Carl Burch MBA, CMA, CIA, ACCA
Let’s say you have an idea, but not just any idea – you have a great idea. You have pitched your idea to investors and they are 100% behind the idea. The investors know the risks but they are excited to get in on the action. They are in the game to make money, and so are you – at some point, although, your return horizon may be a bit longer. We refer to this start-up stage as the Entrepreneurial phase of business growth. It is the entrepreneurs who get businesses off the ground. They are pursuing their vision, rather than the vision of someone else. This start-up or entrepreneurial phase is the most important phase because if you can’t make it through this phase then nothing else matters.
Now…let’s say that your business does take off and revenues are growing exponentially. Unfortunately, fast-growing companies can be chaotic places to work. Management can get overwhelmed with the workload and even previously effective managers can start making mistakes as their span of control expands.
At first, experiencing the growth was fun, but after a time the chaos can be stressful. In addition, problems can mount up that can damage or even be fatal to the organization. This situation is nothing new for businesses. Back in 1972, Larry E. Greiner wrote a paper titled “Evolution and Revolution as Organizations Growth.” In Greiner’s original 1972 paper he wrote that companies typically go through five phases of company growth; however, in 1998, Greiner added the sixth phase.
In this article we first describe the characteristics of each of the six phases but then, we also discuss how to recognize when your company is going through a crisis. Only by recognizing when your company is going through a crisis are you able to do something about it.
So…let’s find out more about the Greiner Growth Model
We just mentioned that Greiner's growth model describes the phases that businesses go through as they grow. It doesn’t matter what business you have, whether manufacturing, construction, retail, etc. if your business grows it will experience these phases.
The interesting thing about these phases is that each growth phase is made up of a period of relatively stable growth followed by a "crisis" when a major organizational change is needed for the business to carry on growing.
Greiner’s model is diagrammed below.
Phase 1: The Entrepreneurial Phase
Greiner refers to this first phase as “Growth through Creativity.” However, because creativity is associated with entrepreneurship, we refer to this phase as the “Entrepreneurial Phase.” In the introduction, we mentioned that it is the entrepreneurs who are the visionaries – the ones who have a dream of creating something. This dream, or vision, outlines what your business would like to ultimately achieve and gives purpose to its existence.
It is during this first phase that the entrepreneurs who founded the company are busy creating products, and/or services, and establishing their markets. As the company grows, production expands, and as production expands, more staff is needed to handle the increased workload. This means that companies often need additional working capital to pay off their short-term liabilities.
This phase ends with a leadership crisis. When it gets to this point, companies usually bring on board professional managers. The initial owners may try to change their style so they can take on this role, but most often, someone new will need to be brought in to keep the company on track and growing.
The characteristics of this phase are:
- Management focus and style. Since this is the start-up/entrepreneurial phase management is focused on trying to get the business to the next phase. If the company is unable to get to the next phase, then it fails. An important aspect of this phase is for companies to have a viable vision and mission statement. We look that the difference between the two statements below.
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A vision statement is a board statement of what a company or an organization would like to achieve in the future. On the other hand, a mission statement is a bit more detailed than a vision statement. The mission statement tells everybody why the business exists and what its overall goals are and so on.
A good example of a mission statement is the one provided by EasyJet. EasyJet is a British low-cost airline carrier. Easy Jet’s mission statement talks about its product and fares, its customers, and even what kind of relationship the company wants with its suppliers.
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The management style is more of an open-door style of management. According to the Business Dictionary, an open-door policy is a “management practice whereby all employees have direct access to the senior executives without going through several gatekeepers or layers of bureaucracy.” Since there are not that many employees the owner knows the employees and it’s common for them to interact socially as well as professionally.
- Organization structure. The organizational structure is flat which means there are only a few layers of management. In a flat structure, managers have a wider span of control with more subordinates. This indicates a short chain of command.
- Control system. There is not a lot of formalization of control policies and procedures. Planning is minimal, and financial measures focus on revenue growth and cash flows, not on operational efficiency.
- Management reward emphasis. The emphasis is for the company to generate positive operating cash flows, and/or even, make a bit of profit so the company is more attractive to potential investors. Management puts in long hours so to incentivize them they are often promised an ownership stake.
Unfortunately, after some time, this phase will eventually become unstable, leading to a leadership crisis. It is not uncommon for the owners to also be the managers. They know the business and they can cope with the demands of leadership; however, as the company grows, the owners/managers are pulled more and more in different directions until they are unable to properly fulfill their duties.
The short article below is the story of Ross Kimbarovsky, co-founder of CrowdSPRING. Kimbarovsky wrote about the importance of knowing when to let go if you want to be remembered as a successful entrepreneur.
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KNOW WHEN TO LET GO…
Some entrepreneurs see 20-hour days as the entry fee to success. Others believe they will succeed by working smart, not hard. In either case, as a business grows, the founder's job becomes too large for one person. You quickly find yourself working in the business, and not on the business.
Successful entrepreneurs know how to let go by handing over authority and responsibility to someone else.
At the start of this year, I handed over the leadership of crowdSPRING's engineering team to one of our senior engineers, Adriano Marques. I have led the engineering team since founding the company in 2007.
I enjoyed working with the engineers -- they've been incredible teachers and teammates. But as I reflected last fall on my responsibilities, I realized I was too deeply involved in day-to-day technical issues. As a result, I could not devote enough attention to other important areas and that became a problem. To help my company grow, I had to let go.
Letting go is one of the most difficult challenges for an entrepreneur. Some fear losing control. Others believe they are the only ones who can do the job right. Many think there's not enough time to properly train another person.
Those are legitimate and normal fears. But they are unfounded if you properly prepare and delegate wisely.
Some entrepreneurs try to compensate for their fear of letting go by retaining authority but giving up responsibility. That rarely works. I knew that to succeed, I would need to turn over both the authority and responsibility for the engineering team.
Almost a year earlier, I started giving Adriano incremental responsibility and authority over discrete areas involved in managing the team. For example, last year, he took over the analysis of our weekly engineering sprints and communicated with the team about their individual and collective performance in those sprints.
By the time I decided to turn over full leadership of our engineering team, I was confident he was ready, knew what needed to be done, when, and to what standard. We worked closely for several years, but more importantly, spent many months before he took over the team, discussing our combined vision, assessing problem areas, and debating the technical direction for our infrastructure and product.
One of the most important things to discuss with someone taking over a managerial responsibility is whether they have the time, resources, and support needed to get the job done right.
Be sure to discuss your expectations and goals and to instill a sense of pride and ownership over the responsibilities being passed on.
Discuss ways to collaboratively measure and reward success, both on the individual and team levels.
In crowdSPRING's case, Adriano knew I would not just abandon him once I turned over control of the engineering team. As with everyone in the company, I provide regular feedback that’s positive when they do something well and constructive when they don't.
Allow room for mistakes. I made many mistakes while learning to manage the engineering team and I made it clear that while I expected my successor to always do his best, I did not expect him to be perfect. I also made it clear that I would not jump in and assume control if he made a mistake. It was his team – he had full authority and responsibility for the team.
Once Adriano was comfortable, my only job was to get out of his way.
If you want to grow your business, you must learn how to let go.
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Phase 2: Growth through Direction
Now, assuming your company makes it through the first phase, the next phase has management introducing a new tier of management. The company is taking the necessary steps that will see the company morph from a relatively small and informal company to one that is more formalized and structured. The new managers set the direction of the company. They were hired specifically to spur growth.
The characteristics of this phase are:
- Management focus and style. Lower-level supervisors become increasingly specialized and focused in their area of responsibility, like marketing and production. Managers focus on their distinct objectives, such as meeting revenue and/or cost of production goals. Management style becomes more formal with policies and procedures ruling the day.
- Organization structure. The organizational structure becomes more vertical. Communications between the leadership and the rest of the company become more formalized and are often filtered down through middle management.
- Control system. Working standards are increasingly adopted. A more formalized accounting and control system is introduced for things like purchasing and inventory. This allows for better control and monitoring.
- Management reward emphasis. Other types of incentive schemes are introduced, such as cash bonuses for meeting objectives.
With time the company will experience a crisis of autonomy. Some of the characteristics to look out for during this phase are:
- Top-level managers are unable to oversee all operations.
- Lower-level managers are constrained in their decision-making despite their greater knowledge of the market or products.
- Top-level managers may be unwilling to give up more decision-making powers to lower-level managers.
- Lower-level managers may not be confident or capable of important decision-making.
- Continuing reliance on centralized processes may cause lower-level management to become frustrated and even leave the company.
The secret of overcoming this crisis is through the delegation of responsibility. This can be hard for top-level and lower-level managers to accept. Top-level managers liked the idea of making decisions, but now they have to delegate that responsibility to others. A precondition to overcome this crisis is to hire the right managers with the right attitude and with the right skill set.
Phase 3: Growth through Decentralization
The second phase ends with companies experiencing a crisis of autonomy. We mentioned that this crisis is remedied by delegating more accountability and responsibility to lower-level managers. The idea behind delegating is to improve decision-making; however, a decentralized structure has to be in place for delegation to occur. This is why Greiner refers to this as the “Growth through Decentralization” phase.
During this third phase, lower-level management needs to act with greater authority and responsibility. The result should be that they can respond faster to customer demands and push into larger markets that create even more growth.
The characteristics of this phase are:
- Management focus and style. A more decentralized management structure with operational and market-level responsibility handed down to lower-level managers. Managers limit themselves to management by exception[1] that allows them to focus on more strategic level work like innovation, R&D, and collaboration opportunities.
- Organization structure. There is less communication with senior management so there is a more bureaucratic/vertical organization structure.
- Control system. Different responsibility centers are introduced, such as cost, revenue, and profit centers. For each responsibility center, formal planning and budgeting procedures are introduced and reviewed by top management.
- Management reward emphasis. More sophisticated types of financial bonuses, such as profit-sharing bonuses, are introduced.
With greater autonomy and responsibility comes a greater sense of ownership. Initially, this seems to be good for the company; however, these autonomous managers may prefer to run their show without coordinating with other departments/divisions. This can lead to a lack of goal congruence[2] within the organization.
For example, let’s say that the goal of a company’s marketing department is to sell a high-quality, premium product. However, if you were to talk with the production manager, he or she might say that their goal is to produce a lower-cost product, not to produce a product of the highest quality. This means the goals of marketing and production are not congruent. This lies at the heart of this third crisis – a crisis of control.
The lack of goal congruence leads top management to attempt a return to centralized management. This usually fails because of the organization’s newly vast scope of operations. Those companies that move ahead find a new solution in the use of special coordination techniques.
[1] Management by Exception is the practice of examining the financial and operational results of a business and only bringing issues to the attention of management if results represent substantial differences from the budgeted or expected amount.
[2] Goal congruence is defined as "aligning the goals of two or more groups." As used in planning and budgeting, it refers to the aligning of the goals of the individual managers with the goals of the organization as a whole.
Phase 4: Growth through Coordination
We just looked at how a crisis of control could evolve from a policy of decentralization and delegation. Greiner said this about the phase, “the delegation phase brings a new period of growth, but freedom eventually breeds a parochial[1] attitude."
Greiner is saying that during this phase, senior management often instinctively tries to steer the business back towards a policy of more centralization, not less, which potentially causes a resurgent crisis of autonomy.
It’s all too easy during this phase for companies to stagnate, which means no growth in sales or profit. The way forward often lies in growth through coordination.
The characteristics of this phase are:
- Management focus and style. The new product/service line groups are treated as investment centers shifting the focus to the return on capital employed (ROCE[2]) they can create. Capital expenditures are rationed based on ROCE and then parceled out across the entire organization.
- Organization structure. Technical functions like data processing are centralized, while day-to-day operational decision-making remains decentralized.
- Control system. There is a thorough review of formal planning procedures which are then established and periodically reviewed.
- Management reward emphasis. Stock options and company-wide profit-sharing schemes are rolled out.
A crisis of red tape can be characterized by a growing lack of confidence between the senior managers and lower-level managers, as well as between headquarters and people in the field. This diminishing confidence is born from an increasingly complex and stifling bureaucracy, which provokes criticisms from all levels of management.
The reason for this crisis has a lot to do with the size and complexity of the company. Eventually, a breaking point is reached during which the structure of a process and the procedure-driven system gives way to a system in which rules trump results and innovation is stifled by a watchdog mentality of compliance.
The main causes of a crisis of red tape are:
- Line managers begin to resent direction and interference from higher-level management and HQ staff who are not familiar with local conditions and considerations.
- HQ staff complains about the lack of cooperation from managers.
- Procedures and box-ticking take precedence over problem-solving, and innovation.
- A watchdog mentality emerges that can demotivate middle management who are focused on compliance, not
- There is increasing pressure on middle management from external regulators, as well as headquarters.
To deal with this crisis companies need to understand the nature of their bureaucracy. While companies of this size need to have some rules and accountability there is a general tendency for companies of this size to slip into a constrictive regime. The key to dealing with this crisis is recognizing it when it happens and doing something about it.
When companies get to the size where red tape becomes a problem, implementing companywide changes can take quite a considerable degree of coordination. The answer to the problem lies in collaboration and building a more flexible and behavior-based management hierarchy, which has to do with the next phase.
[1] Parochial means very limited or narrow in scope or outlook; provincial:
[2] Capital employed is defined as long-term debt plus equity.
Phase 5: Growth through Collaboration and Cooperation
This is thought to be the most challenging phase of Greiner’s model. Understanding this crisis is vital to understanding the inevitable position organizations can find themselves in as they realize that to meet their growth ambitions they must step outside their existing boundaries. Dealing with it and moving onto the next phase of evolution and growth is as much a cultural challenge as it is a technical and managerial one.
During the crisis of red tape, we saw that extensive procedures and processes can stifle a company to the point where the business loses its ability to be flexible and be able to adapt to market changes.
The competing forces at play during the red tape crisis require some careful recalibration to allow essential procedures and oversights to coexist with a more flexible management approach. This can only be achieved through a more collaborative and cooperative model.
The characteristics of this phase are:
- Management focus and style. The focus is on team building. Teams are built across functions specifically for collaborative, group-related activities. HQ staff is used more in a consultative role instead of directing individual business units.
Training programs are introduced to train key managers in behavioral skills, resulting in more efficient teamwork and quicker conflict resolution.
Innovation is introduced to the competency model and a healthy level of dissent is encouraged at an organizational level.
- Organization structure. It is not uncommon for a matrix-type management structure[1] to be used to assemble the right kind of skills mix across a range of teams to deal with specific problems.
- Control system. Real-time information systems are integrated into daily decision-making. As an example, real-time information can help improve a company’s supply chain by properly managing its inventory so products are effectively reordered and stocked.
- Management reward emphasis. Rewards are based on team performance as opposed to individual achievements.
A crisis is brought about when internal resources are no longer sufficient to support further growth ambitions. In this case, companies will have to look for external sources of financing. This may entail merging or acquiring other companies.
Now, among the many issues with mergers and acquisitions is that they often involve a new and complex set of cultural and technical challenges. This often leads to increased tension and conflict between headquarters and line management, and frontline staff. The bigger the company gets, the larger this divide can feel when frustration sets in.
As companies adapt their strategy to seek growth externally, it’s all too easy for the senior managers to become restricted by the prospect of rapid expansion through mergers or acquisitions and they often overlook the most important asset their company has - its employees.
Bringing in another company often means integrating a new workforce, which can often mean job losses, fundamental management restructuring, and a dilution of company culture and values.
The following are some major causes of a crisis of internal growth within a company:
- Managers are often more focused on growing new alliances than it is on its core business. This has an impact on market competitiveness, as well as staff morale.
- Mergers and acquisitions may take place, leading to rapid growth and fundamental changes in culture, business direction, and management structure.
- International expansion can bring cultural, communication, financial, and market challenges to the core business.
What makes this last crisis different is that it emerges from a realization that internal resources will no longer support or deliver the desired growth and that external solutions are required.
Growing your business through alliances, whether they be collaborations or acquisitions, requires careful planning and detailed pre-deal due diligence. It's crucial that the decision-makers understand the values and working practices, systems, and processes of the proposed partner or acquisition, and create a detailed plan about whether and how these will integrate into the company.
[1] A matrix management structure is a combination of two or more types of organizational structures. The matrix organization is the structure uniting these other organizational structures to give them balance. Usually, there are two chains of command, where project team members have two bosses or managers.
Phase 6: Growth through Alliances
The final stage of the Greiner growth model is to address the crisis of internal growth by looking for external sources of financing. As we have seen, one approach is to pursue growth through mergers and acquisitions; however, another way is to create a virtual super-organization by forming partnerships and alliances where business value is created and where everyone benefits. Its purpose is to create a win-win situation. A typical way this happens is where each partner contributes particular skills and competencies to a total customer solution.
There’s no doubt that there are crises beyond this phase; however, the Greiner growth model does not yet discuss them. Typical problems at this phase could include a repetition of earlier phases but on a grander scale.
Case Study of EasyJet and the Greiner Model
If you do any amount of flying in Europe then you have most likely used, or at least heard of the low-priced carrier airline – EasyJet.
EasyJet was founded in March 1995 by businessman Stelios Haji-Ioannou who was then 28 years old. The first flight from London-Luton to Glasgow took off on November 10, 1995. The aircraft used by the airline during the first year was leased from British Airways. EasyJet bought the first of its planes in April 1996.
In the following, we use Greiner's model to highlight the phases that EasyJet went through – from its initial start-up phase to having over twelve thousand employees and generating a net profit of £358 million for the year 2018.
Under the direction of Stelios Haji-Ioannou, EasyJet went through the stages of growth as outlined by Greiner.
The Entrepreneurial Phase
The business in this phase offered two routes from Luton: one to Glasgow and one to Edinburgh. Each route had six flights per day. EasyJet revolutionized the airline industry. The company was unique in that it did not offer complimentary meals, used printed boarding passes, and the cabin crew wore casual jeans and polo shirts. The business model was formulated on the idea of minimizing costs at every opportunity and passing these savings on to customers in the form of lower prices. This was a period of immense entrepreneurial creativity, with the company looking to challenge the perceived wisdom of the traditional airlines.
Customers were intrigued enough to try out the new airline. While non-allocated seating took a while to get used to and is still not universally liked, it has allowed the airlines to charge extra for allowing customers to choose their seats.
This sort of creative thinking is like that of a young toddler who is encouraged to try things out and learn from their mistakes. For many new businesses, it is a case of having a blank canvas to experiment with, and serial entrepreneurs love the challenge of starting again with smaller businesses and seeing them grow.
Direction
As EasyJet grew, it started to add more routes such as Amsterdam and Barcelona; however, it realized that it needed to bring in extra experience and understanding of the airline sector. While the company was not exactly in crisis, it was facing potential challenges from British Airways, which introduced its low-cost airline, Go, to challenge the growth of EasyJet.
At this stage, Haji-Ioannou was keen to develop his ‘Easy’ brand and started to open up internet cafes, cinemas, and hotels. He realized that for the airline to grow he needed further expertise from outside of the business to bring more structure. In March 1996, Haji-loannou hired Ray Webster, a native New Zealander, and former senior executive of Air New Zealand to be the new managing director.
Ray Webster was brought into the firm to help it develop to the next stage. Like a child growing up, rules and direction had to be introduced, and the organization grew more complex as it became larger.
At this time, certain employees who had been at the firm since the beginning began to pine for the "good old days" when as a new start-up any marketing or PR opportunity was seized upon. As the airline grew, more traditional methods of advertising were used and in many ways, the business became more formal and structured.
Decentralization and Coordination
As EasyJet grew in size, the company expanded out of its head office at the end of Luton airport's runway into different areas across the airport. This was necessary, as the operations sector, cabin crew, and reservations staff did not need to be working out of the same place.
While this led to greater efficiency, it also meant that the firm now had difficulty controlling and coordinating its operations, and a crisis of autonomy and then control resulted, with different parts of the business operating separately and having different viewpoints as to where the business should be heading and which area should be a priority. Similar to a child growing up — a balance needs to be struck between giving a child independence but also setting clearly defined boundaries.
In many ways, EasyJet was entering the difficult teenage years, and so decided to embark on a situation where greater coordination between the different parts of the business was introduced. This coincided with the appointment of Andy Harrison as CEO, who decided to bring the different operations back into one central headquarters, as well as introduce a balanced-scorecard approach to evaluate the performance of different employees. This 360-degree appraisal system helped the business become more focused, as employees felt a greater sense of belonging and affinity to the firm after it had perhaps grown too large to manage.
Collaboration
As always with the introduction of change, there was some resistance. However, what could have been seen as a crisis of red tape and more paperwork was overcome with clear communication and education about how the system would operate. From the start of EasyJet’s operation, it had strived to have a "paperless" office as much as possible. This meant that key documents were scanned in and saved digitally and that the majority of communication was performed electronically. This is still a key part of EasyJet's operations today.
No teenager or young adult wants to be tied down by endless work, and one of the key aims of Andy Harrison and his board was to try and make things simpler for their employees and allow them to focus on their main jobs.
All the while, Stelios Haji-Ioannou was an important and sometimes critical onlooker of how the airline had grown. He and his family still own 30% of the plc and sometimes object publically to the way the company is being run. In many ways, this can be seen as an older parent looking at how the child has grown up. While they might not like every choice and decision made, their love and fondness for what was their baby remain strong.
Alliances
In terms of future growth, the company has continued to develop and exploit extra-organizational solutions (i.e. alliances and mergers) as it has grown in size. From just two routes in 1995, it now has over 100, and is the second-largest airline in Europe behind rival Ryanair, flying over 70 million customers each year.
This growth included the buyout of the failed Go airline, as well as GB Airways in 2007. These acquisitions helped EasyJet grow further, and while the company specializes in short-haul destinations, a recent expansion to a Moscow route means that the firm could try and bring its business model to the highly competitive transatlantic and long-haul markets. This is likely to lead to more growing pains as identified by Greiner.
Note: The Moscow route was suspended in March 2016.
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This case study was provided by Phil Waterhouse. Phil Waterhouse is joint editor of Business Review and head of business and economics at Bedford School. September 2017.
Conclusion
Critics of the Greiner Growth Model like to say that it is too simplistic and not every business will suffer crises as it grows. While these criticisms may be valid, business managers still find the model useful because it can help them identify the obstacles (crises) that can hamper their growth.
Writing for the Harvard Business Review (May-June 1998), Greiner wrote, “Clearly, there is still much to learn about processes of development in organizations. The phases outlined here are merely five in number and are still only approximations. Researchers are just beginning to study the specific developmental problems of structure, control, rewards, and management style in different industries and in a variety of cultures.”
“One should not, however, wait for conclusive evidence before educating managers to think and act from a developmental perspective. The critical dimension of time has been missing for too long from our management theories and practices. The intriguing paradox is that by learning more about history, we may do a better job in the future.”
Greiner himself recognizes the weaknesses of his model but he also knows that using his model can help you spot the growth problems before they occur. If you’re able to do this, then you’re in a much better position to avoid them.
Next article: “Growing Your Controls as You Grow Your Company.” As your company grows, so must grow its controls. In this article, I lay out a framework to show how controls need to change as your company changes - as it transitions from one phase to the next.
About Carl Burch
Carl Burch holds an MBA, CMA, CIA, and ACCA. He is a teacher of CMA/CIA/ACCA prep courses for HOCK training in Moscow, Russia, as well, as providing management accounting services for a variety of Russian businesses.
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