Excecutive Summary and Review Question GSLC Chapter 13 Preparing for and Evaluating the

Challenge of Growth

Bernardy

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 Excecutive Summary

Sustained growth : Growth in both revenues and profits over a sustained period of time.

Most entrepreneurial firms want to growth especially in short term that indicated by the sales
revenue. The growth is important because it also indicates the survivability of a firm and its level of
success.

To properly prepare for growth a firm need to :

 Appreciate the nature of business growth : firms need to realize that not all businesses have
the potential to be aggressive growth firms, a business can grow too fast, and business
success doesn’t always scale.
 Stay committed to a core strategy : core strategy defines how a firm competes to its rivals
which determined by its core competencies. It is important that a business not lose sight of
its core strategy as it prepares to grow.
 Planning for growth : Establish growth related plans (anticipating the type and amount of
growth) that indicated by its business plan. Also it's about choosing strategies to pursue
growth as early as possible.

Reason for growth

 Economics of scale : Generated when increasing production lowers the average cost of each
unit produced by buying component part in a bulk to lower its variable cost and lower its
fixed cost.
 Economics of scope : Similar to economies of scale, but the advantage comes from the range
of company's operations.
 Market leadership : Occurs when a firm holds the number one or the number two position in
an industry or niche market in terms of sales.
 Influence, Power, and Survivability : Larger businesses usually have more influence and
power than smaller firms. in setting standards for an industry
 Need to Accommodate the Growth of Key Customers : Sometimes firms are compelling to
grow to accommodate the growth of a key customer.
 Attract and Retain Talented Employees : Growth is a firm’s primary mechanism to generate
promotional opportunities for employees

Managing Growth :

Company must actively and carefully manage its groth it to expand in a healthy and profitable
manner. Some things can be a potential problems and heartaches to business, these can be avoided
by managing the growth process. It’s important for a business owner to know the stages of growth,
along with the unique opportunities and challenges that each stage entails.
Stages of Growth

 Introduction stage : The start up phase where a business determines what its core strengths
and capabilities are and starts selling its initial product / service. The main challenge of this
stage are to make sure the initial product/ service is right and to start laying the groundwork
for building larger organization.
 Early growth stage : Characterized by increasing slaes and heightened complexity. Business
still focus on its product / service while trying to increase the market share. The initial
formation of policiesand procedures takes place, and the process of running the business are
consume more time and attention. Two important things must happen for a business to be
successful in this stage are founder must start working “on the business” rather “in the
business.” and increased formalization must take place.
 Continous growth stage : Indicated by increases of the need for structure and more formal
relationships, pace of growth accelerates. One of the major concern in this stage is resouce
requirement. Often the business will start developing related products and services. This
stage have one tough decision (whether the owner of the business and the current
management)
 Maturity : A business enters the maturity stage when its growth slow. At this point, a firm is
typically more intently focused on efficiently managing the products / service rather than
expanding in new areas. A mature firm often looking for partnering in order to breathe new
life into the firm.
 Decline : It is not inevitable that a business enter the decline stage. A business’s ability to
avoid decline hinges on the strength of its leadership and its ability to adapt over time. A
firm can also enter the decline stage ifi it loses its sense of purpose or spreads itself that it
no longer has competitive advantage.

Challenges of Growth

There's a consistent set of challenges that affect all stages of a firm's growth. The challenges that
business face typically become more acute as the business grows. In general there's 2 challenges of
growing a business :

 Managerial Capacity : To grow, a firm needs a productive opportunity set (set of

opportunities the firm feels it's capable pursuing), however the excecution of this logic have
problem. There's 2 services that are important for a firm's growth
- Entreprenurial services = generate new market, product / service ideas
- Managerial services = Administer the routine functions of the firm and facilitate the
profitable excecution of a new opportunities
The problem is the firm are not always prepared or able to implement its entreprenurial
idea, because of limited managerial capacity.
 As a firm grows, it is faced with the dual challenges of adverse selection and moral hazard.
• Adverse selection means that as the number of employees a firm needs
increases, it becomes increasingly difficult for the firm to find the right
employees, place them in appropriate positions, and provide adequate
supervision.
• Moral hazard means that as a firm grows and adds personnel, the new hires
typically do not have the same ownership incentives as the original
founders, so the new hires may not be as motivated as the founders to put
in long hours and may even try to avoid hard work.

Day-to-Day Challenges of Growing a Firm

 Cash flow management : A firm requires an increasing amount of cash to service its
customer as it grows and need to carefully manage its cash on hand to make sure it
maintains sufficient liquidity to meet its payroll and cover other short term liability.
 Price Stability : If firm growth comes at the expense of a competitor’s market share, a price
competition could ensue.
 Quality Control : An increase in firm activity can result in quality control issues if a firm is not
able to increase its resources to handle the extra work. If a business can't build it's
infrastructure fast enough to handle the increased activity, quality and customer service will
usually suffer
 Capital Constraints : The need for capital is typically the most prevalent in the early growth
and continous growth stage of an organizational life cycle. Different business, need different
amount of capital. Capital constraints are an ever-present problem for growing firms
 Review Question

1. Sustained growth is growth in both revenues and profits over a sustained period of time. It's
important because it's needed to ensure the firm is working in maximum performance
without outsider's help, making the business stable, helps increase market share, increase
power and influence in the industry.
2. I think most firm are not rapid growth firm since the only business that have rapid growth
are only business that have ability to solve significant problem or have a major impact on
their consumers
3. If the firm are growing to fast the downsides are
 Declining in product quality
 Failing in productivity
 Customer complaints are up
 Email starts going unanswered
 Extremely tight profit margins
 Employees dread coming to work.
4. Not all business have potential to be aggresive growth firms because only business that solve
significant problem or have a major impact on their consumers that have potential to be
aggresive growth firm.
5. It is possible for a business growing to fast. The potential downsides are declining in product
quality, failing in productivity, customer complaints are up, email starts going unanswered,
extremely tight profit margins, and employees dread coming to work.
6. It's hard for a firm to grow because to grow the amount of money needed are high,
managerial expertise needed, and they need to keep the balance between infrastructure
development, human resource, budget with the level of the growth.
7. The benefits of planning for growth are to determine the strategies it will choose to employ
as a means of pursuing growth and avoiding growth to fast.
8. Factors that a business needs to keep in mind when preparing growth :

 Appreciate the nature of business growth : firms need to realize that not all businesses have
the potential to be aggressive growth firms, a business can grow too fast, and business
success doesn’t always scale.
 Stay committed to a core strategy : core strategy defines how a firm competes to its rivals
which determined by its core competencies. It is important that a business not lose sight of
its core strategy as it prepares to grow.
 Planning for growth : Establish growth related plans (anticipating the type and amount of
growth) that indicated by its business plan. Also it's about choosing strategies to pursue
growth as early as possible.

Indicators that a business are growing too fast :

 Borrowing money to pay routine operations
  Declining in product quality
 Failing in productivity
 Customer complaints are up
 Email starts going unanswered
 Extremely tight profit margins
 Employees dread coming to work.

9. Firms pursue growth because :

 Capturing economics of scale
 Capturing economics of scope
 Market leadership
 Influence, Power, and Survivability
 Need to Accommodate the Growth of Key Customers
 Attract and Retain Talented Employees

A firm can achieve economies of scale by lowering its variable costs (by buying components
parts in bulk) and the fixed costs.

10. A firm's growth rate affect it's ability to attract and retain talented employee because it's
natural for talented employees to want to work for a firm that can offer opportunities
promotion, higher salary, and increased level of responsiblity. (which indicated by the firm's
growth)
11. If a firm fails in managing growth, the growth can going to fast which can result in :
 Declining in product quality
 Failing in productivity
 Customer complaints are up
 Email starts going unanswered
 Extremely tight profit margins
 Employees dread coming to work.
12. The managerial capacity problem is when the firm growth is limited by the personnel,
expertise, and intellectual resource that the firms have available to implement new business
ideas, but doesnt have enough managerial capacity to implement it.
13. Adverse selection means that as the number of employees a firm needs increases, it
becomes increasingly difficult for the firm to find the right employees, place them in
appropriate positions, and provide adequate supervision. The effect on entrepreneurial firm
is the faster a firm grows, the higher the chances are that an unsuitable candidate will be
choosen.
14. Moral hazard means that as a firm grows and adds personnel, the new hires typically do not
have the same ownership incentives as the original founders, so the new hires may not be as
 motivated as the founders to put in long hours and may even try to avoid hard work. The
effect for the firm can be declined productivity of human resource and low quality product /
service.
15. Because if the firm enter the period of rapid growing, the firm requires an increasing amount
of money and need to carefully manage its cash on hand to make sure it maintains sufficient
liquidity to meet its payroll and cover other short term liability.
16. If the firm are growing rapid, the budget need to be increased ( because the production /
activity will also increased which needed more money). If the cash flow are not adjusted to
the level of the growth, the shortfalls of cash flow will occured.
17. If firm are growing rapid and the growth comes at the expense of a competitor’s market
share, a price competition could ensue.

18. As the firm grow, there will be more activities to do . An increase in firm activity can result in
quality control issues if a firm is not able to increase its resources to handle the extra work.
If a business can't build it's infrastructure fast enough to handle the increased activity,
quality and customer service will usually suffer

19. Adverse selection means that as the number of employees a firm needs increases, it
becomes increasingly difficult for the firm to find the right employees, place them in
appropriate positions, and provide adequate supervision.

Moral hazard means that as a firm grows and adds personnel, the new hires typically do not
have the same ownership incentives as the original founders, so the new hires may not be as
motivated as the founders to put in long hours and may even try to avoid hard work.
20. It is expensive for a firm to grow because if the firm grow, that means there's increased
production and activities to do which require more money.