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3 Ways Growth Can Ruin Your Business

Growth is vital for business health, but only if it’s done in the right way

14Feb

Growth is a must for most companies, whether it's mature organizations or startups. However, many tend to forget that as much as scaling can contribute to their business success, it can also be destructive. Positive changes in earnings, cash flow, reinvestment processes, and overall expansion are common indicators of growth, but often, companies get overwhelmed and fail to spot when these changes aren’t for the good.

So what can cause unhealthy scaling?

Growth As The Main Target

In 2003, Crumbs Bake Shop opened their doors for the first time in Manhattan to sell their signature cupcakes. At the time, cupcakes were New York's favorite type of baked good, so the brand was rapidly earning the support of celebrities and the media. The business was expanding and enjoyed high demand for their premium baked goods.

According to the New York Times, the company went public through a $66 million merger with the 57th Street General Acquisition Corporation in 2011, and by 2013, they operated in 70 locations. Physical expansion and aggressive sales strategies remained a top priority, but a year later, unable to compete and retain customers' interest, Crumbs Bake Shop filed for bankruptcy and closed their doors. They had a reincarnation in recent years, although their net income growth stood at -92.22% as of March 2014 and currently have a small online order cupcake business.

Despite the bakery spotting a good business opportunity at the right time when their niche product was on the verge of popularity, once the trend was gone, there was little to offer. By the time the bakery expanded geographically, they struggled to make a commercial success of their own growth, and instead continued pushing for the wrong opportunities. The all-time highest share price managed to reach $13.5 ($13 per share at IPO) and plunged to 27 cents (as of June 2014).

A lesson to learn from Crumbs Bake Shop is that new product trends occur as fast as they fade, and if a company is unable to innovate, but pushes for further expansion, this can simply accelerate failure. Also, the company overlooked an opportunity of expanding into the digital space, so whilst competitors were setting up online stores and delivery services, Crumbs Bake Shop chose to focus on their physical presence.

As essential as growth is, it's never the only element that contributes to a company's success.

Growing Without Understanding Purpose

Before evaluating the potential of a business strategy and measuring a company's capabilities in the market, there must be a clear understanding of a company's purpose, such as how scaling and strategic instruments are going to fit together without a conflict, so growth is manageable.

Today, there is an increasing number of companies, especially in the tech sector, who are designed for quick growth. Smart ones always have a purpose to follow which can help them to manage this rapid growth. A company's purpose should never be confused with business targets or financial goals, instead, it serves to answer questions like: 'Why is this company on the market?', 'What is this company trying to achieve on a global scale?' and ‘Is this purpose clear on all levels, including employees, investors, and the C-suite?’ Answering these make for a more achievable and planned growth.

Take Google as an example. Their mission statement says: 'Google's mission is to organize the world's information and make it universally accessible and useful.' If we break it down, Google offers their products globally, which fulfills the 'universal access' part. In order to organize large amounts of data, Google maintains databases, uses existing algorithms and develops new ones to deliver requested data accurately and provide reliable services.

As technology and users' needs evolve, the company also recognizes their need for continuous innovation. One of the examples, Google's introduction of speech recognition products, where the OK Google search engine extension and Google Home voice assistant hardware have become relatively successful whilst also fulfilling the company's purpose and accelerating growth.

Growing Despite High Volatility

In today's business environment, business set up costs are increasingly lower than in the past, thanks to digitization and high demand for software, applications, and online services. This explains why so many tech companies don't mind growing exponentially - their operational expenses are lower, but profit margins are higher, so volatility risk is comparatively low. However, many don't realize that this formula cannot be applied in all cases, so companies often miss or ignore high volatility and grow as fast as they can, in the hopes of increasing their valuation and retaining interest for future investments.

Even though Airbnb, Uber, and Facebook can afford exponential growth, it would be wrong to think that their model can become commonplace. A company can only survive growing exponentially if their profits are capable of scaling rapidly. This means long term success rather than over a few quarters.

The best growth is reliable, steady, and stable - it's not what everyone can achieve, but it's something everyone should be aiming for.

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