When Success Isn't Enough

Business is good, but it could be better. So get out of that rut and take it to the next level--here's how.

Rachel Ashwell started out as a wardrobe and prop stylist for photographers and TV commercials in her native England, where she spent a lot of time exploring flea markets as a child. By the late 1980s, however, she was looking for a change and decided to use her eye for decorating and furnishings to start her own home furnishings company, Shabby Chic. Launched with $70,000, the company's first location, a 1,300-square-foot store in Santa Monica, California, featured washable slipcover furniture and other d├ęcor--items she snagged using her mastery of flea market bargain hunting. The launch was an instant success for Ashwell, who admits that rent, cash flow and inventory were new concepts to her at the time. "In a funny way, it was my ignorance that made me as brave as I was," says the 48-year-old entrepreneur. "Had I known all the 'what ifs' that could have happened, I probably would have never done it."

Over the next decade, Ashwell added five retail locations, inked a licensing deal with Target, attracted a celebrity clientele, wrote five how-to books and hosted her own program on the Style Network. But a few years ago, she started to feel like the company was stuck in a holding pattern. "Business was fine," she says. "But it had definitely reached a plateau [at just over $10 million in sales]."

At some point, the rapid growth in your company will level off. Sales will be good, but not great enough to provide the sustained year-over-year growth needed to take your company to the next level. This scenario is fine for lifestyle entrepreneurs who want to keep their companies small, but not for entrepreneurs who aspire to run the next Microsoft, Nike or Starbucks. "There is a choice [of] whether you want to grow or not," says Larry Greiner, a professor of management and organization at the University of Southern California who has spent decades studying how companies develop. "If you get on the growth path, that's a whole different game."

Ashwell realized Shabby Chic's business model had to change if the company was going to grow. She weighed her options and signed on with private equity firm Goode Partners last summer to position Shabby Chic for a big retail expansion. The plan is to boost the company's sales by opening at least 45 new stores nationwide over the next few years. "I wanted to build a team that would really be able to support growth," she says. "There are so many things I haven't experienced with my company."

Picking Up the Pace
What's holding your company back? Ironically, the pressure for short-term growth can make you lose sight of your long-term growth potential, and no industry or segment is immune. Angelo Santinelli, an adjunct business professor at Babson College and a former partner at venture firm North Bridge Venture Partners, has watched companies stall out because they don't have enough capital to grow with the pace of the market, then cede market share to highly capitalized competitors. "They'll get to $50 million [in sales] and plateau," Santinelli says.

In some cases, a small company has the capital but underestimates just how long it can take to build a product and have the mass market embrace it. "Companies can stall out because they have new ideas but run out of early adopters," says Dave Lemont, founder of Lemont Consulting, a firm that advises young companies on growth strategies. "The company can get the first $8 million to $10 million because there are many people in the world willing to try a new thing. But to become mainstream, you've got to get the more conservative laggards in the market."

Brad Allen, founder and CTO of Siderean Software, is trying to grow his El Segundo, California, company from annual sales of $3 million to sales of $10 million over the next year and a half. Siderean started out in 2001 with its own sales staff, but the focus has shifted within the past year to building partnerships and indirect channels that will take the company to the next stage. The company has secured 12 partnerships in the past year, including a co-selling agreement with Oracle and a reseller agreement with software company Inxight Corp.

"Building a scalable, enterprise-focused software company in this day and age is something that needs to depend much more heavily on partners and indirect channels," says Allen, 48. "The real issue moving forward for us is putting people in place to effectively establish, manage and grease the skids for these indirect partners."

Greiner's research has found that successful companies go through five distinct stages of growth. The free-for-all, wear-all-hats first stage gives way to greater divisional structure, formal communication and hierarchy in the second stage. The third stage of growth is focused on delegation, where lower-level managers and employees have greater power to develop new products, chase new markets and help customers. The fourth stage--coordination--is geared toward creating product groups and formal planning and review procedures. Companies that evolve to the last stage--collaboration--are focused, among other things, on creating cross-functional teams and streamlining systems that have gotten too formal. The key is how companies handle the instability that lies between each push for growth. "The [company] starts to get really chaotic and unorganized," says Greiner. "This is often where they fail."

Fifty-five-employee Shabby Chic is feeling the turbulence as it pushes ahead with its multiyear growth plan. Ashwell's management team includes a new CEO, CFO, head of stores, planner and buyer--a big change for Ashwell, who prefers informality to formal analysis. The new team has opened three new stores this year and plans to open 10 more next year. "We are going to do this carefully," says Ashwell, adding that of the 45 new stores planned for the next few years, 15 will probably be free-standing stores, 15 lifestyle mall locations and 15 traditional mall locations. Once the company meets its U.S. goals, Ashwell would like to target the Asian, Australian and European markets.

Ashwell is trying to stay true to the company's original branding concept as she makes big decisions, like whether to move the company's Los Angeles-based manufacturing offshore and where new stores should be located. She has also had to make compromises with her team and come to terms with market realities. Ashwell prefers older storefronts, but a Shabby Chic location recently opened in a brand-new mall in Austin, Texas. "Believe me, I had to be educated and talked into that one," she says. "But it's where the traffic is going." The company is a little bit slower to open stores than anticipated, but the growth is already evident. "Even in this first year, [same store] sales [show growth of] 19 percent," she says. "They're pretty damn good."

Those companies that break through the ceiling of growth have to challenge the status quo and innovate continuously, says Rich Laxer, CEO of financial services firm GE Capital Solutions. They must also be good at finding waste and eliminating it--whether it's in terms of finances, production, time or materials. "You can't have steps that don't add value," says Laxer. "It's making sure you have as lean an organization as you possibly can, both in the people you have and in the steps they [take] to deliver the service."

Middle-Age Spread
Theresa Welbourne, founder of eePulse, an HR technology and research consulting firm, sees small firms struggling with what to grow first, second and third--whether it's head count, cash, customers or sales. The typical scenario is to focus on product, sales cycle and people (in that order), but the companies that win are the ones that spend more time hiring the right people. "[They're] really built on their core team and they're working on the people, but that's not what most people do," she says.

John Keagy is co-founder and CEO of 6-year-old ServePath, a San Francisco-based managed hosting company with 2,500 customers that is working to go from annual sales of $10 million to sales of $20 million. Its growth strategy is to target more sophisticated customers--namely accomplished Web 2.0 firms and software as a service companies--that have more complex requirements, but Keagy needs to build the 100-employee company's middle management layer to spur this growth. "Ten people can't fill out this whole company anymore," he says. "We need to teach the executives we've got now how to build executives that report to them."

Keagy is trying to keep the company's hiring costs in line with recurring revenue, which he expects to grow 60 percent a year. "I hope that our head count doesn't grow quite as fast," says Keagy, 40. "If our head count grows 40 percent and our revenue grows 60 percent, that's probably about right."

To grow, you'll have to balance your company's short- and long-term thinking, creating time and budgets that are focused on the future while also fighting today's fires. "You have to have both points of view," Greiner says. "You have to be short-term oriented to solve problems and get performance; you have to be long-term minded about where you're going."

For Siderean, balancing capital between short- and long-term growth is a struggle as the company alters its business model to expand into new markets. The company has taken on $12 million in venture funding since 2004, which only makes the push for aggressive growth more urgent. "It's easy to watch cash flow and to be able to manage expenses," Allen says, "but it's not necessarily easy to know when you need to increase your expenses to make sure you can capitalize on that investment with increased revenue downstream." Allen and his team constantly analyze market trends and talk about how to generate more repeat sales. At the same time, cost control is always an issue: To keep costs down, Siderean has shifted toward working with customers online. "It's about being very careful with spending," says Allen, "but also spending to be able to grow opportunities to address the market."

Ashwell has learned she's not the only one who wants something different: Sales of her three most recent bedding collections broke company records. "It showed me that I've got a loyal fan base, [but] they still need newness," she says. "That's been a great learning curve for me." And it's not too bad for the bottom line, either.

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Chris Penttila is a Washington, DC-based freelance journalist who covers workplace issues on her blog, Workplacediva.blogspot.com.

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This article was originally published in the November 2007 print edition of Entrepreneur with the headline: When Success Isn't Enough.

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