The Business Book

THE BUSINESS BOOK



THE BUSINESS BOOK

London, new York, MeLbourne, Munich, and deLhi DK jAcKet designer First American edition, 2014 Laura Brim senior editor published in the United states by sam Atkinson jAcKet editor dK publishing Manisha Majithia project Art editor jAcKet design 375 Hudson street Amy child deveLopMent MAnAger new York, new York 10014 sophia tampakopoulos editors 11 12 13 14 15 10 9 8 7 6 5 4 3 2 1 scarlett o’Hara, Alison sturgeon iLLUstrAtions 001 - 192364 - Feb/2014 james graham Us editors copyright © 2014 Margaret parrish, jane perlmutter prodUcer, pre-prodUction dorling Kindersley Limited rebecca Fallowfield pictUre reseArcHer prodUcer All rights reserved sumedha chopra gemma sharpe Without limiting the rights under MAnAging editor original styling by copyright reserved above, no part of esther ripley this publication may be reproduced, stuDio8 Design stored in or introduced into a retrieval MAnAging Art editor system, or transmitted, in any form, Karen self produced for dK by or by any means (electronic, pUBLisHer cobalt iD mechanical, photocopying, recording, sarah Larter or otherwise), without the prior written Art editors permission of both the copyright owner Art director darren Bland, paul reid and the above publisher of this book. phil ormerod editors published in great Britain by AssociAte richard gilbert, diana Loxley, dorling Kindersley Limited. pUBLisHing director sarah tomley, Marek Walisiewicz A catalog record for this book is Liz Wheeler available from the Library of congress. pUBLisHing director isBn: 978-1-4654-1585-1 jonathan Metcalf printed and bound in china by Leo paper products Ltd discover more at www.dk.com

contributors denry machin ian marcouse, consultant editor Denry Machin is an associate tutor at Keele University, UK, and is working at doctoral research on the application of business Ian Marcousé lectures in business and economics education at thinking within education. He also works for Harrow International the Institute of Education in London. He has written a host of Management Services as projects manager, assisting in the business text books for A-level and BTEC students, including development of Harrow School’s presence in Asia. He is the author the popular A–Z Business Studies handbooks, and is the founder of several business books, journals, and magazine articles. and director of A–Z Business Training Ltd. nigel watson PhiliPPa anderson Nigel Watson has taught business and economics for A-Level and Philippa Anderson is a communications consultant and business International Baccalaureate students for 25 years. He has authored writer who has authored articles, magazine features, and books on and co-authored books and magazine articles in both subjects. numerous aspects of business, from market research to leadership. She also provides communications consultancy for multinational firms, including 3M, Anglo American, and Coca-Cola. alexandra black Alexandra Black studied business communications before embarking on a writing career that led her to Japan and stints with financial newspaper group Nikkei Inc. and investment bank J. P. Morgan. She later worked for a direct marketing publisher in Sydney, Australia, before moving to Cambridge, UK. She writes on a range of subjects, from business to history and fashion.

CONTENTS 10 INTRODUCTION 58 Without continuous growth and progress, START SMALL, success has no meaning THINK BIG The Greiner curve STARTING AND GROWING 32 Be first or be better 62 If you believe in THE BUSINESS Gaining an edge something, work nights and weekends—it won’t 20 If you can dream it, 40 Put all your eggs in one feel like work you can do it basket, and then watch The weightless start-up Beating the odds at that basket start-up Managing risk LIGHTING THE FIRE 22 There’s a gap in the 42 Luck is a dividend of LEADERSHIP AND HUMAN market, but is there sweat. The more you RESOURCES a market in the gap? sweat, the luckier you get Finding a profitable niche Luck (and how to get lucky) 68 Managers do things right, leaders do the right thing 24 You can learn all you 43 Broaden your vision, and Leading well need to know about the maintain stability while competition’s operation advancing forward 70 None of us is as smart by looking in his Take the second step as all of us garbage cans The value of teams Study the competition 44 Nothing great is created suddenly 72 Innovation must be 28 The secret of business is How fast to grow invasive and perpetual: to know something that everyone, everywhere, nobody else knows 46 The role of the CEO is to all of the time Stand out in the market enable people to excel Creativity and invention From entrepreneur to leader 48 Chains of habit are too 74 Dissent adds spice, light to be felt until spirit, and an they are too heavy to invigorating quality be broken Beware the yes-men Keep evolving business practice 76 No great manager or leader ever fell from 52 A corporation is a living heaven organism; it has to Gods of management continue to shed its skin Reinventing and adapting

78 A leader is one who 112 Management is a practice knows the way, goes the where art, science, and way, and shows the way craft meet Effective leadership Mintzberg’s management roles 80 Teamwork is the fuel that allows common 114 A camel is a horse 132 Make the best quality people to attain designed by committee of goods at the lowest uncommon results Avoid groupthink cost, paying the highest Organizing teams and talent wages possible 115 The art of thinking Your workers are your 86 Leaders allow great independently, together customers people to do the work The value of diversity they were born to do Make the most of your talent 88 The way forward may MAKING MONEY 138 Utilize OPM—Other not be to go forward WORK People’s Money Thinking outside the box Who bears the risk? MANAGING FINANCES 90 The more a person 146 Swim upstream. Go the can do, the more you 120 Do not let yourself be other way. Ignore the can motivate them involved in a fraudulent conventional wisdom Is money the motivator? business Play by the rules Ignoring the herd 92 Be an enzyme—a catalyst 124 Executive officers must 150 Debt is the worst poverty for change be free from avarice Leverage and excess risk Changing the game Profit before perks 152 Cash is king 100 The worst disease that 126 If wealth is placed where Profit versus cash flow afflicts executives is it bears interest, it comes egotism Hubris and nemesis back to you redoubled 154 Only when the tide goes Investment and dividends out do you discover who’s 104 Culture is the way in been swimming naked which a group of people 128 Borrow short, lend long Off-balance-sheet risk solves problems Making money from money Organizational culture 155 Return on equity is a 130 The interests of the financial goal that can 110 Emotional intelligence shareholders are our own become an own goal is the intersection of Accountability and Maximize return on equity heart and head governance Develop emotional 156 As the role of private intelligence equity has grown, so have the risks it poses The private equity model 158 Assign costs according to the resources consumed Activity-based costing

WORKING WITH 186 Synergy and other lies 218 If you don’t know A VISION Why takeovers disappoint where you are, a map won’t help STRATEGY AND 188 The Chinese word “crisis” The capability maturity OPERATIONS is composed of two model characters: “danger” 164 Turn every disaster into and “opportunity” 220 Chaos brings uneasiness, an opportunity Crisis management but it also allows for Learning from failure creativity and growth 190 You can’t grow long-term Coping with chaos 166 If I had asked people what if you can’t eat short-term they wanted, they would Balancing long- versus 222 Always do what is right. have said faster horses short-termism It will gratify half of Leading the market mankind and astonish 192 Market Attractiveness, the other 170 The main thing to Business Attractiveness Morality in business remember is, the main The MABA matrix thing is the main thing 223 There is no such thing as Protect the core business 194 Only the paranoid survive a minor lapse in integrity Avoiding complacency Collusion 172 You don’t need a huge company, just a computer 202 To excel, tap into people’s 224 Make it easier to do and a part-time person capacity to learn the right thing and Small is beautiful The learning organization much harder to do the wrong thing 178 Don’t get caught in 208 The future of business is Creating an ethical culture the middle selling less of more Porter’s generic strategies The long tail SUCCESSFUL SELLING 184 The essence of strategy 210 To be an optimist ... is choosing what not to do have a contingency MARKETING MANAGEMENT Good and bad strategy plan for when all hell breaks loose 232 Marketing is far too Contingency planning important to leave to the marketing department 211 Plans are useless, but The marketing model planning is indispensable Scenario planning 234 Know the customer so well that the product fits 212 The strongest them and sells itself competitive forces Understanding the market determine the profitability of an industry 242 Attention, Interest, Porter’s five forces Desire, Action The AIDA model 216 If you don’t have a competitive advantage, don’t compete The value chain

244 Marketing myopia 278 Trying to predict the 312 Your most unhappy Focus on the future market future is like driving customers are your with no lights looking greatest source of 250 The cash cow is the out of the back window learning beating heart of the Forecasting Feedback and innovation organization Product portfolio 280 Product, Place, Price, 314 Technology is the great Promotion Marketing mix growling engine of change 256 Expanding away from The right technology your core has risks; diversification doubles DELIVERING THE 316 Without big data, you are them Ansoff’s matrix GOODS blind and deaf and in the middle of a highway 258 If you’re different, you PRODUCTION AND Benefitting from “big data” will stand out POSTPRODUCTION Creating a brand 318 Put the product into 288 See how much, not how the customer’s hands— 264 There is only one boss: little, you can give for it will speak for itself the customer a dollar Quality sells Make your customers Maximize customer benefits love you 324 The desire to own 290 Costs do not exist to be something a little better, 268 Whitewashing, but with calculated. Costs exist to a little sooner than a green brush be reduced necessary Greenwash Lean production Planned obsolescence 270 People want companies 326 Time is money to believe in something Time-based management beyond maximizing profits The appeal of ethics 294 If the pie’s not big enough, 328 A project without a make a bigger pie critical path is like a ship 271 Everybody likes Fulfilling demand without a rudder something extra for Critical path analysis nothing 296 Eliminate unnecessary Promotions and incentives steps Simplify processes 330 Taking the best from the best Benchmarking 272 In good times people 300 Every gain through the want to advertise; in bad elimination of waste is 332 DIRECTORY times they have to gold in the mine Why advertise? Juran’s production ideal 340 GLOSSARY 274 Make your thinking as 302 Machines, facilities, 344 INDEX funny as possible and people should work Generating buzz together to add value 351 ACKNOWLEDGMENTS Kaizen 276 E-commerce is becoming mobile commerce 310 Learning and innovation M-commerce go hand in hand Applying and testing ideas

INTRODU

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12 INTRODUCTION F rom the time that goods of scale—that production costs fall increasingly international— and services began to be as more items are produced. Money environment businesses needed traded in early civilizations, gave rise to the concept of “value different, and more rigorous, people have been thinking about added”—selling an item for more processes and structures. The business. The emergence of than it cost to produce. Even when geographic scope and ever-growing specialized producers and the use barter was the norm, producers still size of these evolving businesses of money as a means of exchange knew it was advantageous to lower required new levels of coordination were methods by which individuals costs and raise the value of goods. and communication—in short, and societies could, in modern Today’s companies may use different businesses needed management. terms, gain a “business edge.” The technologies and trade on a global ancient Egyptians, the Mayans, the scale, but the essence of business Managing production Greeks, and the Romans all knew has changed little in millennia. The initial focus of the new breed that wealth creation through the of manager was on production. mechanism of commerce was An era of change As manufacturing moved from fundamental to the acquisition of However, the study of business as individual craftsmen to machinery, power, and formed the base on an activity in its own right emerged and as ever-greater scale was which civilization could prosper. relatively recently. The terms required, theorists such as Henri “manager” and “management” did Fayol examined ever-more-efficient The lessons of the early traders not appear in the English language ways of operating. The theories resonate even today. Specialism until the late 16th century. In his of Scientific Management, chiefly revealed the benefits of economies 1977 text The Visible Hand, Dr. formulated by Frederick Taylor, Alfred Chandler divided business suggested that there was “one best The art of administration history into two periods: pre-1850 way” to perform a task. Businesses is as old as the and post-1850. Before 1850 local, were organized by precise routines, human race. family-owned firms dominated the and the role of the worker was simply business environment. With to supervise and “feed” machinery, Edward D. Jones commerce operating on a relatively as though they were part of it. With small scale, little thought was given the advent of production lines US investment banker to the wider disciplines of business. in the early 1900s, business was (1893–1982) characterized by standardization The growth of the railroads in and mass production. the mid-1800s, followed by the Industrial Revolution, enabled While Henry Ford’s Model T car businesses to grow beyond the is seen as a major accomplishment immediate gaze of friends or family, of industrialization, Ford also and outside the immediate locale. remarked “why is it every time I ask To prosper in this new—and for a pair of hands, they come with

INTRODUCTION 13 a brain attached?” Output may have were able to make use of computers the means to reach a mass increased, but so too did conflict to help solve operational problems. audience. Businesses had always between management and staff. Human relations were not forgotten, used advertising to inform Working conditions were poor and but in management thinking, customers about products and to businesses ignored the sociological measurability returned to the fore. persuade them to buy, but mass context of work—productivity media provided the platform for mattered more than people. Global brands a new, and much broader, field— The postwar period saw the marketing. In the 1940s US Studying people growth of multinationals and advertising executive Rosser Reeves In the 1920s a new influence on conglomerates—businesses with promoted the value of a Unique business thinking emerged—the multiple and diverse interests Selling Proposition. By the 1960s, Human Relations Movement of across the globe. The war had made marketing methods had shifted behavioral studies. Through the the world seem smaller, and had from simply telling customers about work of psychologists Elton Mayo paved the way for the global brand. products to listening to what and Abraham Maslow, businesses These newly emerging global customers wanted, and adapting began to recognize the value of brands grew as a result of a media products and services to suit that. human relations. Workers were no revolution—television, magazines, longer seen as simply “cogs in the and newspapers gave businesses Initially, marketing had its critics. machine,” but as individuals with In the early 1960s hype about the unique needs. Managers still Entrepreneurship is about product became more important focused on efficiency, but realized survival, which nurtures than quality, and customers grew that workers were more productive creative thinking. Business dissatisfied with empty claims. when their social and emotional is not financial science, it’s This, and competition from needs were taken care of. For the about trading—buying Japanese manufacturers, had first time, job design, workplace Western companies embracing a environments, teamwork, and selling. new form of business thinking: remuneration, and nonfinancial Anita Roddick Total Quality Management (TQM) benefits were all considered and Zero Defects management. important to staff motivation. UK entrepreneur (1942–2007) Guided by management theorists, such as W. Edwards Demming and In the period following World Philip B. Crosby, quality was seen War II, business practice shifted as the responsibility of the entire again. Wartime innovation had company, not just those on the yielded significant technological production line. Combining Human advances that could be applied Relations thinking and the to commerce. Managers began to customer-focused approach of utilize quantitative analysis, and marketing, many companies ❯❯

14 INTRODUCTION adopted the Japanese philosophy of the conditions for business growth, 2000s heralded a new era for kaizen: “continuous improvement of and the correct positioning of business. While early hype led to everything, by everyone.” Staff at products within their market, were the failure of many online start-ups all levels was tasked with improving considered key to business strategy. in the dot-com bubble of 1997 to processes and products through Moreover, what distinguished these 2000, the successful e-commerce “quality circles.” While TQM is no gurus from their predecessors—who pioneers laid the foundations for a longer the buzzword it once was, had tended to focus on operational business landscape that would be quality remains important. The issues—was a focus on leadership dominated by innovation. From modern iteration of TQM is Six itself. For example, Charles Handy’s high-tech garage start-ups—such Sigma, an approach to process The Empty Raincoat revealed the as Hewlett-Packard and Apple— improvement that was developed paradoxes of leadership, and to the websites, mobile apps, and by Motorola in 1986 and adapted by acknowledged the vulnerabilities social-media forums of the modern Jack Welch during his time as CEO and fragilities of the managers business environment, technology of General Electric. themselves. Leadership in the is increasingly vital for business. context of business, these writers Gurus and thinkers recognized, is no easy undertaking. The explosion of new Business history itself emerged businesses thanks to technology as a topic of study in the 1970s. Digital pioneering also helped to expand the Dr. Alfred Chandler progressed Just as television and mass media availability of finance. During the the study of business history from had done before, the growth of the 1980s and 1990s finance had grown the purely descriptive to the Internet in the 1990s and early into a distinct discipline. Corporate analytical—his course at Harvard mergers and high-profile takeovers Business School stressed the Business can be a source became a way for businesses to importance of organizational of progressive change. grow beyond their operational capabilities, technological Jerry Greenfield limits; leverage joined marketing innovation, and continuous and strategy as part of the learning. Taking their cue from US businessman, co-founder of Ben management lexicon. In the late Chandler, in the 1980s and 1990s and Jerry’s ice cream (1951–) 1990s this expanded to venture management experts—such as capital: the funding of small Michael Porter, Igor Ansoff, companies by profit-seeking Rosabeth Moss Kanter, Henry investors. The risk of starting and Mintzberg, and Peter Drucker— running a business remains, but encouraged businesses to consider the opportunities afforded by their environments, to consider technology and easier access to the needs of people, and to remain finance have made taking the first adaptable to change. Maintaining step a little easier. With micro- finance, and the support of online

INTRODUCTION 15 networks and communities of like- for example, may be “the world’s Business is a fascinating subject. minded people dispensing factory,” but its home-grown It surrounds us and affects us daily. business advice, enterprise has companies are also starting to A walk down the street, a wander never been more entrepreneurial. represent a threat to Western around a supermarket, an Internet businesses. As the global recession search on almost any topic will Recent business thinking has of 2007–08 and ongoing economic reveal commerce in its many and brought diversity and social uncertainty have proven, business varied forms. At its core business responsibility to the fore. Businesses in the 21st century is increasingly is, and always has been, about are encouraged, and increasingly more interdependent and more survival and surplus—about the required by law, to employ people challenging than ever before. advancement of self and of society. from diverse backgrounds and to Starting a business might be easier, As the world continues to open act in an ethical manner, wherever but to survive entrepreneurs need up, and as opportunities for they operate in the world. the tenacity to take an idea to enterprise multiply, an interest Businesses such Nike and Adidas market, the business acumen to in business has never been more require suppliers to prove that labor turn a good plan into a profitable relevant, or more exciting. Moreover, conditions in their factories meet enterprise, and the financial skill to for those with entrepreneurial required standards. Sustainability, maintain success. spirit, business has never been recycling, diversity, and more rewarding. ■ environmentalism have entered Continual change business thinking alongside For centuries social, political, and Business, more than any other strategic management and risk. technological factors have forced occupation, is a continual companies and individuals to dealing with the future; it New horizons create new ways of generating is a continual calculation, If business thinking has shifted, profits. Whether bartering goods an instinctive exercise so too has the nature of business with a neighboring village or in foresight. itself. Where once a company was seeking ways to make profits from Henry R. Luce constrained by its locality, today social networking, business the opportunities are truly global. thinking has changed, shifted, and US magazine publisher (1898–1967) Globalization does, however, mean evolved to mirror the wants and that business is more competitive needs of the societies whose wealth than ever. Emerging markets are it creates. Sometimes, as in the creating new opportunities and 2008 financial crisis, business failed new threats. They may be able to in its efforts. In other examples—the outsource production to low-cost legacy of Apple’s game-changing countries, but as their economies products, for example—companies grow, these emerging nations are have been spectacularly successful. breeding new competition. China,

START S THINK B STARTING AND GROWING THE BUSINESS

MALL, IG

18 INTRODUCTION A ll businesses start from the and that they have the skills and find a profitable niche—to succeed, same point: an idea. It is knowledge to turn the original companies need to do something what happens to that idea concept into a successful business. different in order to stand out in that determines business success. the market. The strategy for most It follows that the idea must companies is to differentiate; this According to Entrepreneur be profitable. Sometimes, an idea means demonstrating to customers magazine, nearly half of all new may look great on paper, but turn that they offer something that is not start-ups fail within the first three out to be uncommercial when put available from competitors—a years. Beating the odds at start-up into practice. Determining whether Unique or Emotional Selling is tough. First and foremost an idea, an idea has potential requires a Proposition (USP or ESP). no matter how good, must be study of the competition and the combined with entrepreneurial relevant market. Who is competing Such attempts to stand out are spirit, defined as the willingness for customers’ time and money? everywhere. Every business, and to take risk. Without entrepreneurial Are these competitors selling at every stage of production, from spirit a great idea might never be directly competitive products or raw-material extraction to after- pursued. Not all ideas are good possible substitutes? How are sales service, tries to distinguish ones though; it would be a foolish competitors perceived in the its products or services from all entrepreneur who rushed a product market? How big is the market? others. Walk into any bookstore, to market without careful thought, for example, and you will see research, and detailed planning. Most markets are increasingly countless examples of books, often Risk might be inherent in business global, crowded, and competitive. on the same topic, using design, enterprise, but successful Few companies are lucky enough to style, and even size (large or small) entrepreneurs are those who are to stand out from the competition. not only willing to take risks, but The only thing worse are also able to manage risk. than starting something Gaining an edge often depends on one of two things: being first Realistic propositions and failing … is not into a new market niche, or being Having an idea is the first step— starting something. different from the competition. For the next hurdle is finance. Some example, in 1995 eBay was first start-ups require very little capital, Seth Godin into the online auction market, and a few require none at all. and has dominated it ever since. However, many require significant US entrepreneur (1960–) Similarly, Volvo was first to identify backing, and most will need to seek the opportunity for luxury bus sales funding at some stage in the in India, and has enjoyed healthy growth process. An entrepreneur sales. In contrast, Facebook was by must be able to convince financial no means the first social network, backers that the concept is valid but it is the most successful; its edge was having a better product.

START SMALL, THINK BIG 19 Once a company is established, the second step of employing struggle to make the necessary the challenge shifts: the objective people who are neither family nor changes; some try and fail, while now is to maintain sales and grow previously known friends. This is others decide to remain small. in the short- and long-term. the start of a move from entrepreneur to leader, and it requires a new set Finding a balance Adapting to survive of skills, as new demands are placed Determining how fast to grow is, Long-term business survival on the business founders. Where therefore, a balance of the founder’s depends upon the company once energy, ideas, and passion skills and desires. But in order to constantly reinventing and were enough, evolving businesses survive, the idea must be unique adapting itself in order to remain require the development of formal enough to define its own niche, and ahead of the competition. In systems, procedures, and processes. the individual or group behind it dynamic markets, which are In short, they require management. must demonstrate entrepreneurial growing and evolving all the time, Founders must develop delegation, spirit. They need the flexibility to the idea on which the company communication, and coordination adapt the idea—and themselves— was founded may become irrelevant skills, or they must employ people as business and market pressures over time, and rivals will almost who have them. demand. Luck will play a part, but certainly copy it. The ecosystem it is the balance of these factors in which a business operates is As Larry Greiner described in that determines whether a small rarely, if ever, static. Corporations his 1972 paper, “Evolution and start-up becomes a giant. ■ exist in these ecosystems as living Revolution as Organizations Grow”, organisms that must adapt to as a business grows, the demands When you have to prove survive. In their 2013 book, on it change. The Greiner Curve is the value of your ideas by Reinventing Giants, Bill Fischer, a graphic that shows how the initial persuading other people to Umberto Lago, and Fang Liu noted stages of growth rely on individual pay for them, it clears out an that the Chinese home appliances initiative, and that evolving ad-hoc awful lot of woolly thinking. company Haier had reinvented business practice into sustainable itself at least three times in the and successful growth can only be Tim O’Reilly past 30 years. In contrast, Kodak, achieved by experienced people a US giant of the 20th century, was and rigorous systems. Professional Irish entrepreneur (1954–) slow to react to the rise of digital management, as opposed to photography, and went bankrupt. entrepreneurial spirit, becomes essential to business evolution. Moreover, just as the enterprise must adapt, so too must the owner. Some leaders, such as Bill Gates Most businesses start small, and and Steve Jobs, for example, are remain small. Few entrepreneurs able to make the transition from are willing or know how to take entrepreneurial founder to corporate leader. Many others, however,

20 IF YOU CAN DREAM IT, YOU CAN DO IT BEATING THE ODDS AT START-UP IN CONTEXT ...a good idea allied to ...an entrepreneurial spirit: a great business plan. a willingness to take risks. FOCUS Business start-ups Beating the odds at start-up requires... KEY DATES 18th century The term ...business acumen to ...determination to “entrepreneur” is used to put the plan into action. deal with setbacks. describe someone who is willing to risk buying at T he reasons for starting a holds true for some, pursuing the certain prices and selling business are many. Some dream is risky. Those who attempt at uncertain prices. people dream of being their it must have the entrepreneurial own boss—of turning their hobby spirit to fearlessly quit a well-paid 1946 Professor Arthur Cole into a profitable enterprise, of job, go it alone, and face a future writes An Approach to expressing their creativity, or of filled with uncertainty. Others Entrepreneurship, sparking being richly rewarded for their hard might need a push; often being laid interest in the phenomenon. work. Although Walt Disney’s maxim off (and its associated lump-sum “if you can dream it, you can do it” payment) can be a springboard. 2005 The micro-finance, nonprofit site Kiva.com launches to make small loans to very small businesses. 2009 Crowdfunding websites, such as Kickstarter.com, allow individuals to provide funding for businesses. 2013 A study by Ross Levine and Yona Rubinstein finds that as teenagers, many successful entrepreneurs exhibited aggressive behavior, broke the rules, and got into trouble.

START SMALL, THINK BIG 21 See also: Finding a profitable niche 22–23 ■ Managing risk 40–41 ■ Luck (and how to get lucky) 42 ■ Take the second step 43 ■ From entrepreneur to leader 46–47 ■ Learning from failure 164–65 ■ Small is beautiful 172–77 Younger entrepreneurs are In recent years, securing finance Sustaining a business is increasingly a part of the start-up for start-ups has become a little a hell of a lot of hard work, scenario. They may have gained easier. Many governments offer and staying hungry is half the necessary skills for business by loan plans or grants. Entrepreneurs their early twenties, and enjoy the with big ideas can access large the battle. excitement and freedom of running funds of money and managerial Wendy Tan White their own venture. support from venture capitalists, whose sole purpose is to incubate UK business executive (1970–) Keeping the faith start-ups. For smaller start-ups, and While the reasons for start-up may for people with very little of their failure is a lack of cash. While vary, what all entrepreneurs have in own capital, micro-loans and loan capital can help for a while, common is the willingness to take crowdfunding finance—such as eventually a business must fund risks. Few entrepreneurs get it right that offered by Kickstarter.com— its operations from revenue. A good first time—it takes resilience and are increasingly popular. business plan will analyze future tenacity to keep going in the face cash flows and identify any of failure, and it takes perseverance The business plan potential shortfalls. to remain positive when customers, The key to securing financing is banks, and financial backers a business plan. A good plan will Beating the odds at start-up is repeatedly say “no.” Faith in the outline the idea itself, detail any defined by the tenacity to take an idea is essential. While some start- supporting market research, idea to market, the ability to secure ups require very little capital, most describe operational and marketing sufficient finance, and the business require funding during their early activities, and give financial acumen to turn a good plan into a growth phases. A business owner predictions. The plan should also long-term, profitable enterprise. ■ must be able to convince banks, outline a strategy for long-term or other financial backers, that their growth and identify contingencies concept is valid and that they have (alternative ideas or markets) if the skills to turn the idea into a things do not go as planned. profitable venture, even though this may take some time. It took Most importantly, a good Amazon six years to make a profit. business plan will acknowledge that the biggest reason for business “Tony” Fernandes Tan Sri Anthony “Tony” Fernandes  in the company’s tagline: “Now was born in Kuala Lumpur in 1964 everyone can fly.” One year after to an Indian father and Malaysian his takeover, the airline had mother. He went to school in cleared its debts of $11 million England and graduated from and had broken even. Fernandes the London School of Economics estimates that around 50 (LSE) in 1987. He worked briefly percent of its travelers are for Richard Branson at Virgin first-time flyers. The company Records as a financial controller is now widely regarded as the before becoming Southeast Asia world’s best low-cost airline. Vice President for Warner Music Group in 1992. In 2001, Fernandes In 2007 Fernandes founded left Warner to go it alone. He Tune Hotels, a low-cost hotel mortgaged his home to raise chain that promises “Five-star the finance needed to buy the beds at one-star prices.” He struggling young airline, AirAsia. advises potential entrepreneurs His low-cost strategy was clear to “dream the impossible. Never take no for an answer.”

22 THERE’S A GAP IN THE MARKET, BUT IS THERE A MARKET IN THE GAP? FINDING A PROFITABLE NICHE IN CONTEXT Many markets are crowded, F inding a space in the with multiple sellers chasing market that is unchallenged FOCUS the same customers. by competition is the Holy Positioning strategy Grail of positioning strategy. For these sellers, competition Unfortunately these spaces— KEY DATES lowers profitability. known as market gaps—are often 1950s and 60s Markets are illusive, and the benefits of finding dominated by large companies Market gaps—a new product or one are often equally illusory. offering mass-produced items, sector of the market—offer the such as Coca-Cola. Choice is enticing prospect of healthy Although competition is a fact of limited, but the scope for life, it makes business difficult, products targeted at new profitability. contributing to an ever-downward sectors of the market is high. pressure on prices, ever-rising costs But does the gap contain (such as the funding of new product 1970s and 80s Markets enough business development and marketing), and an become more segmented as incessant need to outmaneuver and companys generate new to generate a profit? outsmart rivals. In contrast, the products and market them benefits of finding a market gap—a toward narrower groups. There’s a gap in the small niche segment of a market that market, but is there a is unfettered by competition—are 1990s and 2000s Companies obvious: greater control over prices, and brands position themselves market in the gap? lower costs, and improved profits. ever-more aggressively and distinctively in the The identification of a market overcrowded marketplace. gap, combined with a dose of entrepreneurial spirit, is often all 2010s Finding and sustaining that is needed to launch a new market niches is assisted by business. In 2006, Twitter founder the promotional capabilities Jack Dorsey combined short-form of the Internet, which allow communication with social media, “one-to-one” marketing and providing a service that no one else customization of products. had spotted. Free to most users, revenue comes from companies who pay for promotional tweets and profiles: Twitter earned advertising revenues of $582 million in 2013.

START SMALL, THINK BIG 23 See also: Stand out in the market 28–31 ■ Gaining an edge 32–39 ■ Reinventing and adapting 52–57 ■ Porter’s generic strategies 178–83 ■ Good and bad strategy 184–85 ■ The value chain 216–17 ■ Marketing mix 280–83 Not all gaps are lucrative, however. Snapple’s positioning in the UNIQUE The Amphicar, for instance, was an crowded US beverage marketplace Snapple amphibious car produced in the was the key to its success. By 1960s for US consumers who wanted focusing on a niche healthy product to drive on roads and rivers. It was a and marketing itself as a quirky quirky novelty, but the market was company, Snapple was able to too small to be profitable. This was wrestle a large market share also true for bottled water for pets— (indicated here by circle size) launched in the US in 1994, Thirsty from its rivals. Cat! and Thirsty Dog! failed to entice pet owners. U N H E A LT H Y Arizona H E A LT H Y OceanSpray A sustainable niche Lipton Snapple, the manufacturer of healthy tea and juice drinks, is a company Nestea that has successfully found a sustainable and profitable niche. A MAINSTREAM glance at the beverage counter of any supermarket reveals that dozens natural ingredients. Its founders ran one sitting. Distribution was through of brands compete for sales. Many a health store in Manhattan, and the small, inner-city stores where companies have failed in this ultra- company used the slogan: “100% customers could “grab-and-go.” competitive market: for example, Natural.” Snapple targeted students, These tactics helped to secure a Pepsi tried to capture a nonexistent commuters, and lunch-time office profitable and sustainable niche, market for morning cola with its workers with a new healthy “snack” distinguishing Snapple from its short-lived, high-caffeine drink, AM. drink, combining its Unique Selling rivals in the 1980s and 1990s. In 1994 Proposition (USP) with irreverent sales peaked at $674 million. Success for Snapple came from marketing and small bottles that positioning the product as a unique were designed to be consumed in Unoccupied market territory can brand—Snapple was one of the first present major opportunities for companies to manufacture juices vision that led to falling sales, companies, but the challenge lies in and drinks made completely from was sold to Triarc in 1997 for identifying which gaps are profitable $300 million. Triarc then sold and which are traps. During the Snapple the Snapple brand to Cadbury 1990s, many companies became Schweppes for $1.45 billion in excited about the potential of the A contraction of the words September 2000, with a further “green” market, across a whole range “snappy” and “apple,” Snapple deal in May 2008 seeing Snapple of goods. But this market has failed was launched in 1978 by become part of what is now the to materialize in any profitable way. Unadulterated Food Products Dr Pepper Snapple Group. This marks one of the potential Inc. The company was founded pitfalls in identifying market gaps in 1972 by Arnold Greenberg, Marketed as “Made From the based on market research: Leonard Marsh, and Hyman Best Stuff on Earth,” Snapple’s sometimes consumers have strong Golden in New York, US. unusual blends of ready-to-drink attitudes or opinions on trends or teas, juice drinks, and waters issues—such as ecology—that they Such was the popularity of are sold in more than 80 are disinclined to consider when Snapple that the company has countries around the world. purchasing products, especially if been subject to numerous they affect cost. Many market gaps, buyouts. Unadulterated was it seems, are tempting, but illusory. ■ purchased by Quaker Oats for $1.7 billion in 1994 but, following differences in strategic

24 IN CONTEXT YOU CAN LEARN ALL FOCUS YOU NEED TO KNOW Analytical tools ABOUT THE COMPETITION’S OPERATION BY LOOKING KEY DATES IN HIS GARBAGE CANS 1950s Harvard academics George Smith and C. Roland STUDY THE COMPETITION Christensen develop tools to analyze companies and competition. 1960s US management consultant Albert Humphrey leads a research project that yields SOFT analysis, the forerunner to his later SWOT analysis. 1982 US professor Heinz Weihrich develops the TOWS matrix which uses the threats to a company as the starting point for formulating strategy. 2006 Japanese academics Shinno, Yoshioka, Marpaung, and Hachiga develop computer software that combines SWOT analysis with AHP (Analytic Hierarchy Process). W hether a company is long established or in its start-up phase, a key strategic issue is its competitive advantage—the factor that gives it an edge over its competitors. The only way to establish, understand, and protect competitive advantage is to study the competition. Who is competing with the company for its customers’ time and money? Do they sell competitive products or potential substitutes? What are their strengths and weaknesses? How are they perceived in the market? For Ray Kroc, the US entrepreneur behind the success of fast-food chain McDonalds, this reportedly involved inspecting competitors’

START SMALL, THINK BIG 25 See also: Stand out in the market 28–31 ■ Gaining an edge 32–39 ■ Thinking outside the box 88–89 ■ Leading the market 166–69 ■ Porter’s generic strategies 178–83 ■ The MABA matrix 192–93 ■ Porter’s five forces 212–15 SWOT analysis helps ...key internal factors, Strengths (S). a company analyze such as: Weaknesses (W). Opportunities (O). its position by ...key external factors, focusing on... such as: Threats (T). trash. But there is a range of more courses. It is a creative tool that included, the deeper the analysis conventional tools to help companies allows managers to assess a and the more useful the findings. to understand themselves, their company’s current position, and to However, there are limitations. While markets, and their competition. imagine possible future positions. a company may be able to judge its internal weaknesses and strengths SWOT analysis A practical tool accurately, projections about future The most popular such tool is When well-executed, a SWOT events and trends (which will affect SWOT analysis. Created by US analysis should inform strategic opportunities and threats) are management consultant Albert planning and decision-making. It always subject to error. Different Humphrey in 1966, it is used to allows a company to identify what stakeholders will also be privy to identify internal strengths (S) and it does better than rivals (or vice different levels of information about weaknesses (W), and to analyze versa), what changes it may need to a company’s activities, and therefore external opportunities (O) and make to minimize threats, and what its current position. Balance is key; ❯❯ threats (T). Internal factors that can opportunities may give the company be considered as either strengths or competitive advantage. The key to If you go exactly where weaknesses include: the experience strategic fit is to make sure that the your competitors are, and expertise of management; the company’s internal and external skill of a work force; product quality; environments match: its internal you’re dead. the company’s financial health; and strengths must be aligned with the Thorsten Heins the strength of its brand. External external opportunities. Any internal factors that might be opportunities weaknesses should be addressed German-Canadian former CEO or threats include market growth; so as to minimize the extent of of Blackberry (1957–) new technologies; barriers to external threat. entering markets; overseas sales potential; and changing customer When undertaking a SWOT demographics and preferences. analysis, the views of staff and even customers can be included— SWOT analysis is widely used it should provide an opportunity to by businesses of all types, and it is solicit views from all stakeholders. a staple of business management The greater the number of views

26 STUDY THE COMPETITION senior managers may have a full is “market mapping” (also known as “leisure.” Additional factors could view of the company, but their “perceptual mapping”). Market maps include the item’s price (high vs. perspective needs to be informed are diagrams that represent a market low), quality of production (high by alternative views from all levels and the placement of products within vs. low), stylish vs. conservative, of the organization. that market, providing a visual or durable vs. disposable. Two of means of studying the competition. these dimensions, or opposing As with all business tools, the The process is useful both internally pairs, are then plotted onto a factor that governs the success of (to help an organization understand horizontal or vertical axis. SWOT analysis is whether or not its own products) and externally (to it leads to action. Even the most chart how consumers perceive the Based on market research or the comprehensive analysis is useless brand in relation to the competition). knowledge of managers, all of the unless its findings are translated products within a particular market into well-conceived plans, new To draw up a market map, a can be plotted onto the map. The processes, and better performance. company identifies several consumer market share of each product can purchase-decision factors that be represented by the size of its Market mapping stand in opposition to one another. corresponding image on the map, A slightly narrower but more In the fashion market, an example but more often, analysts choose to sophisticated tool for analyzing a might include “technology” vs. simply make a rough sketch of the company’s position and competition “fashion,” and “performance” vs. market, ignoring market size. Market mapping plots opposing qualities of products A company may choose to along two axes. By identifying the two main oppositional compile several market maps, each factors for any product, it is easy to see gaps in the market. of which depicts a different set of variables, and then analyze them— PERFORMANCE individually and in combination— to gain an overall view of the Speedo company’s position in the market. TYR Finding the gap ZXU Market gap? The goal of market mapping is TECHNOLOGY to identify opportunities where a Adidas O’Neill company can differentiate itself Nike Quicksilver from its competitors. These are areas where the company offers Puma unique value, and they can be used Slazenger to inform marketing messages. The map will also reveal overcrowded Ripcurl Billabong FASHION segments, which signify heightened competitive threat. Market gap? Gottex H&M For a new start-up, a market Bravissimo map can be used to identify a LEISURE Tommy Hilfiger viable gap in the market—a good place to position a company when it is struggling to establish itself. Established businesses can use market mapping combined with SWOT analysis to discover opportunities and decide whether the company has the strengths to exploit one of those opportunities. The market map helps to inform the strategy (the need to reposition a product away from competitors’

START SMALL, THINK BIG 27 The apparel market is a competitive sector with a host of finely delineated fashion brands. Speedo’s market positioning is built around producing high-performance, technical products. offerings, for example) and the Perceived as a technical based on such data, even though tactics (moving from conservative performance product, Speedo, managers may disagree, the market to sporty, for example) that will for example, needs to ensure that map cannot be “wrong”—it simply help the company to achieve its marketing reflects that view; represents, for better or worse, that strategic goal. a campaign that promotes Speedo how the brand is perceived. The as a fashionable label would risk challenge for management is to use Market analysis such as this may, confusing customers and could the map, and knowledge of internal for example, have helped luxury damage the brand. strengths and weaknesses, to plan Singaporean tea shop TWG Tea the appropriate strategic response. to identify an opportunity in the The key to successful market market. Launched in 2008, TWG mapping is market research. While Both SWOT analysis and market targets a slightly older, wealthier it can be useful to compare internal mapping allow a company to better customer base than coffee shops and external perceptions of a understand itself, its market, and, and other “lifestyle” cafés. TWG product, and the products of the most importantly, the competition. has opened new locations across competition, it is the customers’ Equally, being aware of weaknesses the world, based on studying the views that matter most. When can help avoid costly strategic competition, identifying a market mistakes, such as producing overly gap, and designing its products Albert Humphrey ambitious products or making an and services to fill that gap. entry into a crowded market Born in 1926, Albert Humphrey position. An appreciation of the Internal focus was educated at the University opportunities and threats of the As a company grows it might of Illinois, US, and at the market, and the relative and choose to draw up a map including Massachusetts Institute of shifting positions of competing just its own products. Analysis of Technology (MIT), where he products, is essential to long-term the results can help identify any gained a master’s degree in successful strategic planning. To overlap between different products Chemical Engineering. He later plan where you are going, it helps (informing decisions about which went on to earn an MBA to know where you are—and where products to drop, and which to from Harvard University. While your competitors are too. ■ concentrate research and working with the Stanford development and marketing spend, Research Institute (now SRI leaders and politicians. He also for example). It can also be used International) between 1960 and undertook research to identify to ensure that the company’s 1970, Humphrey came up with why corporate planning failed, marketing message stays on track, the Stakeholder Concept, which by holding interviews with more helping to avoid strategic drift. has since been used by business than 5,000 executives at over 1,100 companies. As a result of the findings, he invented SOFT analysis: “what is good in the present is Satisfactory, good in the future is an Opportunity; bad in the present is a Fault, and bad in the future is a Threat.” Fault was later softened to the more acceptable Weaknesses, and Satisfactory became Strengths. The now-ubiquitous acronym SWOT was born.

28 IN CONTEXT THE SECRET OF FOCUS BUSINESS IS TO Differentiation KNOW SOMETHING THAT NOBODY KEY DATES ELSE KNOWS 1933 US economist Edward Chamberlin’s Theory of STAND OUT IN THE MARKET Monopolistic Competition describes differentiation as a means for a company to charge more for its products or services by distinguishing them from the competition. 1940s The concept of the Unique Selling Proposition (USP) is put forward by Rosser Reeves, advertising executive at New York advertising agency Ted Bates, Inc. 2003 US marketing professor Philip Kotler outlines the need for USPs to be superseded by Emotional Selling Propositions (ESPs) in his book Marketing Insights from A to Z. F ew businesses enjoy the privileges of monopoly power in their chosen fields of operation. Most markets are increasingly global, increasingly crowded and, therefore, increasingly competitive. In order to achieve commercial success companies need to do something different—as Greek shipping magnate Aristotle Onassis recommended, they need to “know something that nobody else knows” in order to stand out from the competition. Unique Selling Propositions Faced with competition, the strategy for most companies is to differentiate. This involves offering

START SMALL, THINK BIG 29 See also: Finding a profitable niche 22–23 ■ Gaining an edge 32–39 ■ Reinventing and adapting 52–57 ■ Porter’s generic strategies 178–83 ■ Good and bad strategy 184–85 ■ The value chain 216–17 Few companies enjoy the To achieve success, ...which requires monopoly privileges especially in its early differentiation in product, afforded by market gaps. stages of growth, a company must stand out... service, process, or marketing. Only then will companies Enduring difference But difference can truly stand out in can only be maintained be easily copied the market. through a Unique by competitors. Selling Proposition. customers something that the prices and protects profitability; the design and functionality of Nike competition cannot or does not and it can give businesses the and Adidas sneakers are distinct, offer—a Unique Selling Proposition competitive advantage needed the differences are so small that (USP). The concept was developed to stand out in the market. they amount to only a marginal by US advertising executive Rosser difference in performance. The Reeves in the 1940s to represent The challenge of difference products’ differences are, however, the key point of dramatic difference By definition, not all products can magnified in the perception of the that makes a product salable at a be unique. Differentiation is costly, consumer through marketing and price higher than rival products. time consuming, and difficult to the power of branding—uniqueness Tangible USPs are hard to acquire achieve, and functional differences is achieved through brand imagery, and hard to copy, which is what are quickly copied—“me-too” promotion, and sponsorship. makes them unique. strategies are commonplace. Touchscreen technology was Apple achieved differentiation in Companies must distinguish introduced to the cell-phone market the fledgling digital-music market by their product or service from the as a point of differentiation for combining easy-to-use software ❯❯ competition at every stage of Apple’s iPhone, but is now a feature production—from raw material of most smartphones. There is no such thing extraction to after-sales service. Differentiation often does not as a commodity. Products such as Nespresso coffee- remain a point of difference for long. makers and Crocs footwear, and All goods and services service providers such as majority With functional uniqueness are differentiable. Asian-owned hotel group Tune being so elusive, marketing guru Theodore Levitt Hotels, are all heavily differentiated, Philip Kotler suggested that each having a strong USP. companies focus instead on an US economist (1925–2006) Emotional Selling Proposition (ESP). The primary benefit of In other words, that the task of uniqueness, however it is achieved, marketing is to generate an is greater customer loyalty and emotional connection to the brand increased flexibility in pricing. that is so strong that customers Differentiation guards products perceive difference from the and services from low-priced competition. For example, while competition; it justifies higher

30 STAND OUT IN THE MARKET with well-designed hardware and a eye of celebrities (a jacket worn expanding its reach—to stand out user interface that integrated the by soccer player David Beckham from the crowd, while welcoming two. The product itself—the iPod became one of its best-selling those crowds into its stores. portable music device—was products, and Beckham himself functionally little different than became an unoffical talisman of the Differentiation can occur at any existing MP3 players, but combined brand), providing free publicity. point in the value chain. Standing with the iTunes software to create a out is not limited to products or unique customer experience. This Superdry focused on offering services—it can occur in any experience is Apple’s ESP, which the clothing with a fashionably tailored number of internal processes company promoted with its “Think fit and attention to detail (even down that translate into an improved Different” advertising campaign. to garment stitching). Worn by off- customer experience. Swedish duty office workers, students, sports furniture retailer IKEA, for Standing out stars, and celebrities alike, the example, differentiates itself not One company that has achieved brand was able to appeal to a broad only through contemporary design uniqueness is the British fashion customer base. Most differentiation and low prices, but through the label Superdry, which has grown to strategies involve targeting one entire customer retail experience. include more than 300 stores in segment of the market; Superdry The company’s low prices are Europe, Asia, North and South chose to target them all. The brand’s achieved, in part, through its self- America, and South Africa. Drawing unique blend of fashion with ease of picking and self-assembly retail a novel, international influence from wear, comfort with style, and the model—the customer experience Japanese graphics and vintage presence of mysterious but involves picking products from the Americana, combined with the meaningless Japanese writing, company’s vast showrooms and values of British tailoring, Superdry has proved a difficult mix for warehouses and then, once they quickly established a strong position competitors to replicate. have transported the goods home, in the hypercompetitive clothing assembling the furniture. market from its launch in 2004. The Maintaining uniqueness business started life in university As many companies discover, Even the way IKEA “guides” towns across the UK, a positioning popularity can be the enemy of shoppers on a one-way, defined that gave the brand a youthful difference. While Superdry clothing route through its showrooms is appeal. Despite limited advertising has become increasingly unique. While this tactic encourages and abstaining from celebrity ubiquitous around the world, its spontaneous purchases, it also endorsements, Superdry’s popularity uniqueness and difference have helps to reinforce IKEA’s points of rapidly grew. The company’s declined. The challenge for difference—customers are exposed distinctive look quickly caught the Superdry, like all companies, is to to predesigned rooms and protect its uniqueness while also furniture layouts that emphasize the brand’s contemporary style. Price is kept low since fewer store assistants are required to direct customers around the store. Different but the same Paradoxically, familiarity can also be a source of differentiation. The entire McDonald’s organization revolves around providing almost identical fast-food products, with the same service, in identical Fashion label Superdry is a young company that has successfully carved out market share. Rapid growth since its founding in 2004 is thanks in part to a highly differentiated, faux-vintage look.

START SMALL, THINK BIG 31 Differentiation is not so important High sales when a company’s products match Low sales Rosser Reeves the desires of the customer High scope for US advertising executive differentiation Rosser Reeves (1910–84) and do not overlap with the held the maxim that an advertisement should show off competition. Although the the value of a product, not the cleverness of the copywriter. risks might be high, After a brief spell at the University of Virginia, from differentiation is most What your company where he was expelled for effective when your does well drunken misconduct, Reeves products are popular, worked as a journalist and then copywriter before joining but overlap with those advertising agency Ted Bates, Inc. in New York in 1940. His of the competition. exceptional talent saw him rise to become Chairman of the What the What your company in 1955. He is credited consumer competitors with redefining television advertising and, among many wants do well others, for formulating slogans such as “It melts in your restaurants the world over. This every point of contact—difference mouth, not in your hand” for familiarity differentiates has to be believable, and it is only chocolate confectionary brand McDonald’s from unknown local believable if it is dependable. M&Ms. Reeves’s Unique offerings, and from other global Selling Proposition, first competitors who cannot maintain Sustaining differentiation outlined in the 1940s, was the same degree of consistency Once established, uniqueness— described in his 1961 book across their operating territories. whether functional or emotional— Reality of Advertising. Such requires nurturing and protecting. was his impact on the In a market in which rival Standing out from the crowd is a advertising industry that his companies promote the uniqueness constant battle that is fought in the legacy lives on long after his of their products in ever-louder and hearts and minds of the company’s death—his pioneering style of more complex ways, consumers staff, as well as customers. As legal leadership was the inspiration have become increasingly savvy clashes between rivals—such as for the lead character in US when it comes to distinguishing Apple and Samsung—demonstrate, television series Mad Men. reality from rhetoric. While uniqueness might also have to be differences do not have to be contested in the courtroom. In order to be irreplaceable one tangible—the evidence shows that must always be different. an Emotional Selling Proposition Every industry has leaders and Coco Chanel (ESP) is often enough—the followers—what separates them is challenge for businesses is that that the leaders are usually those French fashion designer (1881–1971) points of differentiation do have to with the most defensible points of be genuine and believable. differentiation. Whether in features Developing an emotional connection and functionality, brand image, with the customer requires that the service, process, speed, or differentiation is understood and convenience, uniqueness must be consistently delivered throughout established and communicated for the organization. Well-defined core a company and its offerings to stand principles that celebrate a out in the market. The key to long- company’s uniqueness should lasting success is making that inform the customer experience at differentiation sustainable. ■

32 BE FIRST OR BE BETTER GAINING AN EDGE

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34 GAINING AN EDGE First-movers have no competition and have the potential to become market leaders... IN CONTEXT ...but unless the market is static, and technological FOCUS innovation is limited, the risk of failure is high. Competitive advantage Later entrants enter a recognized market and KEY DATES know what mistakes to avoid. 1988 US scholars David Montgomery and Marvin They stand to benefit most in a rapidly changing market, Lieberman write “First-Mover in which technological innovation is advanced. Advantage,” outlining the competitive advantages In order to gain an edge, of being first to market. either be first, or be better. 1995 Amazon.com launches, the first of a new breed of online retailers. 1997–2000 Adopting the “be first” mantra, dot-com companies race to market; many fail when the promised advantages do not materialize. 1998 Montgomery and Lieberman question their original findings in their paper, “First-Mover (Dis)Advantages.” 2001 Amazon.com returns its first profit. The company’s first-mover advantages were significant, but a good business model mattered more. I f you need to buy a book business to enter the online retail competitive edge in the market, online, which website do market, establishing its brand a business needs either to be first, you visit first? If you want to name, and building a loyal or it needs to be better. research the author of the book, customer base. Google, by contrast, which search engine do you use? was by no means first. When Market pioneers The answers, most probably, are Google launched in 1998, the The benefits of being first into a Amazon and Google, respectively. market was already dominated by market are known as “first-mover Such is the dominance of these two several large players; Google’s edge advantage,” a term popularized in Internet giants that their names came from offering a superior 1988 by Stanford Business School define their respective markets. product—not only was it faster, but professor David Montgomery and it produced more accurate search his co-author, Marvin Lieberman. Both organizations have a results than any of its competitors. Although introduced a decade significant edge in the markets previously, Montgomery and they lead, but they achieved that Getting into a market first has Lieberman’s idea took particular dominance by different means. significant advantages, but there hold during the dot-com bubble Amazon, launched in 1995, gained are also benefits to being second. between 1997 and 2000. Spurred its advantage by being the first The key is that in order to gain a

START SMALL, THINK BIG 35 See also: Beating the odds at start-up 20–21 ■ Stand out in the market 28–31 ■ How fast to grow 44–45 ■ The Greiner curve 58–61 ■ Creativity and invention 72–73 ■ Changing the game 92–99 ■ Balancing long- versus short-termism 190–91 Amazon.com was a first-mover in the online retail market. It has dominated the industry since its launch in 1995, creating strong brand recognition and a loyal customer base. on by the example of Amazon, a brand name strongly linked to access beneficial terms with key businesses spent millions pitching the market itself. First-movers also suppliers (who may also be eager to themselves headlong into new have more time than later entrants enter the new market). Additionally, online markets. Conventional to perfect processes and systems, first-movers may be able to build wisdom was that being first and to accumulate market switching costs into their product, ensured that the company’s brand knowledge. They can also secure making it expensive or inconvenient name became synonymous with advantageous physical locations for customers to switch to a rival that segment, and that early market (a prime location on a main street offering once an initial purchase dominance would create barriers to of a city, for example), secure the has been made. Gillette, for example, entry for subsequent competition. employment of talented staff, or having invented the safety razor in 1901, has consistently leveraged its In the end, however, First-mover advantages first-mover advantage to create new overspending, overhype, and accrue when a company products, such as a “shaving system” overreaching into markets where gains a first-mover opportunity that combines cheap handles with little demand existed was the (through proficiency or luck) expensive razor blades. downfall of many fledgling dot-coms. and is able to maintain an With notable exceptions, businesses edge despite subsequent entry. Market strategies found that promised returns were David Montgomery and In the case of Amazon.com, first- not being realized and funds quickly Marvin Lieberman mover advantage consisted of a ran short—and for many of these combination of factors. In the newly first-movers, failure followed. emerging e-commerce market, customers were eager to try online First-mover advantage purchasing, and Amazon was well Being first out of the block placed to exploit this growing undoubtedly has its advantages, curiosity. Books represented a small and in the case of the dot-coms, and safe initial purchase, and those advantages were exaggerated Amazon’s simple web design made to the extreme. First-movers often buying easy and enjoyable. Early enjoy premium prices, capture sales enabled the organization to significant market share, and have adapt and perfect its systems, and to adjust its website to match customer needs—adding, for example, its OneClick ordering system to enable purchases without entering payment details. Amazon was also able to build distribution systems that ensured quick and reliable delivery of its products. Although competitors could replicate these systems, customers already trusted Amazon, and the brand loyalty ❯❯

36 GAINING AN EDGE Gillette invented the safety razor research has indicated that from entering a proven market. in 1901 and later consolidated its significant advantages accrue They are also able to avoid costly first-mover advantage by developing a to market pioneers, which can be investment in risky and potentially “shaving system” that made it difficult directly attributable to the timing flawed processes or technologies; for customers to switch brands. of entry. The irony is that in a first-movers, by contrast, may have retrospective paper that appeared accrued significant “sunk costs” the organization enjoyed created in 1998, “First-Mover (Dis) (past investment) in old, less- significant emotional switching Advantages,” Montgomery and efficient technologies, and may be costs; even today, Amazon enjoys Lieberman themselves backed off less able to adapt as the industry the benefits of this trust and loyalty, their original claims concerning matures. Followers can enter at and almost a third of all US book the benefits of being the first to the point at which technology sales are made via Amazon.com. enter a market. and processes are relatively well established, with both cost and A recent example of how Building on the work of, among risks being lower. important first-mover advantage others, US academics Peter Golder remains are the “patent wars” and Gerard Tellis in 1993, Followers may have to fight contested between most of the Montgomery and Lieberman’s 1998 to overcome the first-movers’ leading smartphone makers paper questioned the entire notion brand loyalty, but simply offering (including Apple, Samsung, and of first-mover advantage. In their a superior product that better HTC). Patents help a company to research, Golder and Tellis had addresses customer needs is defend technological advantage. In found that almost half the first- often sufficient to secure a market. the hypercompetitive smartphone movers in their sample of 500 Brand recognition is one thing, industry, being first to market with brands, in 50 product categories, but technical and product superiority a new technological feature offers failed. Moreover, they found that can give that all-important critical, albeit short-term, advantage. there were few cases where later competitive edge. Moreover, with In an industry in which consumers’ entrants had not become profitable investment costs being much switching costs are high, even or even dominant players—in fact, lower, followers often have surplus short-term advantages can have their research identified that the cash to use on marketing, thereby a significant impact on revenue. failure rate for first-movers was offsetting the branding advantages 47 percent, compared to only of the first-mover. Since the publication of 8 percent for fast followers. Montgomery and Lieberman’s When Google, for example, original paper in 1988, academic Learning from mistakes entered the Internet search The challenge for first-movers is business in 1998, the market was that the market is often unproven; dominated by the likes of Yahoo, industry pioneers leap into the Lycos, and AltaVista, all of whom dark without fully understanding had established customer bases customer needs or market and brand recognition. However, dynamics. First-movers often Google was able to learn from the launch untried products onto unsuspecting customers; and it is Good artists copy; rare that they get it right first time. great artists steal. Large companies may be able to take the losses of such early-market Steve Jobs entry mistakes; small companies, on the other hand, may soon find US former CEO of Apple (1955–2011) that their cash is running out and their tenuous business models are collapsing. Later entrants have the advantage of learning from the mistakes of the first-movers, and

START SMALL, THINK BIG 37 If later entrants can leapfrog Us.) The online clothing retailer of this new market. But success pioneers, companies could be boo.com is an example of a first- is not guaranteed—a 2012 study mover that had technological revealed that on average, 65 better off entering late. superiority, but was ahead of its percent of users delete apps within Peter Golder and time—the site was too resource- 90 days of installing them. Gerard Tellis heavy for most consumers’ slow Internet connections. Launched in Timing is everything mistakes of these earlier entrants 1999, boo.com went into receivership The reason a first-mover does and, quite simply, build a better the following year—being first is not always yield its promised product. The organization realized not a guarantee of success if the advantages is that much depends that with so much information on basic business model is flawed. on timing, and therefore luck. In the Internet people wanted search their 2005 paper, “The Half-Truth results that were comprehensive Despite the evidence presented of First-Mover Advantage,” US and relevant; the various market by Golder and Tellis, and examples business scholars Fernando Suarez incumbents offered a variety of such as Google, it remains the case and Gianvito Lanzolla identified systems for filtering search results, that first-mover advantage has technological innovation and the but Google was able to take the captured corporate imagination. speed at which the market is best of these systems and build Mirroring the earlier dot-com gold developing as crucial in its own unique algorithm that led rush, the recent boom in the market determining whether or not being to market dominance. for web-based smartphone- and a first-mover is advantageous. tablet-accessed applications (the “app” market) is fueled by a desire Their findings suggest that to be first. Thousands of apps have when a market is slow-moving and launched in the hope of staking technological evolution is limited, their claims on lucrative segments first-mover advantage can be ❯❯ 80 73 First-mover failures SHAREHOLDER RETURN (%) Launched just 36 There are numerous examples in two years later, corporate history of first-movers Commodore’s that were unable to achieve or “fast-follower” GUI maintain a competitive advantage. computer yielded a Famous failures in the online shareholder return sphere include Friends Reunited of 80 percent. and MySpace. Although both companies still exist, their first- Apple’s pioneering Apple Lisa (1983) mover advantage was not sufficient GUI computer was a Commodore Amiga (1985) to offset the might (and product commercial failure, IBM Personal System/2 (1987) superiority) of Facebook. Similarly, with a shareholder HP (1989) eToys.com, launched in 1999, was return of -61 percent. one of a new breed of online retailers, but first-mover advantage was not -61 enough to sustain the business and Being the first-mover in a new, untried market the company declared bankruptcy does not always result in success. Apple’s Lisa was in 2001—by coincidence, the same the first computer with a Graphical User Interface year that Amazon started to sell (GUI)—a version of which now forms the user toys. (Resurrected some years later, interface of every computer, smartphone, and etoys.com is now owned by Toys R digital device—yet sales were far exceeded by later offerings from Commodore, IBM, and HP.

38 GAINING AN EDGE significant. They give the example have enjoyed short-lived advantage If you do things well, of the market for vacuum cleaners, but in dynamic markets such an do them better. and, in particular, of the long-term advantage is rarely durable. Even Anita Roddick market leader, Hoover. Until the Apple, who enjoyed significant relatively recent introduction of early-entrant advantage in the UK entrepreneur (1942–2007) Dyson cleaners, the market was smartphone market with the benign and technological iPhone, is not immune from first- importantly, the organization advancement slow. Having been mover disadvantage. Competitors, insists on a deep understanding of first to market in 1908, Hoover Samsung in particular, were able customer needs in any market they enjoyed several decades of to listen to customer complaints enter. In other words, they would advantage—an advantage that about iPhones, analyze customer rather enter mature markets than was (and, in some places, still is) needs, and produce products with be first into new ones. reflected in the widespread use of features and functionality welcomed the company’s brand name as the by the market. Apple, locked into The company values long-term verb “to hoover.” previous technology iterations, took relationships with its customers time to react and iPhone sales and suppliers; its view of innovation In other industries, however, suffered as a result. is different from small companies where technological change or who, in attempting to capture market evolution is rapid, first- Customer needs market share, strive to gain an movers are often at a disadvantage. To gain an edge, therefore, you do edge through the introduction of The first search engines are not always need to be first. Indeed, disruptive technology—innovative examples of businesses that had US multinational Procter & Gamble, technology that seeks to destabilize too much invested in early for example, prefers only to enter the existing market. Procter & iterations of a technology to keep those markets in which it can Gamble, perhaps heeding the up with the rapid pace of change. establish a strong number one or research, considers such strategies number two position over the long- to be short-lived. They realize that Early advantage quickly term—rarely is this achieved in a overly rapid innovation runs the risk becomes obsolete in changeable blind rush to be first. of cannibalizing their own sales markets. As the market evolves, and reducing the returns on new later entrants are those that seem Procter & Gamble seeks product investment. In the market to be cutting edge, offering markets that are demographically for disposable baby diapers, for innovative features that build on and structurally attractive, with example, Procter & Gamble was the market-knowledge as well as lower capital requirements, and more than ten years behind the first learning from the mistakes of the higher margins. But most mover. The company’s now famous first-mover. The first-mover may Pampers brand was launched in 1961, following some way behind Johnson & Johnson’s Chux brand, The PalmPilot, launched in 1997, was a successful fast-follower product. It followed Apple’s unsuccessful Newton, which was the first personal digital assistant (PDA) to enter the market.

START SMALL, THINK BIG 39 which was launched in 1949. At company’s products or services to foothold in the market. But as the time, disposable diapers were that market, and its ability to research shows, second-movers, a new innovation, and customers deliver on brand promises. Both and their followers, may sometimes were wary of their use. Procter & these factors can have a profound be in an advantageous position. Gamble waited until customers had impact on long-term viability and Learning from the mistakes of early come to accept the product before business success. entrants, they frequently offer entering the market. Moreover, they superior products at lower prices. spent nearly five years researching Amazon may have enjoyed With the aid of skillful marketing, and addressing each of the major lasting first-mover advantage, but these benefits can be leveraged to problems with Chux and developed that alone is insufficient to account offset the advantages enjoyed by a product that was more absorbent, for its phenomenal success. Amazon first-movers. To become a market had lower leakage, was more leverages its first-mover advantage leader, a business needs either to comfortable for the baby, offered into a sustainable competitive edge; be first, and impressive, or it needs two sizes, and could be produced its website is continually made to be better. The companies we at a significantly lower cost. Today, easier to use, it offers a range of remember, the Amazons and the Forbes magazine lists Pampers as complimentary products, and it Googles, are those that were either one of the world’s most powerful continues to drive down costs, first or better—the ones we forget brands, valued at over $8.5 billion, enabling it to offer market-beating are those that had no edge at all. ■ with the diapers being purchased prices. Most notably, Amazon did by 25 million consumers in over 100 not return a profit until 2001—the To suffer the penalty of countries. By contrast, Chux was company spent its earlier years too much haste, which is phased out by Johnson & Johnson building a better product. The in the 1970s due to shrinking sales. foundations of success may have too little speed. been laid by first-mover advantage, Plato Securing a foothold but Amazon’s edge has been built on In reality, then, while it is readily long-term good business practice. Greek philosopher (429–347 BCE) assumed that speed is good when entering a market, gaining an edge First-movers undoubtedly have a might depend less on timing than it natural competitive edge. Whether does on appropriateness. Whether a it is a lasting impression on company is first, second, or last to customers, strong brand recognition, market is important; but it is less high switching costs, control of important than the suitability of a scarce resources, or the advantages of experience, that edge can help to secure a strong, and long-term, Jeff Bezos Born on January 12, 1964 in As with many Internet start- Albuquerque, New Mexico, US, ups, Bezos, with just a handful Jeff Bezos had an early love of of employees, created the new science and computers. He business in his garage; but as studied computer science and operations grew, they moved electrical engineering at Princeton into a small house. The Amazon. University, and graduated summa com site was launched officially cum laude in 1986. on July 16, 1995. Amazon became a public limited Bezos started his career on company in 1997; the company’s Wall Street, and by 1990 had first year of profit was 2001. become the youngest senior Today, Bezos is listed by Forbes vice-president at the investment magazine as one of the wealthiest company D. E. Shaw. Four years people in the US; and Amazon later, in 1994, he quit his lucrative stands as one of the biggest job to open Amazon.com, the global success stories in the online book retailer—he was history of the Internet. barely 30 years old at the time.

40 PUT ALL YOUR EGGS IN ONE BASKET, AND THEN WATCH THAT BASKET MANAGING RISK IN CONTEXT E ntrepreneurs are defined failure of new products, or damage by their willingness to bear to the brand or a manager’s FOCUS risk—particularly the risk of reputation. Whatever the level or Risk management business failure. This is especially type, however, risk is something true for those starting new that all businesses need to be KEY DATES companies, because more than half aware of and manage carefully. 1932 The American Risk of start-ups fail within the first five US businessman Andrew Carnegie and Insurance Association years. Lesser risks in established was pondering these issues when is established. businesses include the possible he suggested that in terms of 1963 Robert Mehr and Bob Risk is an inevitable part But it can be quantified Hedges publish Risk of business. and action taken... Management in the Business Enterprise, claiming that the Part of this process involves ...through oversight and objective of risk management deciding what level of risk good management. is to maximize a company’s productive efficiency. is “acceptable”... 1970s Inflation and changes ...and where to place the Managing risk is a to the international monetary risk—on all the “eggs in the strategic process, balancing system (the ending of the Bretton Woods agreement) basket,” or just one? cost against reward. increase commercial risks. 1987 Merrill Lynch becomes the first bank to open a risk-management department. 2011 The US Financial Crisis Inquiry Commission says that the 2008 financial crisis was caused partly by financial companies “taking on too much risk.”

START SMALL, THINK BIG 41 See also: How fast to grow 44–45 ■ Hubris and nemesis 100–103 ■ Who bears the risk? 138–45 ■ Leverage and excess risk 150–51 ■ Off-balance-sheet risk 154 ■ Avoiding complacency 194–201 ■ Contingency planning 210 ■ Scenario planning 211 managing risk, it might be best there is a risk that interest rates will It’s impossible that to put all your eggs in one basket, rise, and repayments will become the improbable will then watch that basket. too burdensome to afford. Start-ups that rely on overseas trade are also never happen. From the collapse of Lehman exposed to exchange-rate risk. Emil Gumbel Brothers (2008), to BP’s Deepwater Horizon disaster (2010), events of Moreover, new businesses in German statistician (1891–1966) the early 21st century fundamentally particular may be exposed to the changed how organizations risk of operating in only one market. At its heart, risk is a strategic perceive risk. Companies now think Whereas large companies often issue. Business owners must in terms of two factors: oversight diversify their operations to spread carefully weigh the operational risk and management. “Risk oversight” risk, the success of small companies of start-up, or the risks of a new is how a company’s owners govern is often linked to the success of one product or new project, against the processes for identifying, idea (the original genesis for the potential profits or losses—in other prioritizing, and managing critical start-up) or one geographic region, words, the strategic consequences risks, and for ensuring that these such as the local area. A decline of action vs. inaction. Risk must be processes are continually reviewed. in that market or area can lead quantified and managed; and it “Risk management” refers to the to failure. It is essential that new poses a constant strategic challenge. detailed procedures and policies businesses are mindful of market Fortune favors the brave, but with for avoiding or reducing risks. changes, and position themselves people’s lives and the success of the to adapt to those changes. business at stake, caution cannot Inherent risks simply be thrown to the wind. ■ Risk is inherent in all business The Instagram image-sharing activity. Start-ups, for example, face social-media application, for example, the risk of too few customers, and started life as a location-based therefore insufficient revenue to service called Burbn. Faced with cover costs. There is also the risk competition, the business changed that a competitor will copy the track into image-sharing. Had company’s idea, and perhaps offer a Instagram not reacted to the risks, better alternative. When a company and been savvy enough to diversify has borrowed money from a bank its offering (regularly adding new features), it may not have survived. In deep water BP’s Deepwater Horizon incident Even large and diverse who examined the disaster led to huge fines and US government organizations can find it hard to claimed that BP had prioritized monitoring of its safety practices and successfully balance risk against financial return over operational ethics for four years. potential financial reward. On risk. Chief executive Tony April 20, 2010, Deepwater Horizon, Hayward, who took the post an offshore oil rig chartered by in 2007, had suggested that the British Petroleum (BP), exploded, organization’s poor performance killing 11 workers and spilling at the time was due to excessive tens of thousands of barrels of caution. Coupled with crude oil into the Gulf of Mexico. increasing pressure from shareholders for better returns, The incident was blamed on the bullish approach that management failure to adequately followed led to significant cost quantify and manage risk; the cutting and, eventually, risk- official hearing cited a culture management failures. of “every dollar counts.” Analysts

42 LUCK IS A DIVIDEND OF SWEAT. THE MORE YOU SWEAT, THE LUCKIER YOU GET LUCK (AND HOW TO GET LUCKY) IN CONTEXT L uck is usually regarded The first rule of luck in as something over which business is that you should FOCUS businesses have no control. persevere in doing the right Maximizing opportunity Yet, as McDonald’s CEO Ray Kroc thing. Opportunities will said, “the more you sweat, the come your way if you do. KEY DATES luckier you get,” suggesting that luck 1974 3M employee Art Fry can be created. The reality is that Ronald Cohen uses the adhesive developed— both are true. As global markets and rejected as defective—by become more volatile and less UK venture capitalist (1945–) a colleague six years earlier predictable, luck plays an inevitable to attach a bookmark in his part in business success. Launch a hymnbook. This chance usage start-up at the same time as a rival leads to the Post-it Note. and it may be luck that determines who succeeds, and who fails. 2009 A Harvard Business Review article “Are ‘Great’ Making your own luck market conditions. In other words, Companies Just Lucky?” A well-considered business plan is what might seem like luck is often reports that in only half of the designed to dispense with reliance the result of planning. Take the 287 high-performing companies on luck. A good idea, underpinned famous example of 3M Post-it Notes. surveyed could success be by detailed market research and The invention of a reusable glue was attributed to distinguishable solid financial planning, may help accidental, but it was business practices or features of the a start-up to ride the whims of the insight that turned the lucky organizations themselves. market. A good plan charts a course discovery into a commercial success. of action in turbulent markets, 2013 Five years’ hard work protects against the unknown, With so many variables, luck is yields music group Daft Punk’s and prepares the company likely to play a part in the survival of aptly titled song “Get Lucky”. A for contingencies. a start-up. But a good plan reduces result of industry collaboration, how much luck a company needs. ■ market research, and strong In addition, a well-conceived plan marketing and publicity, the can ensure that a company is in a song’s commercial success position to benefit from favorable demonstrates the value of business planning. See also: Beating the odds at start-up 20–21 ■ Gaining an edge 32–39 ■ Understanding the market 234–41 ■ Forecasting 278–79

START SMALL, THINK BIG 43 BROADEN YOUR VISION, AND MAINTAIN STABILITY WHILE ADVANCING FORWARD TAKE THE SECOND STEP IN CONTEXT T he business landscape may Entrepreneurial spirit is defined appear to be dominated by as the willingness to take risks. FOCUS corporate goliaths, but the Business owners who do aspire to Expanding the business reality is that small businesses growth must be willing to take the outnumber large companies by a risky but important second step. KEY DATES significant margin. In fact, most For most small-business owners, 1800 French cotton businesses never grow beyond the this means employing the first manufacturer Jean-Baptiste scope of the owner—they start small nonfamily member and beginning Say popularizes the term and stay small. In the US, more than to acquire the necessary leadership “entrepreneur,” which is taken 99 percent of companies employ and management skills to scale the from the French for the verb fewer than 500 people. In 2012, business and manage the people, “to undertake.” there were almost 5 million small systems, and processes. ■ businesses (with fewer than 49 1999 Chinese business employees), but only 6,000 companies Large businesses might appear to be magnate Li Ka-shing employing more than 250 people. towering oaks, but most have acornlike underlines the importance of beginnings. A common difference vision for business growth, Aspiration, or its lack, is a key between them and companies that stay stating “Broaden your vision, factor for small-scale companies. small is the willingness to take risks. and maintain stability whilst Many small-business owners are advancing forward.” content with the lifestyle the business allows them, and have 2011 The Lean Startup by no desire for growth. But he biggest US technology entrepreneur reason for a lack of growth is finance. Eric Ries encourages new Growth requires access to capital, businesses to utilize resources which is difficult and expensive as efficiently as possible to to access for small companies. encourage growth. Moreover, unlimited liability means that an owner’s personal assets 2011 The number of active (such as the family home) are at entrepreneurs in mature risk if the business fails—a risk countries grows by about 20  that many are unwilling to take. percent, reflecting job losses due to the economic downturn. See also: Beating the odds at start-up 20–21 ■ Managing risk 40–41 ■ The Greiner curve 58–61 ■ Who bears the risk? 138–45 ■ Small is beautiful 172–77

44 NOTHING GREAT IS CREATED SUDDENLY HOW FAST TO GROW IN CONTEXT “Grow or die” When the market thinking can lead is growing, a company FOCUS to overtrading and Business growth business failure. must grow too... KEY DATES Nothing great is ...but that growth 1970s McKinsey & Company created suddenly. must be balanced consultants develop the MABA and controlled. matrix to help conglomerates decide which divisions to O ne reason many new is to balance income with grow, and how quickly. businesses fail is, perhaps expenditure, ensuring that there surprisingly, because they is sufficient cash to meet the rising 2001 Neil Churchill—professor grow too fast. Excessively rapid costs of the business. at INSEAD business school, growth can cause companies to France and John Mullins— overreach their ability to fund In 2001, business professors Neil professor at London Business growth: they simply run out of cash Churchill and John Mullins created School, UK—write How Fast to pay for day-to-day operations. a formula for calculating the pace at Can Your Company Afford to A major challenge for any manager which a company can expand from Grow, introducing the self- internal financing alone. Known financeable growth rate (SFG). 2002 Toyota announces plans to be the world’s largest car producer. Eight years later, after recalling more than 8 million cars due to quality issues, it admits to growing too fast. 2012 Edward Hess writes Grow to Greatness: Smart Growth for Entrepreneurial Businesses, describing growth as recurring change.

START SMALL, THINK BIG 45 See also: Managing risk 40–41 ■ Luck (and how to get lucky) 42 ■ The Greiner curve 58–61 ■ Hubris and nemesis 100–03 ■ Profit versus cash flow 152–53 ■ Small is beautiful 172–77 ■ The MABA matrix 192–93 as the self-financeable growth Each of these “levers” helps to The fate of the exploding Helix rate (SFG), it helps managers to generate the cash needed to fuel Nebula resembles the decline of a strike the right balance between faster growth. company that has expanded too rapidly: consuming and generating cash. after using up all its energy resources, It does this by measuring three As a young start-up business, the star collapses on itself and dies. things: the amount of time a the fashion brand Superdry enjoyed company’s money is tied up in phenomenal growth. From its processes and people, eventually inventory before the company has inception in the UK in 2004, the destroying its value and even paid for its goods or services; the company rapidly added new stores leading the company to grow amount of money needed to finance throughout the world. In 2012, and die.” Growth is not a strategy, each dollar of sales; and the amount however, after several profit he claims, but a complex change of cash that is generated by each warnings, it became clear that process, which requires the right dollar of sales. Superdry had become a victim of mindset, the right procedures, its own success. Critics suggested experimentation, and an enabling Sustainable growth that the brand was so focused on environment. ■ When accurately applied, the growth that it had forgotten its SFG formula determines the rate fashion roots, failing to update at which a company can sustain products on a seasonal basis. Other growth through only the revenues reasons for the decline included it generates—without needing to supply issues, accounting mistakes, approach external funding agencies and an inability to react quickly for more cash. Essentially, it enough to fierce competition. In predicts a sustainable growth rate a tacit acknowledgement that and helps to avoid overtrading. excessive growth was to blame, the When a market is growing faster company announced plans to than a company’s SFG, Churchill review its new store openings. and Mullins identified three ways for managers to exploit the growth Business-growth expert Edward opportunity: speed up cash flow; Hess suggests that growth can add reduce costs; or raise prices. value to a company, but if it is not properly managed, it can “stress a business’s culture, controls, A profitable company Edward Hess always linear. Contrary to the that tries to grow too dictum that companies must fast can run out of cash— A graduate of the universities of “grow or die,” he suggests that even if its products are Florida, Virginia, and New York, they are likely to “grow and die.” Edward Hess has been teaching great successes. and working in the world of Hess is the author of ten Neil Churchill and business for more than 30 years. books and more than 100 He began his career at the oil practitioner articles and case John Mullins company Atlantic Richfield studies. He is currently professor Company, and later became of business administration at a senior executive at several the University of Virginia, US. other leading US organizations, including Arthur Andersen. Key works Hess specializes in business 2006 The Search for Organic growth, and especially in Growth debunking the “myths” that 2010 Smart Growth growth is always good and 2012 Grow to Greatness

46 THE ROLE OF THE CEO IS TO ENABLE PEOPLE TO EXCEL FROM ENTREPRENEUR TO LEADER IN CONTEXT As a business grows, Entrepreneurship is its demands change. needed to spark a FOCUS Business growth business into life, but... KEY DATES ...and leadership skills ...management discipline 1972 Professor Larry Greiner are required to maintain is required to support suggests the various stages of that growth... business growth are preceded long-term growth. by crisis, the first being a crisis of leadership. Founders must adjust ...and make the from being the sole decision- transition from 2001 Leadership and change entrepreneur to leader. expert John Kotter writes the maker to delegating... paper “What Leaders Really Do.” Published in Harvard I n the early days of a new co-ordinate a growing enterprise. Business Review, it draws a business the most valuable Some entrepreneurs are able to distinction between the roles skill a founder can have is make the transition to leadership of manager and leader. entrepreneurship—the vision to successfully, while others struggle. identify opportunities, and the 2008 Indian business scholar willingness to take risks. But as the An Ernst & Young report in 2011 Bala Chakravarthy and business grows, demands change. identified entrepreneurs as people Norwegian economist Peter Disciplined management skills and who are nonconformist, driven and Lorange’s paper “Driving corporate expertise are required to tenacious, passionate and focused, Renewal: The Entrepreneur- with an opportunist mind-set. Manager” is published in Journal of Business Strategy. In it, the authors calls for a new breed of entrepreneurship in management, in order to manage business renewal.

START SMALL, THINK BIG 47 See also: Take the second step 43 ■ The Greiner curve 58–61 ■ Leading well 68–69 ■ Effective leadership 78–79 ■ Develop emotional intelligence 110–11 ■ Mintzberg’s management roles 112–13 ■ The value chain 216–17 Other studies report entrepreneurs staying still. His company launched The function of leadership as mavericks, unafraid of failure and in 1998 with a low-cost airline, is to produce more leaders, driven by a passion for success. easyJet, and now includes more While there is some overlap, absent than 20 “easy” businesses that not more followers. from these findings are the traits operate on a similar low-cost model. Ralph Nader that define good leaders and Haji-Ioannou has shown an aptitude managers: organization, an eye for for strategy, and an eye for detail; US political activist (1934–) detail, communication, emotional but he has also been criticized for intelligence, and the ability to lacking leadership skills, for ventures, and leadership skills delegate. And as Indian executive micromanaging, and, common to move the start-up beyond its Vineet Nayar advised, effective to entrepreneurs, for an inability to entrepreneurial roots. leadership involves encouraging delegate and let managers manage. others within the company to Start-ups require the spark realize their potential, and excel. US professor Larry Greiner of entrepreneurship; but growth identified leadership—the ability requires a different set of skills: a Making the transition of a start-up founder to transition founder must transition from being Canadian business guru Professor from entrepreneur to leader—as one sole decision maker to being a Henry Mintzberg proposed that of the major crises that businesses disciplined manager and a management can be broken down face as they grow. Greiner suggests successful leader. Those who are into three categories: managing that successful growth often unable to make this transition by information, through people, and requires the employment of often need to step aside and let the through action. Many entrepreneurs professional managers who bring professionals take over. But this is have difficulty managing through to the business an understanding often easier said than done. ■ information—they often lack the of the requirements of financial skills to build the systems and markets, banks, and—most communication networks on which importantly—have the leadership large businesses are built. skills needed to manage complex organizations. Entrepreneurs may Cyprus-born Stelios Haji- possess bountiful ideas, but it takes Ioannou, entrepreneur and founder management discipline to turn of easyGroup, is known for rarely those ideas into successful Zhang Yin Chinese entrepreneur and paper- exporter in the USA, and the recycling tycoon Zhang Yin was largest overall exporter to born in Guangdong in 1957. China. In 1995, after returning Recognizing that the Chinese to Hong Kong, Zhang cofounded export sector faced a shortage of Nine Dragons Paper with her paper-packaging materials, Zhang husband and her brother. The (her Cantonese name is Cheung company went on to become the Yan) opened a paper-trading world’s largest maker of business in Hong Kong in 1985. packaging paper. Quickly moving from In 2006, at the age of 49, entrepreneur to established Zhang became the first woman business leader, Zhang moved to top the list of richest people to Los Angeles, US, where she in China, according to the co-founded the paper-exporting magazine Hurun Report. The company America Chung Nam in following year, Ernst & Young 1990. The business quickly awarded her “Entrepreneur of became the leading paper the Year in China 2007.”

48 IN CONTEXT CHAINS OF HABIT FOCUS ARE TOO LIGHT TO Middle management BE FELT UNTIL THEY ARE TOO HEAVY KEY DATES TO BE BROKEN Pre-1850 The business landscape is dominated by KEEP EVOLVING BUSINESS PRACTICE small, family-run firms. 1850s and 60s A rapid expansion of the railroad systems and new industrial technology in Europe and America create greater possibilities for entrepreneurial businesses. From 1880s As family businesses grow ever larger, administration becomes important and they begin to employ professional managers. 1982 UK economist Norman Macrae predicts a future trend of “intrapreneurs”: managers with entrepreneurial thinking. P eople are important in organizational life. Whether it is the initiative of a single entrepreneur or the combined energy of thousands of employees, it is people who get things done. However, that energy and initiative would count for little without managers to foster it. The creation, implementation, and management of organizational processes is what molds individual energies into a coherent whole—and as a company evolves, it is the experience of management that is essential in redefining those processes. While management experience can liberate a business, it can also enslave it. Experience quickly gives