“The biggest cause of failure in business is success.”
(A favorite saying of my late father, RM Cornwall)
“Every time the business owned by an entrepreneur who banks with us starts to grow, I get nervous. And if it grows quickly, I go on high alert!”
(A banker who wishes to remain anonymous)
When I look back at a failed entrepreneurial venture, its demise can most often be traced to one of two causes. Either their business model was flawed from the start or they were not prepared for their business model to succeed and had trouble handling the growth that followed.
Business Transitions
During growth, entrepreneurs must lead their businesses through various stages of development. One of the best models to help entrepreneurs understand these changes was developed by Eric Flamholtz. In their book (now in its 5th edition) Growing Pains, Flamholtz and Randle present a practical model that helps entrepreneurs understand the stages of business growth. A fellow entrepreneur gave me a copy of this book in its first edition while we were managing the rapid growth of our healthcare business back in the 1990s. I have been recommending it ever since, and have had the authors as our guest speakers at Belmont several times over the years.
In the early stages of growth, the entrepreneur engages in what Steve Blank refers to as the Search Process for the basic business model. The entrepreneur is finding a gap in the market, and developing a product or service to address that market need. This is where the testing and pivoting of the business model occurs.
Building a Business
Once the business model begins to show signs of market traction, the next stage is to secure the resources the business needs to grow. The entrepreneur must secure the cash, talent, materials, facilities, and so forth needed by the business to support its growth. If the entrepreneur fails to secure necessary resources, even the most promising business model can fail.
In the ensuing stages, Flamholtz and Randle chart the path to successfully navigate growth. First comes the development of critical operating systems, including financial systems, marketing systems, production systems, and human resource systems. Next comes the development of key management systems, including planning, organizing, leadership development, and performance development. Finally, the entrepreneur must build an intentional culture to ensure the sustainability of the values and beliefs the founders brought to their business at its inception.
New Challenges Around Each Bend in the Road
Each stage in the development of the business leads to specific new challenges in the next stage of growth.
The entrepreneur must watch for a wide array of critical symptoms that warn of impending crises involving customers, employees, and the organization itself. If these symptoms are detected early enough, the entrepreneur can act to prevent significant challenges or even the possibility of business failure that can come from poorly managed growth.
Symptoms of Customer Challenges
Customers are the proverbial “canary in the coal mine” during growth. Customers provide the earliest warning signs that growth is not being managed properly.
A fundamental growth challenge for early stage business is selling more than the company can possibly deliver. In their zest to build a successful business, many entrepreneurs get out ahead of their capacity to produce their product or provide effective service. When this happens, the company’s reputation in the market suffers.
Another symptom that a company is having challenges is when it starts to lose good customers. This may be the result of poor quality, poor customer service, or both. Customer retention should be a key ratio for every entrepreneur to watch on their dashboard. When customer turnover reads exceed expectations, an entrepreneur should quickly diagnose the problem and take appropriate actions. Customers have little patience with a business that no longer delivers its promised value proposition.
Symptoms of Employee Challenges
Employees are also an important early warning system for growth problems.
Certainly, the entrepreneur should pay careful attention to staff turnover and employee morale during growth. It can be hard enough to recruit enough new employees to support growth. Needing to also recruit employees to replace disgruntled workers can make it an almost impossible task to keep up with the company’s hiring needs.
Rapid growth often negatively impacts employee efficiency and productivity in their jobs. Employees never seeming to have enough time to get their basic work done or spending most of their time putting out fires may be sure signs that the entrepreneur should slow down growth and take corrective actions.
Other employee related symptoms of growing pains includes poor communication, a lack of understanding of the vision, and a general insecurity among workers.
Symptoms of Organizational Challenges
Finally, there are symptoms at the organizational level that also need to be monitored.
A constant shortage of critical resources, overwhelmed operating systems, and ineffective planning can all be signs that an entrepreneur is not prepared for the growth of the business. I will address all of these more in future posts.
The most disconcerting symptom is when sales are growing, but profits are plateauing or even declining.
No Single Cure
Overcoming the causes of these and other symptoms is no easy task. There is not one magical thing an entrepreneur can do to achieve pain free growth. Over the coming weeks I will be looking in depth at what entrepreneurs can do to help ensure successful growth in their business ventures.
This has been extremely helpful information from Dr. Cornwall. I started my business in December and I’ve experienced so many of these growing pains. In the very beginning, I realized that I had only done maybe 1/3 of the planning that I needed to, I didn’t have the right materials to make the orders I had already gotten, and I didn’t even know how to use my equipment. To be honest, the first month of my business was an absolute disaster. However, I’ve finally made it out the other side and I’m seeing steady growth, which, as Dr. Cornwall mentioned, has brought along a whole new set of growing pains. Excited to read more insights on growing pains in entrepreneurship!
I look forward to hearing more about your reflections on the “cures” for these symptoms of growing pains as these are all side effects that I have witnessed many of my favorite ventures experience. For example, I look up to both OutdoorVoices and Girlfriend Collective greatly in my own entrepreneurial pursuits, I feel I have a lot to learn from them and enjoy doing research about ways I can build a brand and business model similar to theirs; however, growth is one area they both did very poorly with. I experienced frustration with them both as a customer and read really scary reports about both ventures almost failing as a result of growth they were not prepared to sustain. My frustrations stemmed from a lack of inventory; I was a loyal customer to both brands from the beginning, but when I received emails from both brands about new collections that I LOVED, I clicked an email link to attempt an order only to find that everything was out of stock. This pattern of being alerted to new products I wanted only to find them out of stock continued for about a year; it was honestly infuriating. I want to be like both brands in so many ways- but definitely not in the way I handle growth. I will be watching this blog series closely; thanks Dr. C!
It is interesting to note that you believe failure comes from a faulty business plan or the inability to handle their own growth, as opposed to finding fault in one person or their actions. So much planning and careful execution must go into just the business plan itself and it is vital that the entrepreneurs involved not get too ahead of themselves. The points you ask entrepreneurs to consider are ones that many might not think of. Being mindful of them will no doubt guide entrepreneurs in the right direction in order to effectively run their businesses with minimal hiccups.
Dr.Cornwall is exceptional at conveying helpful information to current and future Entrepreneurs. I plan to develop my own business one day, and I will inevitably experience such growing pains. Knowing that I will be better equipped to commence my journey is reassuring. Although such challenges and symptoms may arise, we learn that an entrepreneur can prevent these significant challenges by early detection. I look forward to learning more about what entrepreneurs can do to ensure successful growth.
I like how you say that there is no single cure for growing pains and how this needs to be a multilayered approach. I appreciate that you laid out the symptoms with a way to fix each one.
This article is one I will take going forward in my career after I graduate May 7th 2022. So thank you Dr.Cornwall for this helpful information. It’s very interesting that failure in this intense comes from within or the faulty business plans that come the people building this type of business. I believe with anything we are doing in life that deals with business and success should go through an extensive planning process to make sure you are not in over your head about this.
Managing rapid growth seems to be one of the most unanticipated problems of the entrepreneurial journey. As exciting as it is to see a business take off, this momentum can fade quickly without the resources or staffing to sustain it. This post provided good insight on the signs to look out for when navigating this stage of the process.
The two quotes at the beginning of this post seem paradoxical, but I completely agree with them. When an entrepreneur has spent so much time putting together their venture from the ground up and has been focusing on so many details and finances about it all, it can be a harsh jump back to reality when that concept actually begins to grow. Even if they have planned everything out beforehand in their head or on paper, things they can’t predict the growth that they will actually see. Thus, if they are not prepared to pivot the venture, or move from one role to another, then their success will end up being their downfall.
I think that it is highly important to pay attention to customers and employees when trying to create a sustainable business, especially during growth. If you don’t have customers or employees then you don’t have a business so it is imperative to pay attention to them. I also believe that the macro trends are important in making sure that there is enough product available to expand.