Scaling Up by Verne Harnish: Summary and Notes

Chapter 4The Team: Attracting and Hiring

Hiring A players takes marketing to recruit and the Topgrading method to select, Harnish argues, because according to Topgrading a bad hire costs 15 times annual salary. Topgrading, created by Brad and Geoff Smart, helps leaders hire the right person more than 90% of the time, versus 25% to 60% for conventional methods. An A player is someone in the top 10% of the available talent pool who is willing to accept your offer. Start with a job scorecard in place of a job description: its purpose, measurable outcomes over one to three years and the cultural and technical competencies needed. He urges hiring specialists, chess pieces in Buckingham's image, and even people who are downright strange, if the strategy depends on being distinctive.

Marketing the job matters because you need a minimum of 20 applicants per position. Mom's Organic Market wrote an ad around its environmental purpose and received 40 resumes in a week; its CFO later helped the company grow to $130 million. Atlassian hired 15 developers after touring 15 European cities with a bus reading "Europe, we're coming to steal your geeks." Rackspace received 52,000 applicants for 569 openings in 2013. Gene Brown's City Bin Co. recruited a kickboxing champion to work its trucks. The process then narrows candidates with screening questions to the top three and a chronological in-depth interview of 3 to 4 hours for senior roles. Speedwire grew from 25 employees to 325 in one year using Topgrading. Zappos offers new hires $3,000 to quit after training, and Amazon offers $2,000 rising by $1,000 a year up to $5,000.

"Teams need to be well-rounded, but their individual members don't have to be."

Chapter 5The Managers (Coaches): Keeping and Growing (Educating) the Team

Harnish suggests replacing the word manager with coach. He cites Gallup that managers account for at least 70% of the variance in employee engagement, and Google's data showing periodic one-on-one coaching ranked as the number one key to successful leadership. Great managers focus on five activities, in reverse order of importance: hire fewer people and pay them more; give recognition and show appreciation; set clear expectations and a line of sight; dehassle; and help people play to their strengths.

On pay, The Container Store holds that one great person equals three good ones, hires only about 3% of applicants, pays salespeople 50% to 100% more than the retail average and gives 263 hours of first-year training against an industry average of 7. Costco pays roughly 70% more per hour than Sam's Club, needs almost 40% fewer employees per dollar of revenue and has 6% turnover after one year versus 21%. Mom's pays a minimum of $11 an hour when Maryland's was $7.25. On recognition, people need positive interactions with their manager at a ratio of at least 3 to 1. On growth, Harnish calls the best growth firms training companies and suggests 12 hours of training a year for the frontline, 25 for middle managers and 45 to 60 for senior leaders, budgeting 2% to 3% of payroll. Companies can cope with a charismatic leader who struggles with managing until about 50 employees, but not past 100.

"People join companies. They leave managers."

Scaling UpStrategy

The strategy section opens with Domino's Pizza and its promise of pizza delivered in 30 minutes or less, or it's free, which made Tom Monaghan a billionaire. The signs of a killer strategy are sustainable top-line growth and rising gross margin dollars; without one, the market commoditizes your products. Strategy work has to happen weekly, free from firefighting. Grandmaster chess players, Harnish notes, are no better at thinking ahead; they have ten times the next moves in their repertoire, so leaders should borrow moves from advisors who have seen hundreds of companies. Four tools are covered: the 7 Strata of Strategy, the Vision Summary, the SWT and the One-Page Strategic Plan.

Chapter 6The Core: Values, Purpose, and Competencies

A growing firm needs a strong core, like an athlete, made of values, purpose and competencies, and once it passes 50 to 70 employees and culture begins to drift, the core must be codified and reinforced. Hatim Tyabji grew VeriFone from $31 million to $600 million in 11 years with a nine-page blue book of values and, he says, spent the next 11 years repeating himself. Core values are discovered, Harnish argues, since a company's personality is set like a person's, and trying to change them sends the organization into endless therapy. J. Stuart Moore of Sapient called changing the company's values for an acquisition his biggest mistake. Purpose answers why the company exists, and Harnish cites research that people whose hearts are captured give 40% more discretionary effort. Core competencies, following Prahalad and Hamel, are the capabilities that let a company like BIC grow beyond cheap pens.

Appletree Answers shows the core at work. Its call center turnover was 110%, so founder John Ratliff launched Dream On, which granted employees' dreams, such as funding a family's car and a soldier's Christmas trip home. Turnover dropped to 20%, and the program paid a 20 times return in less than a year. Harnish outlines eight ways to use the core to drive a company's people systems, with Appletree as the case study.

"Core values are the rules and boundaries that define the company's culture and personality, and provide a final should or shouldn't test for all the behaviors and decisions by everyone in the firm."

Chapter 7The 7 Strata of Strategy: The Framework for Dominating Your Industry

BuildDirect.com, a Vancouver seller of building materials, has doubled sales each year since 2003 and has a 2014 run rate of $200 million. The 7 Strata framework, which Harnish calls the page behind the One-Page Strategic Plan, is worked on by a strategic thinking team of no more than 3 to 5 people meeting weekly, modeled on Jim Collins's council. The seven strata are: words you own in the minds of the market; the sandbox and brand promises, meaning who the core customer is, what you sell and the measurable promises behind it; the brand promise guarantee, a catalytic mechanism; a one-phrase strategy; 3 to 5 differentiating activities, per Michael Porter; the X-Factor, a 10x to 100x underlying advantage; and profit per X with the BHAG.

His examples fill each stratum. Darius Bikoff added vitamins to water and created a category Coke bought for $4.1 billion. A niche of no more than 10% of customers often holds most of the profit; dog owners who are fanatical about their pets are only 7% of owners and over 25% of dog food profits. BuildDirect's core customer is Debbie the Do-It-Yourselfer, and its best price means 40% to 50% less than elsewhere, with a 30-day money-back guarantee. Red Balloon refunds 100% of a voucher if the experience is cheaper elsewhere. Oracle once promised $1 million if its software did not run twice as fast. IKEA, with 6.8% global market share, focuses on the 7% of the market fanatical about it. Outback Steakhouse found its X-Factor by asking young managers to invest $25,000 in a restaurant, keeping them in the same location for 5 to 10 years.

"When you nail your strategy, top-line revenue growth and fat margins come almost effortlessly."

Chapter 8The One-Page Strategic Plan: The Tool for Strategic Planning

JSJ Corporation, a Michigan parent of six durable goods firms with 2,700 employees, adopted the OPSP in 2006; it helped CEO Nelson Jacobson decide to sell one company and invest in the rest, and he reports continuously improving profit and growth since. For firms of 50 employees or fewer, the Vision Summary is a simpler starting page: core values, purpose, brand promises, BHAG and the priorities for 3 to 5 years, the year and the quarter. To prepare the plan, the SWT augments a SWOT with trends.

The OPSP has seven columns. Column 1 holds core values. Column 2 holds purpose, profit per X and the BHAG, the measurable 10 to 25 year goal. Column 3, Where, sets 3 to 5 year targets, the sandbox, brand promises and key thrusts; a company growing 100% a year lives in dog years and should shorten every horizon. Column 4, What, sets the year's goals and critical number. Column 5, How, sets the quarter's priority and its rocks, a series of 3 to 5 simultaneous 13-week sprints. Column 6 sets the theme, scoreboard and celebration, and Column 7 names who is accountable for which KPIs and priorities. Harnish notes that more than 40,000 companies worldwide have used it.

"It's a simple yet powerful tool that helps you edit down your vision to a single, action-oriented page."

Scaling UpExecution

Coastal.com, a Vancouver eyewear company, sold to Essilor in 2014 for 430 million Canadian dollars, and founder Roger Hardy credits disciplined execution of the Rockefeller Habits. Visiting German industrialists were blown away by its daily executive huddle. Its leaders called customers weekly, and one change from those calls lifted revenue 60% in one market; an internal shark tank of employee ideas added 15% to revenue in 2013. Hardy reviews the Rockefeller Habits Checklist every three months. The section is built around the 10 habits in three disciplines: priorities, data and meeting rhythm.

Chapter 9The Priority: Focus, Finish Lines, and Fun

The priority chapter argues for one main thing at every time scale. Gene Brown has never learned to drive a garbage truck, which he counts as a key to his success; the City Bin Co. reached $25 million in revenue and 120 employees in 2014 and is aiming for 1 million customers by 2020. Mark Zuckerberg made going mobile Facebook's single priority for 18 months, and mobile ads reached 50% of total revenue in the fourth quarter of 2013. At Ignite Social Media, Jim Tobin wrote two numbers on a whiteboard, 241 late tasks and 728 unassigned, and both reached zero by the end of the month. Ivy Lee told Charles Schwab to work his six tasks in order and was paid $25,000 for the lesson.

The critical number is the quarter's or year's key bottleneck, set with red, green and super green targets. ProService Hawaii set a target of 600 referrals in a year, three times more than it had ever achieved. A quarterly theme wraps the critical number in fun. The City Bin Co. ran Saving Mrs. Ryan to win 10,000 new customers, Life Begins at 40 to raise monthly earnings by 40,000 euros, 180 to 1 for job sharing among 60 employees, and Bin It, in which the team binned more than 150 activities. Each ends with a celebration, the finish line.

"You'll be working on the most important ones, and the others can wait."

Chapter 10The Data: Powering Prediction

Netflix's Reed Hastings fell from grace with the Qwikster spinoff, then recovered by using data to predict that House of Cards would succeed, tracking events such as about 4 million ratings and 3 million searches per day. Data has to be paired with human intelligence gathering. Walmart sent teams to stores Monday through Thursday, reviewed everything Friday morning and had corrections in place by Saturday noon; David Glass said competitors were 10 days behind. Senior leaders need to be in the market 80% of the week.

Habit 5 is gathering employee input. Big Ass Solutions grew from $34 million in 2009 to $115 million in 2013 with 93% retention against a U.S. average of 63%. Jimmy Calano's managers each submitted three ideas a month, and he rewarded the top 20 with a $20 bill. Habit 6 is customer input, using four questions asked in person. Fred Reichheld's research found companies growing 2.5 times faster than competitors spent roughly 20% of leadership meetings on customer feedback. Appletree's employees generated more than 8,800 ideas in 90 days. The Net Promoter Score measures how many customers actively recommend you. Habits 9 and 10 give everyone KPIs and a scoreboard tied to Column 7 of the OPSP.

"The fundamental job of a leader is prediction, according to the late business consultant W. Edwards Deming."

Chapter 11The Meeting Rhythm: The Heartbeat of the Organization

John D. Rockefeller lunched every day with his key people, Steve Jobs lunched almost daily with Jonathan Ive, and T. Boone Pickens credits daily breakfasts with turning $3.2 million into billions. Harnish compares a growth firm to a jazz band: talented players, shared rules, the same song in the OPSP and the same beat in the meeting rhythm. The rhythm should take no more than 10% of senior leaders' week, 5% to 7% for middle managers and 3% for frontline staff, and in the best-run companies the CEO's calendar is pre-programmed 200-plus days a year.

The rhythm runs on several beats. The daily huddle lasts 5 to 15 minutes, starts at an odd time and ends on time, covering what's up in the next 24 hours and where people are stuck; the Ritz-Carlton gathers about 80 people at headquarters for a 10-minute daily lineup. The weekly meeting runs 60 to 90 minutes on quarterly priorities and one or two main topics. The monthly management meeting is the key routine for developing middle managers. Quarterly and annual planning sessions reset the plan, and once a quarter leaders share it with all employees in a 45-minute meeting. Harnish names generalities as the main roadblock and asks for specifics in every update. If a company grows 20% to 100% a year, each quarter should be treated like a year.

"To move faster, pulse faster."

Scaling UpCash

Growth sucks cash, so the aim is to generate enough cash internally to avoid banks and sharks. Costco's membership fees are 75% of its profit, $2.3 billion of $3 billion in pre-tax earnings in 2013. Harnish cites Jim Collins and Morten Hansen's finding that great companies keep 3 to 10 times more cash than competitors, and notes Bill Gates required Microsoft to keep a year's operating expenses in the bank. Gazelles itself ran out of cash after 9-11. The section's two tools are Cash Acceleration Strategies and the Power of One.

"You can get by with decent people, strategy, and execution, but not a day without cash."

Chapter 12The Cash: Accelerating Cash Flow

The Cash Conversion Cycle measures how long a dollar spent takes to come back as cash. When Michael Dell ran out of cash in the mid-90s, CFO Tom Meredith found a cycle of 63 days and, working on one improvement every 90 days, drove it to negative 21 days by the time he left a decade later. Catapult Systems switched from monthly billing to twice a month after more than 90% of clients agreed, and nearly doubled cash flow immediately.

The Cash Acceleration Strategies tool breaks the cycle into the sales cycle, the make or production cycle, the delivery cycle and the billing and payment cycle, and asks teams to brainstorm ways to shorten each, eliminate mistakes and improve the business model. PPR Talent Management freed up a million dollars every month by invoicing more accurately for a thousand clients, mostly hospitals. Benetton India ran an online bidding round that cut its shopping bag price from 52 cents to 34 cents and saved $1.2 million in one year. Harnish recommends a daily cash report from the CFO and one cash initiative every 90 days; improving the cycle by 30 days in a $30 million business frees $2.5 million.

"Constantly improving the cash flow of the company and better understanding how cash moves through the business is a powerful driver for improving the firm as a whole."

Chapter 13The Accounting: Driving Profitability

Co-written with Greg Crabtree, this chapter calls accounting the second biggest weakness of growth firms after marketing. One service business took 14 years to reach $5 million, then grew to $25 million in five years at 10% profit once it measured gross margin, paid the owner a market wage and tracked labor efficiency. Waterfall graphs slice profit by customer, product or location and show where money is lost. Keeping two sets of books lets leaders decide on business terms, as Dell did by expensing technology within 12 months.

Crabtree's corrections: below $20 million in revenue, owner pay distorts profit, and one pair of owners boasting 25% profitability was at 3% once market wages were counted, then reached 20% the next year. Gross margin dollars are the true top line. When gross margin falls below 40%, relate profit to gross margin. At 5% pre-tax profit a business is on life support, at 10% it is doing well and at 15% it is in great shape. The labor efficiency ratio measures what each dollar of labor returns, split into direct, sales and management labor.

"Revenue is vanity, and the weakest number, when it comes to your P&L."

Chapter 14The Power of One: 7 Key Financial Levers

Gary's Furniture had grown profits for 10 years and reached $42 million in revenue, and Gary scored his business 10 out of 10, until his bank called him in to meet its special credit division, which the authors call the hospital division. His revenue had grown from $35 million to $42 million and profit from $1.7 million to $2.1 million, yet cash flow for 2013 was minus $3.3 million. The diagnosis: his gross margin was 31 cents per dollar of revenue while the business tied up 41 cents of working capital, so every dollar sold took him 10 cents backward. He was growing broke.

The Power of One shows the cash impact of a 1% or 1-day change in each of seven levers: price, volume, cost of goods sold, operating expenses, accounts receivable days, inventory days and accounts payable days. For Gary, a 1% change on every lever would add more than $1 million to cash flow. Cutting receivables by 5 days and inventory by 15 days alone would free more than $1.7 million and shrink the negative cash from $3.3 million to just under $1 million. The changes were then built into color-coded KPIs.

"Nothing ages a company's leadership faster than being short of cash."

The closeNext Steps: 5 Things to Do Now

The book ends with five actions. Have the extended management team read the book, take the four decisions assessment and work on the weakest area one chapter a month. Form a weekly council to work through the 7 Strata. Launch a quarterly theme around a choke point, tracked on a whiteboard and closed with a celebration. Start the daily huddle with the executive team, kept to 15 minutes or less, and then cascade it. Plan the first quarterly or annual offsite and fill in the one-page tools, starting with the Vision Summary. Harnish advises adopting the habits one step at a time and giving one person, often the number two, accountability for implementation.

"It generally takes two to three years for all the tools, techniques, and habits to become part of the company's DNA, and another two to three years to truly master the use of them."