It’s been said countless times by many people but is it true that companies have to continually grow to avoid dying? I believe that it’s true only some of the time. What is an absolute truth though is organizations must “do or die.” Doing nothing is not an option if you wish to survive as a business. There are alternatives to growing which focus on improving efficiency, effectiveness and viability. These alternatives aim at improving the cost structure and asset use of the organization. Doing nothing means you have little to no defense against the internal and external forces demanding change. Companies that continually develop eventually reach a maturity that could span several decades before decline. If an organization can make a significant enough change it could find itself in a new growth phase. Many organizations have done this multiple times. Toyota hasn’t always made cars and Wells Fargo wasn’t always a bank.
In the beginning companies must focus on growth to survive. If they are successful there comes a point where they are growing for the sake of growth. At this point there might not seem to be the demand for expansion or enough processes have gone unchecked causing the business to experience a point of diminishing returns. When this happens purchasing the next piece of equipment or staffing another shift doesn’t make sense. Through all the phases of a company’s development they are constantly fighting what Michael Porter calls the Five Competitive Forces. With these five forces (New entrants, Competition, Substitutes, Suppliers, Customers) working against you, maintaining market share and the appropriate cost structure will require keeping customer satisfied and ensuring costs are well managed. In addition to Porter’s five forces there are a number of things that could cause hardships. These could be in the form of legislation or the economy. Sometimes companies do it to themselves by introducing a new product or service that “cannibalizes” existing sales. What most don’t realize is there are more ways to keep a business going than exiting. Companies can market product/services by co-branding, private labeling, or re-purposing the product/service to move into adjacent spaces or fulfill a need as a substitute. Productivity improvements can reduce lead-times placing the product/service as a substitute or provide an advantage over slower competitors. These improvements can also lower costs to offer multiple price points or increase capacity to service larger buyers.
Understanding the economics of your business and industry can help determine what the right size is for your company. There is the combination of fixed and variable costs within each industry that provides for an optimal cost structure ensuring the lowest long-run total average cost while satisfying demand. This is important because there is such a thing as too much or too little capacity. Not having the true balance of capacity at the right time has played out in many industries with devastating consequences such as with the airlines, rental car agencies, and fiber optics. Try to imagine how difficult it would be to start up a pizza or Chinese restaurant. Ultimately business outcomes are a result of managing fixed and variable costs of your business within a specific industry. Economists refer to these business outcomes as taking advantage of economies of scale and scope. Economies of scale means having the right amount of assets to fill customers’ orders while at the same time not paying for idle resources. For example if you rent on average 5 pieces of equipment a month but have 10 on hand then you’re paying for 5 without the benefit of the sales to cover that cost. Each industry has room for only so many businesses. It’s not easy to determine how many companies an industry can support at one time but the limit is usually reached when the only gains come from someone else’s loss. There are economies of scale external to a business that has to do with shared infrastructure, legislation or skills. Companies can influence external economies of scale by partnering with local community colleges to meet unfulfilled skills or support legislation that makes trade more advantages for their industry.
Economies of scope are realized when two or more products/services are cheaper while sold or made together. It could be because materials are better utilized when making two or more similar products. It could also be because two or more products/services are complimentary and customers prefer to purchase them together. Berkshire Hathaway is a case in point that could someday provide a real world example of longevity without growth on a very large scale. Berkshire is clearly growing in sales and net income every year based on a growth strategy of mainly acquiring or investing in well-established firms. As with most mature firms, organic growth doesn’t come easy. As published in Berkshire’s Annual reports a significant portion of their growth comes from acquisitions. So if Berkshire couldn’t find any more acquisition targets would they die? Warren Buffet doesn’t think so. He believes that the competitive nature of the subsidiaries, if no more acquisitions are possible, will allow them to maintain their market share and provide healthy cash flows for decades to come. Significant improvements could possibly be made to any one of the subsidiaries but Berkshire doesn’t seem to believe in interfering with a well-established brand. There will certainly be maintenance costs but it appears no major change initiatives or significant investment would be needed.
There are many strategies organizations can adopt and growth is only one of them. Take the time to decide if growth is right for your company each and every year. First, determine how mature your organization and industry is at the moment. Next, decide if it makes sense to adopt a growth strategy. If so find the right growth that makes sense to your business. If growth isn’t currently an option then look at what you can do to stay relevant. Remember, it’s either Do or Die.