Why are we struggling so much as we seek to grow our business?

by | Jan 4, 2024 | Articles

5-6 min read

The default strategic objective

Most every business includes growth as part of its core strategic objectives. Sometimes that’s simply a knee-jerk following of the crowd. Other times, it reflects something at the core of the company’s culture or history or DNA. Or maybe it reflects some operating reality specific to the company or its industry.1 Regardless of why it’s part of our strategy, many businesses struggle to execute on a growth strategy. Why?

Governors

You have likely experienced the following on an interstate: you and the traffic around you are roughly flowing together at or a bit (or a lot) above the speed limit, and then you encounter an 18-wheeler in the right lane poking along at 55 mph, or maybe 60 if you’re lucky.

Trucking companies know that faster speeds decrease fuel economy, and many of them install governors on their trucks to “govern” the speed of the truck, ensuring the drivers don’t exceed whatever optimal speed management has dictated. The driver may stomp on the accelerator, but the needle won’t budge over the specified limit.

Constraints on growth

Businesses also have “governors,” constraints on how fast they can go, how rapidly they can barrel along the highway of growth. But these are not specified by management. Instead, they are financial, leadership and operational realities management must deal with—and some of them are often overlooked.

In my experience, these constraints fall into three general categories—one quantitative, and two qualitative: financial capacity; risk appetite; and infrastructure maturity.

Financial capacity

This one usually gets the most attention. It’s easier to identify, and it’s something you can measure and model and run scenario analyses about—which folks in a Finance function often spend lots of time doing in a high-growth entity.2 It’s also easier to capture on flashy slides with compelling charts and graphs for the executive team’s discussions with the Board.

In banking, capital and liquidity (funding sources) are the two most common quantifiable constraints, both of which are foundational to a bank’s financial capacity.3 Other businesses have financial constraints specific to their own industries and situations, but capital and funding sources often show up in the mix here as well.

Risk appetite

This one often does not get adequate attention: are both executive management and the Board truly willing and interested in living in and with a different environment? Because growth means things don’t stay the same, and significant growth means things are materially and dramatically not the same.

And that makes for a riskier operating environment for these top leadership echelons—and for the entire organization.

The new-and-different world is likely unfamiliar in important ways.4 Some growth could simply be 2x of what we’ve done before, which involves its own challenges; but sometimes it means 2x of what we’ve done before plus lots of what we’ve never done before—and across a new geographic footprint and possibly with new products or services and likely with a larger team, many of whom might not acculturate rapidly.

Moving into a higher risk environment is not inherently a bad thing. But are both executive management and the Board ready for that riskier reality? This is, compared to financial constraints, more subjective, harder to measure and model, and less conducive to flashy slides. But it’s still real. And it can represent a significant constraint on fruitful growth.5

Infrastructure maturity

And…this one seems to me to be overlooked most frequently of all.

Does the infrastructure of the company—all its functions with all of their intricate combinations of people, processes and platforms (including technology)—have what it takes to operate at a different level?

Management generally and appropriately designs its functions (and especially those combinations of people, processes and platforms) to handle a certain type and volume of activities: so many invoices processed through AP; so many new employees being recruited and on-boarded by HR; so many loans of this variety being processed through loan administration; and on and on.

But significant growth likely means new activities coupled with higher volumes. And all the affected functions may outgrow their current people, processes and platform configurations. We may need more folks plus folks with new and different skills; our processes may not be adaptable for new products; we may not want to rely on the old trusty accounting software which was perfectly fine at $5 million in revenue when we reach and exceed $100 million.

And possibly the most sensitive aspect of this reality: can the existing slate of leaders (from top to bottom) handle the new reality? Are the ones who got us to where we are the same ones who can serve most ably (especially in the same seats) in the new, bigger, more complicated world?

These are real challenges inherent in strong growth. And, again, they aren’t quantifiable and readily modeled and graphed. But they must be assessed and addressed…at least if management and the Board want to ensure fruitful growth.

What to do about it

First, if you’re struggling to grow successfully, acknowledge that you likely have one of these growth “governors” operating unsuspected. Figure out which one (or likely, which ones; possibly all three).

Second, pay attention to all three of these constraints as you consider plans for future growth. If you don’t pay attention on the front end, you’ll very much wish you had later (if you’re even around as part of the entity later when the “dang I wish we’d done that better” discussions are going on.)

Finally, understand that not all growth looks the same and that each growth strategy may have its own bundle of risks. For instance, organic growth affects an entity differently than growth by acquisition. Understand and anticipate and plan for those effects. And make sure you maintain an awareness of all three of the constraints above, even though they may manifest differently depending on the growth strategy.6

In short: count the cost of growth (even the non-quantifiable costs); be careful what you wish for (you may get it, along with lots of unexpected complications and unintended consequences); and be a prudent steward of the business by thinking carefully and thoroughly about what you are getting yourself and your company and its employees and stockholders and customers into.

Growth can be exciting and rewarding. Lead it well.

 

 

No A.I was employed (or harmed) in the creation of this content.

© 2024, Six Arrows Consulting. All rights reserved.

1 I’ve seen an example in banking: lenders (especially rainmaking lenders) live to grow their portfolios of lending clients and balances, and if the bank shuts off the taps for growth, those growth-oriented folks will move elsewhere to find more action (and compensation)—with the same dynamic evident in other industries with their own rainmakers. And when that happens, not only does growth stop, but your company may actually begin to shrink. Not that shrinking is inherently bad. It may or may not be. Just be aware of this possible effect of shutting down rainmakers. (To clarify what causes the shrinking: in banking, loans regularly pay off or pay down; a certain amount of business generation must happen simply to backfill those pay offs and keep the loan portfolio roughly stable. If you aren’t adding new loans, you will shrink your loan portfolio over time.)
2 That doesn’t mean they are necessarily doing them well. Running good, relevant financial models is both an art and a science, an intersection of astute business thinking with strong financial, analytical and modeling skills. But that’s a topic for another blog article another day.
3 Liquidity has been a significant constraint in the banking world for much of 2023 and going into 2024, especially with the broad runoff of deposits as folks seek better rates elsewhere. In a high-growth bank I worked for, our primary constraint was perpetually capital—because we were growing so steadily (and we focused on it and grew capital just as steadily along the way).
4 In banking, for instance, passing certain asset size thresholds means a big step change in regulatory expectations.
5 Notice that careful qualifier: fruitful growth. Management and the Board can barrel ahead with growth that entails more risk than they really want to take on. They will likely grow. But they’ll likely regret it. Or worse. (And the same is true for the next topic.)
6 For instance: as we executed a growth strategy that combined organic and transactional elements at a bank I worked for, we identified, discussed, planned for and carefully modeled the differing financial impacts, and especially the effects on our key financial constraint: capital.