We hear a lot about job creation and how critical it is to our nation’s economic health and future. But who are America’s job creators? Are they the nation’s richest individuals? Are they big public companies? Hot start-ups?
The answer, says business growth expert Professor Ed Hess, is none of the above. He points to new research sponsored by the Small Business Administration—“Accelerating Job Creation in America: The Promise of High-Impact Companies” by Spencer L. Tracy, Jr.—showing that almost all net U.S. job creation in recent years came from existing private, high-growth companies.
“If we are really going to get serious about job creation, policymakers and communities should focus more on nurturing existing private, high-growth businesses,” says Hess, the author of Grow to Greatness: Smart Growth for Entrepreneurial Businesses (Stanford University Press, 2012, ISBN: 978-0-8047753-4-2, $29.95, www.EDHLTD.com).
Focus on an important issue: Growth
“That means doing what’s necessary to create a healthy small business environment, such as encouraging investment in private business through tax incentives, encouraging hiring inside the U.S., making credit readily available, and so forth,” he adds. “But it also means zeroing in on a very important issue that often gets overlooked: growth.”
To this end, Hess thinks, state governments, the Small Business Administration, chambers of commerce, economic development agencies, and entrepreneurship centers at colleges and universities should increase their focus on educating existing private business owners on how to manage both the risks and the challenges presented by growth.
Challenges facing the nation’s real job creators
Professor Hess led a study that looked at 54 high-growth private businesses in 23 different states, included both service and product businesses having an average age of 9.6 years and an average revenue of approximately $60 million with the range being $5 million to $350 million.
The key findings of that study led Hess to write two books: Growing an Entrepreneurial Business: Concepts & Cases, a case-textbook for colleges and universities, and the aforementioned Grow to Greatness. Both were peer-reviewed and published by Stanford University Press. The key concepts in those books are the subject matter of this free course.
So, what are the big challenges facing the nation’s real job creators? Take a look at a few facts Hess thinks every company should know about business growth:
Too often, businesses grow themselves into trouble. We know that many successful small businesses implode when they attempt to grow too much too quickly. Growth can outstrip people, processes, and controls.
“Cash flow management during growth periods is critical, because in many cases growth requires investments in people, technology, supplies, etc., ahead of the receipt of cash from customers,” says Hess.
“Entrepreneurs have to understand that they may not be able to afford all the available growth. Instead of following the ‘grow or die’ myth, a much better axiom to follow is ‘improve or die.’ As a business grows, in most cases entrepreneurs have to scale people, processes, and controls. That means not only more but better people, processes, and controls. A focus on improvement is critical because one must maintain high quality standards and financial controls in the haste of growth.”
Successful entrepreneurs know when to release the growth “gas pedal.” In his research, Hess found that every private business faces the same challenges as it attempts to grow. He found that successful entrepreneurs learned to pace their growth.
“They use what I call the ‘gas pedal’ approach to growth,” notes Hess.
“Letting up on the growth pedal to give their people, processes, and controls time to catch up. We also found that strategic focus was critical to safely growing. Focusing on doing one thing that lots of customers needed better than the competition equated to big opportunities.”
Growth means learning to effectively delegate. For a business to grow, the entrepreneur must grow also. When growth begins, entrepreneurs quickly find that they can do only so much and that they need help from others to properly serve customers. They must evolve from being a doer to a manager of employees and then eventually to a manager of managers (a leader).
“This may sound easy but it isn’t,” says Hess.
“Most entrepreneurs don’t like to give up control of any aspect of their business. Facing the fact that they can’t do it all on their own and that they must learn to rely on others to complete certain tasks (and not necessarily exactly how they themselves would do them) can be a very hard reality to swallow.”
Upgrading never ends. The people, processes, structure, and controls needed to manage a business with $1 million of revenue generally do not work for a business with $10 million of revenue. Entrepreneurs often learn the hard way that growth means continual change.
“As you grow, the solutions that worked at one level will most likely not work at the next,” says Hess.
“Inflection points for the companies I’ve studied occurred frequently when they expanded to 10, 25, 50, and 100 employees. When these changes take place, entrepreneurs often realize their hope of having a smooth-running machine is an elusive dream. Successful entrepreneurs and their employees are open to learning and adapting in an incremental, iterative, and experimental fashion.”
Growth creates business risks that must be managed. Growth stresses people, processes, quality controls, and financial controls. It can dilute a business’s culture and customer value proposition and put the business in a different competitive space. Understanding these risks is critical to managing the pace of growth and preventing growth from overwhelming the business.
“To get a better handle on growth risks, consider how your strategic space will change as you get bigger,” says Hess. “You will probably enter a new competitive space, facing bigger and better competitors than you previously faced. Those new competitors may be better capitalized than you and be able to engage in price competition, driving down your margins.
“The good news is that you can minimize this and other big risks by planning for growth, pacing growth, and prioritizing what controls and processes you need to put in place prior to taking on much growth,” he adds. “I call it ‘what can go wrong’ thinking, and entrepreneurs can’t indulge in too much of it.”