Many many businesses fail to get beyond small – however you define small. They plateau or even fail rather than keep growing. So why is that?
Having done some research (actually some googling) I haven’t found a massive amount on the leadership behaviours that make the difference. Having spent my own business leadership career turning around plateauing (or declining) post-start-up, pre-corporate businesses and over the last twelve years, guiding over 200 business leaders through business growth pains, I thought I’d put my own non-academic and pragmatic mind to work.
These are my own thoughts on what I see as the differences between the small businesses that successfully grow through adolescence and those that stumble in some way. I don’t apologise for focusing on the leadership behaviours that seem to me to distinguish between the adolescent businesses that will continue to grow into adulthood and those that will plateau. I think at this stage of development, successful and sustained growth is more about the calibre of the leadership than about the great idea or the level of backing. I see great ideas with potential fail as an adolescent business and I see many well-funded start-ups fail too. The difference that makes the difference is in my view the leader and the way they behave.
In this article I summarise for those leading an adolescent business, some of my thoughts on what leadership behaviours get an business through that critical adolescent phase. I use the format of eight key tips nervously as I don’t like formulaic solutions. Please note then that all my comments interact and so my division is an arbitrary simplification for the purpose of communication.
Recruit the right people
Growth businesses need managers who are capable drivers of business success in their own right. It is tempting to recruit people who are less capable than yourself so you can stay a directive top dog. Long term success requires you to recruit more expensive people that are better than you and who challenge you constructively to bring the best out of you. Give them clear objectives and reasonable autonomy to make mistakes and learn whilst being open and accountable.
Develop, don’t recruit, megastars
It is also tempting to employ (usually in sales) the ‘proven’ megastar that can do everything and achieve magic results. Rarely does such a person exist and if they do they are probably not on the market and wanting to work for you. In my experience you are much more likely to be successful by recruiting or promoting someone enthusiastic and capable with potential and supporting them to fill the gaps in their skill base.
Keep your product range focused
Many start-ups, in order to survive, have to take any profitable business that comes their way that they believe they can deliver well. That is right for a start-up as it is the best way to understand their opportunity in the marketplace. But if your established but adolescent company does that, you will be limiting your growth.
The complexity of delivering multiple different products and services will limit your ability to scale and deliver repeatable quality so you will miss the opportunity for economies of scale. Likewise instead of building a brand reputation as the real experts in your specialism, you will be competing on price for the remnants after the businesses known as leaders in that market have positioned themselves to take the best and most profitable business.
This is really hard for you as an adolescent business. Primarily because to service your market as you grow you are likely to be tempted to develop great new products that your customers are demanding. And that’s not wrong. The challenge is to drop the old ones that you are no longer making much profit from. But that’s not easy. That is until a new focused competitor comes along and focuses only on the most profitable products in your range and takes the cream. Then you’ll be on the back foot cross at how the new upstart is taking market share of all your best products!
Dominate a small market instead
Contrary to the beliefs of many (we only need 0.0001% of the global market) the narrower and smaller the market the more likely you are to succeed – for three reasons:
Firstly your sales and marketing activity will be much less costly. If your market is ten prospects, then it’s actually quite easy to target them and you can afford to spend 1/10 of your budget on each. If your market is global, how much can you afford to spend on each target customer and how much impact do you think you can have on them?
Secondly your operational costs will probably be lower. If you have ten similar clients from a narrow market you are more likely to find economies of scale as you service them.
Finally your brand reputation will be stronger relative to your market. If you have won two of the ten prospects in your market, you might have 20% market share and if one of the others is considering who to ask to bid for work, you are likely to be on the long list at least.
To illustrate this, think of starting a business as a minicab driver. If you think of your market as the UK, then trying to reach that market through marketing is likely to be quite uneconomic. If you think of your market as your local village of 300 people, then you can deliver a leaflet to everyone in the market in half a day for less than a hundred pounds.
And it’s got operational benefits too. If a prospect from your local village rings you as a result of that leaflet and asks how long it will be before you can get there, will you be at an advantage over the competitor from the next village? Of course. And how much will your overhead (fuel and time cost travelling to the pick up) be compared to the competitor from the next village? Lower of course.
Invest in infrastructure and specialist skills
It’s tempting as you move through adolescence to stay lean and mean and avoid the overheads of professional management for such trivial things as Finance, HR, IT etc. And you are right to keep a lid on the overheads. Many try to grow too quickly and grow their overheads too quickly. But don’t be too lean and mean either as then there is a real risk of hidden overheads.
For example there is research that suggests losing a member of staff costs a business between six months and two years salary after taking into account recruitment time and money, disruption and inefficiently worked notice periods. So how many leavers do you need before you can justify employing a specialist HR manager to ensure you recruit, develop and retain great people?
Similar stories can be told about all the overhead functions. I know a small business of about 50 people that learnt the hard way the cost of not having a Finance Director. By hard way I mean about half a million pounds of lost profit. And I know of others that have canned an IT project costing similar sums or had staff who took them to the tribunal cleaners over an incorrectly managed HR issue.
Few would suggest that Shell shouldn’t have such overhead functions so the question is not whether but when. At what growth stage is it appropriate for you to introduce which overhead function? There is regrettably no simple single answer, but for some rough guidance you might find this article useful.
Watch the cash cost of growth
I won’t labour this one as it is quite well documented by the many financial specialists who earn a living by highlighting it. But I do mention it because it is so important. Businesses fail not because of lack of profits, in the short term at least, but because of a lack of cash. There are many horror stories of people losing ownership of their profitable and growing business because they sold too much. They sold a contract that required cash to deliver and only half way through did they realise that they couldn’t deliver the contract (and so would be in breach) with the cash they had available. And that is not a good time to go to a bank or an investor for help! Both will be delighted to talk to you and may even put in the cash necessary, but don’t expect them to behave altruistically when they realise your alternative is to lose everything!
Create excellence by not accepting the average
Reputation is all they say. And I feel it is true. Whilst I see myself as a nice guy really (because I do care about people really) I am a difficult boss to work for because I expect everything to be done well and preferably done well the first time. In my career running businesses I never realised this was unusual or part of the reason for my success.
I do understand now. Having worked with over 200 business leaders over the past ten years, I’ve noticed that most business leaders are, whilst driven, actually quite ‘people people’. They want their people to like them. That means they find it tough to be tough. And regrettably that sometimes leads them to accept mediocrity. Yes they do so reluctantly but ultimately they put up with low quality and poor performance for too long.
If you want sustained long term success you need to create a culture where everyone expects everyone else to do a good job. Notice I use the word good, not excellent. That is deliberate. Excellence is clearly the goal, but to achieve that all the time is not realistic.
In my experience excellent (and successful) businesses are not those that manage to sometimes do something excellent, but those that get good (or better of course) performance from every single person in every part of the business. So if you want excellence your efforts need to be in the direction of addressing the mediocre wherever it exists. If you can confidently say no one ever does anything mediocre, then feel free to raise the game because you’ll already be world class!
Work towards long-term, not just short-term success
In my experience the successful businesses over the long term are not those that busk it. I have to be honest and suggest that in my experience you can get away with busking it for a time in the small businesses. If you’re a driven entrepreneur that can shout and demand sticking plaster be put over the cracks you will succeed in the early stages of growing your business. But my experience suggests you’ll struggle if you maintain that approach over the long term simply because as the volume of activity in the business increases you’ll find you’re spending more and more time addressing challenges caused by busking it in the past.
Ultimately your adolescent business will fail, or at least cease growing as all your time and money gets sucked into fixing the legacy of past bad decisions.
It’s perhaps best illustrated with a story. I once discovered in a business I ran that the data cables hidden behind the panels were simply twisted together and taped rather than properly joined. How did I find out? Simple: when we’d just lost a multi-million pound contract because of a failure in those cables. Why was it like that? Well fortunately I managed (in my slightly frustrated post mortem) to find the answer. We still used the same subcontractor for cabling and when challenged as to why that was the standard of their work, they explained it was because my predecessor had given them two hours on a Sunday night to do what should have been a day’s work. Not only that, but they had been open about the shortcuts they needed to take to get it done in time and appealed to him to be allowed to come back the next day and make the joints permanent. Regrettably he simply refused to spend the money once the need was less urgent.
And I have many other much worse (and sensitive) stories from my days turning around businesses that were great start-ups that grew quickly for a while but which eventually plateaued under the leadership of the driven entrepreneur with a short term results focus. Ultimately if you want to build a sustainable business you need to spend time developing a culture that gets things right the first time so you’re not distracted from bigger opportunities by trivial legacy problems later.
Bob is a specialist in running high value added service businesses, having run five such businesses as General Manager, Managing Director or Chief Executive. His last employed role was as Chief Executive of a £16M, 200 person family owned business having previously been Chief Executive of an AIM listed company for which he raised £5M funding and which he grew from £4M to £12M in three years through two acquisitions and organic growth, and a corporate PLC subsidiary where he was Managing Director responsible for delivering £10M profit on £45M turnover through 450 staff.
Bob is now following a portfolio career providing entrepreneurial business leaders with mentoring and coaching around business leadership, business growth, merger integration and exit planning.
Core to his portfolio is MD2MD. Having experienced for himself the value of having a strong sounding board of fellow Managing Directors he founded MD2MD in 2004 to provide groups of business leaders with a confidential environment within which they can support and challenge each other to raise their game as leaders and by doing so improve the success of their organisation.More about Bob