Muddled Structure can Block Growth

The organizational structure of the typical small business evolves from a series of specific decisions to help manage the challenges presented by growth.

When there becomes too much else to do, the entrepreneur finally decides to stop doing the books and hires a bookkeeper.

As demand increases and more sales opportunities arise, a salesperson is hired to help. When more and more workers get hired, a supervisor is named to manage day-to-day operations. And when a new location is opened, a manager is brought in to help run it.

With each of these decisions the entrepreneur starts to create an organizational structure.

As the business grows, employees are organized into specific functions such as bookkeeping, sales and operations, and eventually someone is put in charge of each of these departments.

While the decisions an entrepreneur makes to handle each specific challenge may make good sense individually, sometimes it doesn’t add up to a complete whole after the structure has been pieced together.

To be effective, the organization’s structure needs to align with the overall market strategy that the business is pursuing.

In their classic book, The Discipline of Market Leaders, Michael Treacy and Fred Wiersema identify the three common competitive strategies of successful businesses. They conclude that there is a specific alignment of structure, culture and systems necessary to support the chosen strategy.

The first competitive strategy is operational excellence. This is what a business needs to be efficient, consistent and low-cost.   Burger chain McDonald’s is a good example of this strategy, as its customers want the same food served quickly and inexpensively in every McDonald’s they visit. This strategy works best with what might be called a bureaucratic structure, where decision-making is completely centralized at the top levels of the business with tight controls to ensure consistent performance.

The second strategy is product leadership, in which the business seeks to be the leading innovator in its market. This is a common strategy of many technology businesses. The structure that works best with this strategy is one that is flexible and can quickly adapt to each new product offering.  People are reassigned and reorganized to meet the unique needs of each new product.

The third strategy is customer intimacy. This strategy — as it evolves — must allow any employee to do what needs to be done to meet the needs of the customer.   A common mistake of small businesses is that, as they grow, they try to pursue all of these strategies at once. This is never sustainable over the long run.

Each strategy demands a specific approach to organizing how work gets done.

A key to being a successful venture and managing growth is finding the competitive strategy that works best for the market, and then working to build a structure over time that supports that strategy.

There is no one best structure for all businesses. But there is a best structure for the type of market strategy that a business chooses to pursue. Find it.

Career Advice

I am knee deep in academic advising this week.  I have met with several potential new majors.  I often get asked questions about an entrepreneurial career versus a corporate career.  Tim Conway with Ignite Young Adults sent me a great article written by Kerrin Sheldon posted at FastCompany that gives eight reasons to choose the entrepreneurial career over the corporate career.  It is a great article that I plan to share with potential students.

As I read through the list, several of his points reinforced my own thinking on why so many Millennials are drawn to entrepreneurship.  They are overall a rather impatient generation.  And with traditional corporate jobs, they do not seem to find fulfillment and enough new challenges quickly enough.  Entrepreneurship, or at least working in very small firms, seems to be a better fit for many of them.

 

Elements of Successful Growth for Start-ups

Those who have had me for class know about the 3M’s for assessing an opportunity — market, margin, and me.  For a business idea to be worth pursuing there needs to be a big enough market with enough “pain”, enough margin to make the business viable and to cover all of the surprise costs that inevitably pop up,  and it needs to be something you know about and have a passion for.

John Bradberry takes a similar approach in his post at OPEN Forum when assessing the roadblocks, or what he calls bottlenecks, that get in the way of successful growth for start-ups.  His three factors are the market, the math and you the entrepreneur.  He correctly argues that these same three critical elements remain important even after the venture has been launched:

If these limiting factors seem basic, it’s because they are. They are just as basic as picking up a twisted hose and straightening it out, so that the water can surge instead of drip. These are a few of the fundamentals that govern the healthy growth of any venture.

All Signs Show Continued Weakness in Job Creation

It looks like a continuation of a weak economy is likely for at least the rest of 2012.  We know from previous surveys that weak demand is what is holding businesses back from hiring.  It appears that a turnaround is not in our immediate future.

There were some signs of hope in March’s employment numbers.  Intuit Small Business Employment Index showed modest growth in jobs.  And the latest survey from the NFIB also showed some improvement in March.  One exception to these surveys was SurePayroll’s Small Business Scorecard, which showed no job growth in March.

While there has been evidence of modest improvement in job creation over the past few months, the outlook is not good for any continuation of job growth in the economy.  It appears that any improvement may have been short-lived and not sustainable.

“March came in like a lion, with Main Street seeing significant job growth in March—but it appears to have gone out like a lamb, and with no cheer in the forward-looking labor market indicators. What could have been a trend in job growth is more likely a blip,” said NFIB Chief Economist Bill Dunkelberg. “And what looked like the start of a recovery in profits fizzled out. The mood of owners is subdued—they just can’t seem to shake off the uncertainties out there, and confidence that the management team in Washington can deal with the effectively is flagging. What we saw in March is painfully familiar – this was the same pattern of growth followed by months of decline from 2011. History appears to be repeating itself—and not in a good way.”

An additional concern in the NFIB survey is that those small business owners who do want to hire, are having difficulty in finding qualified workers.  Among the entrepreneurs we work with, the specific shortage is in technology workers.

So what do we hear from policy makers in Washington?  They continue to treat the current situation as if it is simply a shortage of capital.  The latest attempt to pump money into the system comes from the “Jobs Act.”  This legislation is an attempt to open up capital markets to support entrepreneurial ventures to a broader group of investors.  (NOTE:  The devil is in the details regarding any impact on this new law as the SEC has yet to write the rules.  Stay tuned, as the actually implementation of this bill will likely be very different than advertised by the politicians who passed it).

But even if the Jobs Act was implement as promised, it does not solve the real problem in our economy.  As Ami Kassar rightly points out, this bill plays into the myth of what kind of entrepreneurial activity really grows an economy.  This is a bill that plays well in Silicon Valley, but probably will have little or no impact on Main Street.  Kassar argues:

In my opinion, the last thing these main street entrepreneurs need is crowdfunding (passed in the Jobs Act today). The first thing an entrepreneur should do is try to figure out how to execute their business model without selling off shares to investors. After all, the investors never go away in their company.

We should be encouraging our entrepreneurs to bootstrap their ventures. We should be doing everything in our power to open up lines of credit and loans at reasonable prices to small business owners. We should be doubling down on efforts like SCORE and / or the SBDC’s to provide mentorship.

And we need to leave more money in the pockets of the consumers who do have jobs and in the bank accounts of the small business owners struggling to sustain their businesses through this prolonged recession.  Government is never an efficient nor an effective middle man for economic growth.  Let’s keep more of the money people are earning in their wallets so they can begin to spend more of it on Main Street.

Aging Baby Boomers Need Two Exit Plans

As baby boomer entrepreneurs age, many more of them are moving toward an exit plan for their business. One of the biggest mistakes an entrepreneur can make when engaging in exit planning is forgetting that there are actually two exit events.

The first exit involves the business itself. This is the exit that gets most, if not all, of the attention.

The entrepreneur begins to prepare the business to be sold. To increase the value of the business, the entrepreneur works to maximize cash flow, develops a strong business plan to make a case for its future value, and tends to any parts of the business that might cause concerns to a prospective buyer.

When we sold our business, it reminded me a lot of getting a house ready to sell — only a lot more complicated and much more stressful. But the goal was the same: Make it look as attractive as possible to a buyer and help the buyer imagine what it would be like to own it.

The final piece to put in place for the first part of the exit is a team of experts in this type of transaction — attorneys, accountants and business advisers with expertise in the exit process.

But none of this preparation work, and most often very little of the attention of your team of experts, addresses the second exit event. While the first exit event is about the business, the second one is about the entrepreneur.

While the entrepreneur may play some transitional role in the business after it is sold, at some point he or she must personally exit the business. This is that second exit event.

For many entrepreneurs, this can create an unexpected emotional response.

The business that had become so much a part of their life is no longer theirs. This can create a tremendous feeling of emptiness inside the entrepreneur. Owning a business consumes every waking moment of your life and can in many ways define who you are. But suddenly, it is now gone.

I had this feeling after we sold our business. I tried to fill up this emptiness the only way I knew how: I was already planning the next business as we were winding up the sale of our current venture. Thankfully my wife slowed me down and helped me take time to discern what to do with the next stage of my life. That is how I got back into teaching.

Baby boomers who are working toward their exit events need to not only attend to the plan for selling their business, but also make a plan for what they will do once that business is out of their life.

“I will spend more time with my family” or “I will play more golf” is not a plan.

Baby boomers currently developing their exit plans can expect to live 15 to 25 years after they sell their business. Find a purpose and a passion. Then put the same level of effort and thought into planning the next stage in life that you put into planning your entrepreneurial journey.

 

Beyond Bootstrapping your Office Space

Most of the start-ups I work with look to space as an important way to bootstrap their space.

They begin by working out of their dorm, apartment, parent’s house, or our hatchery.  Keeping their space cost to zero keeps their overhead low and helps them get to positive cash flow more quickly.

Eventually, or should I say hopefully, their growth takes them to a point where they need real space. But, they often continue to bootstrap by building their own desks, buying old used chairs, and cobbling together what ever they can to get by with furnishing their new location.

A company called turnstone is running a promotional program that is going to give away five $25,000 office make-overs to emerging businesses and help them move beyond their bootstrapped work space.

All you need to do to enter the contest is upload a video to the turnstone website pitching why you deserve a turnstone makeover.  From these submissions, they will be selecting the 25 best entries for a public vote.  This voting will determine the five that get an office makeover.

Good luck!!

 

Find Yourself a Coach…and Listen!

A growing part of my job here at Belmont University is coaching.

We offer our students a “life-time warranty”.  We never take ownership in a student or alumni business and we never take a dime of consulting money from them no matter how successful they are.  We are always there to be their teacher, their mentor, their friend, their therapist, and most of all, their coach.

Besides the teaching I do in the classroom, this is easily the favorite part of my job.

Our students and alumni have learned how to seek out and accept feedback, constructive criticism, and advice.  But not all entrepreneurs have developed this skill set — and it is an essential skill that does not get talked about often enough.

This is something we have learned does not come naturally to many of the entrepreneurs we work with in our program.  Our faculty and staff often talk about what we are doing to try and help student entrepreneurs to become more receptive to our input.  For some students it comes quickly, but for others it can take months or even years to get them to understand the importance of seeking our council and to listen to what others can offer from an informed, outside perspective.

There is too much risk and uncertainty out there.  It is essential to find people who can help you see issues and problems that you are ignoring.  They also help you to discover the things that you don’t know that you don’t know.

Toddi Gutner has a post at Business on Main that helps explain how to become a “coachable” entrepreneur.

Bootstrapping a Franchise

Franchising continues to be a popular pathway to entrepreneurship, particularly for many unemployed professionals who are looking to join the ranks of accidental entrepreneurs created by the great recession.

Rieva Lesonsky looks at home-based franchises as a low cost way to bootstrap your way into business ownership in an article on Business on Main.

Approach a franchise just as you would any new business.  Develop a sound business model, and if financing will be required, a business plan.  Make sure that you temper any projections to the current economic conditions. Also, look for franchise opportunities that create value for the customer.

Franchising is tightly regulated and there can be some sticky contracting issues with buying any franchise. Make sure to work with an attorney who has experience with franchising.

But, beyond the contractual issues that arise in franchising, there are some fundamental business and personal concerns that many franchisees experience after it is too late.

One of the biggest sources of frustration among franchisees is that they perceive that the value added from association with their franchisor diminishes over time. A franchise will charge a significant monthly percentage fee (this can average about 7% of sales) associated with all that they offer, including systems, marketing support, purchasing power, and so forth. Over time, many franchisors realize that they can be just, if not more effective on their own without paying the monthly percentage of sales to the franchisor.

This on-going monthly fee is often glossed over by franchisees during start-up planning, as they tend to think only about the initial fees and capital expenditures in their planning.  So while a home-based franchise can reduce the start-up cost, the on-going monthly fee to the franchisor will still be something to consider when thinking about investing in a franchise.

Another concern expressed by franchisees is that with all of the rules and standardized procedures, they tend to feel more like an employee than a business owner. Those who try to break away from the predetermined model and processes can face the wrath of the franchisor.  Larger franchisors have entire staff dedicated to franchisee compliance.

So as you consider franchising, even a home-based option, approach it as if you are starting a business from scratch and make sure you understand the costs and constraints that come with owning a franchise.

Simple Business Models Often the Best

Sometimes the simplest business models make the best opportunities.

We recently held our competition for the Baker Donelson Outstanding Student Entrepreneur of the Year award here at Belmont University.  The winner not only has bragging rights, but also receives a significant cash award to help with the growth of their business.

This year’s competition was particularly strong.  But in the end, the winning business was not a new app for your smartphone, a new web platform, or a breakthrough technology to change the music industry.  The student entrepreneur who was named the Outstanding Student Entrepreneur of the Year collects medical waste from doctors’ offices and funeral homes.

It took Jerell Harris, founder and at this time sole employee of QuickMed, a long time to get to the point of starting his medical waste management business.

Harris is not my typical student who comes to college fresh out of high school.  By the time he enrolled he had worked for several years, was married, and had a family of four children.

“I operated a small business for more than seven years,” said Harris, “but failed to take the company to the next level of growth. It was very frustrating.”

Eventually he decided to take significant step of entering college to pursue a major in entrepreneurship.

As he began to learn about entrepreneurship, Harris explored several business models.

The most recent one was a biometric attendance-monitoring concept aimed at reducing fraud within the state supported childcare industry.

The further he explored this idea, the more he realized that the technological complexity of the systems to operate the business, the cost of getting it started, and the general political climate it operated within made it too risky to launch.

After abandoning that idea, he decided to try and find a simpler business model to pursue.

Based on conversations with a friend, he recognized an opportunity in a well-established industry — medical waste management.  As he developed the business model for this idea, he discovered that it was relatively inexpensive and easy to launch.

But even a simple business model requires proper and careful execution.

“My entrepreneurship education has helped me tremendously,” said Harris. “I now understand how to make necessary pivotal steps that will help me reach my growth targets.  Above all, I have learned how to manage my company as it goes through various life cycles.”

Even though this medical waste management is a well-established market, Harris was able to find a value proposition that has helped him steadily gain market share.

“I have listened to the complaints in the market and developed QuickMed’s services based on those criticisms,” explains Harris.

Harris has ambitious goals for his new venture.  He intends to extend QuickMed’s waste collection services across the state of Tennessee by 2014.

When searching for a new business idea, avoid the common temptation to try and find a complex, trendy, or glamorous product.  Some of the best opportunities come from the most simple, everyday needs in the marketplace.

Welcome to our New Home

So I know things look a little different at the Entrepreneurial Mind!  We’ve moved to a new home with a whole new look.

However, the content has not, and will not, change a bit.  The Entrepreneurial Mind will continue to bring the content on all things entrepreneurship, just as we have for the past eight years.

Our new home makes leaving comments much easier than our old home did.  I know that some of you got frustrated trying to leave comments with our old software.  You can now leave comments at the bottom of posts by clicking on the comment link or the time and date to the left to leave a message.

You can also use our new feature that allows you to sign in with your Twitter or Facebook accounts to comment.  The option to use your standard name and e-mail is also an option.

We are also trying to be more social in our new home.  We now have social links at the bottom of articles that allow you to share your columns on their own social feeds.

Please continue to give me feedback, which you can share via my Twitter, Facebook or e-mail address.  You can find all of this on the “About Jeff” page.

Again, same old Dr. C., just a new home.  Enjoy!!