To grow or not to grow: that is the question – isn’t it?

Rupert Merson, Adjunct Professor of Strategy and Entrepreneurship teaching
Rupert Merson, Adjunct Professor of Strategy and Entrepreneurship

When teaching entrepreneurship, we focus attention on the trials and tribulations attendant on starting a business. But starting a business is only the start of the trial. For London Business School entrepreneurs who have been able to satisfactorily answer Hamlet’s more famous existential question regarding their new businesses, the more difficult questions come afterwards and are about growth – How to grow? What to grow? Where to grow? How to finance growth? How to manage growth?

Multi-disciplinary growth

Businesses, like business schools, are happiest when the problems they attempt to solve fit snugly within one of the disciplines pre-set by themselves. We all understand in theory the relevance of ‘multi-disciplinary’, but life is easier if you stick to a discipline. Part of the problem with growth is that it is inherently multi-disciplinary. So is entrepreneurship, of course – but at least the multi-disciplinary world of entrepreneurship is confined within the world of the start-up. Growth is both multi-disciplinary and multi-dimensional because as businesses grow, they also change. Businesses need to grow up as well as grow. Growing up demands, not just an understanding of where the business wants to get to, but also a sympathy with where the business is now. To complicate things further, the change demanded by growth is change demanded of a successful organisation. Changing something that isn’t successful is easy; changing something that is growing because it is successful can seem counter-intuitive. It certainly can make for a difficult discussion with the finance director at budget time. Growth will also demand a certain amount of self-examination on the part of the entrepreneur; indeed, if a business that grows needs to change, then nothing needs to change more than the roles of members of the founding team. Alternatively, of course, an honest founder needs to acknowledge that perhaps the best thing to do is to exit. 

Founder dilemmas

For those wanting to stick the course, founders need to start by reconsidering their approach to focus. Founders in start-up mode are best advised to try and strip their propositions down to the bare essentials. Get the quintessence of the business off the ground; the other stuff can be put into a box on the plan called ‘growth’. Once the business is established, that box needs to be opened, and the choices presented inevitably entice the founders away from the focus that helped secure initial success. Those choices can rarely be reduced to anything as simple as an Ansoff matrix.  The choice is complex. The choice adds complexity. New products to existing customers – yes – but which new product? To what extent will a new product actually take you to a new definition of your market or industry? A new set of five forces to sit on top of your old, perhaps? The same products to new customers – yes – but which markets? And to what extent are your new customers not just ‘in addition’ to the old, but different from them? Mainstream customers will behave differently from earlier adopters; bigger customers will have different purchasing processes from smaller customers; in new market segments you might find you have already created new competitors waiting for you to arrive; and, apropos competition, the success that has led to your growth has also attracted new competition there too. Whilst attacking the new market you will need to defend the old.

The growth imperative

Perhaps the most important growth question, however, is the one often not asked at all. To grow or not to grow – this is the question. Some scholars and practitioners refer to ‘the growth imperative’, the assumption of many businesspeople that growth is so fundamental an objective that it needn’t be questioned at all. Topline growth is driven by increased demand for a successful product or service. Growth is evidence of success. Growth also fuels success; ambitious staff demand to be employed by a business with ambitions to grow. Financiers won’t choose to finance stagnation and for most financiers increase in enterprise value is a sine qua non. And although for some entrepreneurs around the world, particularly in frontier economies, just surviving is a stronger imperative than growth, for London Business School entrepreneurs, for whom entrepreneurship comes with significant opportunity costs, some growth will matter more than survival. After all, an LBS entrepreneur can and perhaps should give up on a ‘zombie’ new venture that’s just about got off the ground but is going nowhere and take the King’s shilling offered by consulting or investment banking.

Smaller is more beautiful?

There are, of course, exceptions to every rule, particularly business rules, including the one about the growth imperative. Businesses founded by LBS entrepreneurs need to achieve some scale in order to facilitate the pay down on opportunity costs. But once that scale has been achieved is growth as important? Some are attracted to entrepreneurship because of the (illusion of?) freedom that owner-management implies, and the achievement of personal objectives such as work-life balance can be more compelling than the growth imperative. So, what if financiers demand growth? there are plenty of business opportunities out there for entrepreneurs that mean they don’t have to sign a Faustian pact with the venture capitalists.

And nowadays there are bigger economic and sociological imperatives at play that are perhaps beginning to undercut the fundamental assumptions that prop up the growth imperative and support an entrepreneur who is interested in succeeding whilst staying smaller. Ever since the industrial revolution, the history of economic advance has presumed the need for bigger, more complex organisations. Business schools have been, in part, created to understand and to provide educated human capital to manage consequences. But ever since Ernst Schumacher’s Small is Beautiful, economists, and increasingly politicians, have worried about the ecological costs implicit in these assumptions. In a post-internet age, the assumption of returns to scale has crumbled for other reasons too. Big consulting firms can be threatened by boutiques in a way scarcely imaginable 30 years ago.  Now that networking has shifted from the Oxford and Cambridge Club and an afternoon on the golf course to digital systems and set-ups, the boundaries between organisations as well as the ties that are holding them together are changing. The ways we are thinking about an organisation are having to change, as are our assumptions about growth. Small is increasingly beautiful, in ways not envisaged when Schumacher was writing during the oil crisis in the 1970s.

About the author: Rupert Merson is an Adjunct Professor of Strategy and Entrepreneurship at London Business School. He teaches a range of MBA electives on owner management at LBS and frequently teaches on executive education programmes on strategy and organisational development. Rupert has published a series of books on key management roles in the growing business. His latest book Growing a Business: Strategies for Leaders and Entrepreneurs, was published by The Economist in 2015.