The Unintended Consequences of Growth

Can you think of a more emotionally-loaded business topic than price increases? Food industry CEOs are feeling pressure in the tension between rising costs and customer pricing. Pressure comes from customers resistant to increases, but other pressure comes from inside your organization where market share and sales volume are aggressively defended.

According to a McKinsey study, a 1% price increase contributes an average increase of 11% to your bottom line. Before forwarding this blog to your marketing team, we would like to take the pricing topic in a direction that you, the chief executive, may not have considered.

As you recall from business school, the cost curve is a graph that illustrates the total costs of production as a function of total quantity produced. Costs are high when production is new, but the cost line dips and unit costs decrease as output increases. Economies of scale are derived from purchasing, management and labor skill, finance, marketing, technology and basically, learning by doing.

At a certain point, however, economies of scale level off, and leaders contend with the effects of diseconomies of scale. We like to call this the “elephant effect”. The elephant moves more slowly and heavily as he grows and matures. Powerful and fascinating in the animal kingdom, the elephant effect can erode profitability if not managed carefully in the corporate world.

Examples of diseconomies of scale, or unintended consequences of organizational growth, are:

• Slow or distorted information as it passes between multiple layers of management and across functions
• Delayed decision making
• Congested or reduced response time to problems and opportunities
• Resistance to or poor execution of change initiatives

All these and more carry costs that slowly and deliberately creep up on your bottom line.

Blueberry offers three recommendations for dealing with diseconomies of scale to keep profits robust:

• Strategize only with your organization’s ability to execute in mind. Structure should not follow strategy; strategy should follow structure.
• Thoroughly and objectively quantify the risks, expenses and trade-offs associated with expansion. Its easy to get caught up in the thrill of growth without a clear-eyed understanding of the hidden risks and costs.
• Identify and contain the scope of activities across the organization associated with growing market share, product development, or mergers and acquisitions to ensure faster success, highest quality and lowest cost.

A new twist on the price increase topic but still focused on the health of your bottom line, Blueberry believes this is a great time to take a close look at how decisions, communications and activities are impacting profits as you lead your organization into 2011.