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Scaling up by Verne Harnish
How a Few Companies Make It…and Why the Rest Don’t
I. One Sentence Summary of the Book
The keys to scale up your business are attracting and retaining the right people, creating a truly differentiated strategy, directing flawless execution, and keeping cash reserves to weather the storms.
II. Book Overview
While people continuously create ventures, most of these companies stay as small organizations or “mice”. A few, however, grow into “gazelles”, breaching the $1 million barrier and scaling up to $10 million, $100 million, and even $1 billion. For these gazelles to continue to survive and scale up further, they rely on solid processes and form and follow good habits in order to avoid the pitfalls and usual mistakes of every rapidly growing company. For them, they focus on four critical areas of the business namely People, Strategy, Execution, and Cash.
From these 4 areas of the business, they keys to achieve scale can be summarized as follows: 1) attract and retain the right people, 2) create a truly differentiated strategy, 3) drive flawless execution, and 4) have plenty of cash to weather the storms. Underlying these keys are the Rockefeller Habits which are ten fundamental habits that support successful execution of a strategy.
III. Recommended for
This book is a compendium that condenses the top contemporary leadership and talent-management thinking and delivers it through a textbook style, and almost clinical, approach in writing. The goal is to provide companies the tools to scale up 10x by focusing on four key areas of the business namely people, strategy, execution, and cash. With these tools, scale can be achieved with a growing company where the team is engaged, customers are doing your marketing, and everyone’s making money. Each of the focused areas have a few chapters dedicated to each of them, elaborated along with informative texts, worksheets, charts, and illustrations.
However, due to the textbook style of this book, this will not be an easy book to digest and to be read easily from cover to cover. The writing is filled with a lot of jargon and consultative-speak so understanding this book will take much perseverance. Despite this, the book’s utility and breadth make it a recommended read especially for CEOs and their executive teams to help them work through the issues involved in scaling up their businesses.
IV. Author Biography
Verne Harnish is the founder of the esteemed Entrepreneurs’ Organization (EO) and chaired for fifteen years EO’s premiere CEO program, the “Birthing of Giants” and WEO’s “Advanced Business” executive program both held at MIT. He is also the founder and CEO of Gazelles. Verne has spent the last three decades helping companies scale-up.
A regular columnist for Fortune magazine. He’s also the author of Scaling Up, Mastering the Rockefeller Habits and, along with the editors of Fortune, authored The Greatest Business Decisions of All Time.
Verne is an investor in several scale-ups, Verne lives in Barcelona, Spain, with his wife and four children and enjoys piano, tennis, and magic as a card-carrying member of the International Brotherhood of Magicians.
The lessons in the book can be categorized under the four keys to achieve scale
A. Attract and retain the right people
Lesson 1: Recruitment Strategy and finding “A players”
“You need a minimum of 20 applicants per position (frontline to senior) if you want to dramatically increase your odds of hiring A players.”
Remember that you’re not going to find great employees on job websites. Create a recruitment strategy and find a wide range of candidates (around 20 per opening) to improve your odds of getting a top class hire. From there, screen out half of the candidates with prescreening strategies such as online prescreening methods and exams and then interview the rest to screen out more than half of the remaining candidates. Utilize a “scorecard” which contains the competencies your firm needs and remember that your candidates must fit your culture and demonstrate the competencies listed in your scorecard.
Lesson 2: People Matter
“People join companies. They leave managers. Therefore, to keep your team happy and engaged, you need one thing above all else: great managers – not free lunches or yoga classes!”
Put people in the right places, especially in leadership positions. These leaders have the job of making sure that the right people do the right things. Once you have the right people, invest in their development and training and provide stretch assignments. The only way to grow a company is people first. Spend 2-3% of your payroll on development.
Your managers must be chosen for their ability to coach, not their technical skills. As they coach, they should be able to inspire people by reminding them of the greater purpose of their work. Make sure that they recognize their team’s good work as people excel when they feel appreciated. At the same time, managers should delegate in order for them to focus on coaching, clearing employee obstacles, and think about the future.
Lesson 3: Pay people well
“‘Fairness’ does not mean ‘sameness.’ You need to be creative and flexible in order to keep your top talent happy, from a compensation-package perspective.”
Paying people less than what their worth or in line with some compensation strategy ensures mediocrity. Pay top managers and staff members well, even if it means hiring fewer of them. Not only will it help you immensely in retaining your top talents, you will also be saved from expensive hiring and retraining costs.
B. Create a truly differentiated strategy
Lesson 4: The Value of Having Values
“Finding employees’ strengths and focusing workers on those assets is the most important people-management tool we can suggest.”
Core Values are the rules and boundaries that define the company’s culture and personality, and provide a final “should/shouldn’t” test for all the behaviors and decisions by everyone in the firm. Your culture and values should act like an immune system that spits people out who don’t align.
Core values, moreover, are the starting point of your strategy. It identities your organization’s core purpose, why it exists, and what problems does it solve and condenses the answers to these questions into a concise statement(s). From there, all the firm’s activities will be aligned, especially recruitment and hiring and rewarding employees.
Lesson 5: The 7 Strata of Strategy
“A good plan now is better than a great plan too late.”
As a strategy is a work in progress, a small strategy team should be designated to meet an hour weekly. Moreover, a 7 level approach is recommended to be undertaken by this strategy team:
- “Words you own (mindshare)” – It is important to position your firm with words and phrases that will define it in the marketplace. An example would be Volvo’s “safety”. Find these words which you will own and use, especially in creating content – utilizing Google Adwords and Keywords
- “Sandbox and brand promises” – know your most valuable customers, that group which contributes to an outsize percentage of your profits. Appeal to their emotional wants as much as their reasonable needs. Also, promote your brand promises which guarantees to retain your clients and make them want to do more business with you.
- “Brand promise guarantee (catalytic mechanism)” – state the most important thing that you will deliver no matter what happens. It may be a full refund or a guaranteed free replacement, stand by this promise and make it painful for your organization to fail to deliver.
- “One-PHRASE Strategy (key to making money)” – Focus on one main user benefit. For example, Apple has its “closed architecture”. Out of all the things that your customers want you to do may it be best price, best quality, etc., you can only focus on one main benefit.
- “Differentiating activities (3 to 5 hows)” – Your strategy on service delivery and how it differs from your competitors can either make your business thrive or kill it. Make sure that your differentiators can’t be done cheaply or quickly or else they would be easy to copy.
- X Factor (or the 10x Advantage) – Find your X-factor or that thing you do which outpaces your competitors by at least 10 times.
- Profit per X and BHAG – Choose a “big hairy audacious goal” that connects your purpose and strategy. Based on that, create one critical profit metric.
C. Drive flawless execution
Lesson 6: Execution Is Everything: The “Rockefeller Habits”
“Handling a company’s growth successfully requires three things: an increasing number of capable leaders, a scalable infrastructure and the ability to navigate certain market dynamics.”
The Rockefeller habits are ten fundamental habits that support successful execution of a strategy. These habits would serve as a framework to guide and monitor the execution of activities and make sure that they are aligned not only with the strategy but with the people doing the execution as well. At the core of the execution, make sure that your BHAG or Big Hairy Audacious Goal is broken down into a 90 day focus along with a quarterly theme to rally everyone around what’s important at that time.
In monitoring and checking execution, remember that everything needs a number – a determined outcome that is tracker by a KPI. If you’re not measuring it, it’s not going to get done. Also, put your metrics, goals and plans up big and visible in a place where meetings happen.
D. Have plenty of cash to weather the storm
Lesson 7: Cash is King
“What is more important, profit or cash? If you’re a growing business, it’s cash.”
Stop saying, “Well, this is just the way it is in our industry.” Make sure that you have enough reserves of cash as excellent leaders and teams or a brilliant strategy can’t save a company with cash troubles. Also, companies need cash in order to grow but nothing depletes cash faster than growth. With this in mind, you need to make sure that your cashflow is as tight and monitored as possible. Tighten up your accounting, collect receivables as quickly and accurately as possible and send error-free bills to clients on time.
VI. Other Learnings to Look Out For
- Out of the four critical areas discussed, the most pressing of the four is cash. Without cash and cash flow, there can be no growth.
- Accountability is crucial in scaling up. Every goal needs to be attached to a person.
- The “gazelles” that was discussed in the book accounts for almost all of the nation’s job growth and innovation, making them high impact firms.
- Leaders in gazelles recognizes their team’s good works, delegate tasks, and focus on the future by using data to make better predictions and decisions.
- Gazelles are rare even among the firms who manages to break through the $1 million revenue barrier. They either “stall out” or “screw up”.
VII. Personal Takeaways
- Great leaders and managers play a crucial role in the goal to scale up as it is up to them to steer the everyday activities and routine of their teams and make sure that they are aligned with the BHAG. This is why rather than technical skills, coaching skills are more important for leaders because they must inspire their teams and keep them reminded to the greater purpose of their work. Their judgment and talent management skills also plays a critical role as one of the necessities in scaling up is to make sure that the right people do the right things. It is up to them to make sure that there are actions that happen but at the same, these actions must be aligned with the goals defined by the firm’s strategy.
- Cash is definitely king. Without cash, growth can never be achieved even if a company has the best leaders, most competent and dedicated employees, and the best strategy. Cash enables growth to happen in reality but nothing depletes more cash than growth. This is why the first area of focus that a company must start with is cash.
- The first half of the Rockefeller habits are focused on people being aligned, accountable for ensuring a goal is met, and engaged in open and rigorous discussions.
VIII. Final Words
While the book gives out the tools and ideas that would help every firm to scale up and grow further, it must be noted that scaling up is not easy. If it were, then every company would be able to do it. The book’s title also serves as a reminder that some companies will make it while the rest will not.
IX. What other people are saying
- “Verne Harnish has once again proven he’s the Growth Guy. Scaling Up is packed with the tools to help you bust through the barriers to growth and climb learning curves faster. But don’t let your leadership team carry the load alone — multiply your impact by sharing the book with every employee on your team.”
— Liz Wiseman, best-selling author of Multipliers and Rookie Smarts
- “The idea of guiding a company from the small tide pools to the big seas of business can be exhilarating, but also daunting without a detailed set of directions. Scaling Up provides those directions, along with a remarkably detailed map for how to get there safe and happy.”
— Robert B. Cialdini, best-selling author of Influence
- “Verne Harnish is more committed to helping companies grow than any other person on the planet. Really. He’s also radically practical in his approach and that is reflected throughout this terrific book.”
— Patrick Lencioni, president, The Table Group; best-selling author of The Five Dysfunctions of a Team and The Advantage
- “Scaling Up is a blueprint for building a growth company. With this book, Verne has pulled back the curtain on how the fastest-growing companies in the world fuel their growth. Scaling Up gives you an insider’s view into the inner workings of the most successful companies on earth. A must-read for an ambitious entrepreneur.”
— John Warrillow, founder of The Sellability Score and author of The Automatic Customer: Creating a Subscription Business in Any Industry & Built to Sell: Creating a Business That Can Thrive Without You
- “We’ve scaled up our company from a single office near Calgary to 2,000 employees in 165 locations across Western Canada. Verne’s tools and techniques have been critical to helping us drive and manage this growth during my 20 years as CEO — and ultimately to freeing me up as the founder to pursue other interests.”
— Scott Tannas, founder and Vice Chairman, Western Financial Group; senator, Canadian Parliament