It’s not uncommon to have a conversation with an owner that goes something like the following.
Q: So how’s business?
A: It’s going well. We’re growing and making some money.
Q: So life must be pretty good?
The owner then describes how they are spending more hours in the business, weekends are getting eaten up, and life is not getting better, even though the business is growing. So what’s happening here?
Many things can be contributing to that situation, including unfavorable changes in factors external to the organization. Probably the two most common causes we find are pricing and tier two leadership.
Over time, pricing weakness can creep into even a healthy business with well differentiated products. When it is introduced, a new product or service is differentiated. Often introduced to solve a problem expressed by a customer, the product or service is perfectly in tune with the market forces that spurred its development.
Take the iPhone. It was introduced as a simpler, more elegant, more powerful version of clunky and underpowered smart phones/organizers.
Initially, early adopters must pay the price set by the originator of the product or service, typically a premium, if they want the new features and capabilities. Over time, the new product or service is imitated and becomes less unique as competitors decide they want a piece of the lucrative space the innovator has carved out for itself.
The availability of lower priced alternatives reduces demand for the once innovative product as price conscious customers have more alternatives to consider. This forces the innovative firm to reduce its price or live with lower volumes.
“So what?” you ask. The owner has to work harder to maintain the same level of profit dollars coming into the business. The business has to produce more units in order to produce the same earnings. This is the treadmill effect where the owner (and potentially everyone else) has to spend more time and effort on a larger business just to maintain a standard of living.
This is by far the most common occurrence because it is natural. The normal life cycle is for non-commodity products and services to become commoditized as they become less unique due to imitation and competition.
The solution is to continue to innovate in your product and service set and generate points of differentiation that matter to your customers.
The second most common source of the treadmill effect is ineffective tier two leadership. Eventually, as it grows, a business requires not just employees to work with the owner, but leaders to work for the owner. Around $30 million in revenue, although it can happen earlier or later in any given business, the owner starts to need professional leaders working for him.
Two factors drive this. The first is specialization.
Try as we might, none of us is truly expert at everything. Good leaders have self knowledge and, over time, focus on the areas of the business where their insight and experiences are most valuable. An owner with deep competencies in sales is wise to focus his or her attention on growing sales and delegating financial and production tasks, customer service, or other issues to another leader who can drive performance of that function for the owner.
The second factor is the need for someone to work on growing the business. In the early days, it is enough to satisfy customers in order to get the next order. However, as the business becomes more complex the challenges it faces become less about day-to-day activities, like order taking and filling, and more about complex issues like cash flow, financing, talent acquisition and development, and regulations.
Some of those things can be delegated to that second tier leadership group for management, but the overall decision making about how to allocate resources like talent and capital requires more and more careful thought to the point where, in larger businesses, those decisions become the only focus of the owner or CEO.
In a business where those decisions are made sub-optimally, the treadmill effect is a common symptom.
Differentiating between those two sources of the treadmill effect is usually straightforward. If lots of negative price pressure is present, look there first for a possible solution. Not only because this is a common cause, but also because correcting pricing can yield the cash and profits necessary for a business to address its leadership structure.
If pricing and talent development is important to your business, join us Tues., Feb. 26 for the monthly GBQ Redbank Advisors Profitable Growth Series Seminar.