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Why Metcalfe’s Law Can Destroy Your Business Growth

Posted by Doug Davidoff

Jan 24, 2014 1:30:00 PM

“Businesses don’t fail because of starvation. They fail because of indigestion.” 
          - Peter Drucker

I regularly speak to CEO groups on the topic of sales growth.  The most important warning IComplexity-Cartoon give them is that complexity is the toxin of growth.  The problem we all face is that the natural byproduct of growth is increased complexity.

Those familiar with Metcalfe’s Law already know this.  Metcalfe’s Law states that the value of a network is proportional to the number of nodes connected to the system.  However, what it doesn’t explain is that if you don’t manage it effectively, chaos will ensue. Think of it this way: A business with 5 “nodes” (employees, customers, etc.) has 25 relationships that it must manage.  Expand that to 25 nodes and now it must manage 625 relationships.  A 5x difference results in a 25x increase in complexity.

Unfortunately, that’s only a part of the problem.  As you get bigger, your cost structure increases.  You have to build and increase management functions and overhead naturally increases.

Further, you need bigger and bigger sales to support the business.  As a result, you have to raise your game and solve more complex problems. You must compete against larger, more capable competitors.  Your leadership team gets less and less of a direct pulse to what is happening within the organization.

Don't get me wrong, as Metcalfe’s Law indicates, growth also brings lots of advantages. I’m a firm believer that growth is the single most important issue facing every management team on the planet. Growth brings with it the benefits of increased capabilities, the ability to attract better talent, and the opportunity to unlock the latent equity value of a business.

metcalfes-law-for-business-growth

But – and it’s a big onecomplexity is the toxin of growth.

As businesses grow, they hit what Dan Sullivan, the founder and CEO of The Strategic Coach, calls Ceilings of Complexity. It’s important to understand that a ceiling of complexity is a natural part of any growth businesses journey. You can’t avoid them. Any effort to avoid them will kill the very momentum you need to grow.  Instead, you must prepare for them and know the keys to move through them effectively.

  1.   You Can’t Scale Genius

First, and foremost, the secret to sustainable growth is the development of an effective structure or model for you business, and effective systems throughout your company. When I talk about a system, I’m not referring to your methodology or the processes you have for completing task, I mean a system that guides your company’s thoughts, words and deeds.

When a business is smaller, it can (and should) rely on the genius of a few individuals to drive its value creation and growth engine.  As it grows, it can’t rely on the genius of the individual; it must create a genius of the organization – what Peter Senge calls a learning organization (or The Fifth Discipline).

There’s no place where this is more important – and more absent – than in the sales function. The reason that so few companies have predictable, sustainable or scalable growth is because they don’t have a system designed to deliver that result.  Watch this video to get a picture of what such a system would look like.

  1.   Be (maniacally) clear on who your customer is.

The most important question a business can answer is, “Who do we want to be a hero to?” By answering this question, I don’t mean who do you wan to fill out a 10 on a customer satisfaction survey, I mean who is the customer that you exist to serve?  Who should absolutely, positively love you?

As you get bigger, so does the need to make and manage trade-offs and to allocate your resources. When you’re not completely clear on your target market design, you cannot effectively make those decisions, allocate resources or manage those trade-offs.

When you increase the focus and definition of who your customer is (we refer to this as your “buyer personas”), you are not only able to stand out more effectively to them; you’re able to simplify your business.  The counterintuitive part of this is that as you get bigger, the need to more clearly define your customer increases. When you’re small, you can actually afford to be a little bit of everything to everybody, but as you get bigger, it will kill you.

  1.   Know what you do.

Before you say anything, let me re-emphasize that people do not buy what you do, they buy why you do it. Your why is far more critical than your what. But, that does not mean you can be lazy in defining what you do. Keep in mind that if you can’t clearly articulate the fine line between what you do and what you don’t do, you haven’t adequately defined your “what.”

I’ve found that the vast majority of sustainable growth businesses tend to go through three phases in defining their what:

  • Phase 1:  What can we do?
  • Phase 2:  What should we do?
  • Phase 3:  What do we do?

It’s only when you get to phase 3 that you can sustain and scale growth.  As Jim Collins shared, you need to define what you do better than anyone else in the world (for the market segment you’ve defined).

The challenge here is that there are a myriad number of ways that you can define your “what.” Most organizations go the route of defining themselves by their commodity.  For example:

  • We’re an IT services company.
  • We’re a printing company.
  • We’re a sales training company.

This way of defining your what is the fastest route into the commoditization trap. Define your what by the result you provide for your chosen market segment by the means (method) you choose to do it.  Then use this as a stringent filter to filter all future opportunities. Those that match get a green light, and those that don’t get a red one.

For example, after 10 years here at Imagine, we’ve learned what we do and what we don’t do. For years we struggled, as people tried to define us in a singular fashion, and we realized we couldn’t be defined that way.  While we do sales training, coaching, inbound marketing and strategic advisory, we knew it would be death to allow to be defined by the commodity. 

The problem was that we kept being overwhelmed by complexity, both internally in managing our business (and figuring out what to hire for) and externally in getting our desired market to understand what we do.

As we went through the phases of clarity, we became clearer on and better at what we do and how we do it – because we deviate less from our proven path of success. Today we can clearly define what we do and whom we do it for. 

We enable B2B companies to make sales and profit growth predictable, sustainable, and scalable by aligning their sales and marketing efforts.

Define your business, focus on your core markets, and build the genius into the system and you’ll be able to manage complexity and unlock the opportunities inherent in growth.

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