Tag Archives: competitive advantage

Artisan Opportunists Make Great Entrepreneurs

Having served entrepreneurs for years, I tell my consulting clients that I have worked in almost every industry niche possible. Until my recent involvement with an incubator in Raleigh, North Carolina that is serving artisan entrepreneurs, however, I had not worked with many artistic types in a business setting. A group of Baylor University scholars wrote Small Business Management: An Entrepreneurial Emphasis a few years ago in an effort to define what small businesses need in terms of critical success factors. The authors borrowed some thoughts from a forerunner of management thought, Norman R. Smith. Smith held that there are 2 styles of the entrepreneur; the craftsman (artisan) entrepreneur and the opportunistic entrepreneur. He developed a 14 characteristic scoring system to classify entrepreneurs into one of the two categories, including qualities such ranging from breadth of education to employee relations.

Artisans were observed to possess a skill or talent that drives their initiative to open a business (vs. the tendency of an opportunistic entrepreneur to amass resources needed to respond to a market need.) Many grew up in an environment that values tasks and hard work, often as a result of exposure to the work world very early in life. With a preference for mastering the mechanics of machinery, they tend to become production-oriented early in their work lives. Many have become frustrated with management or unions and take the start-up route only after some critical event occurs.

Other key distinctions include a reluctance to delegate authority and a preference to develop customers by personal contacts only. Often, growth plans are hard to identify in the way they conduct business. This entrepreneur has a paternalistic attitude and tends to think of employees as part of the family. Accordingly, operations are focused inwardly with little engagement of the community around the artisan. With concerns about losing control over a “good” situation, artisan entrepreneurs have been known to resist involving others in key management decisions and shun interaction with outsiders. Traditional forms of financing and marketing are the rule here.

As I think about the artisans whom we serve at Kindred Boutique (the incubator in Raleigh), I see many of these factors at work. While many characterizations are stereotypical, there are enough patterns to validate the mindset of artisan entrepreneurs whom we encounter as being very similar to what is described. We work with the artisans to establish better cooperation–the boutique itself is intended to show the benefits of collective marketing and “product” testing. Often, an artisan entrepreneur has chosen this new career because of frustration with his prior one. Non-traditional forms of marketing and funding their ideas are not well received.Opportunist

What is desirable is to help the artisan think more opportunistically. (This line of thought is not meant to denigrate artisans in favor of non-artisans, who often need to think more creatively and divergently.) Smith found  that opportunistic entrepreneurs come from a background of predominately middle- to upper-economic status; their fathers are typically skilled and professional workers and own small or family businesses. As a result of the household income, these entrepreneurs have been groomed for success through formal education and exposure to other cultures through travel and attending fine arts events. This type of entrepreneur is observed to have significantly more marketing, selling, general administration, and merchandising skills.

Having watched their fathers in the business world run organizations, this group understands and appreciates management practices like delegation, advanced segment marketing techniques, and the value of strategic planning. As a rule, this group enjoys competitive situations, and may be more likely to burn their bridges. There is no critical event that decides when they should go into business. instead of competing on price and personal reputation, the opportunist relies on product development and strategy. 

Artisans can benefit from the experiences of opportunists and vice versa. Take a moment to think about which group represents your basic worldview. Modify the way you start and run your business to incorporate an approach that your counterpart from the other group may employ. You will be more successful in life and business as a result.

Iterate Instead of Analyze for Innovation Success

Intrapreneurship is needed in large companies.  Commonly, these companies tend to have plenty of data that has been collected to document market dynamics. Whether it is corporate strategy or corporate development, larger businesses have departments that constantly evaluate opportunities for growth–be they organic or inorganic.  Encouraging innovation and breakthroughs can be hard. The main reason big business becomes stagnant is that the mindset required for disruptive advances is very different than the risk management and mitigation approach of many market leaders.

Kevin McFarthing, who leads the Innovation Fixer consulting firm, suggests in a recent blog that “These companies also have a very rational approach to the assessment of investment opportunities. Of course, they find that the expenditure line has a much higher level of confidence than either the timeline or the scale of revenue. For that reason large companies want to increase the level of confidence in the income stream. Various techniques are used; for example, many consumer goods companies will undertake a fairly standard sequential program of qualitative and quantitative market research. This will relate to a database of similar products launched in the past. So, as long as you do the market research correctly, you can reduce your uncertainty and proceed.”

As is pointed out above, the traditional analytical tools used to evaluate comparable opportunities are somewhat like the comparables sought out when buying a new residence: intended to estimate what already exists instead of what has never been built. Relying on historical information rather than anticipating future demand is like driving down the road only looking in the rear view mirror!

On the opposite end of the spectrum, small businesses being run by visionary entrepreneurs tend to rely far less on the projection techniques of their larger counterparts. These start-ups rely on gut instinct, passion, and drive rather than systems. Instead of evaluating a market based on dozens of data points, the executive teams of thriving young businesses gather market information, develop a proof of concept, test it on a limited basis, revise the offering, and are nimble in their adjustments to feedback so that they can quickly bring something new to the marketplace. 

leap of faith

Large companies find what is done in the entrepreneurial space to be akin to a leap of faith. It’s very hard for a corporate type to operate from a place of judgment rather than logic. The willingness to produce something that is not perfect is much less in an organization with extensive quality initiatives.  The whole concept of try…try…try again that is the mantra of an entrepreneur is eschewed in favor of taking calculated risks. While it sounds stereotypical, it is not at all uncommon for the large company approach to be one that avoids undertaking projects without tons of documentation and extensive project and/or product planning down to minute details.  This predictable approach has severe shortcomings in an environment where responsiveness can make the difference between producing an offering that resonates versus one that is a “me too” alternative.

Instead of performing market and buyer research that resembles a canned, rote methodology, what is needed is flexibility, customization, and the ability to constantly iterate. Instead of sequence and a step-wise stage gate process, truly innovative organizations are far more willing to engage in trial and error.

McFarthing says that many large organizations lack the right mindset to explore potential. Changes he advocates that they make to become more innovative include: 

–   Rely much more on judgment to move projects ahead rapidly;

–   Don’t apply the same criteria to incremental and radical innovation;

–   Use a fast and iterative sequence of prototyping and market testing to learn and reduce uncertainty;

–   Go to market as soon as you can, don’t wait for all the facts.

Follow these suggestions and you will change your culture to become more intrapreneurial!

 

 

 

Your Perspective May Undermine Innovation and Value Creation

Every company, whether privately owned or with public stockholders, is concerned about its valuation. The value of an enterprise is enhanced when its future growth opportunities are well understood, documented, and pursued. Why is it, then, that so many small to medium size enterprises fail to articulate a compelling innovation strategy that will fuel the needed growth? Kevin McFarthing, who operates the Innovation Fixer consulting firm, argues that it can be a lack of perspective. He has seen too many companies obsessed with current period performance of the exclusion of the long term “big rocks” that must be put in place to build a foundation for sustainable success.

McFarthing evokes the Three Horizons model of the late 20th century in many consulting projects as a means to draw corporate executives’ focus into more far-reaching and significant perspective. Baghai, Coley and White first outlined the model in “The Alchemy of Growth” in 1999. Markets and technology are seen as drivers in the model and are depicted in the diagram below (from Tim Kastelle’s blog).

Three Horizons Model

 

McFarthing’s interpretation of the Three Horizons model is as follows:

The Three Horizons process forces an assessment of technology strengths and market dynamics. It then forces a view of how much resource is allocated to each of the Three Horizons. The example above shows Google’s allocation of 70/20/10, which will differ for different companies in each category. It also forces a portfolio approach to innovation.

It also helps to retain the concept of emergent strategy in your approach to the innovation portfolio, as the days of fixed long term planning are diminishing…You can’t just write a five-year plan, lock it down and expect it to deliver. Large companies must continually revise their perspective of the role radical innovation will play in their growth.

The balance of the projects and resource applied to each element of the portfolio should be decided by the top team in the company, and be dictated by corporate strategy. Incidentally, it’s not just the resource that should follow a strategic allocation; the use of management time should also follow the Horizon split. Too often resource is applied to the opportunities on the edge, but thinking time is taken up by the short term. It should be followed through, and the temptation to reallocate Horizon Three resources to fight Horizon One fires should be resisted.

Where the application of these principles falls apart in many organizations is in the allocation of strategic (often scarce and/or over-committed) resources to pursue what has been stated as a priority. You know the saying, “You gotta walk the talk.” Breakthrough innovation, then, must move from strategy and communications (though it needs to be thoughtfully developed therein) to execution via competent actions. The right combination of talent, unique skills, and initiative, when coupled with appropriate resources, produces an environment ripe for innovation to occur.  While some organizations are able to spur internal innovation, most rely on open innovation (external sources) to re-energize their enterprises. Even large companies like Kraft Foods estimated that 98% of IP in the food industry existed outside Kraft. Knowing that an industry leader like Kraft saw value in eliciting the help of others should embolden your team to admit the need for outside help.

Three Horizons, while instructional, is not the only model used to enhance one’s perspective on the opportunity for innovation. What these models have in common, according to McFarthing, are the following principles:

  • Make space in your portfolio for bets on radical innovation;
  • Balance your portfolio over different time frames;
  • Balance your portfolio over different technology needs;
  • Exploit the potential offered by Open Innovation;
  • Balance your portfolio over different market opportunities;
  • In all cases, stretch your view and take a broader perspective.

Sounds like good risk management, creative strategy, and a plan for sustainability rolled into one approach!

New Small Business: Economic Development Catalyst

Small businesses are the backbone of the U.S. economy. This is a statement that is tossed out for public consumption on a fairly regular basis. What data backs it up? What might it mean for job creation and other key indicators of economic health that matter to the general population? In the November 2012 Business Dynamics Statistics monthly report from the Census Bureau, it was noted that hiring and job creation in small businesses (19 employees or less) with two years or less of operations was stronger than in larger companies that had been around longer.

While older firms only hire 25-33% of new employees for newly created jobs, young firms average about two in five (40%)! A substantial fraction of the job creation for young firms is due to the job creation that occurs in the quarter of starting up. However, there is substantial subsequent job creation as well as job destruction in the succeeding quarters in the first two years. The overall net job creation (the difference between job creation and destruction) is much higher for young firms than for older firms.

Small Business strengthThe other area in which startups excel is in worker churning (hiring in excess of job creation and the separations in excess of job destruction.) Job creation measures the employment gains from the expansion of existing establishments and the creation of new establishments. Job destruction measures the employment losses from contracting and closing establishments. The Department of Labor maintains that churning helps the matching of workers to jobs. Hiring and separation rates at young firms are seen as being unusually high. There is also a trend of a marked improvement in hiring and job creation in young firms since 2008 in comparison to established firms. 

The report, entitled “Job Creation, Worker Churning, and Wages at Young Businesses,” draws its conclusions from the U.S. Census Bureau’s Quarterly Workforce Indicators, which use federal and state administrative data on employers and employees combined with core Census Bureau data. On a less rosy note for employees in small companies, the study also showed that their earnings per worker are lower than at more mature firms. Since the wage premium for workers who choose to work for large companies has persisted, earnings growth–even during the most recent recession–is largely attributable to wages paid by larger companies. Some of this decline is accounted for by changes in the industry  composition of startups over the last decade, but the overall trend is downward.

Just before the 2001 recession, workers at new firms earned about 85 percent as much as workers at mature firms. By 2011, this earnings ratio had dropped to 70 percent. The earnings premium associated with working for a large employer versus a smaller employer also grew during this time period: Average real monthly earnings in small firms fell from a high of 78 percent in 2001 to a low of 66 percent in 2011. 

Churning rates are said to be “procyclical,” dropping during recessions as firms become cautious about hiring, and employees, with fewer jobs available, stay where they are. In both the 2001 and, especially, 2007-2009 recessions, worker turnover rates declined, but failed to recover to their previous peak after the recession ended. Churn rates for the youngest businesses recovered modestly after the most recent recession, but dropped slightly after first quarter 2011, perhaps reflecting eroding worker and business confidence, the study said.

What does this all mean? Here are the key takeaways:

  • Small businesses create more new jobs than large businesses
  • Pay at small companies tends to be less than at larger ones
  • Turnover is higher at smaller firms than at larger ones
  • Small business bounces back faster than big business after a recession
  • Startups are paying less now than they were a decade ago

 

 

 

Don’t Business Plan Before Test Marketing

 

Take a look at the programs available to start-up businesses and you will certainly find that many offerings are based on a business plan. Governmental and educational agencies in particular are often enamored with curricula that present a template for plans that is easily administered and a breeze to teach. The emphasis is usually on the various business disciplines that can be found in a larger business, but applied to a small business. Instructors generally come from corporate or academic careers and are most comfortable with this approach. Yet, most entrepreneurs, when “equipped” with the suggested program, are unable to reach the five years in business anniversary–a full 50%+ fail according to the U.S. Department of Labor’s Bureau of Labor Statistics.

Observe the chart below, used by EntreDot to illustrate how an idea should become a commercially viable business:

 

Business planning is an outgrowth of three prior steps: ideation, conceptualization, and creation. What occurs in each of those steps that better prepares the entrepreneur to actually write a business plan? “Ideation is the process for structuring an idea into a well explained business idea that has enough information for the entrepreneur to decide whether it has commercial potential and whether or not it should be pursued any further. Conceptualization is focused on developing an understanding of the market the entrepreneur intends to pursue, and gathering enough information about it to be able to decide if there is commercial value in the business idea. Creation provides the details of the products and services from the point of view of what capabilities the customer will have and how they will see quantifiable benefit. The focus is on what it provides the buyer and the description has to be from the customer’s point of view and what will be delivered to them.” (courtesy, EntreDot)

Every viable business needs to address the following five issues:

o What is the opportunity (premise)?
o What are you offering (solution)?
o Who will buy it (market)?
o Why will I win (Advantage)?
o How do I make money (Business)?

Ideation is the step in which the issues are raised–not Evaluation (Step 4, where business planning occurs). By wrestling with these questions early, the entrepreneur hones a business idea into an elevator pitch that can be “test marketed” to potential buyers. The key advantage to having a story to tell and people to whom it can be told is the opportunity to collect key data during Conceptualization. The feedback is incorporated into the Creation step. As a result of this improved process, entrepreneurs are able to refine the product offering and message to become a more powerful resonator with a specific target audience. 

The other process, the more prevalent one described in the first paragraph, is faulty by comparison–and not just because it is being carried out by people who have next to no small business experience (launching their own enterprises.) By beginning with a business planning process, the typical entrepreneur is making a series of assumptions. The vast number of assumptions that have to be made to construct a business model from which a plan can be developed is likely to be the proverbial “house of cards.” Assumptions built upon assumptions that lead to projections about assumptions is a presumptuous risk, the outcome of which is likely to be business failure in one out of every two businesses started by the five year mark.

It is way better to eliminate as much of the guesswork as possible so that, when we arrive at Evaluation (Step 4, including the business plan), the planning is focused. The discipline of determining buyer needs–rather than simply looking at internal capabilities and developing products in an isolated manner–yields a recipe for improved business success as risk is eliminated through data verification. 

Do your homework before business planning and your ideas will meet with greater implementation success!