WHY MOST COMPANIES WILL NEVER GROW.
By RODERIC MICHELSON.
According to UK Government statistics and numerous studies by universities, less than 20% of all companies achieve sustainable growth. Why is the number so low? What stops the majority of companies achieving growth? Roderic Michelson is a company growth expert from Aralex Consulting. In his experience, working with both large corporates and smaller SME’s, there are five key barriers to growth. By ignoring these key areas you can be sure you will be in the 80% that fail to grow;
1. Unclear Value Proposition. Is your product solving a real customer problem – technical or operational? Or is it just a nice to have? To achieve growth it must be clear what problem you are solving. Having determined exactly where you are bringing value to your customers, then it may be necessary to fine tune the features or the price. However without a clear understanding of why your customers would want your product or service, tweaking is irrelevant. Do your salespeople have a clear pitch? Is your product explained the right way? Are you high-lighting the right benefits to your target market? “These sound very basic, but in my experience this area is the main reason a company fails to grow, and by tackling it you can make a huge difference in a very short time-frame.” Says Roderic.
2. Owner and management team capabilities. People start companies for different reasons. Some want the freedom, others want to escape the corporate rut. Others are fascinated by a business idea or want to market their invention. However, all entrepreneurs share common psychological traits: a desire for independence and getting things done, persistence, fortitude and optimism. These are great assets but there’s another side of the coin: inability to delegate, competitiveness and unwillingness to listen, also come with the package. Beyond a certain size the family atmosphere of a start-up company needs to give way to team leaders and stronger delegation. With more success comes the need to introduce best practices so everything is done uniformly, everyone understands expectations and delivers with quality. These are also known as processes, a dreaded term for many entrepreneurs. When a company hits the milestone sizes of 6, 20 and 50-70 people, it is up to the entrepreneur to decide whether they want to grow further or stay in the “lifestyle business” size. For a significant number of entrepreneurs, growth in size is not a top priority. Therefore a positive decision to grow requires change and is usually challenging for both the original team and the lead entrepreneurs. Quite often the initial teams are unfit to take the company further and there are more than a few cases where investors have brought in outside management to lead the next phase of growth. Alternatively the entrepreneur brings in a professional manager to help. Failure to make a clear decision can leave a company floundering with a lack of vision and no clear direction. And failure to recognise when help is needed can consign a healthy company to its death bed.
3. Marketing. We live in an over-marketed world. By the time you get to your office you could have been hit by more than 1000 advertising messages. Your customers are busy, overwhelmed with daily trivia and responsibilities, assaulted by other sellers and they’ve become sales pitch-resistant. So marketing must not be left to chance. Start with the basics. Who are your customers and why are they buying from you? What is your Unique Selling Proposition? Which media are you using to reach out to them? Most companies are using 1-2 channels only. But there is gold to be mined in using multiple-media approaches and fine-tuning your message that will be of interest to your ideal customers. Customer satisfaction comes not only from the product/service but also from the interaction with your business. When they contact you, how are you keeping track of their information? These days, follow-up is extremely important as more and more people need 2-6 interactions with your business before they buy. Follow up with prospects who don’t buy. Something brought them to you so there are useful nuggets to be found there too.
4. Insufficient funding. Underfunding is not just a significant contributor to business failure, it’s also a barrier to growth. Even if your business does well, there’s a need to invest in growth: more marketing, more stock, more materials, more salespeople … the list goes on. A good problem to have, you might say. However, with growth comes the cash-flow-crunch problem. In many countries, including the UK, it is customary to give customers credit terms, i.e. they will pay 30-60 days after the sale. The harsh reality is you usually have to pay your suppliers before your customer pays you. And for most companies credit control is non-existent which translates 30-day terms into 45-day reality. So how do you work the Cash Conversion Cycle? First you need to calculate the actual time between paying your suppliers for inventory and stock and the time you get paid from your clients. Even an average number of days will be eye-opening. This will show you the number of days your working capital is tied up and unavailable to invest further. If you do only one thing as a result of reading this article, then let it be a vigorous focus on shortening your cash cycle. Give your customers a small incentive to pay earlier, work with more suppliers so you can push for longer payment terms from them, do an 80:20 review of your product portfolio and emphasise sales of faster moving products, review your distribution channels and find which ones have shorter cash cycle. Whatever it takes. When you have laser focus on this objective, there will be many ideas to improve cash conversion. It is valid for all industries and for companies of any size. This will release cash so you can invest in growth. “I highly recommend an article in Harvard Business Review from May 2001: “How Fast Can Your Company Afford to Grow?” by Neil C. Churchill and John W. Mullins. It has an excellent presentation of the cash cycle and will give you even more ideas on improving it.” says Roderic. As mentioned before, growth is a matter of strategy and choice. If one is intent on growing, the first route is to optimise operations internally and squeeze out more cash for growth internally. If you are prepared to make a significant leap, then outside investors need to be approached.
5. Poor Sales Management. An essential issue that entrepreneurs and managers need to track is the sales pipeline. Is there enough new business? Will it come through in a month, three or six months? This should be done in a very systematic way. It is easier to do in a smaller company where things are more open. As the company grows decision-makers become more removed from sales and visibility deteriorates sharply. This makes sense from a salesperson point of view as they want to have flexibility on exactly how they will hit their quota. So some of the information may be withheld or entered in the company systems in an imprecise/incomplete manner. But this “flexibility” and lack of accurate data can spell disaster for the company’s growth. Working on pipeline visibility and planning can not be emphasised strongly enough. It is a vital activity not only for growth but survival as well. The longer the sales cycle, the more critical it becomes. Ignore this aspect at your peril. Without a clear picture of your pipeline your growth will be sporadic at best and in the worst case – non existent. In addition awareness and closure rates need to be tracked ardently. If you generate leads and qualify them but don’t get business, then the conclusion is there is a need for sales training, product training and a better leads qualification routine. The good news, just by tackling one of these five barriers you can make a significant difference in the short term, but to achieve long-term, sustainable growth, all five areas need to be tackled and diligently maintained.
About Roderic Michelson.
Roderic is a growth expert for Aralex Consulting Ltd. Roderic’s expertise is in being able to assess quickly a company’s growth potential, as well as areas for improvement. Working closely with his clients, he helps them prepare and implement a project plan to position them for sustained growth. He can be contacted at: email@example.com / www.aralex.co.uk.