AN EXAMINATION OF PHASE 2-GROWTH
By Richard Walton, MBA
I have written in this column a number of times about the Small Business Life cycle (SBLC), which consists of four distinct phases each of which requires specialized tasks and managerial attention. The four phases are 1) Startup, 2) Growth, 3) Maturity, and 4) Exit. In this article I want to focus upon Phase 2, Growth.
Why is growth so important and how should it be managed? Growth is the product of successfully creating customers, and without customers the newly formed enterprise will not succeed. Peter Drucker, a famous management theorist once stated: ‘The primary goal of a business is to create a customer’. Growth, in terms of revenue generated by selling products and services to paying customers must be continuously increasing in order that the business survives. The importance of growth cannot be overstated. It represents the difference between success and failure.
There are, however, several important factors to keep in mind when discussing growth. Growth must be profitable, it must be general throughout the organization, and it must be managed according to a plan. These factors must all be managed to ensure that the firm reap the rewards of ‘good growth’. Effective management practice in this phase of the SBLC will set the stage for enduring success. Let’s now take the factors listed above and discuss the required managerial actions for each.
Management ensures profitable growth through the combination of financial and marketing tools. The financial tools include breakeven and cash flow analysis. Breakeven analysis shows the level of volume each product requires in order to equalize revenue and cost. Cash flow analysis enables the manager to predict the inflow of revenue as opposed to the outflow of expenses thereby ensuring continued operation as the business grows. Breakeven analysis shows the level of profitability each product or service can provide and thereby enables the management to concentrate in the most profitable product and service mix to offer customers. Marketing tools include customer relationship management (CRM) and continuous fine tuning of the value proposition as related to individual market segments. (Note: the value proposition is that set of product attributes which uniquely meets the needs of selected customer groups that are segments of the entire market). Marketing efforts also need to focus upon the ‘right’ price, the best use of promotional efforts, the most effective channels of distribution and the product itself.
General growth means that every individual and system within the firm must be enabled to meet the ever increasing requirements of revenue growth. Systems and procedures and their capacity to process increased workloads must be enhanced. Employees must be trained for increased and changed responsibility. Specialized training in ethics may be required along with the development new production systems as well as enhanced productivity of business assets. Financial assets must be sufficient to handle increased workloads. (Financing higher levels of inventory for example).
GROWTH ACCORDING TO PLAN
The growth trajectory must be planned before product launch and must be based upon experimental research conducted with products and customers designed to learn what specific needs the customer has and how well the product and its various attributes meet those needs. Attributes represent a way of making the product more valuable to the customer through product differentiation, such as distinct packaging, credit terms, logistical services, warranties, and distribution channel availability. Obviously the overall plan must include objectives, timelines and milestones. The plan must be flexible enough to all for the inclusion of new information and the possible need to ‘pivot’ (change direction) either to capitalize upon newly emerging opportunities or avoid emerging threats. The need is not only to plan the work and then work the plan but also to be ever vigilant to the possibility of plan obsolescence.
In Phase 2 of the SBLC, growth must be planned ahead of time and the plan must be executed so as to ensure profitable growth and the development of organizational and human capabilities to operate on an ever increasing basis. It is only with each of these factors properly handled that the firm will not only survive but prosper as well.