There’s a cost to growth
Here’s a universal truth that doesn’t get enough airtime among business leaders – and that many leader teams, therefore, don’t fully appreciate:
Growth must be funded.
I started working with a company recently that developed a BHAG of doubling in size over the next 5 or so years. The first year went well – but last year was rough, and they’re now feeling pulled between the commitment they made to their BHAG, the desire they have to distribute profits at a level they’re accustomed to, and the need they have to correct some operational issues.
They have a newfound appreciation for the fact that the decision to grow often comes at the expense of the ability to harvest profits.
What does it mean that growth must be funded? Here are a few of the things that you’d need to invest in to grow – that you wouldn’t need (or wouldn’t need as much of) if you weren’t growing:
- Expanding your training and talent development efforts
- Developing new marketing programs
- Hiring more salespeople or programmers – and if they’re hard to find or need training, then you need to hire them before you have the revenue to support them
- Expanding into new facilities or adding equipment
There can be many more, but you get the idea.
On top of those tangible investments, you’d have two more hidden costs: the time that your team spends solving issues associated with the growth, and the inevitable inefficiencies you’ll have the first time you do things.
This isn’t to deny the wonderful benefits of growth, which include more people and customers to make your stuff better, more resources to solve problems and offer rewards, and more impact and influence on your markets and community.
But as you develop your BHAG, realize that you’ll also benefit from having a Big Heavy Accessible War Chest. And that’s why I often recommend that the first 2 years of a growth strategy focus on increasing your profitability and building your reserves. The path to your BHAG will be a lot more fun and manageable if you have the money to deal with the challenges you’ll face.
A friend of yours runs a successful Stage 2 business – but is also frustrated
that things aren’t going as well as he’d like. It’s your job to set him
on a new path.
How do you create that inflection point – that clarity of understanding and
focus that sets a new path and provides the basis for success?
Let’s look at how it works for Ebenezer Scrooge, because if ever there was a
tough customer for a strategy consultant to work with (cheap! close-minded!
domineering!), he is one. But Scrooge’s consultant (the ghost of his
former business partner) designs a great process that holds lessons for any
He starts with a look at the past (fond memories of Scrooge’s childhood).
What core principles show up then that Scrooge needs to reconnect with
today? What lessons does the past hold for Scrooge?
He then looks at today, from different perspectives than Scrooge usually sees
(a joy-filled market, a family feast, a miner’s cottage). What can
Scrooge learn from those people? What is happening outside of his normal
view that he can use? What does Scrooge have to offer those people?
And finally, he looks at the future to see where Scrooge will go if he
continues on his current path (a neglected grave!). What are the results
Scrooge will get from his present efforts? What results does Scrooge
want? Do the likely results line up with the desired ones – and if not,
what needs to change?
With a process like that, it’s no surprise that Scrooge emerged a new
man. Full of energy. Renewed with purpose.
The Wikipedia entry
about Scrooge’s transformation sums it up well, capturing both the immediate
impact and the long-term sustainability of Scrooge’s new thinking:
“Scrooge has become a different man overnight, and now treats his fellow men
with kindness, generosity, and compassion, gaining a reputation as a man who
embodies the spirit of Christmas. The story closes with the narrator confirming
the validity, completeness, and permanence of Scrooge’s transformation.”
So, as you do your annual planning, use the wisdom of Scrooge’s planning
process in your Stage 2 business, by tapping into the Ghosts of your
The Ghost of Business Past. What was at the heart of your success
in Stage 1? What was fun about the business? What made you
special? As you look to the future, you need to reconnect with that –
especially as your company has to change.
The Ghost of Business Present. Life in Stage 2 is more complex
because you are connected to so many more people and organizations, and because
you need to deal with broader markets rather than just isolated
customers. To come up with an effective plan, you need to take a more
holistic view. What are your customers thinking? Your
suppliers? Your competitors? Your employees? What is
important to them? What trends are happening in the market? You
need to see the world from other eyes, and use that perspective to come up with
The Ghost of Business Future. Stage 2 companies have reached a
point of sustainability, so now their leaders have to turn their attention to what
they are sustaining. What impact do you want your business to have on
the world? What results are you looking for from your business?
What does your business stand for? And what gaps and problems can you
identify today so that you can deal with them before they are urgent,
expensive, and entangled?
Successful Stage 2 leaders understand that it is not easy to design an effective
planning process, and so they put the time and effort into “planning the
When they do, the result is a business that is transformed overnight – with the
power to sustain that change over time.
What do you see when you go on a tour with your ghosts?
Enjoy the holidays, and best wishes for a good new year.
The Futurist magazine had an article several months ago titled, “Innovating the Future: From Ideas to Adoption” by Peter Denning. In it, Mr. Denning described “the work of innovators,” which included 8 types of activities that need to take place for innovation to happen.
The article is interesting to consider when thinking about how small business innovation happens – especially for Second Stage companies.
Remember, growth companies are often led by very inventive and creative people – which is a huge asset in the start-up phase. But in Stage 2, that needs to be supplemented with structure and discipline. Denning’s 8 innovation practices offer a good model to show what’s going on in growth-company innovation.
Second Stage companies are good at these 4 of Denning’s innovation practices:
- Sensing new possibilities
- Envisioning a compelling story about the possibilities
- Leading and mobilizing people to adopt innovations
- Embodying the innovations in their own actions
On the other hand, Second Stage companies are typically weak at the other 4 of Denning’s innovation practices:
- Gaining preliminary customer buy-in to start innovating
- Overcoming resistance to change and creating customer commitment to try the innovation
- Helping customers integrate the innovation into the environment and stick with it
- Managing all commitments to completion
What’s the difference between those 2 lists? The first one – the things Stage 2 leaders do well – leverage inventors’ strengths of vision and passion. The second one – the things Stage 2 leaders struggle with – involve dealing with the complexity of customers, teams, cultures, markets, and projects.
As I say again and again, the only way to deal with all that complexity is to create some structure, process, and systems to handle it. Not a lot…but some.
All 8 of Denning’s innovation practices are important to commercializing new ideas. So, it’s no surprise that many Second Stage companies have a lot of great developments going, but struggle with making money from them.
As your company grows in Stage 2, you should use your sales process to drive more value – yes, for your company…but also for your customers. The only sustainable growth comes from win-win sales, so your sales process will benefit you and your customers.
One of the most important ways that your sales process can increase the value you bring to and get from your customers is by uncovering what the real need is. Oftentimes, customers don’t know what they don’t know, and by managing the sales process well, you can help them realize what they really need. In doing that, you also make sure that you’re paid for any premium value that you give them.
Price is a function of value, and the surprising fact that you need to know is that value is established when the need is defined, not when the solution is defined. If a customer comes to you and tells you what they need, then they have already set the price in their mind. On the other hand, if a customer comes to you and asks you to help define what they need, then you create the value together.
If you’re like most Second Stage companies, it’s hit or miss whether you’re talking to customers about the answer or the problem. It takes a clearly-defined market strategy, and a disciplined sales process, to ensure your conversations consistently focus on the need. That takes some work, but it’s also the best way to grow your small business in Stage 2.
As a small business emerges from the start-up phase, and becomes a Second Stage company, the sales process can and should be formalized.
It can be formalized because you now have enough experience with sales to know some standard steps that you usually follow.
It should be formalized because you need to start building consistent expectations with your customers, you need more consistent information for your team, and you need to start to build up systems around your sales that will need some standardization.
I’m not suggesting you go overboard on this – just some general guidelines or steps that you’ve learned help you.
How do you create a (somewhat) standard sales process?
As a first step, think about the customers or orders that your team handles smoothly. What usually happens when those orders come in?
Then, think about the customers or orders that are a hassle. What usually happens with those orders – and what do you notice doesn’t happen with those.
When I asked these questions of a 20-person manufacturer last year, they realized that most of their sales followed 4 basic steps – but also that complex, unclear orders (which happened to be their highest-value work) needed a different process. They outlined the two different processes, and when I met with them 3 months later, they said, “We’re handling all of our orders much, much better. And the customers are a lot happier.”
If your small business has grown into a Second Stage company, your team and your customers will appreciate you starting to understand and standardize your sales process.
Once you have segmented your customer base, the question is, “What can I do for my best customers that will drive value for them and us?”
The answer to that question should be captured in an Account Plan, which outlines the relationship and opportunities you have with a key customer.
Here’s what I recommend you include in the Account Plans you write for your Second Stage company:
– History and highlights of the relationship
– Background on relevant people you know at the company
– Description of why they work with your company and why they think you’re valuable
– Immediate and next-year opportunities that you’ve identified, as well as the 3-5 year potential for the relationship
– Likely relationship and engagement for the coming year
– Plan for additional activities to expand or enhance the relationship and engagement in the coming year
You’ll be surprised at how much you learn about your customer and yourself when you write an account plan.
I’m working with a $2MM firm right now to build in a performance-based aspect to their compensation program.
Usually, I would follow a process of compensation strategy (guiding principles for how we make comp decisions) > compensation framework (the components that go into comp decisions) > performance framework (the specific definitions of performance). (If you want a full description of the process, you can get it from my book, The Stage 2 Owner’s Manual.)
But with a small firm, we’ll be able to skip the comp framework step. That’s the step where “What does it take for you to stay in the game?” changes to “What is the right amount to pay you?” It looks at things like market pay rates, and what the role of the person is.
If you’re a small Second Stage Company, the most important things to address when you upgrade your compensation program is why you pay people what you do – the overarching principles that are at play, and the specific performance drivers you look at. When you get bigger, or when compensation starts causing you problems, you can fine-tune your pay program based on some more sophisticated thinking about what makes up employee compensation. But that’s a short-cut that, in most cases, is fine to take when you’re smaller.
Stage 2 management focuses on getting approximate answers, not precise ones – and then using judgment to realize when an answer can be more approximate, and when it needs to be more precise.
Have you ever thought about the impact of over-paying, or under-paying, the staff in your Second Stage company?
If you are over-paying, then you are taking resources away from other parts of the business that would give you a higher ROI. Over time, you’ll under-invest in the areas of the business that make your company stronger, and the result is a company that is paying its employees relatively well while weakening the business.
If you are under-paying, the opposite is true. You are “mining” your employees for the value they create, and if they don’t feel rewarded, you will be faced with a triple-whammy – you’ll lose someone who was providing more value to the company than you realized, you’ll have turn-over costs, and you’ll have to spend more than you expected to replace that person.
Compensation is about aligning the rewards that employees get with the value that they create for the business. As your business gets more complex in Stage 2, that alignment gets harder, and more important.
You’ll never pay someone exactly the right amount, but making sure you’re close is important for you, your business, and your employees.
I was reading the blog post Top Compensation Planning Mistakes (And How to Avoid Them) and there were a couple that stood out as particularly important for Second Stage Companies:
Saying one thing and doing another, which the blog says can be avoided by “avoiding secrets…and reducing exceptions.” The particular challenge for Stage 2 is that most leaders who are emerging out of the start-up phase don’t have expertise in compensation, and don’t realize how complicated it gets in Stage 2, and so they hide how they make compensation decisions in a “black box.” This usually works fine for some period and then starts to break down as they add people. In Stage 2, it’s especially important to think through a comp strategy so that you can avoid secrets and reduce exceptions.
Not preparing managers to talk about compensation, which the blog says can be avoided through training and scripting answers to key questions like “How does the organization set salaries?” and “Why did I only get this much money?” The particular challenge is that most Stage 2 managers don’t have expertise or experience dealing with compensation – and in fact what experience they have is with the start-up phase’s “What do you need to stay in the game?” approach. One of the most important aspects of a compensation program for a Stage 2 company is the messages that it communicates about how the company creates value and how performance is measured. If those messages don’t make it to employees – or, worse, if the wrong messages are communicated – much of the power of the compensation program is lost.
Conflict in a team can be so frustrating for a Second Stage company. You want to focus on the work at hand, but you and your team can’t get started – or keep getting sidetracked – because you’re not working together.
There can be several reasons for team conflict. Often people look at the personalities involved, or the level of emotional intelligence, or “teamwork” – and it makes sense to look at all of those. An area many people don’t explore, though, is strategy.
Often times conflict arises from a poor or unclear strategy.
Conflict happens “when you don’t live up to my expectations.” And that happens much more often when (1) the strategy isn’t clear, because then there are no common expectations and everyone just uses their own, or (2) the strategy isn’t good, because that puts more pressure on everyone, and pressure makes it hard for everyone to work outside of their comfort zone.
Team-building exercises have their place. But if there is conflict in your team, you may have deeper work to do than just team-building. If you think that’s the case, schedule a strategic planning session, hire a strategy consultant, or lead your team through the strategic assessment workshop we offer in our Stage 2 Insight program.