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How Growth Can Kill a Business (and what to do about it)

2012 February 19
Businessman Holding Gun To Head

People often say that “nothing succeeds like success,” and, to a certain extent, that’s true.  Successful companies get good press, find it easier to win new business as well as procure and retain top talent.

However, with success also comes growth and that brings its own set of challenges, especially for young companies. Often, it sends promising new stars into a tailspin from which they never recover.

There’s lots out there to advise companies on how to be successful, but very little about how to manage the growth success brings.  I’ve spent most of my career building entrepreneurial companies, done several turnarounds after things went awry and uncovered some common problems as well as some successful solutions.

The Dunbar Dilemma

In 1992, anthropologist Robin Dunbar published his groundbreaking paper on optimal group sizes in primates.  For humans, he estimated the limit to maintain stable relationships in a group to be about 150, now known as the Dunbar Number.

Since then, other researchers using different methodologies have come up with slightly higher numbers, but the general principle stands.  Go past a certain point and natural connections start to break down.  In my experience, that number does seem to be somewhere in the range of 150-200.

That’s when the “really cool place” with a family atmosphere starts to take on a decidedly more corporate feel.  Some of the changes are positive; things become more structured and less off-the-cuff.  Nevertheless the loss of connectivity is palpable and things begin to fray.

The biggest danger at this point is that the breakdown is hard for senior management to see.  They have usually worked together for years, feel a special camaraderie and find it difficult to understand how others don’t feel the same way.  In fact, they are offended that newer arrivals don’t feel the same commitment that they do.

The Rise of the Nasty People

With the loss of connectivity comes a loss of visibility.  People who have been around for a while get promoted on the basis of longevity and internal relationships rather than competence or performance.  Inevitably, some of these people will have a nasty, territorial streak.

That’s when the real trouble starts.  They tend to surround themselves with sycophants who make up for their lack of professional talent with fealty.  Strong up-and-comers who question the status quo are set aside and even ostracized.  False consensus is favored over real debate.

From there the process becomes self-reinforcing.  Strong players become frustrated and leave, while those who stay are rewarded for their loyalty.  They are valued for their reliability and senior management, who by now have come to understand that something has gone wrong, now depend on those they feel they can trust even more.

A bunker mentality sets in.  The wagons are circled.  The”family affair” has been transformed into a set of internal fiefdoms, which can’t seem to work together effectively.

The Reorganization

The next step is the inevitable reorganization.  By now, everybody realizes that the company is going through “growing pains.”  There is a general acknowledgement that the organization is no longer an upstart and must become more “corporate.”  A consensus builds that something has to be done.

Unfortunately, that “something” is usually some form of massive reorganization.  Months are spent planning and then implementing the new structure.  Of course, everybody realizes that there will be some resistance, but there is confidence that obstacles will be overcome and in the end everybody will be better off.  Good times will return.

It hardly ever works out that way.  Personal relationships and tacit organizational knowledge play an important role in any organization, once those become defunct, breakdowns occur.  The new structure breaks old connections and doesn’t replace them fast enough.

Reorganizations rarely, if ever, take informal relationships into account, which is why they usually fail. (Incidentally, the reorganization of the societies in post-Soviet nations ran into similar problems).

A Network Approach

It is the last point, about informal relationships, that is the most crucial.  Entrepreneurial companies that find themselves growing into substantial corporations are acutely aware of the need for structure, yet often implement a hierarchy that looks good on paper but fails in practice.

A well-functioning organization is a well-functioning social network and, as I wrote before, social networks thrive on internal connections.  In a small company, they form naturally, but in a big company they need to be nurtured.  Here are some ways to do that.

Fire Nasty People:  Whenever I’ve been called in to do a turnaround for a company that has hit the skids, I inevitably find that there are a handful of people (usually quite competent) that are the source of many of the problems.

That’s why it always makes sense to fire nasty people.  They tend to be more trouble than they are worth, scare off a lot of good talent and make it much harder to run the company.  It’s tough to build a well-networked organization when everybody needs to watch their back because of a few bad eggs that seek to get ahead by undermining others.

Focus on Junior Employees:  Small companies tend to be tightly knit.  People grew up in the company together and have built strong bonds.  As the business grows, it’s tough for newcomers, especially younger ones who lack commonality with senior staff and are unfamiliar in professional life, to break in.

The result is that they never really feel at home at the company and the “inner circle” becomes even more isolated.  Management needs to put special emphasis on junior staff to make sure that they are being on-boarded and mentored effectively.  It’s the newbies, not the incumbents, that can provide the energy to keep the company vibrant and growing.

Internal Training Programs:  One of the best ways to build connectivity at the junior levels is to create an internal training program run by middle and senior level staff.  It’s also a great opportunity to build mentoring relationships and confers status to promising mid-level employees who are asked to present to newcomers.

They work best when they are cross functional, so that new employees get to bond with others across the organization and learn skills that, while not applicable to day-today-work, helps them understand the bigger picture.  Those relationships and skills are crucial for integrating diverse skills across departments.

Best Practice Programs:  Another exceptional technique is instituting best practice programs across departments.  These are regularly scheduled meetings in which people get the chance to present their best work to their peers.  I’ve found it works best without senior staff present.

Autonomy, Mastery and Purpose:  Most of all, management needs to realize that the people joining the company need to be motivated.  That’s much easier to do in a small group than in a big company.  As I wrote in an earlier post about motivating employees, it’s important to instill autonomy, mastery and purpose.

Probably the toughest thing about growth is that it’s difficult to recognize the problem until it’s too late.  After all, when you’re running a business, growth is what you’re after. Nevertheless, at some point every successful company will have to deal with the challenges that go along with it.

– Greg

11 Responses leave one →
  1. February 19, 2012

    Hi Greg, I really enjoyed and could relate to so many parts of this article. It has been many years since I was in the corporate world but recognize many of the “growing pains” you talk about. “They tend to surround themselves with sycophants who make up for their lack of professional talent with fealty. Strong up-and-comers who question the status quo are set aside and even ostracized. False consensus is favored over real debate…” is also characteristic of some online personalities. Sometimes I scratch my head when I see the number of followers some people have online and then look at the quality of their content – hmmmmmm :).
    Julie Weishaar´s last blog post ..Grow Your List = Increased Sales

    [Reply]

    Greg Reply:

    Thanks Julie and nice to see you again!

    – Greg

    [Reply]

    Julie Weishaar Reply:

    I come out of my cave every once in a while for a good read :)
    Julie Weishaar´s last blog post ..Grow Your List = Increased Sales

    [Reply]

  2. February 19, 2012

    Great perspective on growth, but I think you went light in one key area: hiring. If you haven’t read it yet, look through Gilt Groupe’s Kevin Ryan piece on hiring.
    Matt Albiniak´s last blog post ..SXSWi 2012 Panel Recommendations

    [Reply]

    Greg Reply:

    Matt,

    I did read it and it’s excellent! Thanks for reminding me.

    – Greg

    [Reply]

  3. February 19, 2012

    You could have been an amusement park ride engineer/designer, Greg.
    Ever have a hand in designing Disneyland’s Mr. Toad’s Wild Ride? Or Space Mountain?
    Your recount of the corporate growth track and what happens to it along the way, its path pitch, yaw, climb and descent -maps perfectly to those thrilling rides.
    Those companies that don’t employ outside diagnostic assessments to gauge the effect that values, motivators and behaviors have on individual and cross team performance contribution miss out on the critical element that lies at the heart of repeatable and scalable success; diversity working effectively across the people designing the products.
    Size in and of itself isn’t the issue. It’s as you say; the management of size.
    Companies may design, produce and market a great product, that has a great ride. And along with it an experience that consumers are willing to wait in line for. But can they do it again and again? Like a Disneyland or an Apple does?
    If they can their park size or market share grows. If they can’t they become one hit wonders and shrink over time as their audiences mature and move on.
    Their offerings remain in the end bound to one track and one track only. A track and product cycle that only goes round and round, travels at exhilarating speeds but lasts a shorter time than expected and becomes boring and predictable.
    The issue is how to sustain the magic.
    It ain’t don’t in .xls formats that’s for sure.
    All companies nod like bobble heads and say they want fresh innovation.
    To actualize that though – they’re going to have do a lot more of what you’re talking about here – than just change the paint, color, design and speed on their spinning tea cups.
    Any good mouse in the house – that’s earned their ears, knows that, right?

    [Reply]

    Greg Reply:

    Thanks Jay!

    Disneyland/World is a great example of managing scale. Great points!

    – Greg

    [Reply]

  4. Olga permalink
    February 19, 2012

    I’m lucky to have lived through these principles and confirm that they do work.

    Nice post, Greg! Good reminder!

    [Reply]

    Greg Reply:

    Spasibo Dorogaya!

    – Grisha

    [Reply]

  5. March 28, 2012

    Greg,

    Great post.

    Managing growth is the big problem that entrepreneurs never think of ahead of time – and that’s actually a GOOD indicator of a focused entrepreneur who only focuses on getting the business off the ground successfully. Rarely do you have the luxury of thinking beyond that first crucial stage.

    When escape velocity has finally been reached, it’s very easy to fall into a lazy orbit while the company continues to expand on the tremendous amounts of financial and emotional energy exerted to reach high altitude.

    Party time. We made it. Or did we…?

    It would be great if entrepreneurs knew they were actually heading for a docking station once they’ve had their successful takeoff – with clear orders and operating procedures for what to do once they got there if they didn’t crash and burn on the launch pad.

    While they were managing the joystick and attending to immediate things like making sure the company didn’t blow up, they should expect that – even with it being a small crew at the start – things have multiplied, morphed, and changed by the time they reached weightlessness (eg. cash flow positive!). Former crew mates and personal friends have been taken over by “nasty aliens”. They didn’t plan on it – it just happened. Expect it. Deal with it. Now. If you don’t – well – there are a few films starring Sigourney Weaver that might get you off your butt to deal with situations now rather than letting them fester.

    From there forward, it’s a new stage of the mission. Young and wise old crew (not sycophants – make sure you have respectful but debating perspectives represented) will go forward. But take a good look at the middle, that’s where the cancer starts. Don’t take it with you.

    [Reply]

    Greg Reply:

    Good advice. Thanks Lane.

    btw. If you have kids playing in sports leagues, you definitely need to check out Lane’s site, WePlay

    – Greg

    [Reply]

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