By Dottie DeHart and Mary Best
If you’re a small business owner, you might be nodding along as you read these business mantras, agreeing wholeheartedly with each one. After all, it’s what you’ve always been taught. In fact, these popular business axioms routinely are lauded on Wall Street, in business schools and by some of today’s most well-respected business consultants. Few question their validity.
But, according to Edward D. Hess, these “truths” are anything but.
“At best those beliefs are half-truths and at worst they’re pure fiction,” says Hess, author of the new book Grow to Greatness: Smart Growth for Entrepreneurial Businesses. “Growth can be good and growth can be bad. Bigger can be good and bigger can be bad. ‘Grow or die’ is a belief that has no basis in scientific research or in business reality. When not approached carefully, growth can destroy value as it outstrips a company’s managerial capacity, processes, quality controls and financial controls, or substantially dilutes customer value propositions.”
Hess is professor of business administration and Batten Executive-in-Residence at the Darden Graduate School of Business at the University of Virginia. He’s the author of 10 books, more than 60 cases and more than 60 articles. His book Smart Growth: Building an Enduring Business by Managing the Risks of Growth was named a 2010 Top 25 Business Book for Business Owners by Inc. magazine.
In Grow to Greatness, Hess explains how myths came to define the way growth is approached by entrepreneurs, often to their detriment. The book lays out a framework for how to approach business development—and how to manage its risks and pace. Chapters show how to determine when the time is right for growth, how to grow and how to manage the reality that growth requires the right leadership, culture, processes, controls and people.
Hess’ book is based, in part, on his research into how growth has affected 54 successful private companies. He says he learned that several of the corporate leaders were repeat entrepreneurs who had “imploded” their first business by taking on too much growth too quickly. They learned to respect growth’s destructive ability and, in their second venture, they paced growth so that it didn’t overwhelm their people, processes and controls.
“Instead of ‘grow or die,’ be motivated by this motto: ‘Improve or die,’ ” he says. “Every business must continually improve its customer value proposition better than its competition in order to stay viable. That’s where real success lies.”
If everything you know about growth is wrong, what’s right? Here are Hess’ truths about growth:
1. Growth is change—and change isn’t easy. There are limits to an organization’s capacity to process change. Growth requires a company to install more processes, procedures, controls and measurement systems. The right processes and controls must be put in place and taught to employees. In addition, the right information regarding variances from processes and controls needs to reach managers so mistakes can be fixed quickly.
“Growth also requires that entrepreneurs change what they do,” Hess says. “Successful and sustainable growth requires the right kind of leadership, the right environment (culture) and the right processes.”
2. Growth is evolutionary. Growth requires the evolution of the management team and more sophisticated processes and controls. Often, if not always, the business model and customer value proposition evolve, too. This evolution is continuous, and anticipating and responding to it can necessitate making some fairly dramatic—and difficult—changes.
In his research, Hess found that companies frequently had to upgrade their management teams as they grew.
“Often managers who operated effectively at one revenue level of the business were unable to manage effectively at a much higher revenue level,” he says. “The jobs simply outgrew their skills. The need to upgrade managers to fit the expanding job demands was gut-wrenching for many entrepreneurs because the now-ineffective manager had often had a successful history with the business but was now in over his or her head.”
3. Growth requires continuous learning and constant improvement. Leaders, managers and employees must be open to learning, adapting and improving in an incremental, iterative and experimental manner. No matter how big you get or want to be, continuous improvement is required.
“In my research of high organic-growth companies, I found that one factor they all share is a ‘be better’ DNA,” Hess says. “Their ‘be better’ focus was the underpinning of every growth initiative, whether it was top line, bottom line or developing new concepts. Continuous improvement is the DNA of growth. Improving your product or service, how you deliver it to your customers and every customer touch point is necessary to stay in business and grow your business.”
4. Growth requires disciplined focus and prioritization. The leader must strategically focus the business on a differentiating customer value proposition and achieving daily operational excellence and consistency. Hess writes that one chief executive officer provided this description of the company’s strategic business focus: “Be 2 inches wide and 2 miles deep.”
“Every entrepreneur has limited resources and time,” Hess says. “To be successful, businesses must prioritize their focus because every growing business has resource constraints: limited people, time and capital. So it is critical that entrepreneurs spend their time on the most important areas that can drive success. These priorities, however, may vary with the type of business or the phase of growth.
“To set priorities, entrepreneurs must have concrete and useful data about their business, communicate the priorities to their personnel and implement processes to ensure that these priorities are carried out. One entrepreneur who I interviewed prioritized his focus simply as customers, quality and cash flow. He said that if an issue did not impact directly and materially one of those three areas, it could wait.”
5. Growth is process intensive. Growth requires implementing processes, which include controls. Processes are like recipes for baking a cake. They are the step-by-step instructions for how to perform a task. Processes are necessary to hire and train employees, minimize mistakes, institutionalize quality standards, and deliver products and services on time, defect-free.
“Processes are the ‘how’ part of doing business,” Hess says. “As businesses grow, the entrepreneur loses the ability to be hands-on with all aspects of the business. There is simply too much to do. So the challenge is for entrepreneurs to increase the probability that others will perform the tasks as they would like them done. To accomplish this goal, entrepreneurs implement processes.
“There are two basic types of processes. The first includes directions, recipes, instructions and standards for how to do specific tasks. These include rules or controls for mitigating financial and quality risks. Most processes are designed to instruct an employee how to do something or what not to do. The second type has a goal of producing reliable, timely data or feedback that will reveal variances or mistakes. These data-collecting processes are designed to get the key data in the hands of the entrepreneur quickly as the business grows.”
6. Growth creates business risks that must be managed. Growth stresses people, processes, and quality and financial controls. Growth can dilute a company’s culture and customer value proposition and put the business in a different competitive space. Understanding these risks is critical to managing the pace of growth and preventing growth from overwhelming the business.
“To get a better handle on growth risks, consider how your strategic space will change as you get bigger,” Hess says. “You will probably enter a new competitive space, facing bigger and better competitors than you previously faced. Those new competitors may be better capitalized than you and be able to engage in price competition, driving down your margins.
“The good news is that you can minimize this and other big risks by planning for growth, pacing growth and prioritizing what controls and processes you need to put in place prior to taking on much growth. I call it ‘what can go wrong’ thinking, and entrepreneurs can’t indulge in too much of it.”
Hess argues that he’s not anti-growth.
“Growth can be good or bad—it depends. Aggressive, untimely or poorly managed growth can hurt a business and even destroy value. And, in some cases, too much growth can lead to business failure. Don’t make growth for growth’s sake your business’ goal,” he says. “When you approach growth carefully, you can take your business to greater and greater heights.”