Managing directors and CEOs of small to medium sized companies, when asked about their key challenge, tend to describe one of the following three issues in no specified order: lack of sufficient funding, inability to deliver their product or service in larger quantities through their current operations; and limited access to capable people that can support growth. This list shows up so often that it has shaped the discussion agenda around growth or scaling up in the UK. Scaling up may be hindered by the lack of funding, skills and management structure. However, all three reasons listed have one striking commonality: they assume that MDs and CEOs have full clarity in their minds with respect to the growth direction they want to pursue before stumbling on these three issues. Is this the typical situation an SME leader faces?
Reality shows otherwise. Consider the case of Nick, the MD of a professional services company in the legal space. Nick has followed a typical path of a small to medium sized company. Initial growth has been healthy, led to strong profitability and the natural expansion of the number of employees and clients. The focus of the company has been property law and Nick’s past experience in the insurance industry helped him position their services very competitively. However, after an initial growth period, the number of new clients reduced to small single digits and the respective profit numbers stagnated with volatile ups and downs. Nick has launched into finding out more about how to address this growth plateau. He joined peer groups and attended events. He came across the usual list of challenges mentioned previously. Repeatedly.
So, Nick started thinking along these dimensions. He started looking into employing new people. He came across very good resumés but, every time things were getting close to a new hire, the same question kept bothering him: do we need this person now? He considered additional financing and jumpstarted a round of discussions with all the banks in his area. All of them commended him for the financial health of his company and offered really attractive options. However, every time he came close to accepting a new financial product, the discussions with his senior team ended up questioning the increase in the financial exposure of his company. He even sought advice via a boutique consulting company regarding his company’s processes. While helpful, this ended up with recommendations that seemed overly tactical and with small gains for the business. Growth seemed to be a riddle with no solution. Addressing the ‘funding, talent, management’ list for his company didn’t seem to be offering a way forward and certainly not growth.
Nick’s case is not unique. It manifests an important mistake that often haunts SME leaders. Focusing on growth recipes before deciding on a growth direction is like trying to deliver a generic answer without knowing or understanding the specific question. Instead, growth should start with the uncomfortable questions and the tough choices that any new strategic move requires. Unfortunately, even SME leaders who have achieved success through their previous strategic choices tend, over time, to succumb to compromises that lead to a blurred version of their strategic position. Unless they reconnect with their strategy, they cannot reconnect with the boldness required for growth.
Therefore, before even thinking about new talent, or financing products, or even the standardisation of the current operations, SME leaders need to decide who their customers should be and why these customers should prefer them over competitors. They need to decide what type of services or products would enable them to differentiate from the competition; and how they can deliver the right products or services to the right customers profitably. These questions, albeit simple, entail significant choices given the constraints in terms of talent, management and financing that all companies face on the one hand and the company’s capabilities on the other. So, it makes little sense to start any growth journey by addressing the execution constraints before one clarifies the strategic objectives.
Moreover, the avoidance of clear strategic choices cannot be easily remedied. Often observed responses to lack of strategic decision-making drive strategic failure. These include the uncontrollable broadening of the company’s product or service portfolio, in the spirit of “let a thousand flowers blossom”, or, the decision paralysis of the senior management team confronted by an array of possible growth paths. The former leads, with mathematical accuracy, to an organisation that spreads itself too thin through the overstretching of the existing resources, whereas the latter achieves no progress against competition as time is wasted in over-analysis.
Stimulating growth is a serious leadership task that cannot be automated through lists of standardised recipes. Following standardised recipes can end up putting the details’ “carriage” before the direction “horse,” jeopardising the growth potential of their companies. Instead, SME leaders should focus on the right “horse” and start their growth by reconnecting to their strategy.
Co-authored by Professor Stelios Kavadias, pictured above, Margaret Thatcher Professor of Enterprise Studies in Innovation & Growth and Director of the Cambridge Judge Entrepreneurship Centre; and Konstantinos Ladas, Associate of the Cambridge Judge Entrepreneurship Centre.
The Entrepreneurship Centre at Cambridge Judge Business School aims to support SMEs in developing their managerial capabilities and growth strategy through the SME Growth Challenge. Visit our website for further information and resources.