Survival Strategies the New Normal

Even the optimists are saying that we have at least two more years of economic stagnation. Other experts are warning of a possible double-dip recession.

There is even growing talk in some circles of America experiencing a “lost decade” in its economy. That refers to the 10-plus dismal years of economic doldrums suffered by Japan in the 1990s.

Recent employment and bank lending rate data seem to support a prolonged recession for small businesses.

So what does this “new normal” in our economy mean for entrepreneurs?

For startup entrepreneurs it means you need to be lean. There will still be new businesses forming, even if the economy takes a turn for the worse. Some of these new businesses will be opportunistic entrepreneurs who see ways to meet the needs created out of the dramatic changes taking place in our economy and society.

Others will be among the growing army of accidental entrepreneurs who are finding that starting something on their own has become the only viable way to make a living during these challenging times.

Whichever path leads you to start a new business, a successful launch will require bootstrapping.

There is very little money being invested in or lent to new small businesses right now, so be prepared to find creative ways to get your business off the ground without a lot of funding.

If you are already a business owner and have survived the past two years of economic turmoil, let me be the first to offer congratulations. Clearly you have found a way to continue to offer value to the market. You must have also been an effective manager.

Some businesses that have survived are hanging on by a thread. If that is the case for your business, continue to pay attention to the basics. Keep cutting overhead, pay down debts and take good care of the customers you have so you don’t lose any more of them to stronger competitors.

Every small-business owner should continue to run his or her business cautiously and prudently. There will be more tough times ahead.
Look for growth opportunity

Over the coming months, more of your competitors will probably fail, and that presents an opportunity to attract new customers to your shop.

This can be an excellent time to expand and take advantage of a larger market share. If you do expand, continue to bootstrap and try to keep your use of debt to a minimum.

This is no time for excessive leverage because of the uncertainty of the economic outlook.

Whether you are a new entrepreneur or a seasoned business owner, more than ever before remember, cash is king. Given the uncertainty of the economy, entrepreneurs should try to keep enough cash on hand to cover at least 30 days of monthly expenses — and up to 90 days of cash on hand is not a bad idea, either.

It’s also important to keep one eye on the future. Eventually things will improve. And those who survive the Great Recession have a good chance of emerging in a stronger position. The survivors of today will become the market leaders during the recovery.

(This post was my column in today’s Tennessean).

More on Competition

“There are six billion people in the world. Even if your market is hand-made spoke shaves for left-handed woodworkers, there are more people in your market than you can ever hope to track down.”  (from Seth Godin’s pithy post on competition). 

Thanks to all of you who passed this along!

Entrepreneurship in Tonga

Evidence of the spread of entrepreneurship in the global economy can be found in the latest Global Entrepreneurship Monitor report.

GEM 2009 ranked Tonga 10th overall, out of the 54 countries surveyed.

However, persistent cultural attitudes about an entrepreneurial career path are evident in these findings.  Tonga ranked 1st in terms of “Fear of Failure rate”, which is the measure of the percentage of the population with positive perceived opportunities who indicated that fear of failure would prevent them from setting up a business.

Even with the high fear of failure, Tonga ranked 4th; “early-stage entrepreneurship activity rate” – 10th; new business ownership rate- 15th; overall entrepreneurial activities rate- 16th. But in terms of “established business ownership”, Tonga ranked 49th indicating an inability to sustain growth and suggesting a lack of understanding of entrepreneurship at a later stage.

The GEM Report on Tonga also identified 17 National Policy areas concerning factors constraining entrepreneurial activity in Tonga and it goes to make specific recommendations on what can be done by Government and other support institutions to ease those constraints.

Under “Education and Training”, GEM Tonga states, “Lack of education and training represents a major concern. This situation is the result of insufficient understanding of business as a concept. It can also be attributed to: lack of business skill training; the absence of business studies from both primary and secondary school systems; and an ill-equipped work force.” It goes on to recommend amongst other things, the introduction of business studies and skills into the primary and secondary school curriculum.

Squashing the Future of Small Business in America?

From OregonLive.com:

It’s hardly unusual to hear small-business owners gripe about licensing requirements or complain that heavy-handed regulations are driving them into the red.

So when Multnomah County shut down an enterprise last week for operating without a license, you might just sigh and say, there they go again.

Except this entrepreneur was a 7-year-old named Julie Murphy. Her business was a lemonade stand at the Last Thursday monthly art fair in Northeast Portland. The government regulation she violated? Failing to get a $120 temporary restaurant license.

Not the best public policy to instill the entrepreneurial spirit in today’s youth!

Economics Bloggers Turn Sour

Top economics bloggers are feeling a renewed sense of pessimism about the U.S. economy, according to a new Ewing Marion Kauffman Foundation survey released today. Sixty-eight percent of economics bloggers who responded to the mid-July survey described the economy’s overall condition as “mixed,” with the rest split three to one toward an assessment of “weak” rather than “strong.” Worse, only 5 percent of respondents believe the economy is “better than official government statistics show,” while 47 percent think it is worse.

For this third Kauffman Economic Outlook: A Quarterly Survey of Leading Economics Bloggers, the Kauffman Foundation sent invitations to more than 200 leading economics bloggers as identified in the Palgrave’s econolog.net December 2009 rankings. (NOTE:  I was one of the bloggers surveyed).  The Foundation surveys the bloggers each quarter about their views of the economy, entrepreneurship and innovation.

“Uncertainty is casting a shadow over the economy as well as the debate about the economy,” said Tim Kane, senior fellow at the Kauffman Foundation and author of the study. “There is good news in the forecast, but it seems to have left the country. Expectations of global growth are more than double the projection for U.S. incomes. And bloggers’ frustration with Congress seems to have hit a boiling point as well, yielding a grade point average of 0.8 on a four-point scale, which is roughly half the grade point given to Wall Street firms.”

Research highlights include:

  • None of the respondents assessed the U.S. economy’s overall condition as “strong and growing.” Overall opinion has shifted sharply negative since the previous quarter. Many bloggers acknowledged the possibility of a double-dip recession in response to a question from Econbrowser.com’s James Hamilton: the average probability among respondents was 44 percent.
  • The bloggers expect the U.S. budget deficit to grow stronger than any other variable over the next three years. They also see higher poverty (doubled from second-quarter expectations) and inequality levels in the United States, meager stock market growth, and a slight decline in U.S. competitiveness. On a brighter note, three-year projections also include a relatively strong increase in global output.
  • A large majority–70 percent–of the surveyed bloggers say the federal government is too involved in economic matters, despite the largely non-partisan identification of the respondents.

The response that gave me the biggest concern was about small business.  A majority (57 percent) believe conditions for small business in particular are “bad” or “very bad.”

Not good news for entrepreneurship — the engine of economic recovery.

Building Bootstrapping into Business Models

The myth still exists that it takes outside funding, sometimes massive outside funding, to launch a successful high growth firm. 

If you have a very capital intensive or labor intensive business model you will need a large base of funding to get off the ground.  But for most start-ups, you may be able to adjust your business model enough to cut the funding you need, while still making a successful launch.

One example comes from an e-mail I received about launching a children’s indoor play center.  Such facilities can take a lot of cash to launch due to the cost of facility rent and equipment costs, and the aspiring entrepreneur had no ready source of cash.

My response is that there are no ready outside sources of cash out there for new start-ups like this. The only real options are to use money from your savings or to tap into friends and family who would be willing to invest.

If the entrepreneur wanting to start the indoor play center cannot raise the money to launch the program fully formed, there are other options.  She could start with a much smaller scale that fits in with the money available. Or she could develop the program she wants to run by partnering with a local facility like a YMCA.  Or she might be able to save rent expense by partnering with a local church to use their space.

The point is that some modest tweaks to the business model may bring costs way down and still meet the need of the market.  Once the bootstrapped launch of the play center is cash flow positive, all kinds of options for growing and expanding emerge.

John Wark sent along a great example of how bootstrapping did not stop a new venture called Logik from making the Inc 500.  Logik is one of the firms featured in a series at the blog 37signals called “Bootstrapped, Profitable and Proud.”

According to the interview, Logik launched with only $20,000 from savings and credit cards (NOTE:  I am not a fan of using credit cards to start businesses).  It was profitable within nine months.  And did the bootstrapping limit their ability to grow, as it often commonly assumed?

“Financially, we’ve been very successful considering our size relative to the
competition (most have close to or well over 100 employees, we have 16)…. [F]rom 2005 to 2008 we grew revenue by 1,067% from $373,866 in
2005 to $4.4 million in 2008 with about $3 million in profit. We did that with 8
employees, a ton of servers, niche software, and 1 dog. This, minus the profit,
is all public information now. We were ranked
#181 overall on the 2009 Inc 500 survey and #1 for eDiscovery companies.”

And Logik is still bootstrapping their venture to this day.  This is a great series at 37signals and is worth following for all you aspiring bootstrappers out there.

If funding is your barrier to starting your new venture, play with the business model to see if you can still create a value proposition that the market will be attracted to.  You might be surprised how much start-up capital you can save without hurting your ability to launch and grow.

Use Competitors to your Advantage

Is the fact that there is competition a reason not to start a new business?  Not if you build a realistic competitive strategy into your business model from the beginning.

One of the fatal flaws we see in business plans is when the entrepreneur is in denial about the fact that they will face competition.  Every new business faces some form of competition. 

I always chuckle whenever I read a business plan that, while admitting there are competitors out there, will dismiss them as incompetent or irrelevant.  Remember – they are already up and running and have customers, so they have must have something going for them!

Keep in mind that competition can be beneficial to your start-up business.  The competition has already built awareness about your product or service with customers.  That means you won’t have to spend marketing money educating your customers about the benefits of what you are offering them.

The competition has already spent money learning what customers really want.  You can learn from their successes and their shortcomings as you craft your business model.  

A competitive strategy should always start with the customers.  Learn how your customers make the decision on where to buy the product.  Determine the key decision making criteria they will use to choose your product over your competitors’.  It does not matter what you think they should consider in the decision – all that matters is what the customer thinks and how they actually make their choice. 

How do you gather information about what your potential customers prefer? You need to get out and talk to them, observe them, or do whatever it takes to learn how to think like they do. 

Also gather information about how well your competitors are satisfying these customers.  You can gather this information by talking to customers, visiting your competitors’ businesses, interviewing suppliers, and by meeting with others in the industry.  All of this information should shape your business model and define how you will attract customers.

Understanding the relationship that already exists between your potential customers and the existing competition helps to determine how you should enter the market. 

If your competition is strongly entrenched it may not be wise to try to compete with them directly, no matter how good you think your product is.  Think of your own buying habits.  We all get in patterns of where we like to buy things.  Changing those patterns can become quite difficult, especially if the competition has a good relationship with the customer.

Instead, it is usually better to find a niche of customers in the market.  Find a group of customers whose needs are not being met by the competition and tailor your business model to satisfy them.  They will be the easiest and least expensive to attract.

This strategy gives you the best chance of building your initial sales, while avoiding a head-on confrontation with well-established competitors that may have a much healthier bank account than your start-up business.

Healthcare Forum and Webcast

On Monday, July 26th, the U.S. Chamber of Commerce [“the Chamber”] will partner with the National Federation of Independent Business [NFIB] and the American Action Forum [“AAF”] to host a forum entitled “Behind the Curtain: The Health Care Law’s Impact on Small Business”. The event will feature Washington experts and opinion leaders, as well as the entrepreneurs who run small businesses and create American jobs. Some of the highlights will include:

  • Senator Mike Johanns (R-NE), who recently introduced S. 3758, the “Small Business Paperwork Mandate Elimination Act”, a bill to protect small business owners from the financial burden of filing the endless amount of 1099 forms the health care law requires.
  • Scott Womack, an IHOP franchisee who has created 100s of jobs, who also crunched the numbers and has serious concerns about the effects the new health care law will have on his company.
  • Doug Holtz-Eakin, president of the American Action Forum . In the past he was Director of the Congressional Budget Office, Washington’s top budget prognosticator, and he also served as the Chief Economist on the President’s Council of Economic Advisers. He will be releasing a new white paper discussing the impact the new health care law will have on small business.
  • Bill Rys and Bob Graboyes of NFIB, James Gelfand of the Chamber, and Michael Ramlet of AAF. These policy analysts will discuss important provisions in the new health care law.
  • Benefits advisor Tom Christina (Ogletree, Deakins, Nash, Smoak & Stewart, P.C.) and two entrepreneurs, Joe Olivo (Perfect Printing, Inc.) and Eric Oppenheim (Burger King franchisee). This panel will discuss how the new law is affecting their businesses.

The Chamber, NFIB, and AAF will pull back the curtain on the new law, placing the spotlight directly on the entrepreneurs who will feel the financial and regulatory impact of the health care law – some of the people who constitute the nation’s real economic engine, who are the key to creating enterprise and lifting the U.S. out of the recession.

Click here to register for this free event (to be held at Chamber headquarters), or to view the webcast from anywhere.