Guide to Managing Growth Read online

  The model envisages seven stages in the growth of a business:

  D Dreaming up the idea of a new business, developing plans and defining start-up requirements.

  I Initiating the business plan and inspiring others in order to establish a presence in the market. This is the implementation of the dream.

  A Attacking the first problems of growth and coping with adolescence. During this stage the business has the ability to survive and it can provide a good living for its owners. However, it is not robust enough to sustain a major change in its market or operating environment, and its cash flow and customer base limit its long-term prospects. As a business passes through this stage, the pressures of growth accelerate. Wise and well-advised owners recognise that although the business has succeeded so far, it will not be sustainable for long if it does not anticipate the next stage. For others, failing to recognise and react to the pressure to grow up organisationally can lead to a gradual loss of control, and to accumulating pressures that lead to anxiety rather than action and result in stagnation and even failure.

  M Maturing the business with an emphasis on establishing controls, systems and methodologies. Management is professionalised to deal with the size and complexity of the customer base or the organisational structure of the business.

  O Overhauling the organisation with a clear focus on objectives. The business is more competitive and has a strong customer and marketing orientation, but there is a sense that something has been lost after years of going for growth and a consequent yearning to recapture the spirit of the business at start-up – or at least to recapture the essence of entrepreneurship that at times seems threatened by necessary disciplines of control. There has to be, in short, a reaction against the tendency to overmanage and stifle creativity and enterprise if the business is to make it big time.

  FIG 2.4 The DIAMOND model

  N Networking the units of the business. Strategic processes have become as important as tactical ones. Maintaining and developing a corporate image are important and, by now, earnings are often being managed for a diverse stakeholder group. The personality of the business – its “culture” – is now more influential than the personality of the entrepreneur who founded it.

  D Diversifying into new products and markets. Driving growth through strategic alliances and commercial interdependencies that enable rapid responses to market opportunities in a fast-changing world. The culture of organisations in this stage is highly focused. The means by which they operate – and the markets in which they choose to do so – are highly flexible. The rate of growth, year on year, often decelerates as a function of the size of the business. This stage also implies a return to the start, the establishment of new businesses within the business in the search for renewal and product development – entrepreneurship reborn as intrapreneurship.

  The use of the DIAMOND mnemonic indicates how far the model has moved from the world of academia and towards that of practical applicability. If it wants to be used, it needs to be remembered.

  Other features of the model come from practical experience. Unlike the models discussed so far, the stages, though discrete, overlap. There are echoes of Greiner’s crises here, but DIAMOND takes them further, turning crises into “transitional issues”, and envisaging that businesses can be in more than one stage of evolution at the same time, and that to presume otherwise is simplistic. Figure 2.5 shows that growth is not linear. It is possible for a business to exhibit the characteristics of more than one stage of growth at a time.

  Greiner’s crises in part are a product of the tension between two adjacent stages of evolution, with the problems of the later stage sown in the solutions to the earlier stage. Churchill, when discussing management factors, notes that the skills and qualities required for addressing the problems in one stage of evolution are less relevant to another stage, implying that it is potentially a problem if a business cannot be tidily allocated to one stage of evolution or another.

  Some advisers working with real businesses have taken these worries further. A UK clearing bank put together a training programme for managers servicing small and medium-sized businesses to impart knowledge of the problems those customers faced. It also prepared a set of diagnostic tools, including an exercise based on Churchill’s model, requiring managers to assess which stage of growth a customer might be in. If a business exhibited characteristics typical of more than one stage, the diagnostic tool invited managers to consider whether that customer might be a credit risk to the bank.

  Although the bank was instilling knowledge in its staff about the distinctive issues that might affect smaller businesses, its interpretation of the implications of a business exhibiting different stages of growth at the same time is questionable. Real businesses use growth models to help them understand challenges and to address them, but invariably real businesses are too complicated to be tidied into one box or another on a model. There are real estate agents with an “eat what you kill” culture that have sophisticated selling and marketing systems but rudimentary HR processes. The imbalance here is recognised and indeed fostered by the senior managers. This is the sort of business they want to run. Then there is the company seeking to innovate. A separate subsidiary has been established for the purpose of taking the new service to market. The subsidiary and its parent are at different stages of evolution; at the same time, both parts of the company need to take advantage of the ties that bind them. Some might argue that each part of the business needs its own model. But this fails to acknowledge the entity in aggregate.

  FIG 2.5 Overlapping stages on the DIAMOND model

  The DIAMOND framework has another characteristic that betrays its supposed genesis in the real world. In reality, business leaders are rarely interested in plotting the history of their businesses, and the implication of some of the models covered in this chapter is that this is where a business manager should start. Whether their business was in stage three or phase A between 2009 and 2011, or whether the crisis of autonomy took place in 2007 or 2008, are questions of historical interest. Only if they can shed light on the problems that need to be addressed imminently are they of interest now. Greiner, as has been seen, tries to change this mindset, encouraging managers to look back into history for insight into today’s problems. Even if he is right, managers are rarely persuaded. The DIAMOND framework addresses this by attempting to put more flesh on each of the stages, breaking them down into different dimensions, and inviting managers to consider in more detail the implications of the stage of growth their business happens to be in at present.

  Table 2.1 The DIAMOND framework

  Once the present condition of the business is understood, attention can be given to changes necessary to prepare the business for the future. The DIAMOND framework attempts to address this by presenting “transitional issues”.

  The final stage of the model: re-creation

  All models are weakest in their final stage. DIAMOND’s networking and diversifying stages echo Greiner’s new stage 6, which he speculated about some 16 years after the publication of his first model, but they both seem weak and undefined. Churchill leaves us with a mature business with the threat of ossification on the horizon. Greiner’s last stage is still, despite his rethinking, left as a big question mark.

  It is as if thinkers believe that although it is possible to determine the early phases businesses go through as they grow (not that they can agree what these early phases look like), thereafter businesses have to find their own and different ways.

  Some have attempted to wrestle with the final stage more seriously. Adizes suggests that “prime” is a state to be achieved by big businesses and then sustained through a process of perpetual transformation – from which the only other way is down. Another model encourages managers to invest time in developing business systems and, particularly, brand and organisational culture in these later stages.2 And at least one other model, from Denmark, suggests that it is more helpful to think of growth as a wheel a
nd to consider the end of business evolution to be a process of re-creation, with the last stage in a successful business containing the seeds of new businesses which end up demanding their own growth models. In part, re-creation is implied in DIAMOND’s overhauling stage, in Churchill’s III-G stage and in all Greiner’s revolutions. All these models imply a concern about losing sight of the beginnings of the business and the importance of attempting to reconnect with these.

  Horizons of growth

  One book that considers re-creation in the context of growth more seriously than most is The Alchemy of Growth by Merhdad Baghai, Steve Coley and David White, three McKinsey consultants.3 Rather than model growth as a series of stages of evolution, they talk about three horizons of growth and consider the growth challenges of an established business.

  Horizon one is the core of the business. It might not be growing particularly fast, but without it the business would not exist. It is where the business started and continues to define its identity. Instead of being run with an eye on aggressive expansion, the business is run for profit. Efficiency and quality are crucial. In a large accounting firm, horizon one activity might include auditing and tax compliance advice.

  Horizon two is less predictable, not least because it is a newer line of business activity. Sometimes the business makes excellent profits out of horizon two activity, but sometimes it makes significant losses. New business is less certain. In horizon one, new business is attracted because of the long-standing reputation of the organisation, but it cannot rely on this for horizon two. In a large accounting firm, horizon two activity might include corporate finance advice.

  Horizon three includes experimentation in new lines of business, few if any of which make money immediately. But this does not mean that horizon three should not be taken seriously. Indeed, Baghai, Coley and White argue that a mature business if it is to grow and thrive rather than shrink needs to be active in all three horizons, which have a symbiotic relationship with each other. Horizons two and three will help keep horizon one fresh; horizons two and three might turn into new horizon ones in the future. In a large accounting firm, there is always investment in new lines of advice and service, for example in management consultancy and tax planning, of which some will turn into profitable businesses while others wither on the vine.

  In a successful business, therefore, the three horizons are not static. Baghai, Coley and White cite, for example, Village Roadshow, an Australian company. Until the 1980s its core horizon one activity was operating local cinemas; the development of a national cinema chain was a horizon two investment along with movie distribution, but the business was already investing in horizon three ideas such as multiplex cinemas and theme parks. By the late 1980s, however, movie distribution had moved into horizon one, theme parks and multiplexes had moved into horizon two, while in horizon three the company was exploring cinemas in Asia as well as TV and film production. By the 1990s, theme parks had moved into horizon one, multiplex cinemas remained in horizon two, and new businesses including entertainment centres and retail stores were being explored in horizon three.

  To succeed in all the horizons it is important to recognise that each needs managing in its own way, with different performance measures and different incentives (see Chapter 7). It is unlikely that horizon one people will naturally turn successfully to horizon three activity, or vice versa. Indeed, in a large accounting firm someone who is good at new product development, thinking up new solutions for clients, and excited at winning new business is unlikely to be the best person to lead audit assignments, or would be wasted if given that role. Some of these skills might well be useful in horizon one – hence the importance of the symbiotic relationship of the horizons – but in a post-Enron world, accountancy firms have needed to think carefully about these links; and where they have not thought, the regulators have thought for them.

  Rethinking the dimensions of growth

  When defining the stages of growth, the devisers of models tend to assume that the axes against which growth is plotted are time and size. Even this assumption can be challenged:

  Time. Businesses evolve at different speeds. If they pass through the different stages of evolution, they will not do so at the same speed. The time spent in different stages depends on external factors as well as the ambitions and skills of the management team. In businesses that are growing particularly fast, it may be possible to pass through some of the early stages simultaneously, or perhaps miss some of them out altogether.

  Size. The obvious question is size of what? Businesses grow in many dimensions. Many managers, particularly those who have grown their businesses from nothing and have successfully attracted new customers and clients, can be seduced into thinking that sales revenue is the obvious measure of size. External shareholders, however, might prefer to measure profit, or returns to investors. Without profit the business will ultimately run out of the capacity to invest; without returns to investors it will run out of capital. There are many examples of businesses that have increased their profits by reducing their turnover. (These financial measures are discussed in Chapter 5.) What about employee headcount as a measure of size? Certainly there is a connection between the size of the workforce and the extent of the management challenge. But the same is true of the extent of any critical resource.

  When considering the evolution of new businesses, Amar Bhidé, a professor at the Fletcher School of Law and Diplomacy at Tufts University, focuses less on time and size and pays more attention to risk and irreducible uncertainty, and the relationship of these with profit. In so doing he creates a three-dimensional model of growth (see Figure 2.6).

  Bhidé, however, is really drawing attention to a separate factor that changes as organisations evolve from start-up to sustainable business: their appetite for and attitude to risk and the relationship between this and the resources at the disposal of the organisation and planning processes (see Chapters 3 and 4).

  FIG 2.6 The Bhidé model

  Using growth models

  Some of the best thinking about growth is embodied in the growth models in this chapter. Business managers may have little interest in looking back and considering how their businesses have evolved, but their models can offer insights into the problems that businesses are confronting now, and the sorts of issues that might be round the corner. Identifying a business’s position on one or other of the models will provoke questions about how it is managed and directed, even if the exercise does not directly propose solutions.

  The models usefully remind all managers that growth means change, and the references they make to overhauling, revolution and crisis are a reminder that change is rarely comfortable. However, even though managers worry about current and future problems, their reputations in the main rest on past successes, and so there are strong reasons for not wanting to adopt different techniques. Furthermore, a growing business is a successful business; management practice has worked so far, so why change something that does not appear to be broken? Business planning in established businesses will unsurprisingly be grounded in existing strategies. Donald Sull, a professor at London Business School, calls this reluctance to move away from the past “active inertia”.4 Reconciling this aversion to change with the suggestion that next year’s growth might well depend on management’s ability to do things differently is difficult. Change asks questions therefore not just about management practice, but also about managers – whether you have the right ones. As you expand the management team you may need to recruit individuals who are very different from those currently in post. And, notwithstanding any need to expand management resources, change will probably mean that some of the current team should go.

  The growth models also remind us that there is a point to some of the early stages of growth. Businesses created fully formed can suffer from missing out on the early stages of evolution. Culture and brand – the perquisites of the later stages of growth – can be manufactured, but many of the best brands and organisationa
l cultures grow organically out of the personalities of the people who put the business together in the first place.

  3 Growth enablers and drivers

  THE NEXT TWO CHAPTERS consider the forces that drive and inhibit growth. This chapter addresses the question of why some businesses grow and some do not, and considers the forces that trigger and the circumstances that foster growth. It starts inside the organisation with things that are within the control of those who run it, moves on to the life cycles of products, markets and industries, and concludes with aspects of the economic and commercial environment that affect the growth of a business.

  Ambition and attitude

  Personal ambition has as much to do with growth as any corporate strategy or economic and commercial circumstance. Regardless of the quality of an opportunity, a business will not grow far or fast if the owners and managers do not want it to. A crucial element in any growth plan – an element that will distinguish a plan focused on growth from a standard business plan – will therefore be some consideration of the ambitions of the owners and managers.

  In a 1996 Harvard Business Review article, “The Questions Every Entrepreneur Must Answer”, Amar Bhidé argues:

  [Successful entrepreneurs] need to keep asking tough questions about where they want to go, and whether the track they’re on will take them there.