Here’s an example: when two entrepreneurial partners started a retail chain in college; their sense of the marketplace was amazing. In just 12 years, they built their firm to over $100 million in revenue with no written plan, very few meetings and significant bank debt. They’ve earned money nearly every year, using their natural smarts and hard work to manage the firm. But earlier this year they began to feel they were losing control. They knew they needed change. Company growth started to slow, and new initiatives were high-stakes gambles. They were not executing as well as before.
The problem lies here: businesses get stuck when they grow without what I refer to as “leadership infrastructure”. Leadership infrastructure is the processes, systems and leaders that guide the growth of a company. Sustainable growth requires planning, high-functioning executive level teams and formalized communication processes. As most businesses grow from small to midsized—defined as revenues between $10 million and $1 billion—a number of challenges forces an executive team to take a different approach:
1. Sustaining the growth rate means dealing with bigger suppliers and bigger customers. Growing firms require professional executives, systems and processes to connect with bigger firms, and the financial standing required to guarantee promises.
2. Maintaining a 20% growth rate means adding $20M revenues (for a $100M firm) instead of $2M (for a $10M firm). That expansion mandates bigger programs, greater opportunities, more transformational innovations & larger investments.
3. Whereas small firms can coordinate across functions when a few executives sit down and talk, midsized firms require coordination between teams, which requires clear job duties, defined processes, more time and trust in both processes and people.
4. Midsized firms have many opportunities across all departments, often in several market verticals. Decisions require disciplined comparison of the different opportunities and risks.
5. Small firms can thrive by finding a good niche and exploiting it. But midsized firms have much more to lose—more assets, broader market positioning and hundreds of jobs—and have often fully exploited their niche, or at least popularized it. Most of the time, midsized firms face small firms trying to get a piece of the market, as well as well-funded big firms competing from above.
6. Leadership may be dispersed geographically across field offices and acquired companies in other regions; some of your great new talent may be unwilling to relocate.
Far too often the owner or CEO tries to control everything. They want to be a part of every decision and work crazy hours trying to do it all. Often they are working so hard, they really don’t have time to do their homework or stop long enough to make well informed decisions. Sometimes they are so busy scrambling they don’t notice structural changes in their industry or react to them in time. In other cases, they simply can’t accomplish enough fast enough and the firm stagnates.
In other cases owners loosen their grip, allowing aspects of the company to grow wild—without controls—simply hoping for the best. Costly missteps or out-of-control spending take their toll and produce increasingly larger mistakes.
The owners of the retail chain hired a professional general manager, but he ran amok, diversifying the firm into another line of business that lost lots of money. They fired him and mopped up. Later they made another executive level hire, but her big-spending, aggressive approach didn’t fit the budget or the company culture. They fired her after a year.
These owners had the right idea: hiring seasoned executives is a key element of leadership infrastructure. Their firm was still profitable, still growing; a testament to them and what they’d built. But to keep growing, they had to go global, a huge challenge. They had to start dealing with mega-suppliers, and mega-customers, and their systems and teams were not ready. One department would kick off a new initiative, but the other departments would hear about it too late to do their part. In one instance they won a large account then lost the follow-on business because they weren’t prepared to service it properly.
Getting the retail chain to $100M and 150 people was an amazing feat, but to go much beyond, they needed a step-by-step plan to build leadership infrastructure. With appropriate processes, savvy leaders, planning and the other disciplines of leadership infrastructure, they could take the business to $500M in a few years. While you might label it bureaucracy in big firms, midsized firms need a light, agile structure that sounds like bureaucracy but actually enables them to continue growing quickly.
Let’s get a discussion going here on Forbes. Where have you seen midsized companies fail to adopt leadership infrastructure? I’d love to hear examples of best practices as well. How do you feel about the notion that midsized firms need a bit of bureaucracy to sustain their growth? I’ll reply to each comment.
In my next post, I detail the critical steps toward building leadership infrastructure in midsized firms.
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