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The growth trap

17 May 2017

The article at a glance

The third in a series of articles by Professor Christoph Loch, Hanadi Jabado and Professor Stelios (Stylianos) Kavadias discusses why you need …

The third in a series of articles by Professor Christoph Loch, Hanadi Jabado and Professor Stelios (Stylianos) Kavadias discusses why you need to ensure that your business growth pays.

Venus flytrap, meat eating plant

Mike is the head of a young company. Five years ago he started a business with Vishal, an old friend and a software genius. Their vision was to build a platform that would increase IT productivity, providing IT managers of SMEs with a toolbox to intervene within the existing IT infrastructure, to measure current productivity, to assess underperforming tasks and target new technology implementations to deliver improvements. Right from the start, both friends were firmly against raising money as they were both set against any dilution of their shareholding and any risk of losing control over their fate. Instead, to fund their venture, they decided to develop a side activity: offering IT productivity consulting services to clients. Five years later, this side business activity seems to have become the core: Mike leads a team of consultants with whom he is on a constant run, going from company to company servicing the neverending needs of a growing customer base with high sales. All these at the expense of Mike’s time and focus, whilst Vishal is growing discontented, scrambling to get Mike’s attention and the required resources to make their original dream happen.

Will, from our first article, has introduced 35 different stock keeping units (SKUs) for his polishing tool introducing various features: different colours, different grips, different sizes to match wood size; he has also invested in packaging to make his tool appealing to retail chains. He is proud of such a wide range for such a basic thing as a wood polishing tool. He spends an increased portion of his time in negotiations with various contract manufacturers iterating on details for production materials, quality levels, schedules and contractual terms. Overall his sales are growing, but the growth is modest and it is becoming harder and harder to track where (i.e. for which SKUs) this sales growth is taking place. Will has also absolutely no idea of how that wide range is affecting his margins and his profits.

The amazing motivation and the incredible efforts driving growth in these two companies are very inspiring. But one can’t stop wondering: is their growth strategic? Or is it ad hoc? Has growth become a challenge as opposed to the way out of challenges?

Mike is so occupied with making ends meet with his “side activity”, running from customer to customer, pulling and pushing a team of consultants, that the delivery of a scalable platform, his original dream, is becoming more and more distant. As far as Will is concerned, he does not have a grip (no pun intended) on the cannibalisation among his 35 SKUs or on the cost of his increased operational complexity.

Many SMEs follow the same path: they find something that works, which they take on to the next client, or for which they introduce the next product modification, or the next customisation, because it seems to work better. They eventually find themselves overwhelmed by a sprawling result that oftentimes even fails to deliver more sales because they have not thought about how the additional business affects their strategy. In order to avoid this proliferation trap, the SME should start with its strategic position (as discussed in our last article), the SME needs to evaluate growth opportunities in the strategic context, with a fit between capabilities and additional market potential.

Thus, Mike needs to remind himself that the consulting business was a stopgap (with limited scalability), a means to an end; “fund the IT platform”, that was his original scalable objective! He can benefit more from spending his effort to understand which additional customers he can reach if he offers a “product”, something that the clients can use themselves, even if the first beta version of the product is limited in functionality. If it turns out that the consulting business does not generate enough funds to subsidise the investment necessary to build the platform, he then faces the choice between remaining a consultant, or seeking outside funds to support the transition from running a service business to a product company.

Will must find out who are the customers he reaches with his 35 SKUs. Are they the same original customers as with the first polishing tool, and is he merely subdividing them into finer groups? He needs to question whether he should offer product variants that add penetration to his existing customers, e.g. different grades of polishing, or adapt and offer his tools to different customers, e.g. from professional carpenters to ‘do-it-yourself’ consumers (price sensitive and quality agnostic), or to metal workers (with special hardness requirements).

Growth questions are uncomfortable. They require thinking about different uses of products/offerings, and talking to groups of people different from those we know well. Such moves, and in fact any strategic growth activity, carry risk and unless we are clear internally on how we are modifying the offering and changing the customer base, we cannot evaluate whether the added growth potential is really worth the extra cost and the risk. Weighing the strategic potential versus the total cost is key to making growth pay. Otherwise the growth journey can turn into a complexity trap.

This article was co-authored by Professor Christoph Loch, Dean of Cambridge Judge Business School (CJBS); Hanadi Jabado, Executive Director of the CJBS Entrepreneurship Centre; and Professor Stelios (Stylianos) Kavadias, Academic Director of the CJBS Entrepreneurship Centre, as part of a series on SME for growth.