www.wdc-econdev.com - RISE CAPITAL



Managing Rapid Growth

'Bite off more than you can chew, and then chew it!"

- Roger Babson, Founder, Babson College

Inventing New Organizational Paradigms

It is the nimble and fleet-footed entrepreneurial firms that have sup­planted the aging giants with new leadership approaches, a passion for value creation, and an obsession with opportunity that has been unbeat­able in the marketplace for talent and ideas. These entrepreneurial ven­tures are the job creators, dinosaur killers, and backbone of the economy.

Because of their innovative nature and competitive breakthroughs, entrepreneurial ventures have demonstrated a remarkable capacity to invent new kinds of organization and management. They have aban­doned the organizational practices and structures typical of the indus­trial giants from the post-World War II era to the 1990s. Larger firms tend to lack creativity and the flexibility to deal with ambiguity and rapid change. Many of them made up for this with rules, structure, hier­archy, and quantitative analysis.

The epitome of this pattern is the Hay System, which by the 1980s became the leading method of defining and grading management jobs in large companies. Scoring high with "Hay points" was the key to more pay, a higher position in the hierarchy, and greater power. The criteria for Hay points include number of people who are direct reports, value of assets under management, sales volume, number of products, square feet of facilities, total size of one's operating and capital budget, and the like. One can easily see how to get ahead in such a system: be bureau­cratic, have the most people and the largest budget, increase head count and levels under your control, and think up the largest capital projects. Note that missing in the criteria are all the basic components of entre-preneurship we have seen in this book: value creation, opportunity cre­ation/seeking/seizing, frugality with resources, bootstrapping strategies, staged capital commitments, team building, achieving better fits, and juggling paradoxes.

Contrast the multilayered, hierarchical, military-like levels of con­trol and command that characterize brontosaurus capitalism with the common patterns among entrepreneurial firms: they are flat (often only one or two layers deep), adaptive, and flexible; they look like interlock­ing circles rather than ladders; they focus on customers and critical mis­sions; they are based on education and influence rather than on rank and power. Entrepreneurs lead more through influence and persuasion, which are derived from knowledge and performance rather than through formal status, position, or seniority. They create a perpetual learning culture. They value people and share the wealth with those who helped create it.

Entrepreneurial Leaders Are Not Administrators or Managers

For the growing business, the general focus is on decisions owner-entrepreneurs make in recognizing and choosing opportunities, allo­cating resources, motivating employees, and maintaining control - while encouraging the innovative actions that cause a business to grow. The small business owner's challenge is to learn how to dance with ele­phants without being trampled to death! The ultimate goal of the entrepreneur is to develop the firm to the point where it is able to lead the elephants on the dance floor.

Consider the following quotes from two distinguished business leaders:

"MBAs are people in Fortune S00 companies who make careen out of saying no!"

- Fred Smith, founder, chairman, and CEO of Federal Express

"There isn't any business that a Harvard MBA cannot analyze out of existence!"

- General George Doriot, father of American venture capital and professor at Harvard Business School

Those are profound statements, given the sources. These perceptions also help to explain the stagnancy and eventual demise of brontosaurus capitalism. After all, legions of MBAs in the 1950s, 1960s, 1970s, and early 1980s were taught the brontosaurus model of management. Until the 1980s, virtually all of the cases, problems, and lectures in MB A pro­grams were about large, established companies. That has changed over the last decade as more MBA programs have introduced and expanded entrepreneurial offerings. Yet in many programs, the brontosaurus model is far from being extinct.

*Extracted from Donald L. Sexton and Forrest I. Seale, "Leading Practices of Fast Growth Entrepreneurs: Pathways to High Performance." Based upon data developed by the Ewing Marion Kauffman Foundation, Ernst & Young LLP and the Entrepreneur of the Year Institute. 1997. All rights reserved.

tive decision making; and plan with vision, clarity, and flexibility. Clearly, rapid growth is a different game, requiring an entrepreneurial mind-set and skills.

Growing Up Big

Stages of Growth Revisited

Managing and growing a high-potential small business is a different managerial game than sustaining an operation. Ventures in the high-growth stage face forces that tend to limit the creativity of the found­ers and team; that cause confusion and resentment over roles, responsibilities, and goals that call for specialization; that require oper­ating mechanisms and controls and therefore erode collaboration. You will find this contrary to the entrepreneurial behavior you are used to. The reality is that structures, procedures, and patterns are fluid, and all members of the organization - not just the founder - will have to respond with entrepreneurial thinking.

The first three years before start-up are called the researcb-and-development (R&D) stage; the first three years, the start-up stage; years four through ten, the early-growth stage; the tenth year through the fif­teenth or so, maturity; and after the fifteenth year, stability. Remem­ber that these time estimates are approximate and will vary by industry and particular circumstances.

Various models depict the life cycle of a growing firm as a smooth curve with rapidly ascending sales and profits and a leveling off toward the peak before dipping toward decline. In truth, however, very few, if any, growing firms experience such smooth and linear phases of growth. By and large, if the actual growth curves of companies are plotted over ten years, the curves will look far more like the ups and downs of a roller-coaster ride than the smooth progressions usually depicted. Over the life of a typical growing firm, there are periods of jerks, bumps, hic­cups, indigestion, and renewal interspersed with periods of smooth sail­ing. Sometimes there is continual upward progress through all this, but with others, there are periods where the firms seem near collapse or at least in considerable peril. Ed Marram, an entrepreneur and educator for twenty years, characterizes the five stages of a firm as Wonder, Blun­der, Thunder, Plunder, and Asunder (see Exhibit 8.1). Wonder is the period that is filled with uncertainty about survival. Blunder is a growth stage when many firms stumble and fail. The Thunder stage occurs when growth is robust and the entrepreneur has built a solid manage­ment team. Cash flow is robust during Plunder, but in Asunder the firm needs to renew or it will decline.

Core Management Mode

As was noted earlier, changes in several critical variables determine just how frantic or easy transitions from one stage to the next will be. As a result, it is possible to make some generalizations about the main man­agement challenges and transitions that will be encountered as the cornpany grows. The core management mode is influenced by the number of employees a firm has, which is in turn related to its dollar sales.*

Until sales reach approximately $5 million and employees number about twenty-five, the core management mode is one of doing. It becomes managing with between $5 million and $ 15 million in sales and twenty-five to seventy-five employees. When sales exceed $10 million and employees number over seventy-five, the core management mode is managing managers. Obviously, these revenue and employment fig­ures are broad generalities. The number of people is a better indicator of the increasing complexity of the management task, and suggests a new wall to be scaled, rather than a precise point. Explosive sales per employee was one of the failed promises of the Internet, and to some extent the irrational dot-com valuations of the late 1990s were an antic­ipation of technology massively leveraging variable employee expense.

The central issue facing entrepreneurs in all sorts of businesses is this: as the size of the firm increases, the core management mode like­wise changes, from doing, to managing, to managing managers. During each of the stages of growth of a firm, most firms will confront entre­preneurial crises, or hurdles. Here we consider by stage some indica­tions of crisis.1" As Exhibit 8.2 shows, for each fundamental driving force of entrepreneur ship, there are a number of "signals" that crises are imminent. While the list is long, these are not the only indicators of crises new ventures can and most likely will see - only the most com­mon. Of course, each of these signals does not necessarily indicate that particular crises will happen to every company at each stage - but when the signals are there, serious difficulties cannot be too far behind.