Scaling Up: How a Few Companies Make It...and Why the Rest Don't (Rockefeller Habits 2.0)

by Verne Harnish

If you want to teach people a new way of thinking, don’t bother trying to teach them. Instead, give them a tool, the use of which will lead to new ways of thinking. — R. Buckminster Fuller Designer, inventor, futurist

This sequence describes the life cycle of most businesses as they move up the S-shaped curve of growth. The key to scaling this curve: 1. Attracting and keeping the right People; 2. Creating a truly differentiated Strategy; 3. Driving flawless Execution; and 4. Having plenty of Cash to weather the storms.

1. Attracting and keeping the right People; 2. Creating a truly differentiated Strategy; 3. Driving flawless Execution; and 4. Having plenty of Cash to weather the storms.

To paraphrase Steve Jobs, “I’m always amazed how overnight successes take a helluva long time.” If you’ve been in business less than 25 years, you still have time to make it big; if it has been more than 25 years, and you’ve not scaled up, it’s never too late!

Dumbest in the Room Senior leaders know they have succeeded in building an organization that can scale — and is fun to run — when they are the dumbest people in the room! In turn, if they have all the answers (or act like they do), it guarantees organizational silence, exacerbates blindness (the CEO is always the last to know anyway), and means the senior team ends up carrying the entire load of the company on their backs. The best leaders have the right questions, but turn to their employees, customers, advisors, and the crowd to mine the answers. Every business is more valuable to the degree that it does not depend on its top leader. For more on these topics, read Margaret Heffernan’s book Willful Blindness: Why We Ignore the Obvious at Our Peril and Liz Wiseman’s Multipliers: How the Best Leaders Make Everyone Smarter.

The best leaders have the right questions, but turn to their employees, customers, advisors, and the crowd to mine the answers.

To scale up a business from a handful of employees to something significant (i.e., build a company that has a chance to both put a “dent in the universe” and dominate its industry), our tools and techniques focus on three deliverables: • Reduce by 80% the time it takes the top team to manage the business (operational activities) • Refocus the senior team on market-facing activities • Realign everyone else (onto the same page) to drive execution and results

Leadership: the inability to staff/grow enough leaders throughout the organization who have the capabilities to delegate and predict • Scalable infrastructure: the lack of systems and structures (physical and organizational) to handle the complexities in communication and decisions that come with growth • Market dynamics: the failure to address the increased competitive pressures that build (and erode margins) as you scale the business

Therefore, your team must use our tools to master four fundamentals: • In leading People, take a page from parenting: Establish a handful of rules, repeat yourself a lot, and act consistently with those rules. This is the role and power of Core Values. If discovered and used effectively, these values guide all the relationship decisions and systems in the company. • In setting Strategy, follow the definition from the great business strategist Gary Hamel. You don’t have a real strategy if it doesn’t pass two tests: First, what you’re planning to do really matters to enough customers; and second, it differentiates you from your competition. • In driving Execution, implement three key habits: Set a handful of Priorities (the fewer the better); gather quantitative and qualitative Data daily and review weekly to guide decisions; and establish an effective daily, weekly, monthly, quarterly, and annual meeting Rhythm to keep everyone in the loop. Those who pulse faster, grow faster. • In managing Cash, don’t run out of it! This means paying as much attention to how every decision affects cash flow as you would to revenue and profitability.

In leading People, take a page from parenting: Establish a handful of rules, repeat yourself a lot, and act consistently with those rules. This is the role and power of Core Values. If discovered and used effectively, these values gu...

First, what you’re planning to do really matters to enough customers; and second, it differentiates you from your competition.

In the end, it’s about keeping everyone focused on the summit (BHAG®) and then deciding the appropriate next step (quarterly Priority) while respecting the rules that keep you from being swept off the mountain (Values). Everything in between this quarter and the next 10 to 25 years is a WAG: a wild-ankle guess! There are no straight lines in nature or business.

WAG: a wild-ankle guess!

The key is keeping your eye on the prize and adjusting course accordingly.

“Routine sets you free” is a key driving principle behind our methodologies and tools.

Goals without routines are wishes; routines without goals are aimless. The most successful business leaders have a clear vision and the disciplines (routines) to make it a reality.

Disciplines: To effectively execute, there are three fundamental disciplines (routines): Set Priorities; gather quantitative and qualitative Data; and establish an effective meeting Rhythm. It’s in these meetings, debating the data (the brutal facts!), where the priorities emerge.

“We have the answers, all the answers; it’s the question we do not know.”

KEY QUESTION: Are the stakeholders (employees, customers, shareholders) happy and engaged in the business; and would you “rehire” all of them?

“Right people doing the right things right.”

The toughest decisions to make are when the company has outgrown some of these relationships and you need to make changes.

It starts with your own relationship goals and priorities, then being clear who are the leaders accountable for the main functions and processes that drive the business.

You want to delegate these functions to people who fit your culture and pass two tests: 1. They don’t need to be managed. 2. They regularly wow the team with their insights and output.

In retaining employees and keeping them engaged, we’ll cover the five activities of great (vs. good) managers: • Help people play to their strengths. • Don’t demotivate; dehassle. • Set clear expectations and give employees a clear line of sight. • Give recognition and show appreciation. • Hire fewer people, but pay them more

KEY QUESTION: Can you state your firm’s strategy simply — and is it driving sustainable growth in revenue and gross margins?

The seven components: 1. What word(s) do you own in the minds of your targeted customers (e.g., Google owns “search”)? 2. Who are your core customers, what three Brand Promises are you making them (e.g., Southwest Airlines promises Low Fares, Lots of Flights, Lots of Fun), and how do you know you’re keeping these promises (Kept Promise Indicators, a play on KPIs)? 3. What is your Brand Promise Guarantee (e.g., Oracle has been advertising the chance to win $10 million if its Exadata servers don’t outperform the competition by a factor of five)? 4. What is your One-PHRASE Strategy that likely upsets customers (Apple’s “closed system”) but is key to making a ton of money and blocking your competition? 5. What are the three to five Activities that fit Harvard strategist Michael Porter’s definition of the essence of differentiation (e.g., IKEA’s furniture needs assembly)? 6. What is your X-Factor — a 10 times to 100 times underlying advantage over the competition — that completely wipes out any and all rivals? 7. What are your Profit per X (economic driver) and BHAG® for the company? These come straight from Jim Collins.

QUESTION: Are all processes running without drama and driving industry-leading profitability?

You know you have execution issues if three things exist: 1. There is needless drama in the organization (e.g., something shipped out late; the invoice was wrong; someone missed a meeting; etc.). 2. Everyone seems to be working more hours, spinning his wheels, or spending too much time fixing things that should have been done right the first time. 3. Most important, the company is generating less than three times industry average profitability.

Companies can get by with sloppy execution if they have a killer strategy or highly dedicated people willing to work 18-hour days, eight days per week to cover up all the slop. Just recognize you’re wasting a lot of profitability and time (i.e., you’ll burn both cash and people in the process!)

Who, What, When (WWW): Improve the impact of your weekly meetings by taking a few minutes at the end and summarizing Who said they are going to do What, When. This isn’t about micromanagement; this is about excellent management and being clear in both communication and accountability.

WARNING: You’ll drive everyone in the organization crazy if you implement all of these habits at one time. The key is focusing on one or two each quarter, giving everyone roughly 24 to 36 months to install these simple, yet powerful, routines. Then it’s a process of continually refreshing them as the company scales up.

Patrick M. Lencioni’s The Five Dysfunctions of a Team: A Leadership Fable,

In essence, your executive team needs to have a level of trust that permits true debate and constructive conflict to occur.

scaling a firm is about taking one significant step at a time and then checking data and adjusting accordingly. It is about setting a quarterly goal, providing the company with a badly needed finish line every 90 days, vs. just running and running and running. It also affords everyone an opportunity to celebrate or commiserate — and have some fun along the way. This is the power of setting a Quarterly Theme,

If communication is the #1 challenge, then nailing down accountabilities as the company scales is #2. This needs to be clear both vertically (across functions) and horizontally (across processes) throughout the organization. And it really gets messy when the organization moves to discrete business units.

QUESTION: Do you have consistent sources of cash, ideally generated internally, to fuel the growth of your business?

Growth sucks cash. This is the first law of entrepreneurial gravity. And nothing ages a CEO and his or her team faster than being short of cash.

Jim Collins and Morten T. Hansen, in their best-selling book Great by Choice: Uncertainty, Chaos, and Luck — W...

“Growth sucks cash — the first law of entrepreneurial gravity.”

The quickest action you can take is to have your CFO give you a modified cash flow statement every day detailing the cash that came in during the last 24 hours, the cash that flowed out, and some idea of how cash is looking over the next 30 to 90 days. This will keep cash top-of-mind and give you a great feel for how cash is flowing through the business.

It’s also critical to know your Cash Conversion Cycle (CCC). It’s a technical term for how long it takes, after you spend a dollar/euro/yen on rent, utilities, payroll, inventory, marketing, etc., for it to make its way through your business model and back into your pocket. So that you can see how to calculate this, we recommend that you read a classic Harvard Business Review article titled “How Fast Can Your Company Afford to Grow?” by Neil C. Churchill and John W. Mullins.

Cash Conversion Cyc...

Harvard Business Review article titled “How Fast Can Your Company Afford to Grow?” by Neil C. Churchill and John W. Mullins.

The 7 main financial levers available to managers to improve cash and returns in the business are: 1. Price: You can increase the price of your goods and services. 2.Volume: You can sell more units at the same price. 3. Cost of goods sold/direct costs: You can reduce the price you pay for your raw materials and direct labor. 4. Operating expenses: You can reduce your operating costs. 5. Accounts receivable: You can collect from your debtors faster. 6. Inventory/WIP (work in progress): You can reduce the amount of stock you have on hand. 7. Accounts payable: You can slow down the payment of creditors.

The goal is to reverse the first law of entrepreneurial gravity and develop a viable business model in which the faster you grow, the more cash you generate — through larger deposits, faster collections, shorter sales and delivery cycles, etc. Then you’ve built a company that can self-fund its own growth.