I apologise to my readers for not choosing a more positive sample case study. I believe, however, that this example clearly and strongly conveys the significance and practical relevance of the topic. In addition, some of the dynamics described would not occur in an example where proactive corporate management worked to avoid or downplay certain developments, thus preventing them from being explained as they are within this context.
Many different publications address the different phases of corporate growth. Essentially, it is irrelevant how many steps you divide this cycle into. What is important is to recognise that each of these phases has its own characteristics. And since we humans are so similar in our basic genetic traits, there is obviously a strikingly large overlap of consistently similar entrepreneurial behavioural patterns. In addition, certain constraints arise almost naturally in the individual phases. The following article attempts to describe and exemplify these phases and some of the most common effects experienced. A sample case study will be used as an illustration, with no claim to completeness or scientific merit.
Start-Up
Dr E. is a PhD specialist in a highly complex technology sector. She has an innovative business idea. Dr E. is highly motivated and absolutely convinced that she can offer a consistently competitive product. Her concept is impressive; she obtains funding and is able to persuade two of her former fellow students to partner up with her – the founding members are in place. The team begins its start-up. Each of the three has memorised the business concept and is strongly committed to success. In this phase, this small team is the company’s primary mainstay and Dr E. is the most important team member. Together, they make up the development, sales, production, logistics, and administrative departments, all in one.
Starting off on this positive basis and equipped with a small but effective network of contacts, the business quickly gets off the ground. The small team takes a personal approach to winning over each of its customers, investing a great deal of time in this. With only a few minor setbacks, the business is soon up and running with its first orders, and it continues to steadily grow. During the start-up phase, the team works around the clock, and their high level of commitment ultimately also leads to market rewards as demand increases to a euphoria-inspiring level.
At the peak of this phase, the young company can point to resilient customer relationships and the abundant positive feedback it has already received from the market. They have delivered on the quality promised to customers in this phase and their personal business relationships have matured. Before progressing to the subsequent phases, it is typically still necessary for a start-up to ensure that the increasing financial needs will be able to be met.
The young team celebrates its successes, and its members spur each other on to ever more personal excellence. Sales increase for the first time, making it clear that additional staff will have to be hired. This was also factored into in the original business plan. But the need is now greater than anticipated and the most desirable candidates are looking for salaries that are not exactly within budget. The company makes some concessions with regard to their requirements and hires a few people at conditions that are still quite favourable overall. The new employees receive personalised training and are integrated into the small and still manageable team. Even now, every staff member is still familiar with nearly all of the company’s processes and procedures. Their own roles and importance as well as those of the others are transparent and well-understood. Motivation remains high and the team rejoices at every new assignment. Successes and failures are shared openly. Initial profits are rolling in and the business plan is working. Dr E. is justifiably quite proud and feels completely validated in her approach.
Maturity – Growth I
The start-up months after the founding of the company have flown by and according to its own assessment, the company is in the middle of the growth phase. So far, neither Dr E. nor her founding team has had to deal intensively or from a planning perspective with structural or organisational issues like the ones they have heard about or observed among some of their “older” client companies. Based on the existing framework, which has worked well so far, more staff are now being recruited. However, for the first time, they find themselves under pressure to fill positions, as the need for helping hands has increased significantly.
The increased number of employees leads to the first bump in the road for the operational flow. The communication channels become more complex and the information flows that have been working well up until now are repeatedly interrupted. Management staff intensifies their communications and introduces regular meetings and events that include all employees. None of the people working in the company has sufficient capacity to carry out classic leadership work. However, a decidedly informal and communicative collaborative style effectively compensates for this deficit. This always works especially well at the end of the week, when euphoria and inspiration are at a high. This has now resulted in an understandably increased level of self-confidence. Company management has become bolder, and much more trusting in its small organisation, now approaching the recruitment of new personnel with greater confidence. The organisation’s staffing needs have increased, so that now and then quantity and price have to take precedence over quality. In taking this approach, the company is either consciously or unconsciously accepting a reduction in job performance and corporate resilience. The difference between a merely adequately qualified helping hand and an experienced, well-qualified employee whose profile represents true enrichment for the company is neither sufficiently nor consistently taken into consideration at this point – after all, skills and knowledge can always somehow be “acquired”, and besides, there is the cost factor to take into account.
The moment has long since passed when the founding team was able to handle everything by themselves. The rest of the staff, however, possesses neither their experience nor their expertise. For the first time, the company is lacking overall know-how for important operations. The first defects and errors begin to appear, some of which make their way through to the customer. The continuous increase in the number of employees and the complexity of the processes requires new approaches to structures and management. As it turns out, the type of leadership now required is not necessarily Dr E.’s strong suit, and the other members of the founding team also have to come to grips with it.
For the founding team, the pressure to act dominates their dealings with clients as well as the daily coordination of projects and handling of disruptions. The team members react by deploying the same type of tactics they have used so far. During the turbulent and exciting early days of the company, the need for appropriate reporting that would reflect the most relevant key figures always took second place to dealing with important orders or processes. Among management staff, the dominant indicator of the company's performance was simply their gut feeling.
Growth II
Over the past few months, the number of customer orders has once again risen strongly. There are still new major sales successes to celebrate every week and there is currently no doubt about positive operating results. But the company's increasing size is weakening the accuracy of the gut feeling that previously worked so well but is now increasingly at odds with the real figures. No one is issuing any warnings about this at the moment, however, because the finance department has not invested in state-of-the-art financial monitoring, as their budget had to be diverted to fund an additional developer position. Even the founding team itself is not making any additional demands for high-quality reporting, because none of its members ever became closely acquainted with or, above all, learned to appreciate this tool in their previous positions. In addition, the finance team has been holding off on hiring an experienced management-level employee because the collaboration between the accounting department and the tax accountancy is working well and classic ERP system functionalities were also able to be effectively handled using cheaper on-board resources.
Growth III – Overheating
Dr E.'s company continues to grow steadily in terms of sales and employee headcount. It no longer even resembles the start-up of the early years. Dr E. discovers that, for the first time, she no longer knows each of her new employees personally. Among the staff, groups of like-minded people have formed and interactions are not always as friendly as they previously were. Employees who have been there since the early days notice, for the first time, that the familial spirit of optimism has somehow faded. Discussions begin about the changes that have taken place and their visible effects, while growth-related structural and organisational challenges remain unfaced. Overwhelmingly, the solution demanded by the various teams to deal with the current challenges is the recruitment of additional staff.
Both the onboarding and induction of new staff is still quite situational and handled with a highly personal touch. However, it is not going as well as it did previously, as some employees have changed departments, the distribution of tasks has changed, and the first of the people who had been with the company from the beginning have left. The calls for better leadership and improved structures are now even louder. More and more often, the situation between employees and managers escalates. It is now becoming apparent even to third parties that some of the management positions have been filled by people who lack experience in leadership issues. Dr E.’s founding team has also not invested sufficient time to individual development in this area. Some team members have found that they don't really enjoy resolving these types of escalations, preferring to devote themselves to more tangible business challenges or interacting with customers.
Despite all of the internal friction, sales continue to grow. As a result, management staff is currently convinced that the stressful phenomena they are now experiencing are just the usual growing pains all successful companies go through. This also makes it seem clear that at least the current situation can be overcome by applying the same tactics as before. Some members of the management team are even overcome with exuberance, while, for the first time, company insiders express their feeling that management no longer has its feet firmly on the ground.
In the meantime, the finance department has hired two new accountants, but has not set up any financial monitoring system. There is no functioning or seriously taken early warning or risk management system in place, which means that the chance that specific cause-effect relationships will penetrate the consciousness of the company management is slim to none.
The first cancellations of customer orders are now coming in, but this is not yet leading to a drop in overall sales. Even the increasing error ratio, which more and more frequently directly affects customers, does not yet seem sufficiently alarming.
At the same time, management is delighted with the large increase in sales and the positive operating results. There is little to no discussion about the development of return and performance indicators, as there is still no meaningful KPI reporting. The fact that sales are constantly increasing leads the founding team to draw a fatal conclusion: the company is doing well on the market, otherwise customer orders would not be on the rise.
With this assessment, the management team continues to engage in the same type of tactics they have always pursued. Individual fires are courageously put out and growing workloads continue to be managed by hiring additional staff. Far-reaching structural and organisational measures involving major investments either fail to materialise or are cut back to an inappropriately low level.
Growth damages
Following a steady rise in sales from the founding days of the company, revenues have long since begun to stagnate. In some operational units, losses are increasing. Customers have noticed a downturn in company reliability and quality, and in surveys, customer satisfaction has dropped for the first time. The continuing boom in sales has meant that the company still maintains liquidity, but the current disruptions, coupled with the level of success desired by top management, have led to company leadership flip-flopping between a variety of ad hoc measures.
From here on out, the outcome of our sample case will depend in large part on management's awareness and ability to change. If Dr E. and her management team become detached from reality and their significant stakeholders, they are headed for a disaster.
In light of the course of events described above, the question arises as to whether Dr E. and her staff have the strength and skills required to initiate the necessary and painful changes and restructuring measures. And the question still remains as to how to finance these measures – as well as how to come up with the right story to tell investors, customers and creditors. If these measures fail, all signposts point to the final phase in the growth model described below.
Growth crash
In our case study, Dr E. fails to act on the enormous pressure from within the company to take necessary restructuring measures. Over the past few months, she has also fallen out with some members of the management team. Her determination and joy in building up the company have been diminished. In some business units, uncertainty and a lack of direction are on the rise. To avoid jeopardising the company's success, the shareholders have decided to find a suitable investor for the company.
. . .
In each of the growth phases described above, different tools and measures can be deployed so that the individual development stages can be negotiated successfully and unscathed. In our view, the most important basic prerequisites are an awareness of typical or predictable effects and situations as well as the acceptance that, in the absence of proactive measures, it will be impossible – or at least extraordinarily difficult – to avoid damages resulting from company growth. Only after these first two prerequisites have been met do the abilities of the people involved and the company as a whole follow as additional prerequisites.