071: The Biggest Mistakes in Scaling Up with Verne Harnish

Are you thinking about how to grow your business with near and offshore staffing? But you're also wanting to make sure that it's reliable, cost effective and really well done. I think docsa talent is the way to go. Here's why. They don't just fill your jobs. They bring integrity, top talent, and a people first approach that's hard to find. I've known the people at Doxa talent for over 20 years now and I say that you can count on them. I have. Talk to Docs of Talent and you won't be disappointed. Go to docsatant.com Bill G. Again, that's doxatant.com Bill G. One more time. Doxatalent.com Bill G. Check it out. Today you might be doing it all wrong. What if you are? Today's show will deal with all of the things that you might be getting wrong in the process of scaling up. And we have a very special guest for today's show. Hello and welcome again to the Scaling Up Business podcast. I'm your host and Gazelle's growth coach, Bill Gallagher. On the show with us today, the founder, our guru, patron saint of scaling up, Vern Harnish. Welcome to the show, Vern.

Bill, what a wonderful introduction. Thanks for having me on the show.

Awesome. Well, so I know you don't like to do long introductions and I could say a lot about founding EO and your life story and entrepreneurship and the lessons and the inspiration that led you and then the birthing of giants and the development of the Rockefeller habits, the evolution of that and now into our scaling Up. But is there anything that you'd like to sort of talk about that you're, I mean, you're known in our, in our world so much.

Well, I think, you know, the great news is all the tools have kind of proved themselves out over, across 40,000 companies. You know, I've been at it now this is my 35th year. And so we've got some real practical experience about what it takes to where the rubber meets the road, help these companies scale up. And you're right. So we did. This is a magical year. This is the 30th anniversary of EO. Now it's 12,000 members worldwide. It's 25th anniversary of my company Gazelle's, I mean, 25th anniversary of the MIT program you mentioned. And then it's the 20th anniversary of Gazelle. So it's been kind of a, every five year. Let's add to the ecosystem something we think will be significant to help scale ups.

Yeah, well, that's really great. So I've been involved in EO for like 18 years now and I am one of the regional leaders and participating in the committees and things like that globally and running our accelerator program. And people often ask me, well, why should we hire you as our coach or some other guy as our coach? And they look for all kinds of reasons in your experience or whatever. And I'm like, it's not really about me, it's about the framework based on these 40,000 clients that you mention that across all the coaches and all the experience over all this time and not one particular person, not that I'm so smart or that the next guy is well.

And same with me. It was a curriculum bill, as you know, that was developed from that executive program that I launched and hosted at MIT called the Birthing of Giants. Still hosting it today called emp. They still let the old man come back and do the opening three hour session. And our tools are still there at the heart of helping now 2000 significant CEOs over a three year period learn what it takes in order to scale. Because think about it, a lot of education around startups. Almost every community college now has some kind of a center for entrepreneurship and a good course on what it takes to launch. And then supposedly the MBA which I have is there to teach us how to run the large companies. But there is a dearth of real practical education around what does it take to manage the chaos that comes with scaling up? We just today's insights. You know, it goes out on Thursdays I feature the 76 year old, what I call accidental CEO. He just got named CEO of the year in British Columbia and he was a cancer researcher for three decades, then got into the business company called Stem Cell Technologies. It's rocketed to 850 employees on its way to a. In fact, I love this. He just at age 76 signed a lease, 40 year lease for the next facility that he can expand into to 4,000 employees. You got to love that kind of forward looking thinking and we were honored. He put right at the heart of it. What's helped him manage all of that chaos of scaling has been our tools.

You know, this is the thing, I think that more and more I want people, especially people who are new, who didn't come up through YPO or EO and watch somebody else do it, but who read the book and they're like, wow, this sounds like the thing for us. And then they start into it and they're like, wow, it's also a Lot of work. And I want more of them to hear. Like, we heard the founders of Rackspace talk about having just sold their company for over $4 billion. And they said, you know, we went to the original birthing giants program. We heard what you said. We went back, we did it. It's as simple as that. You said what to do. We went and we did it. I'm like, oh, God, God bless you. And I think more of our, of our would be clients, and current clients need to sort of see and imagine what does it look like in reality, in action, when the habits are fully implemented, which I think is great for the topic that we chose for today, about the top mistakes that we see people make across the four decisions in each of the areas. And you had some great ideas about what are people getting wrong? What are they missing in the world of people, Strategy, execution and cash.

And overall, well, let's summarize it. One word. Pricing.

Okay.

You know, I talk about, you know, the significant functional barrier bill to scaling is marketing. And that research was, you know, has been reproduced many places, including mit, that if you don't have a robust marketing function, that's going to be the significant constraint. Because it's not only about getting new customers, it's about getting new relationships, investors, employees, attention from the media. And if you look at the four P's of marketing, product price, place and promotion, it's price that most companies get wrong. And we're so focused, as I am, on the cost side of my business. You know, we've printed over half a million books ourselves. And so I care about every penny that we can save per book. And there'll be three weeks of negotiations yet when it comes time to set price, we just kind of lick our finger and put it to the wind.

Right?

And I guarantee, well, we are leaving massive amounts of money on the table. And there's really three things I want people to about in terms of pricing. First, you know, what's made Amazon such a powerhouse is they're changing their prices every minute. You know, some poor retailer that's competing with them, you know, puts a sticker on an item and it doesn't change till they got to try to wholesale it out of the, out of the store. Amazon, using artificial intelligence, is monitoring. And not that I don't look at my book's price 10 times a day, but I can tell you over the last couple of months, it has ranged from $15 and change to $21 and change. And they know what time of the day, which day, what Time of the month, what time of the year, they can make those moves. And so first is this need to really develop dynamic pricing both in the B2C as well as the business to business space. The second is there's a real psychology and that's why I think everybody gets it messed up. If there's anything that we've learned. In fact, the guy just got the Nobel prize for it. And that is human beings are not rational. We are irrational decision makers. It's more emotion than it is logic. And so you've heard him speak before. Robert Cialdini, who we just had our last summit, kind of the father of influence. You know, some of the early work they did was let's just take a restaurant's wine menu and they typically listed from least expensive to most expensive. All you have to do is reverse that and put the most expensive wine at the top to lease. You didn't change a single price, you didn't change a single wine. And you're going to generate considerably more revenue just from that change. Then if you anchor it with a really, really expensive bottle, you can impact revenue by as high as 250%. Again, there's nothing rational here.

Well, just understand to underscore that in a company that I was CEO of, we wanted to get our customers initial buy up tenfold. So we're like, how do we get a tenfold increase in the initial buy in and therefore the commitment and the investment and the work that they put into making our product line work. So we brainstormed that we came up with our tenfold thing and what it looked like. And then we created two more above that, two more packages that were priced above that. And we were like, these are completely ridiculous, but we'll throw them in here just to make this one that we really want and are going for the tenfold increase. And then we launched it and I remember it was the first. We did like a million dollars in two days of selling and it was the first time we'd done that after launching this thing. And interestingly enough, quite a few people picked the middle and even the top tier package because they didn't want to be perceived as small players.

You're so I'm back at the reunion of the birthing of giants class and one of the guys reported out, he said, we just experienced this. We've had this really great solution to a critical problem that Fortune 500 deal with. And our solution is only 30 grand, but we're not selling any of them. So he goes out and talks to the customers, they're like, look, this problem is so critical. We don't trust that you can solve it for that little bit of money when we have 10 times that budget at 10. So he went literally 10x the price and he sell them so fast he can barely support what's happening. And so I think what happens is, you know, what got us here won't get us there. You know, when guys launch, when you launch a company, you have a tendency to kind of low ball it. You don't have a lot of confidence, you're new into the marketplace and you fail to ever let that go. And so as you know, we recommend Herman Simon. He's kind of the father of pricing and his book, Lessons from a Pricing Man. But look up Herman Simon on Amazon and get his pricing book. But that to me is the biggest mistake is not submitting three bids. If you're B2B, you know, varying the price just like you had three offers, there's a whole slew of psychological tools that we need to take advantage of and focus more on getting the price right.

Really brilliant. All right, so that's in the world of marketing. And you talked about the four P's which anybody who's had any amount of marketing or business schooling will know those. And too often our world, they just think of promotion. We get into place with things like Sandbox and Core Customer and. But a lot of times it's just about how do I promote better? And the pricing has such a huge impact on that growth. So then let's talk about people for a minute.

You know, here this was the question Bill Gates considered the best he'd ever been asked. And it was a question that was asked of Steve Jobs. He then carried that through all of what he scaled up. And I was privileged to be asked this question back when I was originally launching Ace and Yeo. And it was a question that Regis McKenna, the marketing guru of Silicon Valley, had taught Steve and Intel and Genentech. And I cold called him and said, hey, I want to scale up the world's largest entrepreneurship organization. So I guess it was a good elevator pitch. And he said, all right, I'll take you on as his only free client. And he sends me out the big notebook that he was taking Steve through. And our very first session, he had signed a young guy, Rich Moran, to help me. Was this. Take a piece of paper out and if you want to scale your company 10X, who are the top 25 influencers, relationships, people, whatever word you want to put in there that you need to get behind your venture. And he said, look, the bigger the names, the faster your scale you'll scale. So I'm young and dumb and a student at Wichita State University. So I boldly put on the top of the list President Ronald Reagan. We're talking about 1984. I'm thinking if I can get the president of the United States to be the first to talk about the importance of entrepreneurship. No other president had done that to that point. I then wrote down, look, I got to get Steve Jobs involved with this organization and Michael Dell. Michael had just launched and was growing rapidly his company. And then I didn't know who ran him, but somehow or another I knew I had to get Inc. Magazine and at the time, Venture magazine involved. So we made the list of 25 and all we did was we spent an hour every week figuring out how to get ourselves to each of those people and convince them to support us. And in 36 months, we were global, Bill. That's how quick we were able to scale. And from, you know, launch in 83, 86, I'm hosting the first public event for Steve Jobs post him being fired from Apple. I've got him sitting up there with Michael Dell and Mark Cuban and the other, you know, folks, Ted Leon have come on to be really, you know, superheroes in the entrepreneurship field. We have President Ronald Reagan agree to fly in to do the opening. Welcome. Inc Magazine does a six page story on its ventures giving us full page ads. Bill, I couldn't have scripted it any better. And it's what Steve Jobs did when he went to launch itunes. Who are the top 25 people? I've got to get on board in the music industry. He didn't actually know anyone. He had to begin to work that list. That's practical. Step number one.

So I think today this has gotten easier than ever before. With tools like LinkedIn and our social networks, we start to realize how connected we are to other people. And you can find and track down how to get to these people. But it starts first with targeting. And I want to underscore this is not just with the launch of your business, but a launch of a new product, a new division, the expansion of something, a breakthrough of some kind. These connectors that you're talking about, the key influencers that are going to make all the difference.

You got it? Absolutely. And in this day and age, don't ignore bloggers, YouTubers, my daughter's body butter business, she's identified the top five kind of YouTubers that she has to get behind what it is that she's doing. And so there's a new type of influencer that we can't ignore and they know it well.

So the YouTubers, my nephew is a lead on a top kid show on Nickelodeon and the amount of money that they get now for promoting products on Instagram and that kind of thing that any celebrity is offered for that is extraordinary because a well placed product or mention from some influencer can make a difference. Now you might not be selling to kids and, and you might not need a Kardashian or Nickelodeon star, but you might be selling to business influencers and so on. And there's all kinds of people who have more sway than we realize.

You bet. Yeah. Look what Guy Kawasaki's done in our field as a huge influencer.

Huge influencer.

Yeah. And I've got a good friend that's launched the top notch champagne. I mean it's an existing company to your point, but they've launched it new product line and one of the top ad agencies has said look in Italy, this is the guy and if he says what you've got is great, the thing's going to fly off the shelves. And that's what happened. Esther Dyson in the software industry, if Esther says what you have is golden, you're going to go to a billion. If she says it's not, you better fix it. So every industry has their opinion leaders, the lead customers that if you've got them on board, everyone else falls in line and that's the list you've got to put together and work.

So we often we talk about getting the right people on the bus and that's a great thing about aligning who's accountable for what in your organization. Making sure you cover functions that many earlier stage companies don't think. Well, even beyond that, I deal with companies over 100 million that don't cover. But this idea of this extended group of advisors, influencers, allies that you're going to go out to is a critical piece to consider in that it is in that world. All right, so we've got people strategy. In the world of execution, what do you see people getting wrong, missing out on, forgetting about, passing over the daily huddle.

I mean I hate to keep coming back to such a simple tool, but there isn't Bill, a company in Silicon Valley that's of any ilk, Facebook, Google, just go down the list that wouldn't think top rate even a day without the daily huddle. It's at the heart of the whole agile and scrum methodologies. That power those companies today, yet so many mere mortal firms fail to take advantage of that very simple technique and tool. And one of the things, kind of the theme of the show is I wanted to figure out, so why do companies start it and then stop it? And that's in a word, generalities. You know, the key is in that quick 10 minute daily huddle, we've got to share our specifics. If all I'm going to say, hey, I'm answering some emails, I got some proposals going out and got some phone calls, same thing I do every day, why do I need to be in this silly meeting? The thing is going to fail, but we're looking for patterns and trends. I want to hear numbers, I want to hear names, I want to hear amounts. Not that I'm working on proposal, I want to, I'm working on a $2.37 million prop for Bob over at. And then I can start saying, wait a second, when did the price go up or down? And I thought it was Jerry over there instead of Bob. And. And if I'm in operations, I can be paying attention to all of these numbers coming in every day and get a good feel where I'm about to have some train wrecks. Well, you know, these specifics are critical.

Absolutely. So I work with quite a few tech and software companies, right. And, and I would say that they virtually all do have some kind of huddle at the development team and some of the engineering teams. But it doesn't always move up to the leadership teams. And yet there's all kinds of horse trading and deal making that goes on in that world. And I was working with one team a couple years ago and they had done a roll up through an investment hybrid private equity firm and they'd done a roll up of about nine companies. And the chief complaint among the leadership team was it's just like huddles, like we're all living in huddles now. As the outside coach, I also saw that they were not aligned. Rock habit number one, the leadership team was not healthy or aligned. They all had different visions about the direction of the company because they all had been the founders of and acquired companies, right? So we've got all these teams pulling in different directions. They're complaining that they're in different huddles and what do they not want to do is they're like, there's a total waste of time to do this daily huddle. The CEO is pretty insistent, but they kept getting pushback. I said, just go back and remind them what they said their chief complaint was. And then tell them it's not negotiable.

You got it.

But make it effective, right? It requires some specificity, not generality.

Yep, you got it.

So in the execution, right, there's that, the daily huddle. And then I would just add, like getting proactive. Don't schedule your quarterly off site for planning every quarter. Schedule it on a recurring automatic basis. Mine happens the second week before the quarter ends, on the Friday or whatever. Get in some regular habit of when that's going to be for your company. Whether it happens just before the quarter, just after the quarter, getting proactive about it makes a massive difference.

Yeah, because routine, our throwaway line is routine sets you free. And one of the beauties about the consistent daily and the weekly and the monthly and the quarterly is sometimes it takes longer to set up a meeting than it does to meet. And I see these as important placeholders where everyone already just has it baked into their calendar a year to 18 months in advance. And then you can just build the rest of your life around it and not be scrambling to set meetings every week.

Right. And your top customers will schedule around it and it'll just be a natural, normal thing rather than chasing the one opening for your 10 leaders between. Between every other thing.

Yeah, you got it. And then cash.

Cash.

And there I think, you know, we're big fans of John Mullins, the customer funded business. And you know, I think the poster child of that recently is Elon Musk. You know, here's a guy that needed $4 billion to build his factories and he got the money all from customers. 400,000 customers gave him $1,000 deposit. That's a $4 billion interest free equity free loan. And Costco does the same with their membership fees. It's what's kept Amazon alive, cash flow wise, even though they haven't been profitable up until this last couple of years. Figuring out whether again, B2B, B2C, B2I. Whatever it is, how do you get the customer to fund your growth? Because growth sucks cash. It's even what Michael Dell figured out. You know, he took that thing from zero to a billion in his first seven years, but ran out of cash and they fired everyone but him. And they brought in his first adult supervisor, Tom Meredith, who I discuss in both books the original mastering of Rockefeller habits in this one. And Tom's the one that really got Michael Dell's cash flow cycle corrected so that they actually threw off cash the faster they grew instead of the opposite, which was very helpful. For him to generate the cash necessary to take the company then private. So I don't care whether you're manufacturer, consumer. We haven't found an industry except in some sense, selling to governments can be difficult. You can get the customer to fund your growth.

There are lots of little ways your company can bleed cash from mistakes and delays and things like that that tie up your cash and increase the need to go and seek outside funding. But this one, fundamentally changing the business model with all the examples you've cited, is extraordinary. And market leaders do it. The companies that break out do it. And yet time and again, when we start to work with people, the first thing we hear is, well, but you don't understand my industry. You don't understand our marketplace. Exactly, Exactly Right. So be bold, change it. Don't just be like everyone else. Do something different. Try something right. In each of those cases, they tried something new and different. So those are some of the top mistakes that you see all the time. People. Strategy, execution, and cash. When you think about the whole scaling up framework together, then what do you think is the overarching couple mistakes that you see people making in that we've got a leader of a team, they're going to go scale up and then they go into each of these areas. What's the biggest one that is to.

Fail to continue to learn. It sounds cliche, but, you know, there's a reason, you know, Warren Buffett's the greatest investor of all time. And when they asked Charlie Munger, his partner, all right, how has Warren beat the market 50 years straight? And he didn't hesitate. He said, it's because Warren sets aside time to read and think. 500 pages a day. Mark Cuban, three hours a day since he was 20. He reads Mark Zuckerberg a book every two weeks. Bill Gates does a book every week. And I featured his Think Week, which was powerful. And I was reflecting with some folks today, and I put it in my insight. Microsoft, 41 years in business and their market cap is still ahead of many of the big companies like Facebook and Amazon and all of those. That's significant being 41 years as a tech company. And the CEO of Microsoft was quoting in the Wall Street Journal a couple days ago, it's so important that you focus on learning. And so it's getting so busy, you can't pick up a book or go to a workshop or have the attitude, look, I got more right now. I know that I need to implement. That's not how learning works. You got a pilot upstairs and it's five years from now some strange data bit you picked up is what gives you the the edge in that negotiation or in that deal. And that's where it comes from. This failure to continue to learn is to me the death knell.

I think this when we work with ypo, Vistage and EO companies we see a little more propensity to learn at the leadership level. It doesn't always filter then down to their leadership team but the companies outside of it. But I see more often like a stopping of learning and even companies with hundreds or even a thousand or more employees and they don't necessarily have a learning and development officer, somebody who's thinking about the overall thing or they just have very functionally specific kinds of things but there's no broader learning. And they're like why do we need to come to the Fortune Growth summits with you? Because I want you to learn and grow and think beyond the narrow world that you live in. I think about one of the best things I did very early in my career career working for somebody else and I was trying to get a new area of business going for Sprint and I read a piece in a trade magazine about a program that Subway Sandwiches did and I'm like holy crap, that'll help me in the long distance world. And sure enough it did produce huge breakthrough because I was looking outside the normal stuff that we look at. I was learning with an open ended sense. Right.

Yeah. Well I like to maybe it's a good story to end on. I love to point out that you know the thing Steve Jobs learned in his wilderness years was the importance of focusing on just one thing which he learned from Pixar. And so he knew Bill, he was going to die. And here you are, you've got your baby that you not only want to survive but thrive. What's the last thing you're going to focus on? And in his case it wasn't a particular product or technology but it was Apple University. He knew that if he didn't get that in place and really establish this kind of learning culture his company would not perpetuate. And I got to tell you, I bet against him, I thought the company's market cap would over double five years after his passing, I think almost six years now is unbelievable. And so that, that's why we're there. We know these mid market companies can't put in these corporate universities so we really act as that outsourced university forum as you know.

That's brilliant. Well that is a perfect thing to end on. You've got to keep growing as the leader and pass that down. You've got to lead by example. If you want to scale up your organization, you've got to start with scaling up yourself. And then of course, all the other things that we've talked about today is really great to go a little deeper with you. I thank you so much for being on the show. For all our listeners, scalingup.com is the place to go. You'll find information about, well, you'll find a sample chapter from the book and you'll find information about our summits and you'll find downloads of tools, information about the coaches. And so our whole world is there@scalingup.com thanks again Vern for being on the show and join us, join us next week each and every week for a deeper dive in scaling Up.

You got it. Thank you Bill.

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