Why small companies don’t grow into big companies part 2

It must be run by employees, not entrepreneur

Any business which wants to grow must keep the entrepreneur or CEO almost completely out of the delivery loop, and preferably, out of the business generation loop too. This is such a common issue that I am tempted to list this as one of the most common challenges of all small businessmen from all sectors and backgrounds.

A scalable business must not require the CEO to manage projects himself or deal with customers himself. He may monitor the work of others to ensure that both business generation and delivery to customers are working smoothly. He must track the numbers of all business health parameters (new orders, orders closed, sales, profits, etc) but should not be part of the delivery of any of these things.

A lot of small businesses are “built by” the entrepreneur. He does this by sourcing business and executing contracts. As his business grows, he hires junior executives to help him on all fronts, but the juniors cannot work on their own. He then gets junior managers who monitor these junior executives. These junior managers cannot manage the functions by themselves either — the entrepreneur often finds that he has to guide his managers twice a day instead of once a week. In my view, the once-a-week review is a magic figure. If you can manage something by reviewing its progress only once a week, and you can genuinely be free of handling phone calls or giving instructions on email during the other days, then you can claim to be out of operations.

In my experience, this is where a lot of small businesses stop. They cannot move to a stage where the entrepreneur can get away with just once-a-week meetings with his managers. So, the entrepreneur is never free from operations to be able to drive growth. And therein lies the next key, the real problem: the business is too complex to be run by the managers.

Whenever I speak with these entrepreneurs, they all say they wish they had the budget to hire good senior managers and SBU heads so that they could free themselves from operations. But their businesses do not have the budgets to sustain such high overheads. One answer: simplify the business, simplify the value proposition itself, so that the existing managers can get new orders and execute them. Second answer: build the budget for a senior guy, accrue cash reserves so that it may permit you to pay 12-18 months’ salary for a senior manager and you are freed up to pursue growth aggressively.

Here lies the brilliance of the Indian IT industry. They built a business model which is highly scalable, even if it is intellectually boring. Their pitch was (and is) the following: “We will provide trained programmers, who will do whatever you need done. We will bill you per month.” With the years, variations on this theme have evolved, but this root value proposition is simple, boring, and enormously scalable. Radio taxis, cafe chains, and so on are all simple and, at a fundamental level, scalable. High-end management consultancy or execution of complex, one-off projects are not.

Some thinkers feel that a business is not scalable if its revenues linearly scale with their employee count. This thinking has given rise to the software sector’s fascination for software products, where they can aspire to “non-linear” growth. I agree with the attractiveness of software product-based strategies, but disagree with this thinking — I feel that scalable businesses which require large numbers of junior people are scalable too. The key is junior. It is non-scalable only if it requires large numbers of unique, senior members.

I suspect that most scalable businesses may be doing work which is boring for the entrepreneur. She needs to choose between interesting and scalable. She needs to choose whether she wants to build a growth story or build a business which can stimulate and entertain her with interesting work.

Go beyond the early adopters
Small businesses get initial success relatively easily if they are competent. This success is by pleasing a small set of clients. If it’s a B2B business, then a small set of companies in the same city or region become clients. If it’s a retail business, then a loyal set of repeat customers grows up in the neighbourhoods where the business operates.

Scaling beyond this set of customers is a big challenge, because it is not an organic process. This is a challenge for some businesses of all profiles: traditional brick-and-mortar businesses or new-age tech ventures. And it is important to understand why the first five or fifty customers does not become five hundred over time.

In most cases, the initial success indicates that the business is appealing to a specific profile of customers. Your existing customers do not represent the larger market. The failure to recognize this is one of the key reasons why small successful businesses remain small.

The only way to break out of this initial circle of customers is by studying other potential customers closely and identifying why they are not buying from us. They must be buying something else, so why are they unhappy or uneasy buying from us? These reasons need to be addressed. One of the most common reasons in the B2B category is the small size of vendor compared to the large size of the enterprise customer. In such situations, the business should either re-invent their value proposition so that the size perception becomes less relevant (change from services or manpower delivery to boxed products, for instance) or address other customer profiles who are less sensitive to the vendor’s size (move the focus from large enterprise customers to mid-market customers, for instance). The business must reinvent itself to achieve its growth.

In the B2C space, a common problem could be that you are selling something which the bulk of potential customers don’t really need in large quantities. If you are in the foods business, are you selling pasta in a roti-eating neighbourhood? Yes, we know that quite a few people eat pasta occasionally, but it is possible that only roti or dosas will scale — pasta will remain a once-a-month experiment in most kitchens. If you are in the TV business, then your TV brand may be small and less well-known, and your neighbourhood may have people who are culturally inclined to buy only big-brand TVs?

In short, in each case, identify why those who are not buying from you now are keeping away. Then decide whether you want to sell to them. And then change your business to start selling to them. Focus on one key metric: rate of acquisition of new customers. If this rate is steady and positive, then you have beaten the early-adopter challenge.

In the technology space, there is an entire specialised challenge here, which is best described by Geoffrey Moore’s book “Crossing the Chasm”. This book is a must-read for all entrepreneurs, tech or non-tech, wanting to scale up.

Set up a business development engine
Strange as it may sound, I have met lots of entrepreneurs who don’t have a business development (BD) engine. I used to think that this weakness is a peculiarity of the techie-turned-entrepreneur. I now realise that this is not so; I have encountered businessmen selling physical goods in the old-economy model who don’t have a sales engine either.

Beyond a certain size, you need to devote resources to BD. If you are running a software projects business, you may need someone to go and meet prospects every week. This is investment in sales. If you are running a shop, you may need to work on increasing visibility, set up a tele-calling team, send out flyers to prospects in your catchment area, or advertise. This is marketing and visibility. Do what is right for your business.

When your business is too small to handle full-time sales executives, you, the entrepreneur, must keep aside some time every week for pure business development. This time window must be sacred — no phone calls to manage delivery issues, customer support or HR challenges. This requires discipline, something which most entrepreneurs have little of. (We entrepreneurs value our freedom, which includes the freedom to break rules we set for ourselves. Enter indiscipline.)

If your business is in this phase where you have to do the business development yourself, I strongly suggest that you block one day every week where you do not enter your office. (Yes, ensure that you stay physically out of office.) You must set up appointments during Monday to Thursday for meetings with prospective clients on Friday. If you do not have enough meetings on Friday to fill up the day, then go sit in a cafe with your laptop and finish creating the EDM (electronic direct mailer) or brochure which you can send out to prospects, or sit somewhere and make phone calls to try to set up appointments.

If you, like me, don’t have any idea where to start setting up appointments from and who to set up appointments with, then get external help. Engage with a good direct marketing firm who can do the call-outs for you. These firms will also have databases of, let us say, Purchase Managers of mid-market companies in Maharashtra or Minnesota, or CFOs of large banks in your area. So, they will know who to start calling. Such services are not expensive. Even if the tele-caller cannot set up appointments for you, he or she can make a first call and then set up an appointment for a second tele-call which you will do yourself. Next Friday.

If your business is big enough to absorb the costs of a full-time sales executive or a marketing team, then you must start on that path. Get a sales consultant to help you recruit and train the sales executive, if you have no experience in systematic process-oriented sales. And get him to train you to manage your sales executive through daily reports and weekly reviews. For marketing and visibility, get external consultants to set up a process with a 12-month plan and work with your in-house team.

The entrepreneur must work exclusively on BD at least one day a week. Organic growth by word of mouth is the stuff stories are made of — they work for WhatsApp and FaceBook, but not for most of us. The focus here should be: ignore delivering value to existing customers one day a week, and worry exclusively about getting new customers.

Have a real CEO

This is a problem I have almost never seen with techie entrepreneurs or first-generation entrepreneurs. I have seen this quite often with traditional businessmen from business families who are incubating new businesses using their existing resources. In such cases, the owner of the business does not want to become a full-time CEO, because he has diverse business interests (including, often, some rental or passive income) and wants “his team” to run the business.

Unfortunately, I have often seen that the owner forgets to get a good full-time CEO as part of the business. He believes that he will have a layer of what you and I would term mid-level managers, and he will manage the business himself by meeting them a few hours every day, or twice a week. After all, how complex can it be to run yet another business?

It is true — many businesses are not that difficult to run if you have a “team” who will run under your supervision. Unfortunately, growing a business is quite different from running it. Growing a business needs someone to be worrying about innovative growth strategies, and executing those strategies, and failing over from one approach to the next, 12 hours a day. This is what a good CEO does.

Business owners with their fingers in multiple pies often fail to recognize the need for a CEO. They often have cultural problems delegating control to a non-family CEO, or have a prejudice against spending on the salary of a good full-time CEO. They keep talking of wanting more growth, but unconsciously settle for a low-growth path. Then they talk of destiny, luck, or adverse business environments. The truth is that their business never got a chance — it never had a driver. It had an owner who was a mentor and guide. It had operational managers who would deliver the outputs and pay the bills. But it never got the growth-driving CEO it deserved.

This story is repeating itself in every other business household which has lived through two generations or more and has multiple business interests. They give birth to orphan businesses and hope that the orphans will grow big by themselves with a bit of money and mentoring. As with children, so with businesses, you need someone who will take ownership of the fledgling and drive it towards growth till it reaches a reasonable self-sustaining level. The keyword here is ownership: not on paper but in action and involvement.

The bottom line

A business should either generate wealth (good profits, high free cash reserves) or show rapid growth. If it is neither growing, nor generating enough cash reserves to allow the entrepreneur to invest in growth, it is not healthy. The head of such a business is then stuck in a situation akin to an employee who must continue toiling at a job to continue paying his bills. This is not a desirable state for the entrepreneur, nor for his business. The aim of this essay was to point out some measures to turn such an unhealthy business into a healthy one.