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Hitting the Wall on Growth

Growth is an aspiration for many family businesses. In fact, if owners want to create opportunities for employment and financial return as the size of the family expands over generations, growth is essential. So why is it easy for some companies to achieve their growth aspirations and difficult for others? A comparison of two successful family businesses demonstrates what it takes to achieve growth.

On the surface, these two companies have much in common. They have similar manufacturing operations and similar histories, with both nearing succession from the first to second generation. Both have grown successfully in the past and have similar growth aspirations for the future. Each has a rigorous strategic planning process through which they have developed detailed plans that outline the steps they will take to achieve growth. These steps are both realistic and attainable. So, why is one business exceeding its growth expectations while the other is having difficulty matching the performance it achieved last year?

Let's look at what is different about these companies. First, GrowthCo is larger and older than NoGrowthCo. Second, GrowthCo is the market leader in a business with strong brand recognition and high margins. NoGrowthCo is a local player in a market dominated by one major national player where competition focuses on price and margins are thin. Third, GrowthCo has recently brought in new senior management with experience outside its industry. NoGrowthCo has brought in a couple of new managers, but most members of the team have worked their entire career at NoGrowthCo and the new hires are all industry veterans.

Why do these differences translate into a difference in the ability to grow?

Age, Size and Growth

Most businesses grow through a natural evolution. When the business is started, the entrepreneur/founder does whatever it takes to get the business off the ground. Management is very hands-on, involved in every aspect of daily operations. They do not worry about whether or not the process to get the product out the door is the most efficient---they are just concerned with survival. In the entrepreneurial stage, determination and hard work make the business successful.

As the business grows, systems and processes must be established so that tasks can be accomplished consistently. This consistency is important to ensure product/service quality. Increased efficiency, allows management to spend less time thinking about daily operations and more time on about the future. Managers are able to delegate responsibility to employees who work for them because they can be assured that the business will operate effectively, even if they are not involved in every aspect of daily operations. Companies that reach this phase have transitioned to a professional organization.

GrowthCo, being larger and older, has already successfully transitioned to a professional organization. NoGrowthCo is still in the entrepreneurial phase. So why hasn't NoGrowthCo made the transition?

The number one reason that companies do not make this transition is that they do not recognize the need for change. Companies understand that the way they have done business in the past has allowed them to grow and be successful, so they don't see a need to do anything different. Even if they are aware of the need, human beings generally resist change. Unless they are dealing with a crisis, many managers will maintain the status quo. Some characteristics of family businesses make this problem even more prevalent. Often times family members in the business have never worked anywhere else, so they can't imagine another way of doing things. The founding generation may resist the next generation's suggestions that things should be different. They see the desire for change as a challenge to their legacy.

Level of Competition

Beyond size and age, our two companies operate in different markets. GrowthCo is in a much less competitive market which gives it several advantages over NoGrowthCo. First, GrowthCo has the luxury to think about the long term, while NoGrowthCo has to focus a lot of energy on making sure it does everything right today. NoGrowthCo cannot afford to make mistakes; every mistake it makes provides an opening for the competition to attack its market.

GrowthCo actually made several mistakes as it was growing through the transition from entrepreneurial company to professional organization. They made a couple of bad acquisitions and hired some senior managers that weren't a good fit. They were able to recover from these mistakes, however, without serious harm to the business. Thanks to their healthy margins, they were able to overcome the financial cost of these mistakes.

So does this suggest that in order to grow successfully, you need to be in a high margin business with little competition? Not at all. In fact, companies in competitive markets need to be even more proactive about making the changes needed to achieve growth. If the changes aren't made ahead of growth, problems caused by growth pains can invite opportunities for competitive attack. Case in point NoGrowthCo did not recognize that it needed to streamline operating and customer service processes in order to serve the additional customers required to achieve its growth goals. As a result, product quality and customer service suffered and their customer retention rate dropped.

Bringing In New Players

One last distinction between GrowthCo and NoGrowthCo is the difference in their management teams. As GrowthCo transitioned from an entrepreneurial to a professional organization, they brought on senior managers with experience outside the business. NoGrowthCo has added a few new managers, all industry veterans, but managers in key operational positions have risen through the ranks at NoGrowthCo, with limited outside experience.

As a result, GrowthCo's senior management recognized the need to change systems and processes to achieve its growth objectives. NoGrowthCo's team was slow to recognize the need for change, and when it did, no one had ever managed through the change that was required.

Here are five tips to keep from falling into the NoGrowthCo trap:

  1. Recognize the need for change.
    Just because the way you do business got you to where you are doesn't mean it will take you to the next level. Take a close look at the areas where you're fighting the most fires. Those are the areas you need to consider changing. And, make sure you dig into the root cause of the problems. Problems often surface in customer service. However, the true cause of the problem may be in operations, which is delivering a poor quality product.
  2. Invest in people.
    Take a close look at your management team. Do they have the skills, experience and desire to manage the transition from entrepreneurial to professional organization? You need people who:
    • embrace, rather than resist change;
    • are willing to consider different ways of doing things;
    • have the energy and creativity to investigate different ways of doing things and test them to see if they will work and;
    • are capable of delegating responsibility to their subordinates and managing their performance to ensure that they deliver results.
  3. Put infrastructures in place that allow you to grow.
    People are not the only change you may need to make. You need to take a close look at how you're doing things. Can your key operating processes be replicated consistently day in and day out? Or do they require constant management intervention? To move from an entrepreneurial to a professional organization requires putting systems and procedures in place that produce the same results day in and day out. These systems and procedures allow management to get out of day to day operations oversight and focus on exceptions.
  4. Get managers out of the day to day operations.
    To grow, management must focus its energy on creating a plan to achieve growth. If management spends all of its time focusing on daily operations, no one is focusing on growth. A rule of thumb is that senior management should spend 80% of its time thinking about strategic, long-term issues and 20% on daily operations. The higher you rise in the organization, the more of your time should be spent on the long-term.

Even when the systems and processes are put in place that allow managers to think about the long-term, some stay rooted in day-to-day decision making. They either don't have the desire or lack the skills to think about the long-term, or thinking about day-to-day issues is so ingrained that they have a tough time changing their behavior. Sometimes they are not comfortable delegating to their managers because they know they will be responsible for results in the end.

The best way to get senior managers out of this trap is to engage them in long-term planning and assign them long-term projects. If you set and hold expectations that these long-term projects will be delivered, senior managers will not have the time to manage day to day. In some cases, you may find that senior managers are not able to make the leap to this new management style. They may need to be replaced, or another manager may need to be hired above them.

  1. Get an outside perspective.
    It is always useful to engage the expertise of individuals who have seen operations outside your own. You don't need to reinvent the wheel in creating replicable systems and processes. There are thousands of companies, and employees of those companies, that have done it before. Get them to help you. As mentioned above, you can hire managers from outside to help. Another way to get outside experience is to add outside members to your advisory board or board of directors. Many industry associations support interaction among their members. You can often organize benchmarking visits to friendly competitors to see how they do things. Last but not least, you may want to hire a consultant to help you identify and implement needed changes.

Making the transition from an entrepreneurial to a professional organization is one of the toughest challenges that young businesses face. Many do not survive the transition. But, if you recognize the need for change, enlist the help of individuals who support this change and are not afraid of the future (mistakes and all) you will be able to achieve continuous growth.

 

 

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