This is the first installment in a series on Building a High Growth Business and scaling it up. Click Here for Part two.
The barriers to building and scaling a high-growth business.
Out of all companies in the world, less than 4% ever reach more than $1 million in revenue. Of those, only about one in 10 ever make it to the $10 million revenue mark and only a handful surpass the $50 million mark. At the very top, seat an even smaller group, with revenues exceeding $500 million.
The common thing about most of these companies, even some of the giant mammoths we see today, is that they started small. Then, with a series of growth steps, persevering through treacherous expansions, and acquisitions for some, and even a dance with luck, they became what we know them to be now.
The growth paradox- Is it wind at your back or an anchor holding you down?
For most entrepreneurs and founders, scaling up the company is the ultimate dream —but for many, it can also be a nightmare.
The growth that you once looked forward to brings with it its own share of challenges. Every employee you hire, every new customer you acquire, every expansion you drive at; all seem to stretch you too thin and you find yourself constantly tired. You are now working ungodly long hours and the load gets heavier and heavier, like an anchor pulling you down.
You find yourself wondering, “Is this what I really signed up for? Isn’t it supposed to get easier as I scale? What is happening?”
That’s the growth paradox; the belief that as you scale and grow the organization, increase your clients, employees and have more resources, that things will get easier. But they don’t. Instead, things get more complicated and much harder.
Understanding this new complexity
To understand what causes this increased difficulty in running the organization, let’s look at the change in complexity as more people join the organization.
At the start, it’s just one founder or two. Then an assistant comes along, followed by an accountant or another technician to help out with the growing workload and before you know it, you are up to 10.
In the least complex organization, when there are only two people, you start with just 2 channels of communication. (As anyone in a relationship knows, that too is not a walk in the park) Add a third person and the degree of complexity triples; from 2 to 6. Bring in a fourth and now it shoots to 12.
What defines the complexity is not necessarily the turnover but the employee count in the organization. If you figure that a single individual can comfortably lead a team of 7- 10 others, then some natural clusters begin to emerge.
- At the first level of organizations, where most home-based businesses operate, you will find 1 to 3 employees.
- Climb up the chain a little and you find a cluster of 8 to 12 employees which typically represents a very efficient system with a single leader.
- A few ranks above sit companies with about 40 to 70 employees; the senior team consists of 5-7 people leading teams of about 7 to 10 and everyone in the company knows their colleagues by name.
- For the large firms, it’s 350 to 500 employees. Here, you need about 5-7 leaders with several middle-level managers below them each running teams of about 7- 10. Needless to say, by now, half of the staff don’t know each other.
- Then there are those with more than 2500 employees, with more multiples of 7- 10, leaders, managers et cetera. At this point, the level of complexity cannot even be computed.
Any organization that has an employee count lying between the natural clusters above is very likely to feel stuck. It may be at a point where it’s bigger, but not quite big enough to have the next level of systems and talent needed to sustain the growth. Such as when transitioning from a natural cluster to the next e.g. from 3 employees to 8 or from 70 to 200.
As every organization grows, there are predictable evolutions and cycles it must go through to get from one level of growth to the next. These are determined and shaped by the increasing level of complexity that comes as a result of additional customers, employees, product lines, locations, etc.
For a company to successfully handle this growth, three things must align. Ignore any of them and the growth of the company will lead to its demise as all functions crumble from within. The three requirements are:
- an increasing number of capable leaders,
- a scalable infrastructure or business system and
- an effective marketing function.
1. Capable Leadership
A company will always follow the way its leader goes. If there are challenges existing within the organization, they can often be traced easily to the cohesion and effectiveness of the executive team. On the other hand, for many winning organizations, you will find good competency in three leadership functions: prediction, delegation and repetition.
One challenge that most leaders face is trying to find an edge in their business. For them to do this, most believe they need to be years ahead, but that’s not always the case. A competitive edge can be achieved by being just minutes ahead of the market, the competition and even those being led.
The key to finding it is to have frequent interaction with your customers, employees and competitors.
This is relatively easier when the company is small and its leadership team, or lone entrepreneur, is directly handling all the programming of the software or baking of cakes, the sales and even delivery of the services or products. However, as the company grows, this becomes increasingly more difficult. The senior leaders become more isolated from the customers and the frontline employees thereby losing their gut feel for the marketplace and the business.
A few leaders understand this and often break off the hierarchical walls to spend some time with the customers to personally understand their biggest pain points and how they can serve them better. Those who don’t, are slowly increasing their distance to the very thing that is the lifeblood of leadership.
Even if a leader is clear on where they want to go and knows how to get there, they cannot do it alone. As the company grows, it becomes necessary for others to take over various roles and functions. Learning to let go and trust others to do things as well is another challenge faced by a leader of a growing organization.
For a company to grow to 10 employees, the founders must delegate activities in which they are weak. However, to get to 50 employees or beyond, they now have to delegate functions in which they are strong. In many cases, at this point, the strength of the top leader becomes the weakness of the organization. Eg. If the founder is the lead sales driver and also the CEO, as the company grows, you might see a stagnation in revenue or everyone will ignore the bigger picture.
As leaders hand over the reins to others, it is important not to confuse delegation with abdication. Abdication is when the leader blindly hands over a task to someone with no normal feedback mechanism and expects them to do well at it. For delegation to be successful 4 critical components must be established:
- A clear description of exactly what the team or individual need to accomplish
- A measurable system for monitoring progress
- A two-way feedback loop between the leader and the team or individual
- Times reward and recognition
The leader’s final job is to keep the organization focused on the core message and everyone headed in the same direction. This can only be done by leading by example. Finishing what you start. Meaning every word you say. Not saying one thing and then doing something else altogether. As the leader remains consistent in their action, that repetition is slowly adopted by the organization as its culture.
To do so, the leader must understand a few things:
- Their core values: the said and unsaid rules that define how they do things and how they would like the others to operate.
- The core purpose of the organization and always finding a way to engage others to deliver on it.
- The long-term goal that the company aims to achieve in the next 10 -25 years. This will guide the decisions made by interrogating if they will get the company to the desired goal.
- The priorities for the next 3-5 years, next 1 year and even the next quarter which will inform the daily and weekly tasks needed to actualize them.
Leadership involves frequently delivering the messaging and metrics to assess and reinforce these key characteristics of the company and its culture.
2. Scalable Infrastructure
The complexity of an organism increases as it grows, that’s the law of nature. The amoeba can do everything in a single cell; just as the solopreneur when starting out alone. However, as the organism’s cells increase, it begins to develop systems and subsystems – for circulation, feeding, elimination, etc. So as to survive, each cell must be located close to a source of nutrition.
So too is it for organizations in which case, the subsystems represent the various functions, business units and locations within the company. As the subsystems grow, they must continue to divide otherwise, they will become too big and unmanageable.
In order to keep things running smoothly, a company needs scalable infrastructure. As it grows from, say 2- 10 employees, there is a need for better communication systems and even more structured spaces. At about 50 employees, in addition to improved communication and working spaces, there’s also the need for a robust accounting system that precisely tracks and reports on which projects, products and customers are actually bringing in money.
Between 50 and 350 employees, the company’s information-technology system might need more integration, through an upgrade or even an overhaul. If this is not done, a simple change in the original inputs e.g. a customer’s change of address can lead to a series of costly mistakes.
Apart from the systems, the positioning of different departments also affects the scalability of a company. In deciding where to physically locate teams and employees, it’s important to look at which functions can be co-located. These may have a knock-on effect on the design of the workspaces, break rooms, meeting rooms and even restrooms. This is especially important if the organization grows to occupy a second floor or more.
If this conscious design of spaces is not taken into account, serious communication issues could surface when employees on different floors don’t occasionally bump into each other. The goal as you scale is to increase cross-functional interaction so as to generate new ideas and to keep the company vibrant and on the same page.
Finally, the third functional barrier to scaling up is an organization’s lack of an effective marketing department that’s distinctly separate from sales. Marketing is crucial for two reasons. First, it attracts the much-needed new business relationships ranging from clients, advisors, investors, etc.
Secondly, it helps to address competitive pressure and the eroded margins as the company grows. To do so, the marketing function must answer three main questions:
- What is right for you to be selling?
- Who is the best customer to sell it to?
- How best should you sell it and at what price?
Regis Mckenna, the author of the classic book, Relationship Marketing: Successful Strategies for the Age of the Customer, taught Steve Jobs, Andy Grove and most of the technology stars at Silicon Valley how to market in the ’80s but his lessons still remain true to date. His lessons to these tech startups on marketing were twofold.
The weekly marketing meeting
First, he believed that the key to effective marketing is deliberately setting aside at least one hour per week to focus on marketing by establishing a marketing meeting.
A major agenda on the weekly marketing meeting is what Dr. Philip Kotler described as the 4Ps of marketing- Product, Price, Place and Promotion. Out of the four, Price tends to be most ignored yet it is one of the most important decisions you will make.
In addition to these, Olgivy’s 4E’s of Marketing, namely Experience, Exchange, Everyplace and Evangelism will provide a good discussion framework around your marketing options.
Finally, in that marketing meeting, it’s important to look for ways to identify and attract the right (best) customers to the business. Once this is done, the sales team can be armed with a definitive list of realistic prospects as well as adequate information to help them make the sale. If this is not done, they will always be chasing any low-lying fruit which quickly defocuses the organization and crushes your margins.
A list of influencers
Secondly, he advocated for each leader to make a list of the top 25-30 (250-300 for the big firms) influencers and relationships that you would wish to get behind a certain project to scale it up.
The leaders are supposed to spend time each week figuring how to network their way to these people armed with a compelling vision, wrapped in an elevator pitch, to convince these influencers to help. The more influential the names on your list, the more potential you will have to grow the business faster and to a larger size.
When Verne Hanish, CEO of the Growth Institute and founder of the Entrepreneurs Organization was a University student, he read of this list and being young and ambitious, he included the then President of USA, Ronald Regan, Michael Dell, Steve Jobs and the owners of The Venture and Inc Magazines in his list of 25 influencers to reach out to.
Surprisingly, in less than 3 years of working on that list at least one hour every week, his first venture, The Association of Collegiate Entrepreneurs (ACE) became an international success. It hosted a major event in Los Angeles with over 1100 entrepreneurs in attendance including Michael Dell and Steve Jobs. They also had full-page ads for the organization donated by Venture and INc magazines. The icing on the cake was a congratulatory message via telegram for President Ronald Reagan. (You might want to write down that list immediately and start working on it.)
All this in summary
As a leader, it’s important to understand the growth paradox and figure which side you lie. Is the expansion of your business fueling more growth or is it acting like an anchor? Do you have in place the right systems in place to handle the ever-increasing complexity? If not, get to building them from the ground up starting with just one function and moving from there.
As you focus on creating a scalable infrastructure for your business with well-defined, effective systems and subsystems, it is also vital that you nature and groom capable leaders to take over various functions. Finally, the leaders themselves must be market-facing so as to spearhead the attraction of new business relationships especially those influential ones that will propel the business to unimagined heights.
If you can get your organization to adopt this new growth framework, you will avoid the costly mistakes that so many make and will navigate around the barriers that stop most companies in their quest to scale up.
In the next article in this series, We’ll dive further into the major decisions you need to focus on as you scale up your business.