Why business expansion leads to inefficiency

We live in a start-up culture, where it seems as if everyone is able to have an idea and start a company. Many of these will fail, some will be a success. For those that are a success, they may find that the real challenges are not with that first product launch, but the inevitable growth that success bestows upon them.

The issues that face these companies are nothing new. In July 1972, Larry E. Greiner published “Evolution and Revolution as Organizations Grow” in the Harvard Business Review (on paper, of all things!). He describes a pattern that would be familiar to entrepreneurs and business owners everywhere – that of evolution, in which the business grows smoothly, followed by revolution, where the business goes through a crisis brought about by its own growth. Solving each crisis brings about another period of evolution. Despite its age, Greiner’s piece remains amazingly relevant, even if the companies of today are working in very different industries and producing very different products.

So what does cause a company to become inefficient as it grows? The first inefficiency falls squarely at the feet of the company founders.

Reason 1: specialists, generalists and missing roles

The problem: As a company grows, the leaders don’t recognize that the company structure needs to change.

The solution: It’s a simple truth that a business changes as it grows. Unfortunately, leaders don’t always change with it. Amazing people they may be – full of the energy, drive and vision that a small company needs to get started – but they have to learn to adapt. Small companies are full of people who fulfill multiple roles within the organization: the CEO who does HR or the CTO who does IT. For a while that can suffice, but there comes a point when the company needs to hire specialists, not generalists. Often it’s the support services that are ignored and this can cause real issues down the line, either with your human capital or your infrastructure. Don’t hang on to this “do it all” mentality – specialist roles require specialized people.

Reason 2: ownership

The problem: Leaders, especially founders, keep acting like a small business leader and try to make all the decisions.

The solution: The second issue, one that Greiner termed the “Autonomy Crisis,” is also related to leadership. Whereas before it was the ability to change structure, here it is the ability to change the way you act. For some founders, this is a tough ask; if you’ve built a company from the ground up, the instinct is to continue to drive from the top – after all, it’s been successful so far. Successful it may have been, but it’s not sustainable. As Martin Zwilling states: “For a company to grow, the team has to grow, and decisions must be delegated. Smart growth companies hire decision makers, not more helpers.” The ability to hire effectively and build a strong team is key – but even more critical is the ability to let go of the reins and delegate decision-making to those hires. Only by spreading the decision-making load can a growing company remain agile and stop the “CEO decision bottleneck.”

Reason 3: vision

The problem: With a larger number of leaders in the organization, everyone starts going in a different direction.

The solution: Issue #3 is a continuation of #2 – in fact, the issues that a company faces over time are invariably caused by the solutions to previous issues (hence Greiner’s evolution and revolution cycle). In this case, as the number of layers in the organization grow and the number of decision-makers increases, there is an increased risk of the organization veering away from its original goal (or diversifying wildly in many directions at once). This is where the leader must step back into the limelight. By providing a clear vision, articulated succinctly, they can ensure that all employees, not just the managers, pull in the same direction. As Richard Branson, one of the world’s greatest entrepreneurs, says: “a strong purpose and a sense of ethics give the company a solid foundation. In Innocent’s case the focus was on leaving the planet a little better than they found it. This simple but effective message resonates with both staff and customers, whether they number 10 or 500 people.” By creating a vision, companies have a frame of reference for all decision-making (decisions can be tested simply by saying: “Does this decision take us one step closer to our vision?”), making it a powerful tool for the business.

Reason 4: processes

The problem: More staff and more customers, but out-of-date operations

The solution: If you work for a really large company, you probably think that processes are unwieldy, slow, and perpetually standing in your way. That may be the perception, but for the growing company there comes a time when process is the savior. Greiner calls this the “Control Crisis.” Businesses that don’t address operational elements as they grow soon find themselves with real issues on their hands. Processes that worked when they were half the size suddenly break under increased load, inefficiencies become bottlenecks, and customer service and product quality suffer. Smart businesses will look to continually monitor, assess and update processes as they grow, removing inefficiencies before they impact the ability to deliver. This is especially important in rapid-growth businesses like internet start-ups.

Reason 5: collaboration and communication

The problem: Multiple departments and many processes, but none of them are working together

The solution: The summit of this particular predicament mountain focuses on communication. As a business grows even further, it will split into multiple departments, each driven by its own processes, potentially with its own agenda, and headed by its own leader. It’s in this scenario that communication and collaboration can break down; the result is diversification. In some ways Google displayed this behavior  with many product teams building everything from Google Buzz to Google+ and on and on. Some were great products, but they weren’t working together to create shareholder value. Larry Page’s drive to reduce the number of products and concentrate on product integration has made a massive impact on Google’s ability to work effectively and in a coordinated manner. Increasing the amount of collaboration and communication between teams is essential in large companies, whether this is through innovative working platforms, changes to the working environment, leadership forums, or a wider cultural change.

See the signs

Not every company is the same, but the challenges caused by growth are well-known and common. The good news is that the challenges are not insurmountable. If you can spot the signs of a revolutionary crisis, regardless of whether you are the CEO, you can take action to mitigate the business risks. Stay smart, stay aware, and you can avoid the growth trap.