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Ineffective growth strategies

Covers AS90845

Why growth is a critical problem

Growth is usually treated as success, but the standard lists ineffective choice or management of a growth strategy as a critical problem — because growth consumes cash before it produces it.
A business that expands too fast, or in the wrong direction, can be profitable on paper and still fail: it has paid for new premises, stock and staff before the new revenue arrives.
This is overtrading: growing faster than the business's cash and systems can support.

The growth strategies a business can choose

Selling more of what it already sells (market penetration).

Same product, same market: more marketing, better distribution, competitive pricing.
Lowest risk, lowest ceiling — the market is only so big.

New market.

Same product, new customers: another region, another country, another customer group.
Risk sits in not knowing the new market — different preferences, different competitors, different regulation.

New product.

New product, existing customers: extending the range, adding a service.
Risk sits in development cost and in whether existing customers actually want it.

New product and new market at once.

The highest risk, because the business is learning two things simultaneously and has no experience to fall back on.

Growing by buying or merging with another business.

Fast, but expensive, and the two businesses' systems, staff and cultures have to be combined — the point at which most such deals disappoint.

Why growth strategies fail

Cash runs out. New sites, stock and staff are paid for up front; the revenue arrives over months. The business becomes illiquid while remaining profitable.
The new market was misjudged. Assumptions were made where research should have been done.
Management is stretched. The team that ran one site well cannot personally run four, and the systems that worked informally stop working.
Quality slips. Growth outruns the business's ability to train staff and supervise them, and the reputation that drove the growth is damaged.
The core business is neglected while attention goes to the new venture — and the profitable original is what was funding everything.
Diseconomies of scale appear — communication and coordination costs rise faster than revenue.

What a business does about it

Research before committing — market research in the new market rather than assumptions from the old one.
Grow in stages, testing one new site, one new product, one new region, and using what is learned before the next step.
Forecast cash, not just profit, and arrange finance before it is needed rather than during a shortage.
Build the systems and management depth first — the reason many businesses stall is that they never promoted or hired the second layer of managers.
Set a decision point in advance: what result, by when, would mean stopping? Deciding that before the money is spent is how a business avoids funding a failure out of pride.
Retrench if necessary — closing an unsuccessful new site quickly protects the profitable core, which is a legitimate and often correct solution.

Ineffective growth strategies

Covers AS90845

Why growth is a critical problem

Growth is usually treated as success, but the standard lists ineffective choice or management of a growth strategy as a critical problem — because growth consumes cash before it produces it.
A business that expands too fast, or in the wrong direction, can be profitable on paper and still fail: it has paid for new premises, stock and staff before the new revenue arrives.
This is overtrading: growing faster than the business's cash and systems can support.

The growth strategies a business can choose

Selling more of what it already sells (market penetration).

Same product, same market: more marketing, better distribution, competitive pricing.
Lowest risk, lowest ceiling — the market is only so big.

New market.

Same product, new customers: another region, another country, another customer group.
Risk sits in not knowing the new market — different preferences, different competitors, different regulation.

New product.

New product, existing customers: extending the range, adding a service.
Risk sits in development cost and in whether existing customers actually want it.

New product and new market at once.

The highest risk, because the business is learning two things simultaneously and has no experience to fall back on.

Growing by buying or merging with another business.

Fast, but expensive, and the two businesses' systems, staff and cultures have to be combined — the point at which most such deals disappoint.

Why growth strategies fail

Cash runs out. New sites, stock and staff are paid for up front; the revenue arrives over months. The business becomes illiquid while remaining profitable.
The new market was misjudged. Assumptions were made where research should have been done.
Management is stretched. The team that ran one site well cannot personally run four, and the systems that worked informally stop working.
Quality slips. Growth outruns the business's ability to train staff and supervise them, and the reputation that drove the growth is damaged.
The core business is neglected while attention goes to the new venture — and the profitable original is what was funding everything.
Diseconomies of scale appear — communication and coordination costs rise faster than revenue.

What a business does about it

Research before committing — market research in the new market rather than assumptions from the old one.
Grow in stages, testing one new site, one new product, one new region, and using what is learned before the next step.
Forecast cash, not just profit, and arrange finance before it is needed rather than during a shortage.
Build the systems and management depth first — the reason many businesses stall is that they never promoted or hired the second layer of managers.
Set a decision point in advance: what result, by when, would mean stopping? Deciding that before the money is spent is how a business avoids funding a failure out of pride.
Retrench if necessary — closing an unsuccessful new site quickly protects the profitable core, which is a legitimate and often correct solution.