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Scaling Up with National Speaker, Author & Founder of Global E-O, Verne Harnish

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Learn today the hard and fast differences between Start-Ups and Scale-Ups and what you as an entrepreneur need to do to make the leap from one to the other as you grow your business to the next level of success.

.Joining host Kelly Scanlon is Verne Harnish, founder of the Global Entrepreneurs’ Organization. The author of “Scaling Up” and “Mastering The Rockefeller Habits” Harnish is the Founder and CEO of Gazelles, a global executive education and coaching company with over 150 coaching partners on six continents.  He is a venture columnist for FORTUNE Magazine and chairs their Annual Leadership and Growth Summits.

To listen to more shows hosted by Kelly Scanlon, visit our archives.

Transcript

0:37 Kelly Scanlon

Good morning. Welcome to Smart Companies Radio. I am Kelly Scanlon, publisher of Thinking Bigger Business Media. Our guest today is Verne Harnish. He is the founder of the Global Entrepreneurs Organization. You may also know it as EO. He spent 15 years as the Chair for EO's Premiere CEO Program called, the "Birthing of Giants" and WEO's Advanced Business Executive Program which is held at MIT. He is the author of a book called "Scaling Up" and "Mastering the Rockefeller Habits." You may also know him as the "Growth Guy." He is a syndicated columnist known as the "growth guy" and the Founder and CEO of Gazelles, which is a global executive education and coaching company with more than 150 coaching partners on six continents. He's a venture columnist for Fortune Magazine and he is co-author of "The Greatest Business Decisions of All Times" and Jim Collins happen to write the foreword for that. He is also the chair for Fortune Magazine's Annual Leadership and Growth Summit. Welcome to the show today, Verne.

1:43 Verne Harnish

Glad to be with you.

1:44 Kelly Scanlon

We're happy to have you here. We're excited that you were available after your talk here in Kansas City yesterday. What did you talk about?

1:52 Verne Harnish

We talked about how you scale up a business. You know, the challenge is, a lot of people start up company. And you know, Kansas City has got a great support network for start-ups but very few scale-ups, and it's the scale-ups that really provide kinda the economic and innovation activity in a city. So, it was like, how do you get above that million dollar hump that you got to achieve in order to become a member of EO and then how do you get the 10 million, 100 million, and beyond that. It is different than if you're a start-up.

2:05 Kelly Scanlon

Absolutely. So if you had to define, I mean, you did define it to a certain extent just now, but if you had to give us a textbook definition of the difference between a start-up and a scale-up, what would that be?

2:39 Verne Harnish

Well there's actually a technical term. It's an economic term that they talk about at the G7 meetings. David Bert at MIT was the one who established the criteria and if you're growing at least 20% a year for four years in a row, some countries will back it off to three years on some decent level of revenue. Some people set that at a half a million, some people set that in a million. So, you know, it's easy to grow at 20% a year if you're doing 10,000 a year. It's different than if you're doing a million a year. So, that's the rough criteria.

3:11 Kelly Scanlon

Okay, let's talk a little bit about your entrepreneurial background. You obviously started an organization that works with entrepreneurs and you are constantly in contact and advising and counseling entrepreneurs, so you're writing, so you're coaching. Where did this come from? Were you privy to an entrepreneurial background or childhood? How did that all materialize?

3:35 Verne Harnish

You know, I was. Both of my grandparents on my dad's side down in Kinsley, Kansas, each had their own companies. My grandmother literally wore her fingertips to the bone with her upholstery shop and my grandfather early on, got in the television business back when that thing first -- when television launched, and he sold them, repaired them, then we branched into appliances. And then my dad was a rocket engineer. Martin Marietta in Middleton Colorado involved in a space race. I saw one of the first calculators when he brought it home in the early 60s, and he and a group of his friends laughed and started a company called Higher Electronics. It was a rocket ship and ended up becoming big. We were wealthy and then we lost it all in the '73 recession. That's how we ended up back from Middleton back in Kinsley, Kansas. But I grew up around entrepreneurs.

4:35 Kelly Scanlon

Yeah, so you've seen it all. You've seen the high times, you've seen the low times and then you're paying it forward with the EO organization, and those chapters, do you call them chapters all around the country?

4:48 Verne Harnish

Yeah, well actually all around the world, we're almost 12,000 members and I think 170 chapters and 40 some countries and I've had the chance to visit many of them. I do travel the world.

5:00 Kelly Scanlon

One here right in Kansas City.

5:02 Verne Harnish

It is 29 members and they'll have about 100 of the members -- oh, we had 100 of the members and their teams yesterday so it's fun.

5:11 Kelly Scanlon

Yeah, it sounds like it was a good time. At least that's what I've heard and from anybody who has read any of your articles or read your book, you just have such a great message for entrepreneurs. Let's get back to the scaling up. If I'm an entrepreneur, and I've started a business first of all, you know, I wonder so why not ask you, are all businesses scalable? Should every entrepreneur when they open their doors be thinking about scalability?

5:37 Verne Harnish

No. I think there are plenty of companies, their lifestyle, you know, where people want to keep it small and that's it's what it is that they want to accomplish. So we're really addressing the 4% of companies and that's about the number that are actually able to get the business to scale up. So it's really, if you want to do it, there are some things that we've learned. One of those by the way, it's interesting, you know with start-ups, you need to say yes to everybody. You remember the early days where somebody says, "Hey, can you do this?"

6:07 Kelly Scanlon

Absolutely.

6:08 Verne Harnish

You just lied.

6:10 Kelly Scanlon

Right. Fake it 'til you make it.

6:11 Verne Harnish

Yeah, let's face it, you got it. But when you begin to scale up, that's the one big thing that has to change. You need to now start saying no a lot more than yes. No to clients that want your attention cause it's really easy for you to get distracted and start crushing your gross margins. You need to say no to new opportunities, product lines, locations. It really is a job as you scale up of saying no. probably 20 times more than you say yes, and when you fail to do that, that's when the business gets in trouble.

6:45 Kelly Scanlon

Uhm hmm. So when you start thinking about scaling up, you have to get very focused. You have to say no to the distractions into the demands on your time and so forth, but what are some of the other things that you need to be thinking about in terms of your people, in terms of cash, in terms of strategy and process. I know there's a lot of questions there, but I mean, those are all important things. How do you even begin start filtering through those?

7:11 Verne Harnish

Well, you know, in the book "Scaling Up", we addressed four very specific decision areas: people, strategy, execution and cash, and I thought maybe with the short time we have, we could share some really practical ideas that they could think through in each one of those areas.

7:27 Kelly Scanlon

Please.

7:28 Verne Harnish

So, you know, let's start with people. And to me, the most important idea I got, in fact, Bill Gates called it the single best question he'd ever been asked -- was by Regis McKenna. Regis was the marketing advisor of the Steve Jobs, Intel, Genentech and of this young student in Wichita State University, me, Verne Harnish, and I, back in 1983, I co-called Regis and said, "Hey, you know, it's good enough for Steve Jobs, it's good enough for me, would you help me drive the marketing to scale up the student organization around the world?" and crazily enough, he said yes, he has only three client, he still kids me today after all these years, and the first thing he had was take out a piece of paper and said, "What are the top 25 influencers, relationships, people that you need to get behind this venture so that you can scale it up" and I thought that was a fascinating question and with all the companies we worked with, that's the first thing we do. I just had a company that's jumping into the carbon credit space, and the first thing we did is to take a piece of paper and said, "Alright, who are the top 25 people you need to get behind this", and clearly, you know, you wanna think big. They wrote down Al Gore. I mean, If Al got behind it, that's the right guy.

8:45 Kelly Scanlon

Sure.

8:46 Verne Harnish

So I took a piece of paper and I said, "Look" you know, this is one it's good to be young and dumb which I think, some of us "Wooh, it's too soon if we get old."

8:54 Kelly Scanlon

I agree.

8:55 Verne Harnish

I wrote down President Ronald Reagan. I said "Look, I need the President of the United States to stand up and get on his bully pulpit." I wrote down Steve Jobs, Michael Dell, I did not even know who owned Bencher Magazine or Ink Magazine, but I wrote them down.

9:10 Kelly Scanlon

Right.

9:11 Verne Harnish

And then he said the most important thing to do next, and this is what they did with me, is you got to set aside an hour every week. We talked about how the function that gets in the way of scaling up is marketing. It is not well developed in a lot of companies. In marketing, it comes down to taking an hour every week and working your list, and let me make a long story short. In 36 months, we were global. We had President Ronald Reagan talking about our movement. I was interviewed on Wall Street Journal. Venture magazine was giving us full page ads. Ink magazine did a big six-page spread on our very first event at MIT. We had opened up the Chinese Young Entrepreneurs Association in '86, and that same year, I hosted the event in LA for Steve Jobs, his first public speech after being fired from Apple. That happened in 36 months by making a list and working it. So, that's the most practical idea I can share on the people side.

10:11 Kelly Scanlon

So being very, very deliberate and focused allowed you to be global in a short 36 months. That's phenomenal.

10:19 Verne Harnish

You got it. That led to launching of EO, The Entrepreneur. The young entrepreneurs back then (crosstalk) older.

10:27 Kelly Scanlon

Right. You all got over 40. Here's the story goes and you had to drop the young.

10:31 Verne Harnish

We did, we did.

10:33 Kelly Scanlon

It's pretty funny. You know before we go on to the next one. We're gonna take a quick break. You're listening to Smart Companies Radio on Blog Talk Radio. We'll be right back.

12:30 Kelly Scanlon

Good morning. Welcome back to Smart Companies Radio. I'm Kelley Scanlon, publisher of Thinking Bigger Business Media. Our guest today is Verne Harnish. He is the founder of the Global Entrepreneurs Organization, EO. We have been talking about scalability. Now, not every company is going to scale up, they'll be a start-up but not necessarily a scale-up that makes it over that 1 million dollar market more within just a few years. But we're talking about four different things here. The people, and then next we're gonna talk about strategy. Can you talk to us about how strategy works in the scale-up?

13:07 Verne Harnish

Yeah, you know the most important thing, Kelly, is not just focus but hyperfocus. You know I think if the guy Ali that I read about, I travel a lot since I lived in Barcelona throughout the Middle East. And this is a guy who, you know, was following his passion like a lot of entrepreneurs do. We love to carve wood, and he got a job, carving wood on dining room sets and living room sets for a furniture company but then, he began to focus. He began to specialize in just carving wooden doors but not just any wooden doors, wooden doors for churches, but not any churches, specifically for Christian Churches. He was from a southern province in Turkey where almost Christianity began and today, he is the go-to guy on the planet that if you're a large Christian Church and you want a carved wooden ornate door, Ali is the guy you go to, and he has global brand. And so what we recommend in strategy, the first decision, is what is the word or two you can own in the minds of the market. You know, when my wife and I had our first child 19 years ago, we wanted the safest car and we got a Volvo. Google owns the term "Search" which by the way they stole from Yahoo, so one of the ways that you can actually impact your competition is take their word away from them and by the way, it also, at some point, becomes a limit that's why Google changed their name this summer because 98% of their revenue still comes from search. So go to the search engines, they're the ones that will tell you. Put in a word or two you think you should own in the minds of enough customers, and see if you own it on Google or if your competitors, you know, out grabbing you in terms of this mind share. So that's what strategy or brand is all about. The word or two you can know. W have a client, Trench Safety. They do one thing. Make sure you trench safe if you need a dig up at a construction company.

15:07 Kelly Scanlon

And that's where they put all their resources, where they put all their branding, their marketing, everything is around that. Okay, the next thing that we should talk about then, the next logical thing would be the execution. Obviously, you've figured out your word, you know what you're gonna focus on. How do you execute around that?

15:25 Verne Harnish

Yeah, and you know, we knew we wanted to be the young entrepreneurs organization. We got our 25 key influencers behind us. Now, we have got to execute. And here, I want to suggest, what I think is the number one business book ever written and it's not mine, it's not one of Jim Collins', but it was Eliyahu Goldratt's book called "The Goal." And I really think everyone listening to this, you need to read The Goal. It was a parable, and it really taught one thing. It's called the theory of constraints. What you've got to do is identify and it is not about identifying problems, it's the constraint. What's in your way next of moving the business for, that rock that's in the way. And by the way, if you can get control of that. So, let me tell a quick story from my second book, Greatest Business Decisions. So, Robert Taylor invents softsoap. In 1980, he spent 7 million dollars in advertising. And he tastes this product, Kelly, from 0 to 39 million. And you probably had listeners too young to know that there was not this thing called softsoap, liquid soap. And so, now, we got 39 million, what's the biggest problem he's got to face year two? Well it's not cash flow. It's not supply. Those are issues, problems but his constraint was, "How do I keep Colgate Palmolive from stealing the idea? So to make the long story short, they realized that the real constraint was the spring pop. And there was only one company at the time in California that made these. So he visits them, says how many have you guys, you know, what's the biggest order you've ever fulfilled. They said 5000, I mean 5 million. How many do you make a year, he says 100 million. He goes, so 12 cents a piece and he locks up the entire global supply. So when Colgate Palmolive decides to compete, they have no spring pops.

17:18 Kelly Scanlon

Hmmm.

17:19 Verne Harnish

Steve Jobs did the same thing when he launched the iPod. He locked up the Toshiba flash drive. John D Rockefeller -- the namesake of my first book realized that oil gushing out of the ground wasn't the constraint, it was the storage. So he bought up all the oak barrels that he could. Jim Koch, Boston Beer, Samuel Adams, Jim taught me for years at our program at MIT. You know, he wanted the best tasting beer while the key constraint is the hops and he owns the best hops coming from the best part of Bavaria in Europe, which allows him to maintain his leap so, you know, more down to earth while I was scaling up Gazelles', I realized first, I was the constraint and moved actually to Barcelona and got out of the way of my team. One year was our gross margin. We worked 42% I guess constraining our ability to grow the business. I had to get it to 55%. This year, the constraint was I needed to upgrade our marketing and we brought on a new chief marketing officer, Megan Burns. Many even might know her from Ink Magazine and our numbers have increased 80%, Kelly 'cause I got the right person in the right seat. So, execution is about identifying the number one constraint and focusing all your efforts on it. To do anything else is really a waste of your time.

18:42 Kelly Scanlon

Sure and it is so hard because entrepreneurs, frankly, I think is one of the hardest things is to focus and to concentrate on one thing. I mean, squirrel, you know, everywhere, they see squirrels. So we've got the people, we have the strategy, we have the execution against the strategy, and then the thing that makes the world go around, cash. How do you manage your cash so that you don't run out before you get to scale to that level where you're getting the return.

19:13 Verne Harnish

Well, there are two universal truths and that is number one, don't run out.

19:17 Kelly Scanlon

Exactly.

19:18 Verne Harnish

Growth sucks cash and you can get by with decent people, decent strategy, decent execution, but not a day without cash, and by the way I ran out of it in 2001. You know we went from half a million to million to 2 million to 4 million, getting ready to do 8 million and 9/11 hit and I lost a million dollars in about eight weeks and I got, "Uh-oh, like father like son. I'm about to lose my company." And so two things that I would recommend, there are usually three. First, I get my cash, Kelly, reported to me every single day. I watch it more than I watch profitability. I don't think enough entrepreneurs pay enough attention daily for what their cash precision is. Because when you follow the money, you learn a lot about your business. Number two, there is a great book out, I named it one of the top 5 business books in my Fortune column, in 2014, in fact, John Mullins is going to be key noting for next weekend at our growth summit, and it's all about the importance of getting cash from your customers, a kind of customer-driven cash business, and in fact, I'm gonna see Mark Cuban next week and you know, Mark of the Shark Tank, judge and all that was involved early on in the student organization, YEO. He realized it. He got his company started with 500 dollars that he got from his first customer. When I got in trouble, I went to 17 of my customers and said, "Look, could you pay me in advance for what you're gonna spend this year and in turn, I'll give you a discount," and I still do that today, and that funds our entire payroll for the year which allows you to sleep so much easier. So I think, as Mark Cuban said in his book, there's only two places you should go get cash: Out of your own pocket and from customers. That's what Bill Gates did, that's what Mark Cuban did, that's what we did, and I don't even like getting it from friends and family because it just puts too much pressure on you.

21:17 Kelly Scanlon

Sure and another great example that you've talked about before is Amazon. Amazon with their prime gets a lot of cash upfront from their customers that they can then go invest in operations and in other parts of the company.

21:31 Verne Harnish

Yeah in Costco. That membership fee has allowed them never to have to raise any money. They get enough fees to both represent two-thirds of their profitability and the fund the next Costco they need to open.

21:47 Kelly Scanlon

Yes. With the little bit of time that we have left, because we have gone through the four areas and of course anybody who wants to find more about that can get your book and read about that, let's talk about the role of the entrepreneur and the founder during the scale up. How does their role change? You mentioned yourself that you needed to go to Barcelona and get out of the way. So talk to us about how the entrepreneur or the founder has to change during scale up.

22:14 Verne Harnish

They need to make that transition Kelly from being an entrepreneur to being a CEO or not being the CEO. You know, one of my favorite students, his business card said Found and Head of Customer Service. That was the part of the business that he loved. I loved the R and D part of our business and so, Randy went out and found a CEO, and a COO and a CFO to build the company. He still had the majority of the ownership and he ended up selling it for a huge amount of money, but he was clear which role within the business he loved and he made sure he filled in all the other, you know, seats on the bus, but that is the main transition that the entrepreneur has to make. The second one is they have to learn to delegate. They have to get other people to do things and that is why 76% of companies are still home-based. The entrepreneur cannot let go of it. Usually what happens they try to let go, they did not give it to the right person. They got burnt badly and so, they are not able to go there again and so, they got stuck. Home-based businesses are great if that is what you love. A lot of folks are stuck there and they do not know why.

23:28 Kelly Scanlon

Exactly. Talk to us about the role and the value of mentors and coaches. You are a coach yourself, so talk to us about how that can help a business that is trying to scale.

23:38 Verne Harnish

Well, we think it is really about getting as many brain that you can tap into. That is the beautiful about the Indiegogo sites and other crowd sharing sites is that you can really tap into a lot of expertise. In fact, we think the three things that get in the way of an entrepreneur scaling up are E-G-O, ego. You know, you are thinking you have got all the answers. You only have to get the right question and then you got to tap into advisors and mentors, and coaches, and friends, and your customer base, and your employees and seek the answers. I mean that is what Sam Walton was so good at. When he opened his first store, we talked about it in his second book. He would sit down every Saturday with his employees and ask them. This is 53 years ago, Kelly, what they thought ought to be done to improve the store that week and he would be out shopping competitors and talking to customers, and so he sought his advice from everyone, not just himself.

24:41 Kelly Scanlon

Yeah and as you say that was 53 years ago. He was ahead of his time on that and look where it took the company though. What is the single biggest takeaway from your book that you would like people to know about?

24:56 Verne Harnish

That is a great question. You know, what is interesting is it is not in the book.

25:03 Kelly Scanlon

Really?

25:04 Verne Harnish

I think Bill Gross who build Idealab, that is why I wanted to add it to you on the greater interview and he said, hey we looked at people's strategy execution cash and there is a fifth component and that is timing. You know, you can have everything absolutely perfect and if it is the wrong time, if you do not hit the wave, you are not going to make it and so, I think timing has to be added to that mix.

25:31 Kelly Scanlon

Yeah, that is a great point. Otherwise, sometimes you feel as you say, I have great ideas, but they are so far ahead of the curve and the educational component for the customers and the marketplace is so great that they come in and they do all the work and then somebody else comes in behind them who has watched them and comes out with something even better and they are the ones who are the success story. I have seen that happen more and more than you can count. If somebody...go ahead.

25:55 Verne Harnish

That is why I think Kelly, it is about perseverance. I think he has got to stay in the game long enough until it is your time and that is when Steve Jobs said I am always amazed how overnight successes take a hell of a long time.

26:11 Kelly Scanlon

Yes.

26:12 Verne Harnish

It is because of this timing.

26:14 Kelly Scanlon

Absolutely. If anybody would like to learn more about of what we have talked about today and would like to get a hold of your book, how would they do that?

26:22 Verne Harnish

We recommend they go to scalingup.com. We have got a lot of free resources, bonus chapter on how to prepare and run a strategic planning session. Sample one-page strategic plans, the thing that we are best known for like 40,000 companies are using them around the world and there is also a new one-page personal plan that they can download for free and the accompanying information. So, lots of information, free of charge at scalingup.com.

26:50 Kelly Scanlon

Alright. Scalingup.com go out there and continue the conversation and get some tools for implementing some of the things that you have heard here today. Thank you so much for being on this show today, Verne. Thank you for coming to Kansas City to help educate our entrepreneurs and we just would love to stay in touch with you.

27:07 Verne Harnish

Thank you, Kelly. I appreciate in helping the entrepreneurs out in the region and around the world.

27:12 Kelly Scanlon

And if you would like to learn more about how to grow your business, please visit our website at ithinkbigger.com. Follow us on Facebook at Thinking Bigger Business Media or on Twitter @ithinkbigger. Have a great weekend. We will see you next week.

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