• Innovation & Company Growth

    by  • October 28, 2012 • Uncategorized

    Firms innovate in order to grow and it has been observed that companies who have a systematic innovation process in place grow faster than their competitors, as measured by the percentage of sales coming from new products (a measure of innovation success). However, innovation is part of bigger puzzle which companies need to solve in order to grow successfully. This requires a thorough understanding of growth itself.

    Churchill and Lewis (1983) explained that firms grow in stages with its age: Existence, survival, success, take-off & resource maturity. Each stage is characterized by an index of size, diversity, and complexity and described by five management factors: managerial style, organizational structure, extent of formal systems, major strategic goals, and the owner’s involvement in the business. In the existence stage, owner does everything and main concern is to get customers.

    In the survival stage, company has established itself as a business entity and the main problem is to get enough cash flow to sustain the business. In the success phase, company is stable and profitable and key decision is to either use company as a growth platform or owner decides to disengage. Professional managers are required to take some activities off the owner. In disengage mode company can continue to run as status-quo for longer period and in the growth mode owner garners resources to fuel further growth. Recruitment for future company needs and systems required to manage growth are installed. Operational as well as strategic planning is done and owner is involved in almost all the aspects of it.

    After successful ‘success phase’ company moves to take-off stage. The two major concerns here are of delegation, can owner delegate his/her responsibilities to professional managers for efficient management and of cash, is there enough cash available to fuel the growth. Failing in this stage means, company can fall-back to previous stages or go out of business. Then in the resource maturity phase, company needs to reap benefits of growth, remove inefficiencies and retain entrepreneurial spirit and counter ossification.

    Through all these stages there are 8 factors which are required for successful passing of each stage. But they vary in their needs at different stages of business. They include: Owner’s abilities, cash, business resources, matching of business and owner’s personal goals, people quality and diversity, systems and control, strategic planning and owner’s ability to delegate. For example, cash is critical in existence, survival and take-off stage and not in the middle stage or resource maturity stage.

    But how fast a company can afford to grow? This can be quantified in case of organic growth through analyzing its operating cash cycle, as illustrated by Churchill and Mullins (2001). Three levers can enhance the organic growth rate include: speeding cash flow, reducing cost and raising prices. But if internal funds are not sufficient for desired growth external funding is sought. Two broad categories include lenders (focus on existing value of business) and investors (focus on future value of business). Debt financing can be unsecured or secured (asset backed) and equity capital can be obtained from several sources. To successfully craft a deal, an entrepreneur should be well aware of the business, understand the financier’s needs and understand his/her own needs.

    Thus, having innovation process in place is a necessary but not a sufficient condition for growth. It has to be complemented by an in-depth understanding of growth itself. This would ensure that the required entrepreneurial culture, owner/business manager’s will, supportive organizational structure and policies, and required resources (technical and financial) are all aligned to support innovative activity.

    References:

    Churchill N, Mullins J. 2001. How fast can your company afford to grow? Harvard Business Review 5(May): 135–149.

    Churchill N, Lewis V. 1983. The five stages of small business growth. Harvard Business Review 61(3): 30-50.