GROWTH SECRETS: Assembling a capable management team

Why is it that only a minority of start-up firms ever get beyond six employees and less than 5% ever develop to more than 20 employees? Even when all the external conditions are highly positive, few firms develop into gazelles, ie. firms which experience 20%+ growth rates over several years.

If the demand side of the market is growing and the barriers to entry are low, one would expect there to be a large number of firms capable of taking advantage of the market conditions to grow to a reasonable size. The evidence is, however, overwhelming that very few will ever develop into any substantial size. The answer, therefore, must lie with the management of the enterprise itself.

It is very obvious that many owner/managers have no desire to grow, being content to limit the development of the business to suit their lifestyle. Others simply do not have the knowledge, skills or aptitude to grow the business. For some, it is a lack of imagination and they are simply following the footsteps of others but are unable to find creative means of advancing beyond the business model they started with. Some are limited in personal financial resources and are unable to persuade others to assist them financially.

Then, of course, there are those who have a need to micromanage the business.
Since they must be involved in every decision and oversee every activity, they inhibit the growth of their enterprise through their own intervention. There are also those owners who have the desire to grow but simply have poor judgement, hiring the wrong people, taking the wrong advice and following strategies which have low probabilities of success.

Clearly some businesses fail to grow, not because of limitations in management talent and experience, but because the external conditions seriously inhibit their growth. This could be the high cost of finance, a severely depressed economy, a lack of skilled workers, severe competition with their chosen sector and import and/or export restrictions.

In situations where the environment provides positive support for growing firms, high growth firms tend to display similar characteristics.

There is a growing body of research which shows that the more successful firms are started by individuals or groups of executives who have significant experience within the industry in which they start a new venture. These firms understand how to work within the sector, have extensive networks which enable them to recruit good staff and are able to establish strategic partnerships within the industry, contracts with established suppliers and open doors to key customer accounts. They bring to their new venture knowledge of how to identify and manage risks within their sector and knowledge of systems, processes and policies for undertaking larger volumes of business. They develop organisation structures which can readily grow to the level which they hope to operate at.

However, it takes more than industry knowledge and a capable management team to grow a business over an extended period of time. Very few markets are stable over many years, being impacted by new inventions, new entrants and changing business models. Thus any business which grows over an extended period of time must have an entrepreneurial capability. This is the ability to see opportunities where others don’t, an ability to construct different business models, a strong sense of timing about market changes, a willingness to have a go in the face of incomplete or ambiguous market data and the acceptance that some projects will fail.

Driving a business forward in the face of changing conditions also requires leadership and good judgement. A strong vision, a sense of partnership and involvement and a sense of personal achievement and growth are all characteristics of a positive work culture. A business grows over time, not by doing the same thing all the time, but by evolving to take advantage of opportunities in the market place. A business which is open to new ideas, willing to try new approaches to doing business, encourages people to try small experiments will proactively generate avenues for growth.

Growth itself creates organisational strains. New employees must be brought into the organisation and assimilated, new areas of specialisation will be needed, lines of communication will get longer, systems of reporting become more
formalised and so on. The growth of the organisation is limited to the extent that current employees can absorb and assimilate new staff. If retention of existing staff is low, this places a severe limitation on the rate of growth of the business.

Clearly growth is limited by the rate at which new employees can be recruited, trained and assimilated. Thus higher productivity and growth can be influenced by reducing attrition or turnover. High growth firms seek ways of keeping good staff, encouraging them to see career opportunities inside the firm rather than outside and by developing their skills so they can make a greater contribution to the firm.

Individuals who understand how the firm works and have developed extensive personal networks inside the firm are able to make a greater contribution to the growth of the business than a new recruit. Since the time taken to assimilate or inculcate new recruits limits growth, firms which devote additional resources to assimilating new employees will provide a better platform for growth.

In order for a business to grow, all parts of the business must work in harmony. This means that each individual must co-ordinate their activities with those they connect to in the business. If each person is required to have their actions and decisions reviewed with several other people in the firm, the productivity of each individual is going to be very low. Productivity is therefore increased where individuals are able to make decisions without such review. This is achieved by having policies which guide decision-making and actions and physical systems which direct the flow of products through the valued added activities.

Thus the more the business is able to devolve decision-making and provide guidance through polices, procedures and systems, the higher is the potential rate of growth. Decision-making also needs to be supported by a strong vision and a set of values against which decisions can be tested. The more that decision-making can be made without detailed review, the higher the potential productivity of the business.

High growth firms recognise that senior management have limited time to review decisions throughout the business. These firms typically have highly decentralised structures, often breaking the business up into smaller business units as the business grows. They also have a strong set of organisational values and a strong vision which guides decision-making. Induction programs for new employees spend considerable time educating them on the culture of the organisation and the manner in which it does business. Staff who follow these principles need less supervision and therefore less time is taken within the organisation on managing others. These firms also have superior target setting systems, performance review systems and highly developed personal incentive schemes to stretch employees to work towards common organisational goals.

Some firms have introduced schemes to capture ideas and suggestions of employees, acknowledging that creative and useful ideas are not limited to senior management. Some firms provide training in opportunity evaluation and business planning to allow individuals to test out their ideas and put them forward for funding. While this will not necessarily generate significant new revenue streams, it does build a culture of openness and a feeling of involvement for employees.

High growth firms also have resilience. Experienced business executives know that business plans are very rarely implemented as written. Every plan is based on a number of assumptions and those often prove to be unfounded or are invalidated by economic, environmental and industry changes. Thus the business may not develop in the manner originally planned. Experience shows that the best solution to this problem is to have a proven management team which has the experience to cope with the changes which inevitably will occur.

Thus an executive team which has the qualifications, experience, mix of skills and industry networks to implement the original plan is important but the team also needs to have the ability to react to changing conditions and still be able to achieve reasonable results. To some extent this is simply business wisdom. A team which includes industry executives who have been through several business cycles and perhaps some industry restructuring should have this capability.

Some businesses bring this knowledge in house through a Board of Directors and/or a Board of Advisors. These groups would include older industry executives but may also include executives and professionals from other sectors which can bring new insights into problems faced by the business.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.