Entrepreneurs, Medium-Sized Companies, and the Global Supply Chain

Stephen DeAngelis

January 31, 2011

Every entrepreneur hopes that his business will grow and succeed. When growth does occur, a “start-up company” eventually outgrows that label to become a medium- or larger-sized business. Scaling a business successfully, however, is not as easy as it may first appear. Bradford Shimp believes that “every business should be built to scale.” [“Business Scaling Ideas for Small Business,” allbusinessanswers.com, 21 April 2010]. He continues, “You want to have the ability in place to grow rapidly, even if you are currently a small operation. I think that being able to scale means you have to take measures right now to make it possible later.” He then goes on to provide a few suggestions:

Use a Wiki to Document All Business Procedures — Having your business procedures and systems well-documented is a key step for scaling. A wiki is simply a software tool that makes it easy to document information. You can give out access to the wiki to key employees so they can document their own procedures. You can then review procedures yourself and make changes. Even if you are the only employee, starting with a wiki will make it easy for future employees to access procedures and upgrade them along the way.”

There are no standard measures that people can use to classify businesses as small, medium, or large. Two traditional ways are by looking at how many employees a company has and/or by measuring how much annual revenue a company generates. Some organizations use a combination of those measures. One CEO I read about indicated that as soon as his employees needed name tags at company get-togethers he knew his enterprise had crossed the divide from small- to medium-size. I raise the issue of name tags because it bears on Shimp’s point that you should design a business for good communications among employees from a start-up’s earlier stages. His next recommendation deals with revenue.

Hire an Accountant Early — It is important to hire the right people all throughout your growth as a business, but one of the most important hires is an accountant. You don’t have to bring one in full time. Just find an accountant who understands business and can help move yours forward. Understanding the numbers will help you make the right choices as you go along, and having a firm financial foundation to your business will make it very scalable.”

As most entrepreneurs soon realize, raising capital is a time-consuming and difficult job. It becomes nearly impossible if you don’t have good financial statements to back up the story you are telling potential investors. Investors want to know that the money they provide is going to be handled responsibly.

Record All Training — Anytime you do any kind of training, record it. I don’t care if you write it down or use the family video camera. Just make a record of it. That way the next time you need to train, it will be more streamlined and consistent. Plus, if you take off and grow really fast, you will already have important training materials in place and will not have to personally be there every time.”

Entrepreneurs often overlook the importance of training. The larger and faster a company grows the more important training becomes. If you want your products or service to achieve a certain standard, then you must train to that standard.

Learn How to Measure — This is a big one. What you want to do is find the measurements that speak to your business’s health and wellness. Watch a few key metrics to spot troubling trends and to help you keep the business on track. This habit will become especially important as you get more removed from the daily grind. Determining what to measure takes trial and error. For one business, it may be number of leads in the pipeline. For another, it may be online conversion rate. For a third, it could possibly be the number of walk-ins at the store. It is important to find the measurements that most directly relate to future success (so last month’s sales numbers aren’t always the most helpful). There is some good advice on this topic in Mike Michalowicz’s The Toilet Paper Entrepreneur.”

Knowing what to measure is also important as you try and make your business case to potential investors.

Incorporate — Yes, it costs money. But protecting your business with a legal entity, a corporation, S corp, or LLC, is the right move. In rare cases a partnership makes sense (an LLC will probably be better), but avoid staying a sole proprietor for too long. By making your business a legal entity, you get the legal protection of separation from your personal finances and liabilities. There are also many financial and tax advantages. This is something you need in place if you are ever going to scale your business. I suggest reading Incorporate and Grow Rich to learn more about the options and benefits.”

I agree entirely on this point. There are a number of firms that have cropped up that can help you fill out the necessary paperwork to incorporate. If you want more personal advice, employ a good business lawyer.

Maintain a Database — Your business runs on information. The less information that is stuck in your head, the better off your business will be. I already mentioned cataloging procedures and training. You really should catalog everything. The main use of a database is to store customer information. Get in the habit early of recording everything. This includes emails, phone conversations, preferences, and more. Build up strong information about your customers.” For this, you will want to use a CRM, which stands for customer relationship manager. A good one will help you maintain information on your customers and sales without too much hassle.”

In numerous posts about supply chain management, I have stressed the importance of collaboration up and down the supply chain. This collaboration most often takes the forms of information sharing. If you don’t have information to share you could become a liability rather than an asset to your customers.

Systematize Relationships — This may sound cold, but it is in your customer’s best interests. It also goes hand in hand with using a CRM. You need to find a way to maintain a personal touch with customers, no matter how large you grow. So build in things like customer surveys, thank you notes, social media connections, etc. Take a look at how you handle customer relationships now and work to improve on it while also building a system to maintain your approach no matter how large you grow. One of the worst casualties you can have if you grow fast is your customer service. Building systems now will ensure that you maintain good relationships as you move forward. A good book on this topic is Exceptional Service, Exceptional Profit.”

For more on this topic, read my post entitled Improving Customer Service.

Segment Responsibilities — Early on, you do all of the jobs. Maybe now you have a handful of people doing multiple jobs. You can’t just go out and hire everyone you would like to hire right away. What you can do is start to map out responsibilities. Create the job position before you fill it. If you handle five different things, start to think of them as five different jobs. Come up with descriptions for each job. As you grow, you will be able to easily plug people in, as well as separate yourself from the job. Without planning this out, there will be bumps in the road as you figure out responsibilities after your hire. Check out E-Myth Revisited for great advice on this topic.”

As I have noted in the past, assembling a good team around you is critical if you want your company to grow. Scaling a business is not important to company founders and investors, according to Andy Grove the former Intel CEO, scaling businesses is even more important to national economies. Economic growth relies on the creation of new business sectors in which thousands of new jobs are created in a very short time. He believes the focus of discussions about start-up enterprises should to be on the back end of entrepreneurship rather than the front end. [“How America Can Create Jobs,” Bloomberg BusinessWeek, 1 July 2010]

Let’s assume you’ve done everything right and now find yourself running a medium-sized company. What next? The Economist recommends looking at Germany where, the magazine claims, “80% of the world’s medium-sized market leaders are based.” [“Mittel-management,” 25 November 2010] According to the article, Germany must be doing something right. “Germany is the world’s largest goods exporter after China despite high labour costs and a strongish euro. It is also stuffed full of durable companies that have survived hyperinflation and two world wars.” In Germany, medium-sized companies are labeled Mittelstand. The article continues:

“Although the term Mittelstand is sometimes applied to quite small, parochial firms, the most interesting ones are rather bigger and more outward-looking. Most shun the limelight: 90% of them operate in the business-to-business market and 70% are based in the countryside. They are run by anonymous company men, not hip youngsters in T-shirts and flip-flops. They focus on market niches, typically in staid-sounding areas such as mechanical engineering rather than sexy ones like software. Dorma makes doors and all things door-related. Tente specialises in castors for hospital beds. Rational makes ovens for professional kitchens. This strategy helps them avoid head-to-head competition with global giants (‘Don’t dance where the elephants play’ is a favourite Mittelstand slogan). It has also helped them excel at what they do.”

Although some pundits are concerned that globalization is retreating (see my post entitled Is Globalization Retreating?), The Economist reports that “globalisation has been a godsend to these companies: they have spent the past 30 years of liberalisation working quietly but relentlessly to turn their domination of German market niches into domination of global ones. They have gobbled up opportunities in eastern Europe and Russia. They have provided China’s ‘factory to the world’ with its machine-tools.” The article admits that some people worry that the Mittelstand model “will eventually become the victim of globalisation [as] emerging-world companies … learn to produce their own clever machines at a fraction of the cost.” This may occur, it claims, because “Mittelstand companies are too conservative.” Nevertheless, the article concludes: “The Mittelstand is likely to keep powering Germany’s export machine for years to come.” So what are lessons to can be learned from the Mittelstand model? The articles asserts that there are three general lessons:

“First, you do not need to try to build your own version of Silicon Valley to prosper; it is often better to focus on your traditional strengths in ‘old-fashioned’ industries. Second, niches that appear tiny can produce huge global markets. The third lesson is that Western companies can preserve high-quality jobs in a vast array of industries so long as they are willing to focus and innovate. Theodore Levitt, one of the doyens of Harvard Business School, once observed that ‘sustained success is largely a matter of focusing regularly on the right things and making a lot of uncelebrated little improvements every day.’ That is a lesson that the Germans learned a long time ago—and that the rest of the rich world should take to heart.”

Supply chain analyst Bob Ferrari says that the tenets outlined in the article “have lots of applicability for supply chain management readers.” [“Small and Medium Business Best Practice Can Come from Germany,” Supply Chain Matters, 3 December 2010] He explains how the three lessons noted above can be viewed through the supply chain perspective:

“First, each company needs to build its own center of innovation, even when that innovation is within traditional industries. The focus is on constantly understanding customer needs and building increased value, whether product or services related. Second, niche markets can be huge on a global scale, since multitudes of niche sales do add to a larger number. The unstated premise, however, is that a global market requires global distribution, service and fulfillment capabilities. That also implies more savvy capabilities in leveraging available technology or utilizing global distribution and logistics specialists. The final lesson is that small and medium businesses can indeed be an engine of employment growth, providing that they each have an unwavering focus on operations excellence and continuous improvement in every process. [In a previous commentary Ferrari noted that a MPI funded study of U.S. regionally based SMB’s noted over 50% of respondents indicating not having any direct focus on global business activities. The study also noted that] 57% of respondents reported no organized measurement systems or reviews, with only 17% indicating regular monitoring and review of operations metrics with the CEO, senior staff, or key customers and suppliers.”

For entrepreneurs who envision their companies becoming medium-sized or larger businesses, these lessons should be taken to heart. William Shakespeare reminded us centuries ago, “All the world’s a stage, and all the men and women merely players.” If you don’t see the world as your stage, you may not be a player in the future.