Growth is a choice

The Yin and Yang of business - capacity & growth.

The chicken or the egg? Capacity or growth?

A CEO recently told a major client that they didn’t want any more business, while her recently hired Head of Sales listened in horror. This is in direct contradiction with their growth strategy - but it makes perfect sense as they don't have the capacity to deliver on the contract. In all businesses there is this ongoing dance between capacity and growth - without capacity you can't grow and without growth you can’t afford capacity. 

CEO mindset a major driver of growth

This ties in very neatly with a recent paper by McKinsey on What does it take to Achieve and Sustain Growth? Their view is that one of the biggest drivers of growth is the CEO mindset, leaders have to actively choose to grow and then make deliberate choices in support of that goal. The revelation for me is that the CEOs choice, especially in a smaller business, is tied to their capacity. If you already feel that you are underwater, why would you open the taps further by pursuing a growth strategy?

Managerial capacity is the binding constraint

We can go all the way back to 1959 and Edith Penrose's classic book The Theory of the Growth of the Firm to get confirmation of this. The Penrose theorem is "Managerial capacity is the binding constraint that limits the growth of the firm". This is definitely true for small business owners who are trapped working "In" their business instead of "On" their business. Small businesses also struggle to invest in a senior hire, whose salary often represents a very material share of the profit pool. This creates dangerous volatility in the P&L and makes it a high-risk decision.

Everyone struggles with urgent vs. important

The McKinsey report shows how managerial capacity also affects big business. Despite the greater resources, there is a massive gap between what CEO's want, and what they actually do!

• 72% of leaders want to run a growing business, but only 22% spend significant time on long-term growth initiatives

• 70% of leaders report substantial talent gaps

• Only 30% of leaders increase growth investment during uncertainty

72% of leaders want to run a growing business, but only 22% spend significant time on long-term growth initiatives 

Free up your team

I have seen this dynamic play out in one of my investments. Ten years ago, the board was pushing the executive team to grow, yet there was a lot of resistance - despite the executives being completely aligned as major shareholders. Viewing this from the perspective of capacity, their reticence makes perfect sense. Our key resource was tied up in the factory making sure quality was maintained. Now that we have invested in a General Manager, we have freed her to become Chief Customer Officer.

Without building human capital you won't grow financial capital

Ask any consultant and they will say grow first and the sales will pay for the investment. My takeout is that it is more complicated than that. If the CEO has no capacity themselves (or doesn't believe that the business has the capacity to deliver), they will not choose to grow. Therefore, as an advisor, board member or investor we need to help build their managerial capacity. This might require investing upfront (hiring new staff / fractionals) or building capacity (coaching, focus, role definitions, systems). First prize is consistency - by continually investing across the business one creates a virtuous circle of capacity and growth.