Transforming small business can be a minefield for the unwary – yet it offers many fruitful possibilities. So where do you begin?
Where is the Focus?
It’s interesting to think about where the focus lies with a small business. Do they confine themselves to a locale or is there an attempt to play on a much broader geographic stage? With the advent of digital tech the boundaries have somewhat disappeared but there is often a presumption with the management about where they do or do not operate.
With that presumption comes the application of focus. So, for example, a small local retailer with a bricks & mortar operation is going to focus on the district for footfall and potentially with a side-line in online trading via mail order. Their supply chains will be personal and the quantities relatively modest.
Compare that to a business that is fulfilling customer demands via an online presence without any physical stock or premises. Instead perhaps they are routing orders through to third-parties who will pack and despatch. The store is virtual and there is no limit to stock because the business doesn’t actually hold any of its own. Instead they are effectively acting as agents for the producers – except that the customers don’t see the interface.
The first business has to manage cash-flow above all else and therefore investment in stocks is limited by how accurately they can predict sales and trends. On the other hand they tend to be much more personal with their clientele and focus heavily on keeping that relationship alive.
Our second example can focus instead on volume (without ignoring quality). Yes they want repeat business but since they aren’t geographically constrained it’s just as easy to sell to someone from a completely different town or even country. Cashflow is not as important as continuing to gain market share once the trading is at least covering the basic overheads.
So when it comes to transforming a small business, the first reference point should be to understand the nuances of where the current focus lies and what that might transition to.
Sole Trader to Small Chain
A traditional route for the bricks & mortar trader is to open a second and subsequent branch, shop or office doing pretty much the same thing across all of them. So far that’s pretty obvious but what if the decision to transform is not simply about more of the same?
Here’s where the transformation might put an existing twist onto new ideas. Take the brand values of what is already there and see how those might be planted onto a different type of business. So, for instance, a really good coffee shop might be known and admired for its bakery. Is there an opportunity to use those skills in a bakery school, selling courses and experiences in some of the signature products?
By applying this kind of thinking you switch from a simple expansionist model to a multi-strand related business. Is the expansion resistant to mail order or online competition? Do the new product lines dovetail with what exists without cannibalising the current turnover? Only by examining the reason for wanting to transform and understanding the current focus can you even begin to play with the options.
There’s actually a very obvious large corporate example of this thinking. The founder of easyJet, Stelios Haji-Ioannou, subsequently launched other businesses using the easy brand. The first use of “easy” after easyJet was with easyInternetcafé and subsequently easyHotel. However it’s not clear whether many smaller businesses have tried to follow the example. The reasons seem to be that they have got stuck in the rut of doing what they have always done. So a transformation, where desirable, should also seek to challenge the status quo.
That leads us on to a second possibility. Should a small business stay in its existing niche or should it switch? The idea of switching niche may make eminent sense to transform a small business but what should you look out for?
Here we are dealing with two problems. First the existing management presumably knows quite a lot about the current niche, its problems and quirks. Is that knowledge transferable and if so where to? On the other hand what do they know about alternatives? Clearly they need to be able to find out, leading to the second problem. How are they going to acquire that expertise?
This is actually a highly complex problem that requires a great deal of diligence. It is very dangerous to assume anything about a new niche. Instead the small business owner / operator should start by really understanding WHY the need for transformation arises in the first place. To be successful a transformation should make significant and measurable difference to the operations and outcomes of the business.
Here’s an example of that NOT being the case. A business that has operated in the sales of loft insulation switched to double glazing, then on to selling solar panels and so on. That’s just a string of sales operations in the broad area of home improvements. Yet it typifies the approach by many small businesses, looking for the next hot topic. None of these are a niche – they are simply running with the crowd and taking advantage of a small slice of the overall action.
So, to be successful, the switch of niche requires a real in-depth understanding of the existing niche (if indeed it is a niche at all) and being able to identify the target niche, size and potential customer base. That takes us back to the fundamental requirement – to be crystal clear what the problem(s) are before designing a solution. If this is your business, ask yourself how you are going to go about this. If my experience is anything to go by, then the tools and techniques this will require don’t reside in the desk drawer nor do they reside with the accountant (the usual source of business advice for many people). This means that you have to do something additional right up front – ask for help from people who understand HOW to go about this and can therefore help you make the right decisions.
I wouldn’t ever expect a bank or financial institution to provide the appropriate help – they simply don’t have the right expertise, even though they may profess to be business experts. Nor, for that matter, do any of the many development agencies. The latter are either not interested in very small operations or, if they are, don’t have a clue about the sorts of analysis tools and creativity required. Being offered introductions to “business advisers” with the fees being subsidised by a development agency may sound great but those very advisers tend to be on a treadmill churning out standard responses. Transformation is, by definition, not a standard item, so give them a miss.
Small to Large?
Transformation doesn’t necessarily mean a transition to a larger entity but let’s examine the implications if that were to be the case.
Scaling up brings a series of problems. Physical space; staffing and capital requirements being three of the more obvious. In addition, the technology currently in use may or may not be scalable. If not, then that adds to the pile of things that need to be sorted out.
Problems of Scale
After going back to the drawing board, perhaps you have come to the conclusion that transformation does require upscaling of the business model. Even with a very successful existing model, financiers are frequently reluctant to help with expansion without some serious commitment, perhaps in the form of personal guarantees or stringent loan covenants. So ask yourself two questions:
- Is it possible to find a creative way of financing what is required that can bypass these constraints? Treat this as a serious problem with all the due diligence and creativity you can throw at it. Sometimes it just takes a bit of leverage to move the finance forward. (If you talk to us we can tell you some interesting anecdotes from our experience about getting around just this type of problem.)
- Can you develop truly outstanding plans that will convince any financier that what you are attempting is worthy of their support without the addition of too many onerous conditions?
In either case you need to be rigorous in your approach. Small may be beautiful but it also has to recognise when it needs help, so are you going to need help here?
Organic Growth vs M&A
If you have made the decision to get much bigger as part of transformation, then how is that going to happen? There’s plenty of stuff on the web from big consultancies talking about expansion via Mergers & Acquisitions (M&A) but, let’s be honest, how applicable is that model if you are starting off very small? I’d argue instead that you should seek out strategic partnerships alongside financing as much organic growth as can reasonably be achieved.
What will this mean in practice? Well to start you are going to have to increase the marketing budget (whatever that looks like for your organisation) to gain market share. Whether that is existing markets or a series of small shares in parallel or similar markets. (The question of niche all over again.) Virtually no-one ever grew a business or organisation purely by accident.
Even modest-sized businesses are unlikely to grow much via acquisition, there has to be some synergy between the different components and proprietorial impacts come into play. So instead of buying your way up the ladder, how about designing a collaboration? That’s going to take a lot of detailed analysis and plenty of practical psychology in dealing with the people issues entailed.
Want to Make Sense of it All?
Having worked your way this far are you left reeling and wondering where to find answers? Maybe you’ve got some ideas but want to avoid falling into the many traps along the way. Whichever it is, take the time to have a free consultation with people who can coach you through it all.
With decades of experience in making great things happen we’re happy to share insights and engage. So get in touch and have a conversation. We look forward to helping you get set for your journey.
Rob Wherrett can be contacted at https://robwherrett.com/contact/
© robwherrett.com 2020. All rights reserved