- First things first, what is the law of diminishing returns
- The four phases of starting a business
- Phase 1 is Startup.
- The second phase, growth, is about refining, building on what works, and creating something replicable.
- The next phase is management,
- Which is why the last step is renewal.
- Where are you in building your business?
Growing a business is like a journey, or a story, there is a beginning, a middle, and an end. And once you’ve reached the end you get to start all over again.
There are four phases to grow a business: start, grow, manage, and renewal. Each requires its own way of thinking and each way of thinking eventually creates diminishing returns – each has its strength and each has its weakness. But the greatest risk is in not managing the transition from phase to phase. People get stuck. And when they get stuck the business takes over, they work more, get less and, well, it isn’t fun.
The reason you can’t just keep doing the same thing over and over and expect different results is not just insanity, it is also diminishing returns. Say you start a business and you are good at delivering your product. You are solving a problem for someone, great! you have a business.
You can keep grinding away delivering products and solving problems but at some point, you might want a day off. You might catch a cold. Family issues come up. But if you are the only one running your business the only way you can operate or grow is by doing more work. Diminishing returns will not allow you to get more done for less work unless you operate differently.
So you must shift your way of thinking from start to grow. But even growth has diminishing returns so you will have to scale and adjust in the third phase of managing your business. And, finally, once you are so large that you have to reinvent, adjust and come up with new products you renew the business.
In this post I start by defining diminishing returns, then go through each of the four phases: start, grow, manage, renew.
First things first, what is the law of diminishing returns
The phases matter because, as a business grows, the challenges change – so you have to meet these challenges with the right solutions. The best way to think about this is the law of diminishing returns, as you keep doing something the benefits per amount of effort decline. SO you put in the same effort but get less and less out of it.
If you approach growth with a startup mentality, it will wear you out, so you have to shift to a growth mentality. Likewise, a growth mindset only gets you so far, so then you move to manage.
This also works the other way around. You can’t go straight to manage.
I tried that with Engage Marketing, but since I hadn’t gone through the steps to start and grow the business, it never worked. I was approaching the startup phase with a manage mental model. That doesn’t work.
So, phases. I describe each of the four below.
The four phases of starting a business
Phase 1 is Startup.
The startup phase is where you begin to put the pieces together and define what you are creating. You identify and exploit an opportunity in the market.
This phase involves a lot of design and the mindset shift is away from being an employee and toward owning a business and being self-reliant. The principal activities are:
- Define your transformation and commit.
- Initial legal framework (yep, you have to do it).
- Identify your vision, mission, and value – cohesion.
- Begin clarifying who your customer is. I say begin because you may need to refine it later, so don’t get hung up on making this perfect.
- Identify the problem you solve for them.
- Create your signature program.
- Implement infrastructure, website, email, file storage/sharing, project management.
- Decide how you will begin to attract customers.
- Start your digital marketing strategy.
Starting is less about ensuring that everything is perfect and about creating something that works and starting the journey. You can’t know whether anybody will want to buy what you have to offer until you begin to make the offer and begin to get feedback.
There is an element here of conquering your way of thinking and making the first transition from employed to self-employed.
In my experience, there are two problems that the startup phase presents. Problem one: people don’t do it. They don’t design the business. They create work and effort, but they don’t, but the design effort into creating a business.
Problem two is that business growth stops here.
This is the case for 90% of the businesses that I have working with. They start up, they define their program, and that is it. People can get stuck here, earn enough to live, or to almost live, and then keep grinding away, hoping for more: more growth more clients, more time.
But we want to create a business that supports an extraordinary life. Achieving this goal means transcending the startup phase to create something that grows.
The need to evolve exists even if you don’t want to grow. You may want to stay small, but if you want your business to operate as a business and not a burden, you must go through the phases.
The second phase, growth, is about refining, building on what works, and creating something replicable.
Moving from growth is probably the most significant transition in the entrepreneurial journey because it is here where you start seeing the business as a business and not just a thing you do.
- Focus on mindset shift – from self-employed to entrepreneur – this is key.
- Define the roles and responsibilities in your business (even if you fill them all right now).
- Start delegating.
- Further, refine your ideal customer.
- Develop marketing funnels and processes, deepen your marketing by building on what works
- Begin developing standard ways of working, repeatable processes. Specifically, define products (even if what you sell is a service).
- Formalize finance management and accounting.
- Reduce and hone your value proposition.
Growth requires refinement, clarity, and focusing on the business as a business. This is why accounting becomes essential. Initially, you may experiment with different things and buy various services to see how they work. Now you start evaluating whether what you are doing does, work, and start making decisions based on the numbers, not just your gut.
This is where you hire people and start working as a team. At first the entrepreneur wears all of the hats in the organization. But in the growth phase you have to start delegating.
Growth can be exciting and adrenaline-fueled. Many entrepreneurs enjoy growth. This is the strength of growth – but also the weakness. Often the team burns out before management practices are in place.
And creating the management structures and processes requires a very different way of thinking than growth.
The next phase is management,
Now you hire people or hiring contractors more formally, and more of your work goes to managing the machine rather than doing the work. Your focus in the management phase is on creating and enhancing the systems that allow the business to run automatically.
Leadership is no longer focused on execution but instead is looking forward, planning the next move and optimizing systems.
This is the final mindset shift as you move from treating your business as a company you work in to an investment that produces a return.
In management you:
- Manage the last entrepreneurial mind shift to an investor.
- Hone job descriptions.
- Define processes and procedures.
- Create regular rhythms of meets and assessments.
- Improve the tools that you have.
- Focus on influencing others to take action, rather than taking action yourself.
- Make forward-looking decisions based on numbers and analyses.
- Formalize these analyses: what do you need to be looking at? Define what is driving your business.
At the management stage, you are running a business. You leave the doing entirely behind and focus on making the business work.
This is a great place to be. But it is also vulnerable. The advantage of a business in formation is that it can be flexible and challenge the status quo. Once you get to the management stage, you build inflexibility into the system. Change will continue to happen around you, so you run the risk of having the world change while you manage yourself into oblivion.
Another way to think about this is that you may want to start another business or introduce a new product now that you have transitioned to an investor mindset. You know how you have all of the tools, so why not do it?
Which is why the last step is renewal.
In renewal you look for new ways of solving a problem, and new products to offer. The businesses that last the longest are those who can reinvent themselves. The business owners who do best are those who reinvent and go into new areas.
When you are starting or growing your business, the trick is almost always to focus and narrow the scope. That is the hardest thing to do. Now, in renewal, you can expand and grow – now, you can develop that next great product.
In renewal you should:
- Create new products.
- Imagine the future.
- Break mental models and design something new.
These are the steps, and they are easy to lay out linearly on paper. The reality is that life is not linear, and if life is not linear, growing a business is like wandering through the woods without a compass. You will take a different route than anyone else; you will have false starts. You will find yourself delegating when you are just starting or revising your mission when you are managing.
That is life, and that is okay.