15.2 Growth problems  (Page 4/4)

Much more important, however, is developing the knowledge and competences of the entire staff depending on the start-up’s chosen growth strategy. The knowledge and competences necessary for formulating and implementing the growth strategies must be forecast as part of qualitative Human Resource planning, and then provided by Human Resource development or by acquiring external personnel (cf. Drumm 2000). If this does not happen, start-ups face a growth barrier which is hard to overcome. The failure to implement strategy-oriented HR development and build up and maintain internalized motivation of the employees through attractive work and working conditions is a barrier to growth which is often overlooked.

Inadequate or incorrect internal accounting

All firms, whether young or mature, need cost accounting systems which can report costs and—as far as they are specifically attributable—revenues per cost unit, cost center, and department. It is important that start-ups establish systems for unit cost accounting, cost center accounting, and breakeven analysis (cf. Scherrer 1999) in order to be able to assess economic inefficiencies and sources of loss by means of target/actual comparisons and profit margins. If the competition is fierce, firms should also establish target costing to be able to undermine competitors by adjusting price policy.

Doing without any kind of cost accounting leads not only to the fact that sources of loss remain undiscovered, but also that profit potentials stay hidden as well. Both of these points represent possible growth risks. Start-ups must therefore avoid this risk by establishing cost and profit accounting, and a breakeven analysis as quickly as possible.

Dependence on third parties

Many start-up, survival, and growth strategies lead almost inevitably to the dependence of new firms on third parties. This causes no problem as long as the interests of all people and firms involved are relatively equal and/or compatible. Dependence on third parties functioning as investors, licensors, partners, principal customers in the sales market, or single suppliers does not necessarily lead to growth barriers. However, dependence is a disadvantage if there are diverging interests, or if the partners behave opportunistically. In this case, the growth of the start-up is inhibited and the firm is forced to fight the opportunistic behavior of the partners. For the start-up these defense activities incur transaction costs which arise in the preparation phase of a partnership and in the conclusion of cooperation contracts, and are added to later by transaction costs arising from controlling, and correcting errors.

However, the older the firm becomes, dependence on third parties should be reduced. The dependence on licensors should be compensated for by the firm’s own research and development. The dependence on outside investors, on the other hand, is generally unavoidable, but it can be put to positive use by raising risk capital by profit sharing with investors to create homogeneity of interests.

As shown above, dependence on third parties can arise when a firm markets its products. It can, however, also arise in the acquisition of preliminary products, or in financing. It is at its highest in firm networks. Start-ups must therefore ask themselves repeatedly whether these dependencies secure their existence and survival, or whether they are endangering their growth. As long as the firm’s survival is secured by suppliers or customers through strategic dependencies, for instance within a network of cooperating firms, the start-up can profit. If such dependencies however, endanger the success and growth of the firm, the start-up must try to extricate itself by building up its own sales or supply channels. Homogeneity of interests must also be taken into account when building an external network in order to minimize transaction costs which stunt growth.

Acculturation problems when buying companies

Growth as a result of acquiring companies in the supply chain, or diversifying into other sectors not only creates the potential for mistakes due to inadequate knowledge of the industry, but by insufficient acculturation of the companies acquired. Every company develops its own culture from the moment it is founded. This is manifested in the founders’ value system in regard to their employees, customers, suppliers, sponsors, and other partners. Founders will always try to transfer their value system onto their employees and thus form their behavior completely or at least partly. Company culture is also manifested in desired forms of behavior, rituals, and accepted processes of analyzing and solving processes practiced by the founders which they in turn would like their employees to implement. Communicating these values and forms of behavior is part of the management process.

If other companies are acquired in the course of planned growth processes, the company also takes on their “foreign” firm cultures. The confrontation between two or more incompatible firm cultures makes acculturation essential. The different cultures must be adapted to each other, or the growth of the entire company and its individual departments due to synergy effects is at stake.

There are three different acculturation strategies to choose from. In the case of usurpation, the management from the bought out firm is replaced by the management team of the firm that bought it out. This model is generally expensive, but can be implemented relatively quickly. In the case of adaptation, the buying and bought out firm(s) get to know and understand each other’s cultures in order to change and adapt them step by step. This model is much slower than usurpation, but also cheaper. The synthesis model consists of consciously giving up the old firm culture and creating a new one. This model makes sense if the acquisition means that the markets and thus market-oriented strategies change, or the national orientation of the start-up can be expanded to an international one. Doing without acculturation strategies not only stunts growth, but also increases the risk of bankruptcy.