By Alan Price
A close friend of mine, Patrick, is the proud owner of a growing, albeit struggling, chocolate company in upstate New York. The good news is that his business has earned a delicious reputation for customization, service, and the ability to produce high quality chocolate coins and bars in small batches. The bad news is that the company has lost money since its launch seven years ago. The struggle for profitability has been frustrating. This is Patrick's second entrepreneurial venture, the first being a small and profitable retail shop that he sold when he relocated.
He called me to ask for advice. He told the stories of what he had tried and learned. It seemed that he had tried a great variety of approaches -- perhaps too many. He had experimented with his pricing, cut operational costs, gained production efficiency, reduced waste, changed incentives to boost employee performance, launched a new Web site, studied his competitors, talked with his customers, and so forth.
THE RIGHT QUESTIONS.
The business was growing, but profitability remained beyond their grasp. Patrick knew his breakeven point, but he didn't know how to get there. Pouring money into the business was becoming a financial strain now that he had invested almost all the gains from his first business. Money was fast becoming a source of conflict in his marriage. He still had the burning drive to succeed, but Patrick was starting to doubt whether he was up to the challenge.
Whether or not his business could be saved was questionable. Most "successful" chocolate companies -- the small ones, at least -- generate only modest profit margins. At his current growth rate, it could take another two years to become slightly profitable, and many more to recover his investment. In spite of the odds against him, I asked him to decide whether or not to stick with the business after he wrestled with the following three critical questions: What business are you in? What is your role as a manager of this company? And, what is your role as a leader of this company?
Those three questions can quickly shake loose some of the critical assumptions that keep a company from being successful. Most small-business owners, pressured by daily operational details, don't make the time to clarify either the big picture or their role in the company. If Patrick was a typical small-business owner, his first round of answers might have been:
• I'm in the chocolate business. We sell quality chocolates.
• I have to manage payroll, inventory, manufacturing, advertising, sales, etc.
• As a leader I have to make sure that the business survives.
There may be nothing wrong with those answers, but there is nothing special about them. Patrick's chocolate business would sound like any other generic chocolate outfit, and his role would look like a cardboard cutout of a stereotypical owner. The difficult -- but more fruitful effort -- is rediscovering or creating something special about his business.
Fortunately, Patrick's actual answers were far more revealing. After some back and forth, he realized that in his scramble for growth, he was building three different businesses. The original business was essentially a catalogue sales operation that sold customized chocolates as wedding favors. The orders were event-specific and repeat customers were, predictably, rare. Much of the customer traffic came through Internet search engines, but this fell off dramatically when Google changed its ranking formula. He defined this retail business as, "helping people celebrate."
The second business, which was showing significant growth, sold wholesale, customized chocolates to larger chocolate shops. Margins are thin in wholesale, even if you have a specialty like customization. But his innovative operation was efficient enough to make wholesale viable, but only if the growth continued. He defined the wholesale business as, "providing value on which our customers can make a profit."
Patrick is preparing to launch a third business: a small chocolate factory with a retail shop. Over the next four months, the current chocolate factory will relocate to a facility where the public can see the whole operation and take home a fresh box. He defines this business as, "a fascinating place to visit and experience the fun of chocolate."
Now that he had clarified the three distinct businesses, I asked him to think about them as a single, integrated company. His response was almost immediate, "I'm in the business of sharing my love of ingenuity and fun." The side effect of this conversation was immediate: He rediscovered his passion for the business.
It's always tempting to stop after the first question and analyze the business strategy. Do some parts of the business make more sense than other parts? Arguably. One would ask, "Is he running in too many directions at once?" Probably. But business strategy doesn't exist in a vacuum. Excellent management and powerful leadership can often rescue imperfect strategies. I pushed him on the remaining questions: What is your role as a manager of this company? What is your role as a leader of this company?
Patrick's definition of effective management was, "to get out of the way and empower the team." This was worrisome. Empowerment is a popular idea, however it does not absolve a business owner of management responsibilities. In future conversations with his team, I would hope to learn whether he actually did get out of the way and whether his empowered team could handle the rest of management.
His definition of leadership was, "to strategically drive the company, make choices about direction, and financially sustain it through its infancy." This definition made some sense, almost like a textbook definition. But there were subtle ways in which this definition, and the assumptions behind it, could hurt his chances for success. The simple fact that he was scrambling in three different directions indicated that he was having a hard time making choices about direction.
I began to suspect that if I asked his team, they would not be able to tell us the direction of the business. Financially supporting a business through infancy is the role of the founder and investors, but only if there is a direction and a plan to reach profitability. Pouring money into a business doesn't sustain a business. The only thing that sustains a small business is some degree of sustainable profitability.
CHALLENGE YOUR ASSUMPTIONS.
This is the current stage of Patrick's leadership journey. Where it will end is anybody's guess. In spite of his excellent retail experience and talent, the odds may be against him. My personal belief is that Patrick will succeed, although he and his business may need to adapt along the way. In the coming weeks, I'll work together to focus his strategy, accelerate his action, strengthen his managerial skills, and develop a definition and style of leadership that fits him and the company's situation.
What does this case study teach us about the realities of small business leadership? Plenty.
First, leadership is usually messy. Patrick is one of many possible examples that there are no right answers. Rarely are there textbook solutions that we can copy. There are only human beings with an abundance of gifts, ideas, and blind spots facing situations that will present challenges in ways none of us can imagine. Second, Patrick illustrates the reality that many small-business owners have unclear and fractured strategies. However, with the help of good questions, assumptions can be brought to the surface and behavior aligned to maximize the chances for success.
Finally, Patrick reminds us that leadership development is a personal journey that begins with a choice. It is a choice to reexamine what we mean by the word "leadership" and recommit to living up to our own definition.
Alan Price is director of INSPIRITAS Corporation, a consulting and training firm, and the author of Ready to Lead