For many top-level business leaders, business growth is a gamble they aren’t sure how to approach. Professors Ed Hess and Jeanne Liedtka provide insight on how to think differently about this essential aspect of running a business.
Have you ever watched a professional blackjack player in Las Vegas? They usually have a specific process they use to up their chances of winning big. First, they pick the right table. Then, they test the waters. They make small bets to see where the game is going. As they watch the cards and learn more about the game and their opponents, they periodically increase their bets or they fold certain hands. It all happens fast, and they understand that they’ll lose a lot of hands in this “testing the waters” phase of play. But the information they gain during the process allows them to increase their bets and win big later on.
Business growth, says Ed Hess, is a lot like playing blackjack. But unfortunately, he notes, most top-level CEOs don’t realize it.
“When it comes to growth, most managers, sadly, are like the little old lady with a cup of quarters playing the slots,” says Hess, coauthor along with Jeanne Liedtka of the new book The Physics of Business Growth: Mindsets, System, and Processes (Stanford University Press, 2012, ISBN: 978-0-8047753-4-2, $12.99, www.EDHLTD.com). “They just pull the handle and hope for the best. Sure, they may spend millions of dollars on consultants trying to create the right strategies, but in most cases the results are anemic. Strategies by themselves are not enough. What we’ve learned about business growth in our research is that what many CEOs and leaders think they know about growth is wrong.”
In their new book, Hess and Liedtka present more than 17 years’ worth of research on how successful new growth actually happens in organizations. The Physics of Business Growth helps readers understand how to create growth in today’s business environment, providing them a roadmap and a set of practical tools to navigate its challenges. The book helps readers create the right mindsets and an enabling internal system that aligns culture, structure, leadership behaviors, measurements, and rewards to drive the right growth behaviors. Just as importantly, they set forth proven growth opportunity identification, experimentation, and portfolio design processes.
It’s a quick and easy read by design, created for busy C-level executives to use as a how-to guide as they seek to infuse their organizations with an entrepreneurial spirit—“a small company soul in a large company body”—with a focus on organic growth.
The first thing top-level leaders need to understand about growth, note Hess and Liedtka, is that the only certainty about growth is its uncertainty. Growth takes people into unchartered waters, and the processes used for daily operational excellence do not work. Likewise, the management mindset to eliminate variance and to strive for standardization is counterproductive to growth and innovation.
“Venture capitalists seem to be the most comfortable taking on the gambler mentality needed to grow successfully,” says Hess. “They understand that the force at play here is uncertainty. They see themselves as managing portfolios of growth opportunities. They also know that their ability to predict at the early stages which of two ventures will succeed is poor. They do not attribute this to their personal failings; instead, they recognize that the inability to predict is a property of the uncertainty surrounding any new business.
“Like professional gamblers, they develop a set of practices that acknowledge this reality,” he adds. “They bet heavily on the individual leader of a new business and look for people with experience; they try to keep their bets small and affordable until they have better data; and they develop approaches that help them get in and out of new ventures intelligently and swiftly. Their goal, in other words, is to succeed—or fail fast and cheap.”
As you can see, new growth requires a different way of thinking and different processes than most managers use every day to run their daily business. Growth is a different game from operational excellence. To play the growth game well, one has to learn the rules of the game and use the proper tools.
Hess points out a few important factors about the growth gamble to keep in mind:
Growth, and particularly innovation, is a probability game. When large organizations pursue growth, their mindsets are often completely out of sync with the reality that guides professional gamblers and VCs. Chances are that these organizations expect ten out of ten projects not only to win, but to win big. They demand that their managers and employees produce growth, inadvertently thwart their attempts, and uphold a system in which pulling the plug on a failed growth opportunity is a career-threatening act. Would-be growth leaders in this environment are like professional gamblers who are unable to act independently but instead receive instructions from on high—from a source that has little information about what is happening this minute in this particular game. Not a formula likely to win in Vegas—or in business.
“The reality is it takes on order of magnitude about 1,000 growth ideas to produce 100 good growth experiments,” explains Hess. “And doing 100 growth experiments may produce 10 viable growth initiatives worth investing in. Growth is an iterative learning process characterized by detours, zigzags, and remakes.”
Growth is a learning process. Good growth companies understand the realities of growth. Growth requires the right mindset—a learning mindset—and the right processes designed to make small bets, learn critical information quickly, and then assess next steps.
“We call that process Learning Launches,” says Hess. “Not only is the right learning mindset needed, but also the right attitude is needed individually and organizationally about failure. When you are exploring growth—when you are entering areas where you have not played before—by definition you will make mistakes and have failures. Remember, so long as you make small bets and use the right rigorous process, there is no real failure so long as you are learning.”
Growth can be messy and inefficient. Most companies can’t stomach the uncertainty that comes with growth. It violates their dominant no-variance operational mindset. Well, guess what—growth and innovation are high-variance processes by their nature. If you do not accept that fact, then your growth initiatives will be limited to small incremental improvements, which at some point will not produce enough growth to keep your stakeholders happy.
“Operational excellence strives for 99 percent defect-free performance,” says Hess. “Contrast this to growth experimentation that can result in failure rates of 90 percent. In operational excellence environments, managers are rewarded for stamping out variance. Yet, in growth environments, variance is the norm.”
“Don’t be afraid to step up to the growth gaming table,” says Hess. “Pick the right table to play. Get in the game with a lot of small bets and learn. Upon learning, quickly decide whether to fold or double down on each hand. And if you fold, take that learning to the next hand. Having a growth mindset, using the right growth experimentation process, and having a culture that understands that managing growth and innovation initiatives is different from managing daily operational excellence is ‘table stakes’ for playing the business growth and innovation game.”
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About the Authors:
Edward D. Hess is coauthor of The Physics of Business Growth: Mindsets, System, and Processes (Stanford University Press, 2012, ISBN: 978-0-8047847-7-1, $12.99, www.EDHLTD.com). He is professor of business administration and Batten Executive-in-Residence at the Darden Graduate School of Business, University of Virginia. He is the author of ten books, over 60 cases, and over 60 articles. His work has appeared in over 200 media outlets around the world including CNBC, Fox Business News, Dow Jones Radio, WSJ Radio, MSNBC Radio, NPR, Forbes, Bloomberg, BusinessWeek, CFO magazine, Financial Executive, Journal of Applied Corporate Finance, Big Think, the Washington Post, and Financial Times. His book Smart Growth: Building an Enduring Business by Managing the Risks of Growth (Columbia Business School Publishing, 2010, ISBN: 978-0-2311505-0-7, $27.95, www.EDHLTD.com) was named a 2010 Top 25 Business Book for Business Owners by Inc. magazine.
Jeanne Liedtka is the United Technologies Corporation (“UTC”) Professor of Business Administration at the Darden Graduate School of Business and former strategy consultant at Boston Consulting Group and chief learning officer at UTC. She is the lead author of two recent books, The Catalyst: How You Can Become an Extraordinary Growth Leader (Racom Communications) and Designing for Growth: A Design Thinking Tool Kit for Managers (Columbia University Press), and a leading expert on the use of design thinking tools to create growth strategies and opportunities.