Each year there are over 1,000,000 small businesses started in North America. 800,000 of these fail in the first five years. Of those 200,000 that make it past five years, 160,000 fail in the next five years says, Michael Gerber, the author of the E-Myth, one of my favorite business books, and one of the top 5 best selling business books of all time.
Recently, I participated in a conference call with Michael Gerber who said, “I know more about small business than any human on the planet”. It would be hard to disagree with a man who has consulted with over 10,000 small businesses since 1977.
In this conference call, Gerber said the biggest problem small business owners have is that they are too busy “doing it, doing it, doing it” to really develop the systems that are necessary to run their businesses without them. He went on to say that owners of businesses who don’t have systems to run their businesses without them don’t really own a business. They own a job. He further stated that in this scenario the owner is not really building an asset to sell because no investor wants to buy a job.
He mentioned that McDonald’s is the classic and perhaps best example of a business that is run entirely on systems. These systems allow them to run a worldwide business that does hundreds of billions of dollars per year even though they have a 400% annual turnover rate and employee primarily teenage labor. Their secret? SYSTEMS RUN THE BUSINESS NOT PEOPLE. This reliance to systems is hugely successful and requires no day to day involvement from the franchise owner.
When questioned why small businesses fail he mentioned several reasons:
1. In most cases the owner got their start as a really good “doer of the thing” they are now in business to do.
He mentioned that most small business owners lack the full range of business skills necessary to effectively manage and run a high level organization. As owners, they still think like technicians or sales people, and as a result have not elevated their business management skills beyond that of a “doer”.
2. Arrogance and Ignorance.
Because the owners are technically good at what they do, they think they know how to run a business. However, most of them have had little if any formal business education other than running their own business, attending industry trade shows, and modeling whatever is considered accepted “industry business practices”. They suffer from the myopic “herd” mentality and lack innovation or imagination, which is the currency of 21st century business leadership.
3. They don’t realize that they are the primary obstacle to their business growth.
Instead of being open minded, they think they have the answers. The reality is that they don’t know what they don’t know.
4. They mistaken think that whatever business strategies and practices that worked in the past will work in the future.
As a result, they make faulty business decisions about the future, fail to implement effective systems, and their business falls further and further behind the change curve until one day they wake up and realize that the world has changed and passed them by. By then it is usually too late.
Because of changing market conditions, increased competition and technology, the lack of systematic processes and methodologies that allowed a business to succeed previously will not be good enough to sustain it at its current level long term, much less take it to the next level.
As surely as the sun will rise tomorrow, change will happen in business. The only question is will a business owner proactively choose to embrace change or will they be forced to change by external circumstances?
To quote Jack Welch, the former CEO of General Electric, “when the change outside your business is greater than the change inside your business the end is in site”.
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