Three Strategies for Managing Fast Growth

Many companies approach growth management with no strategy other than to do what they did when they were new. New companies begin with a flourish. They have certain capabilities and knowledge. As they get caught up in short-term survival, they may cling to the same capabilities and knowledge. Or they may acquire the wrong kind of new knowledge and fail to grow the right capabilities. In the end, they may pour on new capabilities and knowledge — when it’s too late.

The key to a long, healthy corporate life is steady growth. According to a 1998 survey, of the companies that enjoyed greater than 10% sales growth per year, about 78% were still around six years after starting. Of the companies with flat or decreasing sales, only 27.5% survived for six years.1

Growing Strategically

To grow steadily and avoid stagnation, a company must learn how to scale up and extend its business, lengthen its expansion phase, and accumulate and apply new knowledge to new products and markets faster than competitors.

Managers can’t leave growth to chance. They must choose a plan that renders consistent sales growth for years, not just in short bursts. A good growth plan captures the vision for expanding the company. It addresses the product and market combinations the company intends to pursue, the size it hopes to achieve in a particular time frame, and most important, the know-how and organizational structures that will support expansion or diversification.

Such planning has an internal focus — rather than a focus on what competitors might do or what type of technological change might transform an industry. It is designed to help a company exert more control over its fate as it tackles outside challenges.2 Implementation is easier for startup companies but possible for established enterprises, too. Company size should not drive the growth plan. Companies of all sizes need systems for creating, acquiring and sharing knowledge. Consider Netigy, a San-Jose-based e-commerce service provider. Netigy has only 650 employees, but it already has invested in a chief knowledge officer and a knowledge-management system for 20,000 people. Netigy is prepared to handle its vision for growth.3

What does drive the growth plan is the company’s set of capabilities. Managers must choose a plan that fits with the knowledge, learning skills and assets that the organization possesses or plans to develop. On the basis of the literature and our personal knowledge of fast-growing companies, we conclude that companies grow using three basic strategies: scaling, duplication and granulation. (See “About the Research.”) There is no one best strategy. A growth plan may end up tapping more than one. The important thing is to include principles of organizational learning, knowledge acquisition and knowledge transfer.

Scaling: Doing More of What You’re Good At

Scaling starts with a coherent vision of products, technologies and customers. The vision is the foundation for growth, at least until circumstances change significantly. The vision should reflect the company’s commitment to growth, be brief and clear, and be understood by all employees. The focus should be on a concrete product, technology and customer segment.4

Netscape’s founders believed that the Internet would revolutionize the way people worked and interacted.5 Their vision was to build infrastructure software that would put the company at the heart of the new, networked world and let it ride the Internet wave while experimenting with new products, technologies and markets.

Scaling requires a company to implement its vision quickly. As co-founder Jim Clark observed, “An axiom of motorcycle racing applies precisely to the technology business: Move fast, keep going — or end up on your butt. Slow down on the throttle and you’ll be off the road and into the trees.”6 In two years, Netscape went from a basic browser for surfing the Internet to more sophisticated browsers for corporate customers. It kept up the momentum by quickly adding a variety of servers, then opening up new markets for corporate intranets and extranets (the latter being intranets extended to select customers or suppliers). Next it moved to electronic commerce, adding new servers and applications tools and creating Netcenter.com — all within four years of starting. When America Online acquired it in fall 1998, Netscape had a value of more than $10 billion.

Invest Aggressively

To grow by scaling, a company expands product development around core technologies and offerings, expands product lines and increases the intensity of marketing by using existing distribution channels to reach new customer groups with related needs. It must increase manufacturing capacity and enlarge corporate infrastructure — for example, by building bigger and better information systems and setting up central human-resource-management systems to recruit and train employees quickly. (See “Is Scaling the Right Strategy?”)/p>

Companies must pursue aggressive investment — often before sales growth becomes apparent. Netscape invested in growth, knowing that without growth, it would face far more serious problems than overinvesting. And Netscape grew — even more quickly than it anticipated.

Specialize and Standardize

Companies that grow fast often centralize and standardize administrative areas such as finance and accounting to handle the increased transactions. Initially, they have simple functional structures, with manufacturing, marketing, sales, product development, finance and accounting all separate. As they grow, they duplicate the functional departments within divisions tied to particular products or geographic markets. Smaller teams then focus on specific customer segments and control the resources they need. Netscape moved from one small research-and-development group to separate R&D divisions for its browser and server products — and later for its e-commerce tools and Web site.

Hire the Right Mix

To refine and exploit existing products, processes and market know-how, key people must learn quickly and share their insights and technical knowledge. Netscape co-founder Mark Andreessen and a core group of programmers gained invaluable design experience and market insights from working at the University of Illinois on Mosaic, Navigator’s predecessor. They distributed 2 million copies of Mosaic and learned how the networked world of the Internet could function, with hot links potentially connecting every computer and database worldwide.7

But although Andreessen and the other programmers had most of the essential concepts and technical skills, they lacked the money, managerial insights and organizational skills needed. Jim Clark, who had founded Silicon Graphics a few years earlier and knew how to make a technology into a viable business, served as a Pied Piper in attracting other talent and resources.8

Netscape had to learn quickly. Its customers changed from savvy Internet users of a single product — the browser — to more-conservative corporate users who wanted an array of products that were rock-solid reliable. Netscape had to figure out how to design, document, test, sell and support mission-critical products in a more professional way.

At the same time, it had to absorb many new people. Clark hired young programmers who had worked on Web browsers and added seasoned managers, engineers, and sales and marketing experts from computer and telecommunications industries. Recruiting from a veritable Who’s Who of U.S. high-tech companies, Netscape leveraged the experts’ knowledge to train the less seasoned.

Adapt the Structures

For knowledge to be shared, a company must set up the right organizational structures, processes and culture. As Netscape grew, it sought to maintain the creativity and innovative capabilities typical of small organizations; in late 1996, it reorganized the product divisions into minidivisions, or divlets. Each divlet reported to its own general manager and worked on a specific product release or server product.

The arrangement had certain flaws: poor cooperation, redundant work and mistakes that could have been avoided through collective brainstorming. In 1997, after Netscape failed to rewrite Navigator/Communicator in Java, Barksdale decided to make the divlets report directly to Andreessen. As chief technology officer, Andreessen had been without formal product responsibilities. Barksdale’s move effectively centralized product planning and gave Andreessen authority to cancel projects and to force more knowledge sharing among the browser and server teams.

Find Ways To Learn From Customers Early

Netscape discovered the intranet market by learning from its customers. A major bank in Switzerland had begun using Netscape’s browser and server technology for its internal corporate network to allow employees to share information easily by using the Internet communications protocols. Netscape quickly identified intranets as a new opportunity and extended the idea to create extranets.

Netscape also learned to cultivate lead users and to have them test early versions of its products and give rapid feedback to developers. It started internal initiatives to find new ways to apply its technology to corporate markets. It used its own technology to create extranets that linked Netscape engineers, sales, marketing and support personnel to independent software vendors, content providers, Internet-service providers and computer manufacturers.

Duplication: Repeat the Business Model in New Regions

Like scaling, duplication starts with a coherent vision of products, technologies and customer segments. But unlike scaling, the vision must include goals for geographical expansion. The vision of IKEA founder Ingvard Kamprad was to go beyond Sweden and democratize the furniture industry throughout Europe by making new products affordable to the masses. Kamprad’s vision relied on Swedish design skills and a store ambiance that could communicate an appealing lifestyle to young people everywhere. (See “Is Duplication the Right Strategy?”)

Balance Standardization and Adaptation

Duplication typically involves packaging the company’s entrepreneurial know-how for new geographic areas — for example, by setting up overseas subsidiaries or franchising a business concept.9 A carefully orchestrated tension balances standardization (keeping processes and organizational details close to the way they are done in the original location) and adaptation (changing the organization and processes to address the needs of the local region).

Duplicating marketing in overseas markets is important, but responsiveness to local market conditions is key to long-term success. In new geographic areas, companies may choose to centralize manufacturing and administrative functions, duplicate the functions or both. Centralized manufacturing reduces manufacturing costs, but duplicated manufacturing increases flexibility.

Duplicated businesses should follow similar human-resource-management practices. By standardizing staffing, training and remuneration plans, a company can rotate employees among subsidiaries instead of having to hire and train new people when work in one locale increases. With HR duplication, employees also share new ideas and experience smoothly while providing consistent service to customers.

Hire Flexible, Independent Managers

Companies must give managers the independence they need to balance adaptation to local markets with preserving what made the original business successful. IKEA did that well, although its senior country and regional managers often were Swedish or familiar with the Swedish language. Eventually, however, a truly global company must train foreign managers in its practices and values, as IKEA has been doing gradually in the United States and China.

Duplicate Key Parts of the Infrastructure

Geographical expansion calls for simple procedures and for work processes robust enough to handle varied employee backgrounds. During expansion, informal sharing of experience usually is not the best learning mechanism. Senior managers have less control over local recruiting and human-resource development than those using scaling. Growing by duplication requires that a company externalize, or transfer, key elements of its infrastructure.10 Some companies use black-boxing — whatever mechanism they can set up to share their black boxes (critical data at various levels of detail in ready-to-use form, such as written or online manuals or video presentations).

Black boxes must be available at a moment’s notice to help employees and managers worldwide to accomplish important tasks. A single black box at one level of detail may help in establishing a new subsidiary in a new territory. It might include checklists on choosing a site, using legal counsel, selecting and training personnel, laying out a store and purchasing manuals. A box at another level might include detailed instructions on how to service clients outside business hours or how to set up a store-maintenance program.

IKEA used black-boxing. The European expansion group it organized to jump-start its duplication in Switzerland, Germany, France, Italy, Denmark, Norway and Austria bought land, hired people, constructed furniture outlets and decided on the new outlets’ decor. Two months before opening a new store, a first-year operations group would move in while the expansion group moved on to the next site. The first-year group would take charge, train people, arrange the store opening and set up the operations. Then IKEA would establish a local country organization to run the operations. The international expansion group, IKEA’s “Knowledge Marines,’’ represented the ideal mechanism for accumulating know-how from each new site and spreading the knowledge to newer operations.

Duplicate Entrepreneurial Knowledge

IKEA learned how to black-box entrepreneurial knowledge, too. The preferred site for new stores was always relatively cheap land on the outskirts of a city. The stores were simple and functional, most often two-story buildings with displays on the second floor and warehousing on the first. IKEA standardized and documented products, catalog format, logo use (although in Norway the company used red and white instead of the traditional blue and yellow), and personnel selection and training. The custodian of the entrepreneurial knowledge was the international expansion group.

IKEA also used devoted practice to duplicate its corporate vision. Local employees would devote themselves to learning certain tasks by studying manuals and attending training courses. Kamprad acted like a field commander, communicating the vision to new employees, visiting new stores, taking notes on store operations and discussing procedures and improvements directly with employees. Through such attention to detail, the black box can become a local routine. Employees then use it as a foundation for devising new and better solutions.

Be Aware of the Limitations

It would be naive to expect black-boxing to be consistently successful. Customer tastes and employee backgrounds are too diverse for one set of processes and programs to fit all situations. When IKEA expanded to the United States in 1986, it found that U.S. customers had subtle but important differences in tastes and shopping habits from Europeans. They wanted shelves, but for televisions, not books. European sheets did not fit American beds. European cups, plates and drawers seemed small to Americans.11

In addition, black boxes may not be sensitive to new requirements. A company that grows through duplication must be able to learn quickly, fixing procedures and products that don’t work and making the people who created them aware of the new requirements. That is especially true of young high-growth companies expanding abroad in highly competitive markets. Senior executives and central-management systems must have the openness and flexibility necessary for modifying a formula that was a winner back home.

IKEA had a slow start in the United States, but it learned quickly.12 The company now adapts fully one-third of its product designs to U.S. tastes. Combining black-boxing and local learning has helped IKEA improve duplication of its business and remain competitive over time in many markets.

Granulation: Growing Select Business Cells

There are limits to scaling and duplicating. A company’s product line may run out of steam, too many low-cost competitors may copy it, or there may be no new foreign markets to conquer. At that point, the best strategy could be granulation — distinguishing the cells, or smaller granules, of the business and growing them aggressively.

SAP, now one of the largest software companies in the world, went through both scaling and duplication before attempting granulation. The company initially specialized in enterprise-resource-planning (ERP) systems that let clients track and plan financial and other resource flows. Its early product, R/1, supported only a few resource flows. In 1989, SAP launched R/2, which offered new features and more than doubled the company’s sales over the next three years. In 1992, it launched R/3, which integrated resource planning across functions and customer-suppliers, allowing customers to manage more than 1,500 business processes. R/3 made SAP a global name in software.

Toward the end of 1997, SAP embarked on duplication. In 1998 it reorganized into industry business units, with a core development unit for new technologies and services plus a global sales-and-marketing unit. As custodians of specialized know-how in industry-specific resource planning, the units transformed SAP from a one-product company to a multiple-product company. SAP now builds on the R/3 platform whatever the customer needs, while integrating component software from other suppliers.13 It continues to improve R/3 and shares knowledge by training in-house personnel and representatives from local IT consultancies. Approximately 150 instructors now teach more than 200 courses at 85 training centers worldwide. SAP is adding remote training programs, too. Such enhancements and SAP’s extensive implementation expertise have enabled it to add Chevron, Eastman Chemical and Microsoft to its long customer list.

Balance the Old and New

Granulation is like the other strategies in starting with a strong, coherent vision for growth, but its focus is on developing unique capabilities and creating new businesses. A company uses its resources and knowledge to explore new territory with new, autonomous business units, independent subsidiaries or corporate spinoffs. Granulation is risky; business units may not leverage fully the company’s existing knowledge and asset base. Although individual entrepreneurs learn from working on local technologies with local customers and local staff, they work better when they have access to information, expertise and resources from other parts of the company.14 Each new cell, therefore, should reuse existing product technologies, manufacturing processes, organizational processes and consumer information but combine those assets in new ways. (See “Is Granulation the Right Strategy?”)

In 1996, SAP released R/3 Version 3.1, which had Web interfaces. The launch inspired further exploration of e-business solutions at SAP and led to a new growth strategy. The company began developing new business groups to create technologies for both individuals and small to midsize firms. It then launched mySAP.com, a portal-based marketplace that facilitates transactions among customers with different transaction volumes. In March 2000, SAP formed SAPMarkets, a separate venture for electronic market activities.

Balance the Informal and Formal

Both informal and formal methods are required for knowledge to flow between entrepreneurial cells. Informal personal ties help people in different groups establish trust and share experiences. SAP favors a “football team” style of work over hierarchies. Communication frequently occurs spontaneously, making SAP seem almost like a university.15

However, informal ties generally center on short-term issues.16 Fast-growing companies need to complement informal mechanisms with more-formal knowledge sharing, such as strategic-planning processes that encourage regular discussions among managers and employees from different cells. Companies also can hold periodic conferences or rotate experienced personnel among company units.

Evaluate and Monitor

Companies benefit from selectively evaluating and monitoring new business opportunities the way venture capitalists do. First, local entrepreneurs conceive business ideas, draft business plans, organize a venture team and form entrepreneurial cells. Then senior-management representatives act as investors, with both a monitoring and advising role. The entrepreneurial model also lets companies invest successfully in outside enterprises with attractive technologies, products, services or customer bases.

Learn From Customers, Partners and Competitors

At SAP, the business units’ chore is to dig up industry knowledge. Often knowledge comes from customer feedback or lead users. SAP has gathered interested customers to work with company developers on some 50 projects. A strategic alliance with Nokia — to extend mySAP.com to a wireless mobile work force — is likely to generate useful learning, too.

When a company grows through granulation, its competitors may be unknown, but they are probably not inactive. The company must establish systems to gather and analyze intelligence on existing and potential competitors — and speed it to decision makers.

Acquiring smaller companies with expertise in the new technology and forming alliances are two ways to acquire external knowledge. Both need routines for sharing knowledge between the acquisition or alliance partner and the rest of the company. Sharing mechanisms may include integration teams (for acquisitions), shared management responsibilities, periodic conferences and meetings, or shared access to databases and knowledge bases.

Combining Strategies

To identify the strategy with the best fit, a company should start with a bird’s eye view of the comparative strengths of scaling, duplicating and granulating. (See “Strategies for Growing and Learning,’’) The scaling strategy is simplest: A company merely learns how to do more of what it already does. Duplication is more complex, requiring a company to learn how to apply what it knows to new geographical markets. The most demanding in terms of knowledge acquisition, granulation requires a company to gather substantial information about new competitors and new product and market opportunities. But it also enables gradual diversification from related businesses into unrelated technologies, products and markets.

Johnson & Johnson, with its emphasis on creating subsidiaries, is a classic example of granulation.17 Founded to provide surgical supplies to doctors, the company grew by expanding into related health-care markets for hospitals and home consumers. Early on, management created separate companies (usually wholly owned by J&J) for each distinct market and allowed them considerable independence. When necessary, the separate companies collaborate — for example, in providing joint distribution services to the hospital industry. By 1999, the company had 190 subsidiaries, 98,000 employees, operations in 51 countries and approximately $24 billion in sales (divided among the hospital, pharmaceutical and consumer health-care sectors). It remains one of the fastest-growing large companies in the world.18

Large companies with business units or subsidiaries in different growth stages may want to tackle scaling, duplication and granulation simultaneously. For most early-stage companies, though, it is best if managers implement the three growth strategies sequentially, with some overlapping, as SAP did. A successful firm might first try scaling up its basic business. As it reaches the limits of scaling, it might start duplicating its successful business model abroad, while still emphasizing scaling as much as possible. Eventually the company should be able to pursue granulation, using new business units or spinoffs to diversify in its home market and, later, abroad.

The road will not always be smooth. SAP learned from early customer feedback that it had overengineered R/3: Implementation at customer sites required considerable time, effort and money. The company responded by launching its AcceleratedSAP rapid-implementation technology, which speeds up the introduction and use of its software systems. It also started to provide best-practice cases of business processes so that its clients could benchmark and improve their own operations.19

Managing and sharing knowledge is vital. Both IKEA, with its Knowledge Marines, and SAP, with its aggressive training program, worked hard to mobilize local staff to sell and implement products in different markets. But however a company chooses to apply its knowledge and whatever strategy it chooses, it must be committed to continued growth. It can’t afford to become complacent. Companies that aren’t steadily growing might very well be on their way to steadily dying.