Why do businesses suddenly stop growing after long periods of expansion? Economists have some good explanations which they stick to like dogma. For instance, they argue that over time, businesses grow so much that they begin to want to preserve their “base business” and are afraid to come up with new ideas just in case they cannibalize it. They also make the point that it becomes harder and harder to expand a business through price increases once the market becomes more saturated over time. As new competitors enter, companies have fewer options for raising prices.
But is this the whole story? Is it some inevitable fluke of the market that companies stop growing and have to content themselves with a future of stagnation? Do the arguments of economists even make sense?
Let’s take the first argument – the idea that companies stop growing because they’re afraid to innovate for fear that they’ll cannibalize their own business. Although this view might make sense in a world of complete isolation where a company is operating by itself, this is never the case in reality. In most markets, many businesses could also quite easily “cannibalize” other company’s businesses by innovating. And even if a company is the only business in a particular sector, that’s no guarantee of safety. With the way that technology is developing today, there’s no knowing where the next disruption might come from.
The other argument – that competition whittles away profits – doesn’t make much sense either. Apple is in an extremely competitive market, the smartphone market, and it yet continues to make multi-billion dollar profits year after year. For Apple, expansion hasn’t come to a halt because of a saturated market: instead, it’s accelerating, with many predicting that by 2020, Apple may be the world’s first trillion dollar company.
Why Do Businesses Stop Growing In Reality?
Because the traditional arguments don’t really make sense, many analysts are looking for alternative explanations for why expansion comes to a halt. They’ve settled on something dubbed the inflection point model by entrepreneur.com. What usually happens is that as a company grows, it reaches certain critical stages where processes need to change in order for expansion to continue. The “inflection point” is essentially a choice: the company can either decide to adapt, change and grow, or stop growing entirely and persist in a state of mediocrity – not something anybody wants.
The problem with inflection points is that they require creative thinking. Teams can’t just keep doing what they do, but on a bigger scale – they often need to change in fundamental ways to keep the business growing. This often means a change in attitudes as well as processes.
Here’s how to prevent your business from getting stuck and keep it expanding.
Stop Bootstrapping And Start Borrowing
Companies of a certain size can afford to bootstrap their way up, saving money as they go to invest in new projects, negating the need to borrow. But, in the long term, this is rarely a feasible approach. At some point, your company is going to have to borrow to buy equipment, logistical services, or even another company to remain competitive. But if you insist on continuing to operate as a startup, you’ll stay small.
Finance options abound. You can find details at RobSinclairFinance.com.au if you need further reading. But the basic point is that there are dozens of different funding options for companies, tailored to their specific activities. Finance is a lifeline that provides your business with the capital it needs to take advantage of opportunities as and when they arise, rather than waiting for your finances to catch up. The last thing you want is another company taking advantage of an opportunity before you can because they decided to borrow and you didn’t.
Begin A Cultural Overhaul
The atmosphere at startups is very different to the atmosphere in large businesses. In a startup, you can get away with being informal and speaking to your colleagues and clients as if they are your friends. But in large businesses, the sheer number of people means that attitudes often have to change.
All companies start off as startups at some point, so how do they make the transition? Simple. Through a cultural overhaul.
Cultural overhauls almost always come directly from the top. They involve the CEO and executives sitting around a table a thrashing out a set of new working practices and policies to be rolled out over the course of several weeks or months. These policies are designed to get their people out of a rut, improve professionalism and make sure that the company has the human resources to continue attracting new talent.
Often, employees on the front lines will need to be coaxed into new methods of working and may put up resistance. The task of managers and executives is to get individuals employees excited about the progress of the business and help them see their careers in a new light. Generating intrinsic motivation is always the best solution.
Change The Business Model
In business, experienced entrepreneurs always say that the way you get your first 20 customers is completely different to the way you’ll get your next 2,000. The reason for this is scale. As your business grows, it adopts new methods of operating. It simply isn’t possible for the CEO to deal directly with all 2,000 individual customers on the books. However, some CEOs fail to delegate and, as a result, they end up losing out on potential business.
This isn’t the only hurdle that expanding businesses could run into. As businesses grow, new production and distribution methods become leverage-able. But if your processes do not evolve to take advantage of these methods, then you’ll struggle to keep your costs down enough to justify expansion. The way you market to customers, the technology you use, and your distribution channels, all need to change as you increase in size. You may have to outsource certain tasks, especially areas of the business which aren’t performing as you might hope.
