What are the key factors in managing small businesses?

Every company has only two possible fates – either to fail or to survive (with greater or lesser success). And while many would say that the path from establishment to stable existence is the same for large and small businesses, these companies differ significantly, which affects their development and management style. That is why we recently wrote about the five phases of small business development in which we described the main characteristics and key moments of each phase.

However, aside from the phases of development, there are several factors that determine the ultimate success or failure of small businesses, and their importance changes as the business grows and develops.

Thus, Harvard Business Review, in its research on small business development, identified eight key factors in business management, with the first four factors relating to the company, while the others relate to the owner.

Eight factors

The factors from the first category, i.e., those relating to the company, are: financial resources (including cash and borrowing power), human resources (the number, depth, and quality of people), system resources (the degree of sophistication of information systems, planning, and management), and business resources (customer relationships, market share, supplier relationships, production and distribution processes, technology, and reputation).

On the other hand, the factors relating to the owner are: the owner’s goals for themselves and for the company; their operational capabilities in performing important tasks such as marketing, production, and distribution management; managerial ability, the owner’s willingness to delegate responsibility and manage the activities of others; and strategic capabilities for the owner to ‘see’ beyond the present and align the strengths and weaknesses of the company accordingly.

As the company transitions from one phase to another (from the aforementioned five: existence, survival, success, growth, maturity), the importance of the factors changes.

Everything depends on the phase of business

The challenges that managers face are very variable. In the early stages of a company’s operation, the owner’s ability to perform the job is crucial for the business. That is why this factor is of utmost importance at the beginning, while the owner’s ability to delegate responsibility is at the bottom of the scale, as there are few or no employees.

On the other hand, as the company grows, other people enter the business processes and, at some point, begin to outgrow the owner’s skills. Thus, the importance of the owner’s operational capability begins to diminish, while the importance of managerial ability and delegation increases. The inability of many business owners to entrust work to others and start delegating tasks is the cause of the failure of many companies that have reached the stage of success. An owner contemplating a growth strategy must understand the change in personal activities that such a decision entails and examine managerial needs. Similarly, an entrepreneur considering starting a business should recognize the need to perform all tasks.

Regarding the factors relating to the company, with the change in business, the role of financial resources also changes. Namely, the money that the company possesses is an extremely important resource at the beginning, then it can be easily managed in the success phase, and it becomes a primary concern again if the organization begins to grow. As growth slows down and the company enters the maturity phase, money again becomes a manageable factor. Companies must be able to recognize the financial needs and risks that new phases of business bring.

Human resources and the company’s systems become increasingly important as the company progresses from initial growth to rapid growth. These resources must be acquired somewhat before the growth phase to be ‘in place’ when needed. Aligning business and personal goals is crucial in the existence phase as the owner must recognize the significant financial, time, and energy demands of a new business, while in the survival phase, the most important thing, despite all other factors, is to survive.

Pipes again become important in the success phase as the owner must decide whether to continue investing in business development or enjoy the success?

Finally, business resources are what success consists of. They include building market share, customer relationships, reliable suppliers, a technological base… and each of them is important in the early stages as losses in this sense are easier to recover later.

In general, the changing role of factors illustrates the need for owner flexibility. A significant preoccupation with cash is very important in some phases and less important in others, while work versus delegation is important in other phases.

Application of the model

As noted by Harvard Business Review, this scheme can be used to assess all kinds of situations in small businesses, even those that may seem exceptions at first glance. For example, they cite a franchise. Namely, such businesses begin the existence phase with a number of differences compared to most other businesses. Often, the advantages include: a marketing plan developed from extensive research; they have a sophisticated information and control system; their operational procedures are standardized and developed; and they have support in the form of brand identification when starting the business.

If the franchisor has conducted a good market analysis and has a solid, differentiated product, the new venture can quickly pass through the phases of existence and survival and move into the early phase of success. However, as one way for franchise growth is acquiring more units, managing multiple units requires a different skill set than managing one, so here, for example, a lack of survival experience can become detrimental.

Thus, the imbalance of factors can create serious problems for the entrepreneur. Indeed, one of the main challenges in a small company is the fact that both the problems faced by managers/owners and the skills needed to solve them change as the company grows. Therefore, owners must anticipate factors and manage them when they become important for the company.