Controlling Growth Is Hard But Necessary
The new, cranberry-colored Jaguar parked outside Bob Sidell’s massive Chatsworth office attests to his company’s success as a mail-order cosmetics marketer.
In fact, last year 450,000 customers purchased $12 million worth of California Cosmetics’ SilkSkin skin care products--a 50% increase over sales the year before.
But instead of introducing the four new products he planned to release this year, Sidell and his partner, Paula Levey, recently decided to introduce one product and deliberately limit the 3-year-old firm’s growth.
Why?
Because Sidell, a former Hollywood makeup artist, said he has watched too many small cosmetic companies fail when their owners became greedy.
“I saw companies disappear because they got a taste of the dollars and thought they just needed more products to sell,” said Sidell.
Unchecked growth can destroy a company faster than sluggish sales, says Eric G. Flamholtz, a management consultant and professor at UCLA. “Fifty percent of entrepreneurs fail because they have no product or market for their products,” said Flamholtz. “Twenty-five percent fail because they choked on their own growth.”
He points to the quick demise of Osbourne Computers, which sold $100 million worth of portable computers in its second year and declared bankruptcy in its third year. Flamholtz considers sales growth beyond 50% to be “hyper-growth.”
“Hyper-growth happens when entrepreneurs get hooked on their own adrenaline,” he said.
Too many small business owners lose control of their companies by focusing on sales growth rather than profits, said Flamholtz. “A company should ask if it is stronger at the end of the year than it was at the beginning.”
To help companies diagnose their growth problems, Flamholtz designed a 10-point checklist. He suggests spending a few minutes thinking about how your company works and then respond to each statement yes or no. The score depends on the number of yes responses.
“If you have one to three yeses, you are OK,” said Flamholtz. “Three to five means there are some problems. More than five is real serious. And, if you said yes to all 10, run--don’t walk--and get some help.”
He suggests that more companies follow Sidell and Levey’s example by restricting and managing growth before it causes problems. But, he said, most growing businesses wait until disaster strikes to take action.
Sidell said he decided to apply the brakes for several reasons. Because the company has never borrowed a penny, it has relied on cash flow to fuel its growth. If the growth continued at the 50% rate, it would have been impossible to keep up without borrowing money.
He said the decision to limit new products was also based on the fact that it costs about $150,000 to develop a new product, not counting advertising and marketing costs. Adding a new product, if it succeeds in the highly competitive cosmetic industry, means paying for expensive packaging and building inventory.
The partners are also reluctant to expand the 51-person staff if it means pulling inexperienced people “off the street,” Sidell said.
Instead of spending money to attract new buyers, they are devising ways to encourage existing customers to buy more products. Now, the average order is $45.40, Sidell said.
“The same money spent on a full-page newspaper ad can be used to produce a quarterly newsletter for our 450,000 customers,” said Sidell, who tracks company operations by computer on a daily basis.
California Cosmetics’ emphasis on customer service is evident in a computer program Sidell had developed to send customers a card, a set of makeup brushes and gift certificate on their birthdays.
“I think the ultimate would be to stop advertising and still sustain the business,” said Sidell, who began developing products while he was doing the makeup for the young actors on the television show “The Waltons.”
Between the Waltons and California Cosmetics, Sidell developed and sold another line of products through beauty supply companies. Through the years, he has worked with cosmetic chemists to develop a line of skin-care and tanning products for men and women. He relies on other companies to manufacture his products using his formulas.
In this case, cutting the growth rate does not mean reducing annual sales. Even though Sidell is limiting new products and cutting advertising costs, he projects that sales may reach $16 million this year.
Looking Ahead
UCLA’s John E. Anderson Graduate School of Management is sponsoring a daylong conference on Feb. 25 titled, “The Entrepreneurial Challenge: Strategies and Opportunities in the 1990s.”
The conference will feature panel discussions and sessions on how to start a business, how to compete in manufacturing and how to manage organizations in transition. The cost is $115, which includes registration, lunch and materials. For information call Joan Svetik at UCLA: (213) 825-2983.
Group Will Honor 2
Bonnie Barnett, president of Collection Consultants of California, has been named business woman of the year by the Los Angeles chapter of the National Assn. of Women Business Owners. Barnett’s Glendale collection agency grosses more than $1 million a year and specializes in collecting delinquent medical accounts.
The chapter also selected Sylvia Fogelman, vice president of Shur Corp., a real estate development firm, as its advocate of the year. Both women will be honored at a fund-raising dinner scheduled for March 14 at the Beverly Wilshire hotel. The price is $60 for NAWBO members and $100 for non-members. For reservations call: (213) 623-9977.
Advice From Wooden
Former UCLA basketball coach John Wooden is scheduled to speak at the Southern California Business Exposition scheduled for Feb. 27 from 9 a.m. to 5 p.m. at the Buena Park Hotel, 7675 Crescent Ave., in Buena Park.
The sessions will provide advice on how to start a home-based business, how to buy a computer, how to market your business and how to finance a new company. Advanced registration is $69. The fee includes panel discussions, displays, exhibits and lunch. For information contact the sponsoring organization, the Learning Activity: (714) 535-8001.
Symptoms of Growing Pains
1. People feel that there are not enough hours in the day.
2. People are spending too much time putting out fires.
3. Many people are not aware of what others are doing.
4. There is a lack of understanding about where the firm is heading.
5. There are not enough good managers.
6. Everyone feels “I have to do it myself if I want to get it done correctly.”
7. Most of the people feel meetings are a waste of time.
8. When plans are made, there is very little follow-up and things just don’t get done.
9. Some people have begun to feel insecure about their places in the firm.
10. The firm has continued to grow in sales, but not in profits.
--Eric G. Flamholtz, management consultant and professor at UCLA
