We have all heard the mantra, “If your business isn’t growing it’s dying.” In today’s highly competitive business environment that is true. Business growth is much more than sales, revenue, and profit. While those are important so is the ability to sustain them. In point of fact if you can’t sustain it, then it doesn’t help your business. So while aggressive growth, and I define aggressive growth as an average of anything more than 20% a year, looks exciting and appeals to your emotions, if you cannot sustain growth then you are harming your business.
How do you sustain your business growth?
Sustainable growth is primarily controlled by your capacity. Capacity is nothing more than the maximum level of output that a company can sustain to make a product or provide a service. Good capacity takes that further and adds words such as error-free, minimum production waste and the shortest amount of time. What we know is that your sustainable growth cannot exceed your capacity.
Simply put capacity isn’t about the dollars it is about the product or service you produce or provide. Capacity by definition is never more than 100%. (Mathematically you can determine that, but anything over 100% is unsustainable and highly prone to costly waste and error. )
One of the easiest ways to measure capacity is to simply use the total production quantity for a given period method. For example, if your plant can produce an average of 20,000 pieces per week, then your total capacity is 20,000 pieces per week. To know that you must know how many pieces you can produce. Production is driven by labor (who will operate your machines) and time. Time is not only the time it takes your machines to produce or your service providers to provide, but it also measures customer demand, sometimes called Takt time. Takt time is calculated by dividing the available working time by the customer demand during that time.
Another method of determining capacity is to simply multiply the number of production machines you have by the number of available shift hours ( number of employees times assigned shift hours) This will give you your daily production hour capacity. This works well when your production facility has multiple products that it is making for customers and each product has a different production time.
Your ability to meet customer demand is a critical component of your capacity and why you must control your growth. You don’t want to realize that you cannot meet customer demand after you’ve obtained or purchased new business.
Growth comes in many forms. You can buy growth, commonly through Mergers and Acquisitions (M&A); or you can grow organically. The difference between them is:
M&A – A merger is when two companies combine as equals to form an entirely new company. These are rare. An Acquisition is when one company buys another through purchasing its assets or its stock. In both cases, the strategy is to add talent, resources, market share and other tangible advantages to the business. Commonly acquisitions are asset purchases where the acquiring company buys all of the assets of another.
Given that some 90% of acquisitions fail this can be a risky strategy for small businesses. A rare and decidedly poor method of acquisition is when one company buys a “book of business” from another. These fail at a higher rate than do asset acquisitions. With that said a well planned and executed acquisition can be a good growth strategy
Organic growth – According to Investopedia “Organic growth is the growth rate a company can achieve by increasing output and enhancing sales internally.” Organic growth performs well over the long term, even though that growth may be slower. It often provides a better return than does M&A activity as demonstrated in a 2017 McKinsey Article “Mastering 3 Strategies of Organic Growth.”
For most small business owners organic growth remains the better strategy and one that can be more easily managed when considering the capacity of the business to manage/handle more work. The business can control the pace of growth by controlling the type of work it “sells” by focusing on customers who bring greater and consistent value while offering products or services that meet customer demand in certain targeted areas. An example would be consistent orders from repeat business while also gaining new customers who also demand consistent products or services of a like nature.
Regardless of the strategy, you choose the key to success in business growth is ensuring that you do not exceed the capacity of your business. While suddenly adding $4M in new business to your already $4M of an existing business may look good on paper, the reality is that you more than likely will not be able to meet your customer demand and as a result lose customers, lose business and see a decline in your business reputation. This is especially true if your strategy is to only buy business from competitors and not buy their assets (labor, equipment, facilities, etc.).
Growth is important to your business, but it must be the right kind of growth. I am always reminded of the parable of The Tortoise and the Hair; slow and steady wins the race.