Posts Tagged ‘Ed Hess’
Monday, January 28th, 2013
 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.”
G rowth 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.”
Tags: Ed Hess, entrepreneurs, Grow to Greatness, job creation, private companies, Startups
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Friday, October 5th, 2012
 Have you ever watched a professional blackjack player in Las Vegas? They usually have a specific process they use to up their chances of winning big. First, they pick the right table. Then, they test the waters.
They make small bets to see where the game is going. As they watch the cards and learn more about the game and their opponents, they periodically increase their bets or they fold certain hands.
It all happens fast, and they understand that they’ll lose a lot of hands in this “testing the waters” phase of play. But the information they gain during the process allows them to increase their bets and win big later on.
It’s a gamble
Business growth, says Ed Hess, is a lot like playing blackjack. But unfortunately, he notes, most top-level CEOs don’t realize it.
“When it comes to growth, most managers, sadly, are like the little old lady with a cup of quarters playing the slots,” says Hess, coauthor along with Jeanne Liedtka of the new book The Physics of Business Growth: Mindsets, System, and Processes (Stanford University Press, 2012, ISBN: 978-0-8047753-4-2, $12.99, www.EDHLTD.com).
“They just pull the handle and hope for the best. Sure, they may spend millions of dollars on consultants trying to create the right strategies, but in most cases the results are anemic. Strategies by themselves are not enough. What we’ve learned about business growth in our research is that what many CEOs and leaders think they know about growth is wrong.”
How growth actually happens
In their new book, Hess and Liedtka present more than 17 years’ worth of research on how successful new growth actually happens in organizations. The Physics of Business Growth helps readers understand how to create growth in today’s business environment, providing them a roadmap and a set of practical tools to navigate its challenges.
The book helps readers create the right mindsets and an enabling internal system that aligns culture, structure, leadership behaviors, measurements, and rewards to drive the right growth behaviors. Just as importantly, they set forth proven growth opportunity identification, experimentation, and portfolio design processes.
It’s a quick and easy read by design, created for busy C-level executives to use as a how-to guide as they seek to infuse their organizations with an entrepreneurial spirit—“a small company soul in a large company body”—with a focus on organic growth.
The first thing top-level leaders need to understand about growth, note Hess and Liedtka, is that the only certainty about growth is its uncertainty. Growth takes people into unchartered waters, and the processes used for daily operational excellence do not work. Likewise, the management mindset to eliminate variance and to strive for standardization is counterproductive to growth and innovation.
VCs most comfortable taking the gamble
“Venture capitalists seem to be the most comfortable taking on the gambler mentality needed to grow successfully,” says Hess.
“They understand that the force at play here is uncertainty. They see themselves as managing portfolios of growth opportunities. They also know that their ability to predict at the early stages which of two ventures will succeed is poor. They do not attribute this to their personal failings; instead, they recognize that the inability to predict is a property of the uncertainty surrounding any new business.
“Like professional gamblers, they develop a set of practices that acknowledge this reality,” he adds. “They bet heavily on the individual leader of a new business and look for people with experience; they try to keep their bets small and affordable until they have better data; and they develop approaches that help them get in and out of new ventures intelligently and swiftly. Their goal, in other words, is to succeed—or fail fast and cheap.”
As you can see, new growth requires a different way of thinking and different processes than most managers use every day to run their daily business. Growth is a different game from operational excellence. To play the growth game well, one has to learn the rules of the game and use the proper tools.
Hess points out a few important factors about the growth gamble to keep in mind:
Growth, and particularly innovation, is a probability game. When large organizations pursue growth, their mindsets are often completely out of sync with the reality that guides professional gamblers and VCs.
Chances are that these organizations expect ten out of ten projects not only to win, but to win big. They demand that their managers and employees produce growth, inadvertently thwart their attempts, and uphold a system in which pulling the plug on a failed growth opportunity is a career-threatening act.
Would-be growth leaders in this environment are like professional gamblers who are unable to act independently but instead receive instructions from on high—from a source that has little information about what is happening this minute in this particular game. Not a formula likely to win in Vegas—or in business.
“The reality is it takes on order of magnitude about 1,000 growth ideas to produce 100 good growth experiments,” explains Hess. “And doing 100 growth experiments may produce 10 viable growth initiatives worth investing in. Growth is an iterative learning process characterized by detours, zigzags, and remakes.”
Growth is a learning process. Good growth companies understand the realities of growth. Growth requires the right mindset—a learning mindset—and the right processes designed to make small bets, learn critical information quickly, and then assess next steps.
“We call that process Learning Launches,” says Hess. “Not only is the right learning mindset needed, but also the right attitude is needed individually and organizationally about failure.
When you are exploring growth—when you are entering areas where you have not played before—by definition you will make mistakes and have failures. Remember, so long as you make small bets and use the right rigorous process, there is no real failure so long as you are learning.”
Growth can be messy and inefficient. Most companies can’t stomach the uncertainty that comes with growth. It violates their dominant no-variance operational mindset. Well, guess what—growth and innovation are high-variance processes by their nature.
If you do not accept that fact, then your growth initiatives will be limited to small incremental improvements, which at some point will not produce enough growth to keep your stakeholders happy.
“Operational excellence strives for 99 percent defect-free performance,” says Hess. “Contrast this to growth experimentation that can result in failure rates of 90 percent. In operational excellence environments, managers are rewarded for stamping out variance. Yet, in growth environments, variance is the norm.”
“Don’t be afraid to step up to the growth gaming table,” says Hess. “Pick the right table to play. Get in the game with a lot of small bets and learn. Upon learning, quickly decide whether to fold or double down on each hand.
“And if you fold, take that learning to the next hand. Having a growth mindset, using the right growth experimentation process, and having a culture that understands that managing growth and innovation initiatives is different from managing daily operational excellence is ‘table stakes’ for playing the business growth and innovation game.”
Tags: book, Ed Hess, gamble, mindsets, processes, system, The Physics of Business Growth
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Thursday, June 9th, 2011
 Brave entrepreneurial souls have shaped American enterprise, and today, they’re playing the very important role of helping to drive the nation’s economic recovery. And if you’re one of these brave souls—pouring your blood, sweat, and tears into running your own business— Professor Ed Hess stresses that there’s no time for rest. Once you’ve got your start-up off the ground, he says, the daunting task of growing your business to the next level must begin.
“Growing a business presents a whole new group of challenges for entrepreneurs,” says Hess, author of the new book Growing an Entrepreneurial Business: Concepts & Cases (Stanford University Press, 2011, ISBN: 978-0-8047714-1-2, $75.00, www.EDHLTD.com) and professor at the University of Virginia’s Darden Graduate School of Business.
“The good news is that most businesses experience the same or very similar challenges when it comes to growth. There is no need for any entrepreneur to reinvent the ‘growth wheel.’ You just have to be willing to learn from those who grew before you.”
Hess recently studied 54 high-growth entrepreneurial companies based in 23 different states, all of which were designated as successful growth companies by leading magazines or accounting firms. His research findings are the subject of an MBA course he teaches at the Darden Graduate School of Business and the subject ofGrowing an Entrepreneurial Business, which he wrote for entrepreneurs and students.
What sets successful entrepreneurs apart
The 54 companies in Hess’s study operated product and service businesses, had been in business on average 9.6 years, and had reached an average revenue level of $60 million with the range being from $5 million to $350 million.
Some of them, such as Eyebobs in Minneapolis, Trilogy Health Services in Kentucky, Defender Direct in Indianapolis, SecureWorks in Atlanta, and Mellace Family Brands in California, were well-known companies. The research was supplemented with case studies of other successful entrepreneurial growth companies.
““What I found was that these successful companies all faced very similar challenges when it came to growing,” says Hess. “But what sets them apart from those companies that didn’t survive or didn’t reach the same level of success is how they approached that growth. The companies in my study understood that growth is change and change is risky. Entrepreneurs who understand this and the challenges that come with it are the ones with the best chances for successful growth.”
The top nine growth challenges facing today’s entrepreneurs:
Getting overwhelmed by growth. Growth is change. Growth requires more processes, controls, and people. Too much growth too quickly can create financial, quality, and reputational risks that if not properly managed can lead to the demise of the business. Keeping tabs on all of these factors can easily overwhelm business owners. “Growth is like Mother Nature,” explains Hess. “She can be good or she can wreak havoc with hurricanes, earthquakes, and floods. To properly manage company growth, successful, experienced entrepreneurs recommend the ‘gas pedal’ approach—when you start to feel overwhelmed, let up on the gas to allow processes, controls, and people to catch up.”
Knowing when to say “no.” Most successful start-ups have a plethora of opportunities. The challenge is choosing the right ones. Good opportunities are those that will enhance your company’s strengths and result in a compelling customer value proposition.
“Opportunities that don’t fall into that category should be met with a ‘no, thank you,’” says Hess. “The problem is that too many entrepreneurs never learn to say ‘NO!’ In an effort to get their business off the ground and keep it up and running, they say ‘yes’ to everything. They end up trying to do too much for too many, which dilutes their focus and often the quality of their product or service.
Determining and having the discipline to maintain a narrow strategic focus is critical to success, and that will require that you turn down certain opportunities. Successful entrepreneurs often call it ‘sticking to your knitting.’”
Learning to effectively delegate. For a business to grow, the entrepreneur must grow. When growth begins, you’ll quickly find that you can do only so much and that you need help from others to properly serve customers. You 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.”
Transitioning from owner to leader. When you get to the point where you’re delegating tasks and relying on your employees to drive your business, you must also transition from thinking of yourself as just a business owner and start developing as a leader and coach. Evolving toward becoming a leader and coach is challenging, because both roles require emotional intelligence, people engagement, and the ability to relate to individuals in a way that they find meaningful.
“Coaching requires that time be spent getting to know people, listening, caring, understanding their emotional needs, and helping them grow,” explains Hess. “Coaching takes patience and a degree of personal emotional intimacy that many entrepreneurs are not able to achieve. It requires a continuation of the mind shift from ‘me, the entrepreneur’ and ‘my way’ to ‘it is really all about them.’”
Hiring smart. Hiring mistakes are costly, time consuming, and create quality and financial control risks for small businesses. When confronted with impending growth, entrepreneurs often panic and hire employees too quickly, making snap decisions based on little data.
“In my research, bad hiring practices often continued when entrepreneurs tried to hire managers who needed to have functional or technical experience,” notes Hess. “In many cases, the companies had to make multiple costly hires for the same position before finding someone with the right competencies who also fit the company culture.”
He adds, “Many of these entrepreneurs frequently stated that they should have ‘hired more slowly and fired more quickly.’ They made much better hiring decisions when they learned to hire against a competencies and cultural scorecard; conduct multiple interviews; have multiple people interview prospects; hire on a trial basis; establish mentors for new employees; develop a good on-boarding process; and encourage good employees to make hiring referrals.”
Managing cash flow. Many times entrepreneurs get overly engaged in the joy of growth and lose sight of the need to manage cash on a daily basis. 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. Thus, there is often a mismatch between expenditures and receipts.
“This might sound simple, but it can be a major issue if not handled properly,” notes Hess. “Entrepreneurs have to understand that they may not be able to afford all the available growth. The amount of cash available for investment can limit growth, especially in today’s economy when many small businesses can’t get loans or credit lines. And finally, I can’t help but stress the importance of cautiously managing your checkbooks, credit cards, and online accounts. If you do decide to delegate this task, choose the employee you trust the most and set prescribed monetary limits. Check your payments and accounts every day, because frauds do occur.”
Spending too much time putting out fires. A high-growth environment is hectic, sometimes chaotic, with multiple mistakes needing to be corrected almost every day. “Entrepreneurs can easily get sucked into playing the role of ‘firefighter,’” says Hess, “spending their days putting out fires. The problem with that is that growth requires the entrepreneur to plan for more growth, to put in place new and better processes, and to be constantly upgrading processes and resetting priorities.
“It is very difficult to find the time to do all that when your time is eaten up mediating employee conflicts, correcting inventory orders, calming angry customers, and so on. Entrepreneurs in my study found that they had to be disciplined in getting away from their businesses for short periods of time to think and plan. They needed ‘firehouse’ time away from the daily ‘fires’ that pop up when running a business.”
Creating a high-performance “family.” Entrepreneurs often struggle with creating a high-performance “family” or team environment. The challenge, of course, arises when someone in the “family” just isn’t meeting expectations and has to be terminated because they couldn’t grow their skills as the business grew. “Here entrepreneurs face an uphill battle in balancing loyalty and changing performance needs,” notes Hess. “Let someone go who everyone else at the company loves and you’ve created morale and emotional issues.
“Let a poor performer stay and you’ve created morale and emotional issues. See the challenge? The entrepreneurs I researched learned that you can have a ‘family’-like culture and high performance by having clear job expectations; a fair, transparent, and frequent feedback process; and by giving people a fair chance to improve or to step into a role that they could do well.”
Understanding that 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,” says Hess. “And as you grow, the solutions that worked at one level will most likely not work at the next. 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.”
Success means learning and adapting continually
He continues, “Successful entrepreneurs and their employees are open to learning and adapting in an incremental, iterative, and experimental fashion. The hard truth is that growing businesses generally do not experience much sameness or predictability until they become quite large—for example, larger than $100 million in revenue—but learn to manage these changes properly, and you can keep the ship pointed in the right direction.”
“Growing a business is an evolutionary process,” says Hess. “Growth is messy. Growth is change. Growth has spurts, detours, downturns, and spikes. Growth requires constant learning and improvement. And if not well planned and managed, it can outstrip the capabilities of companies.
“These are important points that must be heeded,” concludes Hess. “Growth should be a strategic decision made only after the risks of growing and not growing have been assessed. My advice is that rather than focus on growing for growth’s sake, base your goals around how you can constantly improve your business. When you do this, you will be able to meet the challenges of business growth head on and with great success.”
Tags: Atlanta, Best Practices, business advice for entrepreneurs, Ed Hess, effective delegation, Eyebobs, Growing an Entrepreneurial Business: Concepts & Cases, growth challenges for entrepereneurs, hiring smart, knowing when to say no, KT, managing cashflow, MN, SecureWorks, transition from owner to leader, Trilogy Health Services
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