“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.
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.