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

by Verne Harnish

Handling a company’s growth successfully requires three things: an increasing number of capable leaders; a scalable infrastructure; and the ability to navigate certain market dynamics.

Scaling up successfully requires leaders who possess aptitudes for prediction, delegation, and repetition.

I’m tired of sailing my little boat Far inside of the harbor bar; I want to be out where the big ships float — Out on the deep where the Great Ones are! … And should my frail craft prove too slight For storms that sweep those wide seas o’er, Better go down in the stirr...

Great execution won’t get you anywhere if your strategy is wrong.

(For more on this key point from the founders of Pizza Hut, Boston Chicken, Celestial Seasonings, and California Closets, read this Fortune article by Verne: http://tiny.cc/worth-repeating.)

You’re experiencing the growth paradox: the belief that as you scale the company — and increase your dream team, prospects, and resources — things should get easier, but they don’t. Things actually get harder and more complicated.

Expanding from three to four people grows the team only 33%, yet complexity may increase 400%. And the complexity just keeps growing exponentially. It’s why many business owners often long for the day when the company was just them and an assistant selling a single service.

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

“Valleys of Death” — those points in the company’s growth where you’re bigger, but not quite big enough to have the next level of talent and systems needed to scale the venture.

There are roughly 28 million firms in the US, of which only 4% ever reach more than $1 million in revenue. Of those firms, only about one out of 10, or 0.4% of all companies, ever make it to $10 million in revenue, and only 17,000 companies surpass $50 million. Finishing out the list, the top 2,500 firms in the US are larger than $500 million, and the top 500 public and private firms exceed $5 billion. Data indicate that there are similar ratios in other countries.

One to three employees (the majority of home-based businesses) • Eight to 12 employees (a very efficient company with a leader and a bunch of helpers) • 40 to 70 employees (a senior team of five to seven people, leading teams of seven to 10 — in a company where you still know everyone’s name) • 350 to 500 employees (seven leaders, with seven middle managers each, running teams of seven to 10 — actually a very efficient company) • 2,500 to 3,500 employees (more multiples of seven to 10)

Larry E. Greiner’s classic Harvard Business Review article titled “Evolution and Revolution as Organizations Grow,” from July-August 1972 (updated in May 1998).

As goes the leadership team, so goes the rest of the company. Whatever challenges exist within the organization can be traced to the cohesion of the executive team and its capabilities in prediction, delegation, and repetition.

Leaders don’t have to be years ahead, just minutes ahead of the market, the competition, and those they lead. The key is frequent interaction with customers, competitors, and employees.

Letting go and trusting others to do things well is one of the more challenging aspects of being a leader of a growing organization.

To get to 10 employees, founders must delegate activities in which they are weak. To get to 50 employees, they have to delegate functions in which they are strong!

And many leaders confuse delegation with abdication. Abdication is blindly handing over a task to someone with no formal feedback mechanism. This is OK if it is not mission-critical, but all systems need a feedback loop, or they eventually drift out of control.

Abdication is blindly handing over a task to someone with no formal feedback mechanism. This is OK if it is not mission-critical, but all systems need a feedback loop, or they eventually drift out of control.

Successful delegation requires four components, assuming you have delegated a job to the right person or team: 1. Pinpoint what the person or team needs to accomplish (Priorities — One-Page Strategic Plan). 2. Create a measurement system for monitoring progress (Data — qualitative and quantitative key performance indicators). 3. Provide feedback to the team or person (Meeting Rhythm). ...

Repetition encompasses consistency. Finish what you start. Mean what you say. And don’t say one thing and do something else. Consistency is an important aspect of repetition.

@sergeiw

We’ll reinforce the power of repetition throughout the book. Specifically, we will look at: 1. Core Values: the handful of rules defining the culture, which are reinforced through your People (HR) systems on a daily basis 2. Core Purpose: the top leader’s regular stump speech to keep everyone’s heart engaged in the business 3. Big Hairy Audacious Goal (BHAG®): the 10- to 25-year goal that provides constant context for all of the decisions made throughout the organization 4.Priorities/Themes: a handful of three- to five-year, one-year, and quarterly priorities, which require repeated review on a daily and weekly basis to keep them top-of-mind

1. Core Values: the handful of rules defining the culture, which are reinforced through your People (HR) systems on a daily basis 2. Core Purpose: the top leader’s regular stump speech to keep everyone’s heart engaged in the business 3. Big Hairy Audacious Goal (BHAG®): the 10- to 25-year goal that provides constant context for all of the decisions made throughout the organization 4.Priorities/Themes: a handful of three- to five-year, one...

key function of leadership is delivering frequent messaging and metrics to reinforce these key attribut...

Just as living cells need to be near nutrients, companies need to be close to customers (in terms of locations, product groups, and customer segments). This drives how companies structure their organizations and establish accountabilities.

The market makes you look either smart or dumb. When it’s going your way, it covers up a lot of mistakes. When fortunes reverse, all your weaknesses seem to be exposed.

As the firm scales from $1 million to $10 million in revenue, the senior team tends to be focused externally on amassing new business. Yet this is precisely the time when a little more internal focus, to establish healthy organizational habits and a scalable infrastructure, would pay off in the long term.

Between startup and the first million or two in revenue, the key driver is revenue (sell like hell). The focus is on proving that a market exists for your services.

It’s between $1 million and $10 million that the team needs to focus on cash. Growth sucks cash, and since this is the first time the company will make a tenfold jump in size, the demands for cash will soar. In addition, at this stage of organizational development, the company is still trying to figure out its unique position in the marketplace, and these experiments (or mistakes) can be costly. This is when the cash model of the business needs to be worked out (e.g., “How is the business model going to generate sufficient cash for the company to keep growing?”). Will the business model generate its own cash internally; have sufficient lines of credit to sustain growth; and attract investors with deep-enough pockets to support it?

@gabrielhdm

To prevent the erosion in your margins, it’s critical that you maintain a clear value proposition in the market. At the same time, the company must continually streamline and automate internal processes to reduce costs. Organizations successful at doing both will see their gross margins increase during this stage of growth, giving them the extra cash they need to fund infrastructure, training, marketing, R&D, etc.

Which brings us full circle to the main function of a business leader: to build a predictable revenue and profit engine in an unpredictable marketplace and world.

The spoils of victory go to those who maintain a steady pace, day in and day out, in all kinds of weather and storms. And it’s this predictability, driven by effective processes, that is ultimately the key to crafting an organization that attracts and keeps top talent; creates products and services that satisfy customer needs; and generates significant wealth.

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

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

So how do you know you need to make changes on the people side of the business, and in your life, as you scale up the venture? Two questions: 1. Are you happy? We’re not talking about some kind of monklike peace, even in misery. This is a more straightforward question. Do you enjoy coming to work? Or are you experiencing irreconcilable issues with business partners? Is there a specific executive not getting the job done? Is there a team member who disrupts everyone else? Is there a customer with too big a piece of your revenue? Is there a supplier not delivering? Is an investor or the bank making your life difficult? Are you having issues with a family member or friend? 2. Would you enthusiastically rehire everyone, knowing what you know today? This goes hand-in-hand with the questions above (except for family!) and includes not only employees but existing customers, suppliers, and other stakeholders in the business. It’s a painful question that requires one to face the brutal facts and make changes. It’s especially tough when the company has simply outgrown some earlier relationships.

ACTION: Is there a relationship that is draining you emotionally? If you need to deal with a contentious situation, we suggest you read Crucial Conversations: Tools for Talking When Stakes Are High, by Kerry Patterson, et al.

Crucial Conversations: Tools for Talking When Stakes Are High, by Kerry Patterson, et al.

Nothing is tougher and more time-consuming than having to replace people who haven’t kept up with the growth of the business.

“The bottleneck is always at the top of the bottle,” notes management guru Peter Drucker. Challenges within the company normally point to issues with, or among, the leaders. To address them, this chapter will focus on the leadership team.

As a company scales up, the toughest decisions involve people and their changing roles in the organization, especially within the leadership team. Loyalties, egos, and personal friendships make these decisions even more difficult when the company faces a situation in which it has outgrown some of its early leaders.

This is the main principle underpinning effective organizational design. Divide big teams into smaller ones aligned around projects, product lines, customer segments, geographical locations, etc., based on the idea of getting everyone in the organization into small teams and as close to his or her respective customers as possible.

Divide big teams into smaller ones aligned around projects, product lines, customer segments, geographical locations, etc., based on the idea of getting everyone in the organization into small teams and as close to his or her respective customers as possible.

Each cell within the organization must have someone clearly accountable for it. This doesn’t mean the person is boss and/or gets to make all the decisions. In fact, it’s important to delineate the differences between accountability, responsibility, and authority.

Accountability, Responsibility, and Authority Though spelled differently, these business terms are often haphazardly interchanged. Here are our definitions: Accountability: This belongs to the ONE person who has the “ability to count” — who is tracking the progress and giving voice (screaming loudly) when issues arise within a defined task, team, function, or division. It doesn’t mean he or she makes all the decisions (or even any decisions) — which is why people often talk about leaderless teams. However, someone must still be accountable. The rule: If more than one person is accountable, then no one is accountable, and that’s when things fall through the cracks. Responsibility: This falls to anyone with the “ability to respond” proactively to support the team. It includes all the people who touch a particular process or issue. Authority: This belongs to the person or team with the final decision-making power. “If more than one person is accountable, then no one is accountable.”

Accountability: This belongs to the ONE person who has the “ability to count” — who is tracking the progress and giving voice (screaming loudly) when issues arise within a defined task, team, function, or division. It doesn’t mean he or she makes all the decisions (or even any decisions) — which is why people often talk about leaderless teams. However, someone must still be accountable. The rule: If more than one person is accountable, then no one is accountable, and that’s when things fall through the cracks. Responsibility: This falls to anyone with the “ability to respond” proactively to support the ...

Getting accountabilities clear throughout the organization is crucial.

Column 4 — Wealth Rather than viewing financial wealth as an end in itself (as a wise guru once told Verne, “All assets become liabilities!”), see it as a resource for supporting the rest of your personal plan. Besides determining how much money you want to set aside for retirement, set goals for the amount of money you want to donate to causes and communities that matter to you over the next several years. Decide how much money you need to support activities with your family and friends, investing in experiences in the coming 12 months that create lasting memories. And note any wealth-producing assets or cash-draining liabilities you need to address in the coming months.

Overall, focus on how your wealth will flow through you in the service of others, rather than hoarding it. This seems to attract more wealth — the natural law of reciprocity. Lynne Twist’s insightful book titled The Soul of Money: Transforming Your Relationship With Money and Life expounds upon this idea. We hope you find the OPPP a useful planning tool for your life. Let’s now turn our focus to the company.

An organization is simply an amplifier of what’s happening at the senior level of the company,