Business Growth & Managerial Capacity // FM Accountants / Dublin / Ireland
Business Growth & Managerial Capacity

The firm increases its size by using resources more efficiently, thereby increasing productivity, or by introducing new products and services that are well received in the marketplace, a strategy referred to as ‘natural growth’. Alternatively, the firm may use its resources to expand the market by merging with or by acquiring other firms, by taking up the space of a deceased competitor, or by forming alliances with other firms and employing synergies to grow both the market and the business – a strategy known as ‘forced growth’.

But regardless of the strategy, all too often the initiative fails to result in sustainable growth of the firm.


The limitations on management’s ability to achieve sustained growth operates at many levels including: the pool of talent at management’s disposal; the rate at which new management resources can be added and integrated; and the speed with which proven managerial experience can be shared.
To answer the question why strategies so eagerly and hopefully developed unfortunately often fail in their implementation, we need to start by looking at how firms operate.

The administrative framework of a firm consists of two tiers – the entrepreneurial services that generate new markets and
product / service ideas; and the managerial activities that administer the routine processes of the firm and facilitate the profitable execution of new opportunities.

The problem with the introduction of a push for growth is that, while the business may have the capacity to ramp up its production and distribution capabilities, it may not be able to find the extra managerial services, or ‘managerial capacity’, that is the invariable knock on need from growth.

It’s rarely that a firm can evade the effect simply by hiring new managers to shore up its managerial resources. It takes time for a new manager to become familiar with the culture of the place, acquire firm-specific skills and knowledge, and work with other employees long enough to develop trusting relationships. In fact, managerial expertise is often an organisation-specific asset that accumulates over time, and can’t necessarily be rushed.

The bottleneck to growth a firm experiences because its managerial resources are insufficient to take advantage of its new product and service opportunities is a well known and studied phenomenon. Indeed, its alternative name, the Penrose Effect, is taken from Edith Penrose who was doing pioneering work on how firms grow as early as the 1950s. Essentially, it states that a firm that grows faster than the abilities of its management is unlikely to succeed.
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In tough competitive times it’s foolish for companies to believe they can stand still and today hungry competitors operating in a climate of globalised competition stand ready to move into markets previously considered safe from challenge. For many businesses expansion may not be an option – continued viability may necessitate it for the benefits it can bring to keep it competitive.

A convenient excuse for not looking at the reasons why a company cannot grow can be found by attributing failure to external factors such as economic recession and the intensity of competition, studies also show that internal limits on enterprise growth can be just as important. Studies regularly conclude the most prominent internal inhibitor is limitations on the management team’s ability to manage further growth.
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If a firm lacks sufficient managerial services to implement its entrepreneurial ideas, it will either be unable to grow or else it will grow without adequate managerial talent being applied throughout the enterprise

The managerial capacity problem arises when, as a result of growth, managerial resources are diverted from their administrative duties and have to deal with additional responsibilities created by the entrepreneurial services.

If a firm lacks sufficient managerial services to implement its entrepreneurial ideas, it will either be unable to grow or else it will grow without adequate managerial talent being applied throughout the enterprise. As we have noted, the solution doesn’t lie in simply hiring new managers to cover the gap in managerial resources. Newcomers to an organisation begin on the edge of inclusiveness until they can prove an understanding and acceptance of the group's norms and values. Even the best qualified new managers take time to find acceptance and become full contributors to their firms.

Meanwhile, the effects of the managerial bottleneck can be increased by many other factors that can arise in even the best-managed enterprise. Growth might be dependent upon recruiting the right kind of new employees who may or may not be available at that time. Ironically, the faster a firm grows the less time management has to devote to hiring and supervising new personnel.

Cultural problems can also arise that will affect growth abilities. The more rapidly a firm grows the more likely it is that new people will be required to fill positions in the enlarged business structure. The new-hires usually do not have the same motivation or dedication as longer-serving personnel and therefore require more supervision and mentoring.
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There’s little return on the effort expended to recognize new market, product, or service opportunities if a firm does not have the managerial capacity to capitalize on those opportunities.

Firms that want to grow must find ways to mitigate the impact of the managerial capacity problem to create and sustain growth. There are two elements of the managerial capacity problem that must be addressed before a firm can both produce growth and sustain success.

The first concern is that the entrepreneurial forces within the business will be so frustrated by a lack of managerial capacity that they will wither and cease their attempts to drive growth; the second is that it takes time for new management talent to be sourced and brought up to speed to the point where they become effective.

So growth initiatives must include, from the beginning, recognition of the strain that growth might entail and strategies for dealing with them.

The solution is not a single dramatic masterstroke; it’s an armory of initiatives from which a firm can choose those weapons most appropriate to its own situation. These initiatives range from hiring policies to structuring rewards for management, and all should be considered by any company that has rapid growth as a corporate goal. Broadly they can be categorized as internal strategies or external strategies.
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There are a number of incentives and empowerment practices that can be implemented to elicit discretionary effort from employees and reduce the consequences of fast growth.
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Business owners who pursue growth but are reluctant to expand the management team are attempting the impossible. A team of committed managers becomes vital to the growth of the firm. The business owner can stretch themselves only so far before they must attract talented people who will buy into the vision and help grow the firm. And as the team expands, the organisation develops into layers.

How to manage growth of the team and develop the organisation is a critical component of CEO leadership. Two tools that can be used to overcome the managerial capacity problem used in the early expansionary stage are creating a top management team and appointing a board of directors / advisors.
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A mission statement has been shown to provide clear direction to the employees of a business as well as helping experienced employees mentor new-hires. Rapid-growth firms emphasize the use of mission statements to a significantly higher degree than normal and slow-growth firms.
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There are two basic forms of incentive – financial and non-financial. Both can be valuable in helping rapid-growth firms combat managerial capacity problems.

Most important are the growth related financial incentives, including bonus plans, profit sharing, and stock options. These provide quantifiable stimulation to performance and align the interest of employees with those of the firm itself. Financial incentives can also be very effective in attracting and retaining the kind of high quality employee needed by rapid-growth enterprises.

Less important are the non-financial incentives, including non-monetary awards and other forms of recognition such as educational reimbursements, membership of social organisations and travel.
With these it is more difficult to relate the reward to the growth of the business, although some non-financial incentives can be used to support ones of the financial varieties.
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The company’s existing management must be motivated towards growing the business. This can be done using a combination of company wide commitment to growth and incentives to individual managers.
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Rapid-growth firms have a higher quality of communication with their employees than slow-growth and normal-growth businesses. Communications work quickly and effectively in both directions, to and from the employees of the business; this has the dual effect of ensuring that everyone in the business has the same information and that it is unambiguous and not subject to erroneous interpretation.
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Many rapid-growth firms have a policy of recruitment from within, and commit themselves to the grooming of lower-level employees as candidates for management positions. There is no doubt this means a newly appointed manager will settle in and become more effective faster than one hired from outside; they’re already familiar with the people and the culture of the business.
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As the number of employees that a firm needs increases, so it becomes increasingly difficult for it to find the right employees, place them in appropriate positions, and provide adequate supervision. Further, new-hires typically do not have the same ownership incentives as the original founders.

So, although there is always a pressure on rapid-growth firms to speed up their recruiting of new talent, it’s important that they maintain high standards during the recruitment and selection process. It will add costs and involve more time, but in the longer term will minimize the risk of expending valuable resources on people who will not contribute to growth or else will leave the business before there is any return on investment from their hiring / training costs.
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Participating in alliances of one sort or another provides firms with access to their partner’s resources and managerial talent, which,
in effect, allows firms to outsource a portion of their own managerial capacity requirements

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Managerial capacity can be quickly added through forming an alliance with another organisation. This is one of the most important practices adopted by rapid-growth companies to counteract the problems of managerial capacity.

Partnering with other organisations enables firms to effectively co-opt a portion of their partner’s managerial capacity, reducing the need to recruit new managers and incur the costs of training and bringing them up to speed so they can perform their duties.
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Studies have shown that rapid-growth firms are more likely to seek out management talent with a good depth of experience in their own industry. This gives them advantages in being able to tap into their social and business networks to identify other suitable candidates for positions with the company, and to choose partners for alliances.
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Professor Edith Penrose and the other economists who have followed her into examinations of rapid-growth enterprises are in general agreement that the problem of managerial capacity exists and is a limiting factor on the ability of rapid-growth firms to continue growth and prosper at the same time. Indeed, perhaps the strongest constraint on growth in any business is management resources. The demands of the business quickly outstrip the management’s capacity to handle them.
Studies conducted over the past three decades have confirmed this effect but have also, in the process, revealed a number of techniques by which a firm can overcome that challenge. These studies confirm that rapid-growth firms differ from normal and slow-growth firms in a number of key areas in regard to the management techniques that they employ to lessen the impact of the managerial capacity problem and enhance firm growth.

The recognition of new market, product, and service opportunities does a firm little good unless it has sufficient managerial services to implement the opportunities.

So even though the implementation of strategies to achieve that are not likely to be entirely friction free - indeed may arouse the deepest suspicion even on the part of the owner when it comes to relinquishing some managerial responsibility and authority - the ability to translate opportunities into firm growth hinges on the ability to provide sufficient managerial resources.
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