Limits to Growth

Systems Archetype 2

One of the first concepts engineers learn in the Principles of Engineering Economics class is the Law of Diminishing Returns. The Limits to Growth archetype is the systemic representation of the same principle. Growth always runs into resistance, slowing growth. With every increase in effort to accelerate growth, resistance builds. At some point in the curve, the resistance of the limiting factors becomes greater than the strength of the growing action, and growth stops.

Let’s look at an everyday example.

Horsepower

For a long time horsepower in automobiles meant larger engines. The larger the displacement, the higher the horsepower. Auto racing enthusiasts looked for more horsepower to gain more speed. More horsepower meant more speed.

A larger and more powerful engine puts a number of different stresses on a car. The engine is bigger, so it weighs more. The additional power puts more force through the drive train, which must be reinforced, making it heavier. More power to the wheels means that the tires get bigger, adding even more weight. The increase in engine power means that it burns fuel faster, so the car must carry more fuel to go the same distance, adding even more weight. All that added weight is more resistance the new, larger engine must overcome.

The air itself provides resistance. The resistance of a fluid doubles as the speed increases. Eventually, the air resistance becomes so great that adding more power no longer lets the car go faster. Wind resistance coupled with the additional weight of the bigger engine eventually makes for a car that goes slower with every additional HP improvement.

If limiting factors are not addressed, growth stops. In automobile technology, a number of different advances in materials, machining and design have combined to reduce the weight of automobiles, improve the power generated per pound of engine, improve fuel consumption per HP, and reduce the effect of aerodynamic drag. Today engines with 3 liters of displacement can produce HP equal to engines of 5+ liter displacement of 20 years ago. The work that has been done to improve power-to-weight ratios has raised weight limits, and improved aerodynamic designs have reduced air resistance.

What's Happening?

In a business, growth is often slowed by some other system. The other system is often not visible or is unexplained; in some cases the relationship between the acceleration and the limiting condition is not immediately apparent. Like the unseen air resistance to the faster moving car, the limiting factor slows the reinforcing loops of the growth cycle until growth stops.

Key factors that limit growth are people resources (not enough order-entry staff to process additional orders), space or facility resources (not enough dock doors to support the increased volume in inbound and outbound shipments) or capital (not enough money to hire the staff or expand the facility).

Growth can also be limited by external factors, including supplier shortages, regulatory restrictions, and competition.

What the People Say

Managers often say, “Why worry about this, we are growing,” until they feel the first effects of the limiting condition. Then the story changes to “Yes, we are having growing pains, but as soon as we (add more staff or suppliers, or acquire more capital) we will be back on track.” Eventually, if nothing is done to eliminate or mitigate the limiting factor, we hear management say, “The more we increase sales, the less profit we make. Why is that?”

What to Do?

In the early stages of growth, it is not unusual for a low slope to quickly become a steep one. The rapid acceleration of a business, a new product launch, or a new service is fun… and frightening. There are a number of things that managers can do to help keep growth under control:

Secure ample resources: Start-up businesses tend to burn cash and people, depleting assets and resources quickly. This burn gets faster as the revenue increases. Buying options on the market in order to hold the product and avoid tying up cash, allowing the company to obtain and pay for the resource when needed, is one tactic. Another is arranging lines of credit that the company can tap into to obtain more inventory as sales rapidly rise.
Remove limiting conditions: The time to fix capacity issues is before the big wave of activity hits. Add needed equipment as demand starts to build. Train additional staff ahead of the season, or cross-train existing staff to cover the labor departments that are the system’s constraints. Remove the process friction by simplifying the process before the amped-up growth makes this more difficult to accomplish.
Throttle demand: While the sales department may think this is a bad idea, swiftly rising demand that tightens supply should provoke a natural response — increased pricing. If the demand is too high, the purchase price is perhaps too low. This works not only in the obvious areas of pricing consumer products, but in the availability of internal resources. Working overtime in a peak period for a short while is a welcome boost to the paycheck, but extended mandatory overtime gets old, which may lead to labor shortages when your employees get fed up and find new jobs. This third option is the last one to take, only after other options have been exhausted.