominate the market and achieve substantial advantages over smaller firms. In the end, there is the danger of being side-tracked by competitors.
Possible strategies to deal with the problem? It is the managers’ responsibility to make sure that the company has enough resources available to meet their growth objectives, such as finance as well as knowledgeable and fully informed workers. In addition, all important business stakeholders need to be aware of how business growth will affect them in order to remove possible conflicting situations.
2. FINANCIAL ISSUES
On another hand, if the company chooses to grow internally, there is a risk of overborrowing and raising average cost resulting from diseconomies of scale. Expanding the company too swiftly can overstretch financial resources because inorganic business expansion can be extremely expensive. Additional capital will be required to acquire or take over another business, and additional working capital will be needed too to maintain the day-to-day running of the business. All these factors could lead to negative cash flow, an increase in long-term borrowing and lower profitability.
Possible strategies to deal with the problem? Using internal sources of finance when possible will decrease the amount of interest to be paid back to the bank or other lenders. The internal capital can come from earnings retained by the business in previous years, sale of assets that are no longer needed or additional private money injected into the business by its owners. Raising finance from share issues will also allow the business to minimize interest payments. Another solution could be offering shares in the new business instead of paying cash to the shareholders of the target company.
3. UNAVOIDABLE LAYOFFS
After two individual companies merge through horizontal integration, some managers and workers will lose their jobs, position or status. Usually, it will be the bigger business, or the one with more influence, to have more decision-making power in the new reality after the merger. The new enlarged firm will most likely not need two marketing managers, two Human Resource (HR) managers or two finance managers. So, someone will get laid off sooner or later. However, rapid retrenchment could lead to bad publicity and negative reaction from stakeholders.
Possible strategies to deal with the problem? Consider spreading the process of laying off people over a longer period of time, so it is more acceptable for the workers who will be leaving the business to find new employment. The workers who stay will have more time to better cope with change.
4. BECOMING TOO BIG
If a business becomes too large, then internal diseconomies of scale will kick in causing the average cost to increase which will consequently reduce profit margins – Gross Profit Margin (GPM) and Net Profit Margin (NPM). Internal diseconomies of scale occur inside the firm and are within its control. They are caused mainly due to managerial problems. The large firm becomes inefficient after being poorly managed, and the inefficiencies lead to higher unit costs.
Possible strategies to deal with the problem? Managers must decide whether growth is a desirable objective for the company at the certain point in time in order to maximize returns to investors. The cost of growth must also be considered because it can easily outweigh the expected benefits. Careful planning and Managing by Objectives (MBO) can increase the chances of success when growing the business.
5. STAKEHOLDER CONFLICTS
Business integrations will surely cause many stakeholder conflicts. Any two businesses brought together will clash regarding having different ways of doing things, having different business objectives and priorities, managing in different ways, having different corporate cultures, etc. Therefore, all these differences will result in tons of bigger and smaller conflicts between different groups of people involved in the business operations. Examples of stakeholder conflict will include managers vs. workers, managers vs. owners or managers vs. suppliers. In fact, any major business decision is likely to have a serious effect as it is usually very difficult to create win-win situations in daily life. And with bigger business, there will be a lot of potential situations for the conflict to arise.
Possible strategies to deal with the problem? Instead of growing through business integrations which is very prone to stakeholder conflict as big money is involved, there are other strategic options such as outsourcing or franchising that might provide better growth opportunities.
6. LOSS OF CONTROL BY ORIGINAL OWNERS
‘So, who is the boss now?‘ Large firms usually have many shareholders who present various amounts of power and the need for control. After business integrations, the original owners will lose control of the firm, either partially or totally. It is most likely to occur, if a sole trader takes on a new partner(s) to create the partnership. This may also happen, if a private limited company that was previously owned by family members changes into a public limited company which is jointly owned by large investment firms and individual shareholders from around the world. In the new reality it is the managers and workers who will have it incredibly hard to find out who the real owner of the business is now.
Possible strategies to deal with the problem? Because losing control is an inevitable consequence of changing legal structure of a business organization to gain additional capital, there are two things really that the original owners could do. First, minimize the percentage of the company’s ownership to be sold out to outside investors. And second, try to remain as directors forming the company’s Board of Directors (BOD).
7. MANAGERIAL PROBLEMS
Existing managers may not be able to cope with problems of running large scale business operations. For example, those who have never managed a big company may lack of coordination between the divisions of an expanding business. Too large volumes of information, too many financial records, poor interactions with customers and other business contacts, mess with employee details, not following regulatory requirements and so on. Secondly, the original owners may find it difficult to suddenly adapt to being leaders. They may need to decide about the most important areas of the business to remain heavily involved with, and relax control over others.
Possible strategies to deal with the problem? Keeping track of all operations and using resources effectively requires the right systems. Using established management standards can be one of the most effective ways of introducing best practice. Plan ahead as your strategy needs to evolve to suit your changed circumstances. Establishing new systems, structures and policies may be required. Delegation of responsibilities and empowerment of staff could reduce pressure on top staff. Decentralization will give national divisions more autonomy and will provide workers with clear focus.
8. INAPPROPRIATE MARKETING
The original marketing strategies may no longer be valid for a larger organization. The bigger business deals with a wider portfolio of diversified products, larger number of customers and possible international expansion into exotic foreign markets. Following the same business model is not the only route to growth.
Possible strategies to deal with the problem? Conduct essential market research. Adopt focused differentiated marketing strategies for each specific product, market and country where the business operates.
As you can imagine, there will be many serious problems when the company gets bigger. The dilemma of business growth is one that most managers have to face at one time or another.
