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What is Healthy Growth for Family Companies?
By Pascale Michaud, Ph.D.
Family Business Advisor
President, PMXOffice
Montreal, CANADA
Twitter: @PascaleMichaud_
Part 2
January 05, 2015
Growing versus Scaling
The business literature is now making an important distinction between growth and scale. When a company is growing, it is generating revenues more or less at the same rate than it is adding (or spending) resources. However, when a company is scaling, it is generating revenues at a substantially higher rate than the resources it is consuming. Examples of successful ‘scalers’ include Google and Expedia, where the addition of new customers or the generation of new sales is done at merely a fraction of comparable costs the year before. In fact, recent research shows that 75% of total shareholder return for top S&P (Standard & Poor) companies is driven by growth, more precisely by the ability to significantly grow the company while keeping costs well under control.
So how do companies scale, and how can family companies lead the way or emulate such a trend – while maintaining alignment among family owners and leaders in a respectful and caring way? As many who analyze the scaling phenomenon highlight, the key resides in identifying strategies successful companies have used to create scalable models that generate substantial growth, instead of focusing on growth strategies that just add size.
Hence, one way by which a company achieves scale is by automating the delivery of goods or services they already produce. Robots on a production line or automation of call centers come to mind. One might ask: Are such practices aligned with the family values? Perhaps not, but what if non-family companies in the same sector or industry embrace those scaling practices? Should the family company sell their business while it still has a high financial value, and shift their family focus to new business activities? Lots to think about...
A second way by which companies can develop scale is by increasing the rate at which they generate novel ideas. Economists have been exploring idea-based growth models and increasing returns to scale for more than three decades. In a 1998 paper, Charles I. Jones at the Department of Economics at Stanford University writes: “To take a simple example, consider the production of the latest best-selling novel, the hottest-selling computer game, or the new Volkswagon Beetle. To produce the first unit of any of these items requires a large amount of effort: the novel must be written, the computer game must be created and the Beetle must be (re)designed. But clearly these are one-time costs. The “idea” underlying each product only needs to be created once. Afterwards, subsequent units might plausibly be described as being produced with a constant returns to scale production function, following the standard replication argument."
A third way by which businesses can generate scale is by reaching the true potential of mergers & acquisitions: by carefully picking, acquiring and integrating existing companies with complementary skill sets, in ways that can triple revenues while exploiting substantial cost synergies. (A successful, privately-owned second-generation family company in Canada refers to such cost-controlled, giant steps achieved through successful mergers & acquisitions as going from ‘1 to 3’, playing with the classic words ‘one two three’. If they are not convinced they can achieve this 1 to 3 goal, they don’t acquire.)
A fourth way by which scaling can be achieved is by moving upstream or downstream in an industry where the company is successful. One must think ahead of time of the next growth areas. And one will have, at some point, to step out of its comfort zone. As an illustration, the horticulture industry has become increasingly competitive in the traditional core segment of wholesale products, growing at a slower pace than the overall economy in many countries. A family-owned company whose core competency is wholesale horticulture, and who intends to remain vital and growing, will need to transfer some of its unique skill sets in adjacent sectors. The company’s owners and leaders might decide to move downstream in the retail end of horticulture, and/or move upstream in fertilizers and pesticides. If some of the owners do not want to let go of the initial core business, it is well possible to keep it alive, agile and growing, but to give it a smaller relative importance in the overall portfolio of activities of the company.
So all in all, in business, over time, you must grow, and grow at a rate and speed that makes you a leader. Let us open up the dialogue among family owners and leaders, and next generation members on these critical questions. And let us also welcome the presence of external advisors in our discussions who can bring unique additional knowledge and perspectives, and help us frame the issues in a different way. Let us generate creative sets of ideas and identify those where alignment between individual and collective goals in the family can be achieved, and then transform them into realistic action plans. Let us keep a pace of discussion and exchange that is regular and positive. A family company should be viewed as a portfolio of opportunities. Business prosperity and family harmony are feasible, if we approach it with the right spirit.