Entrepreneurs Resource Centre

Entrepreneurship Diagram

2011-06-07T15:22:00.000-07:00

ENTREPRENEURIAL BEHAVIOR

2011-06-07T12:33:00.001-07:00

Introduction

There are literally dozens and dozens of different definitions of ‘the entrepreneur’ and the concept of ‘entrepreneurship’. Researchers and writers often seem to pick the definition that best fits the area they are discussing. We have explicitly linked entrepreneurship to the capability for exploiting successfully innovative ideas in a commercially competitive market. Leaving to one side the fact that individuals working in the public and non-profit sectors can be very enterprising, in historic and policy making terms entrepreneurship refers to business behaviour related to innovation and growth. For our purposes, entrepreneurs may be broadly defined as people who manage a business with the intention of expanding that business by applying some form of innovation and with the leadership and managerial capacity for achieving their goals, generally in the face of strong competition from other firms, large and small. The overall aim of this unit, therefore, is to provide you with opportunities to consider and reflect on the personal aspects involved in transforming an innovative idea into an entrepreneurial product.

To get the most out of this unit you need to be able to make notes in your Open Learn Learning Journal. You must be a registered Open Learn user in order to create your Learning Journal. Once you've registered you can access your Learning Journal either by clicking on your username in the blue navigation bar above, or by using the Learning Journal links in the left-hand side of the unit home page.

Learning outcomes

After studying this unit you should:

· understand the nature of entrepreneurship;

· understand the function of the entrepreneur in the successful, commercial application of innovations;

· confirm your entrepreneurial business idea;

· identify personal attributes that enable best use of entrepreneurial opportunities;

· explore entrepreneurial leadership and management style;

· identify the requirements for building an appropriate entrepreneurial team.

1 Economic function of the entrepreneur

Broadly, entrepreneurs have two vital roles to play in the economy (1) to introduce new ideas and (2) to energise business processes. Strictly speaking, the term entrepreneur, which derives from the French words entre (between) and prendre (to take), referred to someone who acted as an intermediary in undertaking to do something. The term was originally used to describe the activities of what today we might call an impresario, a promoter or a deal maker. The entrepreneur first made an appearance as a distinct economic concept in France, twenty years before the ‘father’ of economics, Adam Smith published his Wealth of Nations in 1776. Richard Cantillon, an Irishman living in France, suggested in 1756 that the entrepreneur was someone prepared to bear uncertainty in engaging in risky arbitrage buying goods and services at a certain (fixed) price in one market to be sold elsewhere or at another time for uncertain future prices, usually in other market (though, throughout economic history, hoarders or traders who try to ‘corner’ a market have sought super-profits in the same markets when short supplies send prices rocketing upwards). This concept of entrepreneur as arbitrager is still relevant today but was clearly influenced by the dominance at that time of trade as the chief means for accumulating new wealth and capital. Manufacturing and trade dominated Britain's heyday in Victorian times whereas today, as the case studies show, it is technology, knowledge and services that provide most, though by no means all, new entrepreneurial opportunities. In other words, entrepreneurship exists in its context as Figure 1.

Business competition chain

Here, the role of the entrepreneur is to conceive a business idea in terms of an innovation to be brought successfully to the market and to find the wherewithal to make this happen. The entrepreneur does not necessarily need to have the design, production or delivery skills (this is the function of the firm) nor to shoulder all or most of the risk (this is often assumed by the providers of finance or investors). Indeed, the notion of the entrepreneur as a risk-taking trader began to be challenged early on by the view of the entrepreneur as an adventurous self-employed manager capable of combining, to personal advantage, capital and labour. It is interesting to note that in France today the entrepreneur is a more generic term mainly referring to small property developers and owners of small construction firms. It would be wrong to state that the element of risk-bearing has completely disappeared from the modern concept of the entrepreneur. The successful management of risk is an important entrepreneurial attribute. However, it does seem true that a swift perception of opportunities and the ability to coordinate the activities of others emerge as the more central economic skills of the modern entrepreneur.

Austrian economist Joseph Schumpeter (1934), who has had a seminal influence on entrepreneurship, as well as innovation, placed the entrepreneur at the centre of his theory of economic development. Schumpeter defined the entrepreneur simply as someone who acts as an agent of change by bringing into existence a ‘new combination of the means of production’. New combinations include process, product and organisational innovations. The means of production includes capital, equipment, premises, raw materials, labour and, in recent times, information. Currently, knowledge has been added to the list as the indispensable ingredient for business success in the new millennium.

The essence of Schumpeter's approach is that entrepreneurs are competitive and always strive to gain an edge over their competitors. When they begin to consolidate and slow down, they revert to being ordinary managers and, in Schumpeter's terms, are no longer entrepreneurial. Thus attitudes to growth and the actual attainment of growth are essential elements of the concept of entrepreneurship. The attainment part of the concept, of course, implies a high level of managerial competence in all the five stages in Figure 1 and a high competence in social and commercial interactions outside the firm with other firms, regulators and, above all, customers and consumers. This implies that entrepreneurial firms that innovate successfully and encourage new innovations are likely to be different from most other firms. They appear to be more open and supportive of different opinions and ideas. If you are developing your own idea as part of an organisation (or if you feel that your idea will need the combined efforts of a firm for its implementation), Activity 1 will help you identify where you need to develop and negotiate support both inside and outside the firm. The art of negotiation is a key entrepreneurial skill.

Activity 1

Referring to the characteristics of successful innovation, complete the Characteristics of the entrepreneurial firm checklist.

Before starting this activity you should determine where you are going to record your notes. You may choose to maintain a paper notebook. You may, however, prefer to record your thought electronically either by using a word processing program or by using the OpenLearn Learning Journal facility.

Consider the ideal firm for bringing your idea to market (or if your ideas have not yet crystallised, an enterprising group or firm of at least two other people you know). Make a note about the purpose of the firm or team before you answer the questions.

Try to answer the following questions (pausing for reflection if you need to.) If the answer is ‘Yes’ write a brief example. If the answer is ‘No’, write the main reason. If you are uncertain about the question click the question mark and an additional explanation of what is being asked will be revealed.

Answer

If you answered ‘Yes’ to five or more questions and were able to give clear examples it is most likely that the firm you have in mind is innovative and encourages both creativity and a sound approach to business. If you answered ‘No’ to five or more questions, your proposed innovation may not recieve sufficient support from such an organisation.

The characteristics of entrepreneurial firms that are successful at launching innovations have been widely studied and are reflected in the questions asked in Activity 1. However, at this stage you may be a long way off starting, or helping to start, your own firm. The checklist should serve as a useful tool for gauging the innovative support from your current situation and as a guideline for the sort of atmosphere that needs to develop in a firm in order to maximise its entrepreneurial potential. When faced with very real resource constraints, maintaining motivation to set up and run such a firm can be very tough. The main motivation for entrepreneurs to overcome the barriers of economic pressure and uncertainty, according to Schumpeter (who was writing in the 1930s), were the prospects of upward social mobility into the capitalist class. At the start of the 21^st century, with the almost universal dominance of market-based economic systems and a hugely increased middle class, the need to cope with the direct and indirect threats of ‘globalisation’ is now often cited as the spur to innovation. For others, economic survival or the chance to create something of value are the driving motivators. Whatever the personal ambitions of entrepreneurial small firm owners, their role in introducing innovations and in improving overall economic development and efficiency is important.

Basically, the concept of development from an economic viewpoint means the growth of goods and services in an economy usually measured in total or per capita rates of growth in all goods and services, known as the Gross Domestic Product (GDP) or the Gross National Product (GNP) when nationally owned overseas goods and services are included. In advanced industrial economies such as Britain, France, Germany and so on, policy objectives tend to be targeted on improving economic performance rather than development per se. As an alternative to an economic approach, one of the best known psychologically based economic development models that is still very influential, David McClelland's achievement motivation model, pays less attention to structural factors while the psychological determinants of economic behaviour are more strongly emphasised:

Some wealth or leisure may be essential to development in other fields the arts, politics, science, or war but we need not insist on it. However, the question why some countries develop rapidly in the economic sphere at certain times and not at others is in itself of great interest, whatever its relation to other types of cultural growth. Usually, rapid economic growth has been explained in terms of ‘external’ factors favourable opportunities for trade, unusual natural resources, or conquests that have opened up new markets or produced internal political stability. But I am interested in the internal factors in the values and motives men have that lead them to exploit opportunities, to take advantage of favourable trade conditions; in short, to shape their own destiny.

(McClelland 1968, p. 74)

McClelland's preferred entrepreneurial motivator, the need for achievement or nAch as it is usually abbreviate – ‘a desire to do well, not so much for the sake of social recognition or prestige, but to attain an inner feeling of personal accomplishment’ – is a more psychologically-based theory. McClelland himself summarised an alternative economic development theory as ‘a society with a generally high level of nAch will produce more energetic entrepreneurs who, in turn, produce more rapid economic development’. However, McClelland was quite disparaging about the profit motive as the mainspring of entrepreneurial activity:

Since businessmen had obviously shifted their concern from intrinsic worth to money worth, Marx and other economists endowed man with a psychological characteristic known as the ‘profit motive’. The capitalist, at any rate, was pictured as being driven by greed, by the necessity of making money or keeping up his rate of profit.

That such an assumption is a typical oversimplification of rational or armchair psychology has recently begun to be realised by historians in particular who have studied the lives of actual business entrepreneurs in the nineteenth century. Oddly enough, many of these men did not seem to be motivated by a desire for money as such or by what it would buy.

(McClelland 1961, p. 233)

Box 1 Wall Sreet (1987) Gordon Gekko: Address to Teldar Paper Stockholders

Teldar Paper has 33 different vice presidents, each earning over $200,000 a year. Now, I have spent the last two months analyzing what all these guys do, and I still can't figure it out. One thing I do know is that our paper company lost $110 million last year, and I'll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents.

The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated.

In the last seven deals that I've been involved with, there were 2.5 million stockholders who have made a pre-tax profit of $12 billion. Thank you.

I am not a destroyer of companies. I am a liberator of them!

The point is, ladies and gentleman, is that greed – for lack of a better word – is good.

Greed is right.

Greed works.

Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.

Greed, in all of its forms – greed for life, for money, for love, knowledge – has marked the upward surge of mankind.

Activity 2

1. Do you think that profit maximisation is the main motivation to entrepreneurial behaviour?

2. Does profit have to be the main motivation of a successful business owner?

3. What alternatives or additional motives can you identify?

Answer

Clearly, the ‘oversimplification’ of the profit motive determining economic development has survived longer than McClelland believed it would and remains a central pillar to current business and economic analysis. Other motives include the need for autonomy, to ‘be my own boss’, to support a preferred lifestyle, to provide security for the family, to achieve social status and so on. Nevertheless, earning profits and making money also feature as important motives and the potential profitability of a new product is still usually the acid test of its likely viability. And well know entrepreneurs to the press and public are usually very successful and very rich business owners.

2 Entrepreneurial qualities

It is now widely accepted that, apart from the start up phase, most small firms in Europe are more concerned about survival rather than growth and relatively few are especially entrepreneurial (Gray 1998). Consequently, a lot of research in this field has focused on finding the characteristics that set entrepreneurs and their firms apart from others. Elizabeth Chell (1985, 1999), a social psychologist, has examined numerous psychological trait-based approaches and concluded that, whilst psychological aspects such as ‘entrepreneurial intention’ and the ‘ability to recognise opportunities’ are strongly linked to entrepreneurial behaviour, the context in which the entrepreneur operates is also very important. Entrepreneurship reflects complex interactions between the individual and the situation, which has to be dynamic because business situations are always changing.

Perceptions and judgement are, therefore, key elements in this process. Indeed, more than 20 years ago, Mark Casson (1982) identified ‘judgement’ as one of the qualities that distinguishes the successful entrepreneur from the much larger group of non-entrepreneurial SME owners. As mentioned before, business judgement can reflect an innate ability but most frequently it directly derives from experience (or, more accurately, learning from experience). However, past experience can also filter out our ability to spot new opportunities or threats. Cultural effects related to family, locality and friends can help us interpret the world but they can also colour what we see. The same may be true of the influences from various networks that business owners often belong to (ranging from business associations such as Chambers of Commerce, business clubs and so on, to more social links related to, say, sport or leisure activities). And, of course, our own expectations and motivations of what we hope for in life, at work and in terms of a career will affect both judgement and business behaviour. The Open University Business Schools (OUBS) has conducted research in this area over the years. The findings from many different entrepreneurial firms, which reveal various influences and feedback loops on the owner-manager's decision-making, are summarised in Figure 2. Apart from the effects of the various influences that can affect business judgements, the main points to note are:

1. Business situations consist of real challenges, constraints and opportunities that directly impact on the business performance of a firm.

2. However, it is how entrepreneurs perceive these that guide their judgments and actions (which is why accurate market information, the ability to learn and experience are so important).

3. Business perceptions are also influenced by personal and business motivations, peer pressures and cultural influences (it could be argued that entrepreneur's perceptions are more closely aligned with reality).

4. Entrepreneurial behaviour is guided by the entrepreneur's expectations rather than a rigid set of strategic objectives (again, it may be that the entrepreneur's expectations are more realistic and, maybe, more ambitious than those of other business managers).

5. The process is not static but very dynamic with feedback and signals from the market consciously and indirectly affecting later decisions and actions.

As each context and set of market signals reflect industry, regional and life-cycle influences, it is difficult to believe that each entrepreneur needs the same set of skills in order to achieve success. The model in Figure 2 reflects the uniqueness of the business situation facing each entrepreneur and the key areas where superior judgement will make a difference.

Model of entrepreneurial decision making

The influences and processes depicted in the model are complex but so too is the reality of entrepreneurial business. To date, researchers have not been able to identify a core and necessary bundle of attributes, characteristics or qualities that mark out successful entrepreneurs unerringly from the large crowd of business owners. However, a commonly quoted empirical and desk research study of new venture start-ups, that has stood the test of time over the past quarter-century, was conducted through the Massachusetts Institute of Technology by Jeffrey Timmons and colleagues (Timmons et al. 1977). They identified 14 important entrepreneurial characteristics of successful enterprise owners (see Box 2) which still frequently crop up in entrepreneurship research.

Behavioral characteristics of entrepreneurs

· drive and energy

· self-confidence

· high initiative and personal responsibility

· internal locus of control

· tolerance of ambiguity

· low fear of failure

· moderate risk taking

· long-term involvement

· money as a measure not merely an end

· use of feedback

· continuous pragmatic problem solving

· use of resources

· self-imposed standards

· clear goal setting.

Timmons admitted that few entrepreneurs would possess all traits but felt that strengths in one might compensate for weaknesses in others. Many of these characteristics are self-explanatory (such as high personal drive and energy, self-confidence and setting clear goals) and some appear to be linked. Others may be less obvious or well-known, such as money and profits being used as a measure of success compared with others but less as an end in itself. Helping you to develop the last quality in the list, the ability to set clear goals, is the ultimate objective of this unit.

Activity 3

1. How many of the entrepreneurial qualities listed in Box 2 do you feel already, in the main part, apply to you?

2. Which ones do you feel a need to find out more about?

3. Which ones have you already identified as needing more development?

Answer

These characteristics appear consistently in other entrepreneurial research studies. For example, more than 20 years ago in a study of Irish entrepreneurs, Cromie and Johns (1983) identified achievement, persistence and self-confidence as general successful business characteristics as well as internal locus of control and commitment to the business, as the characteristics peculiar to entrepreneurs. Some of the qualities that people often find a bit obscure include tolerance of ambiguity (which basically refers to the ability to accept contradictory or unexpected evidence of something while keeping an open mind) and fear of failure (which can lead to pushy, goal-dominated behaviour but, in fact, is the opposite of need for achievement – nAch – mentioned in Section 1; the anxiety caused by the fear can sometimes be strong enough to cause the individual to deliberately bring about the failure that is feared). Low fear of failure means that the entrepreneur is prepared to risk things going wrong and can handle setbacks without being deterred (which is associated with but not quite the same thing as high nAch, where failure can lead to severe disappointment and loss of confidence). High achievement motivation is a great driving force but low fear of failure may be very useful in times of business chaos and uncertainty.

Activity 4

1. Do you feel you are highly motivated to achieve?

2. Are you competitive and get above average satisfaction from success in non-business areas such as, say sport or academic studies?

3. Are you able to take setbacks without becoming too discouraged?

Answer

There is a tendency for high nAch people to come from very supportive backgrounds and for them to be motivated to achieve in different areas. In contrast, high fear of failure people tend to come from disrupted or non-supportive backgrounds and focus more obsessively on areas where they are more likely to achieve their goals (Kets De Vries 1977) (though they often set goals well below their actual potential in relation to the decision-making model in Figure 2, high fear of failure people would have comparatively low perceived capabilities and expectations whereas high nAch people may be a bit over-confident about their own capabilities and stretch their expectations by setting challenging targets). However, these tendencies are not set in stone and the actual experience of business can have a big effect in inducing either more caution or more confidence. Still, if you are uncertain of your own drive to succeed or your ability to persist, the wisest course of action is to consider pushing your idea as part of a team. Small groups not only provide support, they also have a wider range of abilities and skills and often come up with more considered decisions.

Perhaps a little less familiar is the quality that successful small business owners are said to have – high internal locus of control. This means that they believe that their behaviour determines what happens to them and that they can control their own behaviour. This is linked to the need for autonomy and personal independence expressed by many entrepreneurs as their prime motivation for setting up their own firms (Gray 1998). Internal locus of control has featured fairly consistently in studies on the psychological characteristics of entrepreneurs. Essentially the concept implies three separate beliefs on the part of individuals that:

1. the outcome of events and situations are susceptible to intervention

2. individuals can intervene and influence the outcome of situations positively from their perspective

3. they themselves have the skills and capacity to intervene effectively in certain situations or to influence certain events.

The self-confidence, energy flexibility and opportunism associated with entrepreneurial behaviour suggests that entrepreneurs are individuals who are accustomed to getting involved and that they expect positive results from their involvement. In other words, they are prepared to expend energy and mental effort because they expect and often receive appropriate or, in their terms, valuable rewards. Also, they are flexible and opportunistic because they believe they have the capacity to become involved across a broad range of situations. Internal locus of control beliefs are essential to the success of self-motivated behaviour and form a central core of the entrepreneur's self-concept. However, it is equally clear that entrepreneurs will not be the only people sharing these beliefs.

Most reasonably successful students at all levels realise that their own efforts in studying have a lot to do with passing. Most people for whom sport is more than just an occasional leisure activity know the value of expending their own efforts on training and the importance of self-confidence. And in business, most chief executives and reasonably able mid-level to senior managers will be accustomed to obtaining positive responses from their personal interventions. It seems clear that people who believe that outcomes basically depended on their own behaviour and that they can control their own behaviour will generally believe that the control of events of importance to them ultimately rested internally in themselves. This is clearly linked to self-confidence and the ability to self-motivate. However, people with internal locus of control beliefs are in the minority. For many people, their lives are deeply affected by the decisions of people in more powerful positions than themselves which, in business, can include strong partners, customers and suppliers (as Porter's five-forces model has identified). Even more pervasive than the belief that powerful others exert a determining control or influence are widespread beliefs that events are determined by chance or luck. Activity 5 provides you with an opportunity to see where you currently stand (but note that locus of control beliefs are also influenced by context and can vary over time, especially if success breeds success).

Activity 5

Complete the Entrepreneurial attributes: locus of control questionnaire (clicking on 'Launch in a separate player' will allow you to enlarge text). This will give you an estimate of your own locus of control belief profile and what dominates – internal, external or chance.

Click on one of the three choices, depending on whether you agree or disagree with each statement, and your scores for Internal, External and Chance will appear in the respective boxes.

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These concepts have been found to be useful in analysing the behaviour and beliefs of successful entrepreneurs. If you feel you scored too low for your own liking, this is another indication that a team approach may be best. Indeed, Activity 5 could also be useful in developing a balanced entrepreneurial team (not everyone can be leader with a firm belief in their ability to control destiny; opportunity often springs from being open to luck and chance happenings and most good teams rely on some members being prepared to follow more powerful others). If you want to boost your feeling of internal locus of control, one suggestion would be to set yourself attainable objectives and push yourself to achieve them. However, it is important to bear in mind that psychological scales and tests of this kind only ever measure tendencies (not absolute and immutable behaviour that holds in all circumstances) and never attain anything like 100 per cent accuracy. And, in any case, personal belief and motivation is only one part of the entrepreneurial equation.

3 Entrepreneurial work styles

The need for supportive, open and communicative policies, structures and cultures in effective entrepreneurial firms as the optimal crucible for successful innovations comes through very strongly from studies of innovation and successful entrepreneurship. However, the strong internal locus of control of successful entrepreneurs suggests there may be a difficulty in accepting the influence of others, powerful or not. And, the strong need for autonomy does not suggest a personality open to sharing of ideas or knowledge. Indeed, the popular image of a successful entrepreneur can sometimes be that of a determined autocrat who lets nothing stand in the way of success. How can these two conflicting pictures of successful entrepreneurship be reconciled? The answer is that, just as there is no one ‘entrepreneurial personality’ and people have different styles of learning, so too are there different management and leadership styles that vary between particular entrepreneurs, in their particular firms facing their own particular set of circumstances.

Course learning cycle

Looking more closely at learning styles based on the Lewin/Kolb experiential learning cycle (Figure 3) that underlies this unit, it is likely that individuals will be drawn more strongly to one of the four stages than to others. David Kolb's model (1973) suggests that entrepreneurial success should be mainly determined by the individual's ability to adapt and dominate continual changes in the business environment through exploring new opportunities and learning from past successes and mistakes. In the context of business, the cycle starts with a concrete experience (say, the launch of a new product, landing or losing a major customer, unexpected poor staff performance, a delivery failure, and so on); moves on to the stage of observation and reflection on what has happened and why; then onto making sense of what has happened in the form of a rule or guide for repeating successes or avoiding similar mistakes; and, finally setting up a new situation to test the new insights or rules (thus creating a new experience for the cycle to start again). In practice, Kolb observed that most people display skills along a ‘concrete – abstract’ dimension and an ‘action – reflection’ dimension. This suggested to Kolb that there were basically four learning styles (outlined in Figure 4).

Following the flow of the cycle, the learning style in upper right quadrant Kolb labelled the diverger. The diverger is able to see concrete experience from different perspectives and to pull different meanings from experience. Kolb saw people who tend to this style of learning as inventive and creative. This could include entrepreneurs in the creative industries such as design and the media. In the lower right quadrant, the assimilator is attracted to creating models and concepts, an approach that would be a strength in consultancies and marketing firms. The converger in the lower left quadrant has the learning style that prefers to apply rules and to test them. Kolb saw this as a style that appeals to engineers and technical people. It is also useful in innovations based on R&D. In the final quadrant accommodators are at ease in working with other people. They like to plan and carry out new activities. According to Kolb, accommodators are more prepared to accept risks and this may be the most entrepreneurial learning style. However, Kolb was at pains to point out that these are not pigeon-holes because people can move from one style to another depending on circumstances or context. Nevertheless, for many people there is a preferred dominant style.

Activity 6

1. Which style best reflects your own?

2. Where would you place yourself on Kolb's grid?

3. What sort of balance of learning styles do you think would best fit your needs?

Answer

In answering these questions, consider whether you really do think there is a dichotomy between creative thinking and critical thinking. Kolb's categories have been criticised because many people feel that successful managers should have a balance between the two and that, in any case, they are not mutually exclusive. And from our consideration of the characteristics of entrepreneurial firms and the qualities of successful entrepreneurs themselves, the ideal entrepreneurial learning style seems to be one rooted in both action and reflection. Indeed, the fact that business is a social process suggests also that well-developed social skills, such as that of the accommodator, are of prime entrepreneurial importance.

Most definitions of the entrepreneur also stress the ability to organise and combine as the key distinguishing features. This would emphasise the converger's learning style, a conclusion that should find support from influential management writer Peter Drucker (1985). He maintains that innovation no longer results from chance activities but needs to be managed – whether in a big or small firm – as an organised and systematic process. This suggests that preferred learning styles will be directly related to the learning and skills needs perceived at the time and where they work in the enterprise value-cycle. Thus, learning styles are also likely to be linked to preferred management and leadership styles.

Generally, management-orientation can be described in terms of three very broad, but not mutually exclusive areas – structure (organisational and bureaucratic), people (social and motivational) and change (entrepreneurial and innovative) (Ekvall, 1991). Management styles reflect the influences of the management orientation (the requirements of where they manage in the value chain and individual personality). Very broadly, two main categories are often used to distinguish the main approaches – task-focused and people-focused – and the associated leadership styles contrast directive with participative styles. In fact, a basic two-way classification is far too simple. The brief discussion above suggests at least five broad management behavioural styles – structured (rules and procedures), delegative (happy for subordinates to take some direct responsibility for their own work) standards (set or agree quality and performance standards), merit (praise and reward good work) and supportive (helpful and enjoy the team's trust). Completing Activity 7 will automatically give you scores on each of these styles (with scores around 50 per cent representing the average, so that a score of above 60 per cent on ‘structured’ would indicate you like managing by rules or on ‘delegative’ shows you are comfortable in delegating responsibility).

Activity 7

Complete the Management styles questionnaire, noting your score on each of the five styles. (Clicking 'Launch in a separate player' will allow you to enlarge the text.)

Remember, there is no correct answer, only an answer that is right for you.

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Answer

Like all tests of this kind, do not look for 100 per cent accuracy or a picture of yourself that is set in stone. They often reflect how you feel at the time you do the test. High scores on ‘structured’ and ‘standards’ would suggest that you tend to a directive management style while high scores on ‘delegative’, ‘merit’ and ‘supportive’ suggests a more participative management style (of the type recommended for more creative and innovative firms). However, if you have not yet had managerial experience, either in your own firm or working for someone else, it would be interesting to return to the management styles questionnaire after you have had some experience and see if your views have changed. However, there is one more point worth making. To the extent that a test like this can pick up differences in behavioural styles of management, it purports to do so across the board – junior managers, line managers, senior managers and entrepreneurial managers. It is not too difficult to see that any one or a mix of these styles could, in certain circumstances, be suitable for an entrepreneur (even having a structured approach could be essential for entrepreneurs launching a process innovation).

To get a better understanding of the sort of management style that might be the most suitable for the business that is to launch your idea, we need to go beyond different types of management and look to the role of the entrepreneur as leader. Many managers are mainly administrators or specialists in bounded areas whereas one of the key functions of an entrepreneur is to motivate and coordinate the firm in achieving its goals. Accepting that the main management orientation of the entrepreneur must be to manage change and innovation, in some circumstances this means that the entrepreneur also has to be an extremely efficient manager of the day-to-day challenges of competition while, in other cases, administrative functions are delegated and the entrepreneur is required to be an ambassador and leader, with a longer-term perspective. Plotting against the other two management orientations task and people we can identify the five leadership styles in Figure 5.

The firm that best fits the focus of this course clearly has an innovative leadership style where there is a high focus on both people and tasks. The firm is generally seen as a team and is open to collaborating and sharing with external firms or sources of capabilities. However, research conducted over the years among small firm owners suggest that most like to see themselves in command (especially very small firms with, say, less than ten employees) and having a directive style. Interestingly, growth-oriented small firms that have a history of growth, and slightly larger small firms, are much more likely to see themselves as being ‘one happy family’ (paternalistic style) or having a participative style. The firms that are governed by external rules and procedures, have a comparatively low people and task focus and generally have a structured management style that does not encourage innovation (though in some professions there can be a strictly limited delegation).

Leadership styles

Activity 8

1. Which leadership style best reflects your own?

2. Taking your scores on Activity 7 and your own reflections into account, where would you place yourself on the leadership grid?

3. Considering the needs of the firm that will launch your entrepreneurial idea, where do you feel you should be on the grid?

4. If they are different points on the grid, what do you think needs to be done in order to move you to where you feel you should be?

In looking ahead to the launch of a successful entrepreneurial idea, we have already highlighted the importance of social process in innovation so it is important to avoid getting too fixated only on the role and capabilities of the entrepreneur. As Figure 2 (Entrepreneurial decision-making) in Section 2 implies, it is the overall capacity of firms, real and perceived, rather than just the individual abilities of their owners, managers or employees that determine the scope of their activities. Perceptions of their own and their staff's capabilities plus their perceptions of competitors’ capabilities has an important part to play in determining small firm owners’ expectations of success. However, there are also likely to be cultural factors of a more general nature which influence perceptions of desired abilities, resources and skills. Entrepreneurs may well be able to identify crucial skills and tasks more accurately than other small business managers. Entrepreneurs can also be defined in terms of their ability to perceive and to respond to these changes more quickly than other business managers. With reasonable feedback, it is relatively straightforward to discuss opportunities and to identify the gaps between reality and perception. However, customer and consumer needs are often ill defined, hidden from view and difficult to quantify Certainly, the perception of many lower level needs (either the needs of entrepreneurs or of customers) are even more strongly determined socially through broad cultural or more immediate occupational influences.

It seems reasonable to hold that effective business judgement reflects the correspondence of an individual's perceived capacities, opportunities and threats to their objective possibilities and the individual's ability competence) to act upon that information (as in Figure 2). It is not too difficult to then interpret the list of common entrepreneurial behavioural characteristics in Box 2 in terms of business competence. The successful entrepreneurial firm needs the right balance of competences in the team as a whole rather than seeking them in a single individual. Modern management theory is certainly moving in this direction and away from older hierarchical, scientific management or management-by-objectives models. In reality, your leadership and management styles will be determined by what you feel most comfortable with and what you feel is the norm in the circumstances (but remember that the people you are dealing with also have their feelings about what is a ‘normal’ management or communications style for the circumstances). By now we shall assume that you have worked out many of these issues to your own satisfaction but, if you need more help, the following activity on teamwork issues may help you consider them more systematically.

Activity 9

Complete the Teamworking ability checklist.

Consider the last time you worked with or managed a group of at least two other people (preferably but not necessarily one related to business or work).

Write a brief 1–2 line description of the group or team.

Try to answer the following questions (pausing for reflection if you need to). If the answer is ‘Yes’, write a brief example. If the answer is definitely ‘No’, write the main reason but if you are uncertain about the question or answer ‘Don't know’ click the question mark to read an additional explanation of what is being asked.

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Answer

If you answered ‘Yes’ to five or more questions and were able to give clear examples it is most likely that what you had in mind was a group (and not a very cohesive one) rather than a team. If you were able to answer ‘No’ to five or more questions and give good reasons or examples, you have a good understanding of what is required for a team to work effectively.

This should help you identify both your own capacity for team working as well as areas in which you need to develop or delegate. As well as identifying internal strengths, efficient entrepreneurial firms require financial, physical and technical resources which they are increasingly drawing from external sources, as and when they are needed. In many industries, employment relations are giving way to contractual relations and the main function of core staff becomes servicing customers and ensuring contract compliance. Also, industrialised societies have seen a significant growth in the number of qualifications, regulations and standards that govern commercial life and require particular skills or abilities, often in response to the pressures of global competition. Thus a valuable entrepreneurial capability is having the leadership ability to maintain focus on the ends while at the same time to have the management ability to take into account the needs of the whole firm while addressing the means.

4 Key points

The important points this unit has covered include:

· Defining the entrepreneur in terms of economic function and role.

· Identifying the key characteristics of successful entrepreneurs and entrepreneurial firms.

· Considering the role of entrepreneurial motivation in decision making and business behaviour.

· Identifying leadership and management styles appropriate to an entrepreneurial firm

· Considering the entrepreneurial team needed to support your idea.

Please note that this unit was taken from the OU course B722 which will be replaced by B322 in November 2007.

Do this

Now you have completed this unit, you might like to:

· Post a message to the business and management forum.

· Review or add to your Learning Journal.

· Rate this unit.

Try this

THE 21 LAWS OF LEADERSHIP

2011-06-07T12:31:00.001-07:00

THE 21 LAWS

– Follow them and people will follow you

Leadership is leadership, no matter where you go or what you do. The true principles of leadership remain the same, irrespective of time, culture or even new technology.

In his book, The 21 irrefutable laws of leadership, John C. Maxwell explains that real leadership principles stand the test of time – they are irrefutable. These principles can be explained by 21 laws. “Each law is like a tool, ready to be picked up and used to help you,” says Maxwell. “Learn them all, and people will gladly follow you.”

1. THE LAW OF THE LID

Leadership ability is the lid that determines a person’s level of effectiveness. No matter how smart or talented you are, without leadership you can only go so far. “The higher you want to climb, the more you need leadership. The

greater the impact you want to make, the greater your influence needs to be.”

2. THE LAW OF INFLUENCE

According to Maxwell, leadership is influence – nothing more, nothing less. If you cannot influence others, they will not follow you. True leadership comes only from influence, which cannot be mandated. It must be earned.

3. THE LAW OF PROGRESS

Leadership develops daily, not in a day. “Becoming a leader is a lot like investing successfully in the stock market. If your hope is to make a fortune in a day, you are not going to be successful.” You do not become a leader overnight. It takes time to hone your skills.

4. THE LAW OF NAVIGATION

Anyone can steer the ship, but it takes a leader to chart the course. In order to be a successful leader, you need to develop a leadership strategy that will take you to your destination, with the buy-in from those who follow.

5. THE LAW OF E.F. HUTTON

E.F. Hutton is a financial services company with the motto, “When E.F. Hutton speaks, people listen.” To find the real leader in an organisation, just look at who the employees listen to. “People listen not necessarily because of the truth being communicated in the message, but because of their respect for the speaker.”

6. THE LAW OF SOLID GROUND

Trust is the foundation of leadership. “To build trust, a leader must exemplify competence, connection, and character.” Trust makes leadership possible. Without it, no one will follow.

7. THE LAW OF RESPECT

People do not follow others by accident. They follow individuals who they respect, and not necessarily the person with the title. “The greatest test of respect comes when a leader creates a major change in an organisation.”

8. THE LAW OF INTUITION

The great sports coaches refer to intuition as being in the zone. “Leaders see everything with a leadership bias, and as a result, they instinctively, almost automatically, know what to do.” This read-and-react instinct is present in all great leaders.

9. THE LAW OF MAGNETISM

Effective leaders are always on the lookout for good people. According to this law, you attract people into your life who have similar leadership ability as you do. “If you think the people you attract could be better, then it is time for you to improve youself.”

10.THE LAW OF CONNECTION

Leaders touch a heart before they ask for a hand. You cannot move people to action unless you first move them with emotion. The heart comes before the head. “The stronger the relationship and connection between individuals, the more likely the follower will want to help the leader.”

11.THE LAW OF THE INNER CIRCLE

A leader’s potential is determined by those closest to him or her. “When you have the right staff, potential skyrockets. Hire the best staff you can find, develop them as much as you can, and hand off everything you possibly can to them.”

12.THE LAW OF EMPOWERMENT

Only secure leaders give power to others. Theodore Roosevelt said it best, “The best leader is the one who has sense enough to pick good men to do what he wants done, and self-restraint enough to keep from meddling with them while they do it.”

13.THE LAW OF REPRODUCTION

It takes a leader to raise a leader. “An environment where leadership is valued and taught becomes an asset to a leadership mentor. If a company has strong leaders – and they are reproducing themselves – then the leadership just keeps getting better and better.

14.THE LAW OF BUY-IN

People first by into the leader, then the vision. “People do not at first follow worthy causes. They follow worthy leaders who promote worthwhile causes.” Nelson Mandela had the buy-in of the people because he was a worthy leader with a worthwhile cause. To get the buy-in from people, you need to have both a worthy leader and a worthy cause.

15.THE LAW OF VICTORY

Leaders find a way to win for their team. “When the pressure is on, great leaders are at their best. Whatever is inside them comes to the surface.” A good leader will find out what needs to be done in order to win, and then do it, no matter what.

16.THE LAW OF THE BIG MO

Momentum is a leader’s best friend. Every sailor knows that you cannot steer a ship that is not moving. Similarly, strong leaders understand that to change direction, you first have to create forward progress. “With enough momentum nearly any kind of change is possible.”

17.THE LAW OF PRIORITIES

“Examine the life of any great leader, and you will see him putting priorities into action,” says Maxwell. Activity does not necessarily equal accomplishment. A good leader knows which activity is a priority. A great leader satisfies a number of priorities with a single activity.

18.THE LAW OF SACRIFICE

“A leader must give up to go up.” Sacrifice is an ongoing process in leadership. The nature of the sacrifice will be different for every person, such as a pay-cut or less free time. FW de Klerk worked to dismantle apartheid and the cost was his career itself.

19.THE LAW OF TIMING

“When to lead is as important as what to do and where to go.” When the right leader and the right timing come together, incredible things happen. For example, Winston Churchill only became prime minister of England when he was in his sixties, but showed great leadership during the Second World War.

20.THE LAW OF EXPLOSIVE GROWTH

To add growth, lead the followers. But to multiply growth, lead the leaders. Leaders are harder to hold on to because they are energetic and entrepreneurial, and they tend to want their own way. “Leaders who develop leaders experience an incredible multiplication effect in their organisations that can be achieved in no other way.”

21.THE LAW OF LEGACY

A leader’s lasting value is measured by the legacy left behind. This is the most important law of leadership, yet few leaders get it right. “A legacy is created only when a person puts the organisation into the position to do great things without him or herself.”

Entrepreneurship Competency Model

2011-06-07T12:29:00.000-07:00

ABOUT THE MODEL

The Entrepreneurship Competency Model is depicted in a graphic consisting of nine tiers. The arrangement of the tiers in a pyramidal shape is not meant to be hierarchical, or to imply that competencies at the top are at a higher level of skill. The model’s shape represents the increasing specialization and specificity in the application of skills as you move up the tiers. Tiers 1-4 have been developed and are divided into blocks. The blocks represent competency areas, that is, the applied skills, knowledge, abilities essential to successful entrepreneurial performance. A table of the competency definitions and associated key behaviors accompanies the graphic.

Tiers 1 through 3 contain Foundation Competencies, which form the foundation needed to be ready to enter the workplace.

Tier 1 –Personal Effectiveness Competencies are shown as hovering below the pyramid because these competencies are essential for all life roles. Often referred to as "soft skills," personal effectiveness competencies are generally learned in the home or community and reinforced and honed at school and in the workplace. They represent personal attributes that may present some challenges to teach or assess.

Tier 2 – Academic Competencies are critical competencies primarily learned in a school setting. They include cognitive functions and thinking styles. Academic competencies are likely to apply to all industries and occupations.

Tier 3 – Workplace Competencies represent motives and traits, as well as interpersonal and self-management styles. They generally are applicable to a large number of occupations and industries.

Tiers 4 and 5 contain Industry Competencies, which are specific to an industry or industry sector. Since entrepreneurship is not an industry, tiers 4 and 5 have been broken out as follows:

Tier 4 – Entrepreneurship Technical Competencies represent the knowledge and skills that are common to all entrepreneurial activities. These technical competencies build on, but are more specific than, competencies represented on lower tiers.

Tier 5 – Entrepreneurial Focus Areas represent types of enterprise. Related competencies may be developed by interest groups or communities of practice.

Tiers 6 through 9 represent the specialization that occurs within specific occupations within an industry. Information on occupational competencies is available through O*NET OnLine (http://online.onetcenter.org/).

Tier One – Personal Effectiveness Competencies

1. Interpersonal Skills: Displaying skills to work with others from diverse backgrounds.

Demonstrate Insight into Behavior

Interpret accurately the verbal and nonverbal behavior of others
Show insight into the actions and motives of others
Recognize when relationships with others are strained
Assess the abilities and personalities of others

Maintain Open Communication

Maintain open lines of communication with others
Encourage others to share problems, successes, and new ideas
Establish a high degree of trust and credibility with others
Demonstrate honesty and integrity

Work with Diverse People

Demonstrate respect for the opinions, perspectives, customs, and individual differences of others
Value diversity of people and ideas
Keep an open mind when dealing with a wide-range of people
Consider others’ viewpoints
Develop effective relationships with diverse personalities

Take action to learn about the climate, orientation, needs, and values of other groups, organizations, or cultures

2. Initiative: Demonstrating a willingness to work.

Take Initiative

Exhibit confidence in capabilities
Demonstrate the expectation to succeed in future activities
Seek opportunities to influence events and originate action

Set Challenging Goals

Establish personally challenging but attainable work goals (short-, medium-, and long-term goals)
Set definite time spans for the achievement of goals
Articulate a vision for achieving goals

Work Independently

Develop own ways of doing things
Perform effectively with minimal direction, support, or approval
Exert effort toward task mastery
Bring issues to closure by pushing forward until a resolution is achieved

3. Ambition: Demonstrating desire and dedication to achieve goals.

Motivation

Endeavor to succeed and excel
Possess a desire for change, improvement, and personal accomplishment
Strive to exceed standards and expectations
Embrace challenges

Persistence

Pursue work with passion, energy, drive, and a strong accomplishment orientation
Accomplish tasks even when conditions are difficult or deadlines are tight
Persist at a task or problem despite interruptions, obstacles, or setbacks

Perseverance

Show patience, tenacity, and determination to achieve goals
Undertake long-term commitments to new projects
Cope with stress and ambiguity, especially in times of uncertainty
Weather the highs and lows of business

4. Adaptability & Flexibility: Displaying the capability to adapt to new, different, or changing requirements.

Employ Unique Analyses

Generate innovative ideas in complex areas
Integrate seemingly unrelated information to develop creative solutions
Develop innovative methods of obtaining resources when insufficient resources are available

Entertain New Ideas

Consider new ways of doing things
Seek out the merits of new approaches to work
Embrace new approaches when appropriate
Discard approaches that are no longer working
Be willing to change as the organization evolves

Deal with Ambiguity

Show tolerance for ambiguous, unstructured situations

Take effective action even without all the necessary facts in hand
Change plans, goals, actions, or priorities to deal with unpredictable or unexpected events, pressures, situations and job demands

5. Willingness to Take Risks: Displaying a willingness to accept risks associated with entrepreneurial activities.

Evaluate Risks

Identify the risk associated with a particular action or decision
Compare the risk of one decision/action with that of alternatives
Describe the “worst case scenario”
Weigh costs and benefits to assess whether a risk is worth assuming
Evaluate the risks and possible rewards

Assume Risks

Take calculated risks
Develop back-up and alternative plans to minimize potential risk factors
Treat failures, should they occur, as valuable learning experiences

6. Willingness to Learn: Displaying a willingness to learn and apply new knowledge and skills.

Demonstrate an Interest in Learning

Be curious and attentive to identify business opportunities (the environment in which businesses operate is constantly changing)
Anticipate changes in work demands
Search for and participate in assignments or training that address changing demands
Treat unexpected circumstances as opportunities to learn

Learning Strategies

§ Set lifelong learning goals

§ Identify when it is necessary to acquire new knowledge and skills

Pursue opportunities to develop new knowledge, skills, and expertise

Identify Career Interests

Take charge of personal career development by identifying interests, strengths, options, and new business opportunities
Make insightful career planning decisions based on consideration of others’ feedback and available opportunities

Tier Two – Academic Competencies

1. Reading: Understanding written sentences and paragraphs in work-related documents.

Comprehension

Locate written information in prose and in documents such as manuals, reports, memos, letters, forms, graphs, charts, tables, calendars, schedules, signs, notices, applications, and directions
Attain meaning and core ideas in written materials

Attention to Detail

Identify main ideas
Note details and facts
Detect inconsistencies
Identify implied meaning and details, missing information, and trends

Integration

Analyze information in written materials
Synthesize information from various written materials

Application

Integrate what is learned from written materials with prior knowledge
Apply what is learned from written material to follow instructions and complete tasks

2. Writing: Using standard English to compile information and convey ideas.

Organization and Development

Prepare accurate, clear, error-free written communications
Create documents such as letters, directions, manuals, reports, graphs, and flow charts
Communicate ideas and information, which may contain technical material, in a logical, organized, and coherent manner
Convey ideas that are well developed with supporting information and examples

Mechanics

Use standard syntax and sentence structure
Use correct spelling, punctuation, and capitalization
Use appropriate grammar (e.g., correct tense, subject-verb agreement, no missing words)

Tone

Write in a manner appropriate for business
Use language appropriate for the target audience
Use appropriate tone and word choice (e.g., writing is professional and courteous)

3. Mathematics: Using mathematics to express ideas and solve problems.

Quantification

Read and write numbers
Count and place numbers in sequence
Recognize whether one number is larger than another

Computation

Perform basic math computations accurately
Translate practical problems into useful mathematical expressions
Use appropriate mathematical formulas and techniques
Add, subtract, multiply, and divide with whole numbers, fractions, decimals, and percents
Graph and chart data
Calculate percentages, averages, ratios, proportions, and rates
Convert decimals to fractions and fractions to percents

Financial Literacy

Apply personal money-management principles and strategies to personal finances
Explain the functions and services of financial institutions

4. Science & Technology: Applying scientific principles and using technology to solve problems or develop solutions.

Comprehension & Application

Explain basic scientific principles
Use commonly available technology
Consider carefully which tools or technological solutions are appropriate for a given job
Choose consistently the best tool or technological solution for the problem at hand
Demonstrate innovative thinking by using new and existing technology in new ways

Keeping Current

Demonstrate an interest in learning about new and emerging tools and technologies
Seek out opportunities to improve knowledge of tools and technologies that may assist in streamlining work and improving productivity

5. Communication- Listening & Speaking: Giving full attention to what others are saying and speaking in English well enough to be understood by others.

Speaking & Presenting

Express information to individuals or groups taking into account the audience and the nature of the information (e.g., technical or controversial)
Speak using common English conventions including proper grammar, tone, and pace
Speak clearly and confidently
Present information in a logically organized manner
Articulate clearly passion, vision, venture, and commitment
Use eye contact and non-verbal expression effectively
Track audience responses and react appropriately to those responses

Persuasion/Influence

Influence others
Present thoughts and ideas in a persuasive manner
Gain commitment and support for proposed ideas
Help others overcome resistance to change
Woo venture capitalists and other contacts to seek financial support for new ideas
Persuade key decision makers to invest resources to transform ideas into reality

Active Listening

Receive verbal messages and other cues
Pick out important information in verbal messages
Appreciate feelings and concerns of verbal messages
Attend to nonverbal cues
Respond appropriately to verbal and nonverbal messages
Ask questions to clarify issues or unclear messages

6. Critical & Analytical Thinking: Using logic and reasoning to address problems.

Mental Agility

Identify connections between issues
Learn new enterprises quickly
Shift gears and change direction when working on multiple projects or issues

Analyzing Information

Analyze points of view
Categorize and classify data
Compare and contrast information

Reasoning

Possess sufficient inductive and deductive reasoning ability to perform job successfully
Critically review, analyze, synthesize, compare and interpret information
Draw conclusions from relevant and/or missing information
Apply knowledge of the relationships among facts when solving problems
Understand principles of cause and effect

Tier Three – Workplace Competencies

1. Creative Thinking: Generating innovative and creative solutions.

Generate Innovative Solutions

Reframe problems in a different light to find fresh approaches
Entertain wide-ranging possibilities others may miss
Use information, knowledge, and beliefs to generate original, innovative solutions
Take advantage of difficult or unusual situations to develop unique approaches and useful solutions
Search for new ways of improving efficiency of existing processes
Identify what is missing from current product stream
Search for new ideas for product improvement
Apply innovative new ideas that satisfy the needs of a clearly defined market
Demonstrate new ways of thinking, not merely about what is, but of what might be
Conduct brainstorming sessions
Exhibit capacity for imagination, creativity, and empathy

See the Big Picture

Possess broad knowledge and perspective
Piece together seemingly unrelated data to identify patterns and trends to see a bigger picture
Think expansively by combining ideas in unique ways
Make connections between disparate things to see what others may have missed
Identify the pieces of a system as a whole and the consequences of actions on parts of the system

2. Networking: Establishing professional relationships and partnerships.

Building Relationships

Seek opportunities to make contacts through organizational events, social events, external organizations, and professional activities
Identify partners/employees/consultants who complement one’s own strengths and weaknesses
Exhibit trustworthy behavior to build successful business relationships

Partnering

Establish strong and lasting partnerships with business contacts
Seek ways of increasing business opportunities with contacts
Negotiate with partners to create opportunities that increase the competitive position of both parties
Propose innovative business deals to customers, suppliers, and business partners

Leveraging Contacts

§ Leverage contacts to obtain information relevant to the health and continued growth of the organization, including feedback on organizational performance

§ Access outside consultants who can provide market projections and advice

Collaboration

Collaborate among partners to ensure buy-in and follow through on strategies
Identify mutually beneficial goals and work cooperatively with partners to achieve them
Collaborate in virtual teams via conference calls, web casts, and net meetings

3. Planning & Organizing: Planning and prioritizing work to manage time effectively and accomplish assigned tasks.

Planning

Approach work in a methodical manner
Develop business plans to map out approaches to new ventures
Schedule tasks so that work is completed on time
Keep track of details to ensure work is performed accurately and completely

Prioritizing

Prioritize various competing tasks
Perform tasks quickly and efficiently according to their urgency
Find new ways of organizing or planning work to accomplish work more efficiently

Allocating Resources

Estimate resources needed for project completion
Allocate time and resources effectively
Keep all parties informed of progress and relevant changes to project timelines

Anticipating Obstacles

Anticipate obstacles to project completion
Develop contingency plans to address obstacles
Take necessary corrective action when projects go off-track

4. Problem Solving & Decision Making: Applying critical-thinking skills to solve problems by generating, evaluating, and implementing solutions.

Identifying the Problem

Anticipate concerns before they arise
Recognize the existence of a problem
Deal with problems and challenges in order or priority
Identify the nature of the problem by analyzing its component parts
Recall previously learned information that is relevant to the problem

Locating, Gathering, and Organizing Relevant Information

Use all available reference systems to locate information relevant to the problem
Collect and analyze data
Examine information obtained to gain a better understanding of the problem
Recognize important gaps in existing information
Takes steps to obtain information to eliminate gaps

Generating Alternatives

Integrate previously learned and externally obtained information to generate a variety of high-quality alternative approaches to the problem
Identify the strengths and weaknesses, the costs and benefits, and the short- and long-term consequences of different approaches

Choosing and Implementing a Solution

§ Evaluate numerous potential solutions

Make difficult decisions even in the absence of solid data or in ambiguous situations
Commit to a solution in a timely manner
Develop a realistic approach for implementing the chosen solution
Observe the outcomes of implementing the solution
Assess the need for alternative approaches
Identify lessons learned

5. Checking, Examining, and Recording: Entering, transcribing, recording, storing, or maintaining information in written or electronic/magnetic format.

Completing Forms

Complete appropriate forms quickly and completely
Expedite forms, orders, or advances that require immediate attention
Detect and correct errors, even under time pressure

Record Keeping

Keep logs, records and files that are up-to-date and readily accessible
Update logs, files, and records, noting important changes in status
Maintain record of daily financial transactions
Maintain personnel records
Maintain customer records

6. Business Fundamentals: Applying knowledge of basic business principles, trends, and economics to work activities.

Business Ethics

Demonstrate respect for colleagues, coworkers, and customers
Act in the best interest of the company, the community, and the environment
Comply with applicable laws and rules governing work
Recognize relevant, ethical issues in business

Market Knowledge

Explain market trends in the industry and the company’s position in the market
Identify who the company’s primary competitors are
Stay current on organizational strategies to maintain competitiveness

Business and Economic Principles

Explain the economic principles and concepts fundamental to entrepreneurship/small-business ownership

o Business cycles

o Competition

o International trade

o Private enterprise

o Productivity

o Supply and demand

Determine factors affecting a business’s profit
Determine the impact of business cycles on business activities
Assess impact of government actions on business ventures

7. Computer Applications: Using a computer and related applications to input and retrieve information.

Comprehending the Basics

Use basic computer hardware (e.g. PCs, printers) and software (e.g. word processing software, spreadsheet software) to perform tasks
Use common computer terminology (e.g., program, operating system)
Solve routine hardware and software problems

Preparing Documents

Use word processing programs to create, edit, and retrieve document files
Key materials quickly and accurately
Check work carefully
Identify and correct keying errors
Use basic reference materials and tools (e.g., spell check) to ensure accuracy
Use correct style and format, consulting style manuals as necessary

Internet Applications

Use the internet and web-based tools to manage basic workplace tasks (e.g., timekeeping, maintaining employee records, conducting information searches)
Perform internet functions requiring the use of log-in and password information

E-mailing

Compose professional e-mails to communicate business-related information to coworkers, colleagues, and customers
Navigate the e-mail system and its basic functions (e.g., replying to/forwarding messages, using electronic address books, attaching files)
Ensure that key stakeholders are kept informed of communications by copying (i.e., “CCing”) them on important e-mails when appropriate

Spreadsheets

Use spreadsheet software to enter, manipulate, edit, and format text and numerical data
Create and save worksheets, charts, and graphs that are well organized, attractive, and useful

Tier Four – Entrepreneurship Technical Competencies

1. Principles of Entrepreneurship: Knowledge of processes and characteristics that are central to entrepreneurial activities.

Entrepreneurial Process

Implement processes associated with successful entrepreneurial performance

o Discovery – stage in which the entrepreneur generates ideas, recognizes opportunities, and determines the feasibility of ideas, markets, ventures, etc.

o Concept Development – stage in which the entrepreneur plans the venture, identifies needed resources using a business plan, identifies strategies to protect intellectual property, etc.

o Resourcing – stage in which the entrepreneur identifies and acquires the financial, human, and capital resources needed for the venture startup, etc.

o Actualization – stage in which the entrepreneur operates the venture and utilizes resources to achieve its goals/objectives

o Harvesting – stage in which the entrepreneur decides on the venture’s future (growth, development, demise)

Leadership & Team Building

Exhibit passion for goal attainment
Take responsibility for the enterprise
Lead others using positive statements
Encourage creative thinking and innovation
Determine the roles and responsibilities that leaders and members bring to an organization
Enlist others in working toward a shared vision
Build consensus
Evaluate characteristics of effective team players and effective teams
Build a team to compliment one’s own skills and talents
Select people who are committed, interested, and capable of undertaking the task at hand
Recognize others’ efforts

Managing Growth

Use a replicable process to create enterprises that are sustainable
Manage the implementation and execution of the business plan to grow the enterprise
Recognize when to seek outside help and use available resources
Follow advice from trusted sources
Recognize when the enterprise has reached its potential
Develop a continuation plan
Pass over leadership to others when the organization needs change

2. Innovation & Invention: Formulating new ideas for and applications of processes and products.

Opportunity Orientation

Identify changes in tastes, preferences, and trends as they are evolving
Identify needs, wants, and problems as they are changing
Identify smaller niche markets within larger markets
Seek out opportunities to develop and offer new products and services
Seek out opportunities to improve, streamline, reinvent work processes
Maintain fit between business concept and opportunity
Evaluate opportunities
Create and undertake new business ventures

Research and Development

Analyze the failure of other projects as research for a possible new venture
Conduct research and development
Conduct experiment and application
Practice invention and innovation
Identify design trends
Incorporate human, environmental, and technological factors in the design process
Design a system, product, or service

Technology Transfer

Identify scientific research which has potential commercial value
Analyze the consequences of societal or technological change
Develop practical applications for the results of scientific research
Apply newly created technology to new, innovative, productive uses

3. Planning: Determining the direction of an organization/enterprise and identifying a strategy to achieve that direction.

Venture Analysis

Determine feasibility of ideas
Assess start-up requirements
Assess risks associated with venture

Determine break-even point in venture
Determine potential for profit or loss
Estimate costs and potential revenues for planning purposes

Stages of Planning

The Visionary Plan

o Identify a clear entrepreneurial opportunity

o Demonstrate research to support the viability of the idea

o Develop a rudimentary cash-flow projection

o Describe personnel requirements

The Concept Plan

o Describe and explain the market opportunity the venture will address

o Explain how the product or service will work and how it is innovative

o Identify competition and describe strategy for meeting or beating

o Prepare a concise summary of the venture

o Review the plan and evaluate its effectiveness

The Detailed Plan

o Develop a detailed description of the venture and of market opportunity

o Prepare complete plans: financial plan, accounting plan, legal plan, management plan, production plan, and operational plan

The Strategic Plan

o Provide the vision and key strategic elements of the plan

o Provide continuing guidance at a strategic level

o Keep the strategy focused

o Sell others on completed plans and on the process of continuous strategic planning

4. Marketing: Planning and executing a strategy to promote and sell products, services, and ideas.

Marketing Analysis and Strategy

Conduct an environmental scan to obtain marketing information
Identify a customer base
Define a target market
Conduct market analysis and customer profiling
Determine unique selling proposition
Calculate breakeven point
Forecast sales
Plan strategies for meeting sales quotas
Analyze sales reports
Monitor internal records for marketing information
Develop a marketing plan
Determine image business is to project (positioning)

Product/Service Management

Implement various methods to generate a product/service idea
Plan product/service mix
Choose product/service name
Build brand/image
Evaluate customer experience

Pricing

Establish pricing objectives
Select pricing strategies
Set prices and adjust as necessary to maximize profitability

Selling

Establish relationship with the client/customer
Determine customer/client needs and motives
Recommend specific product
Convert customer/client objections into selling points
Close the sale
Manage online sales process

Promotion

Explain the role of promotion
Prepare a promotional budget
Develop a promotional plan
Write a news release
Obtain publicity
Select sales-promotion options such as coupons, display, email
Compare types of advertising media
Conceptualize and design advertisements
Evaluate effectiveness of advertising

5. Financial Management: Managing and controlling money and assets to successfully carry out entrepreneurial activities.

Financing

Determine financing needed to start a business
Determine risks associated with obtaining business credit
Identify sources of financial assistance
Establish relationships with financial institutions
Explore opportunities to secure venture capital

Accounting

Implement regular accounting procedures and financial reports
Prepare estimated/projected income statement
Estimate cash-flow needs
Prepare estimated/projected balance sheet
Determine and deposit payroll taxes
File tax returns

Money Management

Establish financial goals and objectives
Develop and monitor budget
Manage cash flow
Record deposits and withdrawals
Implement procedures for managing debt

6. Business Operations: Carrying out ongoing activities involved in the running of a business.

Operations Management

Plan business layout
Determine equipment needs
Establish operating procedures
Select business location and distribution channels
Manage computer-based operating systems
Establish company buying/purchasing policies
Choose vendors and negotiate contracts
Carry out daily operations: schedule staff, maintain inventory, organize shipping/receiving

Human Resource Management

Develop a personnel organizational plan
Determine hiring needs
Recruit new employees
Interview job applicants
Select new employees
Orient new employees
Delegate responsibility for job tasks
Encourage team building
Build organizational culture
Develop compensation and benefits plans
Conduct performance evaluations
Dismiss/fire employees

7. Risk Assessment and Management: Developing a structured approach to managing uncertainty and evaluating, assuming, and mitigating risks.

Legal Considerations

Protect intellectual property rights
Select form of business ownership (e.g., sole proprietorship, partnership, corporation)
Obtain legal documents for business operations
Explain businesses’ reporting requirements
Adhere to personnel regulations
Implement workplace regulations (e.g., OSHA, ADA)
Identify resources to keep current on business related laws and regulations

Risk Management

Explain types of business risk
Evaluate potential risks
Determine ways that small businesses protect themselves against loss
Determine business’s liabilities
Obtain insurance coverage
Develop safety and security policies and procedures
Establish parameters for staff responsibility/authority

Tier Five – Entrepreneurial Focus Areas (TBD)

It is beyond the scope of this project to develop competencies around Tier 5 Entrepreneurial Focus Areas. The inclusion of focus areas in the model is intended to illustrate that the Entrepreneurship Competency Model serves a resource that underlies entrepreneurial activities at various levels of enterprise. The focus areas may be built out by interest groups or communities of practice.

1. Youth Entrepreneurship

o K-12 education

o Community-based entrepreneurship education providers

o Foster innovation and entrepreneurial thinking

2. Micro-Enterprise

o Cottage industry

o Quick startup

o Low capital investment

o Low income

3. Small Business Development

o Startup capital required

o Franchise

o Revenue - over $25,000 but less than $100,000

4. Social Entrepreneurship

Social Enterprise

o Entrepreneurs who start their own businesses

o “Sector-bending” – blurring lines between business and social sectors

o Social value creation

Social Innovation

o Entrepreneurs as innovators

o New ways to address social problems or meet social needs

o Large scale, lasting, and systemic change

5. High-Growth, High-Value Entrepreneurship

o Venture capital

o Angel investors

o Requires money management/marketing

o Innovation – research ideas to market

o Creates wealth

o Employs others

o Revenue – over $250,000

Transforming Talent and Community Economies through Entrepreneurial Development

2011-06-05T12:17:00.000-07:00

The ultimate goal of economic development is to build assets and create wealth.1 Economic wealth

is produced by entrepreneurs who identify market opportunities and build businesses that capture

them. Entrepreneurs and their enterprises are the engines of individual and community wealth creation.

Therefore, an effective process of developing new enterprises is essential to successful economic

development.

In this article, we offer a new paradigm for enterprise development as well as a new approach for

implementing that paradigm, called the entrepreneurial development system (EDS). As in all paradigm

shifts, our approach encompasses much of what has gone on before but places it in an entirely

different context and adds several elements: a new mission and new functions and tools.

Our approach is based on a number of critical assumptions. In the first half of this article, we

present these assumptions as a series of specifications for a new paradigm and contrast them with

the beliefs and practices underlying enterprise development today. We have chosen to proceed in

this manner because it is often difficult to perceive the limitations of current practice without having

an alternative with which to compare it. This is particularly a challenge when making a case for

an innovative alternative that, to our knowledge, has never been articulated before. We would suggest

that our critique of the status quo and case for change can best be understood after reading both

the specifications and our alternative. In the second half, we describe the EDS and offer it as the

operating program for a 21st-century enterprise development system.

This is a conceptual as well as a practical piece. Because of the relatively unexplored and complex

nature of this territory, we are limited in the kind of “hard” evidence that is available to support

these conclusions.2We have arrived at our ideas about the need for change and the promise of the

new possibilities suggested here in two ways: first, by drawing extensively on the literature from a

number of fields including (but not limited to) economic development, entrepreneurship, innovation,

business strategy, developmental psychology, educational theory, macro sociology, regional

science, and social systems theory; second, by systematically reflecting on more than 40 years of

combined experience working with hundreds of entrepreneurs and enterprises of various types and

with approximately 100 enterprise development organizations throughout the world. We believe

that the ideas presented here suggest a new and fertile research agenda, and we recognize the need

for continued efforts to document both the issues and the solutions.

THE SPECIFICATIONS OF A NEW ENTERPRISE DEVELOPMENT PARADIGM

The mission of enterprise development is to significantly increase the rate of formation, development,

and success of new enterprises within a region in a way that creates individual and community

wealth. The question is how this should be accomplished.

We must develop a diverse supply of entrepreneurs who are capable of building successful companies

in sufficient numbers to create wealth for the entire economy. An entrepreneurial economy

requires entrepreneurs. The critical determinant of a region’s economic vitality is the quantity and

quality of its entrepreneurs and how well they are matched to the market opportunities they pursue.

A region’s supply of entrepreneurs cannot be taken for granted; it is also not acceptable to argue

that nothing can or should be done to change it. However, this is largely the situation in the field of

enterprise development today. It is assumed that there is no need to be concerned with the supply of

entrepreneurs (i.e., it is not anyone’s responsibility, there are already plenty of entrepreneurs), that

other factors are more important for enterprise development (such as financing and technical assistance),

or that nothing can be done to change the supply. Although rarely made explicit, these

beliefs limit the potential success of enterprise development activities.

Building a successful business is often viewed as a matter of assembling the right ingredients

(e.g., products, customers, employees, money)—a mechanistic process of “packaging.” However,

this conception leaves out the critical role of the packager—the entrepreneur. It truly matters who

the entrepreneur is. Venture capitalists recognize that when they invest in a business, they are

investing in a person.3 The individual leading the venture is considered to be more important than

the enterprise’s products, which ultimately must be adapted over time to changing market conditions.

This does not mean that there are not other significant factors that contribute to success—

there are. But these factors are distinctly secondary to the root of the business—the

entrepreneur. Therefore, we must look at the human capital component before examining such factors

as financing and technical assistance.

The assumption that seems to underlie most enterprise development strategies in the United

States is that to significantly increase the rate of formation, development, and success of new enterprises,

we must offer more services. This focus is evidenced by continued calls by service organizations

for funding to support the provision of financial and technical assistance. The problem with

these proposals is that they contain neither a reference to the number and quality of the entrepreneurs

in their community nor any assessment of demand for the proposed services4 (Bennett &

McCoshan, 1993; Johannisson, 1993).

The dynamic regions around the world that communities want to emulate (e.g., Silicon Valley,

Route 128, Research Triangle, Emilia Romagna in Italy, and Toyko) do not just attract or recruit

entrepreneurs from other areas (although this does take place)—they develop them. 5 It is this

ability that accounts for the success of these regions and the abundance of money available for

investment. They are not successful, as some mistakenly believe, because of the presence of financing

and technical assistance. Such a conclusion confuses the consequences of success with its

causes. This same reasoning underlies the belief that by offering these services, individuals will be

induced to become entrepreneurs. Entrepreneurs do not start businesses because services are available;

services are demanded and used as the result of the existence of entrepreneurs. Although services

are necessary, they are not sufficient to transform a region’s economy into a dynamic force. If

they were in fact sufficient, we should wonder why they have not, after significant investments,

produced the desired results in many of the places they have been implemented.

Establish a Development Function

What is missing in the current model of enterprise development is any attention to the quantity

and quality of an area’s entrepreneurial capital. If it is indeed possible to develop entrepreneurs, the

supply is not fixed. We methodically cultivate many other kinds of talent; why not entrepreneurs?6

If our objective is to develop a diverse supply of entrepreneurs capable of building successful

companies, we must change the primary focus of enterprise development from providing services

to developing entrepreneurs. Developing entrepreneurs means increasing the entrepreneurs’ ability

to achieve their goals—specifically, to successfully engage in the kinds of work required to

identify and capture new market opportunities. Development is a competency, an ability to deal

with new circumstances. “It is an increase in capacity and potential, not an increase in attainment”

(Ackoff, 1981, p. 35). The intangible nature of the development process makes it difficult to

describe.

Providing services is not the same as developing entrepreneurs. Services do not create a change

in capacity. Service provision involves a transaction between two parties to solve a problem or

address a specific need. Although the ability to successfully use some kinds of services might

require an increase or change in an entrepreneur’s abilities, the mere provision of that service in no

way ensures that such a result will be brought about.

Service provision involves the delivery of a solution (created by a resource specialist or expert)

to a client. Clients can then use that solution to improve the performance of their business, but they

do not necessarily know how to develop a similar solution for themselves or how to adapt the one

they just purchased in the event that circumstances change. One of the most common types of

enterprise development services is the preparation of business plans. Many entrepreneurs, for

example, comment that they do not understand the meaning of the answers provided by the plan to

the questions about their business, even if they participated in its preparation. This kind of outcome

might be acceptable (although certainly not desirable) if the business plan is to be used only as a

document for obtaining financing, as is frequently the case. But to create a business plan that can be

used for the purpose of managing a business, and to use it as such a tool, requires not only a great

deal more effort but also a higher level of understanding and skill on the part of the entrepreneur. To

produce this kind of a change in capacity requires more than simply delivering a product or service;

it necessitates engaging the entrepreneur in a process of development. The nature of this process

and the ways in which it differs from providing services will be described more fully later in this

article.

To the best of our knowledge, very few enterprise development organizations in the United

States are engaged in the task of developing entrepreneurs. Those that claim to be doing so are

mostly micro-enterprise programs that work with low-income individuals who lack the skills to

be successful entrepreneurs and in which there is no choice but to focus on their development.7

For the overwhelming majority of businesses, the responsibility for development is largely left to

the entrepreneurs themselves.

The primary mission of enterprise development must be to develop entrepreneurs. The secondary

challenge is to provide the services necessary to help those entrepreneurs become successful.

These are two distinctly different functions. The problem with the current system is its exclusive

focus on providing services. It is not that services must be changed or replaced but rather that they

must be supplemented with a new function, the purpose of which is to develop entrepreneurs.

Services must be subordinated to this new function—they must not dictate the system, as they do

now. This change of focus, from providing services to developing entrepreneurs, will produce a

restructuring of the service system.

The function of developing entrepreneurs must be performed by an entirely new and independent

organization in the enterprise development system; it cannot be the responsibility of existing

individual service providers. A single organization is not capable of performing well two completely

different functions simultaneously (Porter, 1985).

Expand the Population of Entrepreneurs

What kind of entrepreneurs should we be trying to develop? Here too the ideas behind current

practice, in both the public and the private sectors, are quite limited and limiting. Different organizations

tend to focus exclusively on particular types of entrepreneurs. This behavior would be

acceptable if it were simply a form of specialization, but the reasons are often much deeper. Such

behavior frequently reflects the belief that the key to economic success is to find and work only

with the “right” kind of entrepreneur—the next Bill Gates or Michael Dell. This belief is reflected

in constant debates about who is or is not a “real entrepreneur” (Huefner&Hunt, 1994; Kassicieh,

Padosevich, & Banbury, 1997; Schumpeter, 1991), the importance of small or large companies to

the economy (Florida & Kenney, 1990; Harrison, 1997), and the superiority of trickle-down over

trickle-up economics.

Problems arise from believing that the economy needs only one type of entrepreneur.We must

accept the reality that dynamic economies require a complex mix of large and small companies. If

an economy requires many different types of entrepreneurs, we must broaden our focus from an

exclusive emphasis on a particular kind of entrepreneur (e.g., high-tech, minority) to the diverse

mix required in a multifaceted, global economy.

Another restrictive belief is that entrepreneurship occurs only if one is creating an entirely new,

independent entity. Entrepreneurship takes place in a variety of settings, including those within

existing companies or in strategic alliances between two or more companies. In limiting entrepreneurship

to one particular setting, the types of market opportunities that require the resources and

capabilities of a large company (or of several companies with complementary capabilities) are

overlooked.

Because entrepreneurship occurs in a variety of organizational settings, we can create a new

supply of clients for enterprise development by broadening the settings from which we draw entrepreneurs.

Mature firms are not necessarily skilled in entrepreneurship and so can use help in developing

those abilities, both individually and as part of a strategic alliance (Block & MacMillan,

1993; Kanter, 1989; Pinchot, 1985).8

Create an Entrepreneurial Community

We must focus not only on developing individual entrepreneurs but also on creating an entrepreneurial

community. The economic performance of a community’s firms is and always will be

broadly distributed. Our goal should be to shift the performance of the entire population of

firms—not just some of them. Given that we want to transform the entire business community into

a globally competitive force, the client in enterprise development should not only be the individual

entrepreneur or particular groups of entrepreneurs, but rather the entire business community.9

To work at the level of the entire business community requires that we view the economy as a

whole, not only as a set of distinct and unrelated parts. There is a common belief that by helping one

part of the business community to succeed, we are helping all.10 However, this assumes that the

many segments of the business community are connected. If they are not, as is often the case, the

improvement in one group’s performance will not necessarily produce an improvement in another.

In highly fragmented economies, such progress in the development of the business community as a

whole will occur only if we work to improve that community’s social capital (the network of relationships

among its members) (Flora, 1998; Putnam, 1995). These connections cannot be assumed

to exist; they must be built if the business community’s development process is to succeed.11

Develop Entrepreneurs by Building Skills

If we want to develop entrepreneurs, we must help them build the necessary skills. There is a

prevailing belief that entrepreneurship is a trait that drives individuals who possess it to engage in

certain behaviors (Huefner&Hunt, 1994; Kassicieh et al., 1997; Schumpeter, 1991). If this is true,

nothing can be done to develop entrepreneurs because we are powerless to effect changes in traits.

The only feasible responsewould be to identify andwork solely with those individuals who already

have them.

Another problem with this belief is that no one has ever been able to accurately identify such an

entrepreneurial “characteristic” or a particular behavior in which all successful entrepreneurs

engage.12 All entrepreneurs, however, do perform certain key functions—they identify market

opportunities or needs, imagine and develop innovative solutions that address those needs, and

build organizations to capture those market opportunities. Because the actions needed to perform

these functions successfully will be different in different contexts, all entrepreneurs cannot be said

to engage in the same behaviors.

It is the entrepreneurs’ skill in performing these functions that determines their success, and

entrepreneurial skills can be developed. Although such talent is not evenly distributed among the

population, the fact is that entrepreneurs are made and not born (Shefsky, 1996).

Entrepreneurship involves a set of skills that is the result of cultivation and development rather

than innate endowment. Given the importance of skills, the extent to which they are overlooked in

enterprise development is surprising. When analyzing entrepreneurs, the current practice is to distinguish

them by characteristics such as the following:

type of business (manufacturing, technology, retail),

demographics (African American, Hispanic, Asian, female),

size of company (micro enterprise, growth firm),

background of entrepreneur (technical and/or scientist, economically disadvantaged), and

geographical location (rural, urban, university town).

The problem is that these distinctions are descriptive only and are useless as guides for action;

that is, they provide no help in determining how one would treat an entrepreneur on the basis of his

or her membership in that particular category. They falsely suggest differences where none exist

and lead policy makers to fail to perceive the real distinctions (and needs) that exist among entrepreneurs

within these categories.

Entrepreneurs can be most usefully categorized by their levels of skill in creating and operating

new businesses rather than by their personal attributes or those of their enterprises. In our experience,

the differences between minority and highly technical entrepreneurs, for example, are

grossly overstated. What determines the potential for success of entrepreneurs in either group are

their levels of skill in creating and operating new businesses.13

The fact is that entrepreneurs have different levels of skill, and one must treat entrepreneurs at

each level differently to work successfully with them. Although this observation is one that any

business advisor would quickly recognize and accept, we know of few enterprise development

organizations that explicitly differentiate their clientele except by size of company. This typically

leads them to adopt one of two approaches toward their clients: a cookie-cutter approach in which

everyone is treated exactly the same or an ad hoc approach in which all entrepreneurs are treated

differently. The cookie-cutter approach can be efficient but never effective; a completely customized

approach can be effective but is certainly not efficient. Neither approach represents a systematic

method for working with a variety of entrepreneurs over the long term.

Entrepreneurs build newskills not by acquiring information but rather through a process of personal

transformation that involves a deep level of qualitative change. Rarely do entrepreneurs,

prior to starting their first venture, already possess all the skills they need to become successful. At

some stage in their lives or at some point in the process of forming their businesses, they have to

build the necessary skills.

. . . entrepreneurs are made and not born.

When you dig deeply into the stories of successful entrepreneurs, you find crucial experiences

and relationships that provide the necessary nurturing or cultivation for undeveloped talent.14

These stories usually reveal the existence of a particularly supportive individual or group of individuals

(Gardner, 1993), a rich context that provided varied opportunities to learn, a series of progressively

more significant attempts and failures, and the emergence of skill over time.

The process of building these skills is not a matter of passively “acquiring” information, receiving

services, or adopting the latest business practices. Although the degree of change required will

depend on the individual’s current level of skill and the growth objectives of the enterprise, becoming

more skillful often involves significant, qualitative, and sometimes difficult changes in behaviors,

capabilities, beliefs, and personal identities—in other words, a transformation (Alexander &

Langer, 1990; Bechard & Toulouse, 1998; Cooper, Gimeno-Gascon, & Woo, 1994; Dilts, 1996;

Fisher & Torbert, 1995; Kegan, 1994; Krueger & Brazeal, 1994; Ray, 1993).

Atransformation represents a leap to a higher level of functioning. It is a qualitative, not a quantitative,

change. Whereas the process of informing takes place within an existing structure and set

of skills, transforming involves a change in the structure of the individual or business itself and the

creation of new capabilities. The difference between information and transformation is similar to

that between growth and development. Growth is a scalar concept that occurs within existingways

of doing things. Development means finding newways of doing things that enable the achievement

of entirely new possibilities.

Many enterprise development practitioners operate under the mistaken assumption that they are

helping entrepreneurs build new skills by teaching them to do business plans15 or by providing

training courses on other subjects. Any training that can be completed in a short period is capable

only of providing information, not of developing new capabilities or skills.16 No amount of technical

or financial assistance will produce a transformation. The value of these resources is realized

only when an entrepreneur already has the skills necessary to use them effectively in his or her business

(Glasmeier, Fuellhart, Feller,&Mark, 1998). It is the entrepreneur’s level of development that

influences readiness, willingness, and ability to use technical assistance. As a result, the provision

of technical assistance should be connected to the entrepreneur’s level of development in order to

be effective. This is rarely done in the current system because differences in levels of skill or development

are not recognized.

Provide New Offerings That Produce Transformations

If building entrepreneurial skills involves a transformation, we must establish entirely neweconomic

offerings that produce these outcomes. Existing programs for entrepreneurs are not

designed to help them build skills. To understand why, we must first introduce a set of distinctions

about different economic offerings and the needs they satisfy (Gilmore & Pine, 1997).

According to Pine and Gilmore (1999), there are five different types of economic offerings

whose values increase in relation to one another: commodities, goods, services, experiences, and

transformations (see Figure 1). Commodities, the most basic economic offering, are distinguished

by price. Physical goods provide different features or benefits and therefore greater value. Services

provide more value still, although their intangible quality makes them more difficult to evaluate

and compare.

However, consumers are increasingly demanding offerings that cannot be adequately described

by these first three categories. The next offering “occurs when a company intentionally uses goods

as props and services as the stage for engaging the customer in such away that it creates a memorable

event” (Gilmore & Pine, 1997, p. 16). The offering is “no longer the goods or services themselves,

but the experiences they create” (Gilmore & Pine, 1997, p. 17). Examples can be drawn

from DisneyWorld to eating establishments such as Planet Hollywood or the multimedia field of

“edutainment.”

Experiences are not the highest level of economic offerings.

Just as customizing a good automatically turns it into a service, so customizing an experience

turns it into something distinct. If you design an experience so in tune with what an individual

needs at an exact juncture in time, you cannot help but change that individual—guiding him to

(and through) a life-transforming experience. (Gilmore & Pine, 1997, p. 17)

The value of transformations exceeds that of all other economic offerings.

Experiences and transformations are not just another kind of service.

Both goods and services exist completely outside the recipient. . . . The new economic offerings

. . . are inherently personal. . . . Experiences only occur within the individual, while

transformations go even further and actually change the individual buyer. . . . Experiences

unfold over a duration of time and transformations must be sustained through time. (Gilmore&

Pine, 1997, p. 17; see also Pine & Gilmore, 1999)

An example from enterprise development illustrates the differences in these five types of offerings.

Originally, the value of business incubators to entrepreneurs was claimed to consist of

low-cost (below-market) space—a commodity whose only source of value was the price. Then, it

was recognized that incubator space provided additional benefits or “goods”—flexible leasing

terms, a variety of sizes, shared physical resources—that were not readily available. Next, incubators

became known as providers of business services (e.g., business planning, accounting, office

support). More recently, entrepreneurs have begun to recognize the value of the experiences they

have in incubators—the opportunity to interact with peers and advisors (Lichtenstein, 1992).

These experiences enable them to gain valuable knowledge and moral support.

The next as yet untapped level of economic offering in the field of enterprise development

would be to help entrepreneurs develop the necessary skills to build successful companies—to

guide entrepreneurial transformations.

These distinctions among economic offerings are consistent with the new vision that has

emerged of how economies develop (Doeringer, Terkla, & Topakian, 1987; Klein, 1977). In this

vision, the sources of economic competitiveness and value have moved away from the factors of

production, such as land, labor, and capital, and now rest with the ability to create new knowledge

(i.e., invention) and the ability to quickly assemble the various resources to capture market opportunities

(i.e., entrepreneurial know-how or innovation). Land, labor, and capital are tangible assets

that are easily duplicated by other firms and countries; they can be purchased. The ability to invent

and innovate is an intangible asset that must be cultivated.

Land, labor, and capital are tangible assets that are easily duplicated by other firms and countries; they can be purchased. The ability to invent and innovate is an intangible asset that must be cultivated.

Howdoes one facilitate the development of an individual whose objective is to create something

new? What entrepreneurs require are offerings that can help them successfully develop these skills.

These new transformational offerings must involve the following.

Two-way or reciprocal interaction between the entrepreneur and those who are helping in the

transformation process. Development or transformation is not something that is done to or

for someone; rather, it can be achieved only by the entrepreneur himself, with assistance.

Intensive, deep, and ongoing relationships that help guide the transformation process. Entrepreneurial

skills are not developed in isolation or through superficial encounters, but rather

within a supportive context such as a community (with the relevant kind of social capital).

A long-term process. Transformations take time.

A different approach to achieving results. Facilitating entrepreneurial transformations does

not mean attempting to control the behavior of entrepreneurs or force predetermined outcomes,

but rather creating favorable conditions or an environment in which entrepreneurial

skills can develop.

Learning by doing. Skills are inculcated, as an ancient Chinese proverb expresses so well:

“Tellmeand I will forget. Showme and I will remember. Involveme and I will understand.”

This new level of economic offerings is beginning to receive attention in the medical, educational,

management consulting, and therapeutic fields. However, the understanding in the enterprise

development community of the transformation process and how to manage it is very limited

at present. New offerings must be established as well as new methods for marketing, financing,

delivering, and evaluating them.

Establish an Enterprise Development System

Enterprise development must be operated as an integrated system of activities and programs in

order to be effective. Such a system is in the highly specialized business of producing individual

and social transformations. As a result, the system will have to use processes that are unique to the

facilitation of transformations.

Enterprise development must be organized around a set of processes and practices that can be

implemented in a methodical, controllable, and reproducible fashion. During the past 15 years, the

quality management movement has demonstrated that you can improve on an outcome only when

you understand the process by which it is produced (Crosby, 1987; Deming, 1986). The more

deeply and explicitly the transformation process is understood, the better the achieved results will

be. Facilitating transformations is clearly not a routine or mechanical activity. The practices and

processes used by the enterprise development system will have to honor the organic and nonlinear

nature of transformational change.

We need to develop and use a body of actionable knowledge about what works in developing

entrepreneurs and under what conditions. The processes and practices used by the enterprise development

system must be based on this knowledge, which in turn has to be subject to continuous

improvement efforts. This knowledge will also enable us to evaluate the performance of the system

in a way that will tell us how it can be changed and improved.

The performance of the enterprise development system should be evaluated on the basis of the

following five criteria: effectiveness, efficiency, equitability, sustainability, and scale of impact on

the community’s economy. The system’s effectiveness in developing entrepreneurs should be

judged by howwell it increases the rate of newbusiness formation, the rate of survival and success,

the rate of development of entrepreneurs and their enterprises, and the efficiency and effectiveness

of the dissolution process if a firm fails.

The system’s efficiency should be judged by the level of resources required to achieve these four

objectives. Its equitability, fairness, and inclusiveness should be judged on the basis of its ability

and willingness to work successfully with different types of entrepreneurs at all skill levels.17

Enterprise development can and should be a system for democratizing entrepreneurship.

The enterprise development system must be judged on its sustainability or ability to produce a

continuous stream of high-quality entrepreneurs. Because economic conditions are constantly

changing, economic success is not a permanent state. Even those places that have achieved a certain

level of prosperity must be concerned with maintaining it. The challenges of achieving

large-scale impact are truly daunting. To create 100,000 net new jobs by a strategy of enterprise

development, for example, a community would have to create firms at one of the rates described in

Table 1 every month for the next 10 years!

We cannot afford to expand the operations of the current system to achieve this scale; a substantial

change in the process by which it produces results is required. How do we get to a scale sufficient

to transform the community’s economy? Not byworking with one entrepreneur at a time, but

rather by creating a dynamic process with a “developmental” multiplier that produces a critical

mass or chain reaction.

We need a new approach to enterprise development that can effectively, efficiently, equitably,

and continuously develop entrepreneurial talent and build successful companies on a large scale.

Our suggested approach is the EDS.

AN OPERATING PROGRAM FOR A NEW ENTERPRISE DEVELOPMENT SYSTEM

The Entrepreneurial Development System

The field with the most impressive track record of success in developing talent on a widespread

basis is sports. Professional sports are built on a highly developed infrastructure or “farm system”

for the methodical cultivation of talent. In this infrastructure, individuals develop and hone their

skills in increasingly competitive environments as they progress. The result is a system that ensures

a continuous flow of skilled players to the very highest levels of the sport.

The EDS is designed to be a farm system for developing entrepreneurs and building the next

generation of companies. The EDS is more than just a strategy; it is an actual operating system for

creating as well as managing the social capital and community infrastructure necessary to develop

entrepreneurs. During the past 10 years, all the elements of this system have been implemented by

the authors in numerous enterprise development programs in Philadelphia, Louisville, and South

Africa that serve high-tech entrepreneurs, manufacturing firms, minority entrepreneurs, and micro

enterprises (see Lichtenstein, 1999). In this section, we present a brief description of the EDS.

The Structure of the System

In a manner similar to sports, the EDS operates by classifying entrepreneurs into levels according

to their skill in creating and operating a new business.18 There is a pattern to entrepreneurial

skills that can be explained by reference to the following four dimensions (Gerber, 1995;

Lichtenstein & Lyons, 1996):

technical skills: ability to perform the key operations of that business;

managerial skills: ability to organize and efficiently manage the operations;

entrepreneurial skills: ability to identify market opportunities and create solutions that capture

those opportunities; and

personal maturity: self-awareness, willingness and ability to accept responsibility, emotional

development, and creative ability.19

An entrepreneur’s level of development is defined by skills along these four dimensions. Table 2

describes the pattern and degree of skills at each level.

Entrepreneurs at each level possess a different profile.20 Rookies, as the label suggests, come to

entrepreneurship with few if any skills. They may include youth entrepreneurs and those who are

thrust into entrepreneurship due to circumstances such as corporate layoffs or welfare-to-work

programs. Single A entrepreneurs are typically technical people with strong operational skills in

their field, be it web development, medicine, specialty chemicals, or collections, but with very limited

managerial or entrepreneurial skills. They may have invented a new product or service but

experience difficulty in building it into a viable business. In characteristic fashion, their business

tends to run them rather than the otherway around (see Gerber, 1995). DoubleA’s are more experienced,

with stronger managerial and entrepreneurial skills, but they are not very highly developed.

Triple A’s have more extensive skills, typically having worked in a number of different businesses

before, perhaps even in other start-ups as a member of the management team, and have left to begin

a new venture. These entrepreneurs may even have started another business before but are now

involved in a venture that demands a much greater level of skill and sophistication.

Beginning with an entrepreneur’s current position on the ladder of development, the EDS helps

him or her progress to higher levels of skill and achievement, the goal being to reach the economic

“majors.” Each movement to a higher level involves a transformation. The time required to progress

up the ladder depends on one’s starting point; clearly, those with a higher level of skills upon

entering the system will take less time to achieve success. Successful outcomes include “graduation”

to the majors (which is defined in terms of business performance, not size), a viable business

at a particular level (e.g., profitable and paying livingwages to its employees), or the kind of experience

that enables the entrepreneur to become a more valuable employee in another business (by

selling his or her company to a larger one or by taking a well-paying job in another firm).

Entrepreneurs at the same level of development are clustered into success teams to address common

needs and to encourage learning and peer support (Sher&Gottlieb, 1989). An individualized

game plan is developed for each entrepreneur based on specific goals, needs, and the development

path of the business. Needs are diagnosed by identifying specific obstacles that stand in the way of

the entrepreneur’s acquisition or use of crucial resources, employing new tools that have been created

for just such a purpose (Lichtenstein & Lyons, 1996).

Services are customized according to the entrepreneur’s level of development, unique pattern of

needs, and personal or stylistic preferences. Such customization requires a comprehensive toolkit

Entrepreneurial Development by Skill Level

Technical Managerial Entrepreneurial Personal Maturity

of solutions that offers a wide variety of choices for delivering services to meet multifaceted and

changing entrepreneurial needs.21 This help is provided on a flexible and ongoing basis during the

course of the entrepreneur’s journey through the development levels.

Through the use of this diagnostic approach and a comprehensive toolkit of solutions, the EDS

is able to systematically and efficiently respond to the needs of different types of entrepreneurs in

different ways. It works with entrepreneurs in a holistic manner, addressing many different aspects

of both the person and the business (e.g., technical, managerial, personal). The system also regularly

monitors the performance of its firms on many different dimensions as a means of evaluating

entrepreneurs’ progress.

The EDS connects all rungs of the skill development ladder together so that movement to the

highest level of performance is possible from any position in the business community. It focuses on

all levels and kinds of entrepreneurs and as a result is neither trickle-up nor trickle-down. It encourages

a complete distribution of performers within its area of operation.

In this respect, the EDS provides away to systematically address the fragmentation in enterprise

development caused by the fact that agencies focus exclusively on different populations of firms

and provide only partial solutions (in terms of movement up the development ladder; Reynolds &

White, 1997).22 For example, entrepreneurs who have successfully graduated from business incubation

or micro-enterprise programs have complained that they did not know where to go to learn

how to take their business to the next level. Graduation, interpreted as a measure of success by service

providers, can in many cases simply be another level in which entrepreneurs stall in their

development as they outgrow the assistance that has been provided by that particular organization.

Most enterprise development programs tend to focus on particular rungs of the development

ladder—some intentionally and others without knowing it. Table 3 describes our perspective about

how current economic development programs are clustered according to the level of entrepreneur

on which they focus. In it, we make some broad generalizations for the purpose of illustrating these

ideas.

Rarely do formal or even informal ties exist among these programs so that entrepreneurs successfully

completing one can smoothly transition to another. TheEDSoffers away to address these

breaks in the ladder by explicitly articulating a progression of development levels and by connecting

entrepreneurs to the organizations that can help themmove to their next stage of development.

New Enterprise Development Roles

The EDS includes six unique and highly specialized functions that are not found in any enterprise

development infrastructure: scouts, diagnosticians, mentors or performance coaches, success

team managers, alliance brokers, and a general manager.

The scout identifies and recruits entrepreneurs to participate in the system. This person also

uses skills to find individuals in the community with the necessary skills to capitalize on market

opportunities that have been identified by the system but are in need of someone to pursue

them. These individuals are then assisted in forming, operating, and owning those businesses.

The diagnostician, or “company doctor,” assesses entrepreneurs’ needs and skill levels and

assigns them to the appropriate level. These individuals also help entrepreneurs develop

game plans, which are revisited and revised on a regular basis, and refer them to appropriate

service providers who can address their needs. The diagnostician, who is a general practitioner

rather than a specialist, provides an unbiased, single point of contact for assistance while

ensuring access to the entire range of enterprise development services. This individual also

helps the entrepreneur integrate the advice he or she receives on a particular issue from various

functional specialists.

The mentor, or performance coach, provides guidance to individual clients as they seek to develop

their skills and improve their performance. Coaches, who are often different at various

levels, go beyond simply providing answers to questions (which is the realm of a service provider

or resource specialist) to take an active role in developing the entrepreneur’s thinking,

skills, and ability to adapt to changing circumstances.

The success team manager is responsible for coordinating the activities of a cluster of entrepreneurs

(15 to 30) who are operating at the same level of development and perhaps in a similar

market or industry. This manager facilitates the sharing of information, ideas, and resources to

deal with common business issues and helps with similar developmental challenges.

The alliance broker identifies market opportunities that involve multiple companies as well

as cut across different development levels and organizes firms to capture those opportunities.

This individual builds forward and backward market linkages and facilitates alliances that

help firms reduce costs by pooling their resources. The broker encourages collective behavior

by viewing all firms in the system as a set of assets (rather than deficiencies) to themselves,

other companies, and the community.

The general manager of the EDS is responsible for integrating these critical functions into a

cohesive and mutually reinforcing system with accountability for well-defined performance

outcomes.

Participation in the system involves intense interaction among peers, entrepreneurs at other levels,

mentors, resource specialists, customers, and a host of other players in the business community.

It is through these relationships that transformation of the client entrepreneurs and their companies

takes place.

Relationship Between Development Activities and Service Provision

At its core, the EDS consists of two interlocking subsystems: a system for developing entrepreneurs

and a system for managing assistance providers. The first subsystem organizes entrepreneurs

to ensure that they receive appropriate assistance; the second organizes providers into a coherent

and strategically deployed confederation.

The service provider subsystem does not replace existing service providers; it integrates and

disciplines them so that each provider can concentrate on what it does best. Service providers

become specialists engaged by the EDS to meet specific needs. Thus, each service provider serves

a particular entrepreneurial need at an appropriate level of development.23

Although some matching of appropriate services as well as referrals takes place in current practice,

rarely is it done systematically, strategically, and on the basis of a thorough knowledge of the

capabilities of the various service providers. With few exceptions, providers commonly compete

against each other for the same entrepreneurs or myopically serve a small clientele without connecting

them to other sources of assistance (Servon, 1998). By helping service organizations clarify

their unique market niche, the EDS eliminates unnecessary duplication, defuses destructive

competition, and releases resources to fill gaps in available services.

In the EDS, all assistance is provided within a common diagnostic framework and process: A

diagnosis is performed, a development level assignment is made, and the type and amount of

Benefits to Entrepreneurs, Service Providers, and the Community

Implementing the EDS offers a number of potential benefits to entrepreneurs, the service providers,

and the community.

Benefits to entrepreneurs. Why should entrepreneurs participate in the EDS? In general, it is

because the EDS can provide a clear ladder to success and help entrepreneurs progress to higher

levels of skill and achievement in building their companies.

No one succeeds in business by working alone, although many try to do so and others seem to

have no choice. Some entrepreneurs make an effort to create for themselves the kind of functions

that are contained in the EDS—and the more successful ones have been able to do so. Others are

unable to assemble the right kind of support and use what they can access and therefore struggle

unsuccessfully. The EDS, as a public good, can present individual entrepreneurs with a support

structure that is easily used and customized to meet their needs. There is no need to operate on one’s

own.

The EDS can provide entrepreneurs with three kinds of benefits: access to resources (that are

also more affordable and available in the right form at the right time), psychological support, and

opportunities to develop new skills. These benefits make it

less costly for an entrepreneur to form a business,

more likely that he or she will succeed (or easier to exit, having created some kind of asset, in

the event of failure),

less time consuming to achieve success (faster time to market),

less expensive to operate a business by enabling firms to share resources, and

easier to use resources more intensively for a greater return on investment.

These benefits can have clear and measurable economic value, which could be measured by

comparing the performance of firms that participate in theEDSwith those that do not. For example,

recent data from the sport of professional basketball clearly indicate that the individual player’s

performance, as well as the general level of play in the sport, suffers when players skip college to

turn professional early. A correlation has been shown to exist between the increasing number of

non-college-trained professionals and an overall decline in shooting percentage and defensive play

(Wise, 1998). A business analogy might be for a firm to go to an initial public offering prior to perfecting

its product or the skills needed to change its product. The risks of failurewould be increased

in the event it does not achieve market acceptance due to the more limited adaptability of the entrepreneurial

team.

Benefits to service providers. The potential benefits to service providers of implementing the

EDS come from its ability to

create demand for services and improve use by clearly articulating entrepreneurial needs;

link clients to providers and provide them with qualified, prescreened clients;

enable providers to take preventive rather than corrective action on a problem (being brought

in before it is too late to solve the problem).

link services for synergistic effect, thus enhancing client performance and the impact of each

provider;24

enable services to be delivered more cost-effectively because entrepreneurs are organized

into levels of development in which needs tend to be similar, yielding economies of scale and

an enhanced demand for services;

foster coordination among service providers, resulting in resource pooling, ease of referral,

and the capacity to assist in strategic decisions about the deployment of limited resources

among client firms.

The EDS would use neither a laissez-faire nor a command-and-control approach to organize

entrepreneurs and service providers. It would rely on enlightened self-interest and individual

choice. Those who believe the benefits outweigh the costs will participate. Those who do notwould

not get access to the same level of opportunity and benefit.

Benefits to the community. Perhaps the greatest benefit of the EDS to a community is as a framework

that enables the diagnosis of complex enterprise development problems on a macro level and

the identification of strategic solutions. For example, one particular northeastern U.S. city has

often been described as good at starting firms but not at growing them to maturity. Local venture

capitalists and others have complained about the lack of “good” entrepreneurs in which to invest.25

An analysis of aggregated secondary statistics on start-ups would neither reveal this problem nor

suggest potential solutions. By using the EDS framework, this situation could be explained with

the following hypothesis: There are many Single A entrepreneurs who start firms and plenty of

financing is available for Triple A entrepreneurs, but the support structure for Double A entrepreneurs

and the processes for transforming Single A entrepreneurs into Double A (and Double A

entrepreneurs into Triple A) are weak or nonexistent.

In fact, discussions with entrepreneurs at this skill level confirm the impression that there is a

disruption in the ladder of development and the infrastructure of support in that region. Many Double A entrepreneurs

must seek financing outside the region because local investors are unwilling to

invest in them until they are at the Triple A level; but in exchange, they are asked to move to the

investors’ location so that they can be closely observed and supported.26 If that is true (and such

statements and conclusions can be substantiated by further research), the diagnosis suggests a clear

and targeted local enterprise development strategy. By using the EDS framework, the issue can be

translated into a question capable of being researched and on which action can be taken.

The benefits of the EDS to a community derive from its effectiveness in developing entrepreneurs,

efficiency in producing results, equitability of focus on different types of entrepreneurs,

ability to build a continuous stream of new companies and business leaders, and operation at a scale

sufficient to transform the economy.

Challenges to Implementation

The uniqueness of the EDS’s mission and approach presents certain implementation challenges.

To adopt the EDS in its entirety, a community or region must be willing to do the following.

Engage in innovation. The EDS is not just a technical solution; it is a political and social one.

A champion or pioneer will be needed to lead the charge—someone with the vision to see the

possibilities and the courage to undertake something new.

Resolve political issues among people and organizations in the best interests of the entire

community and focus all attention on the achievement of results.

Form new institutions with the responsibility for developing entrepreneurs, staffed with people

possessing the right skills,@151those of diagnosing, facilitating, and organizing.

Undertake a community-wide diagnosis to develop a design for an EDS implementation that

is specifically tailored to the local context in which it will operate. This involves a detailed assessment

of existing and potential entrepreneurs to ascertain the percentages operating at

each level of development and entrepreneurs’ specific needs. The diagnosis must also examine

the existing service provider infrastructure to determine its capabilities, gaps, and overlaps.

Implement the entire system. The potential power of the EDS comes from the fact that it is a

system; the synergistic interaction of the elements produces a result greater than the sum of

the parts. Piecemeal implementation of individual elements will not enable a community to

achieve the large-scale, ongoing transformations it is seeking. This investment situation is

similar to that of Federal Express, whose founder, Fred Smith, had to set up an entire network

of operations and planes that could carry packages anywhere in the country customers

wanted to send them—before he opened for business.

CONCLUSION

H. L. Mencken once said that “for every complex problem there is an easy answer, and it is

wrong.” Community-wide enterprise development is a complex problem; therefore, any useful

solution is bound to be so as well. In this article, we offered a new approach built on a fundamental

rethinking of current theory and practice.We believe that this solution can cope with a high level of

complexity, drive transformational change at the individual as well as social level, and be implemented.

Using the EDS, a community could effectively, efficiently, equitably, and continuously

develop entrepreneurial talent and build successful companies on a large scale.

The TENTH Commandment

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Seeing Around Corners

Anticipate incessant change by periodically testing adopted business plans for their consistency with the realities of the world marketplace.

The past will not come again. Neither isolation nor insulation from tomorrow is possible. The problems of the times are the opportunities of the times, as always, but the strings attached are multiplying. Governments and new competitors, domestic and foreign, will increasingly affect the conduct of a business. So will social evolution. Despair has little value. Vigilance is required.

There’s no room for entrepreneuring in a static society. So Commandment Ten carries good news. We are in the midst of a lot of change; the year 2020 is almost closer to us than 1990; the world has shrunk and is increasingly wired together; and today is the first day of the rest of your life. The cliches abound. But the average person is swept along by events, turning his or her head from side to side occasionally as birthdays flash by. Then the day arrives when the energy required to deviate from the worn path exceeds the energy remaining in the reservoir, and what might have been will never be. Commandment Ten is an admonishment: Take advantage of the turbulence to build something new. Commandment Ten is a warning: Systematically tune what you are building to the times. Graphically, the challenges of the times can be depicted this way using the same Stages of Growth model used in Commandment Nine.

Entrepreneur/managers of growth companies must contend with two kinds of pressures, those from within and those from without. From within, both increasing size and complexity generate various problems and crises. They were outlined in Commandment Nine. From without, as depicted by the fat arrows, an increasing number of pressures affect a growing company as it becomes more and more viable and visible. The overriding question for the leaders of a dynamic enterprise is quite simple: What do we do to keep on succeeding? The name of the game keeps changing! There are six specific actions implicit in the dictates of the Tenth Commandment:

Ø Recognize and deal with reality.

Ø Adjust your managing style to fit the changing needs of the enterprise.

Ø Treat organizational structure as a variable.

Ø Nurture a process of managing within the company.

Ø Verbalize information and expectations.

Ø Remain doggedly customer centered.

These are the actions required to anticipate incessant change in order to amend your plans for the business accordingly.

Recognize and deal with reality. Floating interest and exchange rates are a reality. Diversity in the work force at all levels of responsibility is a reality. The merging of the Internet and computing and is a reality. Fresh competition (new entrants) in every kind of growth industry is a reality. Privatization in many countries around the world is a reality. Regional conflicts are a reality. The list goes on. Some of these factors may be pivotal to your company. You must determine which ones they are and weave them into your thinking.

Adjust your managing style to fit the changing needs of the enterprise. Any entrepreneur with industrial experience is familiar with the pluses of the “-tions” in a business: communication, instruction, delegation, motivation, and recognition. These -tions don’t just happen. A senior person causes them to happen, usually both by example and by direction. The ideal case is when these -tion elements of achieving results through others are an acquired taste bred into the fabric of the enterprise from the start. Then there is an ever-growing core of talent available to respond to the times. The alternative to breeding is on-the-job training or, sometimes, a crash program of management development, often triggered by some emergency.

Treat organization structure as a variable. The typical progression in most companies is to move, over time, from a functional organization structure to a profit center structure, as outlined in Commandment Nine. This general progression tends to make sense as the use of profit centers breaks the enterprise up into smaller pieces, develops more general managers, etc. It is important to recognize that there are countless variations and permutations along the way having to do with position titles, reporting relationships, salary brackets, and all the administrative paraphernalia that goes with facilitating a group of humans working together. Ideally, the culture of the company will highly value flexibility, cooperation, and appropriate competitiveness. At a minimum, entrepreneurs will do well to downplay from the start, the significance of the classic status symbols of corporate life. They can make for premature hardening of the business arteries, i.e. structural rigidity in the face of internal and external change.

Nurture a process of managing within the company. The key word is process. It implies a continuing, consistent, if not repetitive, sequence of events over time during which the participants can get to know one another, come to share a common vision and vocabulary, and establish a sense of order in the life of the enterprise. There are enough surprises in the day to day existence of a young company. Irregularities and spontaneity in the way managers conduct themselves are superfluous, if not downright destructive.

Verbalize information and expectations. Everybody is in favor of better communication, but what does it mean? Open offices or an open-door policy? Company newsletters? Friday night beer parties for the staff? Casual, mixed-level lunches? A formal mentor system? These are all candidates for inclusion, but the heart of communicating has to do with transmitting and sharing

ideas, opinions, and critiques on the work being done—the heartbeat of the company. The rest, from newsletters to parties, is just icing on the cake for a company on the move. In the final analysis, productive communicating boils down to regular boss-subordinate interchanges about the tasks at hand and those upcoming. And the value of the interchange is amplified if both parties have at least a rough understanding of what the company is all about—the vision, mission, and objectives.

Remain doggedly customer-centered. Amid all the external pressures, the ones most important to respond to are those that have an impact on your customers. More than one group of entrepreneurs have been surprised to find that interest rates or foreign competition or a new technological development has suddenly put a big dent in their growth plans. Often the surprise

would have been avoided if one or more of the top people had not pushed eyeball-to-eyeball customer contact down low on his or her list of things to do. For example, a year after the Saudi Arabia debacle in Case Z above, AH&B management received another blow. High interest rates

drove AH&B’s remaining largest client, a highly leveraged, second-home developer, into bankruptcy. This demise could have been foreseen by an alert observer of the client and the times, and someone at AH&B should have been that alert observer. How does a new venture get and stay customer oriented? The signals have to come firmly and regularly from the top. The burden is on the entrepreneur.

Commandment Ten calls on the entrepreneur to keep on entrepreneuring in the sense of monitoring and responding accurately to ever-changing reality. Doing this is central to serving society in some useful way on a continuing basis...central to keeping on succeeding. In recent years, a good number of famous companies, business icons, have fallen from grace. Some years ago Business Week published a study by writer/consultant, Tom Peters, of thirty-seven Fortune 500 companies whose managements were generally considered to have been effective in extending the youthful spirit of their enterprises over many, many years, through good times and bad. The study indicated that the managements of these companies shared eight attributes:

Ø A bias toward action

Ø Simple form and lean staff

Ø Continued contact with customers

Ø Productivity improvement via people

Ø Operational autonomy

Ø Stress on one key business value

Ø Emphasis on doing what they know best

Ø Simultaneous loose/tight controls

The NINTH Commandment

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Health is Wealth

Maintain a detached point of view.

Managing a growing business requires unyielding dedication that can consume the body, impair the senses, and warp the mind. Such effects are harmful to the individual and the enterprise. Clinical objectivity is the only preventive. Growth implies and entails risk. Risk begets failure as well as successes. Wide perspective gained through nonbusiness experience or study helps one endure the pressures and accept with equanimity the results, good and bad, of business decisions.

Few new ventures get very far without a lot of what is termed “sweat equity,” the investment of many, many long days of toil by the key people. Just why this investment seems to be mandatory is unclear. It may be a law of the universe. It may have something to do with giving birth to a new entity. The explanation may reside with the fact that entrepreneurs typically have sizeable egos, so they try to do everything themselves. Whatever the cause, when there is an excessive amount of sweat equity invested over time by one or more individuals, the size, success, and overall health of the total enterprise is going to be at risk.

The flourishing company sold stock to the public and moved into its own new factory, during the fourth year. That same year Sam and his wife built a new home high on a hill near the factory. The axis of the new home was aligned with the factory, and the living room bay window looked directly down on it. Sam often invited groups of employees other than his officers, to dinner. He invited the officers, too, on occasion. The dinners were one of the many ways Sam was able to keep his finger on the pulse of the operation and perpetuate his network of information sources within the company. Sam continued his twelve-to-fourteen-hour days. Everyone felt he set an excellent example.

What does it take to stay on the upward growth curve, to continue succeeding beyond what is typically the first crisis point? Usually it takes a broadening of the management talent base, some effective staffing that adds up to the well-rounded Functional Team needed for stage-two growth. Such a team might include accounting or manufacturing or marketing experts depending on the needs of the business and the voids in the entrepreneur’s expertise. In this second stage the entrepreneur, if she or he is to make the transition personally, must begin getting results through others as opposed to through her or his own individual efforts. Many entrepreneurs find this a tough transition to make, and many don’t make it. Sam in Case U above illustrates this point.

In companies where this leadership hurdle is cleared, progress up the growth curve often continues. Products and markets are typically added; the business prospers and also becomes rapidly more complex. The stage is set for the second major crisis, Indigestion. The single level

of general management normally found in a functional organization gets to the point where it simply can no longer efficiently handle the increasingly diverse issues, problems, and questions flooding in from the various functional vice-presidents. (Refer to section 6.0 in the material on Preparing a Business Plan, Commandment Four.) General management suffers an overload. People miss schedules and overrun budgets. Communications bog down. Silly mistakes are made. And the quality of decisions at the top declines because the distance between the general management and the realities at the customer interface has become too great. The enterprise is suffering from success. Usually the best medicine is to break the company into smaller, more manageable pieces—to decentralize into Profit Center Teams.

Stage-three growth, with its multiple profit centers, means that at least one additional layer of general management is added to the organization. This puts key decisions closer to the customer interface. It is often also true that now there will be a more homogeneous character to the range of issues with which each profit center team must deal, since profit centers are typically formed around a single product line, geographical area, or type of customer. Stage-three growth, however, like the other stages, carries with it the seeds of the next crisis. The varied actions of independent profit centers breed the crisis of Control.

Profit center teams have a tendency to go off in their own directions. When this happens, the total enterprise can become merely the sum of the parts, instead of more than the sum. Corporate management gets increasingly uneasy as it senses that it’s losing touch with what is going on. The objectives of the enterprise become fuzzy as it is stretched in several directions. Overall, things get out of control. The people at the center of the complexity can't spell out for sure what business they are in. Coordination is needed in order to exploit competitive advantages systematically on a company-wide basis. Such coordination, stage four of growth, usually takes the form of added management information systems and progress-reporting mechanisms and a more rigorous planning schedule throughout the year. In short, more meetings, manuals, and memos—the bane of the traditional entrepreneur!

These adjustments, in time, do bring about a higher degree of coordination. Experience indicates that they also can usher in the next crisis, Red Tape. The busy business builders in the emerging profit centers find they are spending two-thirds of their time justifying what they do during the remaining third. The control systems developed for the decentralized company become anchors instead of sails. How is the red tape cut, or thinned, without letting the pieces of the enterprise fly apart again?

A variety of human overrides to control systems have been tried. Examples include task forces, matrix structures, and administrative maneuvers to promote the productive interaction of seasoned people for the good of the whole organization. These overrides are sometimes successful, but as a rule they are not particularly enduring.

For example, how long can a task force prevail on a subject? The latest thinking on how to accomplish optimal coordination in companies with increasingly diverse activities (products/services/markets/technologies) is to try to internalize the values, checks, and balances in at least the key players. Such internalization suggests the development of a corporate Culture, a term introduced in Commandment Five. The existence of a culture implies that a group of people share a point of view about matters important to a larger enterprise of which they are a part.

A key point to remember is that the management practices (like the investment of sweat equity during the Entrepreneurship stage) that breed success at one stage carry with them the seeds for a crisis. In a sense, this kind of a crisis is part of the price of success. The important point: It is necessary for an entrepreneur to change his or her managing style as his or her company prospers.

What worked yesterday or today is not the formula for tomorrow. A sensitivity to this issue of managing style is essential if a person is to achieve the degree of clinical objectivity called for here in Commandment Nine. What else is required? Good health, including adequate rest, and some semblance of a balance between vocational and a vocational interests. Few people appreciate the physical wear and tear required to found and run a dynamic enterprise. Any busy manager or executive in any business can tally the litany of meetings, emails, phone calls, airports, rent-a-cars, airplanes, hotel rooms, deadlines, and so forth that he or she endures.

Now add to this litany the incremental burdens on entrepreneurs who have to initiate everything, work without staff support, and shoulder the stress of possibly being wrong or ineffective on a critical item at any given point in the day. The load on the individual, the entrepreneur, the person who is his or her own boss, is often essentially doubled. The only antidote is physical and mental fitness equal to the load. Self-help books by the hundreds prescribe appropriate routines for getting and/or staying in shape. And any competent M.D., especially one associated

with preventive medicine—the entrepreneurial end of medicine in many respects—can help you tailor-make a program compatible, within reason, with your own lifestyle. Likewise, regarding mental health, particularly stress, there is a growing body of knowledge about what causes stress and how to deal with it. A pioneer and foremost authority in the matter is Dr. Hans Selye, M.D., professor emeritus at the University of Montreal and president of the International Institute of Stress. Dr. Selye, among others, has pointed out that at its roots, stress results from the body trying to readjust or adapt itself to a new situation. But please note: The new situation can be good or bad, real or imagined. This is a very important point to appreciate. Your body reacts measurably to each of the following kinds of events:

Ø A threat by a mugger on a city street.

Ø Receipt of a huge order for your company.

Ø A death in the family.

Ø Leaving on a vacation trip to Europe.

Ø A sudden shortage of cash to pay bills.

Ø The apparent failure of a key subordinate to meet expectations.

Ø The loss of a major client.

Ø Extensive, unexpected bad weather.

Each good, bad, real, or imagined event (the mugger may just be a shadow, for example) causes a physical reaction of one sort or another, whether it be an increased pulse and breathing rate triggered by adrenaline or a feeling of malaise brought on by hormones or “. . . newly discovered brain substances, endorphins and enkephalins, and activities of the nervous pathways that mediate and alter the stress response.

“That is to say that all agents [heat, cold, jogging, drugs, hormones] to which we are exposed produce not only their specific actions but also a nonspecific increase in the need to perform certain adaptive functions and then to reestablish normalcy—and the nonspecific is independent

of the specific activity that caused the rise in requirements. This nonspecific demand for activity as such is the essence of stress.

“It doesn’t matter whether the agent or situation we face is pleasant or unpleasant. All that counts—from the standpoint of stress-producing, or stressor, activity—is the intensity of the demand for readjustment or adaptation. “If it seems difficult to see how such different things as heat, cold, drugs, sorrow, and joy can provoke an identical biochemical reaction, nevertheless it can be demonstrated by actual quantitative biochemical measurements that certain reactions of the body are totally nonspecific and common to all types of exposure.

“Stress is not something to be avoided; in fact, it cannot be avoided. As the response to a stressor, a stimulus, a set of circumstances that induces a change in the flow of physiological and/or psychological functioning, it’s inevitable and as essential and useful a part of living as changes in breathing and blood circulation produced when exercise is the stressor. “Depending upon their intensity and the way they affect the individual, stress reactions can be pleasurable as well as helpful. But when they are inappropriate or excessive, they can exhaust the capacity to respond and lead to difficulty—emotional distress, behavioral disturbances, or symptoms of illness.”

Now what does all this mean to the entrepreneur? It means that whether the fledgling business does well or poorly, the absolute number of significant events good and bad, real and imagined, cascading down on the founders and managers is likely to be high. When the number of events is compounded by the inherent risk of failure in both an economic and a psychological sense, it

is easy to understand why stress goes with the territory, particularly in the earlier stages of growth. Physical and mental robustness is achieved, like most everything else in life, through conscious effort. The components of such an effort can be boiled down to these highlights: • Exercise, food, and drink in amounts that result in a physical condition that has a high degree of resilience.

• Purposefulness in one’s chosen work.

• A vocational interests that regularly require undivided attention.

• Perspective on the risks and rewards of decision making, which is a major component of your professional lifestyle as an entrepreneur.

• Simplicity, even in the face of gargantuan success.

Detailed consideration of these components is beyond the scope of this book. But research indicates that the more the matter of physical and mental health in executives is studied, the more these five components tend to stand out as signposts along the road of a full life. Since stress itself is a biochemical phenomenon, a person needs to keep her or his body well tuned, resilient. Purposefulness is the flip (and positive) side of uselessness and its byproduct, frustration. A serious avocation is useful like a haircut. One enjoys, or at least endures, a short respite from intense professional activity and comes away different—at least temporarily. Decisions are the tracks that change runs on, but significant distance can't be covered without encountering some ups, downs, and twists. Planning helps a person select the optimum routing. And simplicity, from cars and clothes to food and entertainment, is one of the few proactive defenses against the turbulence of these fast-paced times.

A wise person once said, “A man is rich who has enough.” What is "enough" for you? In many respects, entrepreneuring is a lifestyle choice. Like other lifestyle choices, entrepreneuring has pluses and minuses, risks and reward. A new enterprise, being small, fragile, and even beguiling, can be loved to death, especially by its parent or parents. Excessive affection and the intertwining of personalities with the sinews of the business may be acceptable practices for the permanently small businesses of the world, but they have limited application in the intentionally higher-growth, business-building situation that is primary subject of this book.

Does the above point of view preclude wide-eyed enthusiasm and the do-or-die attitudes generally attributed to successful entrepreneurs and always espoused by them in speeches after they have emerged into the limelight? Of course not. The best analogy is that of a sports hero or heroine. While the contest is on, there is no limit to what the hero or heroine will pour into the pursuit of victory. And he or she will exhort his or her teammates to excel at almost any cost. But when the contest is over, the hero or heroine who lost doesn’t despair for long or drink himself or herself into a stupor. He or she accepts what happened, tries to learn from it, goes on living, and aims to win next time. That’s professionalism, the kind of professionalism that is a vial part of entrepreneuring in the early 2000s.

The EIGHTH Commandment

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Go With the (Cash) Flow

Project, monitor, and conserve cash and credit capability.

Cash is the blood of a growth business. A company’s ability to continue is determined daily by the contents of the checking account, not at year's end by the financial statement. Keeping money in hand or readily available for both planned and unplanned events is not only prudent but necessary in unsettled times. Cultivation of financial sources is an ongoing duty.

Probably no other commandment is violated more broadly and regularly than this one. Cash gets consumed in many ways, some of them quite unexpected. In recent years, corporate scandals and upheavals, rollercoaster interest rates, international tensions, and suspicious investors have driven even the largest corporations into wild patterns of financing themselves. Many of the approaches involved sophisticated financing schemes that only a chosen few could decipher. As chronicled in the Wall Street Journal, Fortune, Forbes, Business Week, and elsewhere, many of the new instruments have resulted in big bruises on organizations as diverse as Procter & Gamble and Orange County, California. At one point in the last 20 years, interest expense alone consumed nearly 45 percent of corporate net profit before taxes, up from only 14 percent in the 1960s, according to Henry Kaufman, the chief economist at Salomon Brothers.

The squeeze on cash available for operations due to changes in interest rates on borrowings is one example of how unplanned events can cripple a company, regardless of its size. A second cash sump that periodically catches high-growth company managements napping is inventory. A few years back scores of semiconductor companies found themselves with months and months of product on hand, and no customers. The cash accounts on their balance sheets dwindled; the inventory accounts ballooned. But normally you can’t pay a payroll with inventory.

More than one emerging company has found it necessary to let key people go during cash-squeeze circumstances, a high price to pay for failing to protect cash reserves as a market cools or the economy shifts. The third great cash consumer tends to be accounts receivable, the money your customers owe you. Without intending to do so, many entrepreneurs start out being a manufacturer or service-provider and end up being a bank (of sorts).

Usually, the management of a new enterprise assumes that it must conform to the prevailing practices of the industry or industries in which it will operate. If the industry standard is to allow net thirty days on the payment of invoices, then the entrepreneurs allow net thirty days. Doing so is very understandable. But two questions should be asked. One, if the new company does indeed have a better mousetrap of some sort, does it need to meet the industry standard? Perhaps tighter terms can be sold.

Many entrepreneurs shy away from these types of administrative issues. They are hardly the stuff dreams are made of, particularly in the early days of a new venture when everyone is aglow with visions of empires, self-fulfillment, and service to society, capital gains, or all of the above. But, honored reader, you are admonished to recognize the cold fact that a business without cash is like a sailboat without wind. Depending upon who’s aboard, sitting dead in the water, windless, may be interesting, even fun, for awhile. But at some point, survival becomes an issue. Projecting, monitoring, and conserving cash is not an optional feature of entrepreneuring. It is the major part of a high-level, heavyweight task for one of the primary participants.

Another part of that task is the continuing cultivation of financial sources. The thrust of this book has been toward building growth companies. Almost by definition, growth companies usually need more money than they can generate internally. That incremental money has to come from outside. The range of normal outside sources is pretty well known:

Ø Individual investors (the public)

Ø Private investors (wealthy individuals)

Ø Professional investment funds (venture capitalists)

Ø Foundations (money for special causes)

Ø Corporations (joint ventures and equity investments)

Ø Creditors (banks, SBA, individuals)

Ø Credit companies (accounts receivable financing)

Ø Suppliers (extended payment terms)

Ø Customers (payments in advance)

Ø Employees (stock purchases, wage/salary concessions)

Chances are that sooner or later you will have to rely on one or more of these ten sources to supply some additional wind for your sails. The time to go after money is before you need it. It is a well-known phenomenon that it’s relatively easy to get a loan, for example, when you’ve already got plenty of cash on hand. In such circumstances your credit is five-star (or AAA) and any creditor has little worry about getting repaid. It follows that the time to cultivate relations with potential future sources of capital is when you are doing well, meeting your plan, and running smoothly. Essentially what the entrepreneur must do is build confidence on the part of others—confidence in his or her management team, the business concept, and the future of the combination. How is this efficiently done? Pick one or two target sources from the list of ten and court them from day one.

One of the key products of your business plan, your blueprint, is a thoughtful indication of how much money is required at various points along the way in the early years of the business. The business plan, or more likely, updated versions of it, can be your basic tool in courting potential sources of initial as well as later rounds of financing. Let your targeted individuals read the plan.

Ask for comments. Then keep the intended investors and creditors informed of your progress.

In addition, include your targeted sources in periodic mailings. Visit them. Draw them into the life of the company in ways convenient to you. Should you let your potential sources of future debt or equity knows why you are cultivating them? Of course! You’re not playing a game with your business. You are going after needed funding in the same way you would go after needed raw materials or vital parts or a person you would like very much to hire. There’s nothing sacred about money. It just happens to have more mystique than other business ingredients. Go after it. There’s generally more money around than there are good, thought-out business ideas and plans. Once you’ve done your homework, figure “they” need you more than you need them. This is not to suggest arrogance on your part, merely conviction.

There is evidence of the dawn of a new day for progressive business management. The old day featured a rapidly growing population, apparently unlimited natural resources, cheap energy, a stable currency, low interest rates and low inflation, relative isolation from overseas competition, and a compliant work force that understood hard times. The new day features just the opposite.

And the hard times of the transition to the new day are especially aggravating to the most recent generation of employees who had come to take good times, economically speaking, for granted. As the dawn gives way to the new day, managers in general and entrepreneurs in particular have to deal skillfully with the fundamentals of business.

Customer service is already a battle cry across the nation. The effective linking and full use of talent at all organizational levels is becoming fashionable, but it will receive increasing attention as the new century deepens. Marketing will be tightened up in many ways. For example, the proliferation of me-too products will fade as the buying public increasingly seeks real value, rather than the cosmetic appearance of value. Production processes are already undergoing a revolution. Purchasing has increased markedly in stature as a vital business function. Finance now is a global activity that never sees a sunset. The Internet and the information highway, or “farmer's market” as it is called by Microsoft's Bill Gates, continue to trigger whole new vistas of opportunity for those around the world who have their antennas raised. In this time of seemingly unlimited opportunity, cash will continue to be the life blood of a growth business. Entrepreneurs by nature tend to favor hard cash over paper assets anyway. This new century is made for them.

The SEVENTH Commandment

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Walk Before You Run

Expand methodically from a profitable base toward a balanced business.

Optimism is both the poison and the antidote of the growth company manager. It may be possible to accomplish all things, but not simultaneously. With limited resources, incremental growth over time is the judicious prescription for prosperity. Seek logical, extensions of existing activities, but avoid a growth for growth’s-sake psychology. Bigger is not automatically better; more is not necessarily merrier. Make managing a competitive advantage. Increase customer dependency on the enterprise. Economic success can breed more of the same as well as other returns for the primary participants. Money is the traditional reward; life-style considerations are becoming more widely valued.

Walk before you run. Don’t build your skyscraper on sand. Sometimes you have to bunt to get on first base. Avoid growing into trouble. Measure twice, cut once. All of these aphorisms tend to ring true in the cold light of day. But historically, expanding methodically has proven to be something of an unnatural act for those who grow new companies . . . and even sometimes for experienced entrepreneurs who try to turn around old ones. A few years back, Roy Ash, cofounder of Litton Industries and later director of the Office of Management and Budget in Washington, D.C., was fired as the chairman and chief executive officer of the money-losing AM International (formerly called Addressograph-Multigraph).

In effect what this picture says is that 55 percent out of every sales dollar is available to pay first, for the fixed costs and second, for the profit requirements of the enterprise. In a growth company, profit is indeed a requirement, not a luxury. Think back over the ground that has been covered here in Commandment Seven. The crux of the matter of profitability fundamentals is simply this: An entrepreneurial team can harm, or kill, profitability by trying to do too much, too soon. For what often happens when opportunity-chasing overrules methodical growth is that overhead (fixed costs) goes up and the contribution rate comes down. This is a dangerous turn of events.

The end result may well be greater sales volume for the enterprise, but it is paid for with eroding profitability. The combination of higher fixed costs and dropping contribution margin is typically not a formula for long-term happiness in terms of economic vitality. “Look at our 300 percent growth over last year.” But in the process, the fixed costs tripled, and perhaps more importantly, the contribution rate was allowed to drop precipitously from forty cents per sales dollar to ten cents. By 1992, Widgetronics had to sell $10 million of business just to break even at year end. Unless there are compelling strategic reasons to do so and plenty of money in reserve, such performance is unacceptable if the enterprise is operating in a competitive industry.

An even more detailed analysis of how Widgetronics grew itself into trouble indicates that between 1990 and 1992 the management added two major new product lines, one closely related to the main business and one not. Here are the highlights of the impact the additions had on the contribution rate and the fixed costs. Note carefully what the new, unrelated product line brought to Widgetronics.

In this example, a combination of factors hurt profitability. New, unrelated product lines are not categorically troublemakers. But they should be approached with caution. This is even more true now in the 2000s with the advent of the Internet and surprise competitors. If you personally are not comfortable working with and manipulating numbers in the way illustrated above, make sure at least one of the primary participants on your entrepreneurial team is.

As in any business, Widgetronics management has but three basic ways to increase the profitability of the enterprise. They can seek to increase sales volume (of products with positive contribution rates), reduce fixed costs, or increase the contribution rate. And there are also three specific ways to increase the contribution rate:

• Increase selling prices.

• Decrease variable costs.

• Change the product mix being sold so as to increase the net contribution rate for all products being sold.

Of course, in the Widgetronics example, as in real life, a combination of actions is probably required. Profits don’t just happen. Like sales, they typically have to be made to happen. Entrepreneurs must have sensitivity to the dynamics involved. Profitability isn’t a luxury; it is a necessity in a growth company. Without it there are no earnings to “retain.” Without earnings on today’s business it is usually difficult to attract either equity or debt capital to finance tomorrow’s business.

Profitability is the progenitor of cash, and when you are out of cash, you increasingly tend to be out for good in our undulating, economic times. Entrepreneurs are naturally disposed toward spotting opportunities in the form of new product possibilities, additional markets to pursue, processes to initiate, exciting shortcuts to take, etc. Entrepreneurs move society from the old to the new. By definition, entrepreneurs are supposed to have the ability to see around corners!

But a fragile new enterprise will be lucky if the people in it can do a single thing exceptionally well and consistently during the early years. It may be possible to accomplish all things, but not simultaneously. As one weary president put it, “We can do anything, but we can’t do everything.” With limited resources, incremental growth over time is the judicious prescription for prosperity.

The SIXTH Commandment

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Setting Standards; Rewarding Performance

Reward individual performance that exceeds agreed upon standards.

Performance above the perfunctory level is a discretionary matter for each employee. Most people have alternative, off-the-job ways of utilizing excess energy or talent. Channeling such excess into activity beneficial to the business requires a tailored approach to each individual. A manager must first ensure that there is an understanding of the minimum results to be achieved. Then, for performance above the minimums, forms of compensation important to the performer—or in some cases, teams of performers—must be used.

Commandment One spoke to the importance of consistency among the primary participants in a new enterprise. Commandment Five suggested action to promulgate a conscious value orientation throughout an organization as it expands, recognizing full well that diversity will increase with success and size. Commandment Six calls for a sharp break with the past in that it admonishes the builders of new companies to do away with general, all-purpose reward systems. People work for many reasons. This has always been the case. But winning bread is not the common denominator it once was. Today’s work force is constructed of an incredible collection of individuals from all walks of life, each more liberated in one way or another than he

or she would have been even ten years ago. Management people must seek to align the efforts of individuals with the vision, mission, and objectives of the organization as a whole. It is folly to think that general profit sharing plans or benefits packages or promotion criteria or a quarterly beer blast or arty pictures in the lobby or Friday-after-work schmoozing are going to stimulate or reinforce desired behavior right across the population of the enterprise. Once again...forms of compensation important to the performer—or in some cases, teams of performers—must be used.

Conventional wisdom suggests that every employee wants to get rich, be promoted into positions of larger responsibility, have his or her medical expenses paid, work in pleasant surroundings, have a nice boss, be fulfilled, and retire with a substantial nest egg. Much of this thinking by corporate pacesetters is unconsciously based on Abraham Maslow’s famous 1940s hierarchy of needs paradigm.

Maslowism: The Biggest Trap of All*

The quest for self-fulfillment borrows its forms of expression from whatever sources are most convenient. Unfortunately, the materials closest to hand have been an odd combination of the psychology of affluence, reinforced by an outlook whose interwoven tenets proclaim: live for the moment, regard the self as a sacred object, be more self-assertive, hold nothing back. Where did those assumptions come from?

Early in the postwar quarter-century, the ideas of “more of everything” and the “primacy of self ” merged in a school of thought that may be called “self ” psychology. Self psychology received its most influential expression in the work of the psychologists Abraham H. Maslow, Carl Rogers, and Erich Fromm. Their thinking spread throughout the culture, with the help of self-help movements such assets and books with titles such as Looking Out for No. 1, How to Be Your Own Best Friend, and Pulling Your Own Strings. In particular, the theories of Maslow ingeniously combine a psychology of affluence with a vision of inner development. In the 1950s, Maslow posited a hierarchy of human needs that has become part of the conventional wisdom of our time. According to the hierarchy, people who are preoccupied with meeting “lower-order needs” for food, shelter, and economic security have little energy left for pursuing the “higher-order needs” of the spirit. Vital energies are released to the search for “self-actualization” only when the lower-order needs have been met. We move up the hierarchy of needs in an orderly fashion, on an escalator of increasing affluence. There is obviously some sense in which human priorities do function according to a hierarchy. When we are sick, all that counts is getting well. When our survival, physical or economic, is threatened, it powerfully concentrates the mind (as Samuel Johnson observed about the prospect of being hanged). But the idea of selfactualization– the highest achievement of which human beings are capable, according to Maslow–presupposes our ascension through various stages of economic well-being and is a peculiarly self-congratulatory philosophy for a materialistic age.

The inability of entrepreneurs to reallocate their time and energy, to manage more and do less, is one of the most common reasons why many young enterprises stall just as they start to succeed. More on this in Commandment Ten. A second step in the sequence of thinking is to establish agreed upon standards of performance with those directly involved. The overwhelming evidence turned up by both academics and practitioners over the years is that people tend to respond to structured expectations.

They need to know—want to know—where is the goal line or fence? What is the name of the game or the shape of the target? How high is up? What are the acceptable minimum results? What do you expect of me? Lest you think these phrases are merely cliches, spend some time chatting with a cross section of employees in a lunchroom or two. Ask about their everyday concerns; listen carefully to their vocabulary. People on the job want to know what is expected of them. As one engineer put it, “I can’t operate in the dark.” The point is that the practice of managing with objectives covered in Commandment Three has to be percolated down through an organization to the individual employee level. Corporate objectives become meaningful when they are translated into what it is that a given man or woman is to achieve in, say, the next thirty, sixty, or ninety days. The third step in the sequence of working with employees is to insure that the reward systems and practices of the enterprise support and reinforce the desired behavior of the individual(s) involved.

Not everybody is driven by money. Dual promotion ladders whereby individuals can advance in status, responsibility and income without moving into managing jobs are becoming more common, especially in higher technology companies. In many phases of science and engineering it’s almost a full-time job today just to keep current. To compound that burden with the additional tasks of getting results through others invites both frustration and, perhaps, failure. Entrepreneurial innovations in organizational design and organizational processes can be as important as technical breakthroughs.

The FIFTH Commandment

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Hiring Smart

Employ key people with proven records of success at doing what needs to be done in a manner consistent with the desired value system of the enterprise.

People do what they like; they like what they know. Experience adds depth to knowledge. The best indicator of how a person will perform in the future is how he or she has done in the past in the same or related activity. Criteria for selecting key people are dictated by the plan, the blueprint, for the business. A brick mason is not needed to construct a wooden building. The plan reflects the operational objectives, the work-a-day culture, and the intentions of the primary participants. The interests and capabilities of a new key person must harmonize with all three.

Commandment One dealt with the primary participants—directors, advisors, officers, and unique employees. Commandment Five has to do with setting the stage for the expanding and ultimately much larger group of people upon whom a growth company sooner or later must depend. There are two sides to the key-people coin. One side has to do with qualifications in a technical or functional sense; the other has to do with what can best be termed attitude, or, in somewhat fancier terms, inclination to pitch in and enthusiastically participate in building the enterprise. The proper selection of exactly the right key people is akin to building sturdy, square corners on a house under construction; doing so greatly simplifies the later addition of roof joists, wallboard, and siding. Sound, early decisions in picking lead salespeople, supervisors, and senior technicians, greatly simplifies decision making and cooperation as the enterprise grows.

The FOURTH Commandment

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Preparing a Business Plan

Prepare and work from a written plan that delineates who in the total organization is to do what, by when.

Until committed to paper, intentions are seeds without soil, sails without wind, mere wishes which render communication within an organization inefficient, understanding uncertain, feedback inaccurate, and execution sporadic. Without execution, there is no payoff. The process of committing plans to paper is easy to postpone under the press of day-to-day events. In the absence of a document, fully coordinated usage of the resources of the business is unlikely. Each participant travels along a different route toward a destination of his or her own choosing. Decisions are made independently, without a map. Time is lost, energy squandered.

“Getting it down on paper seemed to help.” This captures the verdict that many, if not most, successful entrepreneurs reach after they have toiled through the process of preparing a business plan either for a startup or for the coming year in an ongoing enterprise. But before such plans are put to paper, far too many business builders think, "I'm busy; I'll get to it later." Why is this so? Most people can write well enough. Why do people hesitate to commit to paper what is in their heads? The answer is complex, but it boils down to this: What is consciously in an entrepreneur’s head is usually not as complete, as good, or as promising as he or she would like to think it is. He or she may have an image but it is a long way from being a finished painting. Or, to use a different metaphor, the entrepreneur may have a melody, but it is not yet a symphony. The process of getting an idea down on paper in a business plan format can be a very creative one. It is not merely a matter of translation from head to paper, but of actually generating the complete original. This is typically a heavy undertaking.

That’s why the brain subconsciously whispers to itself:

Procrastinate, procrastinate. It senses that there’s big work ahead. Developing a symphony from a melody or a painting from an image isn’t easy. Generating a written plan for a serious business venture is the same kind of creative challenge.

There are several popular misconceptions about the basic purpose of business plans, particularly those describing a brand new venture. Some people promote them as documents for raising money. Others see the plans as essentially legal boilerplate to provide entrepreneurs with “I told you sos” later on if things go sour for outside or inside investors. Still others stress the preparation of a plan as a rite of passage, a cleansing experience that tends to separate the real players from the spectators and camp followers. A perspective that includes all these but is philosophically of much greater use is that a business plan is a blueprint for building a business. Few readers of this Commandment would attempt even the addition of a room to their houses without a drawing from which to work. A business plan is a word picture of what the entrepreneurial dream is, why the dream can be economically viable for those involved, and how the construction will be carried out over time.

As discussed in detail below, a business plan is most usefully thought of as an internal, operating document, not a showpiece for raising money or satisfying attorneys. A sound business plan can be an important contributor to success whenever one, two, three, or more people wish to organize and synchronize a purposeful business effort over time in order to achieve specified results. Whether or not money is raised via the plan, whether or not an attorney ever touches it, whether or not anyone but the writers ever read it, the energy invested in preparing a blueprint most often will have a high rate of return. This is true even and perhaps especially, when as a result of the effort to put together a workable, believable plan, an idea is abandoned. It’s better to cancel a flight at the gate than after takeoff. Starting a new growth enterprise is normally a relatively high risk proposition. If the venture is successful, that is, economically viable in a projected length of time, everyone is happy, but the requirements of growth are not trivial. If the venture is unsuccessful, careers, money, reputations, spouses, good health, and even lives can be lost. Assuming the leaders of the effort have the necessary personal drive, the height of risk tends to be inversely proportional to the presence of two prime ingredients:

1) the directly applicable experience and managing ability of the team responsible for the venture, and

2) the thoroughness of the thinking that goes into the undertaking before it starts. To some extent, they are interchangeable.

Part of the folklore of venture capital is that it is most profitable over the longer haul to bet on good people rather than simply great concepts. “Back a quality individual before backing a surefire idea,” was a motto of George Quist of Hambrecht and Quist, one of the oldest and most respected venture capital firms in the country.

When pressed to list the indicators of good people or quality individuals, people with proven experience in evaluating entrepreneurs usually include the following:

• Evidence of drive and achievement-orientation

• Applicable business or technical experience

• Verifiable integrity

• Ability to communicate ideas and plans

Increasingly, a fifth indicator is finding its way onto the list, namely a propensity toward team work. The turbulent times, current and projected, generate complexity in every aspect of the business world. A variety of skills is needed to cope successfully with the myriad issues that confront any growth company of consequence. No one individual is likely to have all the skills in sufficient depth to do a quality job across the board on a sustained basis. In short, soloists are falling from favor. A final point of perspective and perhaps clarification is that, by definition, a prospectus is “a report or statement which describes or advertises a forthcoming literary work, a flotation of stock, etc.” A prospectus is not a business plan. A business plan, however, may technically be a prospectus if it is used to raise money.

In summary, after preparing a business plan, the entrepreneurial management team should have before it an agreed program—expectations, actions, and results— to which it will willingly commit itself. After reading a business plan, a director, potential investor, or other interested party should know precisely what those involved intend to do, by when, with the human and financial resources called for in the plan.

Preparing a Business Plan

The length and sequence of contents in a business plan for a startup will depend upon the nature of the proposed venture. One major component that is almost always needed, however, is to describe just why, how, and when economic viability will be accomplished. Other objectives may exist and even seem to be of greater importance to the writers of a given plan, but economic viability is the one necessary condition around which the contents outlined below are molded. Without such viability, few business ventures, no matter how noble, survive for long. Self-sustaining cash flow—economic viability—is at the heart of being in business.

Why is normally addressed by first identifying precisely who outside the enterprise is interested in and qualified to buy whatever it is the enterprise will have to sell, the way it will be sold. How is indicated by a complete coverage of the human, production, organizational, and monetary requirements for providing the product or service on a timely and continuing basis consistent with the pricing and quality demands of a chosen marketplace. When is reflected by a thorough presentation of the financial implications over time of each important event called for in the plan.

In a plan that is to be read critically by others, it is also useful to have an overview or executive summary at the start. Such a section will probably be written last though it appears first. Overall, then, the contents of a basic blueprint for building a business are as follows:

Ø Overview

Ø Concept

Ø Objectives

Ø Market Analysis

Ø Production

Ø Marketing

Ø Organization and People

Ø Funds Flow and Financial Projections

Ø Ownership

1.0 CONCEPT

As suggested earlier, there is powerful evidence that the act of committing an idea to paper is a vital step in the idea's development. This is nowhere more true than when dealing with the fundamental notion underlying the formation of a new, growth venture. By nature, new ideas are fuzzy combinations of needs, interests, capabilities, frustration, optimism, ambition, and a dozen other ingredients. Few entrepreneurs wake up one morning with an Aha! Imprinted undeniably on their brains.

Instant photography, Internet search engines, fail-safe computers, resolvable tennis shoes, hang gliders, fast food stores, bungee jumping, and microcomputers were not conceived with the help of lightning bolts. In most instances, a notion or inkling takes some encouragement before it becomes a hunch. A hunch requires some massaging and mulling before it graduates into a discussion piece. A discussion piece demands conversation and research enroute to precarious classification as a full blown idea. An idea takes a lot of work to refine it into a concept upon which to build a business. With a single, well-developed concept, a massive business empire can be built. But a single product or service is seldom enough to justify the bodily wear and tear required to launch a business that has prospects of being listed some day on a stock exchange.

Above are a few examples to illustrate the difference between a product or service and at least one possible underlying concept. The examples do contain a touch of tongue in cheek. It is extremely unlikely that all the entrepreneurs responsible for the various products and services shown on the left initially elevated their basic ideas to the conceptual level on the right. The question is whether or not it would have been valuable for them to think the implications of their product or service all the way through to the customer/generic level, sooner rather than later.

There is another compelling reason to hammer a concept onto paper in black and white. The possibility of confusion, misunderstanding, and shallowness on the issue of What business are we in? is reduced. A reasonably refined concept can help insure that the second (and third and fourth...) product or service of a budding enterprise is synergistic and complementary to the first.

2.0 OBJECTIVES

The Third Commandment, covered elsewhere, stresses the importance and characteristics of sound objectives. Two levels of objectives should be included in a business plan. First, the longer-term interests (intentions, objectives) of the entrepreneur(s) should be identified. Second, the operating objectives—sales, profits, market share, margins, etc.—need to be spelled out. Both levels typically require a great deal of digging and iteration. They all need to be in harmony with one another. On the first level: What do the plan writers hope to achieve for themselves over the longer term? Most everybody, at a minimum, wants to make at least enough money to get along. But there is a huge difference in pursuing $1,000,000 in capital gains within three years and pursuing a steady stream of $75,000 net income per year for life. Neither of these two objectives holds the corner on virtue, but they are different. And knowing roughly what you, the plan writer, are after is important. Otherwise, critical readers of the plan don’t have a reference point for the plan's feasibility.

These seven measures are not meant to be the final word. A high number of points on a measure is not necessarily good. There have been hundreds of studies of whether successful entrepreneurs are born or made, renegades from society or heroes, lucky or inspired, identifiable in advance or random marriages of chance and capability. There’s a small school of thought in favor of each argument, and chances are good that there will be even more theories in the days ahead as technological advances put immense capabilities at the fingertips of those who are opportunity-minded. When used as points of departure, however, the seven measures above can help an entrepreneur be honest with himself or herself and with the other contributors to the business plan, the blueprint for building the business. One thing is for certain: A business plan written by people with widely differing or conflicting personal objectives is likely to end up as rough reading rather than a smooth description of how the enterprise will compete in a chosen industry.

The second and more obvious level of objectives that should be included in the business plan are those having to do with operating matters such as sales, profits, market share, and so on. The word objective implies what we are going to make happen. An objective is more than a wish. It is an end result to which resources–cash and people–will be allocated. Below -are some objectives lifted from a variety of business plans.

3.0 MARKET ANALYSIS

There is a difference between a need and a market. To use a classic example, the management of Ford Motor Company at one point in time perceived a need for a large, flashy car with a lot of gadgetry for the driver. Ford gave the world the Edsel automobile. For a variety of reasons, the perceived need did not turn out to be a market of consequence when the car was introduced. While many people liked the gadgetry, there were only a few people favorably disposed toward buying a large, flashy, futuristic car.

Here is another example. For some years now a few big manufacturers have been cultivating a need for DVD players in the home. The same is going on today with Internet devices. The cultivating is slowly paying off, and gradually the potential need is being converted around the edges into a market, i.e., a definable group of people favorably disposed toward buying the product.

The purpose of the market analysis section of a business plan is to identify as precisely as possible the size, location, and characteristics of the set of people who are expected to be favorably disposed toward buying what the new enterprise expects to sell.

Please note with care the contents of the last sentence. It includes: people . . . favorably disposed toward buying. If you are planning to get money in the form of sales dollars from people not yet favorably disposed toward your new product or service, then it is important that you state as much in your market analysis. There’s nothing categorically wrong with undertaking to create a market. Many entrepreneurs have done it. Doing so requires what is appropriately called missionary marketing. But it’s expensive, and your capitalization will have to be sufficient to cover it. In addition, you will need the services of people skilled in such work.

4.0 PRODUCTION

There are a variety of ways to make most products. The mix between capital equipment and people, made parts and bought parts, assemble here versus assemble there, and so forth, has to be worked out. Every decision has implications for product delivery times, cash flow, quality control requirements, and other elements of a manufacturing business such as staffing and facility requirements. Likewise, service-business management teams face early choices that often set a new business on a path from which it may be quite hard to turn later. Location is a major consideration if customers need direct access to the business. Key people, high skill or low, must be available nearby. It is hard to produce custom wood furniture without skilled woodworkers, for example. In summary, given a positive point of view about an identified market opportunity, production to capitalize on that opportunity is a key blueprint ingredient.

Production plans probably flow easiest from hard to soft, that is, from equipment lists to systems considerations and people, once a production philosophy has been established. Production philosophies generally start with a decision about where the company will position itself on the make-versus-buy continuum. There are two well-known, high-flying, publicly-held computer companies that have each exceeded $100,000,000 in sales in recent years. Neither actually manufactures more than about 15 percent of its own hardware. Eighty-five percent of every system they ship consists of vendor-supplied parts. This ratio is neither good nor bad, only different from the more traditional pattern of making what you sell. The ratio merely reflects what two different management teams have decided is best for their own enterprises. What is best for your particular enterprise? There is no one answer. It depends most on what it is your management team does best and where money tends to get spent or made in your chosen industry.

5.0 MARKETING

As used here, marketing is a broad term that includes all aspects of creating and keeping customers. A business plan should reflect a detailed description of precisely how the targeted population described in the market analysis (Section 3.0) will be allowed or coaxed to exchange its money for your product and/or service on a continuing basis. Here are some of the questions to be answered:

• How will customers' needs be identified, classified, and fed into the workings of the business?

• How will customer satisfaction be tracked?

• What methods of selling and advertising and communicating are to be used to carry the messages of your business to the intended audience(s)?

• What will make the chosen channels of distribution productive, e.g., incentive systems, packaging innovations?

• What product or service features and benefits are to be emphasized? How do they stack up against competition?

• How are credit approval, collections, and complaints to be administered?

• Who is involved in pricing decisions, and what is the basis for decisions, e.g., cost, value added, value to customer?

• What are the plans for the development and/or evolution of the product or service?

• What level, if any, of research activities are needed to sustain or accelerate the growth of business?

• What responses by competitors are likely, if any, and how will they be countered, if at all?

• What is the schedule of who is to do what, by when, regarding marketing?

• From the above, what is the budget, the timing, and the magnitude of expenditures?

• What will be done if the business grows much faster than expected? Much, much slower than expected?

There is always an element of guesswork in predicting what is going to happen in the marketplace. This is one powerful reason why the width of management’s experience base in the chosen industry is of major importance to an outsider evaluating a proposed business. The broader the base, the more valid management’s expectations should be and the less likelihood there is of surprises. Candidates for entrepreneuring who have backgrounds in the steel industry are going to be less than convincing when they describe their campaign to dominate the world yogurt market. Here is a final point of perspective under the general heading of marketing. You may have noted that the word strategy has not been used so far in this material

on Preparing a Business Plan. It is a word that has been overpublicized to the point of confusion. Everything is a strategy. As a practical matter, there are potentially three levels of strategy in a growth company: Corporate, Business, and Functional. Corporate strategy has to do with what business or businesses the enterprise will be in...and by exclusion, therefore, not in. Then, hopefully, each of the one or more businesses in a given corporation has a discrete business strategy. This is best defined as a summary statement covering what will be sold, to whom, in pursuit of the expectations that have been set for the business unit. And finally, within a given business unit, there are usually functional strategies for manufacturing, marketing, finance, purchasing, personnel, and so on, that summarize how objectives will be pursued.

In the marketing section of a business plan, all three levels of strategy may well be covered, but typically the emphasis is on business and functional issues. In a single business company—such as most new companies—the corporate and business strategies are one and the same anyway. Fundamentally, there are only six basic business strategies: Product Development, Market Development, Forward Integration, Backward Integration, Diversification, and, of course, Stay Put, i.e., continuing to sell just what you have been to your existing customers.

6.0 ORGANIZATION AND PEOPLE

People make things happen. The right people make the right things happen. Selecting and fitting the right people to key responsibilities is a continuous process that ideally starts before or at the time the business plan is developed so that the document truly reflects the input of the team that is to execute it. There are at least four layers of talent potentially active in an enterprise: A board of directors or advisors, the general management, functional specialists, and other key individuals. Some people will contribute in more than one layer. As suggested in Commandment One, directors are often chosen for convenience rather than for the specific talents they might bring to the organization. This is a mistake. Qualified, interested, informed directors can be useful in guiding a company to economic viability and beyond. Properly used, a board can be an internal consulting group or a sounding board for management rather than just a legal appendage or a comfortable formality for the chief executive officer. The senior layer of talent, the board of directors or advisors, should provide perspective based on solid, related experience. As implied earlier in this Fourth Commandment, general management is a prime ingredient for success in most growth companies. Managing here is defined as setting expectations and achieving results through (not with or for) others. Almost every outstanding team in any field of endeavor has one or more good coaches, people responsible for the results who must pursue those results via their subordinates or associates.

In smaller companies, most of the key people often have to wear a manager’s (coach’s) hat part of the time and a doer’s hat the rest of the time. Under such circumstances, it’s easy for the distinction between the two different kinds of work to become blurred. Both kinds of work are necessary for successful entrepreneuring. When blurring occurs, it is often the managing work that gets shoved aside in the rush of day-to-day pressures to obtain orders, finish designs, produce goods, and ship things. A proper organization design can help insure that managers are in place and motivated and free to spend the necessary time on planning and supervising others in pursuit of the expectations of the enterprise, i.e., the vision, mission, and objectives.

7.0 FUNDS FLOW AND FINANCIAL PROJECTIONS

Startup money (initial capitalization) is the temporary glue that holds the building blocks of a new company together until the merit of the company’s product or service is widely enough recognized and valued in the marketplace to generate the earnings needed to support and build the business. The amount and timing of the startup money needed is derived primarily from the production, marketing, organizational, and perhaps technology sections of the business plan discussed earlier.

Many new companies do not require startup money from outside investors. Some do. Entrepreneurs often worry about how much of their companies they will have to give up to investors before they worry about how much glue they need to successfully launch the enterprise. This is backward thinking. A healthier perspective goes something like this:

1) The needs of the business should dictate the amount and timing of the capital required. It probably takes less to start a consulting practice than it does to found a toy company.

2) If the amount required exceeds what the founder(s) can provide, he, she or they should consider raising the incremental money needed from investors. It is usually better to bring in outside money than to start short, i.e., start thinly capitalized. And it is often easier to raise money before starting operations than to try to do so after starting when cash gets tight.

3) For those with growth-company ambitions, it is better to own a small piece of a big pie than vice versa. Money is a continuing need in a growth company. The aspiring entrepreneur who is unable to appreciate (and/or raise) money may be better off setting more modest expectations for himself or herself.

4) Recognize that you are not giving up anything when you bring in outside money, you are selling a piece of the company.

5) If you decide to use them, solicit buyers (investors) who are in synch with your objectives. (See Commandment One.) Be well prepared to negotiate the price. Do your homework. The amount of money you are able to get for a portion of your company will depend on:

• How much money is needed.

• The magnitude and shape (rewards/risks) of the opportunity.

• The background of the management team.

• The quality of the business plan.

• The chemistry between the individuals involved.

• What’s going on in the world at the time of the decision.

It’s academic to worry about “giving up an arm and a leg” until you have crystallized the size of the transaction. A detailed, realistic cash flow projection is the basic technique for determining the needs of a growth business. A cash flow projection consists of three fundamental elements: cash in, cash out, and timing. A skeleton projection is shown on the next page.

The Periods at the top can be months, quarters, or years. Typically, a business plan for a substantial enterprise will show months for the first year or two, quarters for an additional year or two, and years for the balance up to a total of four or five years. While few readers expect the later years’ projections to turn out to be 100 percent accurate, it is important that growth company managers think through their opportunity beyond a year or so, even if there are major unknowns. Items a. and b., Units Sold and Units Shipped/Provided, are increasingly important indicators of the reasonableness of a given plan. The units can be units of service, contracts, boxes of product, gallons, whatever is the basic element of transaction in the business. If the rate at which units move is suspect, the validity of the entire cash flow will be open to question.

8.0 OWNERSHIP

The discipline of preparing a business plan helps founders identify the requirements of the enterprise, the In a sense, the business plan is the recipe. Money is usually one ingredient. Money is often tied to ownership. While all ventures benefit from a business plan, many ventures do not require outside money. For those that do, it is probably obvious that a highly experienced, two person founding team of an enterprise in need of $2 million in capital faces a somewhat different situation than a young, five-person team in need of only $200,000. That’s why general rules for deal making are of limited value. They seldom fit the particular circumstance. The overriding principle is quite simple, however: All the primary participants should feel that any deal finally agreed to is essentially fair. Smart outside investors don’t want to put money into a company which has some unhappy team members because they feel they were done wrong. And smart entrepreneurs don’t want unhappy investors who walk away or send in their lawyers the next time money is required or the first time the company bumps into a crisis.

The THIRD Commandment

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Focus, Focus, Focus

Concentrate all available resources on accomplishing two or three specific operational objectives within a given time period.

Enterprises have finite resources. A smaller company achieves competitive advantage when playing for limited, explicit gains in a marketplace of its own choosing. Specialization breeds an organization sensitive to opportunities and quick to act. But any advantage withers if follow-through is weak. It will be weak if resources are dissipated. Resource dilution is a sure formula for mediocrity, a state of being that aspiring growth businesses cannot afford.

MBO (Managing by Objectives) has been a popular phrase since the 1960s when the acronym and practice were gradually assimilated into the inventory of management techniques. In effect, when working with objectives, an entrepreneur or manager determines what he or she wants to accomplish, by when, and strives to reach that objective. The individual involved focuses on the end result and tries to make it happen. The alternative, working without objectives, typically leaves an individual engaged in day-to-day activities; she or he works hard, perhaps, and hopes everything turns out all right. There are four major variations on how to manage a business without using objectives:

Managing by Extrapolation (MBE)

Users of this system operate as though the future will be an extension of the past. They tend to keep on doing what they have always done, and they often try to do it better and better. Sales and profit lines jog slowly upward and to the right in the planning documents. Some great businesses that are now defunct were probably victums of MBE. For example, what ever happened to Western Union? Encyclopedia Britannica? Pan Am?

Some entrepreneurs use extrapolation to show how their business will grow, but they often overlook challenges of scale. A young aquafarm company in Hawaii found that growing and selling a million abalone a year is quite different than dealing with "just" 100,000 abalone in a year. Extrapolation can be dangerous. Users of MBE typically pay a lot of attention to becoming

more efficient. Prolific management thinker, Peter Drucker, observed that business leaders need to strive for effectiveness, as well as efficiency. Effectiveness has to do with doing the right things, e.g., selecting the right markets, products, and processes for the times. Efficiency, then, has to do with doing those things right.

Managing by Crisis (MBC)

This system, long the specialty of the entrepreneur, has picked up a larger following in recent times for two reasons. First, business life is much more complex than it used to be. Thus there are more crises to be handled. Second, there are a great many technical people in positions of management responsibility today. As a group, technical people tend to be great problem solvers. Give them a crisis and they will smother it with energy and innovation. Should there be a gap in the flow of problems, chances are good that one can be invented—something nice and tangible that a manager can get his or her arms around, or teeth into. Management by crisis is

popular. At the end of any given day, no one can say the boss didn’t earn his or her pay!

Managing by Subjectives (MBS)

A dictionary definition of the word, subjective, is: . . .existing or originating within the observer’s mind or sense organs and, hence, incapable of being checked externally or being verified by other persons.

As the cat said to Alice as she hesitated along the path to Wonderland, if you don’t know where you are going, any road will take you there. There are companies that operate successfully this way, i.e., with very few people knowing where the is headed. Everyone does the best he or she can to accomplish what he or she thinks should be done. Somewhere up in the organization there is presumed to be a guiding star. And there could well be. As long as a given business lends itself to masterminding or central processing by a single individual or a small team, implementation is relatively straightforward and not much talent is needed below the top level.

People just do what they are told to do. MBS may work satisfactorily as long as the business is simple. For a growing company, however, complexity is a price that must be paid as the enterprise expands into new market segments and product lines. MBS can be a real limitation. In particular, a subjective approach to building a business makes it difficult to attract and hold the caliber of people required to capitalize on a competitive advantage.

Why? Because superior performers want to know: What are we out to accomplish? How are we doing in our quest? How am I doing? What's next? Almost by definition, early-stage companies seldom can do more than one thing really well. All available resources need to be focused on that one thing and the results expected. The presence of overriding business objectives can serve as a rallying point, if people know what they are. People tend to rise to meet expectations they understand and support.

Managing by Hope (MBH)

Most readers over forty years of age seem to agree that the pace of life in the corporate world has increased markedly in recent years. Each major business decision— a senior promotion, capital investment, addition of a new service or product category—to name just a few, seems to have many ramifications as we plow through the early years of the 21st Century. Certainties are hard to find. These uncertainties have led some management teams into willy-nilly diversification in the hope that by going in several directions at once, something will work out. These same uncertainties have led other management teams into bureaucratic analysis in the vain hope that with enough study, Aha!s will turn up to point the way for the enterprise. MBH is, essentially, a form of reacting rather than acting, of letting events control you rather than vice versa. It is the other end of the spectrum from MBO, managing by objectives. Sound operational objectives help entrepreneurs. A sound objective is one that is measurable, dated, and vital as a stepping stone, at a given point in time. For example, for any given week or month or quarter or year, objectives can be formulated for sales volume, profitability, cash flow, staffing, product development, production, or margin improvement. Business judgment, based on a combination of facts, advice, and intuition can guide people on the entrepreneuring trail via the process of setting objectives. Creative conflict among primary participants should ideally lead to agreement on the measures to be taken, by when, and and also on accountability, that is, who “owns” each objective.

THE SECOND COMMANDMENT

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What Business Are You In?

Define the business of the enterprise in terms of what is to be bought, precisely by whom, and why.

Businesses are organs of society that perform tasks associated with providing most goods and services the public decides it wishes to own and use. Under this capitalistic system, a business can prosper to the extent that it performs its particular tasks effectively and efficiently within the law. The nature of the tasks to be performed usually changes over time as those served change. The people in a successful company predict and respond to their chosen customers’ needs. Customers, therefore, define an enduring business. At all times, some customers are growing in their ability to buy; others are declining. The astute manager ascertains which is which.

Over forty years ago, Ted Levitt published an article, Marketing Myopia that became a classic. His words still ring true. Levitt said that customers buy need satisfactions, not products. He illustrated his point with two famous examples. Why did railroad companies, once very prosperous, decline in importance and value? Because railroad business people persisted too long in defining their businesses as the rail-bound movement of people and goods. They failed to recognize that customers were buying transportation. Transportation was the generic need being satisfied, and as new, non-rail forms became available, e.g., air and highway, there was no reluctance among railroad customers to switch. Had railroad managements been less myopic, they could have led the way into the new forms of transportation. Levitt's second example was from the movie industry.

What did (and do) people buy when they attend theaters? The movie business people of the 1950s assumed the answer was movies, of course. Levitt noted that a more useful view would have been that people were buying entertainment. If movie executives had defined their businesses in terms of the generic need for entertainment, they might have been the first people into the new medium of television when it appeared.

Entrepreneurs face three special hurdles when it comes to defining their businesses in terms of their customers.

First, many new enterprises are started by technical people—engineers, scientists, and inventors—who, almost by definition, are likely to be deeply attached to the initial product or process. In effect, the founders get caught up in the folk lore of building a better mousetrap. The truth is that people don't buy mousetraps, parse, they buy ways to eliminate mice. Think about it.

Second, entrepreneurs are prone to generalize about who their real customers are. They think in terms of serving "companies” and “consumers,” which are extremely vague classes of potential buyers. Finally, entrepreneurs, in their enthusiasm and infectious optimism, sometimes fail to pinpoint concrete reasons why individual decision makers will buy the entrepreneur’s specific new product, service, or experience. In short, the entrepreneur neglects to think through just what will differentiate his or her enterprise in customers' minds, be it price, performance, convenience, or... Following are three short cases to illuminate these hazards to a successful start-up operation.

Think about the answers before proceeding–

Here is a partial list of possible answers to the questions.

Q1. Customers might buy teaching machines to:

Reduce teacher or instructor costs Improve student or trainee retention of material Increase efficiency (teach more people per hour) Improve utilization of facilities Help slow learners

Q2. The buying decision might be made by:

Academic Market Segment Teachers School administrators School boards PTAs Business/Industrial Market Segment Profit center managers Training directors Personnel managers Purchasing agents

Q3. A given buyer might buy in order to:

Improve his or her performance Enhance his or her reputation as an innovator Capture available investment tax credits before they expire Experiment Avoid hiring additional people

There are certainly a lot of possibilities. Effective entrepreneuring requires that the possibilities be reduced in number to the point where rifle-shot marketing and selling becomes possible.

Children Camps Adult Camps What is bought?

1. Tennis skills 1. Social mixing

2. Camp experience 2. Vacation

3. Baby sitting 3. Tennis skills

Who buys? Parents Adults, mostly singles

Why? 1. Child development 1. New experience

2. Social status 2. Physical fitness

3. Free-up time during 3. Athletic prowess school vacation

4. Meet opposite sex In Case E, properly defining the business in terms of its customers would have led the entrepreneur to the conclusion that, in fact, he was dealing with at least two discrete tennis businesses. Each one had its own distinct marketing, sales, and operations requirements for success. Of course, if an entrepreneuring team such as the one in Case F has enough money, it may be able to muddle through the range of alternatives and eventually ferret out one or more solid, profit-making opportunities.

There is almost always going to be some muddling, which is why a young company needs an adequate supply of money up front, i.e., capitalization. But there is a lot to be said for minimizing the muddle factor beforehand with hard thought, market research, field interviews, and actual sales calls. Up to some point short of paralysis by analysis, the respective enterprise should be defined as tightly as possible on paper. This doesn’t preclude later deviations in direction based on new information (see Commandment Ten). Putting things on paper can help founders minimize spending energy and money leading their companies down blind alleys.

THE FIRST COMMANDMENT

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There are many reasons people become involved in young, growing companies as owners, investors, or key employees. The broad range of satisfactions sought runs from an opportunity for personal expression on one end of the spectrum to capital gains on the other. Unless there is compatibility between what the primary participants want out of the business, debilitating conflict is likely to ensue. The process of trying to reach conscious agreement on the purpose of the enterprise is often difficult and revealing.

The primary participants in a young enterprise are those people who share the initial ownership and/or management decision-making processes. The early months and years in the life of a company are critical ones in which the tone and shape of the venture are determined. If the character formed during the early days is convoluted by too much compromise or scarred by too much acrimonious debate, the foundation upon which the business is to be built will be less sturdy than it could and, ideally, should be.

Here is a list of six common mistakes that would-be entrepreneurs often make in piecing together participants at the start of a new venture:

• The founding group is formed spontaneously.

• Personal or family lawyers, insurance agents, CPAs, and bankers are automatically used as advisers.

• Harmony is sought at the expense of creative conflict.

• Needed support people are given stock or stock options before the people have validated their long term value.

• The board of directors consists solely or primarily of insiders—company officers, their spouses, and friends or relatives.

• People with widely varying motives are mixed together in the same financial lifeboat. Let’s consider these six common mistakes in a bit more depth.

The founding group is formed spontaneously.

It happens in real life and in novels. Visualize a buzzing weekend cocktail party or an animated, after-work conversation in a car or café. Out of the blue a new product or service or distribution idea materializes and takes shape. It’s a euphoric moment, and the two, three, or more souls present are each caught up in the conception.

Too often, they are also included willy-nilly as investors or key employees in the new venture. This spontaneous combination of souls may be just what the venture needs; then again, it may not be. Experience suggests it is best if the choice of investors (if any) and staff flow from a thorough understanding of the requirements for success for the prospective business.

Essentially random collections of folks seldom make the right bedfellows for business building even if they are coworkers, classmates, or professional cousins. How does an entrepreneur go about exploring an idea and triggering enthusiasm and interest, while at the same time reaching the ideal of limiting the number of primary participants to those who can consciously agree upon and contribute directly to that which the enterprise is to accomplish? The answer is: Cautiously. The proper mindset is one that says that the eventual blueprint for building the business—the Business Plan—will dictate the desired specifications for investors and staff alike (see Commandment Four). If a small, qualified group can be organized to create the blueprint with a clear understanding from the start that everyone may not be on the actual construction team if construction is started, then the spontaneity risk is at least addressed. Here is an illustration of how Commandment One was violated via an incompatibility of interests in the founding group.

Personal or family lawyers, insurance agents, CPAs, and bankers are automatically used as advisers.

Growth companies don’t just happen. There is a lot of administrative expertise needed to glue the pieces together and keep the enterprise on a peaceful course among the snags and shoals of government requirements and the law. Any average attorney, CPA, or insurance agent can speak the language, give you advice, mail you something to sign, and send a bill. Not many have the professional interest and proven experience to help you build a business. It’s a relatively narrow spectrum of practice. An entrepreneur has enough to do without investing time and money to educate his or her advisers.

In any metropolitan area there are CPAs, attorneys, and insurance people who have developed or are developing a reputation with embryonic companies. Seek them out. Interview them. Discuss fees. Check their references. Then select who you want and listen to what he or she has to say. Your job as a modern entrepreneur is not to have all the answers, but to know where to get them. Of course it helps to know what questions to ask, too. This book offers a condensation of the experiences of others, to help you ask (and get answers to) solid questions.

How about bankers? In general, most of them do not have particular, in-depth expertise in business building.

However, with the march of deregulation, some are learning out of necessity. Good bankers know about money, particularly debt money. And in Commandment Eight you will be advised to cultivate all your potential money sources on a continuing basis. So developing a working relationship with a reputable banker is a smart thing to do. But don’t confuse doing so with developing a workable financial plan for your new enterprise. For a comprehensive financial plan you may need assistance from one or more people skilled in corporate finance— particularly start-up and small business financing. For example, investment bankers, venture capitalists, and occasionally business school professors of finance or accounting may be helpful. Someone who has worked with numbers and lived through a start-up or two in the same or nearly the same industry as your own is probably the best single source of guidance.

Harmony is sought at the expense of creative conflict.

Entrepreneurs by nature tend to listen most attentively to themselves, but this surely restricts the input they receive. Business builders are wise to regularly seek counsel from others, including people who may well raise contrarian points of view. With these people participating, meetings can become downright uncomfortable. But managed well, such sessions can also be quite productive. Friction produces heat and, ideally, light. There are many experiments that show that groups made up of people with complementary skills usually produce more valuable solutions to problems than experts working alone. The primary participants in a new enterprise need to provide balanced, qualified input to the decision-making process. Harmony is not the measuring stick.

Needed support people are given stock options before the people have validated their long-term value.

Cash is almost always tight in the early days of a new enterprise. Among other things, cash is needed to attract and hire key employees—experienced people who can boost performance quickly. Often such people are relatively expensive to hire, compared to rookies. A practical question then arises: How can you entice desired people aboard with a minimum salary outlay? Often the answer is to grant them company stock options in lieu of part of their salaries. In general, this is a bad answer. Here are four reasons why:

1. Some options will end up in the hands of people you later have to release. Such people can become disagreeable shareholders.

2. Certain option holders may be people who professional investors consider unacceptable equity partners. This could make it difficult for you to raise needed outside money for your company.

3. Options may be converted to shares that could be offered to back to the company via a repurchase option at a point in time when the company can least afford to buy shares.

4. Employees with options can become shareholders who end up working for a competitor, which could create some difficulties for you and your enterprise. Does this mean you should never use stock options for key support people involved in a start-up? The best answer is a qualified yes. Restrict the ownership risks and potential rewards to just the primary participants who, by definition, are making a unique, direct contribution.

Then, once your enterprise has graduated into positive cash flow and reached a point of relative stability, consider options for secondary company builders only after giving the matter deep, detailed, long-term thought. Options can rise and fall in value. In addition, they can distort the true, balance-sheet value of enterprise. Options are a form of compensation. Handle with care.

The board of directors consists solely or primarily of insiders—company officers, their spouses, and friends or relatives.

Legal questions aside, the operating purpose of a board is to aid, challenge, and replace, as necessary, the chief executive officer (CEO) in the service of the stockholders’ interests. Those interests usually revolve around the financial health of the enterprise, so a board ideally concentrates on helping the CEO optimize the financial performance of the company over some finite period of time. If the CEO/entrepreneur is open to seasoned advice (via creative conflict), he or she is unlikely to get it—at least anything very unsettling—from insiders, spouses, friends, or relatives. A properly constituted board cans inexpensively double the width of a young company management’s point of view. One or two directors with relevant experience can be equivalent to another key person on the payroll. A strong board can be the single best source of right questions as the enterprise learns first to stand, and then to walk...and run.

People with widely varying motives are mixed together in the same financial lifeboat.

A huge spectrum of people participate in small, growing companies. Some of them are seeking long-term capital gains; they understand that stock ownership is a prime way to build one’s own net worth. Other people are happy with a comfortable annual income. Still others are interested in technical challenge and its tributaries, including problem solving and personal expression. Other people relish the prospect of fame. A smart entrepreneur will illuminate the driving force in each of his or her potential colleagues and think hard about whether there is compatibility across the members of the basic team.

It is completely honorable for a group of talented people to join together to build a company with the intention to give each participant a chance to do his or her own thing and, incidentally, make a buck in the process. Problems arise, however, if responsible outside investors are brought into the very same company under the false pretense that management intends to vigorously grow the enterprise and make everyone, including the investors, rich in a certain number of years.

In summary, Commandment One is important because a new company is fragile. It needs a well-developed internal system of supports and braces to withstand the pressures of entering and competing successfully in a marketplace. Appropriate supports and braces can be conceived and squeezed into place by dedicated people with qualifications especially suited to the configuration of the particular enterprise. An entrepreneur faces the task of gathering just the right number of right people.

Too few result in weakness; too many create chaos; and a collection of wrong ones can produce debilitating, and perhaps fatal, dissension. Probably as many potential growth companies fail because of internal weaknesses as they do due to wounds inflicted by competitors.

The Commandments of Entrepreneurship

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The final caveat is that the Ten Commandments, even followed to the letter, will not automatically make you rich, beautiful, handsome, fulfilled, or whatever. I wish it could be otherwise, but the record indicates that the primary requirements for success are an identifiable and receptive market, a better product or service, sufficient capital, a balanced team to lead the way, tenacity, and thoughtful timing, which some people call luck. The Ten Commandments do aim to help you weave the ingredients you need together in a pragmatic way and to avoid some of the more common operating mistakes entrepreneurs tend to make during the early years. This is when young companies lack momentum and are still vulnerable to sudden failure from stockholder squabbles, unclear objectives, a short-term negative cash flow, or a shortage of functional talent.

Commandments One, Two, and Three cover start-up issues: Who should be involved? What do you hope to accomplish? Who is going to buy what you are selling? Answers to these questions can save many a false start and point the way to creating a rock-like foundation for your new enterprise . . . if it's justified.

Commandment Four includes a Guide to Preparing a Business Plan. If you wish to build a business of any complexity at all, you should have a written plan. If you wish to attract outside money from people other than your friends and relatives, you must have a written plan. If you want to maximize your chances for building a viable, money-making enterprise without ruining your health and reputation in the process, you will have a written plan that has been critiqued by competent individuals whose opinions you respect.

Commandments Five through Eight deal with day-to-day operating matters required to implement a written plan. Staffing, rewarding people, extending the company, and paying the bills as you go are like blocking, passing, running, and tackling in football. The team that executes well will tend to win its share of games.

Finally, Commandments Nine and Ten are aimed at extending the lifetime of the enterprise, its longevity. Professionalism leads to a reasonable level of detachment in the vocational matters at hand. Entrepreneurship is equated with sweat equity--unyielding dedication that often leads to a merging of the identities of the founder(s) and the enterprise itself. Such a merging sometimes makes for certain efficiencies, but it almost always limits a growth company over the longer run. An entrepreneur faces a choice when her or his enterprise actually grows: she or he either change to meet the new requirements of the enterprise, or she or he can work harder and hope. Knowing when and how to change requires at least a half-an-arm's-length relationship with the budding business entity itself. The company is the company; you are you. They are not the same entity. Working from a proper business plan (Commandment Four) can help maintain this separation.

Just a few last words on philosophy. To some extent, entrepreneuring is a lifestyle choice. Many of the high-rise company founders, officers, and venture capitalists who contributed ideas to this book are people who started companies, built them, sold them, rested a bit, and started over again. But I see more and more cases where founders stay on board, adapt to success, and keep on innovating. The net effect is more entreprenuing in established companies--a good trend. This does not in any way diminish the need and opportunity for the classic soloist; it just enlarges the doorway to the legitimate entrepreneur's club.

It's a fine club. Entrepreneuring is a spirited way of life. These Ten Commandments are aimed at expanding the membership.

WELCOME !!!

2011-06-03T14:23:00.001-07:00

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