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Small Business - A Special Advertising Supplement sponsored by Scotiabank - Monday, October 22, 2001

Management model critical to growth

Monday, October 22, 2001

Small business, by its very nature, is close to its customers. But depending on past goodwill and relationships may not be enough as Canada and the world move into a combination of recession and war.

At the Ivey Institute for Entrepreneurship at the University of Western Ontario in London, executive director Ken Hardy says that small firms are almost always niche companies.

"They are almost always filling a void in the market that is not being served by larger firms. So, part of the success of a small to medium-sized firm is picking products and markets where they can have an advantage. Those are usually relatively narrow or geographically bound."

Hardy offers the example of a firm he knows well as a member of its board of directors -- Sternson Ltd., a Brantford, Ont.-based company that makes a chemical that settles particles in drinking water. The product, sold in the northeastern United States to cities such as Pittsburgh that get their drinking water from rivers, generates $15-million a year in sales. With 25 employees, Sternson is a major seller of the product, polyaluminium chloride, "in a rather small market," he says.

"This firm could acquire competitors as the industry begins to consolidate. It could grow in order to try to create new markets. The thing is, there is not much you can do with the product other than what it does. If the firm is going to grow, it either has to buy other businesses or develop new accounts or do product-line extensions into related areas."

Sternson should not grow at the cost of weighing down the balance sheet with debt, Hardy says. What the firm can do is develop adjacent markets in the forest-products industry.

"Pulp and paper plants turn out a lot of liquefied waste that needs a settling agent of some sort," he explains. "So, those plants are potential accounts. This is the least risky way to increase sales, even though the pulp and paper industry is notorious for taking a very long time -- often years -- to test new processes. Finally, the firm could extend the product line by varying concentrations to settle other things for other industries."

Sternson's problem is a microcosm of the planning issues that larger firms face. Almost all small to medium-sized firms have to grow, or else they may be overcome by larger companies. If you don't get bigger, then economies of operation and the ability to raise money for expansion can be lost, Hardy adds. "You have to grow when there's a window of opportunity. Otherwise, the firm can become disadvantaged.

"The dilemma is that growth usually means adding products or markets. Then opportunities appear. But diversification can lead to a lack of focus. It's a devil's bargain."

He adds, "Small firms haven't got the depth of management and financial resources to make up for mistakes when they extend themselves. So, they really have to stick to their knitting. Smart small firms inch their way forward."

The key to conservative expansion is having a good business plan that matches a firm's capabilities with market opportunities. There must be financial projections, marketing studies and a team to do what has to be done, Hardy says. Each product has its own marketing characteristics, and those qualities are likely to be more important than abstract business-model issues.

For grocery products, marketing issues include getting shelf space or branding. For other products, such as chemicals, service and reliability of deliveries are key. For computer components, it's technology, the speed and reliability of delivery, and low defect rates, he says.

Behind the spreadsheets and the marketing concepts, the business model is more important than ever, Hardy says. "Before a startup or even a firm with $10-million in revenue can get venture-capital backing, it must have a solid business plan that shows a flow of inputs and ideas to the bottom line, and cash. And there has to be a growth scenario."

He adds: "The top-line growth story has been told and nobody wants to hear it any more. It doesn't fly on its own. It has to incorporate profitability in immediate view and sustainability.

"It's true for venture lenders and mezzanine lenders. Everybody is more cautious."

He also says that "the new model and the new metrics of small-business management and expansion have gone back to the way business was done before there was plentiful venture money and dot-coms. Along with that goes an understanding that the firm will use conservative accounting methods.

"We are in a world in which certainty has become precious. A good business plan today has to have focus, a value proposition that shows how the firm generates an economic return, and an experienced team to carry it forward."

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