By Paul Morin
If you are struggling in your small business, take heart — you are not alone, and you should not give up. The potential reasons for your struggles, some of which we’ll discuss below, most likely have both a “macro” and “micro” foundation. As long as you’re willing to be honest with yourself, there’s a good chance you can course-adjust and get your business back on track. If not, you should at least be able to make a rational decision of “where to go from here.”
The first step in determining what you should do if your business is struggling is to assess whether you have a “good business” to begin with! Whether you’re running a business that’s been around for 75 years or one that’s been around for a month, it’s important to take an honest look at what you have. It’s sad to say, but some businesses shouldn’t have been started in the first place, and some businesses that were great at the beginning, have been passed by due to “human progress” (“buggy whips” come to mind) or poor management, or both.
Let’s focus on the case of a relatively mature small business that has run into hard times. If instead you are looking more for a discussion of the characteristics you’ll want to consider in screening a start-up, see Startup Basics: The Difference Between Ideas and Opportunities.
First, I want to make the point that I’m a huge fan of the entrepreneur (and any kind of achiever) who has the “Never say die” mentality. I applaud it. I try to emulate it as much as possible. I believe it leads to more progress in our world than almost any other single trait. All that said, it’s important to be “realistic,” too. I am not saying to lose your never-say-die attitude. Rather, I am saying to assess the situation rationally, do what needs to be done, then channel your enormous willpower and energy in a direction that’s not tantamount to “rearranging deck chairs on the Titanic.”
What are the questions you should ask yourself to determine whether your small business has “hit an iceberg” and become the equivalent of the Titanic? Here are a few thoughts. This is not an exhaustive list, but it should get your mind moving in the right direction.
Struggling Small Business Honest Self-Assessment Question #1: Has the industry taken a completely new direction, in which we are not prepared or equipped to go?
Take as an example the corner video rental store a few years ago. Everyone could see the writing on the wall regarding the stiff competition from pay-per-view cable and Netflix, among other movie sources. If you had owned a chain of video rental stores at that point, what would you have done?
Struggling Small Business Honest Self-Assessment Question #2: Have our margins been squeezed to the point that it’s impossible to make money on the bottom line?
In many industries, there is a tendency toward “commoditization,” which has very negative effects on gross margins, due to severe competition on price, without a commensurate reduction in costs of production. A good example here would be most segments of the computer hardware manufacturing business. The prices have come down far faster than the costs of production. It’s now to the point where you need to be a very large player, doing a huge amount of volume, to have any hopes of making money in that business. This is where commoditized industries end up.
Struggling Small Business Honest Self-Assessment Question #3: Do we have the right leadership team in place to grow our business?
I have seen this issue in non-family and family businesses alike, but it seems to be more prevalent in family-owned companies. What happens quite frequently is that someone has been with the company a long time, so they’re awarded a senior position, without any real assessment of whether they are the person who will be able to handle those responsibilities as the company grows. It happens in sales, in marketing, in finance, in operations, even at the CEO and board level. The business simply outgrows some people. It’s inevitable and it’s a difficult situation, but it must be dealt with, or the entire business is put in danger. It is better to deal with the uncomfortable situation of having to demote or fire someone who cannot “make it happen” than it is to ignore the problem and bring the whole company down in the process. I understand and fully agree with rewarding loyalty, but not to the detriment of the company, all its other employees, its shareholders, and other constituencies. If your company and/or industry has outgrown you or other key members of your senior management team, acknowledge it and fix it as soon as possible.
Struggling Small Business Honest Self-Assessment Question #4: Should we be looking at a different part of the “value chain?”
Quite a few years back, I read a book by a couple of BCG (Boston Consulting Group) guys called Blown To Bits. I don’t recall the exact terminology they used, but one important concept from the book has stuck with me. They talked about how mature players will have to constantly defend attacks from insurgents who want to come in and “cherry pick” the most profitable pieces of the value chain. Where are you in the “value chain” that brings value to your customers and solves their problem(s)? Industries that have many layers of intermediaries en route from production to putting the products in the hands of consumers are frequently seeing entire layers cut out of the chain. This happens due to the ability of the manufacturer to go directly to the consumer. Don’t become “disintermediated” (a term used in Blown to Bits, if I recall correctly)! If you are in one of the layers that is not adding much value, you are in great danger of being cut out. An example here would be auto insurance. Geico simply cuts the broker out of the picture. For other types of insurance, particularly complex business insurance, that’s not quite as easy to do. Take a close look at your own situation. Examine the “value chain” all the way from production to the consumer’s hands. Where is the value being added? Where is the money being made? Where are you?
Struggling Small Business Honest Self-Assessment Question #5: If you conclude the future isn’t bright, you’ll need to answer the question: What should we do then?
If you ask yourself some of these questions and don’t like the answers you’re hearing, you have a decision to make. There are typically several choices, including: close the business, downsize the business, sell the business, change the market focus, upgrade the manufacturing capabilities, upgrade the senior management, etc. In other words, there are a lot of possibilities, and many of them are not mutually exclusive. For example, upgrading the senior management and changing the market focus or overall strategic direction would often be logical complements. The key is that you must do something. The worst thing you can do is nothing and just continue along a path that you know does not end well. The other key is to be honest in your assessment. If your business is struggling, there are reasons for it. It doesn’t just happen. Most likely some of those reasons are related to macroeconomic issues and others are related to micro issues within the business itself. In any case, you must take action to address the issues that you have control over. For the remainder, you will need to do your best to be proactive and navigate around the “storms” in your immediate vicinity and those you see on the horizon.
I look forward to your thoughts and questions. Please leave a comment below.
Paul Morin is the founder of CompanyFounder.com. Morin has worked with various entrepreneurial companies in senior management roles and has led the development, review and selective implementation of several hundred start-up and corporate venture business plans, financial models, and feasibility analyses. You can e-mail Morin at email@example.com.
Originally published: Sep 22, 2011