Building a sustainable business requires discipline, excellent processes, good technology and an empowering culture. Take your company from owner-dependent to self-sufficient with these tried and tested business principles. And the good news is you’ll retire rich rather than poor and burnt out.
A catalyst for burn-out and low growth the overworked, stressed, overcommitted entrepreneur
Take a peek into almost any growing entrepreneurial business and you will see signs of overwork, fatigue, strained relationships and unsustainable stress. Most business owners accept that the journey towards a successful business venture demands exceptionally hard work and significant sacrifice. But, many entrepreneurs get caught in the trap of continually over-promising to clients to win work, working long hours to ensure delivery and sacrificing heath and relationships to focus on the business. It is fine to have to work hard in the short-term but the major risk for a business or an individual is when long hours, stress and fatigue become embedded in the culture of the organisation. In this case the business can get caught in a downward spiral causing employees to look for new jobs and entrepreneurs to question: “Is this all worth it?”
A strong business achieves a fine balance between delivering to clients through hard work, passion and energy and implementing systematic processes and procedures that rely as little as possible on any single person or team. Unfortunately, too many entrepreneurial businesses in South Africa rely too much on the hard work, passion and energy side of the equation and do not implement the processes and procedures that enable them to develop a business independent of themselves.
The entrepreneur’s worst enemy
Entrepreneurs are often their own worst enemy. People who start and lead businesses tend to want to be in control. They want to be the source of energy and inspiration within the organisation and have a handle on all the decisions that are made. This is very often a source of competitive advantage in the early stages of business growth because the entrepreneurs drive the business; they keep tabs on everything that is happening and are able to respond to critical issues as needed. However, as the business grows, individual entrepreneurs can become a bottleneck for growth.
When all decisions and checks need to pass through one person, three things happen: (1) the business becomes slow to respond to customer needs and market changes because employees wait for the business owner to make a decision before doing anything significant; (2) the individual entrepreneur burns out; (3) people become frustrated working at the organisation because they feel disempowered. The consequence? “A-player” employees leave because they are not being challenged and the business is left with complacent, apathetic “B-players”.
1. Build a value network
The traditional business model dictates that an organisation should integrate into a value chain – a linear chain of activities that when linked together create a valuable product or service for the final customer. The traditional management mindset was that the more aspects of the value chain a single company controlled the more powerful they were. However, the more elements of the value chain a single company owns, the more internal controls and red-tape procedures they need to ensure that each element is delivering. Progressive organisations are realising that it is more effective to be linked to a value network than to control a value chain. A value network is a set of interdependent entities that each focus on a fairly narrow and specific task but are able to work together to effectively deliver value to the end customer.
In 1990, Ricardo Semler, the majority shareholder of a Brazilian family owned business called Semco, faced a crisis. The market for the products his company produced was crashing and he needed to look for a way to remain competitive. The company had already been through some massive changes over the past eight years during which Semler had implemented a highly participative form of management in which employees had a big say in almost every major decision in the company from remuneration structures, promotions and employment policies to corporate dress. The tightening up of the external market required an even more innovative approach.
A few years before the market crunch, three employees from Semco had been experimenting with a concept they called a nucleus of technological innovation (NTI). It was a small unit that was farmed off as a separate entity from the main organisation to look at innovatively developing new products and processes that could be sold back to Semco.
The energy and entrepreneurial spirit fostered in the NTI was remarkable and Semler questioned whether it would be feasible to create more micro enterprises to develop and sell products and services back to Semco. He launched a programme in which employees were encouraged to leave Semco to form their own satellite enterprises. Semco gave them contracts, allowed them to lease machinery and space from the larger organisation and also freed them to work for other organisations.
Over a few years, more than half the employees took up the offer to launch their own satellite enterprises. Semco is now at the centre of a dispersed value network of independent enterprises all working together to create products for clients. This is a self-organising, self-sustaining system. It has removed a great deal of stress for Semler, and the value network is more resilient and competitive than the larger, single organisation. Because each enterprise is independently owned, they have a direct incentive to deliver high quality products and services because they are the direct beneficiaries of the profit that is made by their enterprise.
It was a bold step by Semler, but it paid off. If you had invested $100 000 in the business 20 years back, your investment would be worth $5,4 million today, a rare record of profitability and growth in a very volatile Brazilian economy. Over and above this, Semler has freed himself up to lead a remarkably relaxed and balanced life, culminating in a bestselling book entitled The Seven Day Weekend.
2. Utilise technology effectively
Technology can be an entrepreneur’s best friend in building world class systems and processes. Many recently successful entrepreneurial organisations have innovative and empowering technological platforms as the core of their competitive advantage. e-Bay leverages to facilitate auctions, Fedex leverages technology to enable the transport of goods from one point to another, Google utilises technology to facilitate search and Dell leverages technology to build a just-in-time supply chain. Information technology enables effective, very low cost communication, data management and data processing – all critical ingredients in the development of an effective process.
One of South Africa’s most inspiring entrepreneurs of the last 10 years is Simon Stockley, who identified a new model for financing house mortgages in South Africa and launched SA Home Loans in 1998. SA Home loans has captured more than 10% of new home mortgages and created a disruption in the market by consistently offering mortgage loans at a lower rate than those offered by the big banks. Stockley has since sold his shares in SA Home loans for what is believed to be a significant amount and he recently launched a similar concept in the Middle East, called Saudi Arabia Home Loans. Many people think that Stokley’s genius was financial engineering, when in fact the SA Home Loans financial model is relatively simple. The real genius in SA Home Loans is the technological platform that Stockley created to assess clients’ risk profiles, structure mortgage bonds, monitor repayments, verify ID numbers, access real time credit reports, civil judgments and case histories and produce all the necessary documentation relating to the bond.
This all-encompassing software platform means that the same level of control and precision is consistently applied throughout the country when a loan is granted and managed. It enables managers to get out and interact with clients, make sales and drive new business instead of having to worry about strict and rigorous credit procedures. The computer system takes care of that. It has also enabled SA Home Loans to operate as a dispersed organisation with very little physical infrastructure, keeping the overhead costs right down. The agents make use of attorney and estate agent offices when required, tapping into the system from there and they operate a virtual team across the country. The technological platform developed by Stockley early in the business lifecycle of SA Home Loans to leverage low cost communication, data management and data processing, has been at the core of its success.
Information technology can enable a myriad of different processes within a business from customer relationship management, human resource processes, sales force management and invoicing and debtors management, to planning and scheduling, manufacturing management and collaboration. The key is to identify the critical processes and challenge yourself to automate them using information technology to free you up for your clients, employees and family.
3. Empower users to drive a process
One of the major business trends of the 21st century is the enablement of extensive participation among broad bases of users. Wikipedia.com enables users to write and update the content for the online encyclopedia; Amazon.com allows users to write book reviews and enables software developers to design new applications for its website; Lego enables users to design new Lego combinations on its website and then makes the new combinations available for people to buy; and the entire open source software development movement is built on the notion of user collaboration and sharing when developing new software applications. More and more innovative processes are being carried out by a broad base of users within an open system established by an entrepreneurial business. Thus, if you want to create growth and facilitate innovation within your business, ask yourself how you can get customers, suppliers and other interested stakeholders to actively participate in some aspect of your business processes.
Grameen Bank is an outstanding example of user participation to facilitate a critical business process. The bank was started in 1974 and lends money to over seven million borrowers, 97% of whom are women from the poorest communities in rural Bangladesh. Grameen Bank has reversed conventional banking practice by removing the need for collateral. With a banking system based on the formation of self-help groups consisting of five members, each member is loaned money by the bank, but the whole group is denied further credit if one person defaults. This creates a self-managing system in which each member has an incentive to act responsibly and monitor the other group members’ behaviour to ensure that they are being sensible with their money. This innovative banking system produces payback rates of more than 98%.
Professor Muhammad Yunus, the founder and managing director of Grameen Bank argues that if financial resources are made available to the poor on terms and conditions that are appropriate and reasonable, then massive development and economic empowerment is possible. He received the Nobel Peace Prize in 2006 for his efforts in empowering the poor through his self-managing banking system.
4. Decentralise with multiple brands or autonomous business units
The final strategy for enabling effective management and growth, while enabling entrepreneurial thinking and responsiveness, is to decentralise a business. Jack Welch used decentralisation to remove power from the central corporate office and empower managers and business units to be effective and responsive in General Electric in the 1980s. Paul Harris keeps the innovative entrepreneurial flair alive in the First Rand Group through a decentralised multi-brand strategy which has given rise to innovative South African organisations such as Discovery and OUTsurance. Mark Lamberti applies similar thinking within the Massmart Group, allowing competing brands such as Game, Dions, Makro and Builders Warehouse to operate alongside one another in a decentralised manner.
One of the first entrepreneurs to really grasp the power of decentralisation as a strategy for fostering entrepreneurial behaviour in a growing business was Bill Gore, the founder of WL Gore and Associates. The business is most famous for creating Gore-Tex fabrics, which have a transparent plastic coating that makes them waterproof and windproof but breathable. Gore-Tex is worn by astronauts, soldiers, trekkers at the North and South Poles as well as climbers of the world’s highest mountains. It is only one of more than 1 000 products produced by the innovative company which holds over 7 500 patents. WL Gore and Associates has about 6 300 employees yet no facility or unit within the company has more than 150 employees. Gore’s strategy for keeping the units small was to allow for only 150 spaces in a parking lot at any one of his facilities. Once the parking lot was full he knew it was time to break up the unit or launch a new unit.
Gore believed that 150 is the right size for people to get to know one another, have a sense of each other’s areas of responsibility and know what skills and knowledge are available to tap into and get something accomplished – whether it’s creating an innovative product or handling the everyday challenges of running a business.
Bill Gore died in 1986 but he is considered to be one of the great business visionaries of the 20th century. His principles of decentralisation live on in the business today and his ideas have been written about in a number of international publications including the Harvard Business Review, Fast Company magazine and the book entitled The Tipping Point.
Effectively leading an organisation or a team is about dealing with paradox. From building a relationship with one’s staff while keeping a suitable distance, being tolerant but also knowing how you want things to function, and freely expressing your views but also being diplomatic, to being a visionary while keeping one’s feet on the ground; business leaders need to map a path between competing priorities.
As a business grows, one of the most significant conflicts that an entrepreneur needs to confront is that of systematising the business while retaining entrepreneurial flair. The entrepreneur who gets this wrong will inhibit an organisation’s ability to grow and compete. But the entrepreneur who innovatively manages this conflict will create an excellent foundation for competitive growth.
To test whether you are getting caught in this trap, ask yourself the following questions:
- Could my business be sold tomorrow?
Assume that you suddenly decided to emigrate and in order to go you needed to sell your business. Would there be anything to sell? Does your business have value if you are not there?
- Could I franchise my business?
Would it be possible for you to empower another person to set up a business just like yours in another location?
- Could I go on an extended holiday?
Set a goal for yourself to go on a four week holiday in twelve months time – not four weeks in December or January when business in South Africa shuts down but rather of taking four weeks while everyone else is still working. Leave your business in the hands of capable employees working according to a set of systems and processes that are designed to deliver what the customer expects.
Building a value network:
- Focus on what you are really good as an organisation and find other organisations to take care of the other elements of the value creation process.
- Allow your employees to hive off their own enterprises that deliver value back to your business as required, especially in non-core areas.
- Foster strong collaborative relationships with trustworthy, world class independent entities that can contribute to what customers ultimately want and need. Create a common understanding of how you work together.
- Consider which of the regular procedures and tasks in your organisation could be effectively carried out by an IT system or package.
- Invest in an IT platform upfront before volumes become too high or processes too complex.
- Keep the system as simple as possible while ensuring it can do the job effectively.
- Make the system scaleable to ensure that it can take an increased volume of transactions in the future and can be added to over time.
- Ensure that more than one person in your organisation understands how the system works.
Managing the paradox
Many entrepreneurs get into business for themselves in order to escape the bureaucracy and red tape that is associated with systems and procedures in larger organisations. Such people tend to despise rigid systems that disempower people and suck the life and energy out of an organisation. As a result, when they get to create their own organisation, they steer clear of systems and processes and insist on quick entrepreneurial decision making and action. This often results in a state of disorganised chaos within the entity as the business grows.
The key is therefore to build a business system that is able to function independently, without stifling the entrepreneurial spirit, agility and flexibility that makes smaller businesses competitive and responsive. A number of entrepreneurs and business leaders have crafted some innovative management practices and structures to effectively deal with this paradox. These are some of the principles and rules that they have applied to ensure a balance between entrepreneurial energy and systemic business growth
Empowering users to drive a process:
- Map out the different processes that are needed to enable your business to run effectively. Critically examine each process to consider whether there is a user, supplier, customer or external stakeholder who would willingly drive that process. You will be surprised at how willing outside parties are to participate in the processes of others.
- Create platforms for active user participation to enable users to collaborate with each other, with the organisation and with other critical stakeholders.
Overcoming diseconomies of scale as a business grows
For years business owners have been striving to grow their businesses bigger and bigger to achieve economies of scale.
The concept of economies of scale implies that the bigger the business gets, the cheaper it becomes to produce or deliver products or services. This happens because the more units the business sells the more units there are to absorb fixed costs. However, as an organisation grows, certain additional costs creep in. These costs are real and in some cases the cost of growing big can outweigh the benefits.
So as your business grows, beware of the following diseconomies of scale:
Cost of communication.
With organisational growth it becomes more and more difficult for employees to communicate effectively within the organisation. To overcome this, business owners should consider:
- Keeping teams and business units small
- Creating collaborative online work spaces such as discussion boards or wiki’s
- Providing areas, such as chat spaces or coffee rooms, where employees can gather, relax and interact
- Identifying and using the natural communication mechanisms that emerge in the organisation. For example, the founder of Geek Squad, an IT services provider, discovered that his employees used online computer games to interact and communicate with one another.
- Duplication of effort. With growth there is an increased risk that two or more people carry out the same tasks. Aim to create an open workplace where people share what they are doing and can see and hear other employees. Open workplaces are enabled with open plan offices, shared coffee breaks, social interactions at work and heightened communication across the board.
- Top heavy companies. As the business grows, too many chiefs can creep into the system. An oversupply of bosses can slow down decision making and cause confusion among employees. Avoid having too many managers and be clear on each manager’s accountability. Ensure that employees know which chief does what.
- Office politics. Nip it in the bud whenever you see or hear it and avoid getting drawn in at all costs. Set the example.
- Decision makers isolated from the results of their decisions. Get decision makers to the front line. In larger companies this often requires a deliberate effort, but it is critical. Managers must interact with customers and front line employees at least weekly.
- Inertia. An unwillingness to change. Create a burning platform when change is required. Make people uncomfortable with the status quo by highlighting the current reality and how that may lead to a very bleak future. Be visual as well as verbal in drawing people’s attention to the need to change.