[entreprene]
Amar Bhide
Of the hundreds of thousands of business ventures that entrepreneurs launch
every year, many never get off the ground. Others fizzle after spectacular
rocket starts.
A six-year-old condiment company has attracted loyal customers but has achieved
less than $500,000 in sales. The company s gross margins can t cover its
overhead or provide adequate incomes for the founder and the family members who
participate in the business. Additional growth will require a huge capital
infusion, but investors and potential buyers aren t keen on small, marginally
profitable ventures, and the family has exhausted its resources.
Another young company, profitable and growing rapidly, imports novelty products
from the Far East and sells them to large U.S. chain stores. The founder, who
has a paper net worth of several million dollars, has been nominated for
entrepreneur-of-the-year awards. But the company s spectacular growth has
forced him to reinvest most of his profits to finance the business s growing
inventories and receivables. Furthermore, the company s profitability has
attracted competitors and tempted customers to deal directly with the Asian
suppliers. If the founder doesn t do something soon, the business will
evaporate.
Like most entrepreneurs, the condiment maker and the novelty importer get
plenty of confusing counsel: Diversify your product line. Stick to your
knitting. Raise capital by selling equity. Don t risk losing control just
because things are bad. Delegate. Act decisively. Hire a professional manager.
Watch your fixed costs.
Why all the conflicting advice? Because the range of options and problems that
founders of young businesses confront is vast. The manager of a mature company
might ask, What business are we in? or How can we exploit our core
competencies? Entrepreneurs must continually ask themselves what business they
want to be in and what capabilities they would like to develop. Similarly, the
organizational weaknesses and imperfections that entrepreneurs confront every
day would cause the managers of a mature company to panic. Many young
enterprises simultaneously lack coherent strategies, competitive strengths,
talented employees, adequate controls, and clear reporting relationships.
The problems entrepreneurs confront every day would overwhelm most managers.
The entrepreneur can tackle only one or two opportunities and problems at a
time. Therefore, just as a parent should focus more on a toddler s motor skills
than on his or her social skills, the entrepreneur must distinguish critical
issues from normal growing pains.
Entrepreneurs cannot expect the sort of guidance and comfort that an
authoritative child-rearing book can offer parents. Human beings pass through
physiological and psychological stages in a more or less predetermined order,
but companies do not share a developmental path. Microsoft, Lotus, WordPerfect,
and Intuit, although competing in the same industry, did not evolve in the same
way. Each of those companies has its own story to tell about the development of
strategy and organizational structures and about the evolution of the founder s
role in the enterprise.
Every company has its own story to tell about the development of systems and
strategy.
The options that are appropriate for one entrepreneurial venture may be
completely inappropriate for another. Entrepreneurs must make a bewildering
number of decisions, and they must make the decisions that are right for them.
The framework I present here and the accompanying rules of thumb will help
entrepreneurs analyze the situations in which they find themselves, establish
priorities among the opportunities and problems they face, and make rational
decisions about the future. This framework, which is based on my observation of
several hundred start-up ventures over eight years, doesn t prescribe answers.
Instead, it helps entrepreneurs pose useful questions, identify important
issues, and evaluate solutions. The framework applies whether the enterprise is
a small printing shop trying to stay in business or a catalog retailer seeking
hundreds of millions of dollars in sales. And it works at almost any point in a
venture s evolution. Entrepreneurs should use the framework to evaluate their
companies position and trajectory often not just when problems appear.
The framework consists of a three-step sequence of questions. The first step
clarifies entrepreneurs current goals, the second evaluates their strategies
for attaining those goals, and the third helps them assess their capacity to
execute their strategies. The hierarchical organization of the questions
requires entrepreneurs to confront the basic, big-picture issues before they
think about refinements and details. (See the exhibit An Entrepreneur s Guide
to the Big Issues. ) This approach does not assume that all companies or all
entrepreneurs develop in the same way, so it does not prescribe a
one-size-fits-all methodology for success.
An Entrepreneur s Guide to the Big Issues
Clarifying Goals: Where Do I Want to Go?
An entrepreneur s personal and business goals are inextricably linked. Whereas
the manager of a public company has a fiduciary responsibility to maximize
value for shareholders, entrepreneurs build their businesses to fulfill
personal goals and, if necessary, seek investors with similar goals.
Before they can set goals for a business, entrepreneurs must be explicit about
their personal goals. And they must periodically ask themselves if those goals
have changed. Many entrepreneurs say that they are launching their businesses
to achieve independence and control their destiny, but those goals are too
vague. If they stop and think about it, most entrepreneurs can identify goals
that are more specific. For example, they may want an outlet for artistic
talent, a chance to experiment with new technology, a flexible lifestyle, the
rush that comes from rapid growth, or the immortality of building an
institution that embodies their deeply held values. Financially, some
entrepreneurs are looking for quick profits, some want to generate a
satisfactory cash flow, and others seek capital gains from building and selling
a company. Some entrepreneurs who want to build sustainable institutions do not
consider personal financial returns a high priority. They may refuse
acquisition proposals regardless of the price or sell equity cheaply to
employees to secure their loyalty to the institution.
Only when entrepreneurs can say what they want personally from their businesses
does it make sense for them to ask the following three questions:
What kind of enterprise do I need to build?
Long-term sustainability does not concern entrepreneurs looking for quick
profits from in-and-out deals. Similarly, so-called lifestyle entrepreneurs,
who are interested only in generating enough of a cash flow to maintain a
certain way of life, do not need to build businesses that could survive without
them. But sustainability or the perception thereof matters greatly to
entrepreneurs who hope to sell their businesses eventually. Sustainability is
even more important for entrepreneurs who want to build an institution that is
capable of renewing itself through changing generations of technology,
employees, and customers.
Entrepreneurs personal goals should also determine the target size of the
businesses they launch. A lifestyle entrepreneur s venture needn t grow very
large. In fact, a business that becomes too big might prevent the founder from
enjoying life or remaining personally involved in all aspects of the work. In
contrast, entrepreneurs seeking capital gains must build companies large enough
to support an infrastructure that will not require their day-to-day
intervention.
What risks and sacrifices does such an enterprise demand?
Building a sustainable business that is, one whose principal productive asset
is not just the founder s skills, contacts, and efforts often entails making
risky long-term bets. Unlike a solo consulting practice which generates cash
from the start durable ventures, such as companies that produce branded
consumer goods, need continued investment to build sustainable advantages. For
instance, entrepreneurs may have to advertise to build a brand name. To pay for
ad campaigns, they may have to reinvest profits, accept equity partners, or
personally guarantee debt. To build depth in their organizations, entrepreneurs
may have to trust inexperienced employees to make crucial decisions.
Furthermore, many years may pass before any payoff materializes if it
materializes at all. Sustained risk taking can be stressful. As one
entrepreneur observes, When you start, you just do it, like the Nike ad says.
You are na ve because you haven t made your mistakes yet. Then you learn about
all the things that can go wrong. And because your equity now has value, you
feel you have a lot more to lose.
Entrepreneurs who operate small-scale, or lifestyle, ventures face different
risks and stresses. Talented people usually avoid companies that offer no stock
options and only limited opportunities for personal growth, so the entrepreneur
s long hours may never end. Because personal franchises are difficult to sell
and often require the owner s daily presence, founders may become locked into
their businesses. They may face financial distress if they become sick or just
burn out. I m always running, running, running, complains one entrepreneur,
whose business earns him half a million dollars per year. I work 14-hour days,
and I can t remember the last time I took a vacation. I would like to sell the
business, but who wants to buy a company with no infrastructure or employees?
Can I accept those risks and sacrifices?
Entrepreneurs must reconcile what they want with what they are willing to risk.
Consider Joseph Alsop, co-founder and president of Progress Software
Corporation. When Alsop launched the company in 1981, he was in his
mid-thirties, with a wife and three children. With that responsibility, he
says, he didn t want to take the risks necessary to build a
multi-billion-dollar corporation like Microsoft, but he and his partners were
willing to assume the risks required to build something more than a personal
service business. Consequently, they picked a market niche that was large
enough to let them build a sustainable company but not so large that it would
attract the industry s giants. They worked for two years without salaries and
invested their personal savings. In ten years, they had built Progress into a
$200 million publicly held company.
To set meaningful goals, entrepreneurs must reconcile what they want with what
they are willing to risk.
Entrepreneurs would do well to follow Alsop s example by thinking explicitly
about what they are and are not willing to risk. If entrepreneurs find that
their businesses even if very successful won t satisfy them personally, or if
they discover that achieving their personal goals requires them to take more
risks and make more sacrifices than they are willing to, they need to reset
their goals. When entrepreneurs have aligned their personal and their business
goals, they must then make sure that they have the right strategy.
Setting Strategy: How Will I Get There?
Many entrepreneurs start businesses to seize short-term opportunities without
thinking about long-term strategy. Successful entrepreneurs, however, soon make
the transition from a tactical to a strategic orientation so that they can
begin to build crucial capabilities and resources.
Formulating a sound strategy is more basic to a young company than resolving
hiring issues, designing control systems, setting reporting relationships, or
defining the founder s role. Ventures based on a good strategy can survive
confusion and poor leadership, but sophisticated control systems and
organizational structures cannot compensate for an unsound strategy.
Entrepreneurs should periodically put their strategies to the following four
tests:
Is the strategy well defined?
A company s strategy will fail all other tests if it doesn t provide a clear
direction for the enterprise. Even solo entrepreneurs can benefit from a
defined strategy. For example, deal makers who specialize in particular
industries or types of transactions often have better access to potential deals
than generalists do. Similarly, independent consultants can charge higher fees
if they have a reputation for expertise in a particular area.
An entrepreneur who wants to build a sustainable company must formulate a
bolder and more explicit strategy. The strategy should integrate the
entrepreneur s aspirations with specific long-term policies about the needs the
company will serve, its geographic reach, its technological capabilities, and
other strategic considerations. To help attract people and resources, the
strategy must embody the entrepreneur s vision of where the company is going
instead of where it is. The strategy must also provide a framework for making
the decisions and setting the policies that will take the company there.
A new company s strategy must embody the founder s vision of where the company
is going, not where it is.
The strategy articulated by the founders of Sun Microsystems, for instance,
helped them make smart decisions as they developed the company. From the
outset, they decided that Sun would forgo the niche-market strategy commonly
used by Silicon Valley start-ups. Instead, they elected to compete with
industry leaders IBM and Digital by building and marketing a general-purpose
workstation. That strategy, recalls cofounder and former president Vinod
Khosla, made Sun s product-development choices obvious. We wouldn t develop
any applications software, he explains. This strategy also dictated that Sun
assume the risk of building a direct sales force and providing its own field
support just like its much larger competitors. The Moon or Bust was our motto,
Khosla says. The founders bold vision helped attract premier venture-capital
firms and gave Sun extraordinary visibility within its industry.
To be useful, strategy statements should be concise and easily understood by
key constituents such as employees, investors, and customers. They must also
preclude activities and investments that, although they seem attractive, would
deplete the company s resources. A strategy that is so broadly stated that it
permits a company to do anything is tantamount to no strategy at all. For
instance, claiming to be in the leisure and entertainment business does not
preclude a tent manufacturer from operating casinos or making films. Defining
the venture as a high-performance outdoor-gear company provides a much more
useful focus.
Can the strategy generate sufficient profits and growth?
Once entrepreneurs have formulated clear strategies, they must determine
whether those strategies will allow the ventures to be profitable and to grow
to a desirable size. 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 long-term 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.
Is the strategy sustainable?
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 long-term 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
short-term 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
start-ups, 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.
It s easy to knock off an innovative product, but an innovative business system
is much harder to replicate.
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 QuickBooks, 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.
Are my goals for growth too conservative or too aggressive?
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. )
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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 consider many factors,
including the following:
Economies of scale, scope, or customer network. The greater the returns to a
company s scale, scope, or the size of its customer network, the stronger the
case for pursuing rapid growth. When scale causes profitability to increase
considerably, growth soon pays for itself. And in industries in which economies
of scale or scope limit the number of viable competitors, establishing a
favorable economic position first can help deter rivals.
The ability to lock in customers or scarce resources. Rapid growth also makes
sense if consumers are inclined to stick with the companies with which they
initially do business, either because of an aversion to change or because of
the expense of switching to another company. Similarly, in retail, growing
rapidly can allow a company to secure the most favorable locations or dominate
a geographic area that can support only one large store, even if national
economies of scale are limited.
Competitors growth. If rivals are expanding quickly, a company may be forced
to do the same. In markets in which one company generally sets the industry s
standard, such as the market for personal-computer operating-system software,
growing quickly enough to stay ahead of the pack may be a young company s only
hope.
Resource constraints. A new venture will not be able to grow rapidly if there
is a shortage of skilled employees or if investors and lenders are unwilling to
fund an expansion that they consider reckless. A venture that is growing
quickly, however, will be able to attract capital as well as the employees and
customers who want to go with a winner.
Internal financing capability. When a new venture is not able to attract
investors or borrow at reasonable terms, its internal financing capability will
determine the pace at which it can grow. Businesses that have high profit
margins and low assets-to-sales ratios can fund high growth rates. A
self-funded business, according to the well-known sustainable growth formula,
cannot expand its revenues at a rate faster than its return on equity.
Tolerant customers. When a company is young and growing rapidly, its products
and services often contain some flaws. In some markets, such as certain
segments of the high-tech industry, customers are accustomed to imperfect
offerings and may even derive some pleasure from complaining about them.
Companies in such markets can expand quickly. But in markets in which buyers
will not stand for breakdowns and bugs, such as the market for luxury goods and
mission-critical process-control systems, growth should be much more cautious.
Personal temperament and goals. Some entrepreneurs thrive on rapid growth;
others are uncomfortable with the crises and fire fighting that usually
accompany it. One of the limits on a new venture s growth should be the
entrepreneur s tolerance for stress and discomfort.
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Executing the Strategy: Can I Do It?
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.
Do I have the right resources and relationships?
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.
Entrepreneurs who hope to turn underqualified employees into star performers
are almost always disappointed.
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 start-ups 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.
How strong is the organization?
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.
The hard infrastructure an entrepreneurial company needs depends on its goals
and strategies. (See the insert Investing in Organizational Infrastructure. )
Some entrepreneurs want to build geographically dispersed businesses, realize
synergies by sharing resources across business units, establish first-mover
advantages through rapid growth, and eventually go public. They must invest
more in organizational infrastructure than their counterparts who want to build
simple, single-location businesses at a cautious pace.
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Investing in Organizational Infrastructure
Few entrepreneurs start out with both a well-defined strategy and a plan for
developing an organization that can achieve that strategy. In fact, many
start-ups, which don t have formal control systems, decision-making processes,
or clear roles for employees, can hardly be called organizations. The founders
of such ventures improvise. They perform most of the important functions
themselves and make decisions as they go along.
Informality is fine as long as entrepreneurs aren t interested in building a
large, sustainable business. Once that becomes their goal, however, they must
start developing formal systems and processes. Such organizational
infrastructure allows a venture to grow, but at the same time, it increases
overhead and may slow down decision making. How much infrastructure is enough
and how much is too much? To match investments in infrastructure to the
requirements of a venture s strategy, entrepreneurs must consider the degree to
which their strategy depends on the following:
Delegating tasks. As a young venture grows, its founders will probably need to
delegate many of the tasks that they used to perform. To get employees to
perform those tasks competently and diligently, the founders may need to
establish mechanisms to monitor employees and standard operating procedures and
policies. Consider an extreme example. Randy and Debbi Fields pass along their
skills and knowledge through software that tells employees in every Mrs. Fields
Cookies shop exactly how to make cookies and operate the business. The software
analyzes data such as local weather conditions and the day of the week to
generate hourly instructions about such matters as which cookies to bake, when
to offer free samples, and when to reorder chocolate chips.
Telling employees how to do their jobs, however, can stifle initiative.
Companies that require frontline employees to act quickly and resourcefully
might decide to focus more on outcomes than on behavior, using control systems
that set performance targets for employees, compare results against objectives,
and provide appropriate incentives.
Specializing tasks. In a small-scale start-up, everyone does a little bit of
everything, but as a business grows and tries to achieve economies of scale and
scope, employees must be assigned clearly defined roles and grouped into
appropriate organizational units. An all-purpose workshop employee, for
example, might become a machine tool operator, who is part of a manufacturing
unit. Specialized activities need to be integrated by, for example, creating
the position of a general manager, who coordinates the manufacturing and
marketing functions, or through systems that are designed to measure and reward
employees for cross-functional cooperation. Poor integrative mechanisms are why
geographic expansion, vertical integration, broadening of product lines, and
other strategies to achieve economies of scale and scope often fail.
Mobilizing funds for growth. Cash-strapped businesses that are trying to grow
need good systems to forecast and monitor the availability of funds. Outside
sources of capital such as banks often refuse to advance funds to companies
with weak controls and organizational infrastructure.
Creating a track record. If entrepreneurs hope to build a company that they can
sell, they must start preparing early. Public markets and potential acquirers
like to see an extended history of well-kept financial records and controls to
reassure them of the soundness of the business.
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A venture s growth rate provides an important clue to whether the entrepreneur
has invested too much or too little in the company s structure and systems. If
performance is sluggish if, for example, growth lags behind expectations and
new products are late excessive rules and controls may be stifling employees.
If, in contrast, the business is growing rapidly and gaining share, inadequate
reporting mechanisms and controls are a more likely concern. When a new venture
is growing at a fast pace, entrepreneurs must simultaneously give new employees
considerable responsibility and monitor their finances very closely. Companies
like Block-buster Video cope by giving frontline employees all the operating
autonomy they can handle while maintaining tight, centralized financial
controls.
An evolving organization s culture also has a profound influence on how well it
can execute its strategy. Culture determines the personalities and temperaments
of the workforce; lone wolves are unlikely to want to work in a consensual
organization, whereas shy introverts may avoid rowdy outfits. Culture fills in
the gaps that an organization s written rules do not anticipate. Culture
determines the degree to which individual employees and organizational units
compete and cooperate, and how they treat customers. More than any other
factor, culture determines whether an organization can cope with the crises and
discontinuities of growth.
Unlike organizational structures and systems, which entrepreneurs often copy
from other companies, culture must be custom built. As many software makers
have found, for instance, a laid-back organization can t compete well against
Microsoft. The rambunctiousness of a start-up trading operation may scare away
the conservative clients the venture wants to attract. A culture that fits a
company s strategy, however, can lead to spectacular performance. Physician
Sales & Service (PSS), a medical-products distribution company, has grown from
$13 million in sales in 1987 to nearly $500 million in 1995, from 5 branches in
Florida to 56 branches covering every state in the continental United States,
and from 120 employees to 1,800. Like other rapidly growing companies, PSS has
tight financial controls. But, venture capitalist Thomas Dickerson says, PSS
would be just another efficiently managed distribution company if it didn t
have a corporate culture that is obsessed with meeting customers needs and
maintaining a meritocracy. PSS employees are motivated by the culture to
provide unmatched customer service.
When entrepreneurs neglect to articulate organizational norms and instead hire
employees mainly for their technical skills and credentials, their
organizations develop a culture by chance rather than by design. The
personalities and values of the first wave of employees shape a culture that
may not serve the founders goals and strategies. Once a culture is
established, it is difficult to change.
When entrepreneurs don t stop to think about culture, their companies develop
one by chance rather than by design.
Can I play my role?
Entrepreneurs who aspire to operate small enterprises in which they perform all
crucial tasks never have to change their roles. In personal service companies,
for instance, the founding partners often perform client work from the time
they start the company until they retire. Transforming a fledgling enterprise
into an entity capable of an independent existence, however, requires founders
to undertake new roles.
Founders cannot build self-sustaining organizations simply by letting go.
Before entrepreneurs have the option of doing less, they first must do much
more. If the business model is not sustainable, they must create a new one. To
secure the resources demanded by an ambitious strategy, they must manage the
perceptions of the resource providers: potential customers, employees, and
investors. To build an enterprise that will be able to function without them,
entrepreneurs must design the organization s structure and systems and mold its
culture and character.
While they are sketching out an expansive view of the future, entrepreneurs
also have to manage as if the company were on the verge of going under, keeping
a firm grip on expenses and monitoring performance. They have to inspire and
coach employees while dealing with the unpleasantness of firing those who will
not be able to grow with the company. Bill Nussey, cofounder of the software
maker Da Vinci Systems Corporation, recalls that firing employees who had
struggled and cried and sacrificed with the company was the hardest thing he
ever had to do.
Few successful entrepreneurs ever come to play a purely visionary role in their
organizations. They remain deeply engaged in what Abraham Zaleznik, the
Konosuke Matsushita Professor of Leadership Emeritus at the Harvard Business
School, calls the real work of their enterprises. Marvin Bower, the founding
partner of McKinsey & Company, continued to negotiate and direct studies for
clients while leading the firm through a considerable expansion of its size and
geographic reach. Bill Gates, co-founder and CEO of multibillion-dollar
software powerhouse Microsoft, reportedly still reviews the code that
programmers write.
But founders roles must change. Gates no longer writes programs. Michael
Roberts, an expert on entrepreneurship, suggests that an entrepreneur s role
should evolve from doing the work, to teaching others how to do it, to
prescribing desired results, and eventually to managing the overall context in
which the work is done. One entrepreneur speaks of changing from quarterback to
coach. Whatever the metaphor, the idea is that leaders seek ever increasing
impact from what they do. They achieve this by, for example, focusing more on
formulating marketing strategies than on selling; negotiating and reviewing
budgets rather than directly supervising work; designing incentive plans rather
than setting the compensation of individual employees; negotiating the
acquisitions of companies instead of the cost of office supplies; and
developing a common purpose and organizational norms rather than moving a
product out the door.
In evaluating their personal roles, therefore, entrepreneurs should ask
themselves whether they continually experiment with new jobs and
responsibilities. Founders who simply spend more hours performing the same
tasks and making the same decisions as the business grows end up hindering
growth. They should ask themselves whether they have acquired any new skills
recently. An entrepreneur who is an engineer, for example, might master
financial analysis. If founders can t point to new skills, they are probably in
a rut and their roles aren t evolving.
Entrepreneurs must ask themselves whether they actually want to change and
learn. People who enjoy taking on new challenges and acquiring new skills Bill
Gates, again can lead a venture from the start-up stage to market dominance.
But some people, such as H. Wayne Huizenga, the moving spirit behind Waste
Management and Blockbuster Video, are much happier moving on to get other
ventures off the ground. Entrepreneurs have a responsibility to themselves and
to the people who depend on them to understand what fulfills and frustrates
them personally.
Many great enterprises spring from modest, improvised beginnings. William
Hewlett and David Packard tried to craft a bowling alley foot-fault indicator
and a harmonica tuner before developing their first successful product, an
audio oscillator. Wal-Mart Stores founder, Sam Walton, started by buying what
he called a real dog of a franchised variety store in Newport, Arkansas,
because his wife wanted to live in a small town. Speedy response and trial and
error were more important to those companies at the start-up stage than
foresight and planning. But pure improvisation or luck rarely yields long-term
success. Hewlett-Packard might still be an obscure outfit if its founders had
not eventually made conscious decisions about product lines, technological
capabilities, debt policies, and organizational norms.
Entrepreneurs, with their powerful bias for action, often avoid thinking about
the big issues of goals, strategies, and capabilities. They must, sooner or
later, consciously structure such inquiry into their companies and their lives.
Lasting success requires entrepreneurs to keep asking tough questions about
where they want to go and whether the track they are on will take them there.
A version of this article appeared in the November December 1996 issue of
Harvard Business Review.
Amar Bhide is an associate professor at the Harvard Business School in Boston,
Massachusetts, where he teaches entrepreneurship. He has published two other
HBR articles on entrepreneurship: Bootstrap Finance: The Art of Start-ups
(November December 1992) and How Entrepreneurs Craft Strategies That Work
(March April 1994).