3 Reasons Companies Don’t Grow

In my experience, there are 3 reasons why small firms stop growing. I’m talking about companies with up to 100 employees or so. I don’t know about larger companies, I suspect at that scale the dynamics are different. 

Reason #1 They have no more customers to grow into.

They’ve exhausted the market. This is common with the retail business model, or with companies that serve very specialized niches. No one is going to drive 200 miles to come to your knitting store; so if all the knitters in a reasonable driving distance already know about you and shop with you there’s not much growth potential. This doesn’t mean you can’t continue to do well. Just that your customer base won’t increase unless you make a significant change in the number of people you serve. To do that usually requires a change in your business model: adding a completely different set of products, going on-line, opening a new location etc.

Reason #2 They don’t understand how to scale.

Companies don’t grow like kids do. Kids grow in a linear fashion – sometimes slower sometimes faster, but always taller till they stop. Companies grow more like insects. They go through different phases (egg, caterpillar, chrysalis, butterfly), and in some of those phases profit goes to hell. Fast.

Here’s how that happens: At certain stages in a company’s growth it hits the right scale where it’s profitable. Then it grows a little more and has to add costs that are out of proportion to the increase in revenue. Sometimes it’s just a matter of timing: the costs come first but revenue comes in after a bit. Sometimes it’s a matter of increments: the costs come in chunks and if you just add a little revenue, you’ll never cover the costs no matter how long you wait. You may have to add several chunks, and lots of revenue to get big enough to be profitable again. In other words, you can’t be profitable with a little growth – you need a lot to be profitable again.

Consider a company that brings on additional sales people. There’s a lag time between when those people get trained and when they start bringing in sales. That’s a matter of timing. But after they start selling, the company has to produce what those new customers just bought. This generates more variable costs – COGS etc. Variable costs are usually not a problem for profitability (cash flow maybe but not profit). But there may be additional overhead “chunks” associated with the increase. More people may be needed to generate invoices, do collections, and provide other services. Perhaps a new manager is now needed because there are more people making product. It might be that they haven’t brought on enough sales people to generate enough sales to cover all those extra costs. That’s the incremental problem.

Because of the chunking problem, even when growth is steadily increasing, profit can go up and down like a roller coaster. At one point a company is at what I call a “plateau of profitability” and a little later in the “valley of death.” If a company doesn’t understand where the plateaus are, it can grow itself right out of cash (and hence out of business). But other times an entrepreneur will have an intuitive sense that such growth will present a problem so he or she will just not bring on those extra sales people in the first place, so no growth. The company can remain at one of the profitable plateaus: stable, and profitable, but not growing.

Something else I’ve seen that compounds the scaling problem is that entrepreneurs often don’t know when to spend money and when to be frugal.  People generally start a company by being tight with money. If you’re old enough to remember a buffalo nickel in the US you’ll likely have heard the phrase “Squeeze a nickel till the buffalo farts”.

This is a positive attribute in many situations. But sometimes it can be poison. The reason is twofold.  First if you’re in a “valley of death” you want to spend enough to get out of it as quickly as possible. Being frugal can just prolong the time your company isn’t profitable.

Secondly there are many situations where you get more than what you pay for.  Often good salespeople are twice or even three times as expensive as mediocre ones but they can generate five times as much revenue.  The same can be true of computer programmers and other professionals, especially when their work is creative and not just repetitive. Better equipment may be more expensive, but have better productivity or break less often. So it’s possible to stifle growth by being penny wise and pound foolish.

The solution to the scaling problem is to have an accurate model of your business at its various stages and learn where your plateaus of profitability are. Then rest on a plateau until you  have the resources to grow all the way through the next valley so you can rest on the next plateau.

 The third reason companies don’t grow is that they don’t want to. 

Surprisingly (to me anyway) 48% of small business owners surveyed by the Hartford Insurance Company said they did not want their company to grow. Turns out, that’s a wonderful place to be. Your company is just the size you want it.  

But a more insidious form of not wanting to grow occurs when owners think they want to grow but don’t really want to do the things that are required to run a larger company. Often this means putting more time into management, or hiring, or strategy when an owner would rather spend his or her time building product or making sales.  

The solution here is to determine what you really want and then build a company to the scale that allows you to accomplish it.  By “what you really want” I don’t mean just the dollars, but where you want to spend your time and your energy.  In other words take those desires that affect your business decisions in non-conscious ways and make them conscious.