Part II: 5 Risks for a Growing Business (and How to Manage Them)
BY Lee Colan
With business growth comes predictable risks. The survival of your business depends on identifying and managing those risks.
In my last column, I described five common risks for growing businesses. Here are five more risks you need to manage to scale your business.
#6: The planning horizon is too short.
Think of the inscription on your car’s side view mirror: "Objects in the mirror are closer than they appear." We tell our clients to ‘flip their mirrors forward’ when planning for growth--the future is closer than it appears. Although strategic planning horizons have been shortened significantly over the past 10 years, it is still smart business to plan for at least the next two years.
Managing Risk #6: Institute disciplined and detailed planning processes. The trick is translating broad strategy into specific, measurable actions (i.e., the devil is in the details).
The common approach to hiring for key positions is to recruit from companies of comparable size. However, these employees are soon exploring new territory along with everyone else as the company grows. I suggest "over hiring" for key positions so these employees can help drive your employees toward your company’s vision because they've been there before.
#7: Maintain loyalty to the employees who got you here.
This is also a very common risk factor and probably the toughest one to address. Frequently, the needs of a growing business surpass the skills of certain employees that helped build the business. This forces tough decisions in order to sustain the company’s growth.
Managing Risk #7: Acknowledge past contributions while setting new performance expectations based on current business needs. Design people systems to reinforce these new expectations:
Selecting and promoting the right people is the biggest controllable factor in sustaining your growth. Like most decision-making, employee selection is fundamentally emotional. Therefore, it is important to define and prioritize the Critical Success Factors (CSFs) for the job in advance. This enables clear thinking to establish a specific position profile. Yes, it takes time, but it's an effective use of time.
#8: Your organizational focus is blurred.
The profile of the successful entrepreneur feeds right into this risk actor. His mantra is: "Where’s the next deal?" More deals, products, and suppliers create greater organizational complexity. Complexity requires overhead. Overhead results in expense. In fact, a recent German study found that the most profitable companies sold fewer products, had fewer customers, and had fewer suppliers.
Managing Risk #8:Keep it simple. Focus on what you do better than anyone else.
Apply the 80/20 Principle: 80 percent of the output is generated by 20 percent of the parts. This means that the most profitable 1/5th of your company (sales force, products, regions, or whatever slice you want to take) is 16 times more profitable than the remaining 4/5. Make sure that this less profitable 4/5 is meeting a business need--or eliminate it.
#9: Management’s capabilities fit yesterday’s requirements.
As businesses grow, it requires leaders to be less hands on and work on the business--versus in it. The sustained growth of a small business if easily predicted by its management's ability to develop the necessary leadership skills and practices.
Managing Risk #9: Identify and plan for your company’s leadership needs for the next 3+ years. Create a clear, realistic. and manageable exit strategy well in advance, and develop your bench strength in the meantime. Most importantly, develop the skills of the current leadership team so they can take the business to the next level.
#10: A sense of invincibility can be dangerous.
I call this the Titanic Syndrome. Pride and a sense of invincibility drive the most dangerous form of complacency (e.g., General Custer, Pearl Harbor, General Motors, and Japanese imports). Since high revenue growth forgives many sins, fundamental problems are often lurking somewhere between the top line (revenues) and the bottom line (profits).
Managing Risk #10: Formalize an environmental scanning process as a reality check. Environmental scanning is broader than a competitive analysis because it looks beyond your industry. Within your industry, you should also keep your eye on the leading (not lagging) indicators. Leading indicators are reliable predictors of what will happen in your business 3, 6, or 12 months from now. Also fight the "expense expansion theory" (expenses increase proportionately with revenues) with a continuous focus on process, cost, and efficiency.
And here is the full list of 10 Risks for Growing Businesses:
You're betting against the law. (Legally required activities are on the back burner.)
Operational infrastructure is underdeveloped.
Product and service quality are declining. (Customer needs are obscured by growth needs.)
Inability to quickly capture key data.
The "diligence" in due diligence is missing. (Hasty acquisitions cause organizational indigestion.)
Planning horizon is too short. ("Images in the mirror are closer than they appear.")
Loyalty to employees who "got us here."
Organizational focus is blurred.
Management capabilities fit yesterday’s requirements.
Sense of invincibility. (Titanic syndrome)
Next up: Plot the Top 10 Risk Factors for your business on this Free Priority Matrix. This will help you focus on the risks that have the highest impact on your business but that you are currently managing least effectively (upper right corner of matrix).