Why Most Businesses Get Stuck (And What to Do About It)

Why do the vast majority of businesses get “stuck” – doing well enough to “stay alive” but not even close to being either a) a source of significant cash flow for their owners or b) an attractive acquisition candidate for a strategic or financial buyer?

Stuck companies face a daunting array of vexing challenges, almost all of which fall into one of these four “M” buckets – Money, Management, Model, and Marketplace.

Money. Most smaller and mid-sized businesses fight an ongoing, Sisyphean battle with money – pushing the cash flow boulder up the hill month after month, only to see payrolls, rents, materials, insurance and marketing & sales expenses drag bank balances down again and again.

However, losing at the money game is almost always a symptom of deeper problems than a cause in itself.

So when money problems arise, usually the best thing is to not focus on them but rather to confront their root causes, which almost always can be found in one of the remaining 3 “M’s” below.

Management. As described in my The Living Company post, in the end, a business is simply a “Collection of Humans” temporarily united toward a common cause.

As such, the “productive vitality” of the relationships between these humans is the most important indicator of its ultimate success, and can be well measured by answers to the questions below:

1. Would / do the people in the company recommend it as a great place to work?

2. Would / do true leaders view it as a place where they can build their careers / make their mark?

3. Does a productive camaraderie exist in the organization such that that those within it do more and better work than without?

If the answer to any of these questions is no, then a hard and sober look at the company’s management and leadership is required (And, in all likelihood, the problem starts and ends right at the top).

 


Model (Business). I had the great fortune a few years ago to lead a change management assignment for a large, urban hospital here in Los Angeles where Mr. Charlie Munger – Warren Buffet’s famed partner at Berkshire Hathaway – was Executive Chairman.

Mr. Munger’s philosophy and credos were well steeped in the organization, of them my favorite was that for Mr. Munger all businesses – no matter the size, industry, or focus – could be evaluated as to their answer to one question, namely:

“Does the business consistently deliver high quality at low cost no matter the field of endeavor?”

Honestly measuring how one’s company ranks on this cost / quality spectrum relative to competition is a great predictor as to its long term success.

Marketplace. Following on Mr. Munger’s wisdoms, try on one of Warren Buffet’s most famous quotes:

“When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact.”

Now, when it comes to industry and market analysis, most small and medium-sized companies undertake it anecdotally, if at all.

An investment of time and resources which almost universally yields a high ROI is to have an outside research firm undertake for the business a formal industry, competitive, market, and customer analysis.

It is almost impossible to pay too much for such work, as helping managers gain stronger focus as to what their right market positioning is (and what it is not!) is worth its weight in something far more precious than gold, opportunity cost.

Money. Management. Model. Marketplace.

Successful businesses get the last three right and the first naturally follows.

And, as they do, companies get “unstuck” and recapture the promise and excitement of the business’ earliest days, but now with the cash flows and equity value that makes all of the hard work worthwhile.         

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