My grandparents ran their grocery store business out of an old cigar box in the early 1920s.
My grandfather stocked and sold the groceries, and my grandmother took the cash. Customers paid my grandmother for the groceries, and she in turn would pay the suppliers from the same cigar box. There was no fancy accounting system or the need for a bookkeeper. Two people controlled the entire business, which supported a family of eight.
Believe it or not, today’s entrepreneur is not much different. Many entrepreneurs still want to control every transaction that takes place in their business, and that is not a good idea. An entrepreneur who takes that approach will prevent their enterprise from thriving.
All businesses follow a path through three distinct phases: entrepreneurial, professional and managerial.
The entrepreneurial phase
Too many businesses never move out of the entrepreneurial phase because the owner refuses to delegate any responsibility to anyone outside the immediate family. There is a trust factor that needs to be satisfied, and an outside person has a difficult time establishing that level of trust with the owner.
In this phase, the business experiences a rapid rate of growth and employees are added that are outside the immediate family. These additional employees are usually lower level and are not involved in the decision-making process. As the business continues to grow, more employees are added and the first level of supervision is created. Now the owner has no choice but to delegate limited amounts of responsibility and authority.
In a recent survey of the Metropolitan Milwaukee Association of Commerce’s Future 50, the respondents stated that they had difficulty initially delegating responsibility for functional areas. It was an area that many said that they wanted to improve on. As the business enterprise approaches the professional stage, the amount of delegation of authority will only increase and the entrepreneur will have less control over what passes through the cigar box.
The professional phase
As a business enters this phase, the number of professionals required increases. Jobs become specialized, and there is a need for a higher level of expertise. Suddenly, the business needs an accountant, and the bookkeeper is no longer sufficient. The number of employees is now at a level that a human resource professional is required to handle benefits and to see that the company is in compliance with all of the employment laws. The owners can no longer handle all of the sales and marketing responsibilities, and a sales executive needs to be hired.
Suddenly, the business has many layers of supervision, and they are all reporting to the owner. I call this the “wagon wheel” reporting structure. All of the information flows to one person, and that same person makes all of the decisions. Especially when the business needs to be responsive to changes in the market and customer needs, the decision making process begins to slow even further.
It is now time for the reporting structure to change. It has evolved past the ability of one person to function as the sole decision maker. A chain of command needs to be developed to expand the span of control of the owner and speed the decision making process. When this occurs, the business moves into the next phase.
The managerial phase
Now that the owner has elected to delegate authority and responsibility to his or her managers, the business again can begin to grow. The owner now takes on a new role, one of the visionary and not the day-to-day operator of a business. He or she meets with a small number of managers, the operating or executive committee on a daily or weekly basis to review the sales, marketing and operating strategies. It is expected that the managers have also delegated authority and responsibility down the line to their supervisors and are holding them accountable for the daily progress to the agreed upon business goals.
Invariably, this is the stage in which many entrepreneurs fail to take advantage of the opportunity to delegate. They instead hold on to the authority to make critical decisions and tend not to respond in a timely manner to opportunities in the marketplace. They also still rely on the advice of their original group of employees and sometimes are closed to new ideas and approaches they do not thoroughly understand. Because of this reluctance to move forward, the business stalls and sometimes begins to lose ground against the more forward-thinking competition. Sometimes it is hard for the person who started the business to believe that they don’t have all of the necessary knowledge and ability to continue its growth.
In our own business community, we have seen many businesses that were started as entrepreneurial enterprises stall, and then be revived again under new ownership. There are a number of entrepreneurs who have successfully navigated all three phases: Bill Gates of Microsoft; Howard Schultz of Starbucks; and locally, Michael Cudahy of Marquette Electronics.
It is the intuitive and less ego-driven entrepreneur who recognizes when it’s time to bring in the professionals to take the business to the next level. Sometimes it’s the need for specific expertise. Other times, it is the need for a large inflow of cash to fund the business growth. In some cases it’s all about moving into new markets that are not familiar to the entrepreneur. The important thing is to recognize that they have a need that they cannot satisfy with the resources they have. It’s now time to evolve past the cigar box mentality and open up their minds to new ways of conducting and growing their business.
