The paradox: Innumerable companies pursue a clear growth strategy and yet, according to business professor Larry E Greiner [Larry E. Greiner, Harvard Business Review: Evolution and Revolution as Organizations Grow, 7/8 1972 and 5/6 1998], in most cases, all growth periods end in a leadership crisis. Using a sample case study as an illustration, this field trip will explain the reasons behind this, as well as what every entrepreneur needs to know about themselves to achieve maximum successful company growth.
Many different publications address the different phases of corporate growth. Essentially, it is irrelevant how many steps you divide this cycle into. What is important is to recognise that each of these phases has its own characteristics. And since we humans are so similar in our basic genetic traits, there is obviously a strikingly large overlap of consistently similar entrepreneurial behavioural patterns. In addition, certain constraints arise almost naturally in the individual phases. The following article attempts to describe and exemplify these phases and some of the most common effects experienced. We have used a sample case study here as an illustration, with no claim to its completeness or scientific merit.
Start-Up
Ms Dr E is a PhD and a specialist in a highly complex technology sector. She has an innovative business idea. She is highly motivated and is absolutely convinced that she can offer a consistently competitive product. Her concept is impressive; she obtains funding, and is able to persuade two of her former fellow students to partner with her; the founding members are in place.
The team launches its venture. Each of the three has memorised the business concept and is strongly committed to success. In this phase, this small team is the company’s primary mainstay, and Dr E is its most important member. Together, they make up the development, sales, production, logistics and administrative departments.
Starting on this positive basis, and equipped with a small but effective network of contacts, the business quickly gets off the ground. The small team takes a personal approach to winning over each of its customers, investing a great deal of time in this. With only a few minor setbacks, the business is soon up and running with its first orders, and it continues to grow steadily. In this start-up phase, the team works around the clock, and their high level of commitment ultimately leads to market rewards, as demand increases to a euphoric level.
At the peak of this phase, the young company can point to resilient customer relationships and the abundant positive feedback it has received from the market. They have delivered the quality promised to customers, and their personal business relationships have matured. Before progressing to the subsequent phases, it is typically necessary for a start-up to ensure that it will be able to meet the increasing financial needs.
The young team celebrates their successes, and its members spur each other on to greater excellence. Sales increase for the first time, making it clear that additional staff will have to be hired. This had been factored into the original business plan. But the need is now greater than anticipated, and the most desirable candidates are looking for salaries that are not exactly within the company’s budget. The company makes some concessions with regard to their requirements and hires a few people at conditions that are still quite favourable, overall.
The new employees receive personalised training and are integrated into the small, still-manageable team. Even now, every staff member is familiar with nearly all of the company’s processes and procedures. Their own roles and importance, as well as those of the others, are transparent and well-understood. Motivation remains high, and the team rejoices at every new order. Successes and failures are shared openly. Initial profits are rolling in, and the business plan is working. Dr E is justifiably quite proud and feels completely validated in her approach.
Maturity – Growth I
The start-up months following the founding of the company have flown by, and according to its own assessment, the company is in the middle of the growth phase. So far, neither Dr E nor her founding team has had to deal intensively, or from a planning perspective, with structural or organisational issues like the ones they have heard about or observed among some of their ‘older’ client companies. Based on the existing framework, which has worked well so far, more staff are being recruited. However, for the first time, they find themselves under pressure to fill positions, as the need for helping hands has increased significantly.
The increased number of employees leads to the first bump on the road for the operational flow. The communication channels become more complex, and the information flows that have been working well until now are getting repeatedly interrupted. The management team intensifies their communication and introduces regular meetings and events that include all employees. None of the people working in the company has sufficient capacity to carry out classic leadership work. However, a decidedly informal and communicative collaborative style effectively compensates for this deficit. This works especially well at the end of the week, when euphoria and inspiration are at a high. This has now resulted in an understandably increased level of self-confidence.
The company management has become bolder, and much more trusting in its small organisation, now approaching the recruitment of new personnel with greater confidence. The organisation’s staffing needs have increased so that now and then, quantity and price have to take precedence over quality. In taking this approach, the company is consciously or unconsciously accepting a reduction in job performance and corporate resilience. The difference between a helping hand who is merely adequately qualified and one who is experienced and well-qualified and whose profile represents true enrichment for the company is neither sufficiently nor consistently taken into consideration at this point. After all, skills and knowledge can always somehow be ‘acquired’. Besides, there is the cost factor to consider.
The time has long since passed when the founding team was able to handle everything by themselves. The rest of the staff, however, possesses neither the experience nor the expertise of the founding team. For the first time, the company lacks overall know-how for important operations.
The first defects and errors begin to appear, some of which make their way to customers. The continuous increase in the number of employees and the complexity of the processes requires new approaches to structures and management. As it turns out, the type of leadership now required is not Dr E’s strong suit, and the other members of the founding team also have to come to grips with it.
For the founding team, the pressure to act dominates their dealings with clients, the daily coordination of projects and the handling of disruptions. The team members react by deploying the same type of tactics they have used so far. During the turbulent but exciting early days of the company, the need for appropriate reporting that would reflect the most relevant key figures always took second place to dealing with important orders or processes. Among management staff, the dominant indicator of the company's performance was simply their gut feeling.
Growth II
Over the past few months, the number of customer orders has again risen strongly. There are new major sales successes to celebrate every week, and there is currently no doubt about positive operating results. But the company's increasing size is weakening the accuracy of the gut feeling that previously worked so well. It is now increasingly at odds with the real figures. No one is issuing any warnings about this at the moment, however, because the finance department has not invested in state-of-the-art financial monitoring. Why? Because their budget had to be diverted to fund the position of another developer.
Even the founding team is not making any additional demands for high-quality reporting because none of its members ever became closely acquainted with or, above all, learned to appreciate this tool in their previous positions. In addition, the finance team has been holding off on hiring an experienced management-level employee because the collaboration between the accounting department and the tax accountancy is working well and the classic ERP system functionalities have been effectively handled using cheaper on-board resources so far.
Growth III – Overheating
The company continues to grow steadily in terms of sales and employee headcount. It no longer resembles the startup of the early years. Dr E discovers that, for the first time, she no longer knows each of her new employees personally. Among the staff, groups of like-minded people have formed and interactions are not always as friendly as they previously were. Employees who have been there since the early days notice, for the first time, that the familial spirit of optimism has somehow faded. Discussions begin about the changes that have taken place and their visible effects, while growth-related structural and organisational challenges remain unfaced. Overwhelmingly, the solution demanded by the various teams to deal with the current challenges is the recruitment of additional staff.
The onboarding and induction of new staff is still quite situational, and handled with a highly personal touch. However, it is not going as well as it used to previously, as some employees have changed departments, the distribution of tasks has changed, and the first of the people who had been with the company from the beginning have left. The calls for better leadership and improved structures are now even louder. More and more often, the situation between employees and managers escalates. It is now becoming apparent even to third parties that some of the management positions have been filled by people who lack experience in leadership issues. Also, Dr E’s founding team has not invested sufficient time in their personal development in this area. Some team members have found that they do not really enjoy resolving these types of escalations, preferring to devote themselves to more tangible business challenges or interacting with customers.
But, despite all of the internal friction, sales keep growing. As a result, management staff is convinced that the stressful phenomena they are now experiencing are just the usual growing pains all successful companies go through. This also makes it seem that the current situation can be overcome by applying the same tactics as before. Some members of the management team are even overcome with exuberance. On the other hand, for the first time, company insiders express their feeling that the management no longer has its feet firmly on the ground.
Meanwhile, the finance department has hired two new accountants but has not set up any financial monitoring system. There is no functioning or seriously-taken early warning or risk management system in place, which means that the chance that specific cause-effect relationships penetrate the consciousness of the company management is slim to none.
The first cancellations of customer orders are now coming in, but this is not yet leading to a drop in overall sales. Even the increasing error ratio, which more and more frequently affects customers directly, does not seem sufficiently alarming. Yet.
At the same time, the management is delighted with the huge increase in sales, and the positive operating results. There is little-to-no discussion about the improvement in returns and performance indicators as there is no meaningful KPI reporting even now. The fact that sales are constantly increasing leads the founding team to draw a fatal conclusion: the company is doing well in the market, otherwise customer orders would not be on the rise.
With this assessment, the management continues to engage in the same type of tactics they have always pursued. Individual fires are courageously put out, and growing workloads continue to be managed by hiring additional staff. Far-reaching structural and organisational measures involving major investments either fail to materialise or are cut back to an inappropriately low level.
| 1972-2022 ❘ THEN AS NOW: SUCCESS FACTORS IN GROWTH. It is fantastic that some principles are so constant. This enables us to better understand, comprehend and consciously adjust to them. You should definitely do the same. According to the Growth Model of the renowned business professor Larry E. Greiner, growing organisations go through certain development phases, all of which end in a leadership crisis. Successful companies manage to influence the different phases in such a way that serious crises can be avoided. From my own experience I know both the successful and the other cases. Of course, within more than 20 years as a executive I have gone through my own learning curve, made mistakes and experienced cause-and-effect principles in practice. I am firmly convinced that this essential component of entrepreneurship can combine motivation, fun and success if you engage in it early and consciously. In this post Keeping Growth from Becoming a Threat, the individual phases and their cause-and-effect principles are explained concisely using a thoroughly representative practical example. Your's Sandy Pfund - The Enterneer |
Growth damages
Following a steady rise in sales from the founding days of the company, the revenue has long since begun to stagnate. In some operational units, losses are increasing. Customers have noticed a downturn in the company’s reliability and quality. And in surveys, customer satisfaction has dropped for the first time. The continuing boom in sales has meant that the company still maintains liquidity, but the current disruptions, coupled with the level of success desired by the top management, have led to the company leadership flip-flopping between a variety of ad hoc measures.
From here on, the outcome of our sample case will depend, to a large extent, on the management's awareness and ability to change. If Dr E and her management team become detached from reality and their significant stakeholders, they are headed for disaster. In light of the course of events described here, this question arises: do Dr E. and her staff have the strength and skills required to initiate the necessary painful changes and restructuring measures? And the question still remains as to how to finance these measures – as well as how to come up with the right story to tell investors, customers and creditors. If these measures fail, all signposts point to the final phase in the growth model described next.
Growth crash
Dr E fails to act on the enormous pressure from within the company to take necessary restructuring measures. Over the past few months, she has also fallen out with some members of the management team. Her determination, and her joy in building the company, have diminished. In some business units, uncertainty and a lack of direction are on the rise. To avoid jeopardising the company's success, the shareholders have decided to find a suitable investor for the company.
In each of the growth phases described in this example, different tools and measures can be deployed so that each development stage can be negotiated successfully and the company comes through unscathed. In our view, the most important basic prerequisites are: 1) an awareness of the typical or predictable effects and situations and 2) the acceptance that, in the absence of proactive measures, it will be impossible (or at least extraordinarily difficult) to avoid damages resulting from the company’s growth. Only after these prerequisites have been met do the abilities of the people involved, and of the company as a whole, follow as additional prerequisites.
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