Economies of Scale – Negative effects and the solution


Growth is good, right? Explosive increases in sales and revenue. What could possibly go wrong? This time next year, Rodney, we'll be millionaires.

Well, I'm not about to be completely contrary and suggest it's not a good thing, growth is fantastic, but there's a reason we call rapid growth “explosive”, it must be handled with care. In fact, while you're fostering the growth, you'll need to be aware of the potential pitfalls you're about to encounter and a strong team of middle management is a wise, early investment. You don't want to have to install management as a REACTION to growth, you'll probably get the wrong people.

Almost all of the theory of Economy of Scale suggests positive effects (hence, “economies”). Your new titan company has more weight to throw around, your purchasing power is enough to make suppliers beg you for an appointment, your bank manager suddenly realizes he can give you the Platinum business checking account, overheads per employee shrink and your car gets a lot bigger and a lot faster.

But what about the negative effects of growth?

The first one you'll be treated to, in all likelihood, is the fact that you're about to lose control of the things you once very tightly monitored. Last year, you were a small business owner, you employed 15 people and you did their payroll on a Wednesday afternoon in Quickbooks. Now, this is impossible. You have 9 departments, 250 staff members at varying degrees of full and part time employment. So, you've installed a payroll department and they report their figures to you. You're busy so you skip a couple of weekly reports and before you know it, a problem that, last year, would have been nipped in the bud on that Wednesday (say, you realize your employees are claiming lunch and breaks as paid falsely) has just cost you five figures. That'll sour the Starbucks in your mouth VERY quickly.

Another problem, you're about to lose touch with the people and the product(s). An extension of the idea of losing elements of control discussed earlier, but an important point. Remember those 15 employees that worked for you? First name basis? Now your halls are replete with people whose names you will never have a chance to know and, to be honest, they probably won't even know who YOU are except “that person in that office” (unless you've got your name above the door). Now you feel out of the loop. You find yourself receding and, despite the fatter bank account, the whole thing has lost its magic. You put the tissue boxes on your feet and you're Howard Hughes. What price, happiness?

The solution is preparation. As I mentioned earlier, if you're reacting to growth by installing middle managers, you're too late. And I'm willing to bet your hair is coming out in clumps. Grey clumps. Pulling the right people up in preparation for explosive growth, preparing THEM for what's coming (meaning, teaching them how to do all the things that YOU do) and ensuring that there are systems to hold them accountable, measure, track and reward their success will be the difference between keeping and wasting that exploded revenue. And if you've done it early enough, you'll be confident in your selection and development for when you take off.

But how am I supposed to prepare for an explosive growth? How do I know when it's coming? Easy, if you don't think you're about to strike oil every day, then you won't. As Henry Ford said, “Whether you think you can, or you think you can't, you're right.”

Have you suffered any negative effects of growth? How are you preparing for that “lottery win” contract? Let us know in the comments.

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