What does it take to expand year after year, even through the Great Recession? Very few companies have ever done so. You can learn a lot from those that have.
"He not busy being born is busy dying.
That Bob Dylan lyric no doubt has a particular resonance for entrepreneurs. Companies die by the hundreds every day -- and those that survive know they must keep moving and focus relentlessly on growth. The alternative: Well, you know.
By some measures, 25 percent of all businesses fail within the first year, and nearly half fail by Year Three. But what happens once a company makes it through the entrepreneurial phase and reaches a certain level of maturity? What challenges do business owners and their executives face as companies move from 10 employees to 100 to 200 to 500? How do they need to change to keep growing? And why do so few companies manage to grow consistently?
To find out, Inc. economist-in-residence and consultant Gary Kunkle launched a research study of more than 100,000 U.S.-based midsize businesses (those with 85 to 999 employees). Conducted throughout 2013, his project, which was sponsored by the Principal Financial Group, established the goal of identifying companies that are sustained-growth champions: that is, those that added head count for five consecutive years, from 2007 to 2012.
It's a remarkably difficult standard to meet: Fewer than 1.5 percent of companies made the cut. From there, we selected a representative subset of companies that agreed to collaborate with us in analyzing the managerial DNA of their success. Thus, the Build 100 was born. (For a related look at how companies scale successfully, see "How Do You Go From This to This Without Losing What Makes You Great?")
In addition to unveiling the list, Inc. will continue to report on these companies throughout 2014, to learn -- and share --how they have managed to grow consistently year after year, even when times are tough.
The project has, as you will see, already uncovered a trove of insights. First and foremost: All growth, as Kunkle puts it, is not created equal.
A company's growth (assuming, of course, that it has any) typically follows one of several patterns: It might burst on the scene with years of expansion and then decelerate and decline. Or it could grow in fits and starts, possibly in sync with the overall economy, or as the result of opportunities seized or missed. Or it might enjoy a brief boom and then plateau.
The challenge for company leaders is to understand that some forms of growth can't be sustained -- and others virtually guarantee a hard fall. In comparing the Build 100's long-term performance with that of a larger universe of similar-size companies, one key finding emerges: The only statistically significant predictor of a company's future success is steady growth; short- and even long-term bursts mean almost nothing.
"It's akin to Aesop's tortoise and hare story," Kunkle says. "Slow and steady wins the race. Incremental advancement, repeated over time, achieves greater results. That said, Build 100 companies grew, on average, 35 percent annually during the five years studied."
Studying company performance over a 20-year span, we also found that the faster a company grew in one period, the less likely it was to grow again in the future (and the more likely it was to fail). Also, absolute growth (as measured over several years) had no influence on the odds of future survival or growth. But the more frequently a company increased in size, as measured by the addition of head count year over year, the more likely it was to grow again.
What do these companies have in common? Well, let's first take a look at what they don't. First off, these companies don't look much alike. They don't cluster in predictable industries or geographic locations. They don't serve the same customer segments. And they're no more likely to be long-established organizations than to trace their roots back only as far as the dot-com bust. But they do have certain commonalities and noteworthy differences from other companies. A few highlights from our initial survey, conducted in the third quarter of 2013, jumped out at us:
1. More than 50 percent of respondents said "people/talent" and "customer service" were the only drivers of competitive advantage and identified those attributes as core to their company's identity, ahead of nine other factors.
2. A "big change in senior management or leadership" was among the top three factors credited for triggering company growth "breakouts" ahead of six other factors.
3. Two of the top three challenges or obstacles to growth were "attracting top managerial talent" and "training future supervisors and managers," ahead of 11 other challenges.
4. More than 82 percent of respondents said "sharing financial success with your employees" helps a company grow -- tying that practice for the highest response among six management practices.
5. Some 81 percent of respondents named "sudden loss of a key employee" as a concern -- the highest such percentage among 11 "unplanned events" that were rated.
The bottom line: There are two big themes to come out of the first Build 100 survey. First, the leaders of these companies repeatedly indicated that growth owed more to cultural factors such as how well employees work together, how they interact with customers, and how they collaborate on problem solving than to, say, financing or product attributes.
The survey also showed that how you treatyour employees really does matter. For example, there's a direct connection between the sharing of financial success with employees and higher revenue growth and productivity. Also, the companies that were the most generous to their employees, in terms of compensation and benefits, not only achieved higher performance; they also reported a boost in attracting and retaining the best talent.
That all sounds straightforward, but of course it isn't. It's not easy finding good people. It's not easy balancing profitability with generosity. And these companies don't get everything right. But as you'll see in the survey results in more detail and profiles charting the remarkable journeys of three Build 100 companies, they do know how to create a vision, inspire their employees, innovate effectively, and maintain very close ties to their customers. In short, they know how to build.
For more on how to achieve growth:
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