For many companies, and new companies in particular, growth is seen as the principal sign of success. A growing company that takes an ever greater amount of market share is expected to use its increased volume to generate greater profits and return on equity. However, some business managers are hesitant to grow too quickly and prefer to adopt a more limited growth strategy. As with any business decision, there are pros and cons to this strategy.
Avoidance of Massive Debt
One benefit of a limited growth strategy is avoiding the massive amounts of debt that often accompany rapid growth strategies. Managers looking to quickly expand their businesses are typically unable to do so organically, meaning by funding growth through revenues. Instead, they will either take on debt or further dilute the company's equity in order to fund expansion. This debt can be very costly, particularly if the company's sales are not as high as expected.
Greater Ease of Management
Rapid growth is often a substantial burden for managers, who must balance existing operations as well as managing expansion into new markets and more regions. The financial and logistical challenges of rapid growth are often too complicated for even the most skilled managers to handle efficiently, meaning that a once lean and agile company is forced into a business model that involves higher costs than it is accustomed to.
Competitors Taking Market Share
A disadvantage of a limited growth strategy is that competitors may be able to take market share by adopting their own rapid growth strategy. It is generally easier to expand into a young market with few or no players than it is to steal market share from a competitor that has already established itself. A company engaged in a limited growth strategy may miss out on the opportunity to capitalise on untapped markets.
Most venture capitalists and many shareholders are primarily interested in a limited duration for their investments, typically no more than a few years. These investors want to put their money in, make a profit and take that money out to invest in a new, growing company. A manager who adopts a limited growth strategy for her organisation may face substantial pressure from investors to grow the company more quickly.
- Thinkstock/Comstock/Getty Images