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Overcoming the Growth Plateau

Emphasizing the RightEntrepreneurial Practices toAchieve Sustained Growth

Table of Contents

Introduction 1

TheGrowthPlateau 2

ResearchMethod 3

PrimaryPracticesForSustainedGrowth 3

SecondaryPracticesForSustainedGrowth 7

AdditionalPracticesForSustainedGrowth 10

Summary:OvercomingtheGrowthPlateau 12

ParticipatingCompanies backcover

©2006MarketStrategyGroup,LLCandTheUniversityofChicago GraduateSchoolofBusinessPolskyCenterforEntrepreneurship



MarketStrategyGroup/PolskyCenter|

Emphasizing the RightEntrepreneurial Practices toAchieve Sustained Growth

Introduction

Considertwocompaniesinthesameindustryduringthesame

ten-yearperiod:1996-2006.

One,theindustrypioneerpraisedforitsinnovativebusi-

nessmodel,initiallyexperiencesrevenuegrowthofmorethan

20 percent annually, only to see growth tail o and then plum-

mettonegative3percentperyear.By2006itendsupwithanoperatinglossof$427millionafterhavingclosedalmost300

stores.

Theother,afamily-ownedbusiness,experiencesmore

than ve-fold revenue growth in the same period and expands

from58storesin4states,to450storesnationwide.Itgrows

fromregionalnicheplayertothird-largestchaininthecoun-

try.

Sameindustry–bricks-and-mortarvideorental.Same

setofcompetitivechallengesandmarket-forcechanges,from

newentrantslikeNetFlixtonewsubstituteslikedigitalcable

and Internet video. Yet vastly dierent outcomes. The pioneer

andearlymarketleader,Blockbuster,stumbles.Thefamily-

ownedbusiness,FamilyVideo,soars.[SeeFigure1.]

Thequestionis:why?Whydoesonecompanysinkinto

theGrowthPlateau(andevendeeper),whiletheotherby-

passesitaltogether?

Doubtlesstherearemanyexplanations.Butakeyway

thatcompanieslikeFamilyVideoareabletosustaingrowth

overtimeisthroughalaser-focusonmaintainingtheentre-preneurial practices that made them successful in the rst

place.Conversely,wheninnovativeorearly-stagecompanies

losetheirentrepreneurialedgeastheymatureandscale,they

courttheGrowthPlateau…orworse.Blockbusterprovidesa

caseinpoint.

Can entrepreneurial practices really make the dier-

encebetweensustainedgrowthandtheopposite?Justas

important,canresuscitatingentrepreneurshipinamaturing

organizationrescuethecompanyfromstagnation?Market

StrategyGroupandthePolskyCenterforEntrepreneurship

have sought to answer these questions rst by identifying

ve practices that characterize successful entrepreneurships,

andthenbyevaluatingtheiruseamongmorethan20leading

entrepreneurswhosematuringcompanieshave(a)managed

toavoidtheGrowthPlateaualtogether,or(b)fallenintothe

GrowthPlateaufollowinginitialstronggrowthandthensuc-

ceededinbreakingoutofit.

The study shows that of the ve core or “pillar” entre-

preneurialpracticesthatcharacterizesuccessfulstart-ups,

twoneedtobenurturedandemphasizedasacompanygrows.

Firstandforemost,companiesmustmaintainabias for action

–awillingnesstotakeboldanddecisiveactionwithimperfect

informationorresources.Second,companiesmustcontinue

tobecustomer-centric,tokeepbuildingtheirbusinessaround

customersbyanticipatingandrespondingtocustomers’

ever-changingneeds.Thepracticesof frugality , sacrifce,and

culture of everyone knowing everything worth knowing ,while

criticalinacompany’searlystages,becomemoresecondary

inimportanceasacompanymatures.

Thestudyalsosuggeststhattwoadditionalpracticesare

integraltobothsustainingandreignitinggrowth.Oneis selec-

tive recruiting ,thepracticeofcontinuingtohirepeoplewho

aredeeplycommittedtothegrowthandlong-termsuccess

Figure 1




Research Method

Retaining or losing an entrepreneurial edge can be the dier-

encebetweengrowthandstagnation–butjustwhatdoesthat

edgeconsistof?Todeterminetheanswer,MarketStrategy

Group and the Polsky Center compiled a list of the ve pillar

practices that dene successful early-stage companies. The

listhasthreemainsources:(1)Interviewswithentrepreneur-

ship professors at the University of Chicago Graduate School

of Business; (2) Our collective experience running entrepre-

neurial rms and working with successful entrepreneurs; and

(3) Entrepreneurship-focused business literature. The ve

keyentrepreneurialpracticesemergingfromthisanalysisare:

Bias for Action–Early-stagecompaniestakeaction

withoutrequiringexhaustiveanalysisordelibera-

tion.Theyarewillingtoactbeforeallthefactsarein,

and are willing to adjust to new insights on the y.

Customer-centricity –Successfulearly-stage

companies nd innovative ways to serve new or

underservedmarkets.Theyarehighlyperceptive

ofcustomerneedsthatothers–particularlylarge

companies–miss.They’realsostructuredtoquickly

mobilizeresourcesinresponsetocustomerneeds.

Frugality 1–Successfulearly-stagecompaniesare

famouslyfrugal.Theyscrimpandsavewhereverpos-

sibleandspendeverydollarjudiciously.

Culture of Everyone Knowing Everything Worth

Knowing – In an early-stage rm, virtually everyone

knowseverythingworthknowingaboutthebusi-

ness.Notjustinformation,butvalues,decisions,and

ideas. This free ow of information also tends to cre-

ateastimulatingandinnovativeworkenvironment.

Sacrifce–Peopleinsuccessfulentrepreneurial

rms – particularly the founders – tend to be fanati-

callycommittedtothebusiness.Theyarewillingto

make extraordinary personal sacrices so that the

businessdoesinfactsucceed.

1.

2.

3.

4.

5.

With the ve core practices of successful early-stage

entrepreneurialbusinessesestablished,wesoughtinputfrom

successfulentrepreneursthemselves.Ourprimarytargets wereentrepreneurswhosebusinesseshad(a)experienced

stronglong-termgrowth,and(b)successfullyscaledtomid-

market size or larger. (Some successful young rms or rms

innichemarkets,likeAmsyscoandInvenergy,alsoparticipat-

ed.)CompanieswererecruitedfromtheINC.500andfroma

listofbusinessesthathadappearedmultipletimesonCrain’s

“Best in Chicago.” A total of 21 companies participated.

MarketStrategyGroup/PolskyCentergoalsinthestudy

werestraightforward:

First, from the perspective of executives with rst-

hand experience, which (if any) of the ve core en-

trepreneurialpracticesarecriticaltosustainingor,if

necessary,reignitinggrowthasacompanyachieves

scaleinsizeandresources?

Second, if these ve practices or some subset of

themaren’tthekeystosuccessfulgrowth,what

practicesare?

Third,whatexamplesandlessonscouldtheexecu-tivessharewithrespecttoputtingtherightpractices

touseintheirorganizations?

Primary Practices For Sustained Growth

According to study participants, all ve core entrepreneurial

practices identied by Market Strategy Group and the Polsky

Centerare,infact,pivotaltothesuccessofanearly-stage

company.Whiletheyallremainimportantasacompanyscales

andmatures,twoinparticularemergeascriticaltosustaining

growthoverthelongterm:biasforactionandcustomer-cen-

tricity. These are the primary practices among the original ve

pillarsthatcompaniesneedtoemphasizeforgrowth.

1.

2.

3.

1 “Spend with the multiples eect in mind” was the original name of this practice. It

referstothetendencyofsuccessfulstart-upstoviewexpendituresintermsoftheimpact

on a potential acquisition or initial public oering. For example, if a rm’s value is 10x

earnings,ora10xmultiple,hiringsomeonefor$60,000islookedatastheequivalentof

$600,000. Respondents preferred to dene this practice as cost consciousness taken to

the extreme; “frugality” is the term that most accurately captures their view .



|OvercomingtheGrowthPlateau

Bias for Action

For early-stage rms, the importance of a bias for action

is self-evident: without it they can’t get o the ground. As

Michael Polsky, founder of Invenergy, puts it, “The early

stages are all about action.” Initial success almost always de-

pendsonbreakoutmovesthatstartthecompanyonthepath

togrowth.Sometimesthosebreakthroughsareliteral,not

just gurative. Family Video, which began life as Midstates

Appliance in Springeld, Illinois in 1946, got its start when,

onawhim,CharlesHoogland,sonofthecompany’sfounder,

blastedaholeinthesideofthecompany’swarehousein

Springeld in 1978. Somehow in the course of selling ap-pliances, the company had “got stuck” with a large supply of

videos.Withacriticalmassofinventory,anidea,andalittle

extraspace,Hooglandbrokethroughawarehousewallto

form the Video Movie Club of Springeld. A name change

andbillionsofdollarsinrevenuelater,hisbiasforactionhas

clearly paid o.

ForMarkSeigleandhisbrother,Harry,ownersof

Seigle’sLumber,biasforactionmeantdecidingtocompletely

changetheirbusinessmodelnotaftermonthsofmarket

analysis,butafterasinglebusinesstrip.Thetwoownershad

heardofaregionalplayerwithnationalambitionsinthesame

businesstheywerein:

retailinghomebuilding

suppliestoconsumers.

Theywereconsidering

signicant expansion

themselves,andthey

wantedtogaugewhethertheregionalplayer–acompany

namedHomeDepot–posedaseriouscompetitivethreat.

So they ew to Atlanta to see for themselves. As Mark Seigle

says, “We got to the parking lot, saw that it was totally packed,

andturnedaroundandwenthome.Weknewthatwecouldn’t

compete with that.” Other Midwest hardware chains like

HandyAndyandHinesLumberkepttryingtodojustthatand

allbutwentoutofbusiness.Seigle’sLumber,bycontrast,

decided to redene itself by focusing exclusively on suppli-

ers.Theresults–growthtomorethan$250millionand1300

employeeswhenthecompanywasacquiredbyStockBuilding

Supplyin2005–speakforthemselves.It’s the entrepreneurial credo: Ready, re, aim. Just do

it.It’salsotheconsensusviewofeveryoneinourstudy:foran

early-stage rm to get the growth ball rolling, the company

must err on the side of decisive action. It can’t aord to miss

anopportunitybyover-analyzingpossibilitiesorwaitingfor

allthefactstocomein.

Butisthatsameboldnessusefulorappropriateasa

companymatures?MichaelSachs,founderandpresident

of Sg2, a health care consulting rm, points out that part of

thereasonanearly-stagecompanycanmakequickandbold

decisionsisthattherearefewerpeopleinvolvedindeciding.

Thatmakesiteasiernotjusttosetacourse,butalsotochange

or reverse it. He likens an early-stage rm to a speed boat

and a larger rm to an aircraft carrier:

“Speed boats are easy to direct and turn around when a changeisneeded.It’seasytocommunicatebetweenthepeopleonittocharttheimmediatefuture.Aircraftcarrierstakemorepeopletodecidewheretogoandlongertogetoncourse.Once the course is set, it’s dicult to change directions.”

Inotherwords,growinginsizecandullabiasforac-tionsimplybecausemorepeopleareinvolved,whichmeans

decisionsandcoursecorrectionstakelonger.Moreover,

because the stakes are higher and mistakes are more dicult

andcostlytocorrect,therecanbeanaturalinclinationfor

peopletobecomemorecautiousandhesitant.It’snotaseasy

asitusedtobetounderstandwhatneedstobedoneandwho

needstobeinvolved.Theresultinguncertaintyandcomplex-

itycanservetofurtherdiscouragepeoplefromacting.In

time,abiasforactionislostaltogether,replacedbyaculture

and employee prole that values stability and safety over risk

andreward.

Staving o a descent onto the Growth Plateau is one rea-

sonwhyabiasforactionissoimportantoverthelongterm:

whenit’spresent,soistheabilitytonimblyseizeopportunity.

Whenit’sgone,somedegreeofgrowth–andmoreimportant,

thecompany’sabilitytogrow–inevitablygoeswithit.

“I’d rather make a poor

decision quickly than

take too long trying to

make a good decision.” Mark Seigle, Seigle’s Lumber




Becausescaleandbiasforactioncanbeconsidered

natural enemies, the key is nding ways for them to co-ex-

ist.DennisKeller,founderoftheKellerGraduateSchoolofBusinessandchairmanofDeVryInstitute,recommendsa

solution that at rst sounds counter-intuitive. As a company

grows in size, he says, “action must be supported by plan-

ning.” In Keller’s view, planning done the right way creates

acompelling,well-reasonedrationaleforwhyaninitiative

shouldbepursued,whichinturngeneratesemployeebuy-in

throughouttheranks.Whenemployeesseethatactionscan

pay o, they’re more inclined to want to act. In contrast, if

they feel the company is pursuing “just another hare-brained

idea” they’re likely to be unengaged and unenthusiastic about

bringingmeaningfulnewideasforward.

Thetrickisnottoletmoreplanningandanalysisbog

downdecision-making.JohnGeocaris,founderofLittleLady

Foods,sayshiscompanyreliesonavariationofthe80/20

rule. “We get 80% of it gured out and then we go,” he says.

“We gure out the other 20% as we go along. We’ve learned

throughexperiencethateverythingcannotbeperfectly

engineered, nor does it pay to take the time to do that.” That

approachhashelpedLittleLadyFoods,aChicago-basedfor-

mulatorandprivate-labelproducerofbakedfoods,growfrom

$100,000insalesin1984to$200millioninsalesin2006.

JohnLee,presidentofHostway,awebhostingcompany,

oers another tip for fostering a bias for action in a matur-

ingcompany:settingharddeadlinesfordecisions.Bysetting

deadlines,Hostwayensuresthatitcanevaluateimplicationsof

decisionswithoutprolongingtheprocessunnecessarily.Ifall

thedesiredinformationisn’tavailableorinplacebythedead-

line, the company makes the decision anyhow. Putting o de-

cisions,Leesays,isgenerallymoredetrimentalthandeciding

andthenmakingnecessarycoursecorrectionsafterward.

Abiasforactionisworththeriskthatsomedecisions

won’t pan out as expected. “I’d rather make a poor decision

quickly,” says Mark Seigle of Seigle’s Lumber, “than take too

long trying to make a good decision.” The trick is to recognize

immediatelywhenaprojectisheadedintothedangerzone

andtoturnbackassoonaspossible,ratherthanbeingde-

termined to rescue a lost cause. “Admit failure, dust yourself

o and move on,” Seigle recommends. Steve Baird, CEO of

the $175 million real estate rm Baird & Warner, echoes thispoint. “I’d rather try and fail than wait and copy.” One ap-

proachbreedsgrowthwhiletheotherinvitesstagnation.

Customer-centricity

Many early-stage rms rst taste success by focusing on

customerneedsthatnooneelsehaseithernoticedorcon-

sideredimportantenoughtorespondto.Zebra,forexample,

discoveredapervasivedissatisfactionamongusersofbarcode

labels.Apparentlytheprintqualitywasquitepoor,leading

toblurrybarcodeswhichinturnledtoinaccuratescanning.Bybuildingaproductlinearoundthermaltransferprinting,

which produced barcodes in a clearer, ner, deeper black,

thecompanyeliminatedthescanningproblemandaddressed

a signicant customer pain point. Now, 24 years later, the

companyhas$700millioninsales.

Other successful rms have found re-focusing on cus-

tomerneedstobethestimulusforgrowth–andforescaping

theGrowthPlateau.MiddlebyMarshall,whichdesignsand

manufacturescommercialovens,illustratesthisprinciple.

In 1998 Middleby lost $4 million on $132 million in sales; it

was growing in the wrong direction. Under the leadership of

newCEOSelimBassoul,whoarrivedonthescenein2000,

Middlebybegantotransformitselfbyfocusingnotonlyon

whatcustomersneed,butonwhattheyshouldexpectfrom

theirsuppliers.

OneofBassoul’sdiscoverieswasarelativelysimple

insightthathadpowerfulimplications.MiddlebyMarshall

mostlyservesrestaurants.Intherestaurantindustry,the

primerevenuehoursarenights,weekendsandholidays –hourswhenmostrestaurant suppliersareclosed.Bassoul’s

companywasonesuchsupplier.Asaresult,ifanoven

wentdownduringadinnerrush,therestaurantwasoutof

luckuntilthenextday.Thewatershedmomentcamewhen

Bassoul realized, “We need to be open when our customers

are open.” Simply by extending its hours to help customers

troubleshootproblems,MiddlebyMarshallcouldprovidea



6|OvercomingtheGrowthPlateau

servicethatcustomers

hadeveryrighttoexpect,

butthatnosupplierwasproviding.Innovative

moveslikethishave

dierentiated Middleby

fromcompetitorsand

helped propel it to 18%

salesgrowthyearover

year,from$132million

insalesin1998tomore

than$300milliontoday.

[SeeFigure2.]

Middleby’sexample

showsthatit’snever

toolatetobecustomer-centric–thecompanyisnowalmost

120 years old – and that nding an untapped customer need

andquicklyrespondingtoitmightjustbethequickestescape

routefromstagnation.Butaswithabiasforaction,acompa-

ny’sincreasedsizeandmaturingagedoespresentchallenges

formaintainingcustomer-centricity.Or,moreaccurately,it

forcescustomer-centricitytoevolveinordertocounteractthe

tendenciesofincreasedscaleandsizetoweakenit.

Justwhatarethetendenciesthatneedtobecounter-

acted?Forone,asacompanyaddsemployeesandgrowsin

size,internalcompanyneedscanbegintocompeteforatten-

tionwithexternalcustomerandmarketneeds.Foranother,

theinitialcustomerinsightsthatfueledgrowthmaylackthe

freshnessandpowertheyoncehad.Andthenthereisthefact

thatasacompany’scustomerbasegrows,customerneeds

inevitablybecomemorediverse,makingitimpracticalto

customizesolutionsthewaythecompanymighthavedonein

itsearlystages.

Regardingthislastpoint,JaiShekhawat,founderand

CEOofFieldglass,anenterprisesoftwareprocurement

company,observesthattobesuccessfulearlyon,acom-

pany must adopt the credo of “What the customer wants, the

company must deliver.” As the company grows, Shekhawat

says, “it must become more disciplined in how it listens to

customers–inotherwords,thecustomerisnotalwaysright!

Thecompanymustlearnhowtosay,‘No.We’renotgoingto

dothat.’Althoughofcoursetheconversationcan’tendthere.

Rather,thecompanymustexplainwhyitisn’tgoingtodowhat

wasrequestedandwhyitisinsteadgoingtoleadthecustomer

toward something even better.”

Shekhawatsaysthatasacompanyscales,itmusttransi-

tionfromservingcustomers’needstoguidingthemtoward

adeptdecisions.Inhisbusiness,thatsometimesmeans

saying “no” to certain software feature requests from custom-

ersbyexplainingthelargerimpacts.Hecitestheexampleof

a feature change request that would have simplied timesheet

entryforacustomer’semployee,butcompromisedoneof

the customer’s compliance policies. “We held rm in saying

[thatdenyingtherequest]wastherightthingtodoforthe

corporationasopposedtotheconvenientthingtodoforthe

individual employee.”Middleby Marshall oers another example of this guid-

ance.SelimBassoul,theCEO,recognizedthatreducingcosts

wasakeycustomerneed.Healsorecognizedthatenergywasa

mainsourceofrestaurants’coststructures.Lookingoutafew

yearsintothefuture,heanalyzedenergypricesandpredicted

that they would rise signicantly. At the time, customers

wantedenergy-intensive,self-cleaningovens.Yetmindful

Middleby Marshall Growth(1993-2005)

$50

$150

$250

$350

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

R e v e n u e s

( m i l l i o n s )

Source: Middleby Marshall Annual Reports

T h e G r o

w t h Pla teau

SelimBassoulisnamedCEO

Figure 2




thatwhatcustomersreallyvaluedwascostreduction,Bassoul

chosetofocusMiddleby’sproductlineonenergysavings.He

wentagainsttheprevailingvoicesinthemarket,optingin-steadtoguidehiscustomerstowardabettersolution.Energy

pricesdid,ofcourse,risedramaticallyandMiddleby’slineof

energy-ecient ovens was a smash success. The ovens now

savecustomershundredsofdollarsamonth–whichnoself-

cleaningovencanmatch.

Asfarascounteractingothertendenciesthatpullagainst

customer-centricityasacompanygrowsinsize,partofthe

answer lies with organizational structure. Specically, the

companyneedstobesurethatitisorganizedinsuchawayas

to(a)keepapulseoncustomers’ever-changingpainpoints

and(b)havethecapabilitytorespondaccordingly.AtLittle

Lady Foods, CEO John Geocaris likes to say that “everything

centers around the customer” – and he has organized his

companyaccordingly.Eachmajorcustomerorclusterof3-4

smallercustomershasitsownmulti-disciplinaryaccount

team. Team members hail from dierent areas within Little

LadyFoods,suchasaccountmanagement,customerservice,

productdevelopment,

andoperations.Each

teamhasacomprehen-

siveunderstandingof

LittleLadyFoods’capa-

bilitiessothatwhenateamgoesoutonasalescall,theyknow

exactlywhattheircompanycanandcan’tdo.Thisenables

them to steer customers toward mutually benecial solutions.

It also cuts signicant lag time out of the product develop-

mentprocess.Ateamcanvisitapotentialcustomerandbe

decisive,withouthavingtogobacktoseniormanagementand

coddlethecustomer’srequestthroughlayersofbureaucracy.

Ifthenatureofcustomer-centricitychangesovertime,

itsimportanceisconstant.PatrickRyan,executivechairman

andfounderofAonCorporation,saysthateventoday,24

yearsafterAonwasfoundedandwhereannualrevenuenow

tops $8.5 billion, “Everything begins and ends with the cli-

ent.” But Ryan also acknowledges that this takes an especially

concerted eort when a company has scaled to Aon’s size.

Beingclosetocustomerspresentsamuchmoreformidable

logisticalchallengeforacompanyofcloseto$10billionthan

a rm a fraction of that size, and it means that customer focushastobeapriorityforeveryemployee.Italsomeansthat

customerfocushastobesomethingpeopledoratherthan

simplygivelipserviceto.That’swhyRyanhimselfmakes

twentycallseachweektoexistingclientsandnewprospects.

The contact enables him to “feel the pulse” of the marketplace

andtherebyguideAoninawaythatreinforcesitscustomer

commitment.

Secondary Practices For Sustained Growth

Theotherthreepillarpracticesofsuccessfulearly-stage

companies – frugality, sacrice, and a culture of everyone

knowingeverythingworthknowing–don’tplayascentral

aroleinmaturingcompaniesasbiasforactionandcus-

tomercentricity,buttheydoremainimportant.Ratherthan

principles that companies actively seek to nd new ways to

strengthenorreinforce,theybecomemoresecondary,per-

hapsevensymbolic.

Frugality

EdKaplanofZebraTechnologiesrelatesastoryfromthe

companyhefoundedbeforeZebra,calledDataSpecialties,

Inc.KaplanhadtotraveloutsideChicagotodrumupbusiness

forthecompany,andoneofhistargetmarketswasDetroit.

To get there he rst borrowed his brother’s car and went to

thebank,wherehe

stockeduponcoin

rolls.Thenhedrove

toDetroitandstoodinaphonebooth

allday,droppinginnickelsanddimesandcallingpotential

customers. Kaplan recalls, “The reason I did that is that I

couldn’t aord to make phone calls from Chicago.” When the

day’s calls were done, he adds, “I’d go to a little convenience

store,buydonuts,sleepinthebackofmycarandthengetup

and make more phone calls the next day.”

“As a company matures...

crazy frugality...becomes

unnecessary.”

Jai Shekhawat, Fieldglass

“Everything begins and

ends with the

client.” Pat Ryan, Aon Corporation




JaiShekhawatofFieldglassrecountsanotherengag-

ingexample.Hiscompany,theninitsnascentstage,needed

whiteboardsforitsengineers.Hereceivedaquoteof$100perboard, which struck him as exorbitant. So he set out to nd a

substitute.Alittleresearchuncoveredathickshowerlining

productatHomeDepotthatwasaperfectsubstitute–atonly

$9foracomparableamount.

But as a company matures, that kind of “crazy frugality,”

asShekhawatreferstoit,becomesunnecessary,evencounter-

productive.Today,hesays,he’djustbuythe$100whiteboards.

Asacompanymatures,heexplains,itmustbecomemore

cognizantofopportunitycosts.Atthisjuncture,itmakesfar

moresensetohavehispeoplefocusedontheircoreresponsi-

bilities than to send them o on a shopping expedition to save

afewdollars.

Amongstudyparticipants,theconsensusisthatcom-

panies must remain nancially disciplined as they grow and

mature,andtradeafanaticalfocusonspendingforamore

balancedview.MichaelSachsofSg2citestheexampleof

neverlettinghisemployeesscrimponacheaphotelroom

whentheytravel,becauseherecognizesthatapoornight’s

sleepcouldjeopardizeabiggerinvestment–thepurposeof

thetripitself.

Spendingsmartdoesn’tmeanabandoningcostcon-

sciousness. “Capital outlays are almost always worth the

investment,” explains Mark Seigle. “But expenses should

always be controlled – as much in good times as in bad.” Seigle

focusesonlittlethingsliketurningtheheatandlightsdownat

night.Thecompanyalsohasitsjanitorialservicecomeevery

othernight.Thesesimplegesturesnotonlycutexpenses

withoutincurringopportunitycosts,butalsobecomesymbols

that communicate a standard. They say, in eect, we spend

moneywhereit’sneeded,butweneverwasteit.

Sacrifce

When a company is rst getting o the ground, sacrice, like

frugality,istherulemorethantheexception.MichaelFerro

of Click Commerce puts it succinctly: “You need to lay it all on

the line.” Indeed, stories of entrepreneurial sacrice abound

amongstudyparticipants.Inonecase,acompanyfounder

worked20-hourdaysinhergarage,maxedoutfourcredit

cards,andateramennoodlesforsixmonths.MartySinger,ChairmanandCEOofPCTEL,aleadingproducerofanten-

nasformobiletechnology,recountsthatwhenhiscompany

wasfounded,heandhispartnersmovedtoanapartmentin

CaliforniaandleftbehindtheirfamiliesinChicagofortwoto

threeweeksamonth.Thepartnersworkeddayandnightand

evendidtheirgroceryshoppingtogether.

Manyoftheexecutivesinourstudywentthroughthis

phase,andemphasizethatitwasexactlythat:aphase.It’sa

phasethattheyareunanimouslyhappytobeoutof.Without

adoubt,thelonghoursandtoughexperiencesenduredby

leadersandemployeesofmanystart-upscontributeeither

directlyorindirectlytotheircompanies’successes.The

sacrices they undergo build camaraderie, get a lot of needed

workaccomplished,andoftenendupcreatingsymbolic

touchstonesthatcanbetappedandreferencedthroughout

acompany’slife.Butifacompanywantssustainedgrowth,

the early levels of sacrice simply can’t be – and probably

shouldn’tbe–maintained.

Thecentralissueisthatonceacompanyreachesa

certaindegreeofstability,attentionneedstoshiftfrom

sacrice to retention. Selim

BassoulofMiddlebyMarshall

explains: “Once a company

isbeyondthestart-upphase,

people don’t just sacrice

–theyneedtohaveincentives

to work and to stay.” Treat-

ingemployeeswell,suggests

SusanHapak,CEOofCurrent

Technologies,amedical

productsupplycompany,isacriticalenablernotjustofre-

tention but of building the business. “ When the leader treats

employees well,” she says, “the employees naturally start to

take care of the place and treat it like it’s their own.”

Howdoesacompanytreatpeoplewell?Onewayis

through respect for lifestyle. As Steve Baird of Baird & War-

“Once a company is

beyond the start-up

phase, people don’t

just sacrifce - they

need to have incen-

tives to work and to

stay.” Selim Bassoul, Middleby Marshall

Corporation




ner puts it: “I love that my number two person is o biking

in Michigan and I cannot even get a hold of her.” By giving

employeesthefreedomtotaketheproverbialbicycletrip,companiescreatelifestyleincentivesforpeopletostay.

Financialincentivesarealsocritical.AtAmsysco,every

employee that has been with the rm at least a year is entitled

to participate in a 25% prot-sharing plan, part of CEO Rat-

tan Khosa’s attempt to “encourage employees to feel owner-

ship in the company.” Generosity with equity and creative

bonusing(e.g.,givingoutbonusesbeforemajorholidays

insteadofonceayear)areotherincentivetechniquesstudy

participantsmention.

Intheend,sustainedgrowthappearstodependmoreon

“balanced sacrice” than absolute sacrice. Company lead-

ersstillwantpeopletoworkhardanddotheextraordinary

whenneeded,buttheyalsohavetoacknowledgetworealities:

(1) that people won’t sacrice simply because that’s what the

company’sleadersdooroncedid,andstillwantfromevery-

oneelse,and(2)thatpeoplehaveotherpriorities.Oneexecu-

tive puts it succinctly: “You want to say 110% commitment or

get out, but there are practical limits. People have families.”

Culture of “Everyone Knowing Everything Worth

Knowing”

WhenHostway,awebhostingcompany,wasfoundedin1998

by Lucas Roh, John Lee and colleagues, the rm set up shop

in Lee’s Chicago apartment. When the rm migrated to new

spaceandbegantoaddemployees,itintentionallyretaineda

loose,garage-businessfeel.Iteschewedaformalcommand

andcontrolstructureandoperatedthroughpurposelyinfor-

malcommunication,interactionandinformationsharing.

“Keeping it informal was how things got done,” Lee recalls,

“since among other things it increased people’s involvement

with and commitment to the business.” But, as Lee readily

acknowledges, that approach “just isn’t scalable” as a company

maturesbeyondtheinitialstagesofgrowth.

Like Hostway, many early-stage rms experience initial

successbykeepingthingslooseandexploitingaprimary

virtueofbeingsmall:it’seasyforeveryonetobeinsyncwith

one another and with the goals of the rm. The open ow of

information,strategyandtactics,decisions,customerissues,

andideascreatesaculturethatisbothfreewheelingandfo-

cused.Everyoneknowswhathastobedonetosucceed.They

allpulltogethertowardthesamegoal.Andtheyenjoyalotof

latitudetomakeithappen.

AlsolikeHostway,

most companies nd that

astheygrowlargerin

size,acultureofopenness

and “everyone knowing

everythingworthknow-

ing” is tough to scale.Morethananythingitbecomesamatteroflogistics:there

ismoreinformationtoshare,withmorepeople,oftenin

more and sometimes far-ung places. Disseminating what’s

worthknowinggetsincreasinglycomplicatedbecauseofthe

volumeofdatainvolvedandthenumberofpeoplewhohave

tobereached.Speakingfromexperience,JaiShekhawatof

Fieldglass,whosecompanyexpandedfromasinglesiteto

multiple locations throughout the world, identies the crux

of the issue: “It’s much simpler to get everyone on the same

page when you’re seeing everyone on a daily basis.” Tech-

nology,intheformofemail,electronicnewsletters,idea

forums,knowledgemanagementexchangesandmore,can

helpapproximatethatlevelofcontactandinteraction,butin

theendit’sjustthat:anapproximation.

Another issue that makes it dicult to scale a culture

of “everyone knowing everything worth knowing” is that

“what’s worth knowing” tends to be more narrowly dened,

or at least more selectively dened, as a company matures.

Insteadofsharingeverythingofvalue,companiesincreas-inglyshareinformationonaneed-to-knowbasis.This

occurs for reasons of both condentiality and practicality.

With regard to the rst, as a company grows in size, so can

theamountofinformationdeemedtoosensitivetoshare

outsideasmallcircleoftopmanagement.Regardingthe

second, it can become too inecient to cover everything

critical to a business with everyone involved. “Until we got

“Keeping it informal

was how things got

done [in the early

days]... but it just

isn’t scalable.” John Lee, Hostway Corporation




to $20-25 million,” says Mark Ain, founder of software maker

Kronos, “we would all have lunch together every Monday. We’d

buysandwichesandtalkaboutwhatweneededtodo.Thenwe wouldputoutamemosayingwhateveryoneneededtodoby

the next week.” Once a certain size threshold is reached it’s

impracticaltobethatcomprehensiveorall-inclusive.

Whatseemstohappenasacompanymaturesandgrows

is that a culture of openness and “everyone knowing every -

thing worth knowing” gives way to a culture of participation

basedonselectivecommunicationandinformationsharing.

To keep growing, the company must nd ways to selectively

disseminatecriticalinformationandtotheextentpossible,

selectivelyinvitedialogueandinteractionfromemployeeson

issuescriticaltothesuccessofthebusiness.Buttoexpectthe

free-ow of information and ideas typical in early-stage days

seemsneitherworkablenorrealistic.

Additional Practices For Sustained Growth

When discussing the ve core pillar practices of entrepre-

neurialsuccess,theimportanceofpeoplearisesagainand

again. In the view of study participants, the ve core practices

allinvolveorrevolvearoundpeople,butnonecompletely

capturesjusthowessentialpeoplearetoongoinggrowthand

success.Insynthesizingwhatthestudyparticipantsconsider

missing,MarketStrategyGroupandthePolskyCentersuggest

twoadditionalpracticestoemphasizeforsustainedgrowth:

selectiverecruitingandrefreshedleadership.

Selective Recruiting

Asacompanygrows,hiringdecisionshaveatendencytobe

madelesscarefullyandlesswithgrowthinmindthanwhenthe business was rst getting o the ground. There are any

numberofreasons:thepaceofgrowthistoofasttopermit

careful evaluations of each new hire, t becomes too dicult

ortime-consumingtojudge,leadersofthebusinessareless

directly involved, and so on. However it happens, “the bar

just gets lower,” observes one study participant. A company

thatwantstoavoidtheGrowthPlateaucan’tletthatoccur.If

itwantstokeepgrowing,it

needstoplaceapremiumon

continuingtohirepeoplewho willdrivethatgrowth.

Whoarethosepeople?

Typicallytheywillbemore

liketheearlyhiresofthebusi-

ness than later hires. “Early

hires are by nature more risk loving,” explains Jai Shekhawat

of Fieldglass. They are drawn to “a venture that is fraught with

economic and career risk” because they see the potential for

high reward. Later hires, he says, “are generally more conser-

vative” and thus less likely to be strong drivers of growth.

In addition to hiring with a higher-risk prole in mind,

the other key to selective recruiting is t. Michael Polsky

ofInvenergythinkscompaniesalwaysneedtobehiringfor

thelongterm–asiftheywereaddingtoafamilyorforming

partnerships. As they grow they have to be as attentive to t

asthefounderswerewhentheybroughttogethertheoriginal

team. “You have to like the people,” Polsky explains, “so you

wanttogobacktowork[asmuchasyoulike]goinghome.

It’slikemarryingaspouse…It’saboutwhetherpeopleenjoy

each other.” This is especially critical as a company matures

beyond the initial stages of success. “Early on, it’s about indi-

vidual leadership,” he points out. “Later on, it’s about having

therightpeople,havingthemacceptyourcompanyculture,

and using that to hire more people that t and can move the

company forward.”

Whentherightpeoplearealsohighlytalented,itcan

createapowerfulcombinationthathelpsself-perpetuatea

growth culture. As Dennis Keller of DeVry observes, “Ex-

traordinarymanagerstendtobringinotherextraordinary

people.High-qualitynewrecruitsrecognizethecaliberof

thosemanagersandaremoreinclinedtojoin.Itcreatesa

ripple eect in the quality of human capital.”

Mark Ain of Kronos oers one more piece of advice.

“Always try to hire people who are smarter and more capable

than you. Early on I ran everything – manufacturing, nance,

andengineering.[Aswegrew]Iwasalwaysveryconscious

“It’s about having

the right people...

and using that tohire more people

that ft and can

move the company

forward.” Michael Polsky, Invenergy LLC




Summary: Overcoming the Growth Plateau

Countering the growth-inhibiting side eects of scale and

maturity requires more than a rallying cry to “be more entre-

preneurial” or “regain our entrepreneurial edge.” Instead, a

companyneedstotakeactionsandusepracticesthatkeepits

entrepreneurshipalive.Or,ifthecompanyhasallowedthose

practices to languish, it needs to make a conscious eort to

revivethem.

To return to our rst example, Family Video oers a case

in point of a rm that has consistently used entrepreneurial

practices to sustain growth, even as it has scaled signicantly.

Thebias for action thatledtoitsformation(rememberblastingthrough the warehouse wall?) continues to this day. “We still

believe it’s important,” says one executive there, “to be able to

have an idea on Friday and take action on Monday.” Over the

years, the rm has made a number of bold moves. Some have

paid o, such as a decision to focus on secondary markets and

stay out of rst-tier urban markets. Others, such as a recent

forayintotheicecreambusiness–co-locatingicecream

storeswithexistingFamilyVideolocations–havehadless

success.Whethertheinitiativessucceedissecondarytothe

willingnesstoactonandtesttheminthemarketplacequickly

–that’sthebiasforactionthatstimulatesgrowth.

FamilyVideoisalsohighly customer-centric.Knowingthat

itscustomersvalueconvenienceandlowprices,thebusiness

keepsstoresopenfrom10AMtomidnight,365daysayear,

andchargesadollarformostrentals.Ituses selective recruit-

ing to hire people willing to make “Herculean” eorts, as one

executive puts it, work six-day weeks, and be exible – people

who oer a strong t with the company’s distinctive cul-

ture.It’salsoabusinessthathas refreshed its leadershipteam. Althoughthecompanyisstillrunbythesonofthefounder,it

regularlyaddsnewtalent–likeJohnFurton,theVicePresi-

dentofTechnology,hiredjustafewyearsago–tomakesureit

hasthenewskillsetsandperspectivesnecessarytosucceed.

Thesesameentrepreneurialpracticescanbeusedto

resuscitateafalteringcompany.TakeMiddlebyMarshall.The

companyexperiencedanear-completeandpositiverever-

saloffortunethroughnewleadershipandgrowth-focused

recruiting(byCEOSelimBassoulandtheteamhebrought

in),decisiveactioninthemarket–likecuttingtwo-thirdsof

itsproductlineatonepoint–andcontinuedanticipationof

andfocusoncustomerneeds,fromaddedconvenienceand

creative cost-saving approaches to “no-quibble” guarantees.

Theprecisemannerinwhichcompaniesapplythesefour

keyentrepreneurialpracticeswilldependontheorganiza-

tion’suniquecircumstancesandgrowthtrajectory.Buttothe

extentthereisaroadmapforovercomingtheGrowthPlateau,

itbeginswithanhonestappraisalofwherethecompanyis

todayandwhereit’sheaded,encapsulatedinthefollowing

questions:

Whatisourhistoricalgrowthrate?

Whatisthecurrenttrend–isthegrowthratein-

creasingordecreasing?

Whatarethepredictionsforfuturegrowth?

AreweonaGrowthPlateaunow?Isthereoneonthe

horizon?

Thesecondstepinvolvesanevaluationofthepractices

thatstimulategrowth–namelytheentrepreneurialpractices

discussedinthisarticle.Theoverarchingquestionsthat

shouldbeaskedare:

Dowehavetheentrepreneurialmindsetandinfra-

structureinplacethatcanfuelgrowth?

Specically, do we demonstrate a bias for action? Are

we willing to launch initiatives and make dicult

decisionsevenwhentheinformationatourdisposal

isimperfect?

Arewecustomer-centric–dowecontinuetofocus

intentlyontheneedsofourcustomers?Inspiteof

ourscale,arewelisteningtowhatthemarketplaceistellingus?

Areweselectiveinourhiringpractices?Inother

words,arewebringingentrepreneurialpeopleinto

theorganizationthatcanhelpuscontinuetogrow?

Areourleadersconstantlyevolvingtheirperspec-

tives and management styles to reect the growth

goalsofthecompany?

•

•

•

•

•

•

•

•

•




Maintainingabiasforaction,continuingtokeepcus-

tomersatthecenterofthebusiness,selectivelyrecruiting

andhiringpeoplewhocandrivegrowth,andrefreshingtheleadershiprankswithexecutivesableandwillingtoachieve

growthgoals–implementingthesepracticesishowcompa-

niescanavoidorescapetheGrowthPlateau.

For more information or follow-up questions regarding the study, please contact Michael Krauss, President, Market Strategy Group,at 312-356-5737 or [email protected]




Project Team

Linda Darragh Polsky Center for Entrepreneurship

Ellen Rudnick

Joyce Glaid Market Strategy Group, LLC

Michael Hoffman

Sims HulingsJoel Krauss

Michael Krauss

Avi Stopper



Market Strategy Group / Polsky Center |

Participating Companies

Special Thanks

Amsysco, Inc.

AON Corporation

Baird & Warner

Click Commerce, Inc.

Current Technologies, Inc.

DeVry, Inc.

Family Video

Hostway Corporation

Invenergy, LLC

Fieldglass, Inc.Kenny Construction Company

Kronos, Inc.

Lisle Technology Partners, LLC

Little Lady Foods

Middleby Marshall Corporation

PCTEL, Inc.

Richardson Electronics, Ltd.

Seigle’s Lumber

SG2

SPSS Inc.

Zebra Technologies

Linda Darragh Director of Entrepreneurship Programs and

Adjunct Associate Professor of Entrepreneurship

Waverly Deutsch Clinical Assistant Professor of Entrepreneurship

Tanya Menon Assistant Professor of Behavioral Science

Arthur Middlebrooks Adjunct Professor of Marketing

Robert Potter President and CEO, R.J. Potter Company

Ellen Rudnick Polsky Center Executive Director and

Clinical Professor of Entrepreneurship

James Schrager Clinical Professor of Entrepreneurship and

Strategic Management

David Weinstein President, Chicago Entrepreneurial Center

Robert Weissbourd President and Founder, RW Ventures, LLC

aec_2006_11-30_overcoming_growth_plateau_final_study.pdf

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