In the life of every successful small business, there comes what the mathematicians would call an “inflection point” . . . it’s the point on a curve where the curve changes direction. In a business, it’s that point where an owner must decide whether to keep the business at a relatively small size, or pull out all the stops and try to see how big he or she can grow it. Either way, there are risks. If you stay small, you’re at risk of being squashed, or at least marginalized, by larger competitors. Consider what it’s like to be a friendly, neighborhood, mom and pop hardware store when Home Depot comes to town. On the other hand, pursuing a growth strategy carries a whole host of risks that an owner had better understand before going down that road. For a discussion of those risks, please continue reading below.
“Bigger isn’t better if it isn’t making money.” – Pat Flinn, ValueJet
That’s just another way of saying, “Growth for the sake of growth is a fool’s errand,” isn’t it? Depending on the industry you’re in and the prevailing market conditions in that industry, a growth strategy may not make much sense . . . it may be a much better decision to remain a small, profitable niche player. But even if the industry and the market conditions do favor a growth strategy, growth always carries risk. So before embarking on such a strategy, an owner should carefully consider the pitfalls and landmines that could cause him or her to fail.
Below are some of the factors . . . not all, but the most common culprits . . . that cause growth-oriented companies to fail.
- An inability to set priorities. Priorities are not organized in a logical, top/down fashion. Instead, everything is a “top” priority. When everything is a “top” priority, nothing is. As a result, the organization becomes paralyzed in the confusion over which “top” priority they should be working on.
- A failure to stick to the strategy. At some companies, the corporate strategy is fluid as top leadership endlessly tinkers with it. In this situation, the organization can’t support the strategy because no one (including top leadership) knows what it is. It’s a moving target.
- A reckless disregard for the risks. If a company has been successful and is well-capitalized, an arrogant, damn-the-torpedoes-full-speed-ahead mentality can set in. So it piles on overhead in the form of new people, plant, and equipment, but revenue growth can’t keep up, and just like that, bank accounts are dry and the company is in trouble.
- An inability to assimilate strategic acquisitions. Organic, internal growth can be frustratingly slow, so growth-oriented companies frequently choose to grow by acquisition. While their large company brethren may engage in acquisitions routinely, small company managers probably don’t do enough of it to become proficient. As a result, they don’t fully appreciate the difficulty of merging two separate cultures, compensation systems, operating procedures, IT systems, etc.
- Operational failures. When a growth strategy is very successful from a revenue standpoint, it can outrun the ability of people, plant, and equipment to keep up. People become exhausted, frustrated, and may eventually quit. Deadlines are missed as are delivery dates. Customers start seeking alternative providers.
- A cash crisis. Growth always has an impact on cash . . . the more ambitious the growth plan, the more risk that cash flow will go from positive to negative. This happens too often when owners try to get by on a shoestring budget, and find out too late, they can’t. Under-funded growth strategies have sent more than one small company to the bottom.
- A crisis in leadership. Some of the people who got us to this point are out of gas. They have risen to the level of their incompetence. As a result, our growth is stalled, and we may be experiencing the sort of operational problems mentioned in #5 above.
- Market misalignment. In its early, smaller days, with a smaller customer base, the company’s owner and managers are able to be agile, responding quickly to changing trends and customer demands. But as the customer base grows and customer demands become more varied and complex, the company may find it’s difficult to maintain the intimate relationships it formerly enjoyed with its customers. As a result, the company finds it is out-of-touch with its customers’ needs, and probably ill-prepared to meet those needs quickly.
- Outgrowing the business model. While successful companies may have a deep understanding of their business model, and while they may rigorously follow it, over time, it will become outmoded. As customers change, competitors change, technologies change, governmental regulations change, so too must the business model change. As business owners frequently say, “What we did and how we did it when we were a $5,000,000 company don’t work very well now that we’re a $10,000,000 company.” Owners who fail to recognize the need to regularly review their business model, and to make appropriate changes to keep it current, will soon find their company is no longer relevant to the market it is trying to serve.
Business speaker Richard Palmer has said, “Most companies grow themselves out of business. They either can’t finance it, or they can’t manage it.” That’s why 9 out of 10 small companies fail within their first three years . . . a daunting statistic. Still, if you’re determined to get on the road to growth, and if you know where the potholes are and are prepared with plans to avoid them, you stand an excellent chance of being the 1 in 10 survivor.
Rock Solid Business Development
Phone: (847) 665-9134
andy@rocksolidbizdevelopment.com
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