Second phase entrepreneurship: breaking through the growth wall - includes analyses of what strategies some companies adopt to enable expansion after surviving the initial years of business development - includes bibliography

Business Horizons, Jan-Feb, 1994 by Richard L. Osborne

Entrepreneurs are the heroes of market-driven economies around the world. They generate and act on new ideas; they are willing to take necessary risks; and they create jobs at rates that embarrass their large-scale corporate counterparts. Entrepreneurs start new businesses, revitalize old ones, and nurture them to respectability. However, as the energy unleashed by the initial idea and original entrepreneurial impulse dissipates, most of such firms stop growing.

Why do so many owner-managed companies fail to escape their initial entrepreneurial phase? In search of the answer, we studied 20 privately held firms that achieved profitable growth during their first 15 years of entrepreneurial life but have failed to grow appreciably since. We then compared their experience to that of six owner-managed firms that were able to sustain growth beyond the initial entrepreneurial phase.

What we discovered is that the internally focused conventional explanations--inadequate growth capital, exceeding the entrepreneur's personal span of control, the development of bureaucratic practices, and the loss of entrepreneurial energy--were only minor factors accounting for the growth stall in the Phase One companies. (For purposes of this article, companies that have failed to grow beyond their initial entrepreneurial phase are designated as Phase One companies. Those that have achieved and sustained growth beyond their initial entrepreneurial phase are designated as Phase Two companies.) Instead, the major reason they stopped growing was because, unlike the six Phase Two companies, they failed to understand and respond to the complex set of changing opportunities and obstacles that were developing outside the firm.

This article explores the differences between the 20 entrepreneurs who hit the growth wall and the companies that continued successfully into Phase Two. Based on this comparison, I suggest five steps that can help first-phase entrepreneurs grow again, marking a transition into the second phase of development.

THE GROWTH WALL

The 20 Phase One companies we studied represented a cross-section of businesses. The group included several consumer firms, but primarily served industrial sector markets. All were privately held, led by majority owners who were also the firms' chief officers. Most of the owner-managers were first-generation entrepreneurs; several of the firms were headed by second-generation sons of the founders. The entire study group was based in the Midwest, the majority selling to regional marketplaces. They had annual sales of from $10 million to $50 million, with acceptable--sometimes exceptional-- profits. Following are two case examples of companies from among the study group that hit the growth wall.

* A large manufacturer's representative firm grew to $20 million in sales in the eight years following its inception. Based on the expert efforts of 30 highly trained technical salespeople, the firm dominated its Midwestern marketplace, exclusively representing a dozen manufacturers of industrial electronic components. But then the firm stopped growing. As sales continued to plateau, the entrepreneur owner turned up the pressure on the sales force. Intensive sales training was provided, and the average number of weekly sales calls was increased by 25 percent. But the growth stall persisted.

Determined to restore the historical growth pattern, the entrepreneur continued to interpret the problem as one of sales effectiveness. However, the growth constraints emanated from changes in competitor marketing practices and fundamental developments within several of the manufacturers represented by the entrepreneur's firm. Specifically, important competitors had instituted multiple distribution channels:

(1) A key competitor firm established a major telemarketing capability to support its sales reps.

(2) A manufacturer of competitive products created its own direct sales force to sell key accounts parallel to its formerly exclusive representative firm, resulting in increased market penetration.

In addition, the entrepreneur's second largest manufacturer-principal failed in the timing of its product development efforts, providing an advantage to its head-to-head competitor.

In just 18 months, these significant changes in the entrepreneur's environment combined to abruptly halt his firm's growth. However, although he was partly a victim of the confluence of these negative developments, the entrepreneur must nevertheless share the blame. By failing to assess and respond rapidly to the shifting environmental patterns, he is paying the opportunity costs of lost momentum and a demoralized sales force.

There is no question of capital adequacy or span of control. This large rep firm is probably performing more efficiently than ever. The growth obstacles, all external to the firm, are simply too formidable to be overcome by the entrepreneur's sales-driven response.

* A family-owned, full-line processor of dairy products provides another example of how factors outside the enterprise can jeopardize growth. The company's full-product-line strategy achieved steady growth for nearly 20 years and annual sales that peaked at $60 million. However, the industry became increasingly characterized by the consolidation of regional independent dairy producers into large-scale, publicly owned national companies. Such a scale permitted individual plants to specialize in narrow product categories with attendant, dramatic increases in processing cost effectiveness and pricing flexibility.