The third barrier to business growth is:
3. “The need to navigate the increasingly tricky market dynamics that mark arrival in a larger marketplace.”
If you’ve been in business for a number of years you know that the market can make you look good or bad. When things are going well, the market covers up a lot of mistakes. A poor market exposes your weaknesses. Market Dynamics is another place where the counter-intuitiveness aspect of business appears again.
Many companies don’t recognize that as your business grows the marketplace around you begins to notice, especially if your business begins to capture market share and business that your competitors might have earned without your presence.
Suddenly the path you were on becomes a bit bumpier. Couple this with any issues you still have with the previous two barriers (#1, #2) to growth and your business becomes increasingly difficult to manage.
In different industries the threshold for when this begins to heat up may vary, however as your business approaches $10 Million in revenue it is especially true. The irony of this is that under $10 Million when just a little more focus internally on establishing healthy organizational habits would ensure long term success, most businesses begin to focus on the external. Paradoxically, just when you need to begin to focus more externally (over $10 M), is about the time that the organizational complexity issues (Barriers #1 & #2) begin drawing the attention of you and your leadership team inward. That’s when it’s probably more important for the team to be focused on the marketplace. This is particularly a good time to have outside assistance (Consultant/Coach, Advisor) to help you maintain an external focus.
In Mastering the Rockefeller Habits Verne Harnish notes several other dynamics that add to the complexity of running your business as it grows:
“Between $1 million and $10 Million, you add to the focus on revenue the cash concerns you had been putting off. Since the organization will typically grow more and faster during this stage than any other, cash will rapidly be consumed. In addition, in this stage the organization is experimenting a great deal to figure out what its specific focus and position in the market should be. These experiments can be costly.
As the organization passes $10 million, internal and external pressures come to the forefront. Externally, the organization is now on more radar screens, alerting competitors to your threats. Customers are beginning to demand lower prices as they do more business with your organization. At the same time, internal complexities increase, which cause costs to rise faster than revenue. All of this begins to squeeze an organizations gross margin. As gross margin slips a few points the organization is starved of the extra money it needs to invest in the infrastructure like accounting systems and training, creating a snowball effect as the organization passes the $25 million mark. It’s now critical that the company maintains a clear value proposition in the market to prevent price erosion. At the same time the company must continually simplify and automate internal process to reduce costs. Organizations successful at doing both can actually see their gross margins increase during this stage of growth.
By $50 million in revenue an organization is expected to have enough experience and position in the marketplace that it can accurately predict profitability. Not that profit hasn’t been important all along as the organization grows. It’s just more critical at this stage that an organization can predict profitability, since a few points swings either way represents million dollars. This brings us full circle to the number one function of a leader, the ability to predict. The fundamental journey of a growing business is to create a predictable engine for generating wealth as it creates products and services that satisfy customer needs and creates an environment that attracts top talent.”
In summary achieving $10 million in revenue is a significant achievement. There are many balls to juggle on the climb to reach this. The business leader who recognizes these challenges and begins to work on them as they grow will find it much easier to build on these as they reach and surpass this level. Attracting the right people requires specific disciplines that far surpass a business’ immediate needs. The wrong choices limit and restrain, the right ones stimulate and sustain growth. Developing the right systems and structure to align the company from leadership to frontline employees increases the clarity of communication and fuels improved profit margins. Finally being in position to have the proper balance on external focus when revenues pass $10 million ensures a smooth transition, and decreases obstacles from the increased pressures of competition.
How do you manage the shifting set of priorities required from you and your leadership team? How do you grow your leadership team’s ability to navigate the predictable evolutions and revolutions of growth? The two most important functions of a leader are the ability to predict and delegate. We’ll explore these and the tools and resources available to help with forecasting in our next blogs.