©2008, 2012, Eric M. Ross

Hitting the Wall Companies need to change as they grow. This change generally must include management approach, organization, processes, systems, and working capital availability. If a company does not change these aspects of the business at least once or twice each time it increases its top-line 10-fold, it seriously risks losing its ability to operate and do business efficiently and effectively, usually due to increasing size and complexity and an increasingly inadequate infrastructure. Many U.S. companies have been badly harmed or have gone out of business, for this very reason. In general, as doing business becomes tougher with growth, there are several symptoms of the pending problem. The most general (but not always present) are 1) increasing difficulty in making a profit, 2) a growing sense that things are out of control, 3) an increasing bureaucratic burden and/or increasing need for ad hoc actions, 4) increasing cash flow problems, and 5) a change from a sense of optimism and a spirit of cooperation, to growing levels of stress and internal discord. Companies in this situation often start taking drastic measures to maintain performance, and company leadership often feels it has “hit a wall.” Although “emergency” ad hoc measures often temporarily halt cash flow and profitability decline, they do not correct the underlying problem, and other symptoms may surface (a more complete listing of symptoms is on the next page). The graph below is a schematic illustrating some aspects of this situation. Often, continued rapid growth and the increasing substantial revenue being generated can mask many ills and promote a sense of success, security, and complacency, even though the company’s

Sales

Operating Profitability

without the change needed with growth

The Wall -Work is all stress, and no fun

-Everything is tougher than it used to be

$10M

$20M

$30M

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Sales Profit Margin

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©2008, 2012, Eric M. Ross

ability to perform efficiently and effectively may be rapidly diminishing. Key symptoms of being in this condition—in which growth and dynamics of the business have outpaced the changes needed to maintain and improve efficiency and effectiveness—are outlined below. Typically, several to many, but not all of the symptoms will be present, and the number of those present will increase as the company continues on its path to, into, and through the wall, without the needed internal change.

• There is little or no profitability growth, except for temporary gains from traditional cost cutting measures, and profitability may well be in an increasing decline.

• Cash availability increasingly lags cash needs.

• Often, the company finds itself struggling with either 1) a growing loss of former customers with sales growth being maintained through an increasing rate of investment in selling and/or in the acquisition of other companies (this is the usual case) or 2) the start of a difficult-to-explain decline in sales growth.

• In some instances of case “2)” above, sales rapidly plateaus.

• The company is losing internal connectivity and/or is increasingly challenged by a lack of integration. There usually are a number of islands of automation, islands of sophistication, and/or islands of operation, and the company is becoming more and more “stove-piped.”

• Quality and workmanship and/or timeliness seem to be or are degrading, quality issues are increasing, or there are more and more instances of disgruntled customers and of process failure.

• Senior management is generating lots of initiatives and changes to try to make things better; decisions are becoming more ad hoc and reactive; and cash is being “thrown” at problems.

• Process improvement is increasingly ad hoc, based on instant problems and needs and often visionary – but usually independently generated – initiatives.

• Sub-processes and sub-organizations increasingly operate (at least partially) in a manner that is detrimental to the organization’s overall best interest.

• The company is frequently reorganizing itself.

• There are more and more instances of changes made in one area causing problems in others.

• Getting things done becomes more and more challenging.

• Written standards, policies, and procedures either are generally lacking or are limited to a very few areas and are often informal or are outdated or bureaucratic and aren’t being used.

• There is increased frustration, inconsistency, stress, and disruption, at all levels;

• There are growing indications of employee dissatisfaction, often including growing employee turnover.

• More and more employees become disconnected from driving the company forward and become more inwardly focused. Employees become increasingly focused on self-promotion and preservation, rather than on performance.

• There are more and more disagreements among individuals and departments on what the top priorities should be for the organization.

©2008, 2012, Eric M. Ross

• Owners, if the company is privately owned, are becoming or are increasingly discouraged.

The graph below depicts an actual example. The company—a manufacturer of electronic test equipment, located in southeastern New England—was owned by three business partners until its sale in late 1995. The graph is an approximate illustration, recreated from memory, of the company’s financial performance. At that time, the company was continuing its steady growth of about 20%/year, that had been underway for a number of years. Although proactive investments had been made in manufacturing automation and technology, in a fine plant, and in establishing small operating divisions in key market geographical areas; most aspects of how the company was managed, its processes, its operating procedures, its systems, and its approach to information processing automation remained much as they had been or only had slightly changed from where they had been when the company was much smaller (in annual sales). As a result, although sales were continuing to increase, profitability and then actual profit were in significant declines. A proactive performance improvement effort was started in 1994 (the vertical dotted line), which led to a number of management changes, systems initiatives, and process improvements. In part due to the somewhat unique nature of this manufacturing company, these—in turn—led to a fairly quick reversal of the trend, as illustrated by the dashed green line. This reversal was augmented by a significant downsizing, done to position the company for a more profitable sale. The dashed portion of the blue annual sales line indicates the then projected continued growth in sales, prior to the changes within and the sale of the company.

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Operating Profitability

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Sales Profit Margin

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