Should you call the Doctor? Part 4 of 4 (M&A)
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Breaking through a Growth Stall

Thought I would give you a brief summary of recommendations for getting your business growing again after sales have plateaued and you aren’t sure how to kick start another high growth phase.  I work with a number of partners that, with the first year or two of starting their business, they quickly grew to near $1 million dollars per year and 10 or so people – and then stopped growing.  I also frequently see partners reach a plateau when they reach 50-60 people and sales of $6-8 million. 

Where ru goingNot IMO coincidentally, these “growth stalls” are when a business needs to add another layer of management.  At 10-12 people, further growth requires the founder to hire managers and cede responsibility for many day to day activities.  At 50-60 people the founder now needs to start developing a second level of management and ceding some long term business development decisions to them.

Much of the following, which I have seen in action while working with partners, comes from an interview of Frank V. Cespedes, a senior lecturer in the Entrepreneurial Management unit at Harvard Business School.

Failing to become the market leader

Failing to become a leader in your market – a leader in a niche industry on a global basis or a leader in a specific geographic region within a large industry, is a common reason for a growth stall.  You have had good success selling your product or service “locally” but have struggled to expand your geographic reach and/or expand sales of “new” products or services to existing customers.  First – why does it matter whether you become a market leader in your industry?  It’s pretty simple.  Market leaders have lower cost of sales and marketing then non-market leaders.  This is driven by customer behavior – market leaders have been vetted by the industry so I don’t need to invest as much time and effort qualifying a supplier the market has already agreed delivers good value and is reliable.  The lower cost of sales and marketing creates higher profits and increased ability to invest in expanding sales, invest in expanding your product line, and the ability to “as needed” discount your product and services to win key accounts.

Ineffective triage

This is very much related to failing to become a market leader – in that one tries to do too much, tries to be too many things to too many people.  If you are pursuing too many different types of customers, becoming a market leader in one industry segment is hard to do – never mind trying to become a leader in several industry segments at the same time. 

Likewise, trying to grow software sales (whether an app or a web service) while also aggressively pursuing growing a services business is fraught with pitfalls.  The way you manage a software company is way different then the way you manage a consulting services business – management structure, KPIs, financial structure, people management and more.  This is the most common trap I see – companies that started with a software strategy, found growth and profitability slow to develop – so grew their consulting services business.  The trouble is their vision and business structure stayed one of a software company which creates a number of conflicts with the consulting services ide of the business that is paying the bills.  Consulting services companies love complexity and high touch – while software companies are trying to eliminate complexity and high touch through infinitely scalable code.  Consulting services companies are selling bodies and hours – where headcount grows linearly with business growth – very different then a software business with a more fixed headcount that grows much slower than sales.  Are you a services business or a software business (again web services is in the software bucket)?

Another triage trap is geographic.  Are you focused on developing your business regionally, in one or a few countries or in several countries?  As with focusing on a narrow set of customer or choosing to grow a software or consulting business, you cannot grow your business in more than a few companies at one time.  And yes this means turning some business that “walks in the door” away – because of the long term support costs it will inevitably lead to.  If you have a strong business in your home country or region (say Central Europe), sure you can pursue growing the business in 1, 2 or 3 additional countries – but more than that is asking for trouble as “hidden” costs and inefficiencies sneak into your company trying to support customers in faraway lands.  If you are pursuing breaking into a “big market”, such as the US, Japan, Germany or China, where there is lots of local competition, you’ll need to be more focused yet.  Think you can tackle developing your business in a few new countries and one or two of these “competitive shark tanks”?  Think again.

See Frank Cespedes answers to these questions…

Q: Why is it important for companies to select the right customers? Along these lines, what's the difference between what your article terms as partitioning and segmenting a market?

Q: In the article's step-by-step process, you emphasize the "ideal customer profile." Can you talk a little about that?

Some additional late breaking wisdom on a related topic - from "Morettini on Management" - "Growing from a Startup to a Mid-Market Software or Hardware Company".



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