This is the final post in a four part series of posts that summarize an article that first appeared in the March 1982 Small Business Report. This is what was discussed in the previous posts:
- Article 1 (click here to read Article 1) – Financial Pitfalls and Excessive Optimism.
- Article 2 (click here to read Article 2) – Inability to Change and Rapid Growth.
- Article 3 (click here to read Article 3) – Improper Organizational Structure, Failure to Delegate and Lack of Succession Planning.
The publication, Small Business Report, which published the original article is, I believe, no longer being published. However, if you should know of this magazine and either its online or actual contact information, please let me know so I can give proper attribution.
In this final post we will look at these factors that can lead to small business failure: poorly designed management systems, inability to recognize what your business is, and an inadequate board of directors.
POORLY DESIGNED MANAGEMENT SYSTEMS – It is not enough to have a management system; it must be well-designed. You must have a management reporting structure that provides the right information to the right people at the right time. Otherwise, at best your company will fail to reach its full potential and at worst your company will ultimately fail.
Therefore, when you reach the point where more management systems may be necessary, carefully consider what you are getting into and what you are giving up before you take action. Remember that incorporation of new management systems always results in a trade-off. For example, more reporting improves the flow of information at the expense of more time spent on paperwork and less time spent on revenue-generating activities.
Adding new management systems enables a company to run more smoothly, but at the expense of the dynamism that got the company where it is in the first place. That dynamism is so critical because it is needed for the company to stay competitive in the marketplace.
So when do the benefits of management systems outweigh the disadvantages? As a general rule, if your company is in a volatile industry with changing markets and product lines, it is best to keep management systems to a minimum, and to keep communication as informal as possible. Try to postpone implementing new management systems until the company is either so large that a more formal structure is required, or when markets and product lines stabilize.
FAILURE TO RECOGNIZE WHAT BUSINESS YOU ARE IN -Too often, business owners and managers believe that they can be market leaders in many areas. However, the reality is that you must choose between one of two alternatives: (1) overall market leadership or (2) dominant market share through specialization. Choose one. It is simply not viable to pursue a vague, indecisive strategy that lies somewhere in between the two options.
To determine your best strategy, you must know what you do well and in what areas those strengths can best be applied. In other words, what are your specific strengths? Are they being used in the right areas and can they be easily adapted to take advantages of changes in your target market, your industry and your competition?
When you know what your specific strengths are, the next step is to properly apply them. Here again, you have two choices: concentrate or diversify. Either take what you do well and do more of it, or take what you do well and apply it to other market opportunities.
INADEQUATE BOARD OF DIRECTORS -An active, qualified board of directors is essential for long term success, especially for small companies. Your board of directors should be a source of needed talent as well as guidance. If you are a small business, your board members should not only provide you with sound advice, but also facilitate your ability to meet with a key prospect or to obtain financing for your business.
To be the most useful, your board of directors should be comprised of individuals who are not company employees or family relatives. Board members should have a blend of experience in production, marketing, finance, and general planning. Fewer relatives and more experienced business people will ensure that you have a board of directors that provides both value and objectivity.
Finally, avoid having “yes-men” on the board. This is very detrimental to the organization. Even better is to have at least one board member who acts as the devil’s advocate to test and challenge board decisions to ensure the board’s actions are in the company’s best interest.
In conclusion, remember that the company that succeeds does not just have a great idea — it also has a great managment team. If you own or manage a small company, the odds are against your business surviving in the long term. Ordinary or good performance is not enough; outstanding performance must be the norm for you if you want to just stay in business. Improve your chances for success by recognizing why most small businesses fail and taking action to avoid or minimize as many mistakes as possible.
