Explosive corporate growth - opportunity or threat?

Table of contents

1.Introduction
1.1 Background
1.2 Research question
1.3 Purpose

2. Literature review
2.1 What is corporate growth?
2.1.1 Active growth
2.1.2 Reactive growth
2.2 Growth strategies
2.2.1 Growth pathways
2.2.1.1 Organic growth
2.2.1.2 Leveraging
2.2.1.3 Merger & acquisition
2.2.1.4 Joint venture
2.2.2 Choosing a strategy
2.3 Measures of growth
2.4 Normal versus explosive growth
2.5 Growth and change
2.6 Change management
2.6.1 Reasons for change
2.6.2 Reactions to change
2.6.3 How to manage change successfully

3. Main areas where problems occur in a fast growing company
3.1 Cash flow
3.2 Management issues
3.3 Human resources
3.4 Working capital management
3.5 Computer resources

4. Key issues for explosive corporate growth

5. Methodology
5.1 Purpose of the research
5.2 Research objectives
5.3 Research design
5.3.1 Secondary research
5.3.2 Primary research
5.3.2.1 Observation
5.3.2.2 Interviews
5.4 Data quality issues
5.4.1 Reliability
5.4.2 Forms of bias
5.4.3 Validity and generalisability
5.5 Overcoming data quality issues
5.6 Research ethics

6. Findings
6.1 Blackwell Publishing Limited, Oxford, UK
6.2 GTI Specialist Publishers, Wallingford, UK
6.3 IT-Solutions, Oxford, UK
6.4 ATU – Auto-Teile-Unger, Weiden i.d.OPf., Germany

7. Discussion
7.1 Strategies
7.2 Changes
7.3 Problems related to growth
7.4 Key issues for explosive growth

8. Conclusion

9. Recommendations

10. Appendix

11. Bibliography

1.Introduction

The title of this dissertation might make one ask about the nature of threat of corporate growth. The answer to this question seems to be clear; explosive corporate growth must be an opportunity, as it seems likely to be connected with considerably high profits and increasing market shares. However, there are several examples that show that corporate growth could also be a threat for companies that are not prepared and therefore fail to exploit the pace of growth.

1.1 Background

As paradoxical as it sounds, one of the toughest problems facing many of today’s most successful companies is success itself. Like living organisms, companies are complex networks of interdependent systems – and unless managers recognize and swiftly implement the changes to those systems required by a sudden surge in demand, a booming business can easily go bust under the train. Recent history is full of examples of companies whose overnight success led to morning-after failure because their managers, like most managers, lacked the training or experience needed to manage explosive growth (Bragg 1999).

An article in the Business Week by Browder and Reinhardt (1998) shows that even some of the world’s best-managed companies like Boeing faced troubles handling explosive growth. After being flooded with orders as the worldwide market for new airliners has grown, Boeing hired 19,500 employees in 1996 through 1997 to double its production schedule. However, for a variety of reasons, Boeing had to shut down its 747 and 737 production lines for a short time so that workers could catch up on out-of-sequence work while waiting for back-ordered parts to arrive. That delayed deliveries to several airlines, and forced Boeing to pay an estimated $300 million in penalties to customers.

1.2 Research question

The above example shows briefly the effects explosive growth can have on a company that is not aware of the upcoming increase in demand for its products or services.

This dissertation therefore wishes to achieve the following objectives:

1. Establish what is understood by corporate growth and explosive corporate growth and show different growth strategies.
2. Show the importance of change management by describing some effects of change and ways of successful change management.
3. Identify some pitfalls and areas where problems are likely to occur in a fast growing company.
4. Determine some key issues for explosive corporate growth.
5. Give recommendations as to how companies can prepare themselves in order to take advantage of explosive growth and to prevent it from being a threat.

1.3 Purpose

The author chose this topic as its importance becomes clear when problems associated with normal growth are being considered. Today’s business environment, however, requires more flexibility and managerial skills than ever before. This topic is therefore of great importance to managers of companies operating in any business as explosive growth is not necessarily associated with a particular industry.

2. Literature review

2.1 What is corporate growth?

This chapter addresses the first research objective, establishing what is understood by corporate growth and explosive corporate growth and showing different growth strategies.

Recklies (2000) defines two categories of growth – referring to the reason that caused a company to grow. On the one hand growth is being planned – this is ‘active growth’, on the other hand companies can be forced to grow in order to meet the demand of the market, therefore this is called ‘reactive growth’ (Bennett, M. 1989). Bennett further states that the growth process is different for every business and therefore various growth strategies refer to either of those categories. The developing cycle of a company with its various possibilities is shown in figure 1. Related growth strategies are explained later on.

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Fig. 1: Developing cycle of a company

Source: Bennett, M. 1989

2.1.1 Active growth

Before a company starts doing business there is a vision of what is meant to be achieved (Horváth 1994). This vision is successively put in concrete terms, and objectives are defined in the next stage as can be seen in the pyramid of goals that is depicted below.

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Fig. 2: The pyramid of goals

Source: adapted from Bea and Haas 2001

In most companies growth is, amongst others, an objective which is clearly stated in the company’s mission statement (Bea and Haas 2001). Phrases like: “Our objective is to become market leader in XYZ” are a clear indication for planned growth.

There are only a few businesses that do not alter their size for various reasons. A corner shop’s size, for example, is restricted by the size of the shop floor. This is just one example of businesses that would rather define a quantified profit than a growth rate as an objective.

Recklies (2000) stresses that growth for its own sake is not a wisely chosen objective; moreover, growth has to fit into the company’s development and has to reflect the resources available. Ideally, growth is planned, and part of a company’s strategic development.

2.1.2 Reactive growth

Certain circumstances in the environment of a business can force a company to grow. Changes in legislation, increased demand of the primary customer or the emergence of a competitor can require growth, if only to deal with the competition (Bennett, M. 1989). Porter’s five forces model (depicted in figure 3) helps to identify possible reasons that might make growth necessary (Porter 1999). According to Johnson and Scholes (2002) growth is not optional in many markets. If an organisation chooses to grow more slowly than its competitors, it should expect the competitor to gain cost advantages in the longer run resulting from experience.

As reactive growth is not planned initially, companies facing the sudden need for growth are more likely to fail, or at least get into trouble compared to their planning counterparts.

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Fig. 3: Five forces model

Source: Porter 1999

2.2 Growth strategies

Companies can grow in various ways, and it almost never happens that a company becomes an explosive growing one by accident – Bragg (1999) states that there is a great deal of preplanning by management necessary to get into this position. Ahrens (1999) goes a bit further and states that most rapid growth companies achieve their status as they want to. Their selection of rapid growth is a deliberate strategic decision aimed at becoming a large or dominating player as quickly as possible. Where explosive growth is not the result of a deliberate strategic choice, it usually occurs simply because the opportunity becomes apparent. According to Ahrens (1999), it takes an entrepreneur to recognise the opportunity to grow rapidly; this might be the result of a unique offer or just having the right product at the right time. Providing the management wants to grow, the strategy will emerge with time.

There is a debate on the benefits of engaging in strategic planning, especially in smaller organisations (Richardson 1995). Mintzberg (1979) is one of the leading members in the “anti-planners” camp arguing that strategic planning is bureaucratic when what is needed is fast, flexible and incisive action. Countering this is a wide range of literature stressing the benefits of strategic planning in business. Schwenk and Shrader (1993) for example carried out a meta analysis of existing studies that found, on balance, strategic planning was positively linked to growth.

2.2.1 Growth pathways

For many managers growth means getting larger in size by expanding the existing business. This could entail taking over the premises next door, moving to a bigger factory or employing more people, whereas for others it means starting up a branch or similar business in the next town or district (Bennett, M. 1989).

Hax and Maljuff (1999), cited in Canals (2000), propose a conceptual framework based on the specific directions followed by growth. As shown in figure 4, the first distinction made is between expanding in existing business and diversification. The latter can be subdivided into two categories. Whereas the first one is related businesses, the second category is non-related businesses. This type of decision includes those that give rise to conglomerates like the Dr. Oetker corporation in Germany.

The expansion in existing businesses offers three main alternatives: changes in the company’s products, in the geographical mix and in the degree of vertical integration. These options can again be subdivided as depicted below.

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Fig. 4: Growth alternatives

Source: adapted from Canals 2000

Hagel’s (2002) approach is a slightly different one. He identifies three main growth strategies: organic growth, leveraged growth and mergers and acquisitions. These are discussed in the following.

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2.2.1.1 Organic growth

Successive increase in business is called organic growth; that is, with few or no acquisitions. It is only a company’s operations and actions that cause its growth, and these actions may include adding products and/or territories. New products need to be developed as they follow a product life cycle (see figure 5).

According to Jones (2000), innovation is almost always necessary to grow organically. Geographical changes take place by adding territories in order to sell the same product in more places to penetrate the market. A typical example of this is Coca-Cola – sold in every corner of the world. Bragg (1999) believes that if it was not a branded product, it would have already reached the end of its product life cycle and a new product would have been necessary.

Fig. 5: Product life cycle

Source: Bea and Haas 2001

A move to vertical integration needs to be approached with great care. According to Hardy (1997), it is sometimes true that ‘it is always cheaper to do things internally’ but not always. He further points out that when a manufacturer makes an acquisition which moves him into a technology which he does not fully understand, and therefore he cannot manage with full confidence, he may meet a number of hidden problems and consequently extensive hidden costs.

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2.2.1.2 Leveraging

Some companies have been successful in applying leveraged growth. As Hagel (2002) points out, this approach begins with the realization that ownership of business assets is not always necessary to support corporate growth. For the purposes of discussion, leveraged growth or leveraging means business leverage, not financial leverage in the sense of loading up on debt to finance the acquisition of assets (Köller 2002).

Recklies (2000) divides leveraging into franchising and licensing. These two methods can be means to grow by adding territory, as Bragg (1999) believes that it is a relatively uncomplicated way of growing fast and supplying several markets. Barrow et al. (1992) categorises Franchising as a means of financing growth. The example of Steve Bishko’s Tie Rack proves this right. The idea of choosing franchising as a way to grow brought about ₤7m of new money, which is completely risk- and cost-free for Tie Rack.

At least two levels of people are involved in the franchise system: (1) the franchisor, who lends his trademark or trade name and a business system; and (2) the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system (International Franchise Association).

Barrow et al. (1992) describe licensing as a way to accelerate growth of the company while minimising the risks associated with either acquisition or new product/ development. In licensing you buy the rights to make and market a proven product or concept that is usually already some form of intellectual protection like patent or copyright in place.

These methods are fairly easy ways for a company to grow as a large number of branches can be established in a very short time – considerably increasing the level of awareness, the market share and turnover, as well as profits. When using these methods it has to be ensured that all parties adhere to the contractually agreed and specified level of quality. Here lies one of the biggest risks, as the franchisor’s reputation will suffer from any mistakes made by any franchisee. The food sector in particular is considered to be highly sensitive. As published in December 2003 (www.FinanzNachrichten.de) one case of BSE in Washington had a great negative impact on McDonald’s sales and in turn enhanced sales of competitors like Pizza Hut and KFC.

2.2.1.3 Merger & acquisition

According to Olfert (2001) and Gabler (1993), a merger occurs when two corporations join together into one, with one corporation surviving and the other disappearing. The assets and liabilities of the disappearing entity are absorbed into the surviving one. The intention of a merger or acquisition is to add value to the company.

An example of growth by acquisition is represented by Wayne Huizenga, who used it to build Waste Management, Blockbuster Video, and AutoNation into giant companies (Bragg 1999). However, as a merger is practically irreversible a very careful choice has to be made. According to Bennett, M. (1989) buying an existing business may be the quickest route for achieving growth as the company is already set up with equipment, employees, customers and track record. However, there are a number of important factors involved in buying an existing business. Apart from a carefully undertaken appraisal referring to the legal issues and financial situation of the other company, issues like culture and management need to be considered as well. Hardy (1997) points out that it should be recognised that a very high proportion of acquisitions, probably a good majority, are unsuccessful. Barrow et al. (1992) adds that buying a company is certainly not always a sure-fire winning strategy, as although 90 percent of acquisitions took place under friendly or fairly friendly conditions, only 55 percent were eventually rated as successful or very successful by both buyers and sellers as shown in the table below.

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