The Key to 2nd Phase Growth
A large number of business leaders have their start-up ventures fail to get off the ground, for any of a number of reasons. Those entrepreneurs that do succeed do so on the strength of a business model that proves itself viable. But even a sound viable business model that delivers a consistent quality, competitive, in-demand and profitable product, does not guarantee long term business success. To succeed long term a businesses must progress through a minimum of 3 stages:
1) Viability – Business Model is validated
2) Marketability – 1st Phase Growth as Cash Generating Capability is Established
3) Profitability – 2nd Phase Growth driven by Systemization
The Transition to the 2nd Phase of Growth
In the Viability Stage, the firm develops a product / service value proposition that resonates with the market. New customers are acquired and revenue grows. This 1st Phase Growth comes on the strength of the solution offered and the firm’s ability to market the value. Going from only investment and expenses on the balance sheet to break even sales volume, the firm establishes an ability to generate cash at least to some degree. Early in this stage of chasing cash, the entrepreneur accepts any order from just about any customer. It’s a time of fun of wheeling & dealing and solving problems. However, without a good bit of sales discipline, the firm will soon stretch its capability to deliver. Sensing this dilemma, the successful entrepreneur will then steer the ship toward a market niche to generate stronger profit margins from sales to customers that will pay a premium. At that point it becomes a balancing act of increasing operational capacity while securing enough sales to a niche target to cover the increasing fixed costs.
The critical point of 1st Phase Growth is where the firm must balance sales and operational capacity while sustaining growth. With this challenge often comes organizational complexity that can result in an increase in mistakes. And of course, mistakes can lead to poor product quality that can stymy sales. This contracting cycle can spell ruin for an otherwise healthy business. Breaking through this balancing act and scaling the business to the next phase of growth is critical for the vast majority of small businesses.
The firm that passes through the Viability stage can scale only so much by investing in capacity boosting assets. The realization of return on investment can take some time which can put the firm right back in the cash flow crunch of 1st Phase Growth. The better, and truly the only long term sustainable approach, is to scale through leverage. Leverage is doing more with less. The leverage comes from systemizing the business in the Marketability and Profitability Stages driving efficiency using tools and technology as enablers.
In order to succeed long term, the business must deliver greater value to customers than the cost tied up in all the business processes. From prospecting for new business, generating leads, closing sales, securing repeat business, entering orders, procuring and managing materials, fulfilling customer requirements, delivering good and services and invoicing and collecting billings the business must engineer its processes for efficiency. Some entrepreneurs get so caught up with growth that they open up new locations or add entirely new product / service offerings before the business is systemized. This premature expansion inevitably results in a retrenching back to original footprint and product portfolio.
Scaling into 2nd Phase Growth through systemization and continual improvement of all business processes, on the other hand, can reduce costs, enhance customer experience and yield higher value products/services. Furthermore, improved recruiting, training and development processes can also significantly upgrade the capability of the human assets of the firm. And with a high performance and creative team, business processes can be improved further…. An expanding cycle that is key to enabling long-term sustainable success.
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