How close are you to the point of strategic inflection?

As part of their work into strategic management two academic strategists – Johnson and Scholes – produced a model I first came across when doing my MBA that has really resonated with me and which, I think, is very pertinent to the progress of small businesses.

I’ve used the model – in a slightly modified form – on numerous occasions to explain to small business owners how/why they have got to where they are and why they might need to take action to change things in the future.

The model plots time against business progress/growth but the second axis can, I think, be substituted by money, size of workforce or a number of other criteria and still show a valid demonstration of what is happening/might happen to a business.

Here’s how it works…

When a business starts up it generally has a bit of a slow start and then things start to take off.  The business will then spend a period of time growing in all sorts of ways (turnover, profit, staff, market share etc).  This is the first ‘good time’ and, in my experience, is usually fuelled to a large extent by the business owner’s enthusiasm, unbounded optimism and the lump of cash that was used to start the company.

However, after a while, things start to slow down and the company hits a sort of glass ceiling.  Progress from month to month is variable (a bit like the British economy today – up a little one month, down a bit the next) and there is no clear pattern of progress; the business is effectively achieving the same as it did last week/month/year and has become stagnant.

By this point the business owner is also a little jaded, having spent the last few months/years working 18 hour days to make things happen.  Money is a little tight because spending has not slowed down at the same speed as profit reductions and the company has come under pressure from newer businesses who are still on the up.

Those businesses with proper management checks and routines in place will notice this happening more readily than those who just wait for their accountant to tell them how they did at the end of the year.  However, the likelihood is that both will feel somewhat stumped at why things have changed.

This period of stagnation continues until there is a change in conditions and the company reaches what is sometimes called a point of strategic inflection.  This is the point where, due either to internal or external change, massive disruption takes place and the company either dies or moves to the next level.

If the company moves up to the next level then the whole process starts again and is repeated.  If the company dies, well that’s it.

I have my own feelings on the model at this point, backed up by my own experience; not scientifically proven but I’ve seen on a number of occasions.  They are that:

  • The longer a business remains in the period of stagnation then the more likely it is that it will die (or suffer in a majorly negative fashion) after reaching the point of strategic inflection;
  • If it is the management which bites the bullet and forces the seismic change then the company is more likely to improve and jump to the next level.  If it is external events that force the change then the likelihood that the company will die is significantly increased.

It doesn’t take a rocket scientist to come to those conclusions but I have seen the theory backed up by practice both through interviewing smaller companies myself and watching the world’s business markets.  For example, Apple was successful in the 1980s then went into a long period of stagnation.  The introduction of the iPhone and iPad then launched it upwards from its point of strategic inflection but I sense that it has now levelled off and is approaching a period of stagnation following the loss of Steve Jobs.  As a huge Apple fan I hope they can make the next leap successfully but I have my doubts.  If you look at most major companies you will see similar patterns.

Big businesses know and understand this model of stagnation and re-birth but I don’t think small businesses do (at least not widely and to the same extent).  However, get a group of small business owners together in a room and explain it and you can see the realisation spreading across their faces.  Some then get very agitated and emotive – wanting to grasp the nettle and make change; others just start to look more and more depressed as they realise what their (most likely) future holds.

So what?

Well, I suppose the reason for me writing this is to highlight the concept to you – the small business owner – and make you more aware.  It’s also to prompt you into asking yourself where you might be on the journey and what action you might need to take to ensure you head up rather than down when that point of strategic inflection is reached.

The one big problem with this model – from the business owner’s perspective – is that you never really know how close you are to that point of strategic inflection.  If you have a good business ‘dashboard’ and have a clear understanding of your company’s position you might be able to forecast ahead to some extent (‘If interest rates rise by 1% then, with present profit levels, we won’t be able to pay off our business loan’, or, ‘if we don’t close that major contract by June then our cashflow will be insufficient to pay July’s wages’).  In my experience there aren’t that many small businesses with that degree of clarity over their future.

How do you avoid all this happening to you?  Well, as a business coach I suppose you’d naturally expect me to say ‘hire a coach’ but actually the first step is to be honest with yourself and take some time out to think about where you are.  Is the business still on the up?  Do you have reserve funds to help you through a strategic shock?  Do you have the right management tools in place to see where that point of inflection might be?  On a scale on 1 to 10 (1 being no chance and 10 being most likely) how confident are you that the business will still be running successfully in a year’s time?  Then, once you’ve done that, might be the time to give a coach a call!

Alternatively, forget about all you’ve just read and free it from your mind.  That way you will be blissfully unaware of how close to the edge you are and so won’t have to worry about it!

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