“Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.” - Kenneth E. Boulding
When you started your business, everything felt right. You had a solid business idea, if not a written plan, a competitive pricing model, and a good lead generation plan. And of course, you were passionate.
In the first three or four years, your hard work and investment paid off. In fact, you grew faster than you projected. But now, you can’t achieve that same success, no matter how hard you try.
If this sounds familiar, then you’re probably feeling somewhat frustrated and more than a little concerned about the future of your business. But the reality is that you’re experiencing a perfectly normal phenomenon: Your business has reached a plateau.
What is a business plateau?
All businesses hit bumps in the road at one point or another. Sometimes they’re caused by management’s limitations; other times they’re the result of the business cycle—the natural way businesses grow and evolve.
There are four stages in the business cycle: the expansion, the peak, the contraction and the trough. The strategies that work in one stage won’t work in another.
You can reach a plateau in any of those four stages, because as your business transitions from one stage to the next, following the same strategy won’t produce the same results. Consequently, your business growth will start to taper off and eventually level out. In other words, you’ll reach a plateau.
Plateaus are inherent to any company’s development, and a successful company will experience them multiple times over the years. The good news, however, is that with the right approach, you can overcome plateaus and continue to achieve sustainable business growth. To do this, you must first focus on driving internal growth by developing the skills your management team possesses.
The Peter Principle
Before we discuss how to drive internal growth, you need to understand the Peter Principle and how it applies to small businesses. The Peter Principle states that people rise to their level of incompetency in an organization. This happens because they’re promoted based on how well they’ve performed in their previous roles, not on how compatible their skills and experience are for their future role.
For example, a skilled bookkeeper becomes an accomplished staff accountant and, before long, advances to the position of controller, where he does really well. After a few years, he’s promoted to the position of CFO.
Unfortunately, his strategic thinking and communication skills aren’t well developed, his performance becomes subpar and he gets fired. He rose to his level of incompetency.
This same principle applies to small businesses, only they rise to their management team’s level of competency. Let’s say an entrepreneur starts a business and grows it to $1 million in revenue. But after a year or two, the business stalls. If the entrepreneur overcomes this initial plateau by hiring additional managers to run sales, he can grow his business to $3 million or $4 million. But then it gets stuck again.
If he hires a middle management team and delegates more, the company can expand to $8 million, maybe even $10 million—but ultimately, it will reach another plateau.
Consider the following real-life examples:
Frank and Tom (not their real names) are both good sized, managed service providers and owners in the same city. They offer the same service and have the same type of clients. However, Frank’s business is struggling. He has a high turnover and constant cash flow issues. He’s also stressed in his personal life and doesn’t make time for himself or his family.
His employees aren’t happy because he’s unhappy. He doesn’t have a vision for his business; nor does he have any clear objectives or a management plan. Furthermore, he doesn’t encourage learning or foster a positive company culture.
Tom’s IT business, on the other hand, is thriving. He has a happy personal life and makes time for his family. He keeps his finger on the pulse of his business and has clear goals, which he communicates to his employees.
He reviews his financial and management reports, works on improving his strategy, and reviews his management plan every six months. He values his employees, who are happy and engaged.
The first example illustrates how a company plateaus when management doesn’t take action to drive internal growth. Frank’s business can’t grow until he starts to grow, and fosters his employees’ development. He needs to determine and write down what his objectives are and take the thinking time to figure out what his company needs in order to achieve them.
In contrast, Tom consistently assesses where he is in relation to his goals and adjusts his strategy accordingly. By treating his employees as valued assets, he enlists their support in advancing the company towards its objectives. As a result, when Tom’s business hits a plateau, it doesn’t last long.
His team knows the long term vision and BHAG (Big Hairy Audacious Goal) and it takes less time to regroup and get everyone on board with changes to his strategy so that his business can move forward stronger than before.
How do you recognize a plateau?
It’s not enough to have a “gut feeling” that your business has reached a plateau. You need to get the facts and evaluate your business strategy. Use the following questions to examine the various areas of your business that could be contributing to the plateau.
Examine your business financials:
Review your employee engagement, performance and productivity:
- Has performance been improving?
- Are they engaged?
- Are they motivated?
Review client’s activity:
- Are they satisfied?
- Do they have concerns?
- Are they paying on time?
Based on your answers, you can begin to figure out why those areas aren’t developing and which skills you need to acquire for overcoming plateaus—by either top grading or expanding your management team—in order to drive internal growth.
Become a strategic CEO
Passion and good preparation aren’t enough for sustainable business growth. When your management skills plateau, your business will reach a plateau. The only way to move past this is to first, assess what your company needs in order to improve performance and second, put a human capital strategy in place to achieve this. In short:
You need to become a strategic CEO who focuses on leadership and knows how to adjust your leadership style to help your team improve and drive business growth.
Being obsessed with numbers, sales, and marketing efforts is crucial for the strategic CEO. Measuring and monitoring your numbers will help you determine what’s broken and where you need to allocate resources to fix it. To learn how to become a strategic CEO, download our ebook “The CEO’s Guide to Keeping Score.”
On the other hand, you may want to look at your employee turnover, culture and employee recognition by re-assessing your human capital strategy. Based on the ideology of both The Peter Principle and Maslow's Hierarchy of Needs, this is important to help you move past business plateaus. Download our ebook "The CEO's Guide to Increasing Profits", where we dive deeper into how people drive profits.