PREPARING YOURSELF FOR MANAGING GROWTH
How do you manage a growing company? What can you learn from other CEOs facing the dual challenges of maintaining growth and profitability? What issues are you likely to face and how can you best resolve them? We address these questions and more.
We believe our book is unique. We combine extensive interviews and data from nearly two hundred companies along with first hand experience in building J. P. Industries (JPI), a Fortune 500 company.1 Our diverse research and management experience confirm that companies are dynamic and must be managed that way. We sum up our guidelines in the Dynamic System Planning Model that we will show is practical yet based on well-tested theory. We especially address challenges faced by small growing firms. But the model applies whether or not your company is growing right now. It applies whether you have five employees or five thousand, whether you face a maelstrom of growth and change or stagnation and decline. The model provides a means to develop a more successful company strategy for higher profits and growth.
THE DECISION: TO GROW OR NOT
Consider this unusual concept: you don’t have to grow to be self-employed and financially secure.
Ron started several businesses during his life, but once each venture was underway, he eventually reached a point where the business managed him rather than the other way around. While adept at identifying new markets and making sales, when it came to working with other employees, assigning tasks and coordinating their efforts, he never seemed quite able to make the transitions needed to assure business success. After several such failures, Ron hit upon a suitable niche for his talents–as a promoter of trade shows. He has no employees to contend with, each show is of relatively short duration, and he can move on to the next project before he gets bored or runs into complex management challenges.
Ron opted for zero growth–no employees, no hassles, and a good income.
Jeff is CEO of a tool and die shop.3 At one time he was committed to growth of his firm but when the firm approached about twenty employees, Jeff had to make a decision. If he continued to grow, he would have to add middle managers. As things stand, he is making an extremely good income and is able to house all his employees in one large unpartitioned quonset-style building. With this physical layout, and an organization of project teams, he can oversee his whole operation alone. His wife does the bookkeeping and he is able to handle all administrative and sales work in one small room in the front of the shop floor. He has made his decision: simplicity. This is not to diminish his staff’s technical accomplishments. Even the Japanese have toured this little plant, which produces some of the most innovative work in his industry.
WARNING FROM AN ENTREPRENEUR OF THE YEAR
If you are reading this book, you may not identify too closely with Ron or Jeff. Self-employment and financial independence are not your only goals. You probably also relish the challenge of seeing how far and how fast you can grow. Growth can be an exhilarating experience and public recognition of growth accomplishments abound. Most honor rolls of business, such as the Fortune 500 and Inc. 500 base selection on sales or sales growth.
But beware. So much hoopla accompanies rapid sales growth that the question of profitability may go unexamined until major problems set in. Our data confirms the critical point that growth alone does not guarantee profitability or long-term survival–and can actually spell disaster if improperly managed.
The case of a large retail computer entrepreneur highlights this point. At one point in his firm’s meteoric growth, he received many local, state, and national awards honoring his accomplishments, including Entrepreneur of the Year. But he had not put basic control systems in place. Lack of control took its toll on profits and the firm struggled for survival. Fortunately, the CEO did some reading on other fast-growth firms, including a case written about L. L. Bean in Maine, and identified his unmet needs. He hired several full-time experts to install the necessary systems. For several years following, his firm remained an industry profit leader and eventually merged with another successful computer retailer. But he still remembers the irony of receiving so many awards when his business was in such serious financial trouble and cautions the aspiring entrepreneur to beware the hubris that comes with that first Honor Roll award.
OUR BASIC PHILOSOPHY: IDENTIFY THE PROBLEM FIRST
Our strategy for managing the growing firm is called the Dynamic System Planning Model. But first, we would like to present our basic philosophy of running a successful business, that underlies the model’s application.
It can be stated simply: if you know what kinds of issues or problems to look for, it is much easier to find the right solution. The challenge is in learning what kinds of problems or issues to anticipate. Your technical training can be very helpful, but learning how to learn is even more important. Once you can identify the problem, whether it is technical, human relations, or marketing in nature, you can look and find the relevant solution.
Once you master the Dynamic System Planning Model, you will be much better prepared to anticipate the problems that lie ahead and to set up an ongoing strategy to cope with them.
THE DYNAMIC SYSTEM PLANNING MODEL
The Dynamic System Planning Model is a model of organization effectiveness based on both the classical goal approach and open systems theory ideas pioneered by researchers at the University of Michigan’s Institute for Social Research, including Robert Katz, Robert Kahn, and Basil Georgopoulos. Borrowing from the classical goal approach, for-profit firms depend upon financial viability to survive. A financially viable company can pay its bills when they are due and operates at a profit.6
Simple enough. But achieving financial viability is much more complicated than merely determining objectives for profit and production of goods and then setting out to achieve those goals. The DSP Model defines the issues you must manage to assure financial viability, including market strategy, work flow, resource acquisition, human relations, resource allocation, public relations, and technical mastery. Successful corporate strategy must tackle each of these issues.
Each issue raises key questions about how you run your company:
- Market strategy: What is your market niche–who are you selling to and why are your customers buying?
- Work flow: How do you assure the best flow of work? First, how should you divide work among everyone in your firm –and, once divided — how can you assure that everyone’s activities fit smoothly together?
- Resource acquisition: How do you acquire the resources you need–money, people, supplies, information–to begin and/or continue to operate your business?
- Human relations: How can you maintain adequate human relations–esprit de corps, employee motivation–so employees can really contribute? What values do you share with employees?
- Resource allocation: As you acquire the resources you need, how can you best make use of them? How should you spend your money, assign your staff, or otherwise allocate raw materials, information, equipment, and supplies?
- Public relations: Who else outside your firm can shut you down –or help you out? What groups or individuals should you be paying attention to other than your customers and suppliers?
- Technical mastery: How do you maintain the highest productivity and quality? Do you have the needed technical know-how?
- Financial viability: Can you pay your bills when they come due, are your assets growing and do you operate at a profit?
Though critical to the firm’s survival, financial viability is fundamentally different from these other seven issues in one respect: it cannot be managed directly. How well you manage the first seven issues determines how much cash you have, how profitable you become, how quickly your assets grow and how long your company survives.
THE ORGANIZATION IS A DYNAMIC SYSTEM
Each word in the term, Dynamic System Planning Model has a special meaning. We use the term dynamic to signify the ever-changing conditions that organizations face outside the firm–and changing management strategies required to keep up with these changes on the inside. Global competition, court rulings, and the changing caliber of job applicants are all examples of these external dynamics. Because of these dynamics, effective strategy requires frequent review and assessment.
When we speak of a dynamic system, we are allude to qualities of organizations defined by open systems theory.7 According to that view, frequent response and adaptation to environmental changes is critical to survival. Though the eight issues remain the same, to grow profitability, the approach you must take to manage each issue changes over time.8 The open systems view also sees the organization as a collection of interdependent parts. Change one, and it affects the others. You cannot treat any one aspect–be it accounting, marketing, or technical–in isolation.
The words planning model are also important. The Dynamic System Planning Model offers a new way of thinking about planning which guides your daily thinking. Planning should not be looked at as an annual report you file in a drawer or shelve on the bookcase until next year but as a program you can use on an on-going basis to guide your decisions and action. Strategy for dealing with the eight DSP issues forms the backbone of the plan, guided by your vision for your company. As events change over the course of the year, you need to revisit your strategy frequently to make sure it is still adequately addresses each issue.
One common problem faced by CEOs of rapidly changing firms is being blindsided in one area while concentrating too hard in another. For example, perhaps you put all your energy into improving sales but ignore medical insurance concerns your employees have. Sales are dependent on positive customer relations. Can you really improve customer relations while your employees feel miserable about their benefits? You may not be able to resolve all the challenges at once but you are less likely to confront an unexpected crisis if you track all eight issues on a regular basis.
EXAMPLES OF SOME LINKAGES
Let’s look at a few examples of linkages.
LINKAGE 1-1. NET PROFITS ARE HIGHER IN FIRMS that emphasize quality as a part of the mission.
Perhaps you have wondered whether to emphasize quality more in your own firm. However you define it, we find quality to be a significant success factor for many companies we studied. Our findings agree with those from another large study by Buzzell and Gale.9 The topic of quality is explored further in several chapters, including Chapters 6 and 13.
LINKAGE 1-2. NET PROFITS ARE HIGHER WHERE CEOs have a clear vision.
A lot is said about the importance of having a strategic plan or vision. Does this really matter or is it just business school mumbo-jumbo? Our study confirms the importance of a clear focus. Vision does not necessarily pertain solely to products or services. It may relate to emphasis on quality, low cost, focus, or diversification. JPI was founded on a clear vision–to create a high quality, low cost producer of durable goods by acquiring underperforming firms in which the founder could use his expertise in manufacturing and management. Under-performers in automotive and plumbing supplies were targeted, in particular. Of course more than vision alone was required. Detailed strategies were designed to turn around each firm, including the narrowing product lines, selling off excess inventory, consolidating marketing and administrative staff, training personnel at all levels, and replacing managers when needed. This clear vision catapulted JPI into the Fortune 500 just ten years after start up, with strong profits throughout the period.
LINKAGE 1-3: NET PROFITS ARE HIGHER WHERE work flows smoothly, especially in manufacturing and business service firms and in larger firms.
Some linkages apply in all firms. Others appear to be especially critical in certain industries or size ranges. Work flow is an example of the latter.
Smooth work flow means making sure efforts of different individuals and groups in the firm converge properly in the right time and place. Achieving smooth flow of work sounds simple. In very small firms, the owner sees everything that goes on and corrects mistakes. But as a firm exceeds 20 employees, difficulties crop up. Sometimes owners figure if they keep putting in more hours they can continue to iron things out. But sooner or later direct oversight simply stops working. At that point, only more sophisticated techniques will assure smooth work flow, such as a clear chain of command and control systems.
LINKAGE 1-4. NET PROFITS ARE HIGHER WHERE CEOs communicate specific values to their employees.
Our data–and our personal experiences–support the importance of clearly stated values. This is explored more fully in Chapter 10, See referenced Book below including the types of values emphasized by JPIndustries, Inc. and how they were communicated to employees.
The four linkages summarized in this section are only a sampling of those noted throughout the rest of the book. Each chapter of Part II is based in large part on additional linkages we found in data collected from interviews with CEOs and managers in nearly 200 small and medium-sized companies. In Appendix C, we list the linkages specifically supported by our research. We also illustrate points throughout the book with specific comments from CEOs.
SUMMARY OF THE EIGHT KEY ISSUES
The Dynamic Systems Planning Model is centered around eight basic issues, including:
- Resource acquisition: obtaining key capital, personnel, information, and material inputs;
- Market strategy: establishing and maintaining a market niche;
- Public relations: maintaining or enhancing adequate relationships with significant outside groups other than customers and suppliers;
- Resource Allocation: optimally assigning all types of resources–capital, supplies, personnel–appropriately inside the firm;
- Work flow: assigning and dividing work, and in turn,
coordinating these efforts in a manner that assures
- Human relations: maintaining adequate motivation and morale among employees so personal needs of employees are met coincident with the meeting of organizational goals;
- Technical mastery: assuring the firm knows how to
make and improve on what it sells; and
- Financial viability: Having adequate capital and cash
left over to operate and grow the business
If you can keep these eight issues in mind, you will be less likely to waste time on crisis management. Crisis management comes from a lack of ability to anticipate problems. Knowing what those problems are reduces the risk of overlooking them. If a firm is able to resolve each of these eight issues adequately over time, it can more likely remain profitable, with better cash flow and less tension.
University of Michigan Press.