Sometimes, Less Can Be a Whole Lot More
Business growth was easier in the 90's. With few exceptions, markets in all sectors of the economy were expanding, and optimism was in the air. In those halycon days, business owners were more concerned about managing growth than sustaining it. Today's world is different, notes Paul Ratoff, a small-business consultant with Strategy Development Group. Now, growth is likely to come at the expense of a rival outfit and there are more pitfalls to trap entrepreneurs, whose frantic need to produce faster, cheaper, and better products.
Rather than doing more, or less, with their businesses, entrepreneurs should try something different, suggests Ratoff, who spoke recently with BusinessWeek Online's Karen E. Klein. Edited excerpts of their conversation follow:
Q: How is today's business climate different? A:
Q: How is today's business climate different?
A:Today's concerns tend to be more focused on sustaining market share and gaining a competitive advantage. For many entrepreneurs, growth has become their biggest challenge, because what worked in the 90's is becoming less effective in today's markets.
Q: How does a business meet that challenge, and where is it likely to go wrong? A:
Q: How does a business meet that challenge, and where is it likely to go wrong?
A:A lot try to achieve growth and stem falling sales by simply "doing more." In lieu of a well-thought-out strategy, they just add more products and features, expand their customer base and try out new markets.
Q: Does it work? A:
Q: Does it work?
A:It can for some, if they're expanding along logical lines and they put the infrastructure and financing in place to handle that. If they don't do the proper planning, what they find is that they quickly get stretched way too thin. Each part of their business begins receiving less attention and there's a constant outcry for more resources as new skill sets and infrastructures are added to the mix. What happens is that you wind up with an organization that is overcomplex, inefficient, and undercapitalized. Even if you do gain additional sales, they are often at the expense of lower profit margins. And the big problem is that, typically, underattended core businesses begin losing their momentum and competitiveness, threatening the entire company.
Q: What other strategies do companies use to try to expand? A:
Q: What other strategies do companies use to try to expand?
A:Some of them do just the opposite of what we mentioned already. They "do less." That means they drop peripheral product lines, cut loose a portion of their customer base, and try to go back to basics and focus on their core business. Often, they get that advice from CPAs and consultants who notice that their receivables, inventories and operating expenses are growing -- but their profit margins are not.
Q: What's wrong with concentrating on what a company knows best? A:
Q: What's wrong with concentrating on what a company knows best?
A:Nothing, except that it is not enough to "go back to what you know," if you're still not growing. You might see a company that decides to "do less" return to profitability quickly, but if it has lost its competitive edge, eventually, sales will continue to slide, and costs can only be cut so far. What happens when you go backwards is that you often find that competitive advantages you enjoyed in the past have become industry norms. If you don't start gaining again, your profits began to diminish pretty fast.
Q: So what alternatives do you suggest? A:
Q: So what alternatives do you suggest?
A:Instead of participating in this hopeless race to industry commoditization, we tell our clients to find a new business strategy or a new way of competing in their market that provides more value to their customers. Rather than just adding something on, or dropping something that's not working, they should begin looking for opportunities to create customer value that will benefit from changing market realities or holes in the competitive landscape.
Q: What exactly do you mean by that? A:
Q: What exactly do you mean by that?
A:What they have to do is examine a lot of variables, decide where they can best invest their time and effort toward expansion, and then shift their focus into that area -- making sure they have done the planning necessary and have the financing and company culture in place to make the change.
For instance, companies that want to grow should be looking out for emerging markets or market niches that they can respond to. They should be thinking ahead about special services, technologies, or skills that they believe will be in greater demand in the future. They should constantly be figuring out ways to become the lowest-cost producer or provider of services that they can. They should be forecasting the market to determine whether there are patents or resources that they can obtain now that might become important down he road.
When it comes to selling, they might be thinking about developing private labels or new brands in certain niches. They should be looking to other industries to find different ways of selling that might work for their industry. And they should always be aware of new channels that might open up for their products or services.
Q: Some of this sounds like what business owners should be doing constantly, just as a matter of course. Is it? A:
Q: Some of this sounds like what business owners should be doing constantly, just as a matter of course. Is it?
A:Theoretically, yes. But so many times small business owners are running all the aspects of the company themselves and they just don't have the time or perspective to do this sort of "big picture" thinking on a routine basis. Also, going in a new direction may mean giving up something they are currently doing, because remember they don't want to become overloaded by just doing more. And shifting resources away from the familiar is not an easy thing to do -- unless you really have the confidence that you are making the right choice.
Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.