15 May 2008

Growth obstacles for large companies

By Jim Pinto

There are several obstacles/plateaus/barriers to growth that are important to understand. Recognition of these growth patterns allows companies to plan for survival or success beyond the current phase.

All organizations go through five stages of growth. Each stage needs different management structures and strategies to optimize business during that phase of development. It is important to understand why certain management styles, organizational structures, and coordination mechanisms work and do not work at each step in the development of an organization.

Here are the characteristics that describe each growth phase:

• Entrepreneurial: $1 million company, with 10 - 20 people. Start-up, informal communications, hard work with minimal pay. This stage usually ends with a leadership crisis for the founder or founders.
• Direction: $10-50 million, 100 - 300 people. Good, functional organization structure with well-defined responsibilities in all the primary growth disciplines. This phase usually ends with an autonomy crisis—lack of management depth. This typically leads to acquisition by a larger company.
• Delegation and functional management: $ 100-$300 million, 1,000 - 3,000 employees. Decentralized organizational structure. This ends with a control crisis, with management or ownership changes.
• Coordination and monitoring: $1billion+, global span, 5,000 - 10,000 employees. Formal planning, centralization of support functions, corporate staff, motivation through broad-based profit sharing. This ends with an organization crisis.
• Collaboration and global organization: $10 billion+, 25,000+ employees. New evolutionary path, team action for problem solving, decentralized support staff, advanced information systems, team incentives. This may end by a stalled-growth crisis, and lack of visionary leadership.

After a few lean years, industrial automation companies have started to thrive again; most of the majors have announced respectable growth and profits for a couple of years. As predicted previously, this signals a period of new mergers and acquisitions; the weak players are vulnerable to buyout, and the strong are looking for an expanded customer base plus consolidation of talent and resources.

It is very difficult for automation companies to continue to generate organic growth, and so some of the automation majors get stuck at the 5th phase, collaboration and global organization. This leads them to mergers and acquisitions in related areas with accompanying divestiture or elimination of duplication.

When a company has about $5 billion in annual revenues, 10% growth represents $500 million, which is not easy to achieve in the current global environment. Old products and markets decline, while new initiatives take time to mature. Growth by acquisition seems the only alternative. But, acquisitions are fraught with problems—implementing good management and controls to stimulate growth of the acquired company and continued profitability to maintain earnings. The larger the acquisition, the more the danger; one slip and earnings may collapse, causing the stock to dive, making a buyout target for a much larger organization.

The under $10 billion automation majors (Invensys and Rockwell are good examples) are at the Phase-5 growth barrier. I have forecasted the automation industry Big-10 will reduce to the Big-5. That prediction will be realized this year, or at the latest by 2010.

Related links:

• InTech e-News – Business growth plateaus/barriers
  http://listpilot.net/c/ISA/3dyzL/w/isa.org/intechnews.cfm?id=7602
• Managing Growth – 5 Phases of Growth:
  http://www.themanager.org/Strategy/ManagingGrowthI.htm
• InTech e-News – Tomorrow’s leading automation companies:
  http://r.listpilot.net/c/isa/1gp47uk/13jbg

Behind the byline

Jim Pinto is an industry analyst and founder of Action Instruments. You can e-mail him at jim@jimpinto.com or view his writings at www.JimPinto.com. Read the Table of Contents of his book, Pinto’s Points, at www.jimpinto.com/writings/points.html.