The curse of growth

Cristina Cruz. Professor. IE Business School

7 September 2007

According to the GEM Project (Global Entrepreneurship Monitor), the most important international observatory in the world for entrepreneurship, entrepreneurial activity in Spain is developing slowly but positively, with around an average of 600,000 enterprises and/or businesses appearing each year.

This is undoubtedly good news, although what really matters is the final net figure, i.e. not counting the enterprises that disappear each year. The figures are optimistic, since, according to the GEM report, new Spanish enterprises reduced their ´mortality´ rate by 16.2%, which confirms that the entrepreneurialism phenomenon is entering a healthy stage. Despite this positive trend, ´fledgling mortality´ rates among enterprises remain very high, since the statistics show that approximately just over half the businesses created in Spain remain in operation four years after they have begun their activities.

The problem is that enterprises often focus on growing, but not on how they should grow. This phenomenon is even more acute in periods of economic boom, when the abundance of opportunities for growth focuses entrepreneurs´ attention on top-line results, i.e. on increasing turnover, while neglecting other factors related to profitability and efficiency. This is when the enterprise faces a serious problem: uncontrolled growth.

The fact is that growth is not a panacea that solves everything and, taken to extremes, it can be counter-productive, since over-expansion can also be responsible for failure in business. Errors in production, in the pre-sales and after-sales system, internal and external communication problems, cash-flow problems, employee demotivation, clients not attended correctly, lost clients, etc. make entrepreneurs wonder how they should grow without becoming victims of success.

The answer is not obvious and there are no unique formulas, but an analysis of businesses that have managed to successfully overcome this period of internal crisis caused by ´turnover obsession´ suggests that planning, staff training and market focus constitute the three basic factors that can help a company absorb the negative effects caused by ´the curse of growth´, or even avoid them altogether. Consequently, it would appear that rather than growth itself, the circumstances of growth are what determine the risk of failure. Growing implies assuming risks, but in order to grow in a healthy way, risks must be calculated.

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