Managing for Competitive Advantage (part 8)

New Ventures (part B)

 by

 Charles Lamson

 Independent Entrepreneurs 

Our discussion of independent entrepreneurs will answer questions about why people start their own businesses, the role of the economic environment, what kind of business a person should start, what it takes to be successful, planning and decision-making, and the hazards of entrepreneurship.

Why Become an Independent Entrepreneur?

Bill gross has started dozens of companies. When he was a boy, he devised homemade electric games and sold candy for a profit to friends. In college, he built and sold plans for a solar heating device, started a stereo equipment company, and sold a software product to Lotus. In 1991, he sold his educational software company for almost 100 million dollars. And in 1996, he started Idealab, which hatched dozens of startups on the internet. 

Why do Bill gross and other entrepreneurs do what they do? Entrepreneurs start their own firms because of the challenge, the profit potential, and the enormous satisfaction they hope lies ahead. People starting their own business are seeking a better quality of life than they might have in big companies. They seek Independence and a feeling of being part of the action. They feel tremendous satisfaction in building something from nothing, seeing it succeed, and watching the market embrace their ideas and products.

In addition, people start their own companies when they see their progress blocked at big corporations. When people are laid off they often try to start businesses of their own. And when employed people believe there is no promotion in their future, or are frustrated by bureaucracy or other features of corporate life, they may quit and become entrepreneurs.

New immigrants may find existing paths to economic success closed to them. Blocked from conventional means of advancement, these newcomers turn to the alternative paths entrepreneurship provides. For example, the Cuban community in Miami has produced many entrepreneurs, as has the Vietnamese Community throughout the United States. 

The Role of the Economic Environment

Money is a critical resource for all new businesses. Increases in the money supply and the supply of bank loans, real economic growth, and improved stock market performance lead to both improved prospects and increased sources of capital. In turn, the prospects and the capital increase the rate of business formation. Under favorable conditions, many aspiring entrepreneurs find early success. But economics dictate that favorable conditions will change. To succeed, entrepreneurs must have the foresight and talent to survive when the environment becomes more hostile.

For example, the Internet was called a gold rush and a land grab, with space claimed by whoever got there first. Profits were irrelevant. But traditional bricks-and-mortar companies got serious about the Net and started making the transition to bricks-and-clicks companies that took on the upstarts. In 2000, the money for dot-coms dried up, performance pressure rose, and many high-flying dot-coms failed. Strategy, cost, and profit---more generally, good management---are paramount once again. 

Although good economic times may make it easier to start a company and to survive, bad times can offer an opportunity to expand. Steve Jobs loved to innovate and introduce new products while competitors cut back. When Howard Schultz had 17 Starbucks stores, he aggressively expanded when the economy started slowing: when the economy came back his brand was everywhere. It is also easier to recruit talent during down times.

Sometimes areas with weak economies but potential for growth are overlooked by entrepreneurs. But those who understand the potential can achieve business success.

Business Incubators     The need to provide a nurturing environment for fledgling enterprises has led to the creation of business incubators. Business incubators, often located in industrial parks or abandoned factories, are protected environments for new, small businesses. Incubators offer benefits such as low rents and shared costs. Shared staff costs, such as for receptionists and secretaries, avoid the expense of a full-time employee but still provide convenient access to services. The staff manager is usually an experienced businessperson or consultant who advises the new business owners. Incubators often are associated with universities, which provide technical and business services for the new companies.

The most amazing region for start-ups is Sillicon Valley. Local universities (particularly Stanford), great talent, pioneering successes, and then venture capitalists and a complete tech infrastructure characterized by a risk-taking culture have made the Valley an exceptional environment for incubating ideas and companies. Other regions, including Boston, North Carolina’s Research Triangle Park, and Austin, have tried to emulate the Valley’s success.

Other regions in the world followed suit. Government money and tax breaks helped Taiwan’s Hsinchu Science-based industrial park flourish (see Figure 1). The Multimedia Super Corridor (MSC) program was officially inaugurated by the fourth Malaysian Prime Minister Mahathir Mohamad on February 12, 1996. The establishment of the MSC program was crucial to accelerate the objectives of Vision 2020 and to transform Malaysia into a modern state by 2020, with the adoption of a knowledge-based society framework.

FIGURE 1 Hsinchu Science Park

Cyberjaya is the "intelligent city" at the center of the super corridor. To entice corporations, the Malaysian government dedicated a 15 x 50 kilometer zone, promised to leave two-thirds of it undeveloped, gave state tax exemptions, offer unlimited duty-free importation of multimedia equipment, allowed unrestricted numbers of foreign knowledge workers to enter the country, and promised not to censor the Internet. Sun Microsystems, Oracle, Microsoft, and Nippon Telegraph and Telephone Corporation were among the first to sign on. However, after the government invested several billion in the project, the economic crisis came and undermined the park. now there are few foreign companies and only a few dozen homegrown companies, and the project has not come close to achieving its vision.

What Business Should You Start?

You need a good idea, and you need to find or create a good opportunity.

The Idea Many entrepreneurs and observers say that in contemplating your business, you must start with a great idea. A great product, an untapped market, and good timing are essential ingredients in any recipe for success.

Many great organizations have been built based on a different kind of idea: the founders desire to build a great organization, rather than to offer a particular product. Bill Hewlett and David Packard decided to start a company, and then figure it out what to make. J. Willard Marriott knew he wanted to be in business for himself but didn't have a product in mind until he opened an A&W Root Beer Stand! Masaru Ibuka had no specific product idea when he founded Sony in 1945. Sony's first product attempt, a rice cooker, didn't work, and its first product (a tape recorder) didn't sell. The company stayed alive by making and selling crude heating pads.

Many now great companies had early failures. But the founders persisted; they believed in themselves, and in their dreams of building great organizations. Whereas conventional logic is to see the company as a vehicle for your products, this perspective sees the products as a vehicle for your company. Be prepared to kill or revise an idea but never give up on your company---this has been a prescription for success for many great entrepreneurs and business leaders. 

Think about Sony, Disney, Hewlett-Packard, Procter & Gamble, IBM, and Walmart: Their founders' greatest achievements---their greatest ideas---are their organizations.

The Opportunity Entrepreneurs spot, create, and exploit opportunities in a variety of ways. Jay Mueller spotted an opportunity while touring Europe on a concert tour. The German rock musician missed some important faxes while moving from hotel to hotel. He put his recording career on hold (he still records periodically) and hired some programmers to develop software that can compress faxes into files and send them to Internet email addresses. The company took off. 

Java, the internet programming language, was designed to be safe, and was widely perceived to be safe when it first appeared. Ben Shlomo Touboul saw it differently. When he talked about his plans to market a Java security product, people scoffed. Alone, he worked to develop a product that would protect companies from hostile programs embedded in the Java code. When some Princeton scientists subsequently found ways in which hackers could exploit Java's weak spots. Touboul was ready and far ahead of any would-be competitors. 

Schlomo Touboul foresaw the probability that hackers would try to exploit Java's weaknesses. So he developed a product to protect the programs.

To spot opportunities, think carefully about events and trends as they unfold. Consider, for example:

• Technological discoveries. Startups in biotechnology, microcomputers, and nanotechnology followed.
•  Demographic changes. Startups have capitalized on new clothing and music trends, desire for fast food, and growing interest in sports.
•  Economic dislocations, such as  booms or failures. The oil boycott spawned new drilling firms. The steel industry collapse was accompanied by minimill start-ups.
•  Calamities such as wars and natural disasters. Mt. St. Helens eruption spawned new tourism companies. Andrew Higgins's business expanded from wooden boats for the Louisiana swamps to the design and mass production of the landing vehicles that carried infantry ashore in World War II.  Visionics really took off in late 2001; the company makes biometric software that matches video images to a database of facial measurements in order to identify anyone from runaways to shoplifters to terrorists. 
• Rule changes by government. Environmental legislation created opportunities for new consulting firms and cleanup machinery firms. The Small Business Innovation Research Program underwrote new product innovation firms. Deregulation spawned new airlines and trucking companies.

The Next Frontiers The next frontiers for entrepreneurship---where do they lie? Throughout history, aspiring entrepreneurs have asked this question. Four of the industries that look most exciting over the next 10 to 20 years are financial services, health services and health-related things, travel, and education. And all four are really based on the continuing aging of the Baby Boomers. I keep a list of new business ideas. Right now there are about 70 ideas on it. Add biotech, Eastern Europe, nanotechnology, oceanography . . . make your own list.

One fascinating opportunity for entrepreneurs is outer space. Historically, the space market was driven by the government, and was dominated by big players like Boeing and Lockheed Martin. But now, with huge demand for satellite launches and potential profits skyrocketing, smaller entrepreneurs are entering the field.

New ventures in space include satellites for automobile navigation, tracking trucking fleets, and monitoring flow rates and leaks in pipelines; testing designer drugs in the near zero gravity environment; and using remote sensing to monitor global warming, spot fish concentrations, and detect crop stress for precision farming. And think about this: Instead of the government funding, managing, and implementing Mars travel, one possibility is that it will offer a $20 billion dollar prize to the winner of a private company race to the red planet.

The obstacles for entrepreneurs in the space industry are huge. Space startups require hundreds of millions of dollars to ramp up, they are highly unlikely to be profitable, most investors steer clear of them, and most will fail miserably. But the entrepreneurs believe that the challenges are merely financial rather than technical, and that whoever pulls it off will change the world.

Side Streets There also exists a useful role for trial and error. Some entrepreneurs start their enterprises and then let the market decide whether it likes their ideas or not. This is risky, of course, and should be done only if you can afford the risks. But even if the original idea does not work, you may be able to capitalize on the side street effect. As you head down the road, you come to unknown places, and unexpected opportunities begin to appear.

And, while you are looking, prepare so you are able to act quickly and effectively on the opportunity when it does present itself.

What Does It Take to Be Successful? 

Many people assume there exists an "entrepreneurial personality." There is no single personality type that predicts entrepreneurial success, but you are more likely to succeed as an entrepreneur if you exhibit certain characteristics. The following characteristics contribute to entrepreneurs success:

1. Commitment and determination: Successful entrepreneurs are decisive, tenacious, disciplined, willing to sacrifice, and able to immerse themselves totally in their enterprise. "You have to have a true passion for what you're doing" says Dan Bricklin, the founder of VisiCale.
2.  Leadership: They are self-starters, team builders, superior learners, and teachers.
3. Opportunity obsession: They have an intimate knowledge of customers needs, are market-driven, and are obsessed with value creation and enhancement.
4.  Tolerance of risk, ambiguity, and uncertainty: They are calculated risk takers and risk managers, tolerance of stress, and able to resolve problems.
5.  Creativity, self-reliance, and ability to adapt: They are open-minded, restless with the status quo, able to learn quickly, highly adaptable, creative, skilled at conceptualizing, and attentive to details.
6.  Motivation to excel: They have a clear results orientation, set high but realistic goals, have a strong drive to achieve, know their own weaknesses and strengths, and focus on what can be done rather than on the reasons things can't be done.

Making Good Choices Success is a function not only a personal characteristics, but also of making good choices about the business you start. Figure 3 presents a model for conceptualizing entrepreneurial Ventures and making the best possible choices. It depicts Ventures along two dimensions Innovation and risk. The new Venture may involve high or low levels of innovation, or the creation of something new and different. It can also be characterized by low or high risk. Risk refers primarily to the probability of major Financial loss. But it also is more than that it is psychological risk as perceived by the entrepreneur, including risk to reputation and Ito.

FIGURE 3 Entrepreneurial Strategy Matrix

The upper-left quadrant, high innovation/low risk, depicts ventures of truly novel ideas with little risk. As examples, the inventors of Lego building blocks and Velcro fasteners could build their products by hand, at little expense. Even some early electronics companies started in this situation. A pioneering product idea from Procter & Gamble might fit here if there are no current competitors and because, for a company of that size, the financial risks of new product Investments can seem relatively small.

In the upper-right quadrant, high innovation/high risk, novel product ideas are accompanied by high risk because the financial investments are high and the competition is great. A new drug or a new automobile would likely fall in this category.

Most small business ventures are in the low innovation/high risk cell lower-right. These are fairly conventional entries and well-established fields. New restaurants, retail shops, and commercial outfits involve high investment for the small business entrepreneur and face direct competition from other similar businesses. Finally, the low innovation/low-risk category includes ventures that require minimal investment and/or face minimal competition for strong market demand. Examples are some service businesses having low start-up costs and those involving entry into small towns if there is no competitor and demand is adequate.

How is this Matrix useful? It helps entrepreneurs think about their ventures and decide whether they suit their particular objectives. It helps identify effective and ineffective strategies. An entrepreneur might find one cell more appealing than others. The lower left cell is likely to have relatively low payoffs but to provide more security. The higher risk/return trade-offs are in other cells, especially the upper right. So the entrepreneur might place the new venture idea in the appropriate cell and determine whether that cell is the one in which he or she would prefer to operate. If it is, the venture is one that perhaps should be pursued, pending further analysis. If it is not, no one can reject the idea or take action to move it toward a different cell.

The matrix also can help entrepreneurs remember a useful point: Successful companies do not always require a cutting-edge technology or an exciting new product. Even companies offering the most mundane products---the type that might reside in the lower left cell---can gain competitive advantage by doing basic things differently from and better than competitors. 

*SOURCE: MANAGEMENT: THE NEW COMPETITIVE LANDSCAPE, 6TH ED., 2004, PGS. 214-221*

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