Will Your Company Grow Itself to Death?

Last Updated Apr 19, 2010 5:06 PM EDT

It's common wisdom that companies that don't grow -- continuously and smoothly, with ever-increasing quarterly earnings -- will die. But bigger isn't always better. In fact, growth that isn't well planned can often cause businesses to fail. That's the message of Smart Growth, a new book from Darden professor Edward Hess. I recently spoke with Hess about the stresses growth creates, a manager's duty to ask the right questions, and Toyota, a likely casualty of the grow-or-die philosophy. BNET: How does growth challenge a company?

Hess: It puts stress on its people, quality controls, and processes. It creates risk because it requires a business to make many small changes that can inadvertently lead to a diluted culture, lowered customer value proposition, and damage to the brand.

BNET: Can you explain how this plays out?

Hess: Starbucks is a great example. From 2005 to 2008, the company prioritized growth without regard to is impact on the customer experience. Stores opened in sub-prime locations, stores cannibalized each other, the company raised counter heights to encourage efficiency -- while decreasing customer contact -- and the stores began to smell like their newly offered breakfast foods instead of like coffee. Layoffs and store closings followed.

More recently, Toyota made news. Faulty gas pedals were the company's most visible issue, but its problems are systemic and the result of a failure to analyze, identify, and manage the risks of the high-growth course it set in 2002. Toyota made massive changes that impacted design, production, and employees. That's a lot of stuff, and it should have made the company more sensitive to quality issues. But the message to be big trumped all. Bad quality became a cost of doing business.

BNET: What can companies do to avoid these problems?

Hess: They need to be driven by smart growth, rejecting the assumption that all growth is good. What's more important that getting bigger is getting better. Improvement and innovation are growth alternatives, and both will likely lead to smart growth opportunities. The mid-sized companies I researched said when they're in a high growth phase, they have to let up on the gas and allow processes and controls to catch up with people. Management teams should continually ask a series of tough questions, including whether, why, and how they should grow, and what they would need to grow. They ought to consider factors such as people, capital, process, and technology.

BNET: Isn't that like asking management to be both Jekyll and Hyde?

Hess: Managing growth and managing the risk of growth are two separate functions that must be carried out by separate groups. Growth people think differently than risk-management people. If you have the right culture, you'll reward the people who measure and manage risk. When someone calls attention to a problem, give them a gold star. That's how you communicate that growth accompanied by compromised quality has no value.