The merits of growth are not only a consideration for large companies but should also be ingrained in the thinking of the SMME entrepreneur. It is obvious that growth is a natural function of business, particularly in light of the economic need for job creation.
Apart from the usual pressures on the entrepreneur to grow, there can be several other pertinent reasons why management wants the enterprise to grow. The most common forces impacting the growth patterns of new ventures are usually economics, power, employee motivation, exit options and profit.
The environment in which the company operates forces some economic realities upon it. On the supply side, a company must grow to a certain size to be able to buy competitively. Often suppliers require a buyer to purchase large minimum quantities. Small buyers usually pay more for what they buy than do the larger companies. Power is the basis of the economic advantage of size. The small entrepreneur is continually “bullied” by companies of greater size. For example, shopping mall owners show little mercy in the rent charged to a small retailer. The large anchor stores, such as Nakumatt and other department stores, are able to negotiate far less rent per square metre because they are big and necessary for a mall’s success.
Employee morale is another important aspect of growth. As a company grows, more opportunities for promotions and higher paying jobs open up for its employees. As long as the company stays small, employees realise there is little or no chance for advancement. Thus, to retain talent, a company must be able to show its employees a growth plan that will allow them to fulfil their aspirations.
It is often difficult to sell a small concern because it is hardly worth anyone’s time, much less money, to bother with it. The company needs to grow to a certain size for its founders to exit and if the plan is to sell out to the public through a listing on the stock exchange, the company must be large enough to warrant such a public offering.
Profit should not be overlooked as a growth motive. The desire to make a lot of money drives many entrepreneurs to push hard for company growth. As long as the company is small, the entrepreneur may just be working for wages.
There are, however, some significant pitfalls to growth that the perceptive entrepreneur should be aware of. Often entrepreneurs end up with companies larger than they wanted in their eagerness to grow their businesses. Suddenly the fun is gone as they are now managing a large number of people and spending time on things they don’t enjoy doing.
In addition, there are often ranges in which the company cannot increase its profits. It might have made money at a lower level of operations but with the decision to expand, takes on another layer of overheads. So the sales may grow but not fast enough to service the new overheads. In many instances, the costs of growth are reasonable up to a point, after which they rise rapidly and the marginal cost of sales soars. Attempts to grow past this point could lead to ruin. There comes a time when additional growth just costs more than it is worth and careful consideration must be given to the motivation for the growth.
Column by Dr. Cobus Oosthuizen (BCom, MBA, PhD) who is the Dean of the Faculty of Management and Leadership at Milpark Business School, South Africa