As companies attempt to grow quickly, they come under more and more strain. Those that are attemping to grow more rapidly than the market will be particularly at risk. For the purposes of classification a business can be categorised as “high growth” if its existing or planned EG/MG is in excess of 2 which means that the rate of enterprise growth (EG) was double that of market growth (MG).
This Ibis analysis comes from a review of high growth businesses and whether their plans matched outcomes, compared with those that had not achieved such high levels of performance. 59 businesses which had achieved high growth rates over at least three of the five year period under review were asked to identify from a long list, derived from the Ibis business plan outline/ manual and business start up outline/ manual what they had found to have significant effects on their overall growth rates. The chosen companies all had turnovers at the start of the five year period of between 150 and 250 million euros, and were sourced from a range of sectors in attempt to be as broadly representative as possible.
Once this short list was created (items scoring more than 2.5 on a 5 point Likert scale), the respondents were asked to rank their perceived performance in these areas to produce an overall score using this online system. There was a high correlation between growth rates above benchmark and overall scores. Certain aspects of growth organizations such as the normally higher levels of creativity than found in low growth enterprises were not identified in the research, nor was the importance of quality circles in driving growth. This emphasises that the research was based on internal perceptions of the importance of various factors to achieving and maintaining growth. What was particularly surprising was the number of elements considered important in developing and managing high growth rates.
A similar group of 43 companies with growth rates at or just below market increase rates were also scored on these criteria, with turnovers also between 150 and 250 million euros and the same industrial spread. Overall scores were substantially below those of the high growth group, supporting the view that this model has some validity. Only three of the top decile in the low growth group scored more highly than the bottom three of the lowest decile in the high growth group.
These components have been incorporated in the Ibis business plan game, which enables participants to manage a high growth company and make the necessary investment decisions.
Notes to topics
The most important components can be listed under nine headings:
Production/ service supply
In common with the other on-line reviews, the analysis fails to weight the various components, but is designed to give a quick assessment of where the problems of growth are likely to be found. Unless otherwise stated, the comparison is always whether each element is better than benchmark.
Strategy aligned with market drivers. Achieving the right balance within the golden circle was considered one of the most important prerequisites of growth.
Focus on critical success factors. The ability of the enterprise to focus on those components of the plan that generated successful development considerably assisted in the development and management of growth strategies. Best practice would suggest the identification of critical success factors and the creation of a scoring system for the enterprise to measure their achievement against these elements.
Competitive advantage. The creation and maintenance of competitive advantage was the top priority of the high growth sector, achieving a perfect score. Best practice suggests that the enterprise should analyse its competitive advantage as part of its formal planning system using portfolio analysis as well as SWOT and TOWS frameworks, and focus on key performance indicators at an operational level measured against benchmarks, and create rolling targets for knowledge center achievement.
Customer complaints. The level of customer complaints provides a valuable measure of how well the enterprise is managing its growth. Though the number of customers will be increasing, the percentage of complaints per customer should either decline or at best remain stable. Where there is an increase in this ratio, it is a clear indication that the enterprise is likely to be increasing its rate of customer “churn”. Best practice suggests that a target of 1 per 1000 transactions should not be exceeded.
Customer satisfaction. High levels of customer satisfaction are essential to maintain a rapid growth trajectory. Customers once acquired need to be maintained and their consumption of the product or service increased wherever possible. Declining levels of customer satisfaction are a key performance indicator of declining sales and problems with achieving high levels of growth. Best practice suggests an overall satisfaction rate should not fall below the high 80 per cent.
Customer spread ratio. Enterprises must establish a balance between too few customers and too many. Changes in the customer spread ratio may indicate problems with growth.
Region spread ratio. Enterprises must establish a balance between too few regions and too many. Changes in the region spread ratio may indicate problems with growth.
Customer investment review. Regular reviews of key customers and how additional investment would generate a return is seen as a central feature of driving higher levels of growth through the existing customer base. Best practice suggests that applying Pareto's Law and focusing on those customers generating 80 per cent of sales.
TBC. Improving operational responsiveness to customer demands was considered an important method of gaining market share in competitive markets and driving growth. Best practice is to compare company operating procedures with the competition using mystery shopper techniques to identify comparative efficiencies.
Awareness. Good awareness is vital for achieving higher levels of growth. Unless the potential customer is aware of the product or service they cannot even begin to consider purchasing it.
Trial. Within the relevant market segment, overall levels of trial will again determine potential growth rates – the higher the level of trial the more likely that the enterprise will be able to convert non-customers to established customers.
Repeat purchase. Trial will only build a customer base providing that there is a good level of repeat purchase, from which the enterprise can build profitable volume.
Product spread ratio. The enterprise must establish a balance between too few products and too many. Changes in the product spread ratio may indicate future problems in growth.
Product age ratio. Research continues to demonstrate that product or service development has a significant effect on overall sales growth. This ratio measures the average rate of the product or service range.
Barriers to entry. The ideal position for a growth company will be a well protected market segment and rising levels of demand that require customers to buy the product or service of a particular enterprise. Maintaining effective barriers will therefore be important for the growth company, and as these weaken the potential for declines in growth. Best practice suggests that the enterprise should identify the key barriers to entry within their market sector and ensure that policies are designed to maintain them wherever possible.
Average sale. The average sale value provides a valuable indication of whether the enterprise is able to convert customers into from initial small trial purchases into higher levels of sales activity, as part of a customer sales transition plan. Should the average sale remain flat (allowing for inflation), the enterprise is unlikely to be able to drive through its expansion plans which will depend on existing customers generating higher and higher volumes while new customers are added with low initial purchases.
GP. Changes in gross profit levels are one of the most powerful indicators that continued high rates of growth may not be achievable. Declines will be due to a range of factors including declining demand, a more competitive environment, a higher cost base. Reducing gross profit obviously reduces revenue inflows and makes continued high levels of investment in growth more and more difficult.
Objectives. Integrating stakeholders through a small set of agreed objectives was considered to be one of the most important methods of generating and maintaining growth. Best practice suggests a limited number of key objectives (the balanced scorecard) combining short, medium and long term goals.
Communication. A systematic communication plan is considered a vital part of achieving high levels of continued growth. Best practice defines this as combining regular internal and external communication with that necessary for specific actions, such as those in the contingency plan or for particular market initiatives.
Corporate governance. In common with many other surveys, high levels of corporate governance achievement were linked with higher growth rates. This should be expected as good corporate governance improves stakeholder perceptions and support for corporate direction. Best practice suggests that the enterprise should measure its corporate governance achievement ratio as part of its regular planning cycle.
Core competence. A clear definition of what drives competitive advantage within the enterprise builds shared values within the stakeholder base. Best practice suggests that this core competence should be derived from existing and future competitive advantage and supported by the range of trainin, induction, maintenance and development.
Standard operating procedures. Standard operating procedures or SOP's are seen by growth companies as essential in ensuring quality of service throughout the enterprise and most importantly in creating external relationships which will assist in driving growth. Best practice suggests that the growing enterprise should formalize a greater and greater proportion of its operations.
Production/ service supply
TPM. The range of maintenance components within a TPM program was considered to greatly enhance the potential for growth, especially within basic housekeeping functions within the enterprise. Best practice suggests a target of zero housekeeping failures and zero product/ service delivery failures.
Supplier spread ratio. One of the problems of growth that respondents identified was the tendency to add more and more suppliers, creating supply change management difficulties. Too much reliance on a single supplier at the other extreme was also considered to be another barrier to growth.
Joint supplier planning. Integrating key elements of the supply chain into the development of the enterprise was considered to be a vital factor in achieving higher than average growth. Best practice suggests that suppliers providing 80 per cent of the enterprise materials or services should be part of a joint planning process.
Supplier satisfaction survey. The importance of key suppliers in supporting the growing enterprise underlined the relevance of a measurement of supplier satisfaction, with greater satisfaction leading to improved terms of trade, quality, delivery. Best practice would again suggest the inclusion of suppliers providing 80 per cent of goods or services to the enterprise.
Capacity utilization. Growing enterprises often add capacity without continual review of alternative options and overall return on investment. Effectively managing this feature of the production/ service delivery operation provides greater resources for investment to support continued growth.
TQM. Rigorous quality control throughout the supply chain and production/ service supply greatly enhanced rates of repeat purchase and improved overall profitability, through lower rework rates, guarantee claims. Best practice suggests the aim of zero faults or re-work.
SBU. Maintaining a strategic business unit focus was considered to be an extremely element is achieving superior growth. The SBU enables decentralized decision making, improves entrepreneurialism, and unit cohesion through ensuring that group dynamics are improved. Best practice suggests the creation of SBU's wherever there are clear product/ service or geographical specialisations within the enterprise.
Knowledge center. The creation of operational units within the enterprise with the responsibility and authority for the development and management of particular aspects of growth and profitability were identified as one of the most important components in achieving higher levels of performance. It was also considered to be the core factor in developing and managing an effective management information system, and vital for team building. Best practice suggests typically a 7 fold division within the medium sized enterprise.
Formal planning and review. The existence of a formal planning and review system was considered one of the most important components of a growth strategy as it substantially improved the ability of the enterprise to allocate resources to achieve the best possible returns.
Labour turnover. High rates of labour turnover are associated with poor performance, as they mean that more and more resources (time, money) will need to be invested in recruitment, training and retention of staff – resources that could be more profitably used to grow the business. Though there will be peaks and troughs in labour retention, it will be the trend that is important.
Span of control. The span of control is a measure of how many supervisors to effective employees. High growth enterprises can suffer from either of the two extremes – the recruitment of too many supervisors (which may be a consequence of the development of “special units” as the enterprise grows), or too few. Maintaining the correct relationship will ensure that growth continues without a decline in profitability due to the over-recruitment of supervisors.
Skills. Research shows that enterprises with higher skills levels can grow more rapidly than those less well provided. Enterprise wide skills levels will therefore be a key performance indicator for future growth, leading to an emphasis on good recruitment, training (induction, maintenance and development including effective apprenticeship schemes), appraisal and motivation.
BS index. The BS index measures the level of shared values within the enterprise. In a small group these will often be high, but as the enterprise grows and becomes more and more depersonalized with management more distant, they will be difficult to maintain, with consequent declines in levels of co-operation and commitment. Best practice suggests that a BS index below 10 (out of 100) adds considerably to growth prospects.
Labour productivity. As enterprises grow rapidly, there is a substantial chance that the early stage activity levels will reduce as working practices stagnate. Those enterprises that are able to grow this key performance indicator are far more likely to achieve higher levels of growth than those that do not.
Disciplinary levels. Rising disciplinary levels were seen as a major barrier to growth as it was a clear signal that the level of shared values were declining in the enterprise which were coupled with falling labour productivity.
Working conditions. Regular reviews of working conditions were associated with higher levels of productivity and growth. Best practice suggests a combination of an analysis based on labour productivity and employee satisfaction.
Socratic decision making. Inclusive decision making was considered to be a crucial element in achieving higher levels of long term growth. Best practice includes the quality and inclusiveness of decision making in employee satisfaction surveys.
Health and safety. The maintenance of a good health and safety record was seen by respondents as having strong links to continuing high levels of growth through maintaining effective systems that supported all employees.
PDP. The development of a personal development plan system for key employees based around detailed appraisals and integrating succession planning was considered one of the most important growth components. Best practice suggests that PDPs should be considered for the top 15 per cent of the skills profile.
Successes, failures, lessons learnt. The growth enterprise is in a state of continual change, with the continual requirement to assess effective and ineffective directions and policies. A formal system of reviewing success and failure especially in relation to contingency planning and project management was considered to significantly improve the chances of maintaining higher levels of growth.
DER. The debt equity ratio is a measure of how much debt the enterprise carries. There is a great temptation to fund rapid expansion in taking on more and more debt, especially to carry out large scale mergers and acquisitions. Though there is much debate on what is the acceptable level of debt to create the “efficient” balance sheet, a rough and ready ceiling of 40% should be the guide to minimize risk.
ROCE. Return on capital employed provides a measure of how profitably the enterprise is managing its cost base and its product or service supply and value chains. It has a major influence on enterprise cashflow and the ability to invest in growth. Declining ROCE will identify potential medium term problems to maintain growth levels, and as a result it is one of the most important key performance indicators.
FCF. Growth companies need to place a considerable emphasis on emergent rather than directed strategies, holding back funds to take advantage of growth opportunities that develop in the market over the short term. Within the budget, the availability of additional funds generated from cash flow will enable the enterprise to maximize these advantages.
Project ratio. The project ratio measures the percentage of projects that meet the key KPI measurements – normally of being on time, on budget and on specification. As the enterprise grows and becomes more complex the risk will be that projects will fail more frequently. As the rate of projects failure increases, the ability of the enterprise to grow rapidly will decline.
Budget ratio. The budget ratio measures the effectiveness of the enterprise in managing its cashflow. A rapidly growing enterprise may find it increasingly difficult to accurately manage its cashflow and this will inevitably cause problems in financing its growth.
Z score. For manufacturing companies maintaining a low Z score was considered important in providing financial stakeholders confidence. This was seen as providing additional financial headroom should growth opportunities occur.
KPI/ benchmarks. The maintenance of key performance indicators linked to benchmarks throughout the enterprise was considered to be of vital importance to both developing and maintaining growth as it enabled the identification of strengths and the elimination of weaknesses. Best practice suggests the creation of a limited set of key performance indicators for each knowledge center which drive their planning and control.
ISS. Internal satisfaction levels of departmental performance were considered to be an important element in achieving greater shared values and internal responsiveness, both vital for faster growth. Best practice suggests that ISS levels in excess of 80 per cent are necessary for enterprise cohesion.
Balanced scorecard used for compensation/ bonus systems. In growing enterprises, there is a temptation to focus on one single aspect that will drive the enterprise. Experience shows that this SBUstantially increases the risk. Using a broadly based balanced scorecard system to measure performance and ensuring that achievement evaluation is not additive, will significantly reduce the level of risk, especially when combined with substantial levels of deferred compensation.
Deferred compensation. In high growth enterprises there is a great temptation for senior management to look for rapid and short term returns from the enterprise. This often implies the acceptance of more and more risk to drive the level of personal rewards rather than for all stakeholders. A high level of deferred compensation over a three year time horizon for senior staff (in excess of 50%) significantly reduces this overall level of risk, especially when it is combined with a significant level of non-cash (equity component).
Contingency planning. A well organized contingency plan is seen as providing the enterprise with the ability to rapidly respond to environmental changes, while reducing risk and improving efficiencies of the management information system.
Portfolio risk. Maintaining a review of the overall balance of strategies and acceptable levels of risk was considered a valuable risk reduction procedure consistent with achieving a strategic mix consistent with achieving continuing growth.
Implementation options. The methods chosen to implement a strategy will have varying levels of risk which will be multiplied by the proportion of the total enterprise turnover. Best practice would suggest a concentration on organic development.
Investment appraisal. Those enterprises with a formal investment appraisal system for major investments incorporating a hurdle rate saw a considerable reduction in risk while enabling them to continue to invest in activities that would lead to higher growth rates by insisting on a detailed cost benefit analysis.
Debt maturity. Ensuring that debt was split into relatively small packages and spread over as long as possible was considered to be important in risk reduction, and to ensure that growth companies had sufficient financial headroom.
Six Hats/ Devil's Disciple. The development of a review methodology which could critically analyze investment proposals and future plans is seen as significantly reducing the potential risk involved in major investments.
Impact analysis. Those enterprises that used a review system for major change found that it contributed greatly to their ability to respond rapidly to changes in the environment.
SCORE. A systematic and regular review of the cost base within the enterprise was considered one of the most important components in establishing and maintaining higher growth levels. Best practice involves a rotating responsibility for this within members of knowledge centers.
Premises review. The ability of the enterprise to take advantage of opportunities in the market can be constrained by location (especially failing to take advantage of clustering where it is important in a particular sector), the failure to combine all operational activity of the SBU on one site, a logical internal layout which is designed to improve productivity, and an integral canteen/ meeting room. Best practice is to integrate the cost per square metre with measures of employee satisfaction.
BEV/ EBITDA. The ratio between the break even value (BEV) and the total earnings before interest, tax, depreciation and amortisation provides a valuable indication as to whether the enterprise is managing its cost base. Though there will be peaks and troughs as the enterprise adds new productive capacity the trend will identify whether the cost base is being managed to yield the greater and greater returns necessary to fuel future growth.
CR/DR. The relationship between the creditor ratio and the debtor ratio provides a useful trend analysis of how the enterprise is managing its customer cash inflows and its supplier payment outflows. Changes to the payment structures will inevitably lead to changes in working capital requirements.
SER. As the enterprise grows, the sales expense ratio should decline. If it remains high or in the worse case increases, it is an indication that the enterprise is needing to continue to invest heavily in each unit of sales, reducing cash for other areas of the business.
AER. The administration expense ratio should continue to decline with growth as the fixed overhead is spread over greater and greater sales.
STR. The stock turn ratio for manufacturing companies was considered a central control ratio to attack inventory cost and reduce such carrying costs to ensure liquidity for growth policies.
Recruitment appraisal. Those enterprises that used this type of system considered it as vital to achieving higher levels of growth as it forced a continuous review of personnel requirements for all recruitment activity, identifying required operational changes to drive performance. Best practice is to use this technique for all recruitment and promotion.
Wages ratio. Maintaining an effective wages ratio within the enterprise to ensure that wages rates in certain areas of the business did not greatly exceed others was considered to be central to both motivation and cost control.
Testing. For the growth enterprise, continual testing of products/ services, marketing mixes, new approaches to organizational development and operational management will be vital to manage the costs of failure. Best practice is to ensure that all significant investments are rigorously tested.
Filling in the questionnaire
Unless otherwise stated (*) comparison should always be linked to benchmark. Otherwise refer back to best practice in the body of the text.
Your score: Score: As this research only provides an internal measure of factors that are perceived by the enterprises as important for growth, any attempt at quantification has limited value. For the enterprise that has all of the listed policies in place, the total score would be 690. As the score declines from this figure, the chances of the enterprise achieving and maintaining high levels of growth will diminish.
Score: As this research only provides an internal measure of factors that are perceived by the enterprises as important for growth, any attempt at quantification has limited value. For the enterprise that has all of the listed policies in place, the total score would be 690. As the score declines from this figure, the chances of the enterprise achieving and maintaining high levels of growth will diminish.
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