5 Reasons Small Companies Stay Small
I still find Walmart’s growth curve mesmerizing. And, I might throw in some insanity to boot.
Google’s and Amazon’s growth may be more impressive, but I can better relate to Walmart since the founder grew up just a few miles from my boyhood home.
The exponential growth of Walmart started with one man, an idea, and his vision. The before-and-after graphic below shows he clearly achieved his vision.
Keep in mind, this is only the United States. There are more than 6,000 retail sites in nearly 30 other countries.
Only a very small percentage of businesses will ever scale the way Walmart did. Most will stay small. Data from a recent census reveals nearly 21% of all small businesses have sales less than $100,000. Only 4% of all businesses will ever pass $1 million. Growth, therefore, is hard.
Have You Hit a Ceiling of Complexity?
I’ve been in the business of CFOing since 2001 and the majority of my clients have experienced growth spurts during certain stages of their history, but nothing like Walmart.
Some hit a ceiling early on and never seemed to bust through it. Periodically, I’ll land on a client where there seems to be no end in sight–growth just continues to happen year after year as though it’s automatic.
Perhaps the best way to determine where you are is to look at the graphic below which looks like a typical business maturity curve (but I tweaked it). The first question is obvious. Where are you on this curve? The second one requires introspection. Why? Wherever you are, why are you there? Can you answer that honestly?
I’m not as concerned about the businesses on the success and scale curve. Those businesses generally have teams that the CEO is leaning on to achieve the success and scale they have achieved.
I’m also not as concerned about the CEOs that have achieved significance in their businesses. However, I would suggest that significance can be fleeting (purely from a sales point of view). The eventual drop-off in sales can give way to a sinking of the ship driven by various internal or external factors.
I’m More Concerned with the Businesses in Survival Mode
I do not have the research teams that Jim Collins can access at the snap of his fingers, but census data indicates inflection points seem to occur around $1 to $2 million in revenue. Some owners have figured it out and have been able to achieve $3 million. But the number stops there. For varying reasons, there’s always a regression back to the mean if revenues ever start to push through the barrier.
Some owners don’t mind this. As long as the cash is flowing and all is well, flatline growth is fine for them. I call these lifestyle businesses. Show up to work. Fight a few fires. See a few customers. Work on a pet project or two. Then go home. Repeat and rinse–for another 30 years.
That scenario is too dull and uninspiring for me. Instead, I’m not just concerned about the owners in survival mode. I’m concerned about the owners constantly battling to get out of survival mode with the desire to grow and scale.
There are solutions. The solutions are hard and sometimes painful. So let’s get started. Let’s move from survival to success, success that can hopefully scale.
5 Steps to Get Beyond Survival
I like simple. I like process. Accordingly, I want to break out the solutions into 5 components or steps focusing on a simple process leading to change. Order is not important, except for the first one. Below is what our list of requirements looks like for growing out of the survival trap:
1. Person (fixing the person, you)
2. People (getting the people problems right)
3. Process (nailing down processes that are repeatable and scalable)
4. Product (making sure you have a product that customers even want)
5. Promotion (ensuring your marketing message is right using the right channels)
Hang on to your hat. This is not a book, so I’m going to fly.
1. Fixing the Person, You
Around 2004, Gary Boomer introduced me to the E-Myth Revisited, which I’ve read probably a dozen times. Only a few weeks ago, I read what should be the required introduction to that book. It’s called the Entrepreneur Equation by Carol Roth. In that quick read, the entrepreneur finds out if they have the traits to handle such an undertaking. Most do not, and that’s why they either fail or plateau at a certain sales range.
Taking Carol’s great work a step farther, I encourage young entrepreneurs to take the APEX Profile. If you take this test, just enter GANDY50 for a 50 percent discount off the normal price.
I scored heaviest on Systems at 47% and Product came in second at 31%. I scored lowest on Market with 22%.
Do I trust this test? Absolutely. I’m not a DiSC person. Instead, I prefer the Kolbe Index, and the APEX scores are in sync with my Kolbe scores.
I find this test meaningful because the results provide clues as to why the business owner may be stuck in survival mode. According to the APEX test authors, most business owners score highest on product.
That’s no surprise. After a quick discussion with a product-focused person, one can quickly find out there are 1) typically severe weaknesses in the company’s marketing efforts, and 2) that chaos is typically the norm as projects never get finished and processes are typically a mess.
The objective is not to turn you into something you are not. The objective is to keep you doing what you are great at, and then surround yourself with talented men and women that can handle the other areas of the business that can help you grow.
Fear is generally the limiting factor for products-focused business owners when it comes to building a marketing and operations team. It’s costly. It’s hard. But the choice is yours. Stay where you are in the survival trap or start adding team members that can plug the gaps that are keeping your company from growing as it could be.
2. Getting the People Problems Right
If I were to pick which course of action is the hardest in this list, it’s getting the people part of the equation right.
Many of you have read Good to Great by Jim Collins, and his metaphor for getting the right people on the bus and into the right seats is brilliant.
A few years later, Topgrading guru Geoff Smart wrote Who: The A Method for Hiring which is probably the best treatise I’ve ever read in finding, hiring, and keeping A-players.
Should you read both books, and you should, here’s one truism you can certainly bank on. The manager that got you to your first $3 million will probably not be the same management team helping you obtain the next $10 million. And we can keep repeating this message as we move up the success curve.
And therein lies the problem. The business owner stuck in survival mode does not have the right people that can navigate the business beyond its plateau. Growth requires skilled management practices that have been honed successfully in the real world over time.
If you are serious about growing your team, I encourage you to read Smart Growth by Edward Hess. Dr. Hess hits on some of the points that I’m barely scratching the surface on above.
Let me leave you with one tool before we go on. Consider listing all of your staff in a format similar to below.
I would encourage you to do this at least annually. List everyone on the team. As an example, I filled in what you perceive to be the best result for team member number 5, $1 million in top line sales. However, you have documented that the desired or required result is twice that amount.
You need a plan for getting that person out of the gap. Perhaps more training or coaching is needed. Or maybe a new career should be recommended.
I guarantee you most small business owners do not do this simple yet powerful exercise. Should you skip this part yourself, you risk remaining in the survival trap.
Let’s move on.
3. Nailing Down Processes that Are Repeatable and Scalable
By now, you know I’m a systems person. I often think in the abstract and can generally solve issues in my head requiring steps and sequences. But I’ll be the first to tell you that systems and processes are not “the thing” nor the “main thing”. At the end of the day, you need a service or product that customers want (hopefully lots of them). That’s the main “thing”.
Strong systems and processes are merely a tool or a device for pleasing our customers. So product drives the need for strong systems and processes. I can say the same thing for selling and marketing. Both of these disciplines drive the need for systems and process. Great systems and processes were created for amazing products and our selling and marketing methodologies–not the other way around.
There’s a temptation to misapply Gerber’s E-Myth book, and that’s by systematizing everything in the business. Yes, that’s a nice goal. But let’s back up.
Instead, let’s ask ourselves what is the biggest frustration of our customers. Start there first. Then move on to internal processes next.
Next, document your systems. We document to get a baseline of our current way of doing things. Let me repeat, because this is important. The document is not the end result, the end goal, or the ultimate deliverable. The document merely reveals our current way of doing business. By getting the system on paper, we can then start working on how to clean up or fix the processes by moving from chaos to order.
So if the document is not the end goal, what is? A trained staff on the new system or process is the end goal. Don’t believe me? When was the last time you saw a kid manning the 1,000-foot roller coaster referring to a manual in her hand? Have you ever seen a burger flipper at McDonald’s with a documented process in his hand?
Let’s illustrate what I’ve discussed with an example below. My buddies at a small PC firm were frustrated about the reverse logistics of computer equipment. That’s a fancy way of saying the team was not pleased with the process of returned equipment from customers.
We desperately wanted to fix this process because it impacted our customers. Below is how I like to document processes. I start with a picture, I end with a grid. My grids will generally link to a checklist if necessary or a script (if applicable).
In the grid above, let me suggest that you keep all steps for any activity to five or less. My benchmark is 3 steps. The fewer steps you have, the fewer chances you have for errors down the road. More steps means more complexity. We don’t want complexity, we want simplicity if possible.
The example above did not require any scripts (scripts are great for receptionists and call center employees), but we did need a checklist. This checklist has been printed in big font and has been laminated in the accounting area where it’s easy to grab when we do the occasional customer return.
Two of the biggest obstacles to fixing systems and processes is the frustration of being overwhelmed and lack of staff. Again, start out with what’s driving your customer crazy the most. Start there. Then focus on one core process to clean up and train on each month. At the end of a 12-month period, your core processes that touch your customers should be completed.
4. Making Sure You Have a Product that Customers Even Want
I’m purposely not spending much time here. Many business owners I work with have a solid product or service.
My biggest concern is when owners become complacent with their product. I also worry about start-ups falling in love with a product that just cannot scale.
Let’s pick two products with nothing in common.
In my small town, we have a small art and antique store. I’ve been there twice, once to look around and the other to actually buy something. I bought that “something” because it was art designed by my creative sister-in-law. Both times, I was the only customer there.
Or take the small micro brewery start-up who brews beer as a hobby. Friends and family love it. Alas, a business is born $1 million later after the new stainless steel equipment is installed. All is well until there are not enough shipments to even meet fixed costs.
Both cases above are real and sad. The first question for these business owners is, do your customers need you? And for the ones that need you, are there enough of them?
I like data. Lots of it. I’m the sabermetrics guy for small business. Accordingly, let’s move away from micro businesses to mature businesses. Here’s the very first thing I do with a new client I bring on board. Take a look at the graphic below presenting trailing 12-month sales where the high water mark peaked at just north of $2 million. Then, a serious pullback follows.
These pictures are extremely insightful because it gives me the chance to find out what could be wrong with our products or service offerings. In some cases, a competitor could be eating our lunch.
Diving into the root causes of the company above is beyond the scope of this discussion. What’s critical is to know ahead of time when that trailing 12-month moving average starts its downward slope. Before, not after. Critical.
5. Ensuring Your Marketing Message Is Right and Using the Right Channels
Marketing is sales amplified. Drucker stated that business is about customer-creation, innovation, and marketing. Everything else is just a cost.
When I meet a new business person, one of the first questions I ask is how they market their products. When I’ve been asked to be a mentor or a sounding board to a start-up, I always ask for their marketing plan. To date, I’ve never been given one.
Get the marketing equation right, selling becomes easier. Business owners know how to sell; they generally can’t market (unless of course they have a marketing background).
Since marketing is not my forte, I will leave you with just one suggestion. Experiment. If something doesn’t work, try something else.
I was recently fascinated by a story John Warrillow (author of Built to Sell) recently shared in a workshop.
He told the story of how Constant Contact struggled with their primary marketing strategy. Think about it. These guys are one of the big online 800-pound gorillas in newsletter software. Apparently, they had tried everything until finally they tried live events hosted by Chambers of Commerce. If Chambers get butts in seats, the local Chamber of Commerce gets a Constant Contact subscription. So far, this plan is working beautifully for Constant Contact.
Don’t worry if you don’t get the concept right. Keep experimenting. If you need help with content creation, then get help. My friend, Travis Smith, is a great resource for content marketing strategy. Get the content marketing strategy right, and you may find that you’ve created a mini printing press for money. But that assumes you have a great product or service.
Finally, track your marketing results. Unless you are doing top-of-mind-awareness advertising, you should be able to easily calculate the return on your marketing investment as I show below (at a very high level).
In short, get help. Then track performance.
I told you, we’d go fast. Yet it seems like a lot.
My first suggestion is to look at the list above and determine what is holding you back. Many business owners I start working with have issues in all five areas.
If that’s the case, consider a simple matrix I have on just one page. Notice my original 5 Ps are listed from left to right. Under each P, write a 4-5 word theme. Under person, maybe the theme is getting a coach. Under people, maybe the theme is upgrades.
The next row includes a section for objectives, which is a bit more specific than themes directly above. For example, the marketing objective could be developing a portfolio of activities leading to 50 new clients with an average spend of $50,000 per year.
The next sections are for picking measures you will track and projects required to meet your objectives.
I like this tool because it’s on one page and we can update it periodically. Bottom line, keep it simple.
And more importantly, let’s get out of the survival trap once and for all.