How Growth Can Kill a Business (and what to do about it)

People often say that “nothing succeeds like success,” and, to a certain extent, that’s true.  Successful companies get good press, find it easier to win new business as well as procure and retain top talent.

However, with success also comes growth and that brings its own set of challenges, especially for young companies. Often, it sends promising new stars into a tailspin from which they never recover.

There’s lots out there to advise companies on how to be successful, but very little about how to manage the growth success brings.  I’ve spent most of my career building entrepreneurial companies, done several turnarounds after things went awry and uncovered some common problems as well as some successful solutions.

The Dunbar Dilemma

In 1992, anthropologist Robin Dunbar published his groundbreaking paper on optimal group sizes in primates.  For humans, he estimated the limit to maintain stable relationships in a group to be about 150, now known as the Dunbar Number.

Since then, other researchers using different methodologies have come up with slightly higher numbers, but the general principle stands.  Go past a certain point and natural connections start to break down.  In my experience, that number does seem to be somewhere in the range of 150-200.

That’s when the “really cool place” with a family atmosphere starts to take on a decidedly more corporate feel.  Some of the changes are positive; things become more structured and less off-the-cuff.  Nevertheless the loss of connectivity is palpable and things begin to fray.

The biggest danger at this point is that the breakdown is hard for senior management to see.  They have usually worked together for years, feel a special camaraderie and find it difficult to understand how others don’t feel the same way.  In fact, they are offended that newer arrivals don’t feel the same commitment that they do.

The Rise of the Nasty People

With the loss of connectivity comes a loss of visibility.  People who have been around for a while get promoted on the basis of longevity and internal relationships rather than competence or performance.  Inevitably, some of these people will have a nasty, territorial streak.

That’s when the real trouble starts.  They tend to surround themselves with sycophants who make up for their lack of professional talent with fealty.  Strong up-and-comers who question the status quo are set aside and even ostracized.  False consensus is favored over real debate.

From there the process becomes self-reinforcing.  Strong players become frustrated and leave, while those who stay are rewarded for their loyalty.  They are valued for their reliability and senior management, who by now have come to understand that something has gone wrong, now depend on those they feel they can trust even more.

A bunker mentality sets in.  The wagons are circled.  The”family affair” has been transformed into a set of internal fiefdoms, which can’t seem to work together effectively.

The Reorganization

The next step is the inevitable reorganization.  By now, everybody realizes that the company is going through “growing pains.”  There is a general acknowledgement that the organization is no longer an upstart and must become more “corporate.”  A consensus builds that something has to be done.

Unfortunately, that “something” is usually some form of massive reorganization.  Months are spent planning and then implementing the new structure.  Of course, everybody realizes that there will be some resistance, but there is confidence that obstacles will be overcome and in the end everybody will be better off.  Good times will return.

It hardly ever works out that way.  Personal relationships and tacit organizational knowledge play an important role in any organization, once those become defunct, breakdowns occur.  The new structure breaks old connections and doesn’t replace them fast enough.

Reorganizations rarely, if ever, take informal relationships into account, which is why they usually fail. (Incidentally, the reorganization of the societies in post-Soviet nations ran into similar problems).

A Network Approach

It is the last point, about informal relationships, that is the most crucial.  Entrepreneurial companies that find themselves growing into substantial corporations are acutely aware of the need for structure, yet often implement a hierarchy that looks good on paper but fails in practice.

A well-functioning organization is a well-functioning social network and, as I wrote before, social networks thrive on internal connections.  In a small company, they form naturally, but in a big company they need to be nurtured.  Here are some ways to do that.

Fire Nasty People:  Whenever I’ve been called in to do a turnaround for a company that has hit the skids, I inevitably find that there are a handful of people (usually quite competent) that are the source of many of the problems.

That’s why it always makes sense to fire nasty people.  They tend to be more trouble than they are worth, scare off a lot of good talent and make it much harder to run the company.  It’s tough to build a well-networked organization when everybody needs to watch their back because of a few bad eggs that seek to get ahead by undermining others.

Focus on Junior Employees:  Small companies tend to be tightly knit.  People grew up in the company together and have built strong bonds.  As the business grows, it’s tough for newcomers, especially younger ones who lack commonality with senior staff and are unfamiliar in professional life, to break in.

The result is that they never really feel at home at the company and the “inner circle” becomes even more isolated.  Management needs to put special emphasis on junior staff to make sure that they are being on-boarded and mentored effectively.  It’s the newbies, not the incumbents, that can provide the energy to keep the company vibrant and growing.

Internal Training Programs:  One of the best ways to build connectivity at the junior levels is to create an internal training program run by middle and senior level staff.  It’s also a great opportunity to build mentoring relationships and confers status to promising mid-level employees who are asked to present to newcomers.

They work best when they are cross functional, so that new employees get to bond with others across the organization and learn skills that, while not applicable to day-today-work, helps them understand the bigger picture.  Those relationships and skills are crucial for integrating diverse skills across departments.

Best Practice Programs:  Another exceptional technique is instituting best practice programs across departments.  These are regularly scheduled meetings in which people get the chance to present their best work to their peers.  I’ve found it works best without senior staff present.

Autonomy, Mastery and Purpose:  Most of all, management needs to realize that the people joining the company need to be motivated.  That’s much easier to do in a small group than in a big company.  As I wrote in an earlier post about motivating employees, it’s important to instill autonomy, mastery and purpose.

Probably the toughest thing about growth is that it’s difficult to recognize the problem until it’s too late.  After all, when you’re running a business, growth is what you’re after. Nevertheless, at some point every successful company will have to deal with the challenges that go along with it.

– Greg