ORGANIZATIONAL GROWTH



Growth is something for which most companies, large or small, strive. Small firms want to get big, big firms want to get bigger. Organizational growth, however, means different things to different organizations. How, then, is growth defined? How is it achieved? How does a company survive it?

PHASES OF GROWTH

A number of scholars and management theorists have developed models of how organizations change and grow. One such model is that of Larry E. Greiner, a management and organization professor at the University of Southern California. In his 1998 Harvard Business Review article entitled "Evolution and Revolution as Organizations Grow," Greiner outlined five phases of growth punctuated by what he termed "revolutions" that shook up the status quo and ushered in the successive stage. Based on observations of historical company patterns, his phases were as follows:

  1. Creative phase—when a company or subunit of a company is first formed, most attention and activity is focused on developing a product and reaching its market.
  2. Direction phase—when the company begins to formalize business management methods and "professionalize" its practices, usually including centralizing power in the organization.
  3. Delegation phase—when centralization proves too cumbersome for a large organization, it begins to delegate power and decision-making in various ways, such as by creating semi-autonomous business units/divisions and moving the reward/risk paradigm down to lower level managers and employees in general.
  4. Coordination phase—when decentralization becomes seen as excessive or inefficient, management attempts to rein in the organization by merging or coordinating the activities of various fragmented parts of the company, demanding more accountability and creating unifying incentives such as profit sharing.
  5. Collaboration phase—when central coordination efforts prove bureaucratic and inflexible, management adopts a team-based, cross-functional structure and more fluid policies that empower workers and promote dialog, experimentation, and negotiation.

Greiner believed that many organizations stall at certain stages because management is unable or unwilling to shift its organizational paradigm, or especially, because individuals at the top are reluctant to give up power once it's in their hands.

MEASURING GROWTH

In addition to such qualitative notions of organizational growth, there are many more tangible parameters a company can select to measure its growth. The most meaningful yardstick is one that shows progress with respect to an organization's stated goals as in the following examples.

NUMBER OF EMPLOYEES.

Some businesspeople boast of the number of employees in their companies or departments. Employees in and of themselves, however, cost money. A better employee-based measure of growth is change in company or departmental revenue or profit generated per employee. This becomes a valuable measure of increasing (or decreasing) productivity, rather than a measure of labor and salary expense.

REVENUES.

Every business magazine or newspaper describes a company by its revenues as an "X million dollar company." Although this is probably the most commonly cited measure of corporate growth, the pitfall of relying on gross revenue or gross margin as a measure of growth for an organization is that it completely ignores the expenses associated with generating those revenues. Greater revenues do not necessarily mean greater profitability. In periods of very quick "growth," expenses can spiral upward and out of control leaving a company strapped for cash and facing an uncertain future, at best.

More useful, revenue-based measures of growth are increases (or decreases) in net profit or net margins. These methods account for the expenses incurred in generating revenues for the firm and identify the portion that is truly added to the bottom line. Special analyses of profit margins include calculating the return on investment (ROI), either for the company as a whole or for individual units or product lines. ROI tells management whether the profits being generated are enough to compensate for the opportunity costs, the risks, and the time value of the money that the company has invested to produce those profits. A related metric is return on assets (ROA), which evaluates profits against the value of all the assets (capital, plant, equipment, etc.) the company has channeled into generating its income.

For many companies, especially publicly held ones, the ultimate measure of growth is the creation of wealth for owners/investors. While net profits are an indication of wealth creation, companies (or their observers) may scrutinize their finances further to determine whether they are actually generating an economic profit, or a profit that exceeds the implicit cost of the capital invested in them. It is only after the cost of capital is met that the company may be said to create new wealth. This growth may also be expressed in terms of market value added, a more direct measure of shareholder wealth creation.

ACHIEVING GROWTH

While there are many academic models depicting the growth stages of a company, management guru Tom Peters strongly suggests several real-world ways for companies large and small to achieve organizational growth. The business press routinely reports on the activities of companies employing these suggestions.

JOINT VENTURE/ALLIANCE.

This strategy is particularly effective for smaller firms with limited resources; however, in a business environment where changing demand, supply, and manufacturing or service conditions are an everyday occurrence," partnering" makes sense for the large organization as well. Forming joint ventures or alliances gives all companies involved the flexibility to move on to different projects upon completion of the first, or restructure agreements to continue working together. Subcontracting, for example, allows firms to concentrate on those portions of their businesses which they do best.

Joint ventures and alliances inject partners with new ideas, access to new technologies, new approaches, and new markets, all of which can have positive implications for the growth of all firms involved. Creating ventures with upstart or overseas firms may present the best opportunities for accomplishing this.

LICENSING.

"License your most advanced technology," advised Tom Peters. The idea behind this is that no technologies can be truly proprietary today. A rival or an outsider will soon copy whatever a company has developed. Save competitors the hassle of and profit from copying by selling current technology. This creates cash flow for the company to fund future research and development and creates switching costs by making others dependent upon a firm's applications.

SELL OFF OLD WINNERS.

Getting rid of the cash cow operations to focus on growing newer enterprises can make sense for organizations trying to grow. Even though it sounds contradictory at first, top dollar is commanded in the market for this kind of business and the necessary capital to fuel growth of other operations is generated. The decline of a sold cash cow is left up to the new owner. Meanwhile, ventures that were new at the time of that sale may now be cash cows ripe for picking. An addendum to this line of thinking is the divesting of older technology or products. Emerging markets such as Latin America and Eastern Europe have been favorite places for companies to get rid of outdated products or technology. These markets may not yet be able to afford state-of-the-art goods, but can still benefit from older models.

NEW MARKETS.

Entering new markets is an obvious way to expand a company. Creating additional demand for a firm's product or service, especially in a market where competition has yet to fully develop, is a much sought after experience for growing enterprises. As more and more U.S. companies move parts of their operations off-shore, more opportunity and awareness is created for other companies to serve the markets in those foreign locations.

NEW PRODUCT DEVELOPMENT.

Some of the strategies suggested here benefit the firm in generating cash. Product or service development is a smart place to use that cash in order to create future growth for the firm. Many companies reinvest part of their profits in developing new products, either completely new products or extensions or adaptations of existing ones. For some companies, such as pharmaceutical manufacturers, maintaining a robust new product pipeline is essential to long-term growth (and even basic stability) because their drug patents will eventually expire and they will face daunting competition from producers of generic and copycat drugs. Other companies such as toy and clothing producers face highly fickle and changing markets that demand a constant flow of new products. While all research and development into new products doesn't turn up major new product launches, in the long run new products often prove to be some of a company's most important assets.

VENTURE CAPITAL/IPO.

For companies small or large, growth must be funded, but where can one get the money? Where large public firms issue stock or debt, smaller private firms search for capital from banks, private investors, or venture capital firms. A venture capital firm will provide cash to firms it expects will have extremely fast growth. The venture capital firms will expect to be rewarded for its capital infusion with large payoffs at an initial public offering (IPO), the point at which the small private firm issues public stock.

ACQUISITION.

Both small and large firms get bigger by buying other companies. Merger-mania cyclically sweeps the business world as a preferred method to increase a company's size, revenues, product or service offering, etc. The takeover frenzy of the 1980s has returned to Western markets. Successful mergers and acquisitions will blend resources to create a synergy while improving existing core competencies.

For any company that has achieved growth, the work has just begun. Managing and sustaining that growth is imperative if the initial progress is to have any lasting positive effects for the company.

SEE ALSO : Organizational Development

FURTHER READING:

Churchill, Neil C., and Virginia A. Lewis. "The Five Stages of Small Business Growth." Harvard Business Review. May-June, 1983, 30-42.

Greiner, Larry E. "Evolution and Revolution as Organizations Grow." Harvard Business Review, May-June 1998.

Peters, Tom. "Get Innovative or Get Dead, Part I." California Business Review, fall 1990, 9-26.

Weinzimmer, Laurence G., Paul C. Nystrom, and Sarah J. Freeman. "Measuring Organizational Growth: Issues, Consequences, and Guidelines." Journal of Management, March-April 1998.



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