In most cases it takes good people to grow a business, and for an entrepreneur, this means delegating and trusting others to deliver the results that will grow the firm. Hiring the right people, engaging them in the pursuit of their dreams and giving meaning to the employees who are building the business requires different skills than those needed to launch a business. Readers will learn what those skills are and how the entrepreneur can use them to achieve smart growth.
Business growth is one of the most talked about subjects in the entrepreneurial world. Unfortunately, much of that talk is based on faulty assumptions or erroneous beliefs about business growth. For the past ten years, I have been on a journey, along with some of my colleagues, trying to discover the “science” of business growth. The purpose of this article is to share with you some of what we have found. [1]
If you think about business growth, what comes to mind? Well, growth is good; in fact, businesses either grow or die. Yes, and growth is a nice linear function that depends in large part upon a business’s strategy. And growing bigger is always better.
Those beliefs are common. What do we know about them? We know that there is no basis in any science for those beliefs and that, in fact, they are not always true in the business world. At best, they are half-truths. At worst, they are pure fiction.
THE MYTHS OF GROWTH
Growth can be good and growth can be bad. It depends. Growth can create value, but, if not properly managed, growth can destroy value. Growth can destroy value when the amount of or pace of growth exceeds managerial capacity, stresses quality controls, stresses financial controls, dilutes one’s customer value proposition, and propels a business into a different competitive space where it will compete against better capitalized, more efficient competition.
The business axiom that all businesses must “grow or die” seems to have been first promulgated in a June 28, 1954 Time magazine article entitled: “The New Magic Word in Industry.” From that day it has acquired the aura of a being a natural law of business. There is one problem with that: there is no scientific foundation for that belief. In fact, in some cases a business is just as likely to “grow and die” as “grow or die.” Yes, a business must increase revenues to keep pace with inflation, but otherwise, a business can successfully operate for decades so long as it continuously improves its customer value proposition and does so better than its competition.
Growing bigger is not always better. In fact, in growing bigger, businesses increase their complexity, requiring more bureaucracy, rules, administrative and managerial people, and information systems, all of which can destroy the “small company entrepreneurial soul.” And, with increased size comes not only complexity, but also the need for more professional management. A business can outgrow its existing management capabilities.
Finally, especially in the public markets, people think that business growth should be a phenomenon that increases continuously, and in a linear fashion. What do we know from research? Well, continuous public company growth is the rare exception not the rule. At least six studies[2] document that fact. There is no scientific support for the belief that a business can grow in a continuous, linear manner.
Many business people are shocked to discover that biology and complexity theory model business growth far better than economics or finance theories. Business growth is more likely to be a zigzag path including plateaus and, sometimes, dips. Can linear growth occur? Yes, during scaling. But linear growth is not the norm: all scaling growth spurts eventually plateau and decline.
Growth is a lot like Mother Nature. She can be very good and she can be very bad: think hurricanes, floods, tornados and earthquakes.
Lessons for entrepreneurs
A few years ago, 54 high-growth private companies based in 23 states of the United States agreed to participate in a research study designed to illuminate the common management challenges faced when growing an existing entrepreneurial business.[3]
Those companies averaged 9.6 years of existence with average revenue of $60M, the range being $5M to $350M. Some were primarily product companies; others were primarily service companies, and others hybrid companies. That research produced several counterintuitive findings discussed below.
Are you prepared to grow?
Growth will stress existing people, processes and controls. Furthermore, growth requires the entrepreneur to fundamentally change: from being just an entrepreneur to becoming an entrepreneur and manager, and ultimately to becoming a manager and leader. Growth fundamentally changes what an entrepreneur does everyday and how he or she does it. Most first-time entrepreneurs find those changes difficult. Some find them unpalatable. Many entrepreneurs think that growth is just more of the same. Not so. Growth transforms almost everything in a business.
These realities can be better managed if one asks these questions: Are we ready to grow? Are the right people, processes and controls in place? What do we need to do to prepare for growth? What are our risks of growth? How will we manage those risks? How much should we grow? What are the early warning signals that we may be growing too much or too quickly?
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Growth Risks Assessment Tool
a) Culture? b) Customer service? c) Customer experience? d) Cash flow? e) Supply chain, raw materials and suppliers? f) Distribution and delivery? 11. How will we mitigate those risks? 12. Do we have adequate daily information to monitor those risks? 13. Who will help us monitor, manage and correct those risks or results? 14. Do we need to pace growth? © Ed Hess, 2012
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The “gas pedal” approach to growth
When navigating the turbulence created by growth it is necessary to plan for growth and make sure that you have in place the right people, processes or controls. Or, if growth just happens, then pace your growth to give your business time for the people, processes, and controls to catch up. I learned this lesson from successful entrepreneurs whose first businesses imploded, the result of taking on too much growth too fast. From them I learned the “gas pedal” approach to growth: let up on the growth pedal to let your people, processes and controls catch up. People are like engines—they can only accommodate so much stress without a breakdown in quality or performance. Just like one can not continuously “red-line” an engine, one cannot continuously “red-line” an entrepreneurial business.
Growth is much more than strategy [4]
Many entrepreneurs think that managing growth is really all about having a good strategy. Yes, it is important to have a focused strategy targeting a specific large customer segment and delivering a compelling, differentiated value proposition. Every business needs clear answers to the “3Ws”: What am I going to sell? Who is the buyer? Why are they going to buy from me?
Strategic focus and a compelling, differentiated customer value proposition are table stakes in the entrepreneurial game. But while they are necessary they are not enough to guarantee success. Success requires a combination of operational excellence and constant improvement. Success requires that businesses be customer-centric and have highly engaged, high-performance employees. Remember, most businesses are people businesses—people doing business with people. It is the crucial role of people that many entrepreneurs often take for granted.
Beyond having a sound strategy, continuous growth requires an internal enabling system that creates the right environment that drives employee behaviors that result in customer-centricity and high performance. Growth requires an entrepreneur to establish the right culture, structure, HR policies, measurements and rewards to drive the behaviors that produce the desired growth.
Moreover, the skills and processes needed to grow a business are different from those needed to start a business. In fact, my research showed that many entrepreneurs had poor hiring and onboarding processes; had problems having difficult conversations with employees; underestimated the power of culture; and made many hiring mistakes when trying to build a growth-management team.
Why is this focus on people important? Because in most cases it takes people to grow a business, and growth requires an entrepreneur to delegate and trust others to deliver results. Hiring the right people, engaging them in the pursuit of their dreams and giving meaning to the employees who are building the business requires different skills than those needed to launch a business.
Creating an internal, aligned growth system does not happen serendipitously. It requires consistent, seamless messages communicated by culture, leadership behaviors, measurements and rewards (financial and emotional). Some compelling lessons from my research are:
- Growth requires constant improvement that in turn requires people who like to learn and who like change.
- Hiring for cultural fit is essential. Hire slowly and fire quickly. High employee turnover impedes building relationships with customers and operational excellence.
- Choose between a team culture and a star culture.
- Emotional rewards are as important as financial rewards for your employees.
- Make work meaningful.
- Do not become complacent or arrogant.
- When you think you have it all right, you have started the decline.
Upgrading
Another interesting finding was that entrepreneurs discovered that the people, processes and controls that worked at earlier stages of the business life cycle often failed to work when the business grew substantially. For example, the people, processes and controls that worked at $5M of revenue were unlikely to work at the $25M level. The entrepreneurs stated that this was unexpected. Often as a business grows, it is necessary to upgrade people, processes and controls to handle the increasing complexity of the business. These changes are costly, time consuming and create emotional and cultural stresses. This is especially true when one has to upgrade employees and historically well- performing, loyal employees cannot perform at the desired level.
Upgrading means that a business never reaches the point of steady state if the business continues to grow. Many entrepreneurs found these demands unsettling and stressful.
Hitting the first growth plateau
Most businesses enter high growth phases when they are ready to scale—to do lots more of what works well. Scaling is how businesses grow quickly. Getting to that point is hard. This occurs successfully if and only if the entrepreneur has built the foundation—has established the right people, processes and controls that permit scaling to occur without sacrificing quality or financial stability.
Many entrepreneurs reported being consumed during the scaling phase because scaling created significant turbulence. Managing this turbulence took so much time that many were unprepared when the scaling trajectory plateaued or even dropped off. They then needed to think strategically about how to reignite growth.
The four ways to grow
There are only four ways to grow a business: improvements, innovations, scaling and strategic acquisitions.
Improvements means getting better, faster and/or cheaper. Improvements are the “blocking and tackling” of business and include improving your products and services, your business processes and the customer experience. In fact, you can improve what you do in every functional area of your business.
Innovation is doing something that’s new for your business. Innovations do not have to be unique. In fact, uniqueness is unlikely. Innovation means doing something that is really new or different for your business. Most innovations occur in two ways. First, one can innovate by recombining or reconfiguring things that already exist. Second, one can innovate by transferring things from one industry to another or by copying best-of-class ideas or processes from competitors or other businesses.
The third way to grow—by scaling—was discussed above, so I will not address it again here.
The fourth way to grow is by making small strategic acquisitions. Strategic acquisitions are acquisitions of new geographic markets, customer segments, products, services or capabilities that you can either scale through your existing customer base or scale your existing products through. The purpose of strategic acquisitions should be to increase the scaling possibilities for your business.
Innovations and strategic acquisitions are riskier than growing by improvements or scaling. Strategic acquisitions require due diligence, financing, and merger integration skills and capabilities that most entrepreneurial businesses do not have. Research in the public company space tells us that most acquisitions do not end up creating value for the acquirer.[5]
The organic growth proposition
Research has shown that most public companies grow in the same ways and in the same order. This finding creates a good strategic growth checklist for a private company to consider.
- Geographic expansion
- Introduction of complementary products to existing customers
- Expand to new customer segments with existing products
- Add complementary services for existing customers
- Focus on cost efficiencies
- Focus on technological productivity in the supply chain, logistics and manufacturing functions
- Add or acquire (usually on a small scale) strategic new products, customer segments or services
- Move from product-centricity to selling solutions
- Start over at step one and simultaneously improve in all areas
Considering this checklist is no guarantee that a company will grow but it will ensure that when the company does grow, it will grow smart.
[1] Edward D. Hess, “Growth is the Dynamic Confluence of Strategy, Entrepreneurship, and Values,” UVA-S-0197 (Charlottesville, VA: Darden Business Publishing, 2011).
[2] Louise K.C. Chan, Jason Karceski and Josef Lakonishok, “The Level of Persistence of Growth Rates,” Journal of Finance 58, 2 (2003): 643-84; Edward D. Hess, Robert K. Kazanjian, eds., The Search for Organic Growth (Cambridge: Cambridge University Press, 2006), 147-48; Mark Lipton, Guiding Growth: How Vision Keeps Companies on Course (Boston: Harvard Business School Press, 2003), 36-37; Matthew S. Olson and Derek van Bever, Stall Points: Most Companies Stop Growing—Yours Doesn’t Have To (New Haven, CT: Yale University Press, 2008); Sven Smit, Caroline M. Thompson and S. Patrick Viguerie, “The Do-or-Die Struggle for Growth,” McKinsey Quarterly 3 (2005): 35-45; Robert R. Wiggins and Timothy W. Ruefli, “Sustained Competitive Advantage: Temporal Dynamics and the Incidence and Persistence of Superior Economic Performance,” Organization Science 13, no. 1 (2002): 100; Robert F. Wiggins and Timothy W. Ruefli, “Schumpeter’s Ghost: Is Hypercompetition Making the Best of Times Shorter?” Strategic Management Journal 26, no. 10 (2005): 887-911.
[3] Hess, Grow to Greatness, 4-5
[4] Edward D. Hess, “Growth is Much More than Just a Strategy: It’s a System,” UVA-S-0197 (Charlottesville, VA: Darden Business Publishing, 2011).
[5] Robert F. Bruner, Deals from Hell: M&A Lessons that Rise Above the Ashes (Hoboken, NJ: Wiley, 2005).
