Scaling Up

By Verne Harnish and the team at Scaling Up

 

 

Introduction

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In the introduction to this book, the authors – Verne Harnish and the team at Scaling Up – describe it as Rockefeller Habits 2.0. The original book, Mastering the Rockefeller Habits, was published in 2001 and Scaling Up is a 2014 revised version designed to make the contents even more practical, and therefore easier for the reader to put into practice.     

 

They write: If you’ve not read Mastering the Rockefeller Habits, you can skip that book. If you have read it, here’s what’s new:

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1. Scaling Up is organised around the 4 Decisions a leader must address: People, Strategy, Execution, and Cash. This structure provides you with a more comprehensive look into the issues you face in growing a business (75% of it is new material).

2. Our One-Page Strategic Plan has been updated extensively and is supported by a more robust strategic thinking tool called the 7 Strata of Strategy. This tool will help you craft an industry-dominating strategy.

3. There are six new one-page tools, including a simplified Vision Summary document that will make it easier to communicate the vision of your organisation to employees and others.

4. We moved the practical examples, gleaned from more than 50 interviews with CEOs using our tools, from the appendix (no one reads an appendix!) and placed them throughout the main chapters.

5. We share our take on why certain techniques – like the daily huddle – falter. This will save you time (and frustration) in implementing the Rockefeller Habits.

 

Mastering the Rockefeller Habits has helped tens of thousands of leaders of growing firms. We hope you find Scaling Up to be an even more practical resource.

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My Top 3 Takes from the Summary

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• There are 4 Decisions a leader must address. These revolve around People, Strategy, Execution, and Cash.

• Scaling up a business is like climbing a mountain

• Routine sets you free. Goals without routines are wishes; routines without goals are aimless. The most successful business leaders have a clear vision and the disciplines (routines) to make it a reality.

 

 

How a Few Companies Make It… and Why the Rest Don’t.

 

The book begins with an overview of the contents, and it also contains a ‘warning’ in which they write: This overview contains a lot of lists to keep it concise – you’ll be drinking from a fire hose! But it will prep you for the rest of the book where the ideas will be served up in more bite-sized pieces.

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The authors state that most businesses follow an S-shaped growth curve, describing those in the start-up phase as ‘mice’, those in the scale up phase as ‘gazelles’, and then those stalling or failing to scale as ‘elephants’. The key to scaling successfully revolves around four leadership decisions: People, Strategy, Execution, and Cash. They write: “How do we scale up the business?” is a question we’ve heard from countless leaders over the years, prompting the name and focus of this book. “How to survive the process” with your sanity and relationships intact is the second.   

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Four Fundamentals of Scaling Up

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• In leading People, take a page from parenting: Establish a handful of rules, repeat yourself a lot, and act consistently with those rules. This is the role and power of Core Values. If discovered and used effectively, these values guide all the relationship decisions and systems in the company.

• In setting Strategy, follow the definition from the great business strategist Gary Hamel. You don’t have a real strategy unless is passes two tests: First, what you’re planning to do really matters to enough people; and second, it differentiates you from your competition.

• In driving Execution, implement three key habits: Set a handful of Priorities (the fewer the better); gather quantitative and qualitative Data daily and review weekly to guide decisions; and establish an effective daily, weekly, monthly, quarterly, and annual meeting Rhythm to keep everyone in the loop. Those who pulse faster, grow faster.

• In managing Cash, don’t run out of it! This means paying as much attention to how every decision affects cash flow as you would to revenue and profitability.

 

With these fundamentals in mind, you’re ready to start climbing.

 

 

Climbing Everest

 

Scaling up a business is like climbing a mountain. To use a simple analogy, many people dream of summiting Mount Everest (or its equivalent in their life). Those who do it create a plan. Prepared with a set of inviolable rules and a passion for the journey, they head toward the summit. Along the way, they aim for a series of camps: intermediate waypoints normally marking significant changes in terrain. Then it’s a matter of focusing on the next day and, more important, the first and subsequent steps, making adjustments along the way as the mountain conditions dictate. Those who have made such personal journeys report that it’s ultimately about staying acutely aware as you push to take just one more calculated step.

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It's the same for an organization. Guided by a set of Core Values and a purpose, it chooses a Big, Hairy Audacious Goal (BHAG – a registered trademark of Jim Collins and Jerry Porras) to achieve in the next 10 to 25 years. To break up the journey, the leadership team sets a series of three- to five-year targets divided up into annual goals. These are further broken down into specific actionable steps the business takes over the next few weeks or months, adjusting tactics as the market conditions dictate. In the end, it’s about keeping everyone focused on the summit (BHAG) and then deciding the appropriate next step (quarterly Priority) while respecting the rules that keep you from being swept off the mountain (Values) – keeping in mind Bill Gates’ note that “most people overestimate what they can do in one year and underestimate what they can do in ten years.”

 

Everything in between this quarter and the next 10 to 25 years is a WAG: a wild-ankle guess! There are no straight lines in nature or business. As a winding river must follow the contours of the landscape on its way to the ocean, a business must navigate the undulations of the marketplace on the way to its Everest. The key is keeping your eye on the prize and adjusting course accordingly.

 

The authors comment that a key driving principle throughout every methodology and tool shared in the book is “routine sets you free.” They describe routines as habits, and these habits help you climb. In the same way that setting the goal of losing weight requires a change in daily and weekly routines if it’s to be achieved, a business goal without routine is destined to remain nothing more than wishful thinking. They write: Goals without routines are wishes; routines without goals are aimless. The most successful business leaders have a clear vision and the disciplines (routines) to make it a reality.

 

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Key Questions

 

They state: Much of our work is helping leadership teams formulate the right questions. Once they get the questions right, the answers tend to appear. Each of the 4 Decisions – People, Strategy, Execution, and Cash – is anchored by an overarching Key Question.

 

People

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​Key Question: Are the stakeholders (employees, customers, shareholders) happy and engaged in the business; and would you “rehire” all of them?

 

Do you have the “right people doing the right things right” inside the organization? Then you need to evaluate all the key relationships surrounding the business. Would you keep all your existing customers? Are you happy with your investors/bank? Are your vendors supporting you properly? Are your advisors – accountants, lawyers, consultants, and coaches – the best for the size of the organization and future plans? The toughest decisions to make are when the company has outgrown some of these relationships and you need to make changes.

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Strategy

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Key Question: Can you state your firm’s strategy simply – and is it driving sustainable growth in revenue and gross margins?

 

The 7 Strata of Strategy: This tool represents the seven components (stratum) of a robust, yet simply stated, strategy. It’s designed to provide the kind of differentiation and barriers that allow you to dominate your niche in the marketplace.

 

The seven components:

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1. What word(s) do you own in the minds of your targeted customers (e.g., Google owns “search”)?

2. Who are your core customers, what three Brand Promises are you making them (e.g., Southwest Airlines promises Low Fares, Lots of Flights, Lots of Fun), and how do you know you are keeping these promises?

3. What is your Brand Promise Guarantee (e.g., Oracle has been advertising the chance to win $10 million if its Exadata servers don’t outperform the competition  by a factor of five)?

4. What is your one-PHRASE Strategy that likely upsets customers (Apple’s “closed system”) but is key to making a ton of money and blocking your competition?

5. What are the three to five Activities that fit Harvard strategist Michael Porter’s definition of the essence of differentiation (e.g., IKEA’s furniture needs assembly)?

6. What is your X-Factor – a 10 times to 100 times underlying advantage over the competition – that completely wipes out any and all rivals?

7. What are your Profit per X (economic driver) and BHAG for the company. These come straight from Jim Collins.  

 

 

Execution

 

Key Question: Are all processes running without drama and driving industry-leading profitability?

 

You know you have execution issues if three things exist:

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1. There is needless drama in the organization (e.g., something shipped out late; the invoice was wrong; someone missed a meeting; etc.).

2. Everyone seems to be working more hours, spinning his wheels, or spending too much time fixing things that should have been done right first time.

3. Most important, the company is generating less than three times industry average profitability.

 

Warning: Companies can get by with sloppy execution if they have a killer strategy or highly dedicated people willing to work 18-hour days, eight days per week to cover up all the slop. Just recognize you’re wasting a lot of profitability and time (i.e., you’ll burn both cash and people in the process!)

 

 

Cash

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Key Question: Do you have consistent sources of cash, ideally generated internally, to fuel the growth of your business?

 

Growth sucks cash. This is the first law of entrepreneurial gravity. And nothing ages a CEO and his or her team faster than being short of cash. Yet many company leaders pay more attention to revenue and profit than they do to cash when it comes to structuring deals with suppliers, customers, employees (think bonus plans), or investors/banks. And when they receive their monthly financial statements, the cash flow statement is either non-existent or ignored. 

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The Power of One: The 7 main financial levers available to managers to improve cash and returns in the business are:

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1. Price: You can increase the price of your goods and services.

2. Volume: You can sell more units at the same price.

3. Costs of goods sold/direct costs: You can reduce the price you pay for your raw materials and direct labor.

4. Operating expenses: You can reduce your operating costs.

5. Accounts receivable: You can collect from your debtors faster.

6. Inventory/ WIP (work in progress): You can reduce the amount of stock you have on hand.

7. Accounts payable. You can slow down the payment of creditors.

 

The goal is to reverse the first law of entrepreneurial gravity and develop a viable business model in which the faster you grow, the more cash you generate – through larger deposits, faster collections, shorter sales and delivery cycles, etc. Then you’ve built a company that can self-fund its own growth.

 

 

Conclusion

 

The authors share their 4D Framework for growth in firms, stating that this framework evolved from an Albert Einstein quote: “Everything should be made as simple as possible, but not simpler.” In this book, the simple but robust tools and techniques needed to scale up  successfully are set out clearly and concisely, making it possible for leaders to “get the job done.”

 

 

Highlights

 

The contents are presented in a highly readable way with lots of case studies to help hammer home key learnings. The authors note that the successful business leaders used as examples share a common habit, and they write: All these great biz leaders know one thing – nothing interesting can come out of your brain that you don’t put in first. Having a natural curiosity and thirst for learning separates the good from the great in our experience. Happy reading!

 

 

Bio of the Author

 

Verne Harnish is founder of the world-renowned Entrepreneurs’ Organization (EO), and founder and CEO of Scaling Up, a global executive education and coaching company with over 200 partners on six continents.

Scaling Up by Verne Harnish, 2014, ISBN: 978-0-986-01952-4 is available to buy at Amazon.