Why is it so difficult to manage a rapidly growing company?

[The Conversation] - Published on December 9, 2019 in Entrepreneurship, Science and Society

Many business leaders dream of hypergrowth. Being at the helm of a company that achieves annual growth of more than 20% for at least three years has become a major goal for entrepreneurs.

Bénédicte Aldebert, Aix-Marseille University (AMU) and Ophélie Laboury-Barthez, University of Montpellier

Indeed, this is precisely the path taken by Google, Facebook, and Airbnb. Yet hypergrowth is a genuine disruptive force in a company’s life. Whether the company is young or more mature, hypergrowth creates radical instability, which weakens it, and emerging from this situation all too often results in the company’s failure. How can we explain and prevent the tensions arising from this exceptional situation from leading to failure?

We focused our analysis on the issue of governance, which, according to a recent KPMG study, stands out as one of the main challenges (along with recruitment and cash flow) faced by hyper-growth companies.

Indeed, governance plays a crucial role in managing the delicate balance between the various paradoxes faced by hypergrowth companies. We therefore embarked on a groundbreaking exploratory study of a sample of 10 hyper-growth companies and their ecosystems. Following this analysis, we present our initial observations and findings on the governance of “hyper-growth” companies.

Different approaches

Corporate governance is a theoretical concept originally developed for large companies that addresses the balance of power within a company among those responsible for its performance, investors, and other stakeholders.

To put it simply, there are two main types of approaches that seek to understand how relationships between shareholders, stakeholders, and executives are regulated within companies.

The first approach, which is contractual and disciplinary in nature, focuses more on the relationship between shareholders and executives and examines the role of the board of directors and ways to limit the executive’s discretion. This was particularly the case with Carlos Ghosn when he was at the helm of Renault-Nissan.

A second, more recent alternative approach focuses on understanding the knowledge and resources that managers need and draw upon to drive the company’s growth. This approach is referred to as cognitive and behavioral.

The statements made by the executives of hypergrowth companies we interviewed reflect this type of cognitive governance, which focuses on the value creation process and places particular emphasis on building competencies, fostering innovation, and adapting to their business environment. The executives emphasize that this approach is preferable to disciplinary governance practices when it comes to managing tensions.

The company in its teenage years

A rapidly growing company must quickly navigate conflicting situations, and more often than not, it is not prepared to do so. Research highlights four major paradoxes within organizations that are particularly pronounced in rapidly growing companies. These include:

• Learning: Hypergrowth drives the company to explore new knowledge (often requiring a long maturation period, through trial and error) while continuing to leverage its existing knowledge (i.e., putting it into daily practice). The company must be ambidextrous and therefore know how to streamline without becoming too rigid, while retaining what has made it strong—often improvisation, innovation, and flexibility;
• Identity: The rapid expansion of the company’s size is not keeping pace with the existing teams’ acceptance of these changes, leading to concerns that the company’s founding cultural model may be eroding;
• An organization that emerges from the delicate balance between control and autonomy, or between stability and change. One executive we interviewed put it this way: “I give them a lot of freedom (referring to employees), but I want to control everything”;
• Performance: Hypergrowth brings with it a wide range of new stakeholders (such as new partners or employees) whose interests may be contradictory and conflicting.

Amid all these pressures, our study shows that leaders feel they must above all address organizational pressures.

In short, hypergrowth refers to a situation in which a company transitions from its infancy to adulthood through a period of intense, heightened, and accelerated adolescence.

Four Key Factors for Effective Governance

Our exploration has led us to identify four key levers that must be activated to establish a governance structure suited to a situation of hypergrowth:

• Dealing with tensions within the company: Leaders must acknowledge that their behavior and the rapid growth phase are creating tensions, and allow themselves to build their business while managing these tensions. Trying to eliminate these tensions would be counterproductive to the well-being of both the leader and the company. The solution lies in skillfully navigating these tensions to find a balance.
• Building a culture of hypergrowth: The arrival of all new employees requires special attention to ensure that the company’s identity and values are not lost. It may be beneficial to establish routines for sharing information with employees, communicating the company’s vision and purpose, and setting aside time for discussions about upcoming changes. These sessions synchronize and align employee behaviors with those of the company.
• Take the time to establish a governance structure: this involves planning ahead and initiating an internal organizational framework by forming a management team, tailoring the shareholders’ agreement, and selecting your financial partners. This must be accompanied by a strengthening of the leader’s legitimacy, who must reflect at each stage on their capabilities and skills: are they hands-on or a delegator? Are they more of a manager or a leader? Should they focus on operational or strategic matters?
• Ensuring the legitimacy of governance: The governance structure put in place will enable the management of the various paradoxes and tensions encountered. This governance must be both cognitive—to build trust, foster relationships, leverage networks, and provide expertise—and disciplinary, involving the implementation of metrics and financial ratios to inform decision-making and ensure a safe transition out of hypergrowth. As one executive we interviewed pointed out: “In hypergrowth, what’s crucial is having financial and commercial indicators. Driving a Formula 1 car blindfolded is fine—you’re going 300 km/h—but you don’t know if there’s a turn […]. Without those indicators, you’ll crash into the wall.” This balance between cognitive and disciplinary governance will facilitate dialogue with all stakeholders and bring the entrepreneurial vision to fruition.

In conclusion, hypergrowth is a phase that can seriously jeopardize a company’s survival. This is hard to imagine, since most people associate hypergrowth with success. However, effective governance is essential to ensure that power is distributed appropriately between management and stakeholders, taking into account organizational paradoxes and without neglecting the company’s culture.

This paper is based on the article titled “Can a gazelle be managed like an elephant? A Study of Tensions and Governance in Hyper-Growth Companies,” by Boulmakoul N., Aldebert B., and Amabile S. (2019), presented at the^18th conference of the International Association for Strategic Management (AIMS) and supervised by Ophélie Laboury-Barthez.

Bénédicte Aldebert, Associate Professor, Entrepreneurship, Aix-Marseille University (AMU) and Ophélie Laboury-Barthez, Adjunct Lecturer in Strategy and Innovation Management, University of Montpellier

This article is republished from The Conversation under a Creative Commons license. Readthe original article.

Keywords: Economy, Company, Politics, Startup