The past two months have been tough for Toyota. The Japanese automaker came under fire as reports of faulty equipment and subsequent recalls spread quickly, calling into question the company’s previously strong reputation for reliable, consistently high-quality products and services.
The carmaker has since been engaged in damage control, but the most important takeaway from the Toyota story — and from many others like it — is that bigger is not always better, said Ed Hess, professor of business administration at the University of Virginia’s Darden School of Business and author of the book Smart Growth. While Hess stressed that he is not a Toyota insider or consultant, he did research the incidents, and based on his findings and experience, the company was experiencing the effects of mismanaged growth.
“I know that in 2002, they changed their strategy. They changed [it] from being the best in quality and reliability to being the biggest sales leader,” Hess said. “That is a fundamentally different strategy, a different mindset, and in order to execute that strategy in a very short time frame, they had to build new factories; they had to hire a lot of people; they had to form new outsourcing relationships; and they had to start changing the design of their cars so they could be made more quickly, more efficiently and more cheaply.”
But any kind of growth — let alone the type that requires a fundamental shift in business priorities — needs a specific plan and careful execution to positively impact the organization. Hess said the first step in creating this plan is to acknowledge and debunk four widely held beliefs:
1. “Businesses must grow or die.”
2. “Bigger is better.”
3. “Growth is always good.”
4. “Growth in public companies is continuous and linear.”
“I was able to trace the myth of ‘grow or die’ to a Time magazine article from 1954 where it said ‘grow or die’ was the chief axiom of business,” Hess said. “The ‘bigger is better’ and ‘growth is always good’ [sayings are] our cultural assumptions; [they’re] almost part of our individualism and entrepreneurial spirit.
“The [myth about] public company growth being continuous and linear? Those rules were made up on Wall Street,” he continued. “There are six research studies that show that less than 10 percent of the companies at any given time can grow above industry averages or above GDP for five years or more. So continuous linear growth is the exception, not the rule.”
In fact, “there is no empirical data, and no business reality, justifying the commonly held beliefs about growth — they are fictitious,” Hess said. “And they shouldn’t drive business decisions.”
Instead, learning executives should help create a company culture and environment conducive to continuous learning and improvement.
“[You need] a constant learning environment to be a great growth company, with highly engaged employees and highly engaged customers,” he said.
CLOs can begin to create the right environment for growth by planning appropriately and engaging in a risk audit; prioritizing the processes and controls needed to accommodate growth; and pacing it reasonably so as not to “outstrip your processes, controls and managerial capacity,” according to Hess.
“Growth, if not managed, creates risks,” he said. “Those risks, if not managed, can lead to a Toyota or a Starbucks situation. Sometimes, you have to let up on the gas pedal and let process and people and controls catch up.”