"Entrepreneurs must continually ask themselves what business they want to be in and what capabilities they would like to develop

“Entrepreneurs, with their powerful bias for action, often avoid thinking about the big issues of goals, strategies, and capabilities. They must, sooner or later, consciously structure such inquiry into their companies and their lives. Lasting success requires entrepreneurs to keep asking tough questions about where they want to go and whether the track they are on will take them there.

Entrepreneurs must continually ask themselves what business they want to be in and what capabilities they would like to develop. Many young enterprises simultaneously lack coherent strategies, competitive strengths, talented employees, adequate controls, and clear reporting relationships.

The entrepreneur can tackle only one or two opportunities and problems at a time. The entrepreneur must distinguish critical issues from normal growing pains.

Entrepreneurs should use [this] framework to evaluate their companies’ position and trajectory often - not just when problems appear.

The framework consists of a three-step sequence of questions. The first step clarifies entrepreneurs’ current goals, the second evaluates their strategies for attaining those goals, and the third helps them assess their capacity to execute their strategies.

Clarifying Goals: Where Do I Want to Go?

An entrepreneur’s personal and business goals are inextricably linked. Whereas the manager of a public company has a fiduciary responsibility to maximize value for shareholders, entrepreneurs build their businesses to fulfill personal goals and, if necessary, seek investors with similar goals.

Only when entrepreneurs can say what they want personally from their businesses does it make sense for them to ask the following three questions:

What kind of enterprise do I need to build? Long-term sustainability does not concern entrepreneurs looking for quick profits from in-and-out deals. Similarly, so-called lifestyle entrepreneurs, who are interested only in generating enough of a cash flow to maintain a certain way of life, do not need to build businesses that could survive without them. But sustainability - or the perception thereof - matters greatly to entrepreneurs who hope to sell their businesses eventually. Sustainability is even more important for entrepreneurs who want to build an institution that is capable of renewing itself through changing generations of technology, employees, and customers.

Entrepreneurs’ personal goals should also determine the target size of the businesses they launch.

What risks and sacrifices does such an enterprise demand? Building a sustainable business - that is, one whose principal productive asset is not just the founder’s skills, contacts, and efforts - often entails making risky long-term bets.

Can I accept those risks and sacrifices?

Setting Strategy: How Will I Get There?

Formulating a sound strategy is more basic to a young company than resolving hiring issues, designing control systems, setting reporting relationships, or defining the founder’s role. Ventures based on a good strategy can survive confusion and poor leadership, but sophisticated control systems and organizational structures cannot compensate for an unsound strategy. Entrepreneurs should periodically put their strategies to the following four tests:

Is the strategy well defined? A company’s strategy will fail all other tests if it doesn’t provide a clear direction for the enterprise.

The strategy should integrate the entrepreneur’s aspirations with specific long-term policies about the needs the company will serve, its geographic reach, its technological capabilities, and other strategic considerations. To help attract people and resources, the strategy must embody the entrepreneur’s vision of where the company is going instead of where it is. The strategy must also provide a framework for making the decisions and setting the policies that will take the company there.

Can the strategy generate sufficient profits and growth? The failure to earn satisfactory returns should prompt entrepreneurs to ask tough questions: What’s the source, if any, of our competitive advantage? Are our offerings really better than our competitors’? If they are, does the premium we can charge justify the additional costs we incur, and can we move enough volume at higher prices to cover our fixed costs? If we are in a commodity business, are our costs lower than our competitors’? Disappointing growth should also raise concerns: Is the market large enough? Do diseconomies of scale make profitable growth impossible?

Is the strategy sustainable? The next issue entrepreneurs must confront is whether their strategies can serve the enterprise over the long term. The issue of sustainability is especially significant for entrepreneurs who have been riding the wave of a new technology, a regulatory change, or any other change - exogenous to the business - that creates situations in which supply cannot keep up with demand.

A model based on one or two strengths becomes obsolete as success begets imitation. Competitors can easily knock off an entrepreneur’s innovative product. But they will find it much more difficult to replicate systems that incorporate many distinct and complementary capabilities.

Are my goals for growth too conservative or too aggressive? Different enterprises can and should grow at different rates. The optimal growth rate for a fledgling enterprise is a function of many interdependent factors (See the insert “Finding the Right Growth Rate.”)

Finding the Right Growth Rate

To set the right pace, entrepreneurs must consider many factors, including the following:

Economies of scale, scope, or customer network. The greater the returns to a company’s scale, scope, or the size of its customer network, the stronger the case for pursuing rapid growth.



The ability to lock in customers or scarce resources. Rapid growth also makes sense if consumers are inclined to stick with the companies with which they initially do business, either because of an aversion to change or because of the expense of switching to another company. Growing rapidly can [sometimes] allow a company to secure the most favorable locations or dominate a geographic area. . .

            Competitor’s growth. If rivals are expanding quickly, a company may be forced to do the same.

Resource constraints. A new venture will not be able to grow rapidly if there is a shortage of skilled employees or if investors and lenders are unwilling to fund an expansion that they consider reckless.



Internal financial capability. Businesses that have high profit margins and low assets-to-sales ratios can fund high growth rates.



Tolerant customers. When a company is young and growing rapidly, its products and services often contain some flaws. In some markets, customers are accustomed to imperfect offerings . . ..



Personal temperament and goals. Some entrepreneurs thrive on rapid growth; others are uncomfortable with the crises and fire fighting that usually accompany it.

Executing the Strategy: Can I Do It?

Entrepreneurs must examine three areas - resources, organizational capabilities, and their personal roles - to evaluate their ability to carry out their strategies.

Do I have the right resources and relationships? The lack of talented employees is often the first obstacle to the successful implementation of a strategy.

A young venture needs more than internal resources. Entrepreneurs must also consider their customers and sources of capital. Ventures often start with the customers they can attract the most quickly, which may not be the customers the company eventually needs. Similarly, entrepreneurs who begin by bootstrapping, using money from friends and family or loans from local banks, must often find richer sources of capital to build sustainable businesses.

For a new venture to survive, some resources that initially are external may have to become internal. Many start-ups operate at first as virtual enterprises because the founders cannot afford to produce in-house and hire employees, and because they value flexibility. But the flexibility that comes from owning few resources is a double-edged sword.

How strong is the organization? An organization’s capacity to execute its strategy depends on its “hard” infrastructure - its organizational structure and systems - and on its “soft” infrastructure - its culture and norms.

An evolving organization’s culture . . . has a profound influence on how well it can execute its strategy. Culture determines the personalities and temperaments of the workforce. Culture fills in the gaps that an organization’s written rules do not anticipate. Culture determines the degree to which individual employees and organizational units compete and cooperate, and how they treat customers.

More than any other factor, culture determines whether an organization can cope with the crises and discontinuities of growth.

Investing in Organizational Infrastructure

Few entrepreneurs start out with both a well-defined strategy and a plan for developing an organization that can achieve that strategy. In fact, many start-ups, which don’t have formal control systems, decision-making processes, or clear roles for employees, can hardly be called organizations. The founders of such ventures improvise. They perform most of the important functions themselves and make decisions as they go along.

            Informality is fine as long as entrepreneurs aren’t interested in building a large, sustainable business. Once that becomes their goal, however, they must start developing formal systems and processes. Such organizational infrastructure allows a venture to grow, but at the same time, it increases overhead and may slow down decision making. How much infrastructure is enough and how much is too much? To match investments in infrastructure to the requirements of a venture’s strategy, entrepreneurs must consider the degree to which their strategy depends on the following:

            Delegating tasks. As a . . . venture grows, its founders will probably need to delegate many of the tasks that they used to perform. To get employees to perform those tasks competently and diligently, the founders may need to establish mechanisms to monitor employees and standard operating procedures and policies. Telling employees how to do their jobs, however, can stifle initiative. Companies that require front-line employees to act quickly and resourcefully might decide to focus more on outcomes than on behavior, using control systems that set performance targets for employees, compare results against objectives, and provide appropriate incentives.

            Specializing tasks. In a small-scale start-up, everyone does a little bit of everything, but as a business grows and tries to achieve economies of scale and scope, employees must be assigned clearly defined roles and grouped into appropriate organizational units. Specialized activities need to be integrated by, for example, creating the position of a general manager, . . . or through systems that are designed to measure and reward employees for cross-functional cooperation.

            Mobilizing funds for growth. Cash-strapped businesses that are trying to grow need good systems to forecast and monitor the availability of funds.

            Creating a track record. If entrepreneurs hope to build a company that they can sell, they must start preparing early. Public markets and potential acquirers like to see an extended history of well-kept financial records and controls to reassure them of the soundness of the business.

Can I play my role? Before entrepreneurs have the option of doing less, they first must do much more. If the business model is not sustainable, they must create a new one. To secure the resources demanded by an ambitions strategy, they must manage the perceptions of the resource providers: potential customers, employees, and investors. To build an enterprise that will be able to function without them, entrepreneurs must design the organization’s structure and systems and mold its culture and character.

A founder’s role must change. [It] should evolve from doing the work, to teaching others how to do it, to prescribing desired results, and eventually to managing the overall context in which the work is done.

Ken Roys, CEO

BTF Management Consultants Inc

866-385-1900 Toll Free 713-983-7904 Fax

Ken.Roys@btfmanagement.com