Why Small Companies Stay Small

By Florence M. Stone

Have you ever noticed how small successful companies seem to be going great early in their history and then something goes wrong? On the surface, they look as if everything is all right, yet they can't seem to progress beyond second or third place in their market.

Here are five problems they may be experiencing:

1. They don't know they could do better. They don't move beyond second place, and even may begin to slip to third or fourth place, because they don't realize that they have to evolve in order to succeed. Failure to acknowledge they could do better can ensure that they won't do better.

2. They have learned how to thrive in chaos. That's fine when you are on a fast growth curve. But there's a point where senior management must learn to take control of the organization. I am reminded of Michael Dell's experience in 1984. His company was on a fast track. There wasn't time to think. All seemed well, but unbeknownst to him and his top team the company was leaking money. He had thought he could grow the company even faster by selling computers in stores like his competitors did. He hadn't thought about the costs of setting up an entirely separate manufacturing and distribution system or competing with other computer firms on their territory. Fortunately, he had hired a new financial executive who alerted him to what he had done. Further, he stopped Dell from building a new plant to accommodate this different distribution channel. The college dropout, entrepreneurial wiz learned the benefits of professional management, including MBO.

3. Their leaders become too dependent on their gut feelings when making decisions. Although gut instincts can be effective early on in a business, they can be a problem when a business is no longer small. This is particularly true for first-time CEOs of their own businesses. They often lack the experience on which to base gut decisions. It's time to bring others into the decision-making process and explore the many tools out there to weigh decisions more carefully.

4. They are too focused on the competition. This may surprise you, but you can get too focused on what the competition is doing. Again, think about Dell. He saw his competitors selling in stores and he thought, "Why not?" As his VP of finance demonstrated, it might have made sense for some firms but it didn't make sense for a firm built around the philosophy "Direct from Dell."

5. They are too focused on the end result. While I don't want to advocate entrepreneurs become process-obsessive, there is something to be said for considering how one's business is run and looking for ways to organize operations to do things most effectively and efficiently.

If you'd like to explore this topic further, consider these AMA seminars:

• Fundamentals of Business Strategy
  
• Strategic Planning: Processes for Formulating Winning Strategies
  
• Competitive Strategy: How to Develop Winning Marketing Plans and Breakthrough Strategies
  

Author Bio: Florence Stone is Editorial Director of AMA and author of the new book The Manager's Question and Answer Book (AMACOM 2003).