The Challenges of Small and Medium Sized Businesses
Advice for students looking to lead in this area, from veteran CEOs
Former CEOs Jim Sharpe and Lauri Union reflect on the unique challenges faced by leaders of small and medium sized businesses. Jim is a Senior Lecturer at HBS and the former CEO and owner of Extrusion Technology. Lauri is an HBS Entrepreneur in Residence and the former CEO and owner of Union Corrugating Company. They will co-teach a new EC course on this subject in 2013.
Is running a small to medium sized (SME) business a good career opportunity for an HBS student? Why?
Lauri: Like any career, running a SME will be a better fit for some individuals than for others. Running a SME will appeal to those who want the opportunity to have a transformational influence on a company via their direct actions. In the case of a SME, the manager has the opportunity to see the direct impact of his/her efforts on the business and in some cases the lives of stakeholders like employees. Running a SME is entrepreneurship when the manager takes an existing business to a new level of success. In some cases, running a SME may be less prestigious than other opportunities and may provide less opportunity for building a network of peers and mentors. But, the rewards especially in terms of personal satisfaction can be extremely high.
Jim: Depending on the circumstances, running a SME can provide a great opportunity to work for yourself. In that case, the freedom to make personal lifestyle choices and decisions about the direction and impact of the business are the reward. Having ultimate responsibility for the business, financial and otherwise, can be the flip side of this.
What are the paths to becoming CEO of an SME?
Jim: There are a variety paths to a General Manager role, depending on your personal situation and the stage of your career. Stepping into a leadership role in family business is an option, if you are lucky enough to pick the right parents! However, most advisors agree that obtaining some experience outside of the family business for 2-5 years is optimal if your entry can be deferred.
You can acquire a business through a 1-2 year search process, either funded by an investor pool or self funded through savings. A search fund may be a more typical early career option and a self-funded search may be typical mid-career when you have had time to create a pool of savings to invest. Targeted sellers are generally an experienced, older owner, with no succession plans in place looking to maintain their legacy and bring youth into their business and willing to take a risk on selling to a less experienced manager.
Lauri: Focusing in on a SME through a directed job search may also yield a CFO or COO position that can lead to CEO and perhaps an equity position and ultimate ownership via an “earn in”. Another way to become CEO of an SME is by founding a successful start-up. Finally, many traditional corporate positions may lead to CEO/General Management positions in their SME business units.
How is running a SME different than running a large company?
Lauri: In an SME, often the best strategy is superb execution and the strategic advantage of the firm is the leadership and business skills of that firm’s manager relative to the management of competing firms. To put it succinctly, the strategic advantage of the firm may be you! Smaller size leads to the opportunity to change direction and/or shape company culture more rapidly. The manager of an SME should expect to both be involved in the details of the business and to be able to see the big picture.
Jim: Since there are typically fewer resources, both financial and otherwise, than in a larger company, investment decisions must be made carefully with a high focus on cash flow. Developing networks of peers and mentors may be something that you have to build outside of the business, using your HBS and other connections.
What personal leadership characteristics are important for success in SME?
Jim: One of the most common characteristics of a successful SME general manager is attention to detail and willingness to become fully engaged in many parts of their business. In my own case, there were just not enough people in the business to delegate to and I was involved at 40,000 feet and 6 feet!
Being open to learning and at the same time teaching employees, vendors and customers means that the status quo is never static, whether it is a new quality standard, computer system implementation or significant process change. Taking action without sufficient information requires a willingness to admit mistakes quickly and make corrections on they fly. This “bias for action” got me in trouble, regularly when employees would ask “can’t we just have a month with no changes?”, to which I always replied, no!
In many circumstances, the position is lonely and requires effort to reach out to find others in similar roles.
Lauri: Another personal characteristic that I found effective was leading by example. In a smaller firm, employees
can see how hard you work, how you treat other people, to what degree you are willing to step in and help, etc. Because I did these things, I was able to be firm in my expectation that others would also.
What other management tips can you offer students from your experiences?
Lauri: Select people not only based on skills but also based on fit with the culture of the company. In a small business, each person’s actions are visible and can have a significant impact. Selecting employees that want to work for the company versus just having a job will increase the likelihood that they will be loyal and that your investment in them will yield long-term benefits. On another note, don’t feel that you have to have all the answers. Use your skills to gather and synthesize information from talking to everyone – employees, customers, vendors and by gathering industry data. Your employees and customers may already have all of the right ideas, but just need someone to synthesize them and develop an action plan.
Jim: Find ways to be in front of customers regularly. You are the best salesperson the company has. Manage a few accounts yourself, travel with your sales force, take complaint and service calls. Be involved in pricing and, take measured risks with increases, pushing for ways to extract higher margins early in the customer life cycle and also at their end.
Finally, never forget that you are in a fishbowl, everyone watches what you do and more importantly what you don’t do. Be vigilant and aware of this by setting examples and being predictable, leading company themes like quality, delivery and continuous improvements. Be humble and have fun!