In With The New
From the beginning of 1996 to the end of 1997, Jana Taylor's company grew from seven employees to 35, while sales increased from $5 million to $8.6 million. To many entrepreneurs, that kind of growth would suggest trouble in the offing.
But for Taylor, 44, who started Jana's Classics Inc., a Tualatin, Oregon, cookie bakery, at her kitchen table in 1984, an emphasis on growth is part of the equation for success and longevity. As her company blossomed from a single employee and $7,000 in sales its first year to 100-plus employees and $13 million in sales in 1999, Taylor has embraced the attitude that growth is good and the faster the better. "Our target this year," she says, "is $18 million."
To reach that goal, Taylor juggles at least 40 new-product development projects at any given time and introduces 40 to 60 new products per year, adding to a portfolio of more than 400 varieties of cookies, dough and related products. Meanwhile, she's expanded the company from selling frozen dough in the Pacific Northwest to providing baked cookies and dough to ice cream makers, candy companies, restaurants, frozen dessert manufacturers and in-store grocers nationwide.
Taylor's rapid-growth strategy is a smart one, according to a recent study of high-growth firms by the Kauffman Center for Entrepreneurial Leadership, a Kansas City, Missouri, entrepreneurial education and research organization. A recent study of 672 Ernst & Young Entrepreneur of the Year winners indicated companies that maximized sales growth with strategies similar to Taylor's, emphasizing new products and new markets, had 25 percent higher profitability and increased company net worth three times faster than firms that focused specifically on profit growth, cash flow or increasing net worth.
The results ran counter to prevailing wisdom that maximizing sales is a strategy with a poor risk-to-reward ratio, says Larry W. Cox, research manager for the 1998 study, which was released last year. "There's a feeling that if you grow fast, it's going to hurt profitability and wealth creation," says Cox. "We found that's not necessarily so. Fast growth can be a good thing."
Mark Henricks is an Austin, Texas, writer who specializes in business topics and has written for Entrepreneur for 10 years.
What Makes Companies Grow
One striking finding from the study shows that firms that used a market penetration strategy, trying to increase penetration of their current markets by selling new products to existing customers, didn't grow as fast or perform as well on other measures as firms that stressed diversifying by introducing new products to markets they'd never sold to before. The difference was amazing: Companies following the diversification strategy grew 87 percent faster, on average, than those relying on penetration. Businesses that tried to grow by mergers and acquisitions, likewise, turned in poorer performances than those with an aggressive diversification bent. These findings are rather surprising, considering the record number of mergers and the current popularity of con-servative stick-to-your-knitting strategies.
An even bigger surprise was the low correlation of international expansion with rapid sales growth. The report essentially determined that companies boasting more international sales were no more likely to grow rapidly than those that looked mainly at domestic and regional markets. Going global, in other words, is not a requirement for fast growth despite the widely held opinion to the contrary. "The assumption I'd had going in was that if you were going to grow, you'd have to go overseas," says Cox. "But that was a surprisingly small part of it."
|Sometimes your employees just need a little TLC. Read "You're My Hero" and learn how to play older sibling.|
The study found a strong tie between rapid growth and certain employee compensation practices. Connecting pay to incentives was indeed a powerful growth-booster. In fact, the more importance companies placed on incentive pay, measured as a ratio of incentive to base pay, the stronger their sales growth.
A policy of giving stock to employees was also heavily connected to sales growth. However, companies that offered stock only to the CEO didn't get any benefit from the practice. Only when equity participation is broadly spread are sales likely to be supercharged. The study even found that the strongest sales growth rates of all were from companies that gave stock to everyone but the CEO. These companies reported 115 percent average growth, compared to flat sales for those with CEO-only stock plans. This connection was one of the strongest found in the study. Says Cox, "The equity compensation was the big piece."
Variables That Make A Company Successful
There are a number of questions the study didn't answer. One is whether the findings apply to all or even many other companies besides the ones studied. The study companies were all finalists in the Ernst & Young Entrepreneur of the Year award program. "The sample was unusual in that it was the best of the best entrepreneurial companies in the country," says Cox. "To make a generalization to the business population as a whole is difficult." In addition, only 20 percent of the firms studied had under $5 million in sales in 1997, and 41 percent had more than 100 employees in 1995. Average sales were $89 million, and they averaged 269 employees. About 20 percent were publicly held.
Another question the study failed to answer was whether firms following the diversification strategy were turning their backs on established, solid customers to pursue new markets, or whether they were merely, in conformance with current mainstream strategy, being selective and only getting rid of their worst customers. "Our survey didn't distinguish that," says Cox. "We only know they're doing more with new products and new markets."
|View the Kauffman Center's "Survey of Innovative Practices: 1999 Executive Report" at www.entreworld.org.|
Additionally, Cox points out there are good reasons, other than seeking growth, for entering international markets. These include the opportunity to tap more attractive markets than exist domestically and the chance to partner with foreign companies that have attractive capabilities. And he doesn't discount the importance of financial controls in fast-growth companies. He notes, "Growing takes cash, so there's some cash-flow management in there." Anecdotally, he says he found a pair of similar companies, one which was growing at twice the rate of the other and was flush with cash, and the other losing money and seeing its net worth decline. "The reason was, they didn't have the cash," Cox says of the problems besetting the slower-growth firm.
According to the study, maximizing sales growth will take, in addition to cash investments in new-product development and marketing campaigns, significant loosening of ownership by a lot of entrepreneurs. Most of the privately held companies surveyed failed to offer equity compensation plans to the employees, and, overall, just 3 percent of all equity was in the hands of people other than top managers. "If you want to grow your business," chides Cox, "you've got to loosen up on that and think about how to distribute some of that equity value to the whole company."
The last word on maximizing growth isn't in yet. Cox is replicating the study, with additional questions on strategy, this year. The big difference is that it will include firms from 18 countries. "It will be interesting," he says, "to see if a German company has the same perspective on international sales."
Meanwhile, cookie entrepreneur Taylor is hoping to focus Jana's Classics more on the best markets she's tapped, and perhaps to slow down her rapid growth of the past few years. Bringing out new products and new production lines always impacts short-term profits, she says. "We've been very satisfied with our profits," she says. "But growth is tough. I'm in a position to know that-luckily."
|Take it easy, speed racer! Read "Crash Course" before trying to grow your business at maximum velocity.|