For SBT
It begins as an imperceptible transition, like watching the sun slowly peek out on a cloudy day; or like noticing that your little girl isn’t so little anymore.
For entrepreneurs, it is the most painful time of their business experience, primarily because of the slow and insidious way the "second stage" business appears.
So what is a "second stage" business? TEC International, through its ONLINE Web site, has studied the second-stage encounters of hundreds of businesses. To quote TEC International, the second stage "is that point in a business’s life cycle when the casual ad hoc methods of an entrepreneurial start-up begin to fail."
It means the business owner must convert from a doer/decision-maker to a delegator/direction-setter, and then to a team builder, coach, planner, and communicator. This is why a business passing into the second stage is in exciting but also treacherous times.
How do you know you are there? My thanks to Eric Flamholtz for sharing his thoughts:
1. As owner there is not enough time in the day; people who need your time can’t get it.
2. It’s becoming physically and emotionally impossible for you, as owner, to get everything done.
3. Many people are not aware of what others are doing.
4. People don’t seem to comprehend the firm’s ultimate goals.
5. There are too few good managers.
6. People say, "If I want to get it done, I have to do it myself."
7. Many people think that company meetings are a waste of time.
8. Plans are seldom made and hardly ever followed up.
9. There is a growing feeling of job insecurity among employees.
10. Sales growth is good, but profits are poor.
11. Bankers are asking tough financial questions, and there is difficulty accounting for where the cash is going.
12. "Fighting fires" is the order of the day, every day.
13. Customers are demanding more and more meetings because they are uneasy about service levels.
14. There are many growth alternatives, but there is no obvious path to pick the best ones.
15. As owner, you are stressed-out, don’t sleep well, and may be having problems on the homefront as a result.
Let’s face it. This is scary stuff. Here are some other things businesses have encountered at the second stage: salespeople sell a product out of inventory only to learn that it’s out-of-stock; one vendor’s invoice is paid more than once, others are not paid at all; product quality drops for no known reason; and missing letters, e-mails, files, etc., lead to embarrassing admissions, not to mention loss of time and work productivity.
Now here is an interesting statistic. A company typically reaches the second stage around $3 million in sales, plus or minus. There is no magic number, really, it’s the onslaught of the above symptoms that tells the story.
So what to do if you are there? I suppose the revelation is no different than an alcoholic finally recognizing the need for rehab. The experts recommend four steps to move from the second stage to a third-stage business:
1. Do a full-scale organizational audit. Turn over every possible stone. Use professional resources to help. In TEC, many of our groups actually track "key indicators" to monitor performance trends. These indicators in many cases signal the first alarm.
2. Formulate an organizational development plan. Build it in stages (e.g., what will we need at $5 million, $10 million, $20 million, etc., to continue to grow and survive?).
3. Implement the plan. And as I have said many times before in this column, set measurable, reachable goals with a reward system to recognize individual and business accomplishments.
4. Install a meaningful system or process to monitor progress.
In TEC, we have learned that this will probably take from two to four years, if you are at the "get-go" stage of getting serious about moving beyond the second stage of business.
As you embrace this process, make no mistake about it, the following issues will and must be addressed:
1. Transition of the leadership role (there will be new players for the transition to succeed).
2. Financing (new money, better management of cash flow, and higher financial risks accompanied by higher financial reward).
3. Supplier chain economics, e-commerce, and other sophisticated marketing tools will be adopted.
4. The structure of the firm, its systems and operating protocols, will be advanced under the guidance of a cohesive leadership team.
Sound impossible? Not really. You’ve no doubt heard that while an inordinate number of companies fail within the first five years of their existence (80% or more, I believe), the fact remains that over 80% of our US employment is provided by firms with fewer than 500 employees.
They made or are making the transition successfully. Until next month, happy transitioning to Stage Three!
Harry S. Dennis III is the president of TEC (The Executive Committee) in Wisconsin and Michigan. TEC is a professional development group for CEOs, presidents and business owners. He can be reached at 262-821-3340.
April 12, 2002 Small Business Times, Milwaukee
