The dreaded top of the “S” curve
This article was written by Ed Hatton, the Start Up Coach for Entrepreneur Magazine (South African edition), as the My Mentor column published in March 2014 and is posted here by their kind permission
A threat or a real opportunity?
Successful start-ups normally begin slowly, then grow rapidly. Growth is not usually a straight line, but can be compared to an elongated “s” curve, with a slow start then strong growth until it levels off. Think about a flat topped mountain – the lower slopes are quite gentle then the sides steepen until the plateau on top, where the business becomes static with little or no growth. Arriving there can be a problem where the company depends on growth to pay the bills, and if nothing changes then like the mountain example the only way from there is down. How can you avoid this trap?
Many S curve books focus on large corporates, getting to the plateau when they reach market saturation, but the slowdown can occur in businesses with less than ten employees, and in as little as two years from start-up. This is often attributed to running out of the friends and family the business relied on as customers in the early stages, or running out of working capital.
Running out of time
In my experience a frequent reason for getting to the top of the S curve is the management style of you, the entrepreneur. You often run everything, and do it very well. You learned this when the company launched and you had to manage everything – from sales to logistics. As the business grew you got better at them than anyone else, so there was no sense in delegating to others. One day you run out of capacity to do more work and the business stalls, limited by your available time. Continue reading
Staring at failure
This article was written by Ed Hatton, the Start Up Coach for the South African edition of Entrepreneur magazine, as the My Mentor column published in May 2013 and is posted here by their kind permission.
That terrible time when it looks like the business cannot continue
There comes a time in almost every business’ life when failure seems inevitable, and the entrepreneur fears that they are unable to continue. His or her self confidence nose dives. Prospects for success or even survival appear to be extremely limited and a sense of hopelessness sets in. It is a terrible time, and often happens within the first year of operations, sometimes near the launch.
There is a real basis to this fear. Businesses frequently fail and start-up businesses are especially vulnerable, with many never getting beyond the first year of operations. Entrepreneurs may not have the skills, knowledge, risk taking ability or drive to manage their businesses profitably.
Rational thinking
The key to managing through this stage is to decide rationally whether the business is really doomed or whether the entrepreneur has just hit that painful wall that left so many others bruised and shaken but stronger and thriving. Many business owners quit in despair at this stage when with the right tactics they could have succeeded. Decisions have to be made only on facts and stripped of emotions, pessimism, and blame. This is extremely difficult for an entrepreneur to do alone at a time when they are swamped by doubt about the whole business concept, their own abilities and their fears of the consequences of failure including catastrophic financial loss and shame. This is a great time to have a mentor to turn to.
An old business saying suggests that the best loss is the one taken early. If a rational analysis of the state of the business shows that there really is no likelihood of the business succeeding then plans must immediately be made to close the business with as little damage as possible. It is not smart to continue to ride a failure into yet more debt and broken promises.
Finding out why
An assessment of the current situation is vital, write down cash resources, sales prospects, market reaction, product and service quality and fitness for purpose and all the things a buyer would look at it he were thinking of buying the business.. These must be compared to the business plan to see what has changed. Why were the expected returns not made? Are the causes fundamental or can they be reversed? Be certain that the real causes have been identified; this is not a place for rose tinted spectacles. Once the causes of the distress are identified it is a whole lot easier to make a close or survive decision. Often the crisis is brought about by something as simple and reversible as the failure of marketing promotions to attract potential customers, deviating from plans to satisfy unreasonable demands by early customers, trying to attack too many markets or spending too much time on product development and not enough on selling. This is where a mentor can bring an impersonal outsiders view, especially if the mentor has experience in managing similar situations. Continue reading
Decision time
This article was written by Ed Hatton for the column the Start up Coach and published by the South African edition of Entrepreneur magazine in March 2012 and is posted here by their kind permission.
A business with no sales needs to change or close
Challenge
This entrepreneur started a model and artist management company and signed up models, planning to take a commission of their earnings. But there have been few castings and very little income. E-mails to potential clients go unanswered. She asks if she should change her way of finding clients.
Response
This entrepreneur is faced with a three way choice right now. She can persevere, working hard to make a break through, she can quit, or she can change strategy and tactics. When potential buyers do not buy a product or service as expected businesspeople either become bewildered, as is this entrepreneur, or frustrated and angry at the buyers ‘illogical’ refusal to buy. This is naive; the buyer has no obligation to buy from the entrepreneur.
The key question to ask is ‘why would they buy from my business?’ Are the models more talented, or less expensive? Are my services superior to those of others? Users of models have an enormous choice, and will have their favourites. They know what to expect and the like the look of the models they use. If they want a fresh look there will be a large choice from their current agency. So why would they switch from the known and liked to an unknown agency and model? Continue reading
Risky business
This article was written by Ed Hatton for the column the Start up Coach and published by the South African edition of Entrepreneur magazine in February 2012 and is posted here by their kind permission.
Having one large customer is wonderful – until something bad happens
The Challenge
This entrepreneur has printed training manuals for a large national company for 18 months. He purchased additional machinery for their work, although there was no contract in place. Recently the orders have dwindled and the new machinery stands idle. The buyer now places orders with a friend. The entrepreneur asks if there is any way he can complain about cronyism.
Our response
Most small businesses dream of having at least one really large company as a customer. Big orders mean rapid growth and the cost of sale is lower than dealing with many small businesses. But there are disadvantages – entrepreneurs entering deals with very large organisations should consider Porter’s ‘Five Forces’ model, where the power of customer is identified as a competitive force. Continue reading
Competing with giants
This article was written by Ed Hatton for the column the Start up Coach and published by the South African edition of Entrepreneur magazine in July 2011 and is posted here by their kind permission.
Start ups must respond to aggressive and bullying tactics to survive
By Ed Hatton
The challenge
A small concrete pipe manufacturer with great customer service opened a factory in East London to support the local demand from local contractors and government. This reduced the cost and delays in transporting pipes and was an immediate success; turnover increased rapidly. The large and powerful manufacturers in this industry lost market share and reacted by slashing prices dramatically, absorbing reduced or negative margins with their substantial resources to attack the upstart. The new factory cannot match these prices and there is no product differentiation. Their question: how do they compete?
The Solution
Voltaire wrote that “God is on the side of the big battalions”, but I wonder if the Almighty would want to be associated with some competitive practices of large and predatory organisations. Entrepreneurs starting new ventures in competition with powerful organisation often face the kind of threats experienced by this questioner. The competition may be price based as in this case or it could be massive increases in marketing spend, cornering the raw materials supply, buying key staff from the start up and others. Many believe that free competition and entrepreneurship are the best routes to more employment, but sadly practices on the ground are often very different.
How can this entrepreneur compete? Continue reading
Priceless
image courtesy of imageafter.com
In which of these products and services would you choose the lowest cost option over all other considerations?
- Legal services
- Fast food
- Motor vehicle maintenance
- Carpeting
- Wine
- Computer printers
- Office furniture
I would guess most people will answer ‘none of the above’. We value our safety, working environment and enjoyment to highly to compromise.
A scenario
Now picture this all-too-frequent scenario: you are called out in the early hours of the morning to your business. There has been a break in. With a sinking heart you see the smashed security door, notice that your delivery vehicle is missing (it is subsequently found abandoned and burnt out) and the premises are a shambles. All the computer screens are missing and so are the servers – a terrifying thought strikes; are the backups up to date? Will they work? Continue reading
Taking baby steps – a strategy to overcome disaster
pic courtesy of imageafter.com
Here is a familiar story. A good and profitable business sees a potential threat become reality and turnover falls suddenly. The former comfortable profit becomes a monthly loss.
The first imperative is to stop losing money which means that there must be more gross profit or lower expenses or both. Surprisingly tiny, almost insignificant changes will stop the company losing money. It’s the practice of taking baby steps instead of giant leaps.
For example: A business turns over of R1M per month before the crisis at a gross margin of 40% with operating expenses of R350K per month, leaving a net of R50K per month. To simplify the accounting this article will look at profit per month, as if this was a cash business and ignore tax. Say turnover shrinks by 20% after the disaster strikes, and the profit turns to a loss of R30K per month.
If, instead of making radical changes or retrenching staff, the company implements a careful strategy of tweaking several factors the loss can be eliminated without major change. Continue reading
How to panic sensibly – strategies for overcoming a business reversal
Pic courtesy of freeimages.co.uk
In most businesses there is always a risk of a sudden and serious reversal. A big customer stops buying, a supplier kills a product range, there is a strike in your sector, a major competitor appears, or any one of many potential threats occurs. Turnover slows and profits fall below breakeven and turn to losses.
Usually the business owner now exhibits some degree of panic. Common responses include the owner (male or female, the male gender is used only for convenience in this article) punishing himself by taking out less money, adding to his worries and possibly getting into personal debt. Then he delays paying creditors as long as possible and as a reward may have raw material or inventory deliveries being suspended because his account is not up to date. Often he holds off paying his VAT and incurs penalties. He may institute some special offers for new customers to regain the lost turnover, but this will affect his margins and alienate his regular customers who are paying a higher price. Continue reading
The new base line
pic courtesy of imageafter.com
In an economic downturn, as the world experienced recently, many small business owners react in peculiar ways. They will tell anyone who will listen about how bad times are while ignoring the depressing effect these words have. While they are usually skilled decision makers they often panic and retrench skilled staff, cut back on customer support and otherwise cut costs but have no plan to review these changes in the future. They avidly read case studies of businesses that have found a wonderful solution to their plummeting sales and therefore become recession proof; and then desperately try to find a similar ‘magic wand’ answer for their own business.
Some operate in the hope that the bad times are a temporary blip on an otherwise smooth growth path; an inconvenience which will disappear soon. They believe that at worst it may mean retrenching a few unwanted workers. They will prepare highly optimistic forecasts for the future, anticipating that ‘things will get better’ in a few weeks or months time.
A better way
There is a better way to weather these bad times. But first the small business owner has to face a few facts: Continue reading
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