The failure to
earn satisfactory returns should prompt entrepreneurs to ask
tough questions: What’s the
source, if any, of our competitive
edge? Are our offerings really
better than our competitors’? If
they are, does the premium we
can charge justify the additional
costs we incur, and can we
move enough volume at higher
prices to cover our fixed costs?
If we are in a commodity business,
are our costs lower than
our competitors’? Disappointing
growth should also raise
concerns: Is the market large
enough? Do diseconomies of
scale make profitable growth
impossible?
No amount of hard work
can turn a kitten into a lion.
When a new venture is faltering,
entrepreneurs must address
basic economic issues.
For instance, many people are
attracted to personal service
businesses, such as laundries
and tax-preparation services,
because they can start and
operate those businesses just
by working hard. They don’t
have to worry about confronting
large competitors, raising
a lot of capital, or developing
proprietary technology. But
the factors that make it easy
for entrepreneurs to launch
such businesses often prevent
them from attaining their longterm
goals. Businesses based
on an entrepreneur’s willingness
to work hard usually confront
other equally determined
competitors. Furthermore, it is
difficult to make such companies
large enough to support
employees and infrastructure.
Besides, if employees can do
what the founder does, they
have little incentive to stay with
the venture. Founders of such
companies often cannot have
the lifestyle they want, no matter
how talented they are. With
no way to leverage their skills,
they can eat only what they kill.
Entrepreneurs who are stuck
in ventures that are unprofitable
and cannot grow satisfactorily
must take radical action. They
must find a new industry or develop
innovative economies of
scale or scope in their existing
fields. Rebecca Matthias, for example,
started Mothers Work in
1982 to sell maternity clothing
to professional women by mail
order. Mail-order businesses
are easy to start, but with tens
of thousands of catalogs vying
for consumers’ attention, low
response rates usually lead to
low profitability—a reality that
Matthias confronted after three
years in the business. In 1985,
she borrowed $150,000 to open
the first retail store specializing
in maternity clothes for working
women. By 1994, Mothers
Work was operating 175 stores
generating about $59 million in
revenues.
One alternative to radical
action is to stick with the failing
venture and hope for the big order
that’s just around the corner
or the greater fool who will buy
the business. Both hopes are
usually futile. It’s best to walk
away.
The next issue entrepreneurs
must confront is whether
their strategies can serve the
enterprise over the long term.
The issue of sustainability is
especially significant for entrepreneurs
who have been riding
the wave of a new technology,
a regulatory change, or any
other change—exogenous to
the business—that creates situations
in which supply cannot
keep up with demand. Entrepreneurs
who catch a wave can
prosper at the outset just because
the trend is on their side;
they are competing not with
one another but with outmoded
players. But what happens
when the wave crests? As market
imbalances disappear, so
do many of the erstwhile high
fliers who had never developed
distinctive capabilities or established
defensible competitive
positions. Wave riders must
anticipate market saturation,
intensifying competition, and
the next wave. They have to
abandon the me-too approach
in favor of a new, more durable
business model. Or they may
be able to sell their high-growth
businesses for handsome prices
in spite of the dubious longterm
prospects.
Consider Edward Rosen,
who cofounded Vydec in 1972.
The company developed one of
the first stand-alone word processors,
and as the market for
the machines exploded, Vydec
rocketed to $90 million in revenues
in its sixth year, with nearly
1,000 employees in the United
States and Europe. But Rosen
and his partner could see that
the days of stand-alone word
processors were numbered.
They happily accepted an offer
from Exxon to buy the company
for more than $100 million.
Such forward thinking is an
exception. Entrepreneurs in rapidly
growing companies often
don’t consider exit strategies
seriously. Encouraged by shortterm
success, they continue to
reinvest profits in unsustainable
businesses until all they have
left is memories of better days.
Entrepreneurs who start ventures
not by catching a wave but
by creating their own wave face
a different set of challenges in
crafting a sustainable strategy.
They must build on their initial
strength by developing multiple
strengths. Brand-new ventures
usually cannot afford to innovate
on every front. Few startups,
for example, can expect to
attract the resources needed to
market a revolutionary product
that requires radical advances
in technology, a new manufacturing
process, and new distribution
channels. Cash-strapped
entrepreneurs usually focus first
on building and exploiting a few
sources of uniqueness and use
standard, readily available elements
in the rest of the business.
Michael Dell, the founder of Dell
Computer, for example, made
low price an option for personal
computer buyers by assembling
standard components in a college
dormitory room and selling
by mail order without frills or
much sales support.
Strategies for taking the hill,
however, won’t necessarily hold
it. A model based on one or two
strengths becomes obsolete as
success begets imitation. For
instance, competitors can easily
knock off an entrepreneur’s
innovative product. But they
will find it much more difficult to
replicate systems that incorporate
many distinct and complementary
capabilities. A business
with an attractive product line,
well-integrated manufacturing
and logistics, close relationships
with distributors, a culture of responsiveness
to customers, and
the capability to produce a continuing
stream of product innovations
is not easy to copy.
Entrepreneurs who build desirable
franchises must quickly
find ways to broaden their
competitive capabilities. For
example, software start-up Intuit’s
first product, Quicken, had
more attractive features and
was easier to use than other
personal-finance software programs.
Intuit realized, however,
that competitors could also
make their products easy to
use, so the company took advantage
of its early lead to invest
in a variety of strengths.
Intuit enhanced its position
with distributors by introducing
a family of products for small
businesses, including Quick-
Books, an accounting program.
It brought sophisticated marketing
techniques to an industry
that “viewed customer calls as
interruptions to the sacred art of
programming,” according to the
company’s founder and chairman,
Scott Cook. It established
a superior product-design process
with multifunctional teams
that included marketing and
technical support. And Intuit
invested heavily to provide customers
with outstanding technical
support for free.
After defining or redefining
the business and verifying its
basic soundness, an entrepreneur
should determine whether
plans for its growth are appropriate.
Different enterprises can
and should grow at different
rates. Setting the right pace is
as important to a young business
as it is to a novice bicyclist.
For either one, too fast or too
slow can lead to a fall. The optimal
growth rate for a fledgling
enterprise is a function of many
interdependent factors. (See the
insert “Finding the Right Growth
Rate.”)
Finding the Right Growth
Rate
Finding the optimal growth
rate for a new enterprise is a
difficult and critical task. To set
the right pace, entrepreneurs
must …
The third question entrepreneurs
must ask themselves
may be the hardest to answer
because it requires the most
candid self-examination: Can
I execute the strategy? Great
ideas don’t guarantee great performance.
Many young companies
fail because the entrepreneur
can’t execute the strategy;
for instance, the venture may
run out of cash, or the entrepreneur
may be unable to generate
sales or fill orders. Entrepreneurs
must examine three areas—
resources, organizational
capabilities, and their personal
roles—to evaluate their ability to
carry out their strategies.
The lack of talented employees
is often the first obstacle to
the successful implementation
of a strategy. During the start-up
phase, many ventures cannot
attract top-notch employees,
so the founders perform most
of the crucial tasks themselves
and recruit whomever they can
to help out. After that initial period,
entrepreneurs can and
should be ambitious in seeking
new talent, especially if they
want their businesses to grow
quickly. Entrepreneurs who
hope that they can turn underqualified
and inexperienced
employees into star performers
eventually reach the conclusion,
along with Intuit founder Cook,
that “you can’t coach height.”
Moreover, after a venture establishes
even a short track record,
it can attract a much higher caliber
of employee.
In determining how to upgrade
the workforce, entrepreneurs
must address many
complex and sensitive issues:
Should I recruit individuals for
specific slots or, as is commonly
the case in talent-starved
organizations, should I create
positions for promising candidates?
Are the recruits going to
manage or replace existing employees?
How extensive should
the replacements be? Should
the replacement process be
gradual or quick? Should I, with
my personal attachment to the
business, make termination decisions
myself or should I bring
in outsiders?
A young venture needs more
than internal resources. Entrepreneurs
must also consider
their customers and sources of
capital. Ventures often start with
the customers they can attract
the most quickly, which may
not be the customers the company
eventually needs. Similarly,
entrepreneurs who begin
by bootstrapping, using money
from friends and family or loans
from local banks, must often find
richer sources of capital to build
sustainable businesses.
For a new venture to survive,
some resources that initially
are external may have to
become internal. Many startups
operate at first as virtual
enterprises because the founders
cannot afford to produce
in-house and hire employees,
and because they value flexibility.
But the flexibility that comes
from owning few resources is a
double-edged sword. Just as a
young company is free to stop
placing orders, suppliers can
stop filling them. Furthermore,
a company with no assets signals
to customers and potential
investors that the entrepreneur
may not be committed for the
long haul. A business with no
employees and hard assets
may also be difficult to sell, because
potential buyers will probably
worry that the company will
vanish when the founder departs.
To build a durable company,
an entrepreneur may have
to consider integrating vertically
or replacing subcontractors with
full-time employees.
An organization’s capacity
to execute its strategy depends
on its “hard” infrastructure—its
organizational structure and
systems—and on its “soft” infrastructure—
its culture and norms.
