Dynamic Management of Growing Firms–Part 3

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After revisiting the research results on over 200 small and medium size companies I  thought it useful to provide a presentation of the central focus of the research.—the Dynamic System Model (DSM)—and how the model and the research results relate to other work in strategic management and entrepreneurship.

This presentation, due to its length, will be published in 4 Parts in two week intervals each.

This is the 3rd of a 4 part article on Dynamic Management of Growing Firms.

The DS Model can be used to Develop Action Plans

The third, and equally important though often neglected phase of strategic planning is the development of an effective implementation plan.  Once again, following the traditional path, you can develop action plans along functional lines (marketing, production, etc.) as many strategic planning books suggest. However the DSP model provides an alternative, cross-functional perspective for considering needed changes in executing a new strategy.  To illustrate this point, we share a rather detailed description of an implementation plan carried out  by the Canadian McDonald’s Corporation and its Soviet joint partner in a Russian joint venture during the late 1980s and early 1990s. In 1976, George Cohan, president of the Canadian McDonald’s Corporation, introduced the idea of a joint restaurant venture to Soviet officials at the Montreal Olympics. Negotiations took twelve years, with two more to build the first location, opening finally on January 31 1990. McDonald’s broke its own world’s sales record on opening day, serving over 30,000 customers. That location served over one million customers in the first month. This success did not come about due to luck. Publicly available information about the planning process reveals an amazing attention to detail to each of the seven DSM issues.22 For each point, we include in parentheses, the aspects of the DSM supported by this part of the action plan. Consider:

  • A clear vision guided the overall project. The locations to be opened in Moscow were to serve the Soviet people, not just the tourists and the elite. (Overall vision)
  • In keeping with this mission, the restaurants accepted only rubles. The first location was located in a major downtown location. To retain its ethnic attraction, a strictly American menu was served. (Market strategy)
  • To assure a local food supply (and to support local farmers, again consistent with the overall vision), McDonald’s Corporation invested in a joint partnership with the Kashira farming collective to boost farming yields and improve the quality of their potatoes. McDonald’s also arranged for milk, beef, and other supplies from local producers.(Resource acquisition strategy—materials)
  • Key management personnel were all drawn from the Soviet citizenry. Further, the top four candidates spent nine months in Toronto and at Hamburger University in Oakbrook, Illinois. These trainees received receive extensive technical and supervisory training to assure quality control, an understanding of McDonald’s approach to work division and coordination and to develop an understanding of McDonald’s corporate culture and how it was enforced. McDonald’s also sent an additional twenty-seven assistant managers to Toronto for training, again revealing its strong commitment to employee training. (Technical mastery, work flow and human relations)
  • McDonald’s avoided excess in developing its recruitment program, again revealing a thorough understanding of its environment. It placed a one line advertisement in the Moscow paper for employees, and received over 27,000 applications as a result. But in the follow-up effort, managers carefully screened and interviewed applicants. (Resource acquisition strategy—recruitment)
  • The Moscow McDonald’s restaurants, though modeled on the American menu and technology, are far larger than most of McDonald’s other restaurants. The joint venture’s first location alone seats 700 inside, and an additional 200 outside the restaurant. Thus, though many aspects of the Soviet operations were copied from its American model, to assure smoother work flow, the joint venture created a separate food-processing plant to better service the large-scale restaurants it had in mind. The plant takes care of much of the food preparation, such as baking, patty preparation, and cutting potatoes into pieces ready for frying (work flow strategy)
  • By probing deeply into the Soviet system, and patiently making many trips to Moscow over a twelve year period, George Cohan and his management team at the Canadian McDonald’s Corporation succeeded in making the Soviet government a part of the McDonald’s team, rather than as a potential adversary, a truly amazing accomplishment especially when one realizes that negotiations began well before the Cold War had even ended between the Soviet Union and West Bloc countries. This thoroughness, and the related efforts to build trust, may explain why McDonald’s Corporation’s presence in Moscow survived the collapse of the Soviet regime, and remains a success. (Public relations).
  • Some of this same evidence also supports the view that McDonald’s had a thoughtful approach to resource allocation: It spent large sums on certain areas (e.g. for the food processing plant, training in the U.S. and Canada, potato farming venture) and acted frugally in others (using local contacts for other food stuffs, placing a short ad in the newspaper).(Resource allocation strategy).

Whatever planning system McDonald’s Corporation intentionally used, as we review these facts and others publicly available about this joint venture, we find evidence that McDonald’s developed implementation strategies supporting all seven DSP issues, helping to explain its success. We find McDonald’s  thorough approach to implementation of the joint venture remarkable, perhaps as remarkable as its resulting sales success.

At this point you may well ask: Don’t all major corporations pay attention to such details?  Perhaps. The question is hard to answer, other than by inferring from company actions, since implementation plans are not generally made available to the public. But based on press reports, there is evidence to suggest that companies do not always succeed so well in anticipating appropriate details. Consider for instance the launching of Euro-Disney by Disney Corporation.  We won’t go into a full case analysis here, but consider just one DSP issue—resource acquisition, and recruitment in particular.  At start-up, Disney Corporation so miscalculated the availability of local citizens interested in employment at Euro-Disney that it was forced to build dormitories on site, temporarily housing many out-of-town employees in high-rent Parisian apartments many miles away. Disney could have done a better job of anticipating this recruitment problem. At the time Euro-Disney was scheduled to open, Western Europe historically had faced entry-level labor shortages, due to a combination of relatively low unemployment and generally attractive unemployment entitlement programs. In fact, the word, “guest worker” is a part of the Dutch and German vocabulary to refer to those immigrants brought into those countries to fill these entry-level, lower-skilled positions. Did Disney Corporation misjudge the attractiveness of its jobs to the local population, or simply overlook consideration of the recruitment issue at all?  We may never find out the real story, but we can’t help wondering whether a more thorough implementation plan could have provided Disney with a smoother, more profitable launch of its EuroDisney project.

In devising your own action plans, how do you avoid overlooking obvious details? We recommend a fairly simple approach. First, consider each of the seven DSP issues carefully, relative to you overall direction or vision. Then for each issue, complete the following information as specifically and thoroughly as possible:

  • (For each DSM issue): Describe the specific strategy you plan to follow. Be sure to consider how this might support the overall strategy and/or vision for your company.
  • Define the anticipated outcomes you expect as a result of following this strategy (e.g. improved work flow, boost in market share, profitability, etc.) Be as specific as possible although not all goals have to be numerically defined.
  • Define your time schedule: When will the project begin? What are the key milestones? When must the project be completed?
  • Describe the resources required to carry out the plan  (staffing, capital, information, raw materials, equipment) and who will provide these resources.
  • Outline the specific steps to be followed to execute the strategy or any other details defining the actual tasks to be carried out.
  • Assign the person responsible for overseeing the action plan.
  • Finally, develop a feedback system so that the assigned person can report to you on a timely basis (perhaps at certain milestones and/or time intervals) and be made accountable for the success of the plan. The report should cover steps taken, resources spent, and any surprises encountered along the way, suggesting a change in direction.

 

Summary of how the DS Model is Used in Strategic Planning

If  you want to use the DS Model as part of a formal strategic planning process, you can use it in all three phases: 1) To assess current strengths and weaknesses, including core competencies or capabilities and competitive advantage; 2) To trigger ideas for a unique overall strategy or new competitive advantage;  and 3) To organize more detailed action plans.  The same seven issues are considered at each step, making the overall system relatively easy to learn. A successful overall strategy  requires a clear vision, considerable creativity in devising new strategy, and an ability to sift through a lot of extraneous information confronting you on a daily basis to identify the important trends about your immediate competition, your industry and general social, political, technical, economic and ecological trends. And equally important, it needs a carefully thought-out implementation plan. We cannot give you a pat formula for producing a powerful strategy. But as a mental model, the DSM model may trigger your awareness of aspects of your company you otherwise might have overlooked.

 

Update on Current Strategy and Sales Growth Literature

In this final section of the introduction, we update the reader on relevant research published after (or overlooked by) the first edition of our book. Some readers may prefer to come back to this material after reading the remainder of the book. This section is organized as follows:

  • First, we compare the DSM to other classification schemes.
  • In the remainder of this section we report upon and discuss research results linking various management strategies or actions with sales growth.

Note that when we mention our own research, we are referring the results of the project “Managing the Growing Firm,” reported in this book and related publications.

Other Classification Schemes of Growth Problems

One of the considerations in developing any typology is the degree to which it should be driven by theory or by an empirically-supported, factor analytic base. One of the questions we faced in developing our original model was whether the DSM should be theory or data-driven.  Our DSM is a blend of the two. For instance, we fully expected certain issues, such as resource acquisition, to be multi-faceted, covering a range of strategies to attract personnel, capital, materials and information. On the other hand, factor analytic results partly influenced our final determination of the aspects to be included in resource allocation and work flow.

Though many studies have created their own lists of issues, only a handful actually test categorization schemes. Studies avoiding an a priori determination of categories and empirically testing at least some of these categories with factor analysis are rarer still. Thus, we must piece together ideas from different studies meeting at least one of these criteria.

Hambrick and Crozier’s classic article on strategy and growth provides an interesting starting point. In examining a sample of Inc. 100 companies from the early 1980s, they identify several internal transformation issues as key to success, including resource acquisition (hiring experienced managers and being able to recruit effective  middle managers); work flow (formal systems and decentralized teams), human relations (develop and reinforce the culture) and resource allocation (paying attention to frugality and variable cost compensation).23 Although not meant as a comprehensive classification scheme, the focus on internal issues is noteworthy, especially given the relative lack of attention given many of these issues in empirical research on strategy and sales growth.

In a different study, Terpstra and Olson develop a listing of issues, avoiding an a priori classification scheme, with a technique very similar to the one we used to identify key growth problems in our own research(see appendix a).24 Using an open-ended interview format with CEOs of 121 Inc. 500 companies, they identify key problems at start-up and at later stages of growth.25 Since they do not factor analyze their results, their clustering (based on functional categories) is relatively arbitrary. More interesting, we think, are the actual problems they identify at start-up and later stages of growth. Ignoring their clusters, the actual problems they identify are very similar to the list we developed in our own research. Two exceptions, including the problem, “managing growth,” which is probably  a rather general problem that can apply to the whole process, and lack of management experience, which can be linked with either the recruitment component of the resource acquisition strategy, or any of several other issues, depending upon whether the CEO is referring to skills at time of hire, or inadequate training within the company.

Kazanjian’s research is noteworthy for a different reason.  He does not derive his  set of eighteen issues from open-ended interviews, but rather from a review of the literature. Not surprisingly, this produced considerable gaps. For instance, he omits coverage of any problems we would classify within human relations, public relations, or the quality component of technical mastery. However, his factor analysis provides further insight into some of the other dimensions of the model—for instance confirming our own conceptualization of the work flow issue. In particular, he identifies an organizational systems factor including the following variables: develop management information systems; control costs; define organizational roles, responsibilities, and policies; develop financial systems and internal controls; and cut administrative burden and red tape.26 Readers looking over our approach to work flow in Chapters 7 and 8 (see reference book) will find a strong similarity with our work flow construct.  Indeed, this was one area for which we also used factor analysis to develop the final construct. Kazanjian’s second factor, sales/marketing, also provides interesting comparisons with our concept of market strategy.  Dominant problems loading on this factor include the following: Meet sales targets; attain profit and market-share goals; penetrate new geographic territories; and (weaker) provide product support and customer service (also loading on production). Kazanjian’s third factor, people, really involves two recruitment-related issues: Attract capable personnel;  and achieve management depth and find talent. Table 1 also indicates how the eighteen problems are grouped according to his analysis into the following six factors: organizational systems; sales/marketing; people; production; strategic positioning; and external relations.

D’Souza and McDougall  also report results of a factor analysis of strategies.27 They empirically identify four clusters of strategies, including resource allocation, operational efficiency, market/product and value emphasis. Their research most clearly validates the resource allocation concept, with such diverse variables as investment in advertising and investment in research and development loading on the same factor. However, their factor analysis suggests that technical mastery may really be two dimensions: one focused on productivity and costs (operational efficiency); the other focused on quality and value added (value emphasis).

Taken together, it would appear that most of the issues described by other researchers can fit within the overall framework of the DSP model, although more extensive work on the empirical verification of these different dimensions will be helpful.

The Focus of the Review: Management Actions and Sales Growth

 

In the remainder of this chapter, we focus specifically on research predicting sales growth in small-to-medium-sized companies. Using a rather broad definition of strategy, we include research measuring some type of management activity or strategy subsequent to a company’s formation.28 We group our conclusions by DSM issue, and in turn, by specific independent variables.

We choose sales growth as the dependent variable rather than profitability, primarily for pragmatic reasons. Much of the recent research in entrepreneurship focuses on sales growth, making it easier to compare findings across studies.29 Both profitability and sales growth are important, however, and based on research to date, evidence suggests that they should both be included, but as separately measured dependent variables. Although they correlate to some extent, the correlation is fairly weak. Furthermore, independent variables that predict sales growth do not always predict profitability, and vice versa.  For instance, the choice of a broad strategy at start-up may stimulate greater sales growth, but not necessarily optimize the level of profitability, at least in the short run.30 Ideally, future research would include both as dependent variables, so that we can better understand what these trade offs might be and where they occur.31

 

References and Footnotes-Part 3:

22.     We derive our facts from the video, McDonald’s in Moscow originally prepared by the Canadian McDonald’s Corporation and later distributed through The Dryden Press to accompany the marketing text, Louis E. Boone and David L. Kortz, Contemporary Marketing, 7th ed. (Orlando, FL: Dryden Press, 1993).

23.     Donald C. Hambrick and Lynn M. Crozier, “Stumblers and Stars in the Management of Rapid Growth,” Journal of Business Venturing, 1, (1985), pp. 31-45.

24.     For more detailed discussion of the technique we used to develop the model, and the specific problems we categorized into the different DSP issues, refer to Hendrickson, “Bridging the Gap between Organization Theory and the Practice of Managing Growth.”

25.     David E. Terpstra and Philip D. Olson, “Entrepreneurial Start-up and Growth: A Classification of Problems,” Entrepreneurship Theory and Practice, 17, no. 3 (1993), pp. 5-20.

26.     Robert K. Kazanjian, “Relation of Dominant Problems to Stages of Growth in Technology-Based New Ventures,” Academy of Management Journal, 31, no. 2 (1988), pp. 257-79.

27.     Derrick E. D’Souza and Patricia McDougall, “Exploring the Competitive Strategies of High-Growth Manufacturing Firm,” Presentation, 1995 Southern Management Association Conference.

28.     This broader definition of strategy  is consistent with approach taken by British researchers Storey and Barkham.  See D. J. Storey, Understanding the Small Business Sector (London: Routledge, 1994).  See also Barkham, et al, The Determinants of Small Firm Growth.

29.     Storey, Understanding the Small Business Sector provides a major literature review on strategy and growth, although the reader should be cautioned that some articles on employment growth are intermingled with those on sales growth.  Barkham’s study represents another major study done recently on sales growth (Barkham, et al, The Determinants of Small Firm Growth). Brush and VanderWerf  find that from a sample of 34 studies, “changes in sales” was overwhelmingly the most popular operationalization, with 16 of 34 studies reviewed utilizing this measure ( See C. G. Brush and P. A. VanderWerf, “Measuring Performance of New Ventures,” in Frontiers of Entrepreneurship Research (Wellesley, MA: Babson College, 1990).

30.     See Patricia Phillips McDougall, Jeffrey G. Covin, Richard B. Robinson, Jr., and Lanny Herron, “The Effects of Industry Growth and Strategic Breadth on New Venture Performance and Strategy Content, Strategic Management Journal, 15 (1994),  pp. 537-54.  They find that although broad breadth strategy ventures in high growth industries exhibit significantly highest sales growth rates, they showed only modest ROS (see p. 550).

31. Tsai, et al warn of possible trade-offs between sales growth and profitability.  See W. M-H. Tsai, Ian MacMillan, and Murray B. Low, “Effects of Strategy and Environment on Corporate Venture Success in Industrial Markets,” Journal of Business Venturing, 6 (1991), pp. 9-28.

The research:

The research was conducted by Dr. Lorraine Uhlaner with guidance from Dr. John Psarouthakis in the College of Business, Eastern Michigan University. An outcome of the research was the book “Dynamic Management of Growing Firms”, by Lorraine (Hendrickson) Uhlaner and John Psarouthakis, published by the University of Michigan Press in 1998. Upon reviewing recent literature, John Psarouthakis, given his experience in entrepreneurial management on how such companies are managed he thought it useful also to make the research results and analysis available through this magazine after we concluded that the management model described is still valid.

Lorraine Uhlaner is Professor of Entrepreneurship at EDHEC Business School, France and
Visiting Professor of Entrepreneurship at Nyenrode Business University, The Netherlands
She was a member of the faculty at the College of Business, EMU prior to her engagements  above.
An academic researcher and teacher. In research, Prof. Uhlaner currently focuses on ownership and governance issues in the privately-held firm, especially responsibilities of ownership in firms with multiple ownership. Extensive research on SMEs as well as larger family-owned firms.
Extensive teaching experience in entrepreneurship, family business and organization behavior. She specializes in Family governance, responsibilities of ownership, knowledge management and structure in SMEs, Business transfer in the privately held firm.

Prof. Uhlaner received her PhD in Organization Psychology from the University of Michigan.
Her prior studies were at Harvard University, and at the University of Leiden, The Netherlands.

 

 

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