Text Size

Sustaining Growth Series

Managing the Predictable Problems of Growth

By Ian MacDougall, TEC Speaker, September 2008

Topic: Growth, Best Practice

The Crystal Ball of Growth
Infancy
Go-Go
Adolescence
Prime
Additonal Resources

The Crystal Ball of Growth

Managing growth would be a lot easier if you could peer into the future and see exactly what would happen to your company if you doubled or tripled in size. Unfortunately, magic crystal balls only exist in science fiction and fairly tales, right?

Not so, says TEC speaker and organizational development expert Ian MacDougall.

He asserts that you can know about many organizational problems in advance, and therefore plan ahead to minimize their impact on your company. All it takes is an understanding of organizational life cycle principles and the ability to identify in your company the characteristic traits of each growth phase.

"As organizations grow, they move through a series of distinct phases that make up the organizational life cycle," explains MacDougall. "Some phases involve growth, others involve decline, but each has a unique set of identifying characteristics and problems that befall all companies who enter it. More important, these problems are unchanging and highly predictable. Every growing company -- regardless of size, industry, or age -- sooner or later runs head-on into these inevitable challenges.

"The good news is that by knowing where your business stands in the life cycle, you can identify these major barriers to growth before they occur. You can't eliminate them because they are direct results of the previous stage's growth. But you can do a much better job of managing them and thereby facilitate your company's evolution to the next growth phase."

(For a quick overview of the organizational life cycle, see "Structuring for Growth" in Additional Resources below.)

The five growth stages in the organizational life cycle are courtship, infancy, go-go, adolescence and prime. Since the business exists only in the entrepreneur's mind during courtship, this article will focus on the predictable organizational pitfalls found in the other four phases.

^ top

Infancy

Infant organizations eat money like it's going out of style. Consequently, they have two primary tasks -- get the product out the door and keep the cash coming in. To keep the cash flow positive, the company has to sell, sell and sell some more. Often, it takes business at a loss just to get the cash coming in. Infancy represents an exciting but very risky time in the life of the business.

According to MacDougall, the primary challenge in infant organizations is survival. This manifests itself in the following organizational problems:

Running out of cash. Often, the infant organization grows so quickly that it outstrips its ability to pay its bills.
Making a fatal mistake. The company gets hit with a product liability lawsuit, misjudges the price point of its product, or suffers some major trauma from which it can't recover. Unlike larger companies with more resources, it only takes one major mistake to deliver a death blow to an infant business.
Loss of commitment. Often the founder gives up too much equity in order to finance the business. Once he loses control, the founder often loses interest and the company dies of neglect.
Personal problems. Many times, the founder's spouse doesn't share his or her vision and dream for the business. When the spouse resents how much time the entrepreneur spends with the business, the personal turmoil can easily tear the fledgling business apart.

To work through these inevitable problems in the infant phase:

Keep the cash flow positive at all costs, even if you have to tone down your sales growth for a while. Do not grow yourself out of business.
Don't give up control. You may have to give up some equity, but never give away controlling interest in your business.
Track cash flow before profits. Rather than using traditional monthly P&L statements to monitor your company's financial performance, use a 13-week rolling cash flow report. Forget about profits and watch cash flow like a hawk.
Don't seek the advice of consultants. Most are trained to work with larger, more mature organizations. Consequently, their counsel tends to be inappropriate for infant organizations.
Avoid premature delegation. In infant companies, the roles are often blurry. Do not delegate any roles or responsibilities until you know exactly what you're delegating.

^ top

Go-Go

In go-go, the company manages to establish ongoing sales and a predictable income. As a result, cash flow problems become a thing of the past and the company no longer has to struggle to survive. Now that it has some money to work with, the company begins chasing one opportunity after the other. This early success, notes MacDougall, inevitably brings about a new set of problems:

Lack of controls. As the growth rate begins to climb, the company fails to shore up that growth with the proper infrastructure. Lacking any internal systems, budgets, policies or procedures, the organization becomes an accident waiting to happen.
Midas Touch syndrome. At this stage, the founder starts to get an inflated sense of his or her own worth. Fueled by hubris, arrogance and ego, the entrepreneur may venture into new products or businesses that have nothing to do with the core competencies.
Lack of resources. As the company starts to grow in all directions, the founder gets spread alarmingly thin. The entrepreneur often compounds the problem by leaping into areas he or she knows nothing about. As the company grows beyond the entrepreneur's span of control, things begin to fall through the cracks.
"More is better" syndrome. During go-go, the founder always reports progress in terms of sales growth. The entrepreneur thinks, " More equals better. If sales keep going up, we must be doing good in all phases of the business." This myopic focus on sales causes problems in other areas of the organization and to the balance sheet.
Wakeup call. As a result of these problems, every go-go company eventually makes a major mistake or encounters a disaster of some kind, such as taking a huge financial hit from an unprofitable acquisition or losing a major customer. If the company is lucky, the disaster serves as a wakeup call. If not, the founder can lose overnight what may have taken years to create.

"Go-go is a very interesting phase," notes MacDougall. "The entrepreneur -- who founded, nurtured and grew the company to this point -- now becomes the source of most of the organization's problems. Of course, the founder doesn't want to acknowledge this, so everything goes along just fine until the major disaster hits. At that point, the founder suddenly realizes that more is not better and that he or she had better start bringing some order to the organization before it gets completely out of control."

You can't avoid these go-go problems. However, to keep the damage to a minimum:

Stay focused (as much as possible). Before adding any new product, acquiring another line of businesses or plunging ahead with any new venture, ask yourself, "Why am I doing this? Does this really fit our business? Do we have the core competence, knowledge and skills to take this on?"
Don't spread yourself too thin. Entrepreneurs love to work hard and make things happen, but they can only do so much. Ask yourself, "Do I really need to take on this new role or responsibility? Does this truly add value to the organization or will it distract me from more important duties?"
Keep your ego in check. Just because you have had some success with your small company, don't automatically assume that you now have the magic touch. Watch out for other signs of entrepreneurial ego, such as shedding your spouse for a "trophy" wife or husband and getting involved in the larger community in order to "get the respect you deserve."

"Unfortunately, it's almost impossible to prevent go-go companies from making a barn-burner mistake," says MacDougall. "It's like telling a young child not to touch the hot stove. No matter what you say, they will touch it anyway because they have to learn for themselves. Go-go companies have to do the same thing. Until they make a mistake and get hurt, they are not willing to take the steps needed to grow to the next level."

^ top

Adolescence

In go-go, everything is a priority. In adolescence, the founder finally recognizes the need for some discipline and structure. In most cases, the founder hires an experienced manager from outside the company to institute rules, regulations and policies. Naturally, this sets off a whole new (and predictable) round of problems and challenges:

Resistance to the new policies and procedures. Interestingly, the founder is usually the first to violate the newly established rules and regulations. Once the founder violates them, others feel free to do the same. Soon, the company returns to the anarchy prevalent during the go-go stage.
Improper organizational structure. The go-go organization organizes around the needs of people. Adolescent companies need to organize people around the needs of the organization. This usually requires a lot of reorganization, which people tend to resist.
Changing goals. In earlier stages, the main goals are survival, growth and market share. In adolescence the company starts to focus on profits. Some of the "old-timers" may resist the changing goals.
Lack of information systems. As the company grows and roles become more distinct, the need for communication increases. Up to this point, however, the company hasn't invested much in the way of information systems, which makes it difficult for people to get the information they need to do their increasingly specialized jobs.
Role clashes. In order to install systems and procedures, the founder hires a professional manager. In terms of skills, priorities and personalities, the two are like night and day. Founder and new manager frequently bump heads over what needs to be done (especially if the entrepreneur hasn't clarified the manager's role) and how it should be done. Often, it ends up with the founder firing the manager and having to start all over again.
Founder's trap. When it comes time to start delegating part of their responsibilities, the founder often finds it impossible to let go. The entrepreneur wants other people to make decisions, but doesn't trust them to make the right ones. Until the founder learns to delegate, the company can only grow to the extent of his or her abilities.

"As a result of all these changes, the organization gets distracted by tremendous internal conflict. It turns inward and starts to lose touch with customers," explains MacDougall. People spend increasing time in meetings discussing organizational problems, not customer issues. Many of the early employees, who liked the freedom of the younger company, get fed up with the bureaucracy and leave. Adolescence is a time of real turmoil and inner conflict for the organization."

To mitigate these adolescent growing pains:

Don't bring in the A role (the professional manager to provide organization and control) when the company is in a financial crisis. In particular, don't bring in the professional manager when sales have gone flat. By definition, the A role will focus the company on internal issues at a time when you absolutely need to focus on external issues, specifically, increasing sales.
Don't bring in the A role when you can't afford to be distracted from external activities. The introduction of the A role always causes the organization to look inward. If customer, market or other forces require an external focus, hold off on bringing in the A role until a more appropriate time.
Don't bring in the A role without a very clear organizational structure. Before hiring a professional manager, know exactly what that new manager will do and not do. This may involve restructuring a significant portion of your role so that you and the new manager don't end up fighting in each other's sandbox.
Trim the growth. Having a healthy garden requires periodically cutting back on the growth. In the same manner, adolescence is a time for trimming, which means deciding what the company will do going forward and -- more important -- what it will not do. In particular, this means letting go of all the opportunities the company pursued in go-go that don't fit the core business.

"Adolescence is a time to get rid of all the extraneous stuff the company took on during go-go and really get back to the core business," says MacDougall. "Unless the company sheds this excess baggage, it will never grow to the next phase."

^ top

Prime

To make it to prime (the Holy Grail of the organizational life cycle), companies must overcome enormous obstacles, both internal and external. Once at this stage, however, MacDougall believes that prime organizations have only one major challenge -- staying there. His prescription for achieving that goal involves two courses of action.

Continually redefine what business you are in. After prime comes stable, the first of the decline phases. In order to avoid decline and stay in prime, companies have to keep reinventing themselves by constantly redefining what business they are in. This critical activity requires defining your business according to the needs of your customer, not according to the product you sell. By doing so, you expand the boundaries of your market and open up possibilities for future growth.

"Suppose you have a regional paint manufacturing company that specializes in interior household paint," poses MacDougall. "Up to this point, the company has considered itself in the paint business. But you can only sell so much indoor paint. In order to continue growing, the company could redefine itself as being in the wall protection business. An even broader definition could extend to surface protection rather than just walls. Clearly, these definitions open up all kinds of possibilities for fulfilling new customer needs with a wide array of products and services.

"The key is remembering to define your business according to the customer and the needs of the marketplace. Once you hit prime, you can never spend too much time thinking about what you really do and why customers buy from you."
Continuously decentralize the organizational structure. As companies grow, they tend to add more and more layers of management, particularly after the A role attains a prominent position in the organization. However, those layers create distance between the company and its customers as well as between people within the organization. When that happens, the company becomes less responsive to customer needs and begins to lose the essence of what made it successful in the first place.

How do you avoid this fatal process? According to MacDougall, by creating individual profit centers/business units, each one focused on a different product group or market segment and led by someone with a strong entrepreneurial mindset. Instead of having one huge slow-moving battleship, the organization should look like a fleet of small cruisers -- light, nimble, each with its own commander who has plenty of decision-making flexibility within an overall strategy.

"To stay in prime, you have to keep the entrepreneurial role alive," insists MacDougall. "You do that by constantly redefining the business and by structuring the organization to reflect that. In today's markets, that can mean reinventing yourself as often as every 24 months. Customer needs change quickly, and the only way to keep up with them is by staying small and flexible.

"When you allow the company to remain large and centralized, the E role inevitably gets squeezed out. Once the E goes, it becomes impossible to respond to changing customer needs in a timely manner. You end up trying to teach the elephant to dance, and no matter how hard you try, you can't make an elephant dance."

^ top

Additional Resources

The following articles are accessible to members only. If there is something you are particularly interested in, just let me know by emailing sandy@tec.com.au.

Sustaining Growth: An Introduction
Structuring for Growth
Keeping the Growth Alive: How to Avoid the Aging Organization Syndrome
Financing Rapid Growth
Six Principles for Financing Growth
How To Avoid "Growing Broke"
The Entrepreneur's Dilemma: How to Get Through No Man's Land Without Blowing Yourself Up

Plus hundreds more in-depth, how to articles for executives, extensive members-only networking opportunities, one-on-one coaching, CEO forums, monthly executive group sessions in your area and more.

Are you a chief executive, president, VP, business owner or director? You may qualify for TEC membership. Contact me today: Sandy Haythorn, sandy@tec.com.au

Click here if you would like to receive quarterly “TEC Best Practices“

^ top