For companies looking to grow, there’s hardly a better adviser than Verne Harnish, founder and CEO of Gazelles, a global executive education and coaching company with partners all over the world. getAbstract had the opportunity to sit down and have a chat with the scale-up guru. Whether your company is a startup or an established business, we’re sure that the lessons from his three decades of experience will help you scale up.
getAbstract: When new clients come to you, what do they usually want to achieve?
Verne Harnish: What they’re really trying to get their arms around is the chaos that comes with trying to scale up something new – whether it’s a start-up that’s now ready to move forward or it’s a new venture inside a large company. When you scale up there’s a period of rapid growth until you reach maturity. So, our tools are designed to help on the steep part of that S-curve.
getAbstract: What’s the first step that a company must take during that growth period?
Verne Harnish: Our framework is built around four key decisions that you have to get right. The decisions are around people, strategy, execution and cash. The first thing we do is look at those four areas and ask, where is the immediate constraint in continuing to move up the S-Curve?
getAbstract: And how do you figure that out exactly?
Verne Harnish: We have a look at all those areas and ask a few questions:
- People: Are you missing a critical hire? For example, when Michael Dell took over Dell in 2007, he realized that the company had gone two years without a Chief Marketing Officer. So, he recruited Mark Jarvis from Oracle. He also needed someone to focus on customer service, so he made internal changes and moved Dick Hunter to that position. Michael increased revenue and helped Dell get back up to a 20% growth rate over the next 18 months. It’s not the only reason, but filling those gaps at the senior level of the organization was critical.
- Strategy: Are you focused? When you begin to scale, it’s easy to get defocused. You need to do the opposite and focus on the customers that you go after, and the products and services that you’re providing. You have to make sure that you nail down what Jeffrey Moore calls a 100% solution. We tend to get an 80% solution to the marketplace and we don’t close the back door completely. That’s where competition can sneak in.
- Execution: How’s your communication? Once you’ve nailed down the strategy and you have the right people on the team, then it’s time to execute. The key is to move faster than the competition, and that has to do with your communication rhythms. The number one challenge in any organization with more than two people is communication. Communication is the key to being the leader in your field. The company that has an advantage in the marketplace is not the one that’s first to start up, it’s the one that’s first to scale up.
- Cash: Do you have cash? Even new business ventures inside large companies are usually starved for cash. We’re big fans of John Mullins at London Business School who wrote a book called the Customer Funded Business. He says that the best place to get the funding that’s needed to scale up is from the customers themselves. For example, think about Elon Musk. He needed to build a $4 billion factory. So, what did he do? He pre-sold 400,000 cars to customers for a $1,000 deposit and generated $4 billion in free cash at zero interest and no equity.
getAbstract: What would you say is the biggest challenge when scaling up?
Verne Harnish: The biggest challenge is that we tend to throw people at the problem. Often, companies hire more people when the problem lies somewhere else. The number that suffers is revenue or profit per employee. In fact, that’s an interesting statistic. In the United States, the average revenue per employee of the Fortune 500 is over $400,000, whereas the average revenue per employee of a mid-sized company is less than a third of that, $126,000.
You’d think that small to mid-size companies are more efficient than the Fortune 500, but they’re not. And that’s because when companies are scaling up, they don’t always take time to organize properly and re-design – or design – flow and process. Companies end up wasting a lot of money. So, generally what we help companies do in the first 12 months is at least double their operating cash flow so that they can begin to grow on their own internally generated cash, which is critical.
getAbstract: And what about pricing, how does that come into play when scaling up?
Verne Harnish: That’s another hot button we deal with. Most of the leaders of companies grew up when it was all about the supply chain side of the business – how can we do it better, faster, cheaper? But all the unicorns of the 21st century understand the demand side of business as well as – or better than – the supply side. They understand the customer infinitely better than most companies out there. They understand that customers make emotional decisions, not logical ones, and they use that information to adjust pricing.
About Verne Harnish:
Verne Harnish is founder and CEO of Gazelles, a global executive education and coaching company with over 210 partners on six continents. Verne has spent three decades helping companies scale up. He’s the author of Scaling up and Mastering the Rockefeller Habits.