01 July, 2013

Managing managers - why companies plateau

How many companies employ less than 10 people, less than 20, 50, 100, 200, 500, 1000, 5000, etc? Look at most countries’ industry statistics and you’ll see a common pattern. There’s a pyramid - lots of micro-businesses, tapering up through mid-sized businesses to a few large businesses.

Putting aside companies used for administrative purposes and the myriad of small businesses which won’t ever grow, why don’t more companies with good market offers grow larger?
  • Some market offers have limited appeal.
  • Some business models simply won’t scale.
  • Sometimes the business is too risky or unpredictable, so funding growth is difficult (especially now that we’ve seen the downside of risky investment!)
  • Some owners and managers reach a point where they have achieved what they want - a good income and a solid business. I can’t criticise them for wanting an easier life enjoying the fruits of their earlier risk-taking and hard-work.
But assuming none of those are a factor, what holds growing companies back? In two words - executive skills. Many small and mid-size companies can’t grow because their owners/managers don’t have the skills to build and operate a bigger business. There’s a naiveté in business thinking and an unfortunate tendency to under- or over-bureaucratize. I’ve seen many promising businesses plateau for those reasons, plus one other factor. I have a pet theory: many previously-successful small and mid-size business leaders simply don’t know how to manage managers.
  • 10 people = 1 layer of management = you. You call the shots, you know everything, you direct everything.
  • 10-50 people = 2 layers of management = you plus team leaders (say development, sales, fulfilment, business support). You still drive the ship and your team leaders take care of operational detail within your control. The first plateau point - can you manage through team leaders?
  • 50-100 = 3 layers of management = you plus a team of specialist and regional managers plus their team leaders. You’re still the hands-on leader, but you’re likely to be constrained by the skills of your managers and the unsophistication of your business processes.
  • 100 -250 people = still 3 layers of management, but with more highly skilled managers and more complex processes. This is often an inescapable plateau point, maybe with several stops as you re-design your business and your team to handle growth. And you have to achieve unity of purpose and action through intermediaries who have initiative, brains and minds of their own (that’s why they’re in the role).
  • 250-500 people = 4 layers of management, with your executive team capable of developing and driving their divisions strategically and operationally, and indeed of doing your job. Your businesses model is working, but the business is much more complex and the challenge of achieving unity of purpose and action has gone up another order of magnitude,
After that it starts to get easier - the issues are the same, but you’ve learnt how to deal with them. You’ll continue to be challenged by competitive and economic pressures, multiple lines of business, multinational operations and so on, but you’ll know how to manage managers.

That 250 person barrier seems to be especially challenging. Many companies do well until they reach that scale, but then seem to bounce around at 150-250 people, never quite breaking out, falling back in tough times, then growing again only to repeat the cycle. Given all the complexity, risk and frustrations of running a bigger business, it’s no wonder many businesses owners decide to stay where they are.

First published June 2011

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