Musings on Entrepreneurship and Innovation
Wednesday, September 01, 2004Is Your Growth Strategy Your Worst Enemy?
Not long after my previous post, I rediscovered an old, but still highly relevant, article [1]:
History is littered with companies that experience "boom and bust" rapid growth followed by steep decline, often into oblivion...The challenge to finding a sustainable growth rate means striking a balance between growth drivers and constraints.
The authors go on to describe six principles that are worth repeating:
- Every action produces a reaction.
- Structure shapes behavior.
- Complex interrelationships make a system.
- Time clouds the picture.
- "Hard" and "soft" factors interact.
- Feedback reinforces and counteracts.
Business decisions [2] made without due consideration of these principals are likely to result in unintended consequences. Young companies that are defined by scarce resources can ill-afford the cost of unintended consequences.
[1] Avila, Joseph A. and Nathaniel J. Mass, The McKinsey Quarterly, 1995, Number 2.
[2] I subscribe to the notion that a business decision results in the allocation of resources; a decision is not simply arriving at a conclusion.
Stop and Go Growth Can Harm the Health of Your Company
Always-On Network posted a provocative CBS Marketwatch piece this morning:
In every boom and bust cycle of the technology sector that I can recall, business software sales have always been the first to fall, and this was certainly the case back in 2000...In a second phase, the malaise spread to hardware companies...Now, four years later, it's happening again...These companies still don't get it. They need to focus on boosting sales in a sustainable manner -- not providing just a one-time shot in the arm for investors [emphasis added].
Here's the stop-and-go behavior in which even large, sophisticated corporations engage:
- Devote a lot of resources to increasing sales
- Strain your operating capacity to the limit
- Go on a hiring and building binge in order to increase capacity at diminishing marginal productivity
- Watch sales slump and profitability erode
- Cut capacity indescriminately in order to reduce costs
- Repeat until exhausted
So why do big, presumably smart, companies keep doing this? For starters (at least in the short-run) they can. Large companies have accumulated enough slack in their system to absorb a fair amount of abuse. Second, the two sides of the corporate brain (sales, finance, and marketing on one side; operations, product development, and customer support on the other) don't talk to each other -- many times they don't event speak the same language. Third, in a CEO as hero culture, CEOs tend not to have long tenures [1]. Consequently, they are sometimes motivated to pump up sales, dump their stock, and run before the shit hits the fan. For too many CEOs, sustainability is academic [2].
A small company, on the other hand, doesn't have any slack. Furthermore, the CEOs of such companies rarely have the ability to cut and run -- the second mortgage on the home tends to serve as an effective anchor. So why would a small company engage in stop and go behavior? The second reason posited above -- the inability of the two sides of the company brain to develop a shared understandingn of, and commitment to, a long-term value creation plan. Nevertheless, over-steering your company is not inevitable. It's possible to plot a more stable course.
[1] According to CEO Go Quick Stats, the average tenure of CEOs in North America fell 26% between 1995 and 2003.
[2] If you have any doubt about the extent of agency risk in corporate America, tune into the Hollinger fiasco.
Seeking Co-Moderators for Free Range Conversation Online Forum
Please email or phone me, Dave Bayless, at 406-587-1900, if you would be interested in co-moderating the Free Range Conversation online forum (i.e., bulletin board).
In addition to the fee-based forums I facilitate as part of my "not primarily for profit" Pioneer Entrepreneurs service, I'm interested in offering free platforms for less structured conversations among entrepreneurial peers and others. My goal is to help catalyze conversations using a variety of online tools that can lead, when appropriate, to more personal communications. I've taken to calling my experiments Free Range Conversations. Currently, these are composed of live text chat events and, potentially, asynchronous bulletin board-style conversations.
Over the last couple of years, I've experimented with online forums with decidedly mixed results. However, a recent conversation with Nat Welch has encouraged me to consider testing whether the timing is now right. Specifically, Nat recommended I seek out others who share a similar interest who would be interested in co-moderating the board. Hence, my entreaty.