PDF Summary:Scaling Up, by Verne Harnish

In Scaling Up, Verne Harnish covers key strategies to grow your business from a small company into a firm employing hundreds or thousands of people. These facets include

• Articulating a clear vision for what you ultimately want your company to be—anchored by a core set of values
• Implementing the right long-term, multiyear strategy to bring that vision to life
• Putting the right team in place with smart hiring practices to bring new employees on board and regular training to keep your existing employees performing at a top level
• Guiding implementation by assigning core functions to individuals who will be accountable for them, establishing and tracking key performance indicators (KPIs), maintaining a healthy cash flow, and maximizing your company’s labor productivity

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One of the earliest and most famous practitioners of this matrix structure is the global consumer goods giant Procter & Gamble. P&G owns 65 of some of the world’s most famous consumer goods brands, organized through six SBUs, each of which has responsibility for a family of product categories and the brands that serve those product categories. Each SBU is responsible for sales, profit, cash, and value creation within its sector in P&G’s primary markets in North America, Western Europe, and Asia, with responsibility for those functions in emerging markets in Latin and Central America, Eastern Europe, Africa, the Middle East, and Oceania assigned to a separate emerging markets unit.

Pros and Cons of the Matrix Structure

There are some important benefits to a matrix structure. Because functions are not housed in siloed departments, there is often greater ease of communication between employees. This leads to a more cohesive work environment. Because SBUs within matrix structures share common resources like accounting or human resources, there can also be significant savings that accrue to a company by using this structure. Lastly, matrix structures can be good at fostering employee growth and skill development. Because employees in an SBU are faced with a wide variety of projects, challenges, and customers, they tend to become more versatile and agile.

But there are also drawbacks. Because of overlapping reporting hierarchies, employees often report to more than one boss. This can lead to confusion for the employees and conflicts between bosses of the same employee if their priorities don’t align. And because matrix structures tend to make people responsible for multiple projects at once, the system can quickly lead to burnout, discontent, and turnover if not managed properly.

Move Beyond the Founder

Lastly, Harnish argues that as you grow and your strategy progresses, you’ll have more product lines, more physical locations, more expenses, more employees, more competitors, and more marketing needs. Naturally, this requires the founder to delegate some functions and bring in new people who are experts in the company’s emerging and complex functions. Harnish warns that this can often be difficult for founders and entrepreneurs who may be reluctant to let others have input on the future course of “their” company.

But, writes Harnish, having a strategy in place helps prevent these kinds of power struggles and turf wars because it creates a results-driven process rather than a personality-driven process—bringing clear focus, policies, and procedures that keep the company on track, regardless of the whims of the founder.

Beware the Cult of the Founder

Founders perceived as visionary or unique creators often present problems for their companies as the firms grow. In Silicon Valley, the “cult of the founder”—a sort of reverence for perceived rule-breaking, creative-minded, visionaries in the mold of Apple’s Steve Jobs, Microsoft’s Bill Gates, and Facebook’s Mark Zuckerberg—has frequently led to investors pouring money into enterprises with ill-conceived business models and/or incoherent paths to profitability, based on little more than the charisma or salesmanship of the founder/CEO.

In fact, one study showed that companies led by their founders tend to rate poorly relative to other leadership structures on a host of management criteria—including setting intermediate growth targets and rewarding talented employees.

Build Your Team

Harnish writes that once you’ve articulated your company’s vision and crafted the strategy to bring that vision to life, it’s time to develop your company’s most important resource: its people. Without quality people, any effort at growth will be short-lived and fizzle out before you even get started. To scale up successfully, you need to build an all-star team, from senior leadership to middle management and the rank-and-file.

Cultivating this top-tier team means changing both how you hire new people and how you train and motivate people already with the company.

New Hires Tactic #1: Focus on Accomplishments, Not Job Descriptions

Harnish says that when creating new positions, you should ditch the practice of writing job descriptions. Job descriptions are just what they sound like: descriptions. All they do is tell you the boxes that a person needs to tick every day to do their job. And if you focus too much on that, you’ll end up hiring people who do nothing more than tick boxes.

Instead of designing roles with specific day-to-day functions in mind, Harnish recommends designing roles in which people are asked to accomplish specific goals from year to year. Focusing on ability to deliver outcomes instead of people whose experience simply matches the job descriptions will hone the interview process and help you screen for the right kind of candidates. You’ll be better positioned to find candidates that align with your company’s vision and points of excellence.

(Shortform note: Other writers have noted that many job descriptions suffer from a common set of problems. They’re often badly out of date, because the hiring manager just uses the same job description for a given role every time it needs to be filled. They can also be written too vaguely, giving both applicants and hiring managers an unclear sense of what the duties and responsibilities, qualifications, and measures of success are for the position. To write better job descriptions that elicit responses from the kind of candidates you want to hire, make the job description-writing process a collaborative effort, seeking input from peers and colleagues, as well as the position’s direct supervisor.)

New Hires Tactic #2: Comprehensive Interview

Harnish recommends screening candidates with phone interviews and only bringing in the final five to 10 candidates. You should ask candidates to go through an entire chronological overview of their work history, pointing to specific challenges, experiences, and highlights at each of their jobs. This thorough approach, known as a “topgrading” interview, gives you far deeper insight into a candidate’s personality, temperament, character, and resiliency than a typical interview would.

Harnish argues that understanding these attributes can help you better determine if this candidate’s personality will be a good fit with your company’s culture, vision, and values. He notes that this can count for far more than someone’s measurable skills or level of experience.

Personality vs. Experience: Top Entrepreneurs Weigh In

The subject of whether to hire based primarily on experience or personality is a controversial one. Virgin Group founder Richard Branson favors hiring based on personality, emotional intelligence, and cultural fit with the company. Branson argues that, while job-specific knowledge can always be taught, the emotional or temperamental attributes that make someone a good or bad fit for a position are innate. For Branson, if someone has the wrong personality, no amount of training can overcome that.

On the other hand, Robert Herjavec, founder and CEO of the Herjavec group (and one of the judges on Shark Tank) says that a candidate’s skillset and level of focus are the most important attributes when it comes to hiring decisions. Herjavec says that an interview needs to be structured to help the interviewer distinguish between good performers and those who are merely good at presenting themselves in interviews.

Current Employees: Build the Culture Through Training

Harnish writes that for people already with the company, building a values-driven culture of success is a crucial component of any scaling-up effort. Cultures are the sets of norms, behaviors, and values that guide day-to-day behavior. As a leader, you want to create the conditions for a culture that values innovation, risk-taking, and strategic thinking, instead of complacency and short-term thinking. Harnish writes that you need to get people to buy into your scaling-up strategy, and making the values and priorities clear to new hires when they walk through the door is a great way to start.

In addition, Harnish recommends boot camps, retreats, and regular training sessions to help reinforce this message. Even if organizing these events and paying for training costs money, it will be money well spent that will surely pay off in the long run.

Use Role-Playing in Your Training

In The Ultimate Sales Machine, Chet Holmes cautions that not just any training will do. It needs to be consistent, regular, interactive, and fun. One-off annual training events where employees are simply lectured to for a few hours won’t have any lasting impact. Real skill-building, writes Holmes, comes when employees are engaged in the training and participating in shaping their experiences as they’re learning. Role-playing exercises can be great for this, helping your sales team direct their own education while working through thorny real-life scenarios.

In fact, some firms make role-play training itself a regular part of company culture. In Peak, Anders Ericsson offers up the example of Blue Bunny Ice Cream. This company used its regular meetings between regional sales managers and the senior sales managers to stage role-playing exercises, in which the regional sales manager practices making their pitch to a customer and receives feedback on their approach. Ericsson writes that this not only helps refine the skills needed for the next call with a customer, but it also gets everyone in the company used to the idea of practicing and training itself—because it just becomes a normal part of the business day.

Ensure Implementation

By now, you have most of the pieces in place to begin growing, expanding, and making progress toward your ambitious goal. You’ve defined your vision, crafted a multiyear strategy to bring it to fruition, and put the right team in place to make it all happen.

But even after doing all that, you as the leader can’t just walk away and assume that the entire operation will run on its own. You need to be on the ground to guide implementation of the scaling-up plan. Harnish writes that there are four keys to this:

• Promote accountability by making sure every function and process is assigned to an individual.
• Set intermediate goals to secure company buy-in and learn valuable lessons as you go.
• Track your progress with KPIs.
• Think beyond just profits by looking toward maintaining healthy cash flow.

Promote Accountability

Harnish writes that effective systems of personnel management are essential to successful implementation of the strategy. Crucially, people must be accountable for the processes and functions that they touch.

With every core function and process, assign responsibility for it to a single person. They own it now. Everything that gets done in your company should have a return address— someone who owns that function, takes the fall if things go wrong, and whom people at your company know to reach out to if they have problems in that area. But while every function should be accountable to one person, and no function should lack someone who’s accountable for it, no single person should have too many responsibilities.

High-Performing Teams and Accountability

In The Five Dysfunctions of a Team, Patrick Lencioni writes that a willingness to hold peers to high performance standards is a crucial characteristic of high-functioning teams. They are able to do this because everyone is clear on what is expected of themselves and their teammates and is comfortable being vulnerable and sharing feedback.

When there is a lack of accountability, Lencioni argues, teams encourage low standards and force the leader to become the sole source of discipline. He recommends that teams engage in constructive peer pressure by publishing team goals and standards and instituting regular process reviews. They can also receive team rewards, which motivates teams to work together and point out individuals who aren’t pulling their weight.

Set Intermediate Goals

Harnish writes that you need to set smaller, intermediate goals on the path to larger goals toward the fulfillment of the vision. Since your main goal is likely a multiyear effort, your intermediate goals should be broken up into monthly, quarterly, and yearly benchmarks. This is crucial to successful implementation, because these intermediate goals—and the public celebration of them when they’re met or exceeded—helps secure buy-in and align the entire company with the vision. When people see genuine progress being made, it makes it far easier for them to get on board with the vision and see their individual roles and responsibilities as part of a company-wide strategy to make that vision a reality.

Intermediate goals can also be important learning opportunities. If you miss an intermediate goal, it doesn’t necessarily mean that your strategy is doomed. Instead of reacting hastily and pulling the plug on the entire scaling-up plan (as far too many companies do), Harnish advises that you take a breath and try to figure out what happened. Often, it’s just a matter of reallocating resources and fine-tuning some processes to get the outcome you want. Indeed, there’s usually a productive lesson to be learned and applied.

(Shortform note: You can break the intermediate goals down even further into actionable business objectives. These are the specific steps that people in your company must take to achieve an intermediate goal. Thus, if one of your short-term goals is to add five new people to the sales staff by the end of the quarter, actionable business objectives might include posting the jobs to Indeed, screening candidates, and scheduling interviews by the end of the month. All actionable business objectives should be assigned to a specific person and have specific, targeted deadlines.)

Track Your Progress With KPIs

Harnish writes that you can’t implement what you don’t measure. Since every important function in your company now has a specific person assigned to it (and responsible for it), you should make ample use of key performance indicators (KPIs). These are stats that get to the heart of whether a department, functional area, or specific individual is pulling their weight.

There are many types of KPI. They could be hard, quantitative financial data points (like earnings per share or debt/equity ratio) or more “soft” qualitative metrics (like measures of customer satisfaction). As the leader, you just instill into managers the expectation that performance will be measured and evaluated on a regular basis to ensure that implementation is running smoothly. To track progress in real time, you can even insist that certain measures of progress (like cash flow) be submitted to you on a daily basis.

Harnish writes that your strategic thinking group should meet weekly to assess the progress of the growth initiative. They can make use of real-time data and reports from customers, employees, suppliers, and other stakeholders to evaluate how the strategy is going and fine-tune any adjustments that need to be made.

Use the OKR System to Track Your Company’s Goals

In Measure What Matters, John Doerr argues that the key to developing useful metrics is to identify your company’s OKRs—objectives and key results. The objective is the ultimate goal, what you and your team exist to achieve. If you’re a sales team, then your objective might be defined as total sales or possibly net revenue. Doerr emphasizes that whatever your objectives are, they must be measurable, concrete, and action-oriented: If they’re intangible or not something that individuals can actually do things to work towards, then they’re not truly objectives.

The key results are the rungs on the ladder toward your objective. These are the sub-goals that facilitate the achievement of your ultimate objective. For a sales team, these might be total calls or emails made to customers, new inbound leads, or conversion rate. To implement the OKR system, Doerr advises that you need to start by identifying the most important tasks your company needs to accomplish within a set timeframe. Once you’ve identified your company’s objectives, you then direct departments, teams, and individuals to identify their own objectives. Every objective, regardless of whether it’s an individual or department objective, should align with the company’s top objectives.

Note that KPIs and OKRs are not the same thing. OKRs are a more expansive and encompassing framework for directing a company’s growth. KPIs measure a company’s performance on certain tasks within an existing framework. The objectives within the OKR framework, however, are similar to the “vision” as described by Harnish. Also, individual KPIs can sometimes be synonymous with the key results in the OKR framework.

Maintain Cash Flow

Harnish warns that all your visionary and strategic thinking might come to nothing if you don’t maintain adequate cash flow.

When implementing a growth strategy, many companies find that growth does not pay for itself. In fact, growth can quickly act as a drain on cash reserves. And that’s a problem, because you need cash to meet your payroll, finance debt obligations, meet daily operating expenses, as well as to finance new projects and invest in new customer acquisition.

In general, Harnish writes, you should strive to have two full months’ worth of operating expenses in cash. Anything less, and you’re leaving your company seriously exposed in the case of a cash crunch from unforeseen expenses or a sudden loss in sales.

The Cost of Cash Reserves

Some other business writers actually go beyond what Harnish recommends and urge firms to hold cash and other liquid assets worth three to six months of operating expenses. This is especially true for highly seasonal businesses, which need fairly high cash reserves to make it through the low-revenue parts of the calendar year. Drilling down even further, you can separate your cash reserves into 1) a monthly operating account able to cover the expenses for the leanest month of the year, and 2) a contingency or “rainy day fund,” set aside for unforeseen catastrophes like losing a top customer, a labor strike, or natural disaster.

Note that there can also be such a thing as having too much cash. If a business is sitting on several times more than the cash it needs to cover both its operating and contingency accounts, that might be a signal that leadership at the company isn’t finding useful ways to invest that money. If the interest the company is earning by holding cash is less than the return on equity it could be earning if that money was invested in a new project, then holding the cash actually represents an expensive opportunity cost.

Think Beyond Profits

Harnish notes that many companies make the mistake of only caring about quarterly or annual profits instead of their continuous cash position. This can have grave consequences.

A cash-poor company (no matter how high its profits may be) is always considered a major credit risk by banks. Understandably, banks will be concerned that you won't be able to meet periodic debt obligations without a healthy amount of cash on hand. After all, you can’t make monthly payments on your business loans with profits that may not materialize until the end of the year.

Furthermore, Harnish argues, banks know that certain financial statements can be easily manipulated with clever accounting to make your company look healthier than it really is. But it’s more difficult to manipulate the numbers on a cash flow statement.

(Shortform note: In accounting, there are three main financial statements, each of which tells you something unique about a company’s financial health—1) balance sheets, 2) income statements, and 3) cash flow statements. A balance sheet is a snapshot of a particular moment in time, telling you what assets a company owns, what liabilities it owes, and how much equity the shareholders have. An income statement shows revenue earned over a period of time—usually quarterly or annually—as well as the direct costs associated with earning that revenue. Cash flow statements, which Harnish identifies as the most important, show the fluctuations in cash on hand over a period of time.)

Look for Labor Productivity

Harnish writes that a final key to successful implementation is tracking your labor productivity. In other words, how much in revenue comes back for each dollar spent on labor? By measuring your gross margin (revenue minus non-direct labor costs), he writes that you’ll be able to find greater efficiencies and opportunities for each dollar you spend on labor.

Harnish contends that when your company is running smoothly with high labor efficiency, you should be able to achieve 15% profit as a percentage of net revenue (the maximum in most mature markets). Once you reach this point, this is your signal to invest in new productive labor. If you don’t reinvest in labor, he warns, your existing talent pool will become stagnant (skilled employees retire or leave or old skills become obsolete) and you will lose competitive advantage.

Harnish recommends increasing overall labor productivity by:

• Offering raises to top performers
• Hiring new talent
• Getting rid of ineffective or underperforming labor

(Shortform note: Although, as Harnish writes, there are some things that individual firms can do to boost labor productivity, output-per-worker or output-per-labor-hour is often determined by global macroeconomic forces that are too large to manipulate at the enterprise level. For example, in Basic Economics, Thomas Sowell notes that much is said about how American goods can’t compete with goods produced by low-wage workers in poorer countries. But in reality, he notes, American workers produce more per worker-hour than poorer workers elsewhere. In other words, American workers are more efficient per unit of output. The efficiency may arise from better machinery, more capital investment, greater average levels of education, or greater economies of scale. For example, Sowell observes that average labor productivity in India is 15% of that in the U.S. This means that hiring an Indian worker at even 20% of a U.S. worker’s cost would be more expensive.)