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Ask SCORE: Managerial effort as a function of the firm's life cycle
Managerial effort as a function of the firm's life cycle
A new way to be effective as a practicing manager
By Richard Walton
Assistant District Director for SCORE
What is the best way to learn about what managers do? This question has often been posed to me in my work as a SCORE mentor. After careful thinking about the subject, my answer is that what you have to do depends on a lot of things, but mostly on the life cycle situation of the business you are working in. This is because each stage of the life cycle requires different managerial focus and effort. Accordingly, I have developed a linkage of managerial actions that tie neatly to the life cycle concept, thereby helping managers be more effective no matter what stage of the cycle they are in at any given time.
The stages of the life cycle are initial start up, followed by the growth stage, then the maturity stage, and finally closure. As mentioned above each stage requires different managerial effort and focus, and I will describe the specific tasks for each stage of the life cycle. Let me add as well that a business does not typically progress routinely through each stage, and sometimes is forced to repeat a stage already traveled. But above all the concept of Managerial Effort as a Function of the Firm's Life Cycle can be a very useful tool to enable the firm to successfully negotiate the stage it is in at any particular time and to prepare itself for entry into the next stage. Presented below are the stages of the firm's life cycle.
Stage 1-Initial Start Up
This stage is characterized by chaos, stop and go activities and general uncertainly. The firm needs to be successful in two major areas in this stage. The first is to develop a solid foundation for the business through innovation. Innovation is the way in which a business justifies its existence, through providing to its customers and/or clients, a valuable service, typically not easily available elsewhere, at a cost that yields a profit to the firm, and is perceived as bring fairly priced to the customer. The second major requirement is collaboration with people, other firms, and agencies, wherein the firm obtains advice, assistance and support, and perhaps even products and/or services for resale. An excellent resource for the start up business at this stage is your local chapter of SCORE. In sum, these two areas of focus, innovation and collaboration set the foundation for a firm to provide its customers with valued products in a sustainable fashion thereby assuring continuity and success.
In this stage the firm is attempting to move from early start up uncertainty to an extension of its activities on an expanding and profitable basis. To do this, the firm needs to manage quality and information. Quality management is essential to ensure that as the firm scales up its operations, its products and/or services are of uniformly high quality, and that product or service variability does not exist. Quality management is assured by attention to and organization by the principles of Total Quality Management, involving continuous improvement, employee involvement and open communication. Information management ensures that as the firm grows, it maintains its profitability by managing according to the principles of effective cost control through ratio analytics, breakeven analysis, and cash flow management. At all times, the manager must know that high quality is not only sustained but improved on a continuous basis, and that costs are not only effectively controlled, but actually reduced through constant quality and productivity improvement monitored through financial controls.
In this stage the firm should have a solid foundation of loyal customers, profitable operations, and highly motivated employees. Now, the firm has a lot to lose if it is unable to maintain its competitive advantage in the marketplace. And so it turns its attention in as subtle a manner as possible to a defensive stance, to protect its position and profits. The key factors that have to be managed in this stage are change and sustainability. Change may be forced upon the firm through a competitor's actions, technological change, or other external factor. And it may be brought about by direct action on the part of the firm, but in any case, change processes must be managed to avoid a disruption of the firm's operations and its market position. The second major factor at this stage is sustainability in the broadest definition of the term. Many regularly used business practices are not sustainable over the long run, such as paying low wages, using outdated business methods that involve deleterious effects on the environment, or failing to anticipate both public and governmental actions that could undermine the firm's business model. Managing change and maintaining a sustainable is brought about by embracing change as a corporate and personal way of life and incorporating environmentally friendly methods into every business activity.
In this stage the firm, a typical small business owned by a single individual is facing a major turning point, namely that of the retirement of the owner/manager. In larger businesses, this process is known as succession planning, but in small businesses, the process more than likely would involve sale or disposition of the business due primarily that there is no currently employed individual or family member available to take over the operations of the business and run the firm profitably. The key managerial attention now must turn to issues of valuation and the options open to provide for the owner to liquidate his or her financial position in the firm. Valuation is difficult because the opposing viewpoints of the potential buyer who wants to obtain assets and profit making power for as low a cost as possible, and the seller who wishes to dispose of these assets for as high a return as possible. The best way to approach valuation is to minimize costs while maximizing profit through excellent cost control, steady quality management and thereby profitability, and careful attention to accounting policies that put the firm in the best possible light when viewed by a potential buyer. The firm must be positioned to look and act like a business with an excellent future outlook based upon a solid record of achievement in the past, and careful stewardship of the firm's assets. Similarly, the manager/owner must keep all options open as long as possible and not feel pressure for a fast and potentially unwise financial move to dispose of the company quickly. It would be rare that a favorable deal could be arranged if the seller was under constant pressure for a fast resolution. Being prepared as a regular part of the business process is the best defense against hurried and poor decisions under pressure. This last part reminds me of the old show business adage, that the humorist should 'leave 'em laughing'. In other words, sell the business at its peak, not the trough.
Managers face differing challenges as the firm moves through the life cycle from initial start up to ultimate closure and transfer of ownership. But each phase can be successfully managed if the key elements present at each stage are recognized and dealt with in a carefully designed and executed fashion, not under extreme pressure but rather as a fact of managerial life through calm and steady progress toward a clearly defined goal.
Mr. Walton teaches Financial Management, Operations Management, Corporation Finance, and Entrepreneurial Finance at Frostburg State University. He is also Assistant District Director for SCORE, Western Maryland, and the President of ERMACORP, a Hagerstown based Management Consulting Firm. He may be reached at 301-462-9850, or by email to Richard@ermacorp.com.