The 4 Decisions Driving Growth

Verne Harnish's argument is that a growing business only ever has four sets of decisions to get right: people, strategy, execution and cash. Everything else is a subheading. Get all four broadly right and growth is uncomfortable but survivable. Get one badly wrong and it does not matter how good the other three are.

The value of the model is not the list. It is that the four are not additive, they are limiting. Your growth runs at the speed of the weakest one, and most owners spend their attention on the one they find most interesting rather than the one that is holding everything else down.

The four, and the test for each

People. The test Harnish uses is deliberately uncomfortable: would you enthusiastically re-hire everyone currently on your payroll? Not tolerate. Not keep because they know the system. Enthusiastically re-hire. Every name you hesitate on is a decision you have already made and are postponing.

Strategy. Do you have something a customer can point at and say why they chose you, and is the top line growing as a result? If the honest answer to why us is that you were available and roughly the right price, you do not have a strategy, you have a diary.

Execution. Is the bottom line growing at least as fast as the top line, and does the work get done without heroics? Execution shows up in gross margin, in on-time delivery, in rework, and in how often somebody has to save a job at the last minute. A business that needs heroes has a process problem.

Cash. Do you have enough cash to fund the growth you are planning, and enough to absorb a bad run? Growth consumes cash before it produces it. A business can be right about the other three decisions and still die of good news.

Why the limiting idea matters

Most owners treat these four as a checklist and work on all of them a bit. That feels responsible and it wastes the year, because progress on three of them cannot compensate for the fourth.

If your people decision is weak, better marketing simply pushes more work through a team that will not deliver it consistently. If your execution is weak, better strategy wins you clients you then annoy. If cash is weak, everything you get right becomes a reason you cannot pay a supplier in April. There is always one constraint at a time, and it is almost never the one you enjoy thinking about.

A worked example

The figures are illustrative arithmetic, not a client. Take a recruitment business billing £2.1m a year with 14 staff. Gross profit is £680,000. Net profit is £120,000. The owner wants growth and has priced up a £40,000 marketing programme to bring in more vacancies.

Scored honestly, out of 10: People 4, Strategy 7, Execution 5, Cash 8.

Look at what those two low numbers mean in cash terms. The team takes on roughly 480 vacancies a year and converts 34 per cent of them into placements, at an average fee of £4,200. That is 163 placements and the £680,000 of gross profit. But the 34 per cent is a blend. One team converts at 45 per cent because they qualify the vacancy properly before they work it. Another converts at 22 per cent because they take anything.

Bring the whole business up to the better team's 45 per cent, on the vacancies it already receives, and you get 216 placements. That is 53 more placements, worth about £222,000 of extra gross profit, with no additional marketing spend at all.

Now price the marketing option. Say £40,000 buys 90 extra vacancies. At the current blended 34 per cent that is 30 placements, roughly £126,000 of gross profit, less the £40,000, so about £86,000 net. Less than half the return, and it lands on a team that is already inconsistent.

And the People score is the reason the Execution score is a 5. Two consultants left during the year, each costing roughly £14,000 to replace once you count recruitment fees and a dead desk. One remaining biller is very good and very difficult, and is a material part of why the two left. The owner knows all of this. It has been true for eighteen months.

The £40,000 was going to be spent on decision two, when the constraint was sitting squarely in decisions one and three.

How to apply it this week

1. Score the four out of 10, alone, in ten minutes. First instinct, no discussion. Then ask two senior people to score them separately without seeing yours. The spread between the scores is as informative as the scores.
2. Run the re-hire test on every name. Go down the payroll and mark each person: enthusiastic yes, or hesitation. Do not write anything else. The hesitations are your people decision, in full, on one page.
3. Write your strategy in one sentence a customer would recognise. Who it is for, what you do that others near you do not, and what you deliberately do not do. If you cannot get it into a sentence, that is the finding.
4. Pick one execution number and start measuring it weekly. Conversion rate, gross margin by job, on-time completion, rework hours. One number, measured every week, beats a dashboard nobody opens.
5. Calculate your months of cover. Cash in the bank plus undrawn facility, divided by average monthly outgoings. Under three months and cash is your constraint, whatever the other scores say.
6. Work on the lowest score only, for 90 days. Park the other three. This is the instruction most owners ignore and it is the one that produces the result.

The mistake most owners make

They work on the decision they find most enjoyable. For a founder who sells, that is strategy. For an operator, it is execution. For a former accountant, it is cash. The constraint sits somewhere else, and because it is being neglected the business keeps producing the same result while the owner keeps producing effort.

The second mistake is scoring yourself generously and privately. People is the one that gets inflated most, because scoring it honestly means admitting you have been avoiding a conversation. If your people score comes out at 8 and you have had two unplanned leavers this year, score it again.

The third is fixing all four at once. Four half-fixed decisions in a business that only has capacity for one change at a time leaves you with four unfinished projects and a team that has stopped believing anything gets completed.

The questions to sit with

• Out of 10, how would you score each of the four right now, and which one have you been quietly avoiding?
• How many people on your payroll would you enthusiastically re-hire tomorrow? What is stopping you acting on the rest?
• If a customer had to explain in one sentence why they use you rather than the next firm, what would they say?
• If revenue doubled in the next twelve months, which of the four would break first?

This is the frame behind the 6 Steps and the Strategy & Destination work. Growth is rarely blocked by a lack of ideas. It is blocked by one of four decisions that everybody in the business can see and nobody has been willing to name.