How to break the profitable growth ceiling

In the 11 years I’ve been an independent coach and advisor, I’ve seen many companies that grow to a certain point and, despite all their best efforts, can’t seem to grow beyond that.

I’ve also seen companies that do continue to grow but become less and less profitable, and more and more stressful for the owner or CEO.

Turns out this isn’t just my experience.  It’s a common pattern.

Growth isn’t common

Out of the roughly 28 million firms in the US, only about 1.1 million have surpassed a million in revenue.
Only 112,000 have gotten past $10 million. And only 17000 have grown beyond $50 million.

The reason is that companies need to operate differently as they grow. Companies that don’t adapt how they operate will tend to grow to the limits of that way of operating. 

Owners, presidents and CEOs who have had success getting to a certain point often tend to repeat what they know, thinking “well, it got us here.” But, as the title of a book by Marshall Goldsmith goes, “what got us here won’t get us there”. 

The systems to manage a growing team

The changes needed for a growing company are driven by the added complexity that comes with having more employees. 

Think simply of going from 2 to 4 employees. This makes the number of relationships between individuals increase from 1 to 10. This complexity continues exponentially as the company grows from 10 to 25 to 50, 100, 200 employees or more. 

To predictably achieve results within this growing complexity, a certain level of order is needed. Processes, systems and structures create that order in companies. And the systems needed to create order in the complexity of a 200 person organization are different than that of a 100, 50, 25 or 10 person organization.

For example:

• When a company has 1-10 people, the owner can manage everyone. When the company gets to 10 to 15 people, the owner needs to bring on supervisors and managers, as well as some basic people management systems.
• When the company gets to 25 people, it needs more than one leader and the beginnings of a middle management group. The CEO now has to get most of the company’s results through other managers. So effective leadership and management becomes more important. And keeping those leaders and managers all heading in the same direction becomes more challenging. Strategy, goals and priority setting become critical along with meeting rhythms to keep everything on track.
• When companies hit 60 employees, they’ve already had to implement project management processes to get new systems fully implemented. And now, they often have to revamp their competitive strategy as they are now more visible in the market, and therefore a deliberate target of competitors.
• At about 95 employees, another layer of middle management is usually needed, making new employees more disconnected from top level decisions. This then requires new systems to monitor and improve employee buy-in and engagement.
• At 160 employees, the size and complexity of the organization starts to make it more resistant to change and it often becomes less profitable as its costs go up and products start to lag the market. Other systems and processes are needed to speed up getting new and more profitable offerings to market.

Hitting the ceiling, valleys of death

Any company within one stage will usually hit a ceiling if they keep doing things the same way they always have.

Companies that don’t make the right changes, or aren’t successful in making those changes, will fall into what we call a “valley of death”. 

Valleys of death are where the leadership makes big investments, but they don’t work out. So the company doesn’t move beyond that stage. The company can also fall backward in terms of revenue and often profitability because of the failed investments. Worst case, it can lead to company failure.

Growing unprofitably

Some companies grow despite not making the changes needed for the next stage. With sheer grit or dramatic demand growth, they’ll grow. However, these companies often become increasingly inefficient with the increasing complexity and resulting chaos. And so the company’s profitability will decrease, sometimes significantly. 

Unless exceptionally well funded, with investors willing to accept short to mid term losses for a longer term windfall, the decreasing profitability and resulting cash flow challenges will eventually prevent the company from investing in the capacity to grow and the systems to grow profitability. And so growth will stall. One can also count on drama, stress and headaches being the overarching theme for the leaders.

So what stops a company from making the right changes and improvements to grow successfully and profitably?

The CEO and leadership team are the linchpin

From these stages and key changes, we can see early in a company’s life - by about 25 employees - that an owner or CEO has to learn to get results from people through other managers. That means the changes and improvements the company makes will depend on the CEO working WITH top level managers as a team…a leadership team (or management team, executive team, or whatever you want to call it) .

And, very often, leadership teams in mid-size companies are working in silos and at cross purposes. They often are too focused on the day-to-day, so the big projects to move the company forward often don’t get done or aren’t done right. 

The result is the company doesn’t identify or successfully implement the right processes, systems and structures to handle the increasing complexity of a growing company.

It’s the CEO’s job to pull their leadership team together, get them all going in the same direction, moving in lockstep, making the needed changes and improvements to enable their broader team to keep growing.

An always-evolving leadership team

The challenge of having an effective leadership team continues through the life of the company. New leaders come and go. Markets evolve. Systems need to change. And so the capabilities of the leaders and the team need to evolve as well.

The crucial underlying challenge to achieving profitable growth is to build, maintain and continuously improve a great top team that is highly capable, aligned, leading and executing effectively and efficiently, and therefore minimizing silos and strengthening execution between and across departments. Essentially, working as one unit to move the company forward because the owner CEO can’t do it alone…because it’s too much for the owner or CEO to do it alone, at least effectively and sanely. More about that in my next 5 Minute Growth Tip article.
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What systems can you improve to grow a thriving company?

To find out what systems you and can improve to grow more easily, quickly and profitability, AND enjoy the ride, try our complimentary Agile Growth Checklist. This self-service questionnaire takes 5 to 10 minutes to complete. You'll receive the checklist with your responses immediately. Within 24 hours, you'll receive a compiled report highlighting areas to improve. Find out how your company is doing in each of the 7 areas needed to produce more rapid, profitable and sustainable growth. This report is complementary and involves no obligation.

check your systems - try the checklist

*These examples of structures, systems and processes are drawn my own experience over my last 16 years coaching, facilitating and advising, and from the 7 Stages of Growth research: a 6-year study of entrepreneurial companies in the Front Range and Silicon Valley including interviews with over 700 CEOs to understand and decipher the patterns, the behaviors and the characteristics of growth in entrepreneurial enterprises. This research was led by James Fischer, Founder of Origin Institute, a research and consulting company out of Boulder, CO.