How To Build A Successful Business Regardless Of The Economy

The original title of this post is "How Small Businesses Should Cope with the Present Economy". It was a special request by one of my most esteemed blog readers. The idea, I thought, was to write about how small businesses can survive in this present economic downturn.

I tried to write about it but I kept deviating from the theme. So I decided to change the title to one that aligns with my deviation. 

I have some fundamental beliefs I got from being out there as a business person. 

Number one is that there are no small businesses. Being small is just a phase. Some stay in the phase longer than others. Heck, some appear not to have passed through that phase. 100% of the time, businesses that seem never to go beyond small are purely the result of the owner/management's strategic action (or lack of it). There is no business that is in itself of the small type. Think about the restaurant business, it is a classic example of a business you would consider small -- geo-locked, scaling restrictions, often owner managed, relatively small turnover. Then, think again. KFC, Domino's Pizza, McDonald's are no small businesses.

A business is only small when the owner/manager decides to stop growing it. There are many ways to grow a business, including the ones that don't scale easily. And no one says a business must always have one core revenue generating activity. Businesses can integrate horizontally or vertically.

Number two is that a business is meant to provide value in a way that grows the owner's equity. Provide a service people need and charge enough to stay in business + grow. Do this at all times -- whether economy is booming or economy is dooming. If the economy is not making it possible, then change your business strategy. Even if temporary, to weather the bad times.

I don't think the economy kills a small business more than it kills a big business. There are just poorly run businesses and well run businesses. Businesses that thrive are those that adapt well to changes -- both within the industry they operate and within the macro-economy they exist.

The big businesses that die are the dinosaurs. The ones whose organizational culture is built around, "that is the way things have been done here". The small businesses that die are the ones run by proxy. You see someone with a full-time job trying to run a business on the side. Maybe he started to take advantage of an unusual opportunity. I can bet you, when there is a sudden industry change or economic stress, his company will struggle the most. Imagine, a manager who delegates all his tasks and decision making to subordinates. Those subordinates will ruin him -- either by making too many mistakes or by being too good they compete with him and make him irrelevant. And that is exactly what people who run their business on the side do. But they begin to acknowledge that risk and decide to keep the business small, way below its potential. But still they get thoroughly battered by Porter's Five Forces.

image: linkedin.com

To build a successful business, whether you intend to spend a long time in the small phase or not, you have to be very agile. You need a management that sleeps/drinks the business. That thinks 24/7 about the business success. You need an owner-manager. Tough times come for all businesses and not just a bad macro-economy. Every industry faces its own internal changes and disruptions. You can't succeed if you run your business by proxy. You can't succeed if you act like a dinosaur. You can't succeed if you lose focus on creating value. You can't succeed if you don't have your hand on the changing pulse of your customers.

It is okay to have some bad business days, months or even years. In fact, it is better to have your tough (loss making) days upfront so you can swim in profits later. It is called management strategy. And that is how the once small companies like Amazon, PayPal, Uber and Facebook all achieved big-ness. They took their losses upfront. In fact, Uber is still taking its losses. But they are sunk costs, innovator's costs and killing the competition costs; not losses due to poor management.

Regardless of economy, people will still spend on value. Volume may go down. Margins may get squeezed. But well run companies, whether small or big, are like chameleons. They flow with the change, not fight/resist it. And they will not only survive but come out the other end better, as they grab market share from others who didn't survive.