Everyone in the management arena and even those out of it, have, at some point or the other, come across the story of Henry Ford. Ford’s rise, decline and rebirth is often referred whenever there is a talk of growth and mismanagement. Starting from scratch in 1905 to becoming the world’s largest and most profitable manufacturing enterprise in just 15 years is no small feat by any measure. From Ford’s seemingly impregnable perch as a market leader to falling into shambles in 1927 until it’s revival in 1944 by Henry Ford II makes it much more than just a dramatic story of personal success and failure. It’s a true life experiment in mismanagement that tested many management style hypothesis, completely disproving that a business can grow and thrive on ‘owner’ and ‘helper’ model instead of needing managers and management (as a function at all levels) beyond a certain point.
Management in this context, and in-fact in any context, is not about ownership, rank, designation, position or power. It’s management as a function, a discipline, a task to be done. Managers, in this reference are then the ‘people’ who perform these functions and is again not about a designation or rank. Ford Sr. had a strong conviction that the ‘owner’ and ‘helper’ model is perfect and he did not need managers and management. No actions, decisions could be taken without his approval. His uncompromising attitude towards this conviction led to the decline of his empire. Ford lost money every year for twenty years. Of course, he had all that money to lose in the first place. Any other company would have collapsed much earlier.
In 1944 his grandson, Henry Ford II, took control at a ripe age of 26 with no training and experience, brought in a completely new management team and saved the company. He saw what Ford Senior has failed to see. He understood that a large, complex enterprise cannot evolve ‘organically’ from a small business. Growth is more than just a change in size. Complexity comes as a package deal with growth requiring different structures, different principles, in short, requiring managers and management.
In early 1920s General Motors was a weak number two crushed under heavy competition by Ford. Alfred P Sloan Jr. was then newly appointed as the president of GM. He transformed the disorganised GM into a powerful management team that made GM the leader in American automobile industry in just five years and has remained a leader ever since.
Peter F. Drucker has very aptly put down the comparison of business run by Ford Sr. and that by General Motors with two organisms. The insect, which is held together by a tough hard skin and a vertebrate animal which has a skeleton. Biologists have showed that insects can only reach a certain size and complexity. Beyond this, an animal needs to have a skeleton. However the skeleton has not genetically evolved from the hard skin of insects. The skeleton is a different organ with different antecedents. “Similarly management (the skeleton) becomes necessary when business reaches a certain size and complexity. But management, while it replaces the ‘hard skin’ structure of the owner, is not it’s successor. It is, rather, it’s replacement.”
Between 2005 and 2007, Starbucks aggressively opened new store locations and made several operational changes that diluted its customer value proposition, diluted its high employee engagement culture, violated its real estate site selection controls, and weakened its high value-added “experience” business model. Toyota’s quality issues leading to multiple recalls resulted from too much growth too quickly.
Strategy and Management
These may sound like the whines of a ‘nay sayer’ or a devil’s advocate but that is not the intent here. The point here is about planning the growth in a manner that it gives time and breathing space for people and processes to evolve as the business grows. Every business has limited resources and time. For any growth strategy to be successful, businesses must prioritise their focus, allow time and make deliberate efforts to overcome these resource constraints first: be it finances, process limitations or people capability constraints.
It is logical to base a growth strategy on assumptions of emerging market trends, global socio-economic scenario, market growth projections. In fact a business must constantly study the external environment and plan it’s growth to leverage the markets. Yet at the same time it is very important for a business to be completely aware of it’s own capacities, capabilities and limitations. It is prudent for a business to base it’s growth strategy carefully considering these factors. Any company that takes on a growth initiative ignoring organisational capabilities and assumes that the organisation will evolve organically, is on a path of self-destruction.
Corporations of any size can fail but the most significant cause of failure is not strategy, but the incapacity to execute a balanced strategy. Unless a business is able to translate strategy to actionable and measurable objectives that can be executed at all levels of the organisation, it would become increasingly difficult to maintain the edge, remain competitive and attain sustainable growth.
Value of a company’s human capital is indisputably the most important factor in determining the extent to which a growth initiative will succeed. Human capital refers to the stock of competencies, knowledge, habits, social and personality attributes, that together constitute the ability to perform work so as to produce economic value. In short, organisational capability.
Financial institutions are more than willing to lend money to businesses and businesses have enough expertise available to project a lucrative ROI on expansion projects but finally it is the management of the initiative and value of human capital that decides the success or failure of the process. Yet no financial statement considers the value of human capital needed for success.
Management is acyclic behaviour. It is the art knowing what to deploy in both good times and rough ones. Scrambling for answers when the chips are down, is a clear indication that the business failed in aspects of strategising, managing and direction setting even while they might have been monitoring and measuring.
The major causes of such a paradox are:
- Mistakenly viewing strategy as operational effectiveness
- Mistakenly assuming that strategy and actions in the organisation are always aligned
Often the root cause of the paradox is strategy formulation with little or no regard to the strength and weaknesses in capability and competence existing within the organization. Rather than creating a blind strategy, it would be prudent for businesses to first create the capability, competence and capacity for change and then take on the challenge of strategy formulation when the right operational framework is in place to execute the strategy.
Pushed by the economic drivers and market forces or more dangerously, simply assuming everything will fall in place, businesses try to do this backwards. A blind strategy is formulated and then there is the rush to create the operational framework to execute the strategy. It is not unusual then to find that the organisation neither has the capability nor the competence to achieve the strategic objectives and thus ensues the act of hiring and firing as there is no time left now to assess, train and build capability with the existing human resources.
Capacity for Change
Growth is change and change neither happens organically nor is easy to come by. There are limits to an individual’s and an organization’s ability to process change. Growth requires the business to install more processes, procedures, controls, and measurement systems. While it is easy to define and install such processes, controls and measurement systems, the real challenge lies in implementing and institutionalising them. Having the right operational framework and talent is a prerequisite for institutionalising a change.
Productivity is an important metrics, specially for manufacturing companies. Capacity utilisation is a planned, carefully executed strategy that ensures maximum utilisation of the installed production capacity. The right growth strategy for a manufacturing company would be reaching optimum productivity with installed capacity before even thinking about increasing production capacity. A garment production unit with a capacity to produce 1000 garments a day producing only 600 would do better if it focuses on managing its production to reach 80-90% efficiency and sustain it before even considering a capital expenditure to increase production capacity.
Even this seemingly small increase in productivity by 20-30% requires change. Change in ways how production is managed, change in management of people and processes, creating acceptance and commitment towards the change, and maybe taking some drastic decisions. More important than increasing the productivity is sustaining it which can only happen when there is acceptance of the change and commitment towards it, purely a management function delivered by the manager and executed by the people.
Processes are the “how” part of doing business. As a business grows, the owner loses the ability to be hands-on with all aspects of the business. There is simply too much to do. This is where the ‘owner’ and ‘helper’ model fails. So, the challenge is for the owner to find the right people who will do the tasks as he would like them done. In other words, a transition to managers and management becomes imperative. Unless the company has the right operational framework and systems in place to attract, grow, nurture and retain the right talent, change management gets that much more difficult and the growth is more likely to be regressive than progressive.
Brand image is a deliverable of stakeholder experience with the company. It may not be overtly apparent, yet the satisfaction quotient of a business’s customers, vendors and suppliers, employees and investors has a significant impact on a business’s growth and sustainability in the long run. It would be a fallacy for a business to think it can be emancipated of it’s responsibilities towards it’s stakeholders.
A mismanaged growth initiative can stress a company’s relationships with stake holders, both internal and external. Stressed finances not only put the existing business in peril, it is usually the primary cause of loss of image and market reputation. Starved finances trigger an avalanche of negativity against the business as the vendors, suppliers and employees are denied timely compensation. Slippage in delivery schedules earns the wrath of customers. Under dire circumstances it is not unusual for the company to be facing a drain of talent and customers.
At the end of 2012, Vijay Mallya’s King Fisher Airlines crumbled under a debt or Rs 7500 crores in just about 7 years after the maiden KFA flight took off. The employees have remained unpaid for 23 months, 15 of it’s aircrafts have been re-possessed by banks for non-payment of loans and the company is facing a myriad of legal issues. The internet today has thousands twitter accounts, Facebook pages, blogs and scores of digital news articles with negative sentiments about KFA.
Any negative impact on stakeholders leads to a silent but sure erosion of brand image. While it takes ages to build a reputation, ironically, it does not take much to lose it. If workforce turnover increases, businesses suddenly start facing a dearth of talent to hire as they begin to lose the favours of headhunters and referral hiring. Regular vendors and suppliers either take a step back forcing the business to identify new ones or they put down revised operating terms. Either can increase per unit cost of production and toss the company in a different competitive space altogether. The way a company is managing it’s financials becomes very important during implementation of a growth strategy. Cost of finance per unit produced can have a significant impact on company’s competitiveness.
The Tail Spin
Overstressed financial controls is the first impact of mismanaged growth unless the business has overflowing coffers like Ford had, to absorb the impact and come out of a tail spin. Ask any pilot about tail spin and he will tell you that no pilot ever wants to get into one for the simple reason that it is nearly impossible for an aircraft to recover from it. A tail spin almost always results in a crash. While Ford was able to avoid getting into a tail spin because of its financial strength yet it has been unable regain it’s market leader status ever since.
This is the era of global competition. Unless the company has a very unique, monopolistic offering, the profit margins usually run very thin. Some businesses even to go the extent of pushing their working capital into an expansion plan. This is nothing short of having a death wish. Loss of working capital is the deadliest sin of a growth intention. Converting working capital into capital investment for growth would require the business to borrow money to sustain even it’s existing business. Cost of finance spirals when this borrowing is added to the borrowing required for expansion. It is prudent for a business to carefully evaluate the cost of finance for a growth initiative and impact on product cost.
Customer value proposition dilutes if your value offering becomes unsuitable for the customer. This could translate into losing partial or total loss of business from the customers and losing them to your competition. Conversely the business can choose to maintain its customer value proposition and retain them which can only happen by absorbing a loss per sale.
This has been more or less the story of King Fisher Airlines. The liquor baron Vijay Mallya set up KFA in 2003 and went public in 2006. Competition was ripe over Indian skies during this period with multiple airlines making a foray with no-frills, low cost strategy. Alex Wilcox, CEO of Kingfisher, said the airline would not adopt the low-cost, no-frills model but chart the middle course. KFA was banking on the assumption that the services offered by them would have a perceived value with it’s prospective customer segment to justify the middle course strategy. The company also worked quickly to increase passenger capacity by adding more aircrafts to the fleet. In 2005 the airlines ordered five A350-800s and five A330-200s for over $3 billion. In June 2007 KFA acquired the crisis ridden Air Deccan for Rs 300 crores taking it’s fleet size to 71 aircrafts.
In a cost sensitive market, the middle course strategy did not work for KFA and in fact lost it’s customer value proposition. The airlines hasn’t seen a single year of profit since it got listed in 2006. KFA accumulated debts to the tune of 7500 crores through continued losses and rapid, unplanned expansion. By 2012 company had no working capital to continue operations or even pay it’s employees. In just 6 years, KFA has been blown out of the skies, not so much by competition but due to the lack of a balanced strategy and mismanaged growth.
KFA assumed too much, expanded too much too soon, lost it’s working capital to remain operational and failed to align it’s strategy with consumer sentiments.
KFA went into a tail spin. If the business is not earning any revenue through sales, the negative cash flow aggravates the need for more borrowing which in turn escalates the costs, in turn increasing the losses further.
The Gas Pedal Approach
When not approached carefully, growth can destroy business value as it outstrips a company’s managerial capacity, processes, quality, and financial controls, or substantially dilutes customer value propositions. Unplanned growth can stress a company’s resources, finances, employee relationships, vendor relationships, supply chain, marketing efforts, and move the business into a different competitive space. At the wrong time, or with the wrong people, or with the wrong approach, growth may hurt the company rather than improve it. It can even put a question mark on business’s sustainability itself.
Growing bigger…may actually put a business, out of business!!
Growth creates business risks that must be managed. Understanding these risks is critical to managing the pace of growth and preventing growth from overwhelming the business. Edward D. Hess suggests the “gas pedal” approach to managing growth. Let up on the growth gas pedal as needed to give people, processes, and controls time to catch up. Keeping the foot on the gas pedal without giving time for the resources to evolve results into unmanageable situations.
Growth needs to be treated with respect. The business leadership need to understand when the ‘owner’ and ‘helper’ model has become defunct and the time has come to transition from a ‘Hard Skin’ to an evolved business model with a ‘skeleton’ of managers and management to deal with the complexities of a growing business. Decentralisation, empowerment, autonomy and self managed teams are the approaches to sustained growth, institutionalisation of processes, control and measures that drive efficiency. Right leadership at all levels is necessary for creating a culture where the organisation has the human capital capable of accepting and adapting to change quickly.
The mantra for success is easy and requires:
- A complete understanding of the organisational capabilities
- Creating the right operational framework and building capability for change first
- Choosing a pace that will allow people, processes and controls to evolve
- Maintaining customer value proposition
- Continued delivery of value to stakeholders
A growth strategy implemented with the knowledge that an organisation can never evolve organically and with due consideration to the factors mentioned above can exceed expectations and propel a business to new heights with sustainability and resilience.