Case Analysis UniPalm A & B

Case Analysis UniPalm A & B

Order Description

The Unipalm case illustrates the visionary approach to leadership, the dilemmas this creates in a management team and how they might be resolved. It shows how different teams can have radically different results. You might find exhibit 5 of the A case a particularly fascinating read (note the date of the case)!

Individual Case Analysis Paper
Evaluate these cases (Unipalm A & B) using whatever tools and frameworks discussed as shown in the Uploaded attachments to date you feel apply – the case provides a useful capstone of many of the things we’ve learned so far. You may want to assess the business’ development in phases and critique Peter Dawe’s approach at each stage. I’m looking for your ability to synthesize the themes and issues into a coherent analysis of the situation, the decisions to be made and your recommendations.

PLEAE READ BOTH THE CASE (A&B) AND ALL THE ATTACHMENTS UPLOADED AND INCORPORATE ALL THE THEORIES AND LEADERSHIP APPROACH MENTIONED IN THE UPLOADED ATTACHMENTS WITH THE CASE ANALYSIS.

www.hbrreprints.org
What are my goals? Do I have
the right strategy? Can I
execute the strategy?
The Questions Every
Entrepreneur Must
Answer
by Amar Bhide
Included with this full-text Harvard Business Review article:
1 Article Summary
The Idea in Brief—the core idea
The Idea in Practice—putting the idea to work
2 The Questions Every Entrepreneur Must Answer
12 Further Reading
A list of related materials, with annotations to guide further
exploration of the article’s ideas and applications
Reprint 96603
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The Questions Every Entrepreneur Must
Answer
The Idea in Brief
The Idea in Practice
Of the hundreds of thousands of business
ventures launched each year, many never
get off the ground. Others fizzle after spectacular rocket starts.
A closer look at Bhide’s three questions:
Why such dismal odds? Entrepreneurs—
with their bias for action—often ignore ingredients essential to business success.
These include a clear strategy, the right
workforce talent, and organizational controls that spur performance without stifling
employees’ initiative.
Moreover, no two ventures take the same
path. Thus entrepreneurs can’t look to formulas to navigate the myriad choices arising as their enterprise evolves. A decision
that’s right for one venture may prove disastrous for another.
COPYRIGHT © 2006 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.
How to chart a successful course for your
venture? Bhide recommends asking yourself these questions:
• Where do I want to go? Consider your
goals for the business: Do you want the
rush that rapid growth delivers? A
chance to experiment with new technology? Capital gains from selling a successful
company?
W HERE DO I WANT TO GO?
To articulate your goals for the enterprise,
clarify:
• What you want personally from your business: An outlet for artistic talent? A flexible
lifestyle? The immortality of building an institution that embodies your values? Quick
profits?
• The kind of enterprise required: For example, if you want to sell your business eventually, you’ll need to build a sustainable
enterprise—one that can renew itself
through changing generations of technology, employees, and customers. And you’ll
need a company big enough to support an
infrastructure that won’t require your
daily intervention.
• Your risk tolerance: For example, building a
sustainable business entails risky long-term
bets—including trusting inexperienced
employees, personally guaranteeing debt,
and tolerating delayed payoffs. Are your
goals worth the attendant risks?
HOW WILL I GET THERE?
• How will I get there? Is your strategy
sound? Does it clarify what your company will and won’t do? Will it generate
sufficient profits and growth?
• Can I do it? Do you have the right talent?
Reliable sources of capital?
Improvisation takes a venture only so far.
Successful entrepreneurs keep asking tough
questions about where they want to go—
and whether the track they’re on will take
them there.
Successful strategies:
• Provide clear direction: Articulate the enterprise’s policies, geographic reach, capabilities, and decision-making framework—
in concise terms that employees, investors,
and customers can understand.
petition, and major technological change,
then ensure that your strategy accommodates those future scenarios.
• Establish the right growth rate: Plan for a
growth rate that will attract customers and
capital without causing excessive stress for
you and your employees.
CAN I DO IT?
A great strategy is worthless unless you can
execute it. To do so, you’ll need the right:
• Resources: Augment your workforce with
employees possessing the skills, knowledge, and values needed to implement
your strategy. A strong workforce attracts
customers and investment capital.
• Infrastructure: Establish the organizational
systems needed to execute your strategy.
For example, suppose you want to build a
geographically dispersed business, grow
rapidly, and eventually go public. In this
case, you’ll need to invest heavily in mechanisms for delegating tasks, specializing
job roles, forecasting and monitoring availability of funds, and maintaining financial
records.
• Role flexibility: To grow your business,
your role must shift from doing the “real
work” to teaching others to do it, prescribing desired results, and managing
the work environment.
• Generate sufficient profits and growth:
Ensure that your strategy will produce desired business results. For example, Mothers
Work—which sells maternity clothing to
professional women—took off only when
its founder revised her strategy from mail
order (which generated low profits owing
to stiff competition) to retail stores.
• Serve the enterprise long-term: Anticipate
future market saturation, intensified compage 1
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What are my goals? Do I have the right strategy? Can I execute the
strategy?
The Questions Every
Entrepreneur Must
Answer
COPYRIGHT © 1996 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.
by Amar Bhide
Of the hundreds of thousands of business ventures that entrepreneurs launch every year,
many never get off the ground. Others ?zzle
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 pro?table ventures, and the family has exhausted
its resources.
Another young company, pro?table 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 pro?ts to ?nance 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 ?xed costs.
Why all the con?icting 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
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The Questions Every Entrepreneur Must Answer
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).
panic. Many young enterprises simultaneously lack coherent strategies, competitive
strengths, talented employees, adequate controls, and clear reporting relationships.
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.
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
?nd 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 ?rst step clari?es 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 entre-
preneurs to confront the basic, big-picture issues before they think about re?nements
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-?ts-all
methodology for success.
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 ?duciary responsibility to maximize value for shareholders, entrepreneurs build their businesses to ful?ll
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 speci?c. For example, they may want an
outlet for artistic talent, a chance to experiment with new technology, a ?exible 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 pro?ts, some want to generate a satisfactory cash ?ow, and others seek capital
gains from building and selling a company.
Some entrepreneurs who want to build sustainable institutions do not consider personal
?nancial 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 pro?ts from
in-and-out deals. Similarly, so-called lifestyle
entrepreneurs, who are interested only in generating enough of a cash ?ow to maintain a
certain way of life, do not need to build busi-
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The Questions Every Entrepreneur Must Answer
nesses 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 sacri?ces 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 pro?ts, 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
naïve 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 dif?cult to sell
and often require the owner’s daily presence,
founders may become locked into their businesses. They may face ?nancial 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 vaca-
An Entrepreneur’s Guide to the Big Issues
If the answer is yes…
Are my goals well defined?
Personal aspirations
Business sustainability and size
Tolerance for risk
Do I have the right strategy?
Clear definition
Profitability and potential for growth
Durability
Rate of growth
Can I execute the strategy?
If the answer is no…
Resources
Organizational infrastructure
The founder’s role
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The Questions Every Entrepreneur Must Answer
To set meaningful goals,
entrepreneurs must
reconcile what they want
with what they are
willing to risk.
tion. 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 sacri?ces?
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.
Entrepreneurs would do well to follow Alsop’s example by thinking explicitly about
what they are and are not willing to risk. If entrepreneurs ?nd 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 sacri?ces 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 de?ning 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 de?ned? A company’s
strategy will fail all other tests if it doesn’t provide a clear direction for the enterprise. Even
solo entrepreneurs can bene?t from a de?ned
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 speci?c 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.
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 productdevelopment 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 ?eld 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 ?rms 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
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The Questions Every Entrepreneur Must Answer
A new company’s
strategy must embody
the founder’s vision of
where the company is
going, not where it is.
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 ?lms. De?ning the venture as a high-performance outdoor-gear company provides a much more useful focus.
Can the strategy generate suf?cient pro?ts
and growth? Once entrepreneurs have formulated clear strategies, they must determine
whether those strategies will allow the ventures to be pro?table 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
?xed 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 pro?table 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 dif?cult 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 unpro?table and cannot grow satisfactorily must take radical action. They must ?nd
a new industry or develop innovative economies of scale or scope in their existing ?elds.
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
pro?tability—a reality that Matthias confronted after three years in the business. In
1985, she borrowed $150,000 to open the ?rst
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 signi?cant 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 ?iers 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 ?rst 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
harvard business review • november–december 1996
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The Questions Every Entrepreneur Must Answer
It’s easy to knock off an
innovative product, but
an innovative business
system is much harder to
replicate.
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 pro?ts 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 ?rst 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 ?nd it much more dif?cult to replicate systems that incorporate many
distinct and complementary capabilities. A
business with an attractive product line, wellintegrated 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 ?nd ways to broaden their
competitive capabilities. For example, software
start-up Intuit’s ?rst product, Quicken, had
more attractive features and was easier to use
than other personal-?nance 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 de?ning or rede?ning
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 ?edgling enterprise is a function of many interdependent factors. (See the insert “Finding the Right Growth
Rate.”)
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 ?ll 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 ?rst obstacle to the successful implementation of a strategy. During the startup phase, many ventures cannot attract topnotch 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 underquali?ed and inexperi-
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The Questions Every Entrepreneur Must Answer
enced 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 speci?c 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 ?nd 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 ?rst as virtual enterprises because the founders cannot
afford to produce in-house and hire employees,
and because they value ?exibility. But the ?exibility 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 ?lling 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 dif?cult 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.
Finding the Right Growth Rate
Finding the optimal growth rate for a new enterprise is a dif?cult 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 pro?tability
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 ?rst 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 operatingsystem 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 ?nancing capability. When a new
venture is not able to attract investors or borrow at reasonable terms, its internal ?nancing
capability will determine the pace at which it
can grow. Businesses that have high pro?t
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 ?aws. 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
?re ?ghting 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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The Questions Every Entrepreneur Must Answer
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 ?rst-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.
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 sti?ing
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 ?nances very
closely. Companies like Blockbuster Video
cope by giving frontline employees all the operating autonomy they can handle while maintaining tight, centralized ?nancial controls.
An evolving organization’s culture also has a
profound in?uence 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 out?ts. Culture ?lls in the
gaps that an organization’s written rules do not
anticipate. Culture determines the degree to
Investing in Organizational Infrastructure
Few entrepreneurs start out with both a wellde?ned 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 ?ne 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 sti?e 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 startup, 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 de?ned 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. Cashstrapped 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 ?nancial records
and controls to reassure them of the soundness of the business.
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The Questions Every Entrepreneur Must Answer
Entrepreneurs who hope
to turn underqualified
employees into star
performers are almost
always disappointed.
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 ?ts 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 ?nancial controls.
But, venture capitalist Thomas Dickerson
says, “PSS would be just another ef?ciently
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 ?rst wave of employees
shape a culture that may not serve the
founders’ goals and strategies. Once a culture is
established, it is dif?cult to change.
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 ?edgling
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 ?rst
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 ?rm grip on expenses
and monitoring performance. They have to inspire and coach employees while dealing with
the unpleasantness of ?ring those who will not
be able to grow with the company. Bill Nussey,
cofounder of the software maker Da Vinci Systems Corporation, recalls that ?ring employees
who had “struggled and cried and sacri?ced
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 ?rm through a considerable
expansion of its size and geographic reach. Bill
Gates, co-founder and CEO of multibilliondollar 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
harvard business review • november–december 1996
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The Questions Every Entrepreneur Must Answer
When entrepreneurs
don’t stop to think about
culture, their companies
develop one by chance
rather than by design.
compensation of individual employees; negotiating the acquisitions of companies instead of
the cost of of?ce 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 ?nancial 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 ful?lls and frustrates them personally.
Many great enterprises spring from modest,
improvised beginnings. William Hewlett and
David Packard tried to craft a bowling alley footfault indicator and a harmonica tuner before developing their ?rst 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 out?t 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.
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The Questions Every Entrepreneur Must
Answer
Further Reading
ARTICLES
How Entrepreneurs Craft Strategies
That Work
by Amar Bhide
Harvard Business Review
March 1994
Product no. 94202
In this earlier article, Bhide focuses on the
questions “How will I get there?” and “Can I do
it?” Given the fast-moving environment of
start-ups, entrepreneurs must move quickly—
or opportunity may no longer exist. The author emphasizes the importance of combining creative ideas with superior capacity for
execution—and provides four guidelines for
success: 1) Screen out unpromising ideas
early, using your judgment and reflection.
2) Realistically assess your financial situation and goals for the venture. 3) To conserve
time and money, minimize the resources you
devote to researching ideas. 4) Don’t wait
until you have all the answers to act.
Why Entrepreneurs Don’t Scale
by John Hamm
Harvard Business Review
December 2002
Product no. R0212J
To Order
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617-783-7500. Go to www.hbrreprints.org
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Harvard Business Review article reprints,
call 617-783-7626, or e-mai
[email protected]
Natural-Born Entrepreneur
by Dan Bricklin
Harvard Business Review
September 2001
Product no. R0108B
This first-person entrepreneur’s account affirms many of Bhide’s recommendations. In
addition to establishing the right talent and
achieving good timing, Bricklin maintains that
entrepreneurs need several more tricks in
their bag: 1) Know your limits—by gauging
your penchant for risk and personal sacrifice
and knowing when your ambitions exceed
your skills. 2) Don’t wait to get started. If you
do wait, understand that you may find it
harder to sacrifice your standard of living for
your business. 3) Recognize that you are not
your business: failure doesn’t make you an
awful person—and success doesn’t make you
a genius. 4) Possess genuine passion for what
you’re doing, as well as the humility to know
when you need help.
If you want to build a large business either for
profitable sale or to leave a legacy, you face
significant obstacles. Hamm identifies the four
management tendencies that are valuable in
the early stages of a venture but that make it
difficult for entrepreneurs to grow their companies into large, sustainable businesses:
1) Excessive loyalty to comrades can prevent
you from making staffing changes necessary
for continuing growth. 2) Excessive attention
to detail can cause you to lose sight of your
venture’s long-term goals. 3) Single-mindedness
can limit your company’s potential as it grows.
4) Working in isolation stunts growth because expansion requires engagement with
many other people.
page 12
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