We consultant types like to impress readers with stories of clients who have overcome adversity and risen from the ashes. But we also learn the most from failure--or conveniently for me, the occasional failures of our clients (they don't listen 100 percent of the time).
I am in the business of helping companies scale, and there are certain scars from combat I have lived first hand. These five deadly sins are barriers to scale:
1. Bad Products
According to CB Insights, the number-one reason new companies fail is their product does not satisfy a market need. A common pitfall is companies going to market with products that are not ready for prime time (Theranos comes to mind).
This is particularly true in technology, where the wrong platform or product can put a company behind the eight ball very quickly. Even companies such as Google (Google Glass) and Amazon (Amazon Fire Phone) are not immune.
Of course, every product will not succeed. The problem many companies face is identifying customer needs, which requires thorough market analysis. It's critical that companies consider external forces and conduct a thorough value chain analysis to understand exactly where they fit within their industry's dynamics.
Poor talent can also be limiting in terms of building the best product. As Standout Jobs executives wrote in their post mortem (after the startup failed):
"The founding team couldn't build an MVP (minimally viable product) on its own. That was a mistake. If the founding team can't put out product on its own (or with a small amount of external help from freelancers) they shouldn't be founding a startup."
Having the team to build the right product is of paramount importance.
2. Forced acquisitions
Often as a consequence of poor organic sales growth, companies try to buy growth in the form of forced acquisitions. In 2015, Mattress Firm acquired Sleepy's in an effort to revive its brand. The industry quickly reached saturation. The company never recovered and filed bankruptcy in 2018.
Acquisitions are extremely expensive and time consuming. During the ramp of the acquisition both the acquired and acquirer are under tremendous stress. Their costs are higher. Their finance and accounting teams are distracted. Companies should not enter into acquisitions unless they are already on solid footing. When well-thought-out and executed, acquisitions can be highly accretive to value. Don't do them until you are ready.
3. Stretching capacity
One of our clients, a major consumer packaged goods brand, committed the deadly sin of getting over their skis. They added significant capacity right before an industry downturn. Suddenly, they found their balance sheet bloated and operating costs higher.
Companies should seek to maintain capacity (in terms of physical space, equipment and labor) calibrated at a level that will not overextend them when demand slips.
When possible, outsource a sensible level of production so you can expand and contract your business based on fluctuations in demand.
4. Bad hiring and retention practices
Recruiting has become the fly in the ointment for many companies. Failed hiring practices lead companies to employ B and C players, who hire other B and C players. Bad hiring is too expensive to ignore. If your company is staffed by inadequate people, throw out your HR playbook and start over.
Make sure your management team employs an all-hands-on-deck mentality. Hiring is not HR's job; it is a crucial function owned by the senior management of your company.
Even worse than employees who quit and leave, are employees who quit and stay. Make sure your performance management system demands performance within your organization. Allowing poor performers to stick around sends a message that you will accept mediocrity.
5. Running out of cash
Ernest Hemingway once wrote that companies go bankrupt "two ways: gradually, then suddenly." This is what happens when they run out of cash. They often don't see it coming.
Every company should have a clear cash flow projection by month and create multiple scenarios that anticipate the ebb and flow of demand. The best-run companies maintain a three- to six-month cash reserve (easier said than done).
Be aware of the five deadly sins. Scale is hard enough to achieve without shooting yourself in the foot.