Beyond Growth

Tweet

George Carruthers, for instance, recently relized that there was no way to continue profitable growth along the same high-speed avenue that had led his company to the INC. 500. Carruthers established Polycoat Systems Inc. (#50) back in 1978 as a distributor of insulation, roofing, and coating materials.Yet as the Hudson Falls, N.Y., business grew -- Carruthers opened branch offices in Pittsburgh, Atlanta, Dallas, and Los Angeles -- the CEO felt more and more unhappy with the results. Prices of building materials were under continuing severe downward pressure. Finally, Carruthers concluded that the market was so competitive, "the only real way for us to increase sales and market share [was] to cut our prices."

That, to Carruthers, was unacceptable: Lower prices would lead directly to thinner profit margins. So he decided to turn Polycoat, whose 1983 sales were $17.4 million, in a new direction. "We're planning a major move into manufacturing," he says, an "upstream move within our industry." Polycoat, he explains, will create new products and manufacture them, and may acquire some of the companies whose products it now distributes. The goal, Carruthers says, is a pretax profit margin of about 10%. "You can only increase profits in so many ways, and manufacturing is at the top of our list."

For some INC. 500 companies, the most pressing challenge is preparing for a new stage of growth, even if that involves reining in current expansion. Tool King Inc. (#162), a Denver-based retail chain specializing in home power tools and related equipment, spent its first few years establishing a name for itself in its marketplace and building an internal organization. In close to six years of operation, the company opened seven stores in Colorado, investing heavily in advertising, personnel training, and computers. From 1980 to '83, Tool King's sales grew from $1.2 million to $6.5 million.

From the beginning, notes CEO Donald Cohen, the company financed its growth almost entirely with internal cash, and profits were commensurately skimpy. In fact, he says, "we deliberately took losses in order to build a quality organization and to penetrate our market. We might not have been able to grow anywhere near as quickly if we had focused on being profitable too early." Today, Tool King sells nearly three times as much merchandise on a per-square-foot basis as the average home improvement center.

Now that many of the substantial investments have been make, however, 34-year-old Cohen thinks the time has come to prepare for the future.Last year, the company slashed its advertising budget by nearly half, and with sales still increasing by about 30%, Cohen found his pretax profit margins for 1984 were up to 3%, versus around 1% in 1983. These higher profits, Cohen hopes, will give him the momentum he needs to open several stores at once in a major new market, such as Minneapolis/St. Paul or Boston. For such a move, the company would need about $2 million of outside equity, something Tool King has nevel before required.

"When you start depending on banks and other investors," says Cohen, "you're forced into thinking about profits. Until recently, we weren't ready to be measured that way. But now that we've built our prototype organization, we don't think we have anything to be afraid of."

The one inescapable fact of growth is that it creates pressure for more growth. The CEO of a rapidly expanding company is therefore faced with a unique set of challenges: selecting the right opportunities while not losing sight of the business's fundamentals. "We wanted to be respected in our business," says Craig F. Lieberman, executive vice-president of Sunbelt Distributors Inc. (#203) in Houston, "and we wanted to build an organization that we could be proud of." Lieberman, 33, and his partner, Robert Wise, began their company in 1977, four years after they had graduated from the University of Texas. Beginning with a Haagen-Dazs ice cream distributorship, they have since taken on an assortment of other upscale frozen foods and have moved into the food service business.

Sunbelt's 1983 revenues were $5.6 million, an enviable six-year growth record. From the beginning, however, the founders have been interested in more than top-line expansion. Growing too quickly, Lieberman worries, might cause dislocations within the business and force Sunbelt to raise outside capital. To limit these pressures, he and his partner have held back on expanding until "we're satisfied that what we have is working."

As Sunbelt has developed a track record in the market, its menu of expansion possibilities has become a lot longer, says Lieberman. Food manufacturers interested in launching their products in Texas now call upon Sunbelt with increasing regularity. More and more supermarket chains are interested in the company's products. The trick, says Lieberman, is to sort out the options and to avoid biting off more than the company can chew. "We feel strongly about managing our growth. But we don't mind all the attention. I guess you could say that the recognition itself is some measure of success."

For Gordon Black, the market researcher, fast growth presented rather more pressing problems than Sunbelt's. But the solution was similar: Black became a lot more circumspect about pursuing new business than he used to be. "We no longer go after every job in sight," he says. The company's costs are now being tracked with great care by a newly hired chief operating officer, who generates computer reports almost daily.

Given the way things used to be managed, Black concedes, it is a miracle that the damage wasn't a lot worse. "The easiest way for any business to go under is to grow too fast, unprofitably," he says. "If you really want to grow -- and continue growing -- you have to be in control."

 PREV  1 | 2