Private businesses which grow beyond a few employees are in the minority.
Achieving a size which can generate a significant sale price is challenging. Just how challenging – check out these statistics from the ABS – similar data would exist for all major developed countries.
As at June 2007, there were 839,938 (42%) employing businesses and 1,171,832 (58%) non-employing businesses in Australia. Thus over half the registered business had no employees.
Of the employing businesses, 755,758 (90%) employed less than 20 employees. This comprised 527,445 (70%) businesses with one to four employees and 228,313 (30%) businesses with five to 19 employees. Of the larger business, there were 78,304 (9%) businesses with 20 to 199 employees and 5,876 (<1%) businesses with 200 or more employees.
If we assume that any reasonable chance of long-term growth potential is going to need a business with over 20 employees, you can see from this data that you have a one in 10 chance of building a business to this size. Size of business by annual revenue shows a similar challenge.
As at June 2007, there were 501,467 (25%) businesses with turnover between zero and $50k and 742,288 (37%) businesses with turnover from $50k to less than $200k. This was followed by 646,458 (32%) businesses with turnover from $200k to less than $2 million, and 121,557 (6%) businesses with turnover above $2 million per annum.
Source: Australian Bureau of Statistics 8165.0 – Counts of Australian Businesses, including Entries and Exits, June 2003 to June 2007.
Growing a business to over $2 million dollars would appear to be beyond the reach of most start up ventures. To be realistic, a $2 million business is still a relatively small business. Clearly, if growing a businesses was easy, there would be many more larger businesses. Since the data shows that this is not the case, it begs the question – why is growth so difficult?
If we put aside the product/market issues and just focus on the organisational hurdles to growth we can see that this alone presents huge problems for the growth focused entrepreneur. The research shows that the growing business has to go through major changes as it copes with the challenges of increasing size.
The business of two to five employees will not look the same when it has five times the number of employees and/or five times the revenue. It is almost inevitable that it will have to change the way it does business in order to manage the increased complexity of a larger business. Different stages of growth will require it to change fundamental aspects of the business. Too many businesses fail to plan for these changes and put the business at risk by trying to make major changes on the fly.
Entrepreneurs who have grown a business from a start up will tell you of the transitions that they had to go through as the business grew. I discovered major transition points in my own business at 12, 50 and 100 staff. The business also went through a major organisational crisis when it undertook an acquisition
12,000 kilometres away.
Complexity increases dramatically with the volume of staff, customers, products and locations. In order to achieve five times the level of the current business, most of these size attributes will increase significantly. What is not so obvious to most entrepreneurs is that the business will need to be managed differently with each additional level of complexity.
Almost without exception, small businesses face a crisis of management as they grow. In the start up phase, the entrepreneur is able to drive the business through sheer energy, passion and vision. He or she knows everyone and the staff are motivated because they are part of the grand adventure.
As the firm adds staff, new people come into the business who were not present when the grand vision was created and their motivations and needs are likely to be different. They may see it more as a job than a mission. They have different needs and thus management styles have to change. At the same time, the growth brings with it specialisation of tasks and more formal organisational structures.
Reporting lines become more rigid, job descriptions become the norm rather than the exception and performance targets and monitoring is introduced.
Soon there is a new layer of management between the CEO and the operations.
What was once a project has now turned into a real business. As the business grows further, communication becomes increasingly formalised as communication lines become longer. The left hand no longer knows what the right hand is doing. Customer service quality may fall as new customers no longer have the advantage of personal links with the founders.
Problems escalate with the second location and daily face-to-face communication is not physically possible. External shareholders and/or external Directors force more transparent decision-making and thus the entrepreneur can no longer make decisions on the fly. Larger numbers of staff, customers and other stakeholders now depend on the business for their livelihood.
As the business develops the entrepreneur discovers, often too late, that they have the wrong organisational structure for the more complex, larger business.
They will almost always find that some of their best staff are unable to make the transition to the larger enterprise. They may lack the skill, personality, work ethic or experience to work effectively in a more complex situation.
As the business grows, the entrepreneur will also find that the data collection and reporting systems are inadequate for a more complex, larger business.
The same may well apply to the distribution channels, alliance partners, manufacturing processes, professional advisors and so on.
Many entrepreneurs simply are not able to make the transition. They may not have the skills, personality, drive and energy, leadership skills, knowledge or business acumen to be effective in the growing firm. Just because a person is a natural entrepreneur does not mean they have any business training or skill. The inventor may be great at the discovery of new products but that does not make them a good business leader. Thus the person in place as the business manager may well be the source of its failure or its lack of capability to grow.
The drive, skill and experience of the CEO is only one of the many elements which have to work effectively for the business to grow successfully.
The business still has to deal with getting its products, markets, distribution channels, financing, recruitment and training and many more things right to drive successful growth. Each one of these many facets can undermine growth processes.
We also know from the research into high growth businesses, the ‘Gazelles’, that very few businesses are able to maintain double-digit growth for more than a few years. Even the best companies have difficulty managing the exponential complexity of an integrated growing business.
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