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Prison Break: 6 Key Constraints That Stop Small Businesses From Becoming Big Businesses

April 21, 2012 | Comments: 0 | Views: 145

Recently I met a group of Small and Medium Sized Enterprises (SMEs) business owners who were sharing who were sharing their experiences and exchange ideas on how to grow their businesses. They were entrepreneurs at various stages of running businesses from one year to over ten years.

One lady who has been running a seemingly successful SME for over a decade brought up an interesting question that occupied most of the discussions. She asked why most SMEs struggle to grow into large enterprises. She explained that despite hard work, capital injection, strategic planning majority of SMEs are unable to break some confining walls that ensure the business remains at certain level of turnover and profitability. This happens after some years of exciting growth that plateaus at certain level. I jokingly called what he was describing the being held in the prison of smallness.

Why would theses enterprising, hardworking, passionate and ambitious entrepreneurs be held in this prison? I kept on thinking.

After evaluating my working experience with many SMEs I picked the following factors as the key constraints that combine to create this prison.

1. Unscalable Business Models.

The biggest limitation to SME growth, from my observation, has been unscalable business models.

No business can outperform its business model. A business model describes the integrated means and processes through which you are trying to achieve your business objectives- creating and delivering value to the market for profit. When the perfect combination of such means is put to the highest test they could only give a certain result at best. However hard you work your model will not get any higher results after some point. At this point we say your business model can't be scaled any further.

Let me explain this with an example. If you were a dairy products processor you could have the following factors as some of the elements that form your business model. You keep dairy cattle, which provide all the raw milk you require. You then process and package the end products in your family run factory. You own two trucks with some delivery people who take the milk to various shops in your neighboring city. As the business keeps on growing you increase your cows, you expand your factory, buy more trucks and hire more delivery boys. But you will only be able to do this to a certain level.

At that point you won't be able to keep more cows and therefore your raw materials will become a constraint. The factory could only expand to a certain level and the market will only be able to absorb a certain amount of your products. However, much capital is injected into this business for expansion the business will become a prisoner of its own business model. Unless the model is changed to a scalable one, the revenues and profits of this firm will plateau.

A change in model may mean a change in how the firm gets its raw materials - from self production to buy from other dairy farmers; it may also mean selling semi-processed products to other dairy products, it may mean sourcing out its excess capacity to competitors, add other products into its fold rather than focusing on dairy products only, develop a different channel of distribution among many other factors that affect its business model.

As you evaluate your business model you need to fully appreciate all the factors that drive your business and how they relate to each other. If you are a prisoner of smallness then you need to have a thorough look into your business model.

2. Over dependence on new customers

All start up entrepreneurs have great stories of their first customers. The excitement of getting someone to believe in your product or firm is essential to keep you going in the early days of the start up. Unfortunately for most SME entrepreneurs this excitement becomes an obsession and it becomes the only purpose of all its business efforts.

It has been widely believed that the most successful business is the one that has the highest number of first time customers. This is a partial truth. I evaluate business success by the number of repeat customers, how frequent the orders are and whether they are increasing with time. As a growth strategist, marketing consultant and business owner, I know how costly and difficult it is to get a customer make the first purchase. This is incomparable to the easiness of keeping a customer and getting him to make a repeat purchase.

Many SMEs owners will agree with this logic in conversations but in practice the opposite happens. You hear and see the inscription, 'Lose them once they make the first purchase!' In their customer dealings. You see it in the customer service, the quality of its products and weak after sale follow-up. After a customer buys don't ask, "How do I get the next one." But shout to yourself, "How will I get him to come back!"

3. Flawed Marketing Mindset

For big companies marketing seem to be at the heart of everything they do. They do as much marketing as money can buy. A friend who owns a SME once told me that the market budget of a competitor was more than his company's annual turnover (not profit). SMEs are limited in financial resources. But that is never an excuse for not marketing.

Marketing is not a nice to have thing when you have money it is an essential for growing your business. Today's business battles are worn or lost in the marketing arena. Many people seem to conclude that you have to invest all your capital into marketing. That is a fallacy. One guy who has been able to start SMEs and convert them into large organizations is Richard Branson. In his book, "Screw It", he says that since he discovered early that he didn't have a lot of money for advertising he had to become a publicist of own companies by becoming a news character. By appearing in the media he gets free advertising. I have just given him free advertisement in this article. You get the point.

Unless you want to remain small forever, you have to think of ways of getting marketing leverage for your business at low cost and ensure you get the highest returns possible from your marketing investments. You don't have to be a marketing guru to do it. In our marketing course for entrepreneurs we cover various aspects of marketing your business with minimal budget- and there are limitless ways of doing so.

4. Lack of Quality Human Capital

You wish I said financial capital. This may be a challenge to some businesses. But, for those that remain small this is more of a consequence than the cause. I have consulted and trained for large organizations and SMEs and the most visible difference between the two is the number of quality of people they have in their team.

While large organizations have a large number of talented, skilled and passionate people, SMEs particularly the ones whose growth has stagnated have only one such person - the owner. That is why minus the physical and mental health of the owner many SMES end up closing doors.

When you hear of a guy who single handedly started and grew a small business into a large multinational just know that is a lie. Businesses are grown by having a wealth of skilled, talented, loyal and passionate employees. Many entrepreneurs running SMEs complain that getting and retaining great people expensive and almost an impossibility. It is difficult but not impossible.

Early last year I advised a client to go for the right attitude and develop skills with time. And for sure they are starting to experience great results from this. You need to craft a strategy and develop a culture that will attract, develop and retain the best people you require for your business. Your business will be as great as the quality of people working in it.

5. Lack of Innovation

Closely related to lack of human capital is lack of innovation. The two are directly proportional. One true measure of business growth is its innovativeness. Majority of the businesses highly admired for their growth from small start ups to success companies are not doing what they started out doing and if at all they are, they are not doing it the same way they did it in the beginning.

The yester-year giants that have stagnated are doing exactly what they started out doing. I don't want to mention names. The world we live in is continuously changing. That which was a genius idea yesterday will not be appealing tomorrow. That which your customers fought to have last year will be highly inferior compared to what your competitors will introduce next year. How do you grow in this environment?

INNOVATE! Innovation is what fuels of business growth. You have to develop new products, create more selling channels, give your customers more flavors, more service options, different ways of communicating to your customers. Innovation will be possible only if you become more outward looking. Then align everything in your business to the external happenings and prepare for the future. Innovation thrives in a business culture that allows, even encourages, mistakes. Unfortunately this culture is a major deficiency among many SMEs.

The only person who can get away with a mistake is the owner. As a consequence no new ideas come up in the business for fear of failure and the result is being a prisoner of smallness. You will not grow the business if there is a monopoly of idea generation in the business.

6. Lack of systems that support growth

Systems are the skeleton upon which growth is built upon. Too much growth with without strong systems will result into chaos and ultimately the business will tend to shrink to the level that the system can support. Talk of Business Body Mass Index. To move from biology to architecture systems are the pillars upon which the business is built on. They can only hold as much weight as they can support.

I have been involved in assisting SMEs put in place business systems and in most cases the only system that exists in some form is the accounting system all else is dependent on whims, know-how and temperament of the people. People move, people forget, people get sick, people get bored, and all this become your business.

While systems may not completely eliminate the effects of these occurrences they drastically minimize them. You then have a predictable business that can always deliver what it is supposed to deliver regardless of the mood of the moment.

In SMEs mistakes happen all the time. Some are never discovered and corrected, some become habits. While dressing downs, reprimands and firings are the methods used to deal with these problems they are hardly the most effective ways on their own to ensure mistakes are not repeated. Systems go along way to help. If you want to break away from the prison of smallness you need to work on removing all these constraints.

Sam is business strategist, consultant and trainer focusing on helping Small and Medium Sized Entreprises(SMEs) realize their full potential. He helps them develop and implement growth strategies, refine their business models, create systems and train their sales people on effective ways of selling. He operates from Nairobi Kenya.

You can reach him by emailing or visit Linkedin

Source: EzineArticles
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