Uncontrolled Business Growth Can Kill. Be Prepared.March 8, 2016 . .
I remember hearing an interesting story about this great company, with a great product and a great vision, who got the contract of their dreams. That dream experiences uncontrolled business growth, and it almost killed the company.
This little company was doing very well selling their products through small retailers and a couple mid-size grocery chains. They were profitable and felt they were ready to make the next step. The contract of their dreams: Costco.
Their pain: as they tried to scale to meet demand, their costs increased at a greater rate than revenue. At the same time, Costco was driving down their prices.
The end result: they were losing money on their dream contract, and it almost cost them everything.
Growth is important, but it must be strategic and managed. Uncontrolled growth can kill you just as easily as not enough sales.
How do you prepare for that dream contract? You build for scale.
1. Go from ad-hoc to systems
When we start a business, we often sacrifice scalability for convenience and speed. Oh, Bob just “does that”. Great… when it’s only 5 minutes, but what happens when it becomes so much that Bob can’t do it all? Or worse, when Bob leaves the company?
Start changing the ad-hoc into easy-to-follow processes. The simpler they are, the easier it is to scale them.
2. Understand your constraints
One of my favorite books is “The Goal” by Eli Goldratt. In it, the protagonist works with a company to understand the ONE THING holding back cash flow. It’s the constraint on the system.
By understanding your constraints, you can know exactly when you will exceed your capabilities (and when your costs will increase disproportionately). By knowing this point, you can have a plan to solve it before it becomes an issue.
For example, you are currently making 60 widgets an hour. Your manufacturing floor can make 100 widgets an hour at full production, because your widgetizer is constraining you. Increasing the capacity of the widgetizer will cost $100,000.
With this constraint known, you can make sure you don’t sell beyond 100 widgets/hour or your costs will increase too much.
Constraints can come in any area – people, processes, resources, suppliers, cash flow etc. The key is understanding where your constraints are and how to overcome them.
3. Invest in optimization when it’s slow
Why is it that many companies only get around to optimizing their processes when they’re so busy that the processes start to break?
When it’s slow, use your most constrained resource (time) to make your company run more smoothly. Think to yourself, we’re going to be strategic and grow xxx%. What do we need to do internally to handle the growth AND improve our profitability?
Look at the organizational design, major business processes, sales methodology, and fulfillment. Automate everything you can. Consider applying Lean (or another methodology) to see where savings can be made.
But what if growth doesn’t come? The investment you’ve made in optimization will reduce costs and errors, which will improve the bottom line (and make you more profitable).
What happened to the company that Costco almost killed? They pulled out of Costco and went back to being a smaller niche player. They survived and are back to being profitable.
Mike is a Technology Strategist, Project Superhero and Cyber-Security Simplifier. He is a partner at Incrementa Consulting a boutique consulting firm dedicated to helping businesses be more successful. You can connect with Mike on Twitter, LinkedIn or the Incrementa website..