By Peter Lyle DeHaan , PhD
One of the assignments I enjoyed most in college was analyzing case studies. I was, and continue to be, fascinated with learning what founders and their companies have done—both right and wrong. While the success stories are the more exciting and inspirational, it is the failures and missteps that are the more enlightening and educational.
It should not be surprising that I take most seriously the adage, “Those who fail to learn from history are doomed to repeat it.” For those in business, the best histories to learn from are business case studies, especially those accounts of the downfall, demise, or defeat of once prosperous and successful businesses and entrepreneurs. Of course, scrutinizing the steps taken in a remarkable turnaround are also instructive, as well as encouraging for anyone faced with a formidable uphill battle.
I consider the phenomenal success stories, which are uplifting, to be “light” reading and as much entertaining as educational. Success stories abound of the cash-strapped entrepreneur who by focused vision and through sheer determination, bootstraps a dream into a profitable and flourishing business.
In like fashion, there are many accounts of the big-business corporate executive who leads his or her company to the next revenue plateau, into a new line of business, or to revolutionize an industry. Rare, however, are the entrepreneurs who starts with nothing, these individuals are a unique breed. They have the ability to grow, change, and mature as leaders, in parallel with the evolving entity they parented. These are the business superstars; three such examples come to mind.
The first is Steve Jobs who, with buddy Steve Wozniak, yearned to bring the power of computing to the masses. Financed by the sale of their only tangible assets, the pair began making computer kits in a parent’s garage. Apple computer was born and though Jobs was for a season extricated from the company he co-founded, he to the helm, guiding this multi-billion dollar a year company until his recent passing.
The next example is found in Bill Gates and Paul Allen who founded Microsoft. Starting in 1975, by providing operating systems and programming languages, they parlayed their fledgling company into another multi-billion dollar a year juggernaut.
Then there is Michael Dell who started assembling PCs in his college dorm room, hence the humble beginnings of Dell Computer. Now also a multi-billion dollar a year company, Dell set the business and operational standards which changed an industry.
Many, if not most, businesses started with equally humble beginnings. Tales of founders sleeping in their offices so that they could offer 24/7 coverage (and save money on housing). Others started in their apartment, out of a converted warehouse, from their front porch, or even in a garage. Fortunately, those businesses that survived soon left these inauspicious beginnings. In true entrepreneurial fashion, they grew their meager investment into viable, ongoing concerns, quickly moving to more suitable and appropriate environs.
While it is not realistic to expect most businesses to grow into the multi-billion dollar size of Apple, Microsoft, or Dell, it is wise to consider their founders’ paths. Indeed, the precise traits and characteristics that serve one well as an entrepreneur, can become a hindrance and counterproductive as a business grows and matures.
Although Steve Jobs, Bill Gates, and Michael Dell all made this transition (and had books written about them as a result), few individuals can successfully transform their leadership style each time their enterprise metamorphoses into the next iteration of scale, scope, and complexity. Case histories and business literature repeatedly shows that, all too often, the next plateau is met with disaster. Frequently, the entrepreneur turned reluctant CEO, micromanages his or her business, unconsciously reducing it down to a more comfortable size that he or she can successfully handle; at worst, the miscast founder mismanages the business into insolvency.
The astute entrepreneur, well aware of this trap, can employ several strategies to avoid this. One technique is to form an advisory board, consisting of those owning and running larger concerns, to guide the founder’s nascent climb into management acuity. Some bring in an experienced and seasoned business manager to handle the day-to-day management, allowing the entrepreneurially focused founder to concentrate on visioning, planning, or innovating — whatever he or she does best and enjoys most.
One wise founder confided that he always hired management people who were over qualified and paid them accordingly – knowing that as the business continued to grow, they would easily rise to the occasion. Others go back to school and earn their MBA. Another approach is founders who send their kids to college, in anticipation that the next generation can guide the company to the next level and beyond. But that brings up a second caution for small businesses – passing the baton to the next generation.
Although studies differ by degree, they all confirm the majority of small, family businesses are not successfully passed on to the second generation and only about 15 percent make it to the third. There are many theories as to why this is the case. The leading supposition is that the second generation, not needing to make sacrifices to launch the business, lacks the requisite drive and wherewithal to persevere. Another is problems occur when the business is handed over too quickly to adult children who are still too young or too inexperienced.
Some entrepreneur parents attempt to avoid these problems by making their successor children start at an entry-level position and work their way up the organization. But this fast-track status often backfires, engendering resentment from non-relatives who may be otherwise more qualified, better educated, and possessing greater tenure. In attempts to avoid this pitfall, some founders add a stipulation for their children to earn a degree and put in time at another company, gaining valuable experience and acumen before joining the family business. Although this final approach is the one that seems to offer the greatest chance for success, it is by no means a sure-fire strategy.
Other growth problems occur when a single location business adds a second location or acquires a geographically disparate competitor. Since most small business owners employ the simple, yet effective style of “management by walking around,” they find it impossible to successfully and simultaneously manage multiple locations– this is especially true for a service business. Indeed, this common management style does not work for long when the manager is not physically present.
As stated earlier, the results are usually disastrous, rooted in either micromanagement or mismanagement that thwarts growth, hampers quality, and limits profitability. The solution is simple, albeit difficult. Quite simply a change in management style is required. Either the founder must adapt a new way of doing things or find someone else who can, giving them the leeway and latitude to do their job. However, neither approach is comfortable or painless for an entrepreneur used to putting his or her mark on everything that happens and in making all decisions.
A fourth problem faced by the entrepreneurial founder is addressing life-cycle changes. While some may have both the drive and ability to run a business for the remainder of their lives, most get to a point where they want to scale back, be it not handling the day-to-day issues, taking longer vacations, semi-retiring, or not working at all. These are all various forms of letting go; it is hard, if not impossible, for someone who sacrificed to launch a business, makes every decision, and oversees all activities.
The solutions to the first three entrepreneurial dangers all apply to this situation. If there is a son or daughter interested in taking over the business, this may be the best solution, providing there is time to do it properly and correctly. Changing one’s management style is another option, just as is required for the growing or expanding enterprise. Still, all too many founders find themselves in a position where their kids don’t want the business and they can’t change their management style, so they opt for the only other solution; they sell the business.
Regardless of the situation or business dilemma one faces, be assured someone has encountered it before. Don’t struggle with a problem as though it is unique, because it is not. Do some research, read some business books and case studies, and whatever you do, learn from history so that you are not doomed to repeat it.
Peter Lyle DeHaan, PhD, shares his lifetime of business experience and personal insights with others through his books and blogs to encourage, inspire, and occasionally entertain.