Business Model Innovation Leadership

Prime Future 112: Growth: DNA trait or decision point?


Sanderson Farms began as a humble farm supply store in 1947 while Wayne Farms traces back to a feed milling operation started in 1895. I wonder what the founders of these businesses would have said their ambition was for these companies, way back when? You probably saw the recent announcement about the newly merged Wayne-Sanderson Farms, now the 3rd largest poultry producer in the US.

On the one hand, it’s hard to imagine that the early founders of what are now the biggest companies in the space set out to become what they became.

On the other hand, growth orientation is a DNA trait. Or is it?

We recently talked about the Business Model Canvas and the 9 building blocks around business model innovation. It’s a great framework, but I think there is a 10th building block that’s missing: ambition.

The last several years I’ve had one foot in ag where economies of scale continue to drive consolidation, and one foot in tech where startups create a vision to someday become a billion-dollar company to raise venture capital.

In both worlds, sometimes it seems like growth is the answer…no matter the question.

Why is it that some organizations hit the ground running towards scale either by leveraging the business with debt or by selling portions of the business as equity, while other businesses rock along for decades or generations without taking risk?

I think much of it has to do with ambition. The ambition level of the founder, investors, board, and/or leadership team. When I spoke with Greg Bethard, CEO of High Plains Ponderosa Dairy, I asked him how he thinks about growth. Here’s what he said:

“Growth is not for everybody. We have embraced growth; as a business our ownership has decided we want to grow. We’re all in it to get a good ROI, and I look at this as if we want to attract partners to invest in our business so we have capital to grow then we need to deliver a good ROI.

If you aren’t growing it gets harder to deliver a good return because your equity levels get higher. Its really hard to get a great ROI if you own a lot of your business and have very little debt. But if you are growing all the time and fairly highly leveraged then you can get a good ROI.

Now that comes with risk, obviously the higher the risk you should get a better return. Every partnership has to decide how much risk they are willing to accept, how leveraged are we willing to be, and you have to find the happy spot where everyone is comfortable.”

Greg mentioned a book that he and his board read as they began scaling the business, No Man’s Land: Where growing companies fail.

“No Man’s Land is that period when a company is too big to be small and too small to be big.”

The author describes No Man’s Land as the awkward teenage phase for a company. The majority of the book is about how to move through No Man’s Land effectively, but the author points out that companies have a decision point of whether to move into & through No Man’s Land.

Not every company is going to make it out, not every company should even try.

I think this has applications for both ag producers and tech founders. In a venture world that celebrates growth at all costs and an ag industry that assumes economies of scale are always the best path to profit, there’s the sometimes ignored idea that not every company can scale and/or not every company should scale.

There are two questions:

  1. Do you want to grow the business? That’s a personal preference question.
  2. If so, should you grow the business? That’s a financial & business model question.

And these questions are only relevant when the founder is more interested in working on the business rather than working in the business. If the founder would rather drive tractor than find new customers, or rather work cattle than recruit talent, or rather write lines of code than think about how to reduce CAC….then maybe growth isn’t the path.

But where growth is the intentionally chosen path, No Man’s Land lays out 4 traps that entrepreneurs run into and ideas for getting past those traps. Here are my takeaways:

Trap #1: Market misalignment

  • Market misalignment is “when a gap opens between the promises made to customers and the operations required to satisfy them.”
  • Careful consideration has to be made about which promises to extend to which customers. Chasing any customer may be fine in the early days, but it will wreck a business trying to scale.
  • The correct decisions here will keep you growing through No Man’s Land, while the wrong ones will kill you. Deciding which promises to make to which customers is strategic planning in its essence.
  • Scale the system for value delivery by breaking it down step by step to make it repeatable, and profitably.

Trap #2: Companies in No Man’s Land risk outgrowing their money.

  • Undercapitalization is not a cause of death, it is a symptom of being perceived as too risky to raise capital.
  • What most entrepreneurs fail to realize is that the growth itself generates the need for capital. Look around and you’ll find many rapid-growth firms that are rolling in profits, yet have no cash on hand. Even when a business is and remains profitable, growth requires infusions of capital, for the very reason that growth eats up cash flow.”
  • Equity investors need confidence in the upside potential, while lenders need confidence that the downside risk is managed. Choose wisely which path to take.

Trap #3: Companies in No Man’s Land usually outgrow existing management.

  • To make it through No Man’s Land, companies have to make the switch from hiring cheap labor to hiring someone trained as an expert to do the thing. This usually means hiring someone who learned how to do the thing on someone else’s dime and can immediately step in to begin executing.

Trap #4: Companies in No Man’s Land often outgrow their model.

  • You have to know how your company will make money as you scale, how will you be more profitable at higher volumes? Do the math. Let the math provide another important indicator of whether this business should be scaled up.
  • “Distribution channels – the mechanism to identify and acquire a new customer – are often by far the most expensive components of the business model, costing even more than delivering the value proposition.”
  • “Is your business viable at greater and greater scale, or do you risk growing yourself out of business? Are the fruits of growth work taking the risk of making infrastructure investments up front?”
  • As a machine for making money and creating value, how does it work now and how will it work at scale?

“If an entrepreneur doesn’t find a way to get through No Man’s Land, the company goes back to being small or goes under.”

I appreciated Greg’s recommendation because the book gives a helpful framework for thinking about the predictable risks of growth, but perhaps the most helpful are the questions about when and why to make the intentional decision to grow, or not grow. To grow and scale towards becoming an Industry Giant, or to refine and improve to be a Small Giant. Neither better or worse, just different objectives based on the business and individuals. Neither has the corner of the market on high ambition.

It’s only in the last couple of years that I’ve even entertained the idea that maybe growth is not the only measure of success, or the absolute measure of ambition. Books like Built to Sell: Creating a Business That Can Thrive Without You or Small Giants: Companies that Choose to Be Great instead of Big offer alternatives to the idea that scale = success.

There are other measures of success, including balancing financial objectives with impact objectives or with lifestyle design.

One of my favorite things about spending time with producers of all stripes is that you know when you’re in the presence of excellence. You know when you’re talking with a cattle feeder who is completely dialed in and optimizing every aspect of their business, or a seedstock producer who is proving out a new business model, or a poultry company that is rethinking what ‘best in class’ even means. Sometimes those are the big companies and sometimes those are the companies that you just know will overtake the big guys someday in some way in at least some markets, because they’re just better.

So maybe excellence is the real ambition flex.

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