Friday, July 04, 2008

Can firms grow too fast?

Notwithstanding our volatile and depressed equity markets...

One of the good things about working in growing economies like India is the sort of interesting things you get to hear about managing growth - things unspoken in mature markets. Instead of grappling with growth challenges, here one gets to ask questions such as in the title line.

But this is an interesting question: Can a firm grow 'too' fast for its own good? Over the past few months, I've been fortunate to be exposed to industries and firms which are witnessing explosive growth; and I've heard people talk terms such as 'sustainable growth' and 'manageable growth'- terms which you'd typically hear only in the context of national economics.

But after all, firms resemble nation states, in a sense. Just as countries can overheat if fiscal and monetary economics are not managed to suit growth (these days, they can overheat otherwise as well, as we've learnt to our chagrin) firms too can overheat their operating models when faced with huge unprecedented growth.

Ultimately, a firm's operating and financial structures are designed for a certain range of volumes. And if these structures are not modified in time to support a much higher range, it is likely that they'll strain; just as short-term mismatches can drive up national inflation, such strains can drive up internal cost to serve, destroying firm value.

Another issue with growth is the change in the nature of the firm in relation to its size. A small firm is quite different from a medium-sized firm, which is quite different from a large sized firm: in its operating structures, in its human capital and policies, in its customer relationships, in its ambitions. As firms rapidly make the transition from one-stage to another, the sheer nature of the firm changes. People used to the informality and flexibility of the startup suddenly get saddled with policies and formal mechanisms. Internal divisions suddenly grow into the size of small firms ...

Of course, nobody wants to give up on growth (I doubt if any nation state would either) - after all, who knows how long it would last. But is it sometimes detrimental to grow too fast? Economies like China and India have been caught at the raw end these days from unmanageable growth. Statements have been made on sacrificing growth to rein in overheating. Should growing firms also 'manage' their pace of growth? Of course, firms dread being left behind in the marketplace, but would slowing down sometimes make you a 'better' firm?

The below is from the Ram Charan chronicles :

"We were driving to the airport in Charleston, W.Va., and he said to me, 'Why are you trying to grow this thing so fast?' I was sort of shocked by the question. Three weeks later my financial guy came to me and said, 'We don't have money to meet payroll.' Charan realized we were growing too fast, that's why he asked me that question."
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