Why is it so difficult to manage a company experiencing hypergrowth?

[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 experiences growth of more than 20% per year for at least three years has become a true ambition for entrepreneurs.

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

Indeed, that is precisely the path taken by Google, Facebook, and Airbnb. Yet hypergrowth is a true 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 understand 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 vital role in managing the delicate balance between the various paradoxes faced by a hyper-growing company. We therefore embarked on a unique exploratory study involving a sample of 10 hyper-growth companies and their ecosystems. Based on 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 the company’s 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 a leader needs and draws upon to develop the company. It is referred to as a cognitive and behavioral approach.

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 to governance is preferable to disciplinary governance practices when it comes to managing tensions.

The Company in Its Teenage Years

A hyper-growth company must quickly manage conflicting situations, and most of the time it is not prepared to do so. Research sheds light on four major paradoxes within organizations that are particularly pronounced in hyper-growth companies. They concern:

• Learning: Hypergrowth drives the company to explore new knowledge (often requiring a long maturation period and involving trial and error) while continuing to leverage its existing knowledge (that is, applying it to day-to-day operations). The company must be ambidextrous and, consequently, 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 fears that the founding cultural model may begin to unravel;
• An organization that emerges from the delicate balance between control and autonomy, or between stability and change. One executive we interviewed made this illustrative point: “I give them a lot of freedom (referring to employees), but I want to control everything”;
• Performance: Hypergrowth brings with it a wide variety 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 deal primarily with organizational pressures.

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

Four Keys to Effective Governance

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

• Dealing with Tension in the Company: The leader must acknowledge that his behavior and the rapid growth phase are generating tension and allow himself to build his company while managing that tension. Trying to fight these tensions would be counterproductive to the well-being of both the leader and the company. The solution lies in skillfully balancing these tensions to find equilibrium.
• Building a culture of hypergrowth: The arrival of all new employees requires special attention to ensure 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, as well as setting aside time for discussions about upcoming changes. These sessions help synchronize and align employees’ 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 putting together a management team, tailoring the shareholders’ agreement, and selecting your financial partners. This must be accompanied by a strengthening of the leader’s legitimacy; at each stage of the process, the leader must reflect on their capabilities and skills: are they someone who gets things done or someone who gets others to do them? 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 foster trust, interpersonal relationships, networking, and 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 sales metrics. Driving a Formula 1 car blindfolded is all well and good—you’re going 300 km/h—but you don’t know if there’s a turn ahead […]. If you don’t have those metrics, you’ll crash into a wall.” This balance between cognitive and disciplinary governance will facilitate dialogue with all stakeholders and bring the entrepreneurial vision to life.

In conclusion, hypergrowth is a phase that can truly jeopardize a company’s survival. This is hard to imagine because, for most people, hypergrowth is synonymous with success. However, effective governance is essential to ensure the optimal distribution of power between leadership and stakeholders, while taking organizational paradoxes into account and not neglecting the company’s culture.

This contribution 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 Instructor 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