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Growth

When a manager recognizes a growth situation you can see it in their eyes:

Gee whiz!
Right on!
Oh boy!
Wow!
Top notch!
Hot dog!

Growth is wild and crazy, and being pulled up by the market is like going up and up on a roller coaster, holding your breath, waiting for the dizzying fall to start. It requires the taking of chances, almost like gambling: risk taking, failing, and trying again with just as much intensity and enthusiasm. Lots of managers say they experience all this in their positions, but they don't realize the difference in degree.

Many managers and executives talk about growth, but very few are really up to the challenge of properly managing growth in revenue rates above 25% per year.

It seems to be a requirement for managers to talk about growth all the time, and how the company (and the manager) is dedicated to making it happen. It seems that if a manager doesn't give it at least lip service they are considered incomplete or inadequate.

However, while nearly every business and strategic plan shows high growth rates, very few ever achieve that growth. The problem is that many managers and companies don't have the personalities necessary to rise to the occasion when opportunities for growth present themselves. Accelerated growth means constant change, something that runs against the grain for many. It requires compromise and constant uncertainty, where most managers generally require discipline and safe choices. It requires the manager to operate with little or no control for long periods of time, where most managers want to be in control all the time.

I am often amazed at the number of managers who say they are going to step up the growth rate but really have no chance of succeeding. One walk around their company and it becomes obvious why increased growth will never happen. It may feel and sound good for managers to say, "I believe in growth," but when the tempo, passion, intensity, and commitment aren't there, growth will never work.

The Growing Manager

Growth is not for people who have to be in control all the time. People who have to stop to figure everything out and people who don't know how to be flexible, how to compromise, don't have what it takes. Decisions must be made constantly, with little time available, limited resources, and limited information. Managers in these situations can't be afraid of making mistakes, but must recover quickly and have the energy for equally quick reversals. They must be ready to try a different approach, and always keep trying harder.

These managers must be willing to take chances and have quick feet, and they must be able to make continual changes in priorities and direction. They must be adept at learning by trial and error and be able to operate in an environment you could describe as "a match box on a conveyor belt headed for a furnace." There are many types of management situations that can be handled by any sound, competent manager. Caretaking and downsizing, start-ups, workouts and turnarounds can all be mastered quickly on the job because time may allow it. A growth situation does not allow the manager the luxury of taking the time to become comfortable with a task.

Any sound manager can be counted on to follow through on commitments, but the manager of a growth situation will have to meet those commitments with less control and stability. The unknown influences and the new experiences can sidetrack many people with the best of intentions. The proactive manager is often a good one, but the manager in a growth situation must often be more reactive than proactive.

The executive running a growth company for the first time must be able to operate on a steep learning curve. It may be very difficult, but it might be necessary to make changes in the corporate culture on a daily basis. After all, every day that executive comes to work they are running the biggest company of their career, and that bigger company may require a different operating philosophy. Growth is not for the faint of heart!

The Growing Company

Growth companies need people inside who will champion their priorities, because in a growth situation, all the priorities can't be served at the same time. They need self-starters and superstars who can make decisions on their own, who can't wait around for top management

decisions with so many fires to fight daily. Frequent meetings replace the planning exercise, because the company needs to communicate constantly and continually reorder priorities. Finally, growth companies must keep motivation high among all the troops if it is to perform, and top management needs to go out of their way to keep things from killing that spirit, that motivation. Autocrats who don't like compromise can kill the spirit and enthusiasm required to succeed.

During my tenure with a computer manufacturing company, a major computer company came to us because they were having serious memory system failures in the field. They had chosen a proprietary approach, and due to corrosion problems, it was only a matter of time before all of it failed. They asked us how soon we could replace hundreds of systems, and they were quite pleased with our extremely optimistic answer.

After we got the contract, they sent their top materials control manager to help us. Part of his experience included writing procedures on line of balance," a planning tool used by many companies. I admired him for his vision and understanding of our situation, because when he returned, he advised his company to leave us alone. His reasoning was that if they interfered with us by trying to get us to do it their way, we would have no chance whatsoever of meeting the

schedule. As it was, he gave us a 40% chance. I am pleased to say that we succeeded, delivering the product on schedule. That materials control manager was smart enough to realize that our worlds were quite different and that there was no way their system could meet the required replacement schedule.

Growth companies are characterized by a fast-paced environment and employees who are "leaners." I look for that kind of person when there is accelerated growth. The "leaner" is the person who is always leaning forward at meetings, ready to jump across the table. In many cases, they jump on the conversation before the speaker finishes their comments. They are the type of people who make things happen. Leaners are also people who can wear multiple hats and juggle whatever hats the situation requires.

Unfortunately, most companies are loaded with "slumpers" instead. "Slumpers" are people who sit back, slump down, and listen to what they have to. I've seen managers try to make slumpers into leaners, and it never works. When a business plan is rejected because it isn't bullish enough, the slumpers will come back with better numbers to appease management, but since they didn't even really believe their original numbers, their chance of making the higher numbers a reality is negligible.

The Growing Board and Staff

Spectators, which may include customers, vendors, and even employees, need to understand growth in order to deal effectively with the company caught up in it. Perhaps most important is for the board of directors and investors to recognize this unique phenomenon as they watch in awe and shake their heads. If they aren't able to recognize growth for what it is, these people can get in the way and hinder, rather than support, the process.

Why must employees understand growth? One experience I had as a president of a growth company highlighted how competence and professionalism alone are not enough in a growth situation. We had hired an excellent, professional production control manager, and for the first time we rewarded our learn-by-doing employees with an experienced supervisor. After six months this new manager decided it was time to talk. He said he really liked the company and the people he worked with. To top it off, he even gave me high marks. Despite all this praise, however, he was leaving to take another job.

It turns out that when he first joined the company, he really didn't like the work pace, the constant schedule changes to accommodate accelerated deliveries, and the daily revenue meetings. He thought we were in a crisis situation and that all these things would pass, so he took the job anyway. After six months with no change, he began to realize that this was not a temporary crisis, it was a way of life in our company, and he didn't need this in his life.

This man was very proud of his knowledge of MRP systems, and was getting frustrated at the lack of success in our company. He did not realize what I had already learned -- that no MRP system could be effective in a situation where this week's shipping schedule was being changed daily.

The Growing Risk

There are definite risks in investing in equipment because the expenditures are usually high and are more difficult to downsize, should that become necessary. I had an interesting experience that illustrated this point. This was a semi-conductor operation that was one division of a major multi-million dollar, multi-national company. This division grew to $8 million in revenue in the first six months.

At one of the group planning meetings, the division's general manager asked for several million dollars to invest in equipment to maintain the growth rate. One simple question, asked by a member of the group staff, stopped the proposal cold and probably saved the corporation millions of dollars. That question was, "How many repeat customers do you have?" The answer was, "None." Since the technology and products were new, the customers were evaluating the products, verifying their perceived performance. The product was eventually accepted in the marketplace, but never came near the original growth expectations.

Of course, going all out and trying to do things for the first time also has its dangers. Timing is crucial. Lack of action at the beginning of a new program can kill a potential growth situation before it has a chance. One cliché I do believe in is that there are windows of opportunity, and unless you take advantage of them fast enough you will be on the wrong side. This is especially true if you are second in line and really can't make the market happen.

For example, when minicomputer manufacturers were changing over to disk operating systems, they had to both convince the market of the need and also develop an entirely new product. We were to supply the disk drive, which was also a new concept and product.

Because the potential was so great, we had to stay poised to step up production with little or no notice. Through development delays and slow customer acceptance, we had to always stay ready to jump out "next" month. I lost count of how many times I told our board of directors that "next month would be our big start." Fortunately, in that era everyone was thinking growth. Their patience was ultimately rewarded, as one day business took off straight up, and we did over $10 million in sales the first year of shipments.

It is better to have a market pull you along, to have to chase it, instead of trying to create it. One common danger in growth plans is getting there too soon. Many people with great vision put all the resources in place, poised for growth, and don't make it because they tried to hit the market a little too soon. I was once a partner in a company that bought end-of-life products (those no longer being manufactured) with the objective of selling service and maintenance for the installed base in the field. Twenty five percent of the product lines we purchased were from companies that died before they were successful.

In fact, some of these companies suffered from having too much money up front. They used their creativity to find ways to spend it, and then when the market took off, they found themselves out of capital. It is a great advantage for the market to pull you along, because the requirements and pressures of the market help you set your priorities and define the reactions needed to serve the market.

Tips and Strategies

Clearly growth is easier for a process-oriented company than a service-oriented company, but I've seen managers approach both in the same way. The primary difference between the two is that it is generally easier to add equipment and processes to increase output than it is to add people. Also, the delay is shorter. Output can increase as soon as equipment is in place, but doubling a service's output requires doubling the number of employees, which takes much longer over all.

And there are other growth advantages. Process outputs can be increased more easily using yield improvements and other adjustments than service outputs can be improved by trying to make people more efficient. Equipment learning curves can be short, but labor learning curves, particularly if turnover is high, may yield 33% per year efficiencies at best. As a result, it requires significant overkill in hiring. In my experience, when a great idea comes along, it is almost always possible to raise capital for facilities and equipment but it is almost always difficult to get the right people in place fast enough.

When it gets down to it, people are the most frequent factor limiting growth, both in terms of quantity and skill availability. The second most frequent limitation is a cash shortfall, because many managers don't understand the relationships of cash to growth.

I've seen many high-tech managers who believe they can support growth from profits alone. In my experiences, growth rates above 20% mean that outside funding will be needed to supplement it. The more successful the company is with growth, the more cash will be required to fuel that growth. Many factors define what growth can be supported from within, including the type of product, the nature of the business, how much development money is needed, and the payment terms that are normal for the market served. As a result, even though growth requires a special person to drive it, someone who really understands cash flow must be along to keep it going.

Understand that if you don't have a company, personality, or personal agenda compatible with this type of situation, don't touch it, or you will get burned. If an opportunity for growth comes your way, get help from people who thrive on that situation, hire them, and get out of the way. If it is "not your bag," don't waste time talking about it; just forget it.

Rapid growth in sales will bring inefficiencies, and at the time, it will seem that "the faster you go, the behinder you get." In many growing markets, prices drop quickly, forcing throughput rates that are even higher than the elevated sales rates. This kind of growth often requires planned over kill to reach the new levels of output demanded. Planning based on what you've done in the past won't work, because before the new output and efficiency targets are reached, the requirements have increased, creating new needs and inefficiencies. Then additional resources must be put in place to meet these newer targets.

In planning any growth resources must be put in place to cover the additional output needs. In a slow, controlled growth situation, these resources are placed early enough that they will be producing the output needed by the target date. The time it will take to get those resources up to speed depends on several other factors, including the length of the manufacturing cycle, the length of any required training, the complexity of the product, the skills needed for the operations, and the tools and support available.

These resources will also have to cover temporary inefficiencies created by people's inexperience, and the demand for them is related to the rate of growth. With continual growth comes the need to continually add resources and the fact of continued inefficiencies of this type, making it unlikely that you will ever really catch up. What I call "the hump theory" is the idea that you will have to put extra resources in place to cover inefficiencies and future output levels, that you have to plan overkill. If these extra resources aren't added, the projected output will never be achieved.

The Hump

Figure 1 shows the relationship between resources and output for slow growth. The resource curve leads the output curve, and the horizontal difference between them is the lead time required to get the resource level up to the needed output level. For low growth rates, needed additions can be integrated and absorbed with little effect on the overall efficiency average, even though new hires are at the top of the learning curve.

The "hump" is shown in figure 2. Point A is the current point in time and also indicates the resources that could meet the output at point A' in a slow growth situation. Point B is the resources actually required to meet the output requirements at A' in a high growth situation with all its inefficiencies. These resources are nearly twice what would be needed for normal efficiencies. The hump will move as the output requirements move up. By the time A' is reached, the resources are now at B', since they are needed to meet the higher output requirements at output A''.

This hump will continue to "roll" up the resource curve so long as rapid growth is still required. Management always desires and plans to get ahead of it, but this will be difficult at high growth rates. The size of the hump depends on the slope of the output curve (rate of growth) and the normal lead time it takes new hires to raise their efficiency and quality to the norms.

Efficiency and Inefficiency

Keep in mind that people resources are much more difficult to bring on line than equipment. For instance, a machine already in place producing X parts in a single 8-hour shift can, in a short time, show an almost instant doubling of output by simply adding an additional shift to the machine's operation. This is because the machine can maintain the same output rate for two successive shifts. By contrast, doubling people-related outputs is generally far more difficult and time-consuming, because you first have to find, then hire the people, and then get them up to the expected efficiency.

In rapid growth there isn't time to get everyone up to the increased efficiency standards before the overall requirements change dramatically, when more resources are needed and have to be loaded in. Where experienced workers may be operating at an efficiency of 85% and be far down the learning curve, an inexperienced worker, almost by definition, starts at the top of the learning curve with an efficiency that's essentially zero. Their low efficiency, though temporary, will still pull down the overall average significantly. How much that average drops will depend on both the time required for improvement and the number of new additions to the base.

To make matters more difficult, rapid growth tends to flood the process with new employees, making turnover much higher than the norm. Those transients who leave early on offer a negligible contribution for the time expended, hurting overall performance and slowing the process of integration and improvement in efficiency. All this tends to make growth that much more costly.

Cash flow can also be heavily impacted by inefficiencies during the hump period. In high growth planning, cash flow projections generally focus on inventory and accounts receivable needs. This planning misses important factors, such as inefficient (lost) hours, which are not building useful inventory but still need to be paid for. In addition, these hours will probably not be covered by pricing and collection activity. It really makes sense to carry the cost of inefficiency as a separate line item in the cash forecasting schedules.

It is also important to note that in this "hump period," the expected inefficiencies will adversely impact the profitability to be expected from the increased sales. This unexpected, heavy hit on profitability happens because the extra resources needed to cover the inefficiencies eat up a good bit of the contribution potential and because the cost of that inefficiency will eventually be written off as operating expenses on an ongoing basis.

Staffing and Quality Issues

All areas of a company will need the additional help growth demands, but it is common for managers to hold down additions to the indirect work force until the staff members either quit or suffer breakdowns. For instance, the sales department will need more sales staff and engineering will need design help, and each of these new resources bring the same extended periods of low efficiency as the direct staffing.

While this law applies across the entire organization, it is sometimes possible to delay the addition of indirect personnel by working everyone harder and for longer hours. This luxury is often not possible with direct labor, however, because with no added labor there will be no added output.

In high growth situations, the battle cry is, "Get more people in!" Generally the needs are so severe that the company will hire anyone who is breathing. Unfortunately, even though demands for the product or service from the market may be high, pricing is often critical and cannot easily be raised to cover all the inefficiencies associated with rapid growth. Some companies try to make increased sales cover the additional costs by holding down indirect staff costs, but this results in the indirect work force being stretched, producing laxness in procedures, discipline, and controls.

It is also not easy to rapidly add personnel with the skills needed for upper level positions, so people within are often over-promoted. They hardly have time to learn their newest job before they're promoted again. The inefficiency of indirect employees may or may not be as visible as that of direct employees in terms output, but efficiencies suffer just as badly. In addition, it adversely impacts the product and customer service quality.

High growth creates an atmosphere of compromise, lowering the overall quality and performance of the company. This let down may come back to haunt the future reputation of the company, or they may keep the company from catching up and optimizing performance while they chase higher output and profitability levels.

Improving Efficiency / Yield

Large increases in manufacturing play havoc with the entire operation. It puts a tremendous strain on many areas of the organization, including supervision, human resources, material and production control, and top management, and it creates chaos on a daily basis.

Two experiences I had are good examples of how improving the process improves yield -- gets more output for the resources that are in place.

In the first case, the product was a system that we weren't testing thoroughly enough in the final stage. The manufacturing manager and I sat down to discuss how to process returns faster, and were confronted with an amazing statistic: At the rate we were building up returns, and factoring in our growth rate, in three years the returns would fill up the entire five buildings we occupied. This inspired us to bring engineering in to help, and as a result, we made many changes. We tightened specifications for the major components, added thermal testing, and put our best assemblers on the rework needed before we shipped to the customer the first time. As a result of these changes, yield and output went up considerably with little additional expense.

In the second case, the product was a component. We were producing over ten billion per year, going to fifteen billion, with a yield of 50%. Every time we needed to increase production there was a flood of purchase orders for additional manufacturing equipment, totaling several hundred thousand dollars. Finally, one day I said, "No more." Enough was enough. We formed a tiger team, taking a couple of our best process people and charging them with increasing the yield one percent at a time.

These incremental gains of 100 million units turned out to yield good revenue gains at a modest cost. We made those gains by adding controls and monitoring devices in the production phase. It was painful making those changes; we had to shut down the entire production line a few times. However, our sales people did a great job of keeping the customers hanging in there, and convincing them that ultimately they would be better off. The best thing is that they actually were better off when we were done.

Backlogs

Finally, during these periods of rapid growth, there is a time when backlog coverage ends. Even though there are high hopes all around that this rapid growth rate will continue, the manufacturing manager will lose many hours of sleep worrying when it will end, seeing it as the cliff looming ahead.

There are times when too much backlog can hamper movement. First, when backlogged shipping commitments exceed resources, customers end up disappointed. Because it is clear early in a period that all customer requirements cannot be satisfied, managers generally know which customers will get their needs met and which will not. This creates a dilemma, because customers get upset when they're told at the last minute that they won't receive their order, but it is hard to tell the customer they won't get their order when there is still time to work with. This can anger the customers even more because it sends the message that their needs are a low priority compared to others' needs.

There are also other problems with an over committed shop. If your time until delivery is longer than the competitive market norm, you risk losing the customer permanently.

In figure 2, the backlog covers sales until point C. At that point, the firm, committed sales output falls off a cliff. Since the manufacturing manager is closest to the situation, his discussions in meetings will be seasoned liberally with the word "cliff." However, with high growth rates there is no turning back, and each day becomes a gamble. If management hesitates to figure out how to control this juggernaut, when they look up again, the opportunity might be gone.

An Example

To further illustrate the hump theory, I've traced the near-term impact of rapid growth on the efficiency of a manufacturing operation. In rapid growth, the near-term pressure never goes away -- it is always "near term." Since the changes are ongoing, we must assume that the example covers only a portion of the operation, as the dynamics of the bigger picture will force constant changes.

The following example shows the impact of high growth rates on efficiency. It only examines the period before new resources reach normal levels of efficiency. In this example, the company begins with 100 hours resources in place at 85% efficiency. It then adds additional work hours in the form of overtime and new hires. Overtime hours are assumed to be 10% less efficient. Remember that new hire hours will be significantly less efficient for the period of time while they are brought up to speed.

The example above shows that to get 25% more output, the input to the resources has to increase 44%. This is rather disappointing, as it takes a tremendous amount of energy to increase the input 44%. The cost factor is even worse, as getting 25% more output will cost 56% more. The figures for new hire efficiency are worse yet, as the addition of 24% in resources only yields 8% in output.

In fact, if it were necessary to grow 100%, the additional growth (above the 25%) would have to come from new hires with the same low efficiency. Continuing with the present example, a 100% increase would require a 354% increase in work hours. In other words, to double the output it takes 3.5 times the original work force. It seems incredible, but then again, 100% growth doesn't come easily.

Other high growth situations may vary somewhat in the time frames and efficiencies to be used, which would change the size and shape of the hump curve. However, one thing is consistent: growth above 25% in a short period of time demands that the work force explode.

It's Not Easy

Remember, in a high growth situation, historical loading factors aren't adequate. It is far more accurate to plan this week based on last week's efficiency and yield factors. One way to lessen operating problems is to set aside a key person whose job it is to look toward the future. Make their job to examine today's way of doing business and target changes needed over the next six months. Otherwise, the company will still be wrestling with the same problems it has today six months from now.

Where no growth means not having to risk committing additional resources, growth requires counting on the growth rate being higher without firm commitments. As a result, the more resources are committed and the more output is increased, the higher the cliff looms, and once the commitment is made, there is not turning back. This is why everybody talks about wanting and needing growth, but many work subtly to avoid it.

Not all companies can handle high growth. When high growth is new to a company, it might not be easy to make the needed culture change. Imagine a stable company with a well-established, controlled mode of operation, creating all that turmoil and dramatic change. Can a company whose policy is to put resources in place only after a firm sales order is received make the change to a method of operating where uncontrollable growth and gambling on the future is the norm? Not likely.

Rapid growth must be approached with an understanding of the need for change, high energy, sometimes chaotic operations, and compromise. It is for those who are willing to gamble and are not afraid of planning week to week Rapid growth is not for those with faint hearts or weak stomachs.