Case in Point: Giving growth just enough gas to go
By Ed Hess,
The big idea: Most entrepreneurs assume that a business must “grow or die.” As this case shows, the decisions on whether to grow, how much and how fast are complex.
The scenario: Founded in 2004, Enchanting Travels delivers customized travel experiences primarily to discerning travelers from the United States and Europe who desire to visit Africa, South America and India and other parts of Asia. Its business model is different from most of its competitors’ in that it is vertically integrated, keeping control of the customer’s entire trip through local destination presence and superior product knowledge. Technology and highly engaged employees are its competitive differentiators.
Enchanting Travels has increased revenue during the past four years at a compounded annual growth rate of 51 percent. It operates six offices that deliver tours in 27 countries, and it employs more than 150 people on five continents. In seven years, the company has developed a loyal customer and employee base.
Growth is on the founders’ minds, but it is no longer necessary to make the business viable or sustainable. They pondered: Should they grow? How fast? What investments would they have to make to grow?
They reflected back on their days as MBA students at the international business school. They had correctly sensed a market need to make travel to countries with difficult logistical challenges easier for customers. Had they accomplished their goal? Yes, they had thousands of happy clients. They were the rare entrepreneurs who successfully started a business and sustained it for more than five years.
So, why grow? Because having built the foundation, they can. Growth could make them the dominant player in their niche market. The growth potential was at least five times current revenue. Growth would create bigger financial rewards for the founders, investors and employees. It would create career opportunities for more employees. It would produce even more personal satisfaction and a strong feeling of accomplishment by sharing memorable travel experiences with a larger audience of people. And, of course, if successful, growth would create more liquidity options that would provide the founders more choices in deciding how they wanted to live the rest of their lives.
Being good business leaders, they knew that growth had its risks. They estimated that while the upside was significant, reaching that level would require significant investments in technology and people, including more senior leadership, and building new marketing channels. Although those investments would deplete cash reserves and would utilize much of the projected operating cash flow for a few years, they thought they could self-finance the growth. The lower-risk (from the perspectives of investment and complexity) growth upside was only 100 percent of existing revenue if they continued to use the existing business model and marketing channels.
These discussions raised the issue of whether they should focus on revenue growth or profit growth. It also raised questions of the costs of growth, how to phase growth, how much growth was affordable and the priority of growth investments.
The resolution: The founders concluded that growth would require more people, processes and controls. It would require upgrading everything in their business. They knew that their business had to maintain its quality execution and continue to deliver great travel experiences.
This case illustrates the reality that although growth can create value, if it is not properly managed, growth can destroy value.
The lesson: Too much growth too fast can dilute one’s culture and customer value proposition and create major quality and financial risks. This leads to the gas-pedal approach to growth: You have to take your foot off the pedal so you do not outrun your processes and controls and the bandwidth and capabilities of your people. To grow or not to grow is a much more complex question than many people think.
— Ed Hess
Hess is a business professor and Batten executive-in-residence at the University of Virginia Darden School of Business.
51% Compounded annual growth rate over the past four years 27 The number of countries in which the company gives tours 150 Employees, operating out of six offices on five continents