Why Small Businesses Fail to Grow

I have written previously about why small businesses fail. Informed by my own failures as well as those I’ve witnessed, that post is a gut-wrenching list of the causes of death for too many companies.

But there’s more than one way for companies to fail. They can stay in business but fail to reach their potential, or fail to get beyond mediocrity, or just fail to grow. Failing to grow is not necessarily a problem — if the owner is happy with where the company is. In fact, my company was featured in Bo Burlingham’s book “Small Giants: Companies That Choose to Be Great Instead of Big,” so I am no advocate of growth at any cost. But there is an uncomfortable place between big and very small, where the owner is still doing a lot of the work and still not making much of a living.

There are many reasons some small companies grow and others hit a wall. There are external factors like market size, competition and demand. But there are also internal factors that have to do with operations and leadership. In every industry, there are companies that grow and dominate, while others stagnate or shrink and ultimately fail. Here are what I believe to be the 10 factors that separate the two:

1. Complacency. An important aspect of corporate culture, a popular topic these days, is how driven the company is. A small company is usually a reflection of the owner’s needs, desires and personality. Some owners want to take over the world, and some are happy making a living. Still others just want to golf as much as possible. There’s nothing wrong with that — unless you work there and want to grow with the company.

2. The right people. You cannot build a company without the right people. This requires both a great hiring protocol and the stomach to make the changes that become necessary as the company grows. This is easier said than done — especially when it turns out that people who were “right” at the beginning are no longer “right” in their roles as the company grows. The ability to manage these issues might be something of a gift, although it’s also nice to have some luck. But it mostly takes dedication to the process.

3. Lack of standards and controls. This covers a lot of territory, including quality, service and problem resolution. Whether a company enjoys a 97 percent customer satisfaction rate or a 93 percent rate will have a significant impact on the size of a company over the long run. It’s not enough to have high standards without implementing the control systems that assure those standards are met. Without the controls, you will have good intentions accompanied by bad results.

4. The customer attitude. Not the customers’ attitude but the company’s attitude toward its customers. I can think of few things that are more destructive than employees who regularly dismiss difficult customers as “crazy” and conclude that there is no way to make them happy. The problem is that most crazy customers have sane friends, and word of mouth travels fast these days. Aretha Franklin has the answer: R-E-S-P-E-C-T.

5. Technology. It can be both a blessing and a curse for small businesses. New technologies can do many wonderful things but can also be overwhelming and expensive. Occasionally, they can be nightmares. This might be one of the biggest differences between running a large company and small one. Amassing the financial, technical and staff resources necessary to solve a technology problem can be very difficult for a small company. But there’s not much choice; the market does not stand still.

6. Marketing. This includes everything from branding to advertising to market analysis. How a company executes may be the major driver of its success, but how it is perceived is also crucial — perception, as they say, is reality. The other reality is that small companies can have a difficult time finding resources to help them with this critical part of their business. That means that the success or failure of a small company’s marketing frequently comes down to the abilities of the entrepreneur. Few people are good at everything.

7. Stale products or services. Whether you are talking about products or customers, the market is always changing, and your products and services have to change with it. If you are lucky, the changes are slow and subtle; sometimes, they are dramatic.

8. Lack of investment. Whether it is for more inventory, new technology, a bigger facility, more employees or more equipment, growing companies suck up more cash than non-growing companies. Getting this cash may require borrowing money, finding more investors or using up whatever cash is on hand. It never stops, much to my chagrin. Some entrepreneurs tire of the demands and decide to slow down the investments — and that slows down growth.

9. Stubbornness. It is stubbornness that helped the entrepreneur get the business off the ground, get through the learning curve, survive the recession and cope with every problem along the way. At some point, though, dogmatic adherence to what you know can limit a company’s ability to adapt to change and get to that much-romanticized next level. Policies and strategies that might have worked when you had 20 employees can be a detriment when you have 50 — for example, when you start to hire higher-priced managers who have different expectations than a $12-an-hour employee.

10. Leadership. This includes vision, courage, fortitude, attitude and of course the ever-important corporate culture — all of which should create an inspired staff. And of course there’s the over-used word that is sometimes called the secret to it all, passion. Here is the real secret: passion is critical, but it can’t make up for deficiencies in the other categories. I have seen many people fail in business, and they were all passionate. It is not enough.

Jay Goltz owns five small businesses in Chicago.