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A formula for expanding successfully

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Gabrielle DeSantis-Cummings and Monica Hillman are on the hunt for about $250,000 to quickly expand their small company, Gigi Hill, which sells totes through home sales parties. But they're worried about making a fatal misstep.

Money isn't the only thing the tiny business will need before it can become the next Tupperware or Pampered Chef, two titans of the direct sales world, says Eric G. Flamholtz, president and co-founder of Management Systems Consulting Corp. in Los Angeles. Gigi Hill will have to learn and apply the principles of professional management across six areas before it can reach each new stage of growth.

"What works now when they are small is not going to work when they are much larger," says Flamholtz, who also is a professor emeritus at the Anderson School of Management at UCLA.

He met with the entrepreneurs in his Wilshire Boulevard office to determine how well they were prepared to handle growth, assessing their organizational and management strengths.

The management survey showed that they had a reasonable set of skills but weren't prepared to be senior leaders of a significantly larger enterprise, Flamholtz says. That can be solved in part by laying the groundwork now to hire the heavy hitters they will need to complement their strengths in the future.

His organizational assessment looked at the markets, products and infrastructure needed to expand a company. The infrastructure includes a company's resource management, operational and management systems and corporate culture.

Like most start-ups, the company is strongest in the markets, products and culture categories, he says. Here's a quick look at his take on how they fared in the six areas.

Markets and products

The owners have a good handle on their target market, which they define as women 18 to 60, Flamholtz says. And they've clearly defined their bags as functional lifestyle products that are fashionable but user-friendly.

He says they could do better by trying to be like companies such as Jamba Inc., parent of Jamba Juice, that gather details in order to paint sophisticated definitions of their customers -- "for example, an 18- to 25-year-old female with a disposable income of less than $50,000 who views the product as a disposable luxury," Flamholtz says.

Resources

Flamholtz breaks down the growth curve in several ways. At this point, Gigi Hill is in the first stage, where a company has sales of less than $1 million and is proving its concept. The next stage is a time of scaling up operations, and the last is achieving a professionally managed business, he says. That takes money.

The owners know they can't accomplish their goals with their cash flow alone and must turn to outsiders for funding. That quest requires a business plan and a strategic plan, says Flamholtz, who outlines strategic planning in his book "Growing Pains: Transitioning From an Entrepreneurship to a Professionally Managed Firm," written with Yvonne Randle.

Many entrepreneurs are confused over the difference between the two plans, he says.

It helps to think of a strategic plan as a detailed set of construction documents for your business, he says.

"We are building the architecture of your business," Flamholtz says.

"Most entrepreneurs are good at thinking about the product and the market, but they are not good at the other part of the business that will make them successful, which is the infrastructure," he says.

By comparison, using the construction metaphor, a business plan for funding sources such as banks or angel investors would emphasize certain information from the strategic plan such as what kind of building you want to build, to whom you will rent and what the business opportunity is, he says.

The strategic plan should be attached to a business plan submitted to potential lenders or investors.

Operational and management systems

To successfully navigate the second stage of growth -- the scale-up period between $1 million and $10 million in annual sales -- the company will have to build a core group of senior management, Flamholtz says.

"You need a team of three people that we call the leadership molecule, that functions as a real team" to scale up rapidly, he says.

The team performs four basic functions: setting the vision, creating the culture and setting up the systems and the operations.

At Gigi Hill, vision and culture are largely the purview of DeSantis-Cummings, he says. Hillman focuses on systems. They both are involved in operations.

"One of the secrets to Starbucks' success is not just coffee and not just the coffee-shop experience, but they had a core group of senior management" that handled key areas, Flamholtz says. "In all the successful companies, we've found this."

At Gigi Hill, "they've got the dynamic duo now and it's fine at $100,000, but it's going to be a stretch at $1 million and definitely at $5 million and $10 million, and at that level they'll be working so hard and running so fast that things will slip through the cracks," he says.

Gigi Hill probably can't afford a third person until it reaches at least $1 million in sales, but between there and $2 million they should start looking, the consultant says.

They can work in two stages by hiring a junior-level person to get them to $5 million or $10 million in sales. After that they'll need a heavyweight who can leverage their strengths in products, markets and culture, he says.

Culture

Gigi Hill has a clear idea of what kind of company culture it wants to build and why, Flamholtz says. The owners have honed their marketing message to attract their target independent salespeople, most of whom are mothers. Gigi Hill's founders say the first two years of operation have been like an ongoing focus group that has showed them what these women value: fun, friendship, family and financial freedom.

They hope their research will pay off by helping them to reach their goal to recruit enough salespeople to reach $25 million in sales in five years.

It's a big jump, but the consultant thinks they have a good chance to be successful.

"I gave them some tools and tips on how to avoid pitfalls," Flamholtz says. "I think they have a very high probability of making it happen."

cyndia.zwahlen@latimes.com

Copyright © 2014, Los Angeles Times
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