Strategic Planning

Strength Inspite Of Size

Read in 11 min. Growth is necessary, but size is no guarantee of a successful future! Nevertheless, growth is needed. Without growth there is no life. In a certain sense, life is growth. This is just as true of nature as it is of the economy, just as true of organisms as it is of organizations.
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Is growth rewarded but size penalized?

All large animals, and not just the dinosaurs, have died out in the course of evolution. The largest animals of today are a number of times smaller than their large ancestors. Can it be that size is penalized by evolution? Can it be that the law of nature lays down maximum sizes that can only be exceeded at the cost of becoming extinct?

In the case of the dinosaurs, it has not yet been settled exactly what caused them to die out. There have been a number of hypotheses. One of the suggestions is that the cause was a cosmic disaster, a gigantic meteor impact. Another claims mass volcanic eruptions and a subsequent change in the climate. Another possible explanation is provided by the speculation that the nervous system of the beasts might not have been able to keep pace with their growth, thus causing their size to result in the organisms becoming "unmanageable".

Whatever the reason, it is important to appreciate that although the dinosaurs may have died out, life itself did not - in fact there seems to have been a wide variety of forms of life that originated after them. There were thus plenty of opportunities for surviving but the dinosaurs could not take advantage of them. Was it their size that stopped them from doing so?

Growth needs strategy

Growth has always found people who are opposed to it. However, even its opponents generally admit that things will not work unless there is growth. What they normally do however is to make a distinction between quantitative and qualitative growth. Yet even that is not a solution.

Growth always means that certain factors grow quantitatively, though this does not means that we can always measure what is happening. The increase in growth factors may lead to a qualitative change, and does do so in the majority of cases, but the path that is followed is a quantitative one.

Growth is the greatest challenge to any company. Existential questions are posed: what needs to grow, what ought to grow, what can be allowed to grow, and what cannot be allowed to grow? For successful growth, the most thoroughly thought-out strategies are required. What growth needs more than anything else is correct management, so that it will not turn into a "cancer" but will produce a strong and competitive company. Companies need a strategy for growth even, and indeed precisely, when they are in markets that are not growing or are even shrinking.

If conclusive answers are not found to the key questions of growth, what exists cannot be called a strategy. This is precisely where the business plans that are so fashionable today fall down. A large number of the New Economy companies that went to the wall would have been able to survive and prosper if they had a sound strategy for growth. What were mistakenly thought of as strategies were business plans that simply extrapolated dreams and desires.

Some survived - by a lucky chance. It does happen, but one cannot budget for luck. The best start-up companies in the New Economy era, which today are successful firms, had a well thought-out strategy for healthy growth that was adapted to the particular situation. Growth always brings problems with it and the companies were ready to manage these problems competently.

One of the best examples of successful growth management is Microsoft. Bill Gates is rightly admired but for the wrong achievement. Most experts agree that Windows does not exactly measure up to the standards of really good information technology. There were and are better things. The achievement for which Bill Gates and his people deserve to be admired is not the operating system but the successful management of the growth of Microsoft. That is a truly major success.

Key elements of successful strategies for growth

Growth strategies are demanding. They call for knowledge that is not of a routine kind and above all for experience. There are a whole range of aspects that have to be considered. The PIMS research has contributed to a vast enrichment of the knowledge that exists on the subject. Developing a strategy without considering this research is comparable to flying blind across the North Atlantic. Some principles, which are regularly ignored, will provide protection against risks to existence itself.

Growth not just for the sake of size

A first maxim is that growth must not be striven for just for the sake of size. Size in itself - as measured by turnover and number of employees - is of no economic significance. What is crucial is for size to be the right size. This may sound trite, but it is in fact the key question that growing firms are faced with.

It can only be answered from the outside inwards, or in other words from the point of view of the market and the structure of the competition. What is right today may be wrong tomorrow. The "right" size changes because the structure of the market changes - not necessarily more quickly today than at other periods but certainly more radically.

Growth without an improvement in productivity is "cancer"

The second principle is that, with no exceptions, growth in size only produces strength if there is a growth in productivity at the same time. A growth strategy is only as good as the productivity targets and the controlling and monitoring of productivity. The companies for which this is most important are ones that are not growing in size or are growing only slightly. It is precisely when one cannot get any larger that one has to get better. There has not, as yet, been any discernable limit to the improvement in productivity in the economy.

Growth has to start from market position

Any kind of growth, even the negative kind, has to be measured strictly by the market position of the company and of its business units. As well as productivity, the most important goal for a strong company is ongoing improvement in its market position. What one has to do is always to grow more quickly than the market or always to shrink less quickly than the market, or in other words always to be relatively better than the market.

The prerequisite for this is to know what is called the "relative market", or in other words the market in which one really has to compete. Defining the market is one of the more difficult tasks for a strategy, as anyone who deals with strategies will be well aware. This is the very area where the PIMS results have made some significant advances.

One of the reasons why it is important to know the relevant market is because this knowledge is one of the most important pieces of information that will protect one from being led astray by a mistaken understanding of growth. There are firms, such as local brewers of beer for example, that have an unassailable position in their long-standing market. However, when visions of growth seduce them into expanding beyond the boundaries of this market they run acceptable risks because when they get outside the relevant market they come up against competitors of superior strength.

Growth lives on innovation

A challenge that the management of growing companies faces is the need both to control the increases in size themselves and, at the same time, to manage innovations. The growth in markets is almost always fuelled by innovations. It is necessary to keep pace with these and if possible to be ahead of them. Managing both these things successfully calls for highly developed, professional management systems, i.e. regulation, control and communications systems. One advantage is that - thanks once again to the PIMS research - it is known with a fair degree of accuracy what the quantitative yardsticks are for a strategy for innovation that is likely to be successful.

Growth needs the right human resources policy

What is perhaps the greatest challenge is presented by the human resources. In a company that is growing vigorously the best people, who are generally young, are urgently needed and for this reason they change their positions so quickly that they hardly have time to pass any really meaningful probationary tests. They have to climb to the next level before they have shown any results in their previous post. The risks thus rise when more and more demanding posts are filled by people who can give less and less evidence of their ability to perform.

In companies that are not growing, the human resources problems are even more serious because the unavoidable stagnation in the company is the very reason why the key employees have to be given all the more demanding tasks and challenges if the company is to hold onto them. The best people are the very ones who know when they have to go. Under circumstances like these, an appeal to loyalty to the company is a waste of breath. The only way of solving the problem is by assigning major, wide-ranging tasks so that there will still be a link between the stagnation of the company and continuing personal development.

Managing complexity: the better way to success

In geometry, it is known that area increases as the square of circumference and that volume increase as the cube. Similar laws govern the growth of organizations. What has to be borne in mind here is not their geometrical properties but their complexity. Growing companies do not just become big; they also become complex, and they do so by the mathematical laws of combinatorial analysis which means, exponentially.

A typical example is a growth in turnover that is based not on an improvement in market position but on the size of the range of products and variants. If the growth rate of the range is higher than the growth rate of turnover, the consequences are inevitable: costs rise; the market position per sector becomes weaker; earning power collapses. There is no point in the usual sorts of cost-cutting schemes because the problem lies in the exponential growth in complexity and in the simultaneous exponential fall in the transparency of the business.

The art therefore lies in managing complexity. There are two ways of doing this: reducing complexity, which results in the loss of customers and market shares, or increasing complexity to take advantage of the opportunities that complexity offers. How it all works can be seen from cybernetics and bionics, because they learn from Nature how Nature does it. This is the very point that one of the hypotheses about the disappearance of the dinosaurs picks up on: the dinosaurs had become large but it may have been that their cybernetic systems, i.e. their control, regulating and communications systems - or in short their central nervous systems and sensory organs - had been left behind and were underdeveloped. They were thus unequal to the challenges that came with the changes in their environment.

In one of his books, the German biologist Karsten Bresch says something similar, namely that all higher attributes arise solely from greater complexity. The question is, in the end, a simple one: whoever or whatever has been equipped by evolution with a more powerful brain and nervous system has a better chance not only of surviving but also of getting so far ahead of its competitors that it may be impossible for the latter to catch up.

What does that mean in practice? It is true that a company that grows becomes bigger, but what it becomes above all is more complex. Growth, size and complexity can only be kept under control if all the control and regulating systems keep pace with them. This is a matter of control and communication, as the MIT mathematician Norbert Wiener explained in his book "Cybernetics", with which he founded modern-day cybernetics.

Control and communication are key terms in the cybernetics of complex systems. Complexity results in fresh demands, but also in opportunities for systems to be controlled and regulated and to evolve. The greater the complexity, the more do systems have to be transformed: from regulation to self-regulation, from organization to self-organization and from design to evolution. That is not something that happens all by itself.

Healthy growth should have strength and the ability to compete as its goals. These are in a sense a matter of skeleton and muscle. Growth however may not jeopardize the manageability of the company and should maintain and improve its flexibility, adaptability and speed of reaction. This is a question of the "nervous system" of the company, i.e. its cybernetics, its systems for mastering complexity.
This Article is authored / contributed by ▸ Albert Einstein who travels from Ulm, Germany. Albert is available for Professional Training Work both Virtually and In-Person. ▸ Enquire Now.

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