Why do entrepreneurs need a growth strategy?
Growth is the very essence of entrepreneurship. Growth is the only vehicle that will deliver returns to your investors. And as we discuss in a previous Article, uncertainty and risk are a vicious cycle in high growth-potential ventures. Uncertainty and risk increase because the number of elements in the venture increases, the differences among those elements increase, and the interdependencies among those elements also increase.
Thus, high growth leads to managerial complexity, which requires entrepreneurs to establish business practices and organizational management systems to get a hand not only on the increasing organizational complexity, but also on the increasing macroenvironmental complexity and risk.
The beginning, launch, and transition to growth depend on the industry, the assets, and marketing team required, and on the time to acquire the industry-specifics know-how. As Bhide points out, Dell used his college dormitory room and less than $5,000 to launch Dell Computer in less than a year.
Sam Walton was first a franchisee of the Ben Franklin variety store chain, and he spent years developing the know-how of operating a retail store, therein discovering many opportunities in discounting before launching Wal-Mart.
However rapid growth occurs, once it does, entrepreneurs face unusual challenges. Like the weightlessness of space, it is unknown until you are there. But you can and should prepare to grow, to change, and to handle such challenges.
How Fast Is Really Fast?
One thing for certain, successful high growth-potential ventures do not stay small very long. When they do launch they can be as exciting as a rocket racing to the sky.
Siebel Systems tops the list of the fastest-growing technology companies in the United States. In 1999 they recorded a five-year revenue growth rate of 782,978 percent! Founded in 1993 with $50,000, they had $391 million in revenues in 1998, and by 2003 had nearly $2 billion in revenues, with 8,000 employees working out of 136 offices in twenty-four countries.
Each year since 1982, Inc. magazine has recognized 500 of America’s fastest-growing private ventures. The 500 ventures on the 2002 list had $12.3 billion in sales and employed just over 80,000.
The averages per each company were:
- five-year growth, 1,521 percent
- sales, $25 million
- age, 8 years old
- number of employees, 160
- the average revenues per employee were $154,375
From the top ten we prepared the following averages:
- five-year growth nearly 9,000 percent
- sales, $56 million
- age, 7 years old
- employees, 240
- the revenues per employee were a phenomenal $2,321,408!
In fact, these top-ten ventures accounted for just over $500 million in revenues. Five years prior, each one had about ten employees and $695,000 in top line sales. This means they had about $70,000 per employee in the early stage.
So on the average, sales per employee grew some 3,216 percent during the five years prior. And employee growth meant that, on the average, each venture had to be hiring a new employee per week for five years straight!
Defining Growth Expansion Strategies
With respect to growing, Bhide tells us that there are two basic types of business ventures.
– One is the “precocial” venture, which, like a horse, is relatively mature and can walk the day of its birth. These ventures are capable of moving on their own when launched.
– The “altricial” venture is born helpless, naked, and blind. These ventures take years to build the assets and proceed sometimes through management of “trial and error” rather than through the execution of a growth strategy.
A growth strategy is about investing in a broad base of assets, developing professional management know-how and mechanisms to coordinate these assets, and having a formal plan in place to overcome growth constraints.
Instead of relying on opportunistic adaptation to exploit niche opportunities by chance, successful entrepreneurs have to formulate and implement ambitious long-term strategies.
Growth strategies according to the Inc. 500 winners:
- 71 percent said that they actively and systematically search out new markets for existing products or services
- 45 percent actively and systematically search out new products or services
- 38 percent concentrate on selling “more of the same” to existing customers
- 12 percent seek growth through an acquisition or merger
The growth-through-acquisition strategy, like Cisco’s “cookie-cutter” approach, involves numerous risks:
- including difficulties in integrating the operations, technologies and products of the acquired companies
- increasing capital expenditures to upgrade and maintain combined businesses
- increasing debt to finance any acquisition
- diverting management’s attention from normal daily operations
- managing larger operations and facilities and employees in separate geographic locations
- and hiring and retaining key employees
Global expansion, which is creating and developing opportunities through multinational business activities, is perhaps the most difficult expansion strategy. We will discuss this topic in another lesson.