Small Businesses: Understanding your pathway forward
When I taught corporate strategy at the University of Houston, publishers would send me Strategic Management books by their authors hoping they would be used in my classroom.
For the most part, these were all very thick tomes with an assortment of large company case studies. This was worthwhile for students wishing to pursue executive careers in large enterprises.
However, as my focus shifted to advising small company entrepreneurs, these books were not something I could recommend to clients even though the concepts were very worthwhile.
Entrepreneurial Operating System (EOS)
Then, I was introduced to a book by Gino Wickman entitled Traction: Get a Grip on your Business. It is specifically geared for small businesses. Wickman has thoughtfully integrated the planning concepts espoused in Strategic Management books in a straightforward and thoughtful manner for the small business owner.
It is very digestible and takes a wholistic systemic approach. I have recommended this book to my clients and members of the Silver Fox Advisors’ CEO roundtables.
4 Stage Growth Model for Small Businesses
Clients have found it very worthwhile, but continue to ask the question of” What does the pathway forward look like for a small business?” Said another way, “Where am I at in trying to grow my business into a successful enterprise and what comes next?”
These questions plus work on developing a new approach for the Silver Fox Advisors’ CEO Roundtable led me to develop a 4 Stage Growth Model for Small Businesses.
In this blog, we will look at the 4 stages with a high-level sketch. In future blogs, we will examine in more depth the different stages and how the model can help guide you forward. This is not a researched base model but rather a combination of my business experience, education, teaching, and advising small business clients.
When a business is in the early stage, revenues are not robust. Achieving a million dollars is often a goal. Cash is king and everything if focused on getting customers and limiting expenditures. The offering is the owner’s idea without a lot of customer validation. Processes are not well defined and often ad hoc. Planning is sketchy at best and words like leadership are somewhat of a distraction. In general, the time horizon is noticeably short with firefighting on a day to day basis.
Owner(s) are getting excited about organization success. Traction with new customers or expanding activities with current customers is generating a growing revenue base. Typically, revenues run above one million and below ten million.
The organization is approaching a going concern where the owner is less critical to survival and growth. Revenues are providing cash to invest in the business and improve operability and to compete more effectively for new business. Loss of key customers can prove devastating.
There is a fair amount of activity on generating new ideas for products/services/customers and more sophisticated approaches to attracting customers through marketing. Still planning is heavily oriented towards current year. Planning still may be rather ad hoc lacking strategic focus synchronized with tactical game plans. Planning framework including mission, vision, objectives, value propositions, target markets, strategic themes, competitor analysis, goal cascading, accountability, and so forth are often lacking. Effort does not seem to match current rewards for many with the focus still on the here and now.
Other key players beyond the owner have evolved and perform critical roles. Often, these players interact more, and teamwork is emerging. Organization structure is still somewhat loose with not overly formal role definition. The size of the organization varies based on the nature of the product or service provided. Often staff exceeds ten and but generally does not exceed fifty and almost always less than one hundred. Contractors are used to avoid adding staff in many cases. People can perform multiples functions.
Processes have emerged and there is a level of documentation and sometimes training. Processes are often changing and adapting as more effective functioning progresses and customer feedback requires modifications to be made.
Local market continues to dominate customer base in most cases. Customer loyalty has emerged and identified as key customers with a retention focus. Expenditures for sales and marketing have expanded significantly. Often there are some dedicated people to sales beyond owner and budgets for improved web sites, marketing collateral, and marketing campaigns.
Owner and key players are beginning to think about how to motivate and retain employees. Decision making processes are receiving some scrutiny. Delegation has emerged where owner feels comfortable with key players carrying out more defined roles. Level of participation in decision making varies but generally still well controlled by owner.
“Take Off” Phase
Customers are pulling business into extended and new offerings. Revenue generation feels robust giving confidence to be more aggressive in investing and taking business activities to next level. As revenues trend towards ten million the excitement begins that the business could be much bigger. This phase generally drives the business through doubling of sales approaching $20 to $25 million.
Organization has become a going concern and largely self-sustaining if owner were to disengage. Thus, business also become sellable for potential multiples of revenue depending on growth rate of revenue and profitability. Owners consider acquiring competition to expand current market or move into new markets.
Leadership team recognizes that making this leap forward requires much more sophisticated planning. Planning exercises with key staff and down deeper in the organization occur. Outside consulting assistance can occur with business plans developed and EOS type structures implemented. Current year still receives the greatest focus, but plans can extend out 2 to 3 years and occasionally to five + years particularly where new geographic markets are being pursued.
Organization has matured with more structure on roles and responsibilities. Delegation has taken shape. Developing staff for further growth is an agenda item as is how to acquire more of the right people to help drive the organization forward. Often a human resource manager or responsibility is defined. Owner will not always get involved in hiring lower level staff, but still heavily engage in getting the right team in place. Management team is generally defined and often have team meetings. Decision making generally becomes more participative. Again, the size of the staff will vary depending on product and services offered but generally greater than twenty and may approach or exceed one hundred.
Operational and organizational processes are often seen as a competitive advantage as they have become fine-tuned for offerings. Focus centers on developing capabilities that beat the competition. Accountability around the processes has become an important aspect of daily operations. Often computer system applications play an integral role with key processes.
Strategic account management for key customers has generally emerged. Much greater understanding of competitors and their strengths and vulnerabilities. These insights are often brought together to pursue new markets whether geographical or enhanced/new offerings.
The owner now typically sees their role as leader and that developing their leadership further will be key to breaking out. They begin reading books on leadership and exploring support to improve their leadership and often that of their team. They begin to assess leadership of their key players.
Organization has matured to stage where planning systems have been implemented and natural ongoing routine with a comprehensive framework, guidelines, meetings, and so forth. Accountability clear with target objectives and follow up for business units and individuals.
Revenues are significant exceeding twenty to twenty-five million but still with clear upside through organic growth and acquisitions. Sustainability is no longer an issue. Company is fully functioning with vibrancy and robustness. Raising money for expansion can impact growth rate.
Generally, there are clear roles and responsibilities with multiple organizational levels. Human resource manager/group is an ongoing function managing competitive salary and benefit offerings as well as performance management systems. Management team is clear with defined accountabilities. May have a board of directors or board of advisors. As with other phases, size of organization dependent on products and services however staff levels may be several hundred. Empowerment begins to emerge as a discussion topic. Values are generally well defined and seen as key to organization’s culture.
Almost always the processes are well defined and considered key to success. As expansion occurs through mergers or strong organic growth, processes may need a revamp. Often more sophisticated computer application systems are installed for some key activities. Processes are generally considered owned by the function or management of the area.
Generally, the company has already moved into new markets from the original conception at the Development Phase. Sales and marketing activities have matured in Take Off phase and often require revamp to drive further growth with greater sophistication. The organization expects to move into new opportunity areas often into new geographies as local market’s growth may have played out but are highly leverageable for new entry. Markets and customers are well defined. Often company has developed a go to market strategy.
Value proposition seen as multi-dimensional. Company excels on various dimensions such as product leadership, operational excellence, and customer intimacy with one chosen as the lead theme.
The organization begins to evaluate the quality of leadership. Informal groups have emerged and can begin to counterbalance management team objectives. New levels of leadership sophistication become important to an organization’s success.
Contributed by Lane Sloan, former Shell CFO and Silver Fox Advisor.