Overcoming Stage II Stall

Part 1

By Chuck Violand

Starting a business is easy. Every month, more than 500,000 are launched in North America. The tough part is sustaining profitable growth once your business moves beyond the start-up phase. Even more challenging is sustaining growth and profitability when your company moves beyond Stage I, typically defined as generating less than $1 million in annual revenue, and into Stage II, usually defined as generating between $1 million and $50 million in annual revenue.

While this is not a line drawn in the sand, it’s at about Stage II when an owner realizes a lot has changed within his company and he can no longer do everything himself, nor can he keep running it the way he did in Stage I. Borrowing a page from comedian Jeff Foxworthy, you might be a Stage II company if:

  • People are doing jobs in your company that you have no idea how to do.
  • Your guts feel the same way they did when you were a kid riding your bike down a hill faster than you had ever ridden before.
  • You start to feel lonely as you realize the key people in your company look to you for leadership and direction before friendship or beers on a Friday night.
  • You find yourself doing work and making decisions you never dreamed you would and for which you have little training—formal or informal.
Walking Into a Brick Wall

Sometimes restoration companies are inadvertently thrown from Stage I into Stage II as a result of sales momentum, landing a large contract or weather events. Other times, their owners can muscle the company to Stage II through a combination of iron will, working insane hours or a seemingly bottomless reserve of adrenaline. But at some point, the weather events subside, the adrenaline runs out, or the owner’s mind and body, or spouse, makes it clear that the pace can’t be sustained. This is when a business owner realizes that what got him to this point isn’t enough to take him where he wants to go. This is where small businesses typically encounter what I call “Stage II Stall.”

While the causes of Stage II Stall aren’t always easy to uncover, its symptoms are easily identified: sales growth slows to less than 1 percent per year for two years or more, declines for two years or more or “ping-pongs” back and forth for several years. A client of ours once described the process of trying to fix this problem on his own by saying, “We kept walking into a brick wall wanting it to be a door.” While the door might have been there, the owner and his leadership team couldn’t see it. Sometimes it just takes someone from outside the company to point out where the door is and then help open it.

Economic turbulence and market downturns may contribute to Stage II Stall, but they are rarely the cause. The impact these two factors have on businesses is usually short lived and the companies affected by them either rebound quickly or go out of business. Overwhelmingly we see it occur in companies run by smart, hard-working owners—decent people with noble intentions who want the best for their stakeholders, but who simply need assistance to free up the bottleneck.

All Stage II Stall isn’t inherently bad or a predictor of imminent business failure. Sometimes it’s just an indication of the company’s natural rebalancing as it postures for future growth. It’s when the symptoms persist for two or more years that you want to pay close attention before they cause unnecessary damage or throw the company into a dangerous decline.

The causes of Stage II Stall I want to address are by no means the only ones that exist. Rather they are four of the most common my colleagues and I have observed in our nearly 50 years of combined business consulting. They are:

  • loss of focus,
  • checking out,
  • arrested professional growth and
  • swollen ego.

Most companies can survive the effects of one; it’s when two or more causes exist simultaneously that serious, sometimes irretrievable, damage can occur. In this installment, I will discuss the first two causes. In the November/ December issue, I will cover the final two.

Cause I: Loss of Focus

Business owners and their companies are least at risk during the start-up phase or when experiencing financial trouble. During the launch phase of a company, there’s a lot of enthusiasm and passion. Everyone is focused on survival and growth. The same concept holds true when the company is experiencing financial difficulty. If you want to get an entrepreneur’s attention, just mess with his money!

Things change when a company starts enjoying success. An experience with a client illustrates this. This company enjoyed several years of aggressive growth, strong profitability and healthy cash flow. They had grown from $1.5 million to $7 million in annual revenue in just four years. The team worked day and night handling the work that flooded in. Their energy was consumed maintaining the high level of quality their customers demanded, putting out operational fires and staffing front line and management positions in their rapidly growing company.

The owner of the company was engaging with unquestioned integrity; he is the kind of person everyone likes and who easily gains the respect and loyalty of those around him, a key strength in Stage I and even more so in Stage II. Everyone had access to the owner when the company was small, but as it grew and managers were added to handle different divisions, he was no longer able to personally communicate his vision for the company to his employees.

While the company’s strong CFO kept it operating from a budget, the rest of the strategic plan was weak and gave little attention to sales and marketing, organizational health or operations. Furthermore, the owner/CEO held the plan close to the vest.

Because of the owner’s reluctance to share the strategic plan with his management team and to assign accountability for its execution, no one knew what their jobs were beyond daily to-do lists and extinguishing fires within their own divisions. The division managers worked on their own agendas with little regard for the needs of other divisions, sometimes even working in conflict with them. There was no common, long-term goal, no “flag on the hill” that everyone could see and work together to capture.

Unable to maintain the pace without a common objective and clear accountabilities, the company went into Stage II Stall. Fortunately we were able to identify the problem in time for them to turn things around.

The consequences of a company losing its focus may not be noticeable until the organization experiences increased speed, similar to what happens when the front end of a car is out of alignment. At lower speeds, it may go unnoticed except for a slight pull in the steering wheel; at high speeds, the effect can be pronounced. In extreme cases the driver may even lose control of the car.

When a business is misaligned and there is no clearly defined vision or long-term goals, its people—especially owners—are tempted to chase the next new thing that captures their fancy: geographic expansion, new service lines, shifting sales goals. Employees become confused when they don’t know what’s expected of them and morale slips as they become frustrated or disengaged. When a blurred focus keeps the target moving, people can’t gain traction and performance is often sub-par.

This doesn’t mean people aren’t working hard or don’t care. In the case of the company mentioned above, people were simply pulling in different directions. In extreme cases, this can become so frustrating for those who are motivated by growing and winning that they leave the company.

Solutions: Remembering the Mission

The best place for a business owner to start when refocusing the company is to clarify where the company is going, what has to be done to get there and who is responsible for doing what to make sure it happens. Then he needs to write it down. Simply walking around expounding about dreams for the future of the business will not hold up when a non-producing employee who’s being called on the carpet asks to see a copy of the goal in writing.

Burt Nanus, professor emeritus at the University of Southern California Marshall School of Business, makes some great points about the value of a company’s vision. He states that a company’s vision—and by extension its strategic plan—clarifies the purpose and direction of the company. They’re ambitious, yet achievable. When they are articulated and easily understood, they inspire enthusiasm and encourage commitment. Perhaps most importantly, they “prevent people from being overwhelmed by immediate problems because they help distinguish what is truly important from what is merely interesting.”

Having a written plan (vision) is only the starting point. Follow-through is where the real work takes place and where the results are delivered; this is especially true when things don’t go according to plan, which they rarely do. This is also why it’s so important to include your key people when drafting your plan. They help the CEO remain focused and the company moving toward its stated goals.

Finally, and perhaps most importantly, the company remains focused when the owner/CEO models the appropriate behaviors to keep the company focused on its long-term goals.

Cause II: Checking Out

I was sitting in a car with a client waiting for the traffic light to change when he uttered two of the most alarming words an entrepreneur can say: “I’m bored.” Instantly, I knew he was checking out.

Checking out is what happens when a business owner mentally disengages from his business. It is one of the surest ways to experience stall or decline in a company. So, if we know this to be the case, why do so many entrepreneurs put their companies and their own futures at risk by checking out?

Sometimes as businesses grow, the owners aren’t sure what they are supposed to be doing. They are fine when the companies are small and their time is spent on jobs they understand or were trained to perform. But as companies grow, it’s not uncommon for them to outgrow the owners’ comfort zone. So they start to spend their days engaged in inconsequential activities, those they are either familiar with or comfortable doing, as the company struggles along without its leader. This may be described as “rearranging deck chairs on the Titanic.”

Sometimes owners check out because they get bored, as was the case with this client. Many entrepreneurs are by nature high-energy people who constantly search for the next new thing. Inevitably, the excitement of their venture wears off, which leads to an overwhelming urge to find something new that rekindles their passion. The upside is that this generates new inventions and progress. The downside is that this flightiness is why many great ideas and business ventures never gain enough traction to become financially viable or to reach their promise.

Finally, owners check out when they “go Hollywood,” referring to a pursuit of the trappings of success.

Lee Iacocca, former chairman of Chrysler Corporation, accomplished what many consider to be one of the greatest turnarounds in business history when he led Chrysler back from the brink of bankruptcy in 1979. As with many companies, when Chrysler was looking over its own fiscal cliff at impending disaster, it was easy for its leaders to stay focused on what needed to be done (see Cause #1: loss of focus.) Then the company started to experience success.

That’s when the chairman went Hollywood. We saw Iacocca grace the cover of Time not once but twice, pitch margarine, and even be considered a candidate for president of the United States. It didn’t take long before we were once again reading about Chrysler’s financial woes, which led Dr. Dieter Zetsche, one of Iacocca’s successors, to later remark, “Every time we get successful, we get stupid.”

When owners check out of their companies mentally or physically (or both), they weaken their decision-making mechanisms and their willingness to confront the tough issues that present themselves every day in business. While they may assign others to perform certain tasks and to deliver results, when push comes to shove, it’s easy to back away from making the calls that need to be made when expectations aren’t met. Instead there’s a temptation to accept mediocre performance because the alternative— having to reengage with the company—is more undesirable than the lack of performance.

Just as important, when the owner of a small business checks out physically, the visionary who provided inspiration and direction is no longer around to provide guidance. This is one of the reasons so many companies suffer when the owner unexpectedly dies or is absent for unforeseen reasons. People look to leadership for direction.

Leadership expert Max De Pree, former chairman of Herman Miller Inc., addressed this point when he wrote, “Leaders are obligated to provide and maintain momentum. Momentum in a vital company is palpable. It is not abstract or mysterious. It is the feeling among a group of people that their lives and work are intertwined and moving toward a recognizable and legitimate goal. It begins with competent leadership and a management team strongly dedicated to aggressive managerial development and opportunities. This team’s job is to provide an environment that allows momentum to gather.”

Does this mean that to avoid Stage II Stall, the CEO has to show up every day and lord his presence over his people? Absolutely not! In a large organization or one with multiple locations, there’s no way the CEO can be physically present everywhere every day. But there’s no question that he can be present mentally and that his presence is felt. While there are never any guarantees in business, it is this mental engagement that helps to inoculate a company against Stage II Stall.


A PDF version of this article from C&R Magazine can be downloaded by clicking here.