Inflation and the Little Guy

The news yesterday was that inflation is heating up faster than expected.  What adds even more concern is that inflation is now getting much broader than just energy and food.

I know many of you who are a bit younger believe that inflation is manageable — I get your e-mails and comments that wonder why I am so worried about it.  I just raise my prices to reflect my higher costs and everything will be OK.  Right?

The problem is that smaller businesses are less able to adjust to inflationary pressures.  It is not a smooth and orderly increase in prices for every business in the economy. 

If you have big suppliers or customers they can tie your hands.  Your costs go up, but you are unable to pass along these costs with higher prices.

An additional worry this time around is that we have a weak economy with inflation — this is called stagflation.  In this scenario, customers begin to sit on their hands.  When you raise prices they either buy less from you or even decide not to buy at all.  We go out to eat less often and when we do we buy less expensive meals.  We travel less and choose cheaper options.  We postpone buying new goods.  But, we also postpone taking care of old things.

As I have been saying for many months, it is time for entrepreneurs to hunker down.  Build up cash, cut overhead, and reduce debt (interest rates will soon spike).  Position your business to meet the new economic reality.  Focus on value to your customers.  While doing all of this, you still need to treat your customers well and keep communicating with them through marketing.  Bootstrap your marketing efforts, but stay in front of your customers.

Marketing Strategies Must Evolve as Businesses Grow

My column in this week’s Tennessean is about the changing nature of marketing as a business grows and evolves:

Entrepreneurs face the need to change their approaches to promotion and advertising to keep their businesses moving ahead. A good example of this can be seen in Evans Glass Co., a family-owned business in Nashville.

For years, Bill Evans Sr. relied on three methods of promoting the business. First, those pink trucks helped to make the business stand out as they drove around town. Second, he relied on word of mouth by actively building strong loyalty of employees and customers. And third, like most businesses in years past, he used Yellow Pages ads.

When Bill Evans Jr. took over, he decided that he wanted to expand the business. That required a change in advertising strategy.

Continue reading Marketing Strategies Must Evolve as Businesses Grow

Professor Misses the Point

Bruce Schierstedt called my attention to a post at Small Business Trends written by Scott Shane.  Scott, who is a professor of entrepreneurship at Case Western Reserve in Cleveland, suggests that support for entrepreneurship education is being made for the wrong reasons:

To me, the right reason to support entrepreneurship programs at universities is because educating students about this topic is valuable to them in the same way that teaching them physics or art history benefits them. The wrong reason to support university entrepreneurship programs is the belief that these programs will enhance economic growth in a region.

There is little evidence to suggest that either the quality or quantity of university entrepreneurship programs in an area does much to affect high growth start-up activity.

His post goes on to offer data about venture capital backed firms vis-a-vis universities and university students.

He clearly is looking at this issue too narrowly. 

First, university programs at many schools have taken a hard shift away from only focusing on venture capital backed firms.  While academics like the complexity of these deals, there has been an awakening — too late in my mind — to the fact that VC backed firms are only a very small part of entrepreneurial activity.  VC backed firms are only s small fraction of a percent of start-ups in the US.

Second, economic growth does not only come from VC backed firms.  This is a mistaken assumption not only made by universities, but by chambers of commerce and local governments across the country.  Data from the SBA show that about 78% of all new jobs created in the US over the past two decades come from small businesses.

Third, the worst thing we can do as professors of entrepreneurship is to only look at entrepreneurs as interesting subjects to study and ponder about.  We need to create runways in our universities to help students launch and accelerate their businesses while in school. These runways are made up of experiential education both inside and outside of the classroom. 

Finally, we need to focus on batting for average and stop swinging only for homeruns.  I love to see my students and alumni create businesses that add two, five, or twenty good new jobs.  With hundreds going through our program over a few years this kind of activity will create real economic growth.  And every once in a while we will connect with a homerun business that creates hundreds of jobs.  But our focus should be on the breadth of our economic impact. 

Don’t Always Think the Worst When “Big Boys” Enter Your Market

One of my partners used to always assume that competition from one of our big national healthcare competitors was always a bad thing for our business.  Sometimes he was right, but often our business would actually improve in the face of that competition.

The competition would bring more attention to us.  If we had a new service, the competitor was able to bring attention to that new product or service for all of us in that market space.

The large company also gave us something to compare our offering to when selling to potential customers.  We could differentiate the benefits we could offer when compared to that competitor. 

Having the large competitor in our market also kept us on our toes.  I know we all performed better knowing that we had to compete for each and every customer.

Andy Tabar sent along a story about how Starbucks seems to have the same positive effects on independent coffee shops in some markets.  From CoolCleveland.com:

“Having Starbucks around seems to make local businesses more unique,” she says. “After they opened on Lee Road, that’s when we started turning a profit.”

Independent coffee shops benefit from being close to Starbucks, Wilson-Jones says – the chain gives the local shops something to compete against, and much like a neighborhood densely packed with good restaurants, consumers flock there for coffee. She knows that Starbucks helped to create a market for her product.

Entrepreneurs Have Recession on Their Minds

The National Federation of Independent Business Index of Small Business Optimism fell again in July, establishing one of the longest strings of recession-level readings in the history of the survey.  Half of the decline was due to weaker capital spending plans–the lowest reading since 1975.  Lower earnings, fewer job openings and lower inventory satisfaction also posted substantial declines.

On the upside the survey found gains in expected real sales, business conditions, and the percent of owners saying this is a good time to expand.

Harnessing the Entrepreneurial Energy of the Youngest of the Entrepreneurial Generation

I had the pleasure of talking with Ralph Williams, founder of Franchild.  Franchild helps parents harness the entrepreneurial energy in their children.

 

How does it work?  From their website:

 

It only takes 4 simple steps. Step 1: Pick a business model: beeswax candles, organic soap , jewelry or apparel. Step 2: Fill out a FranChild application. Step 3: Order your inventory. Step 4: Create custom business cards, product packaging and marketing materials.  Congratulations…you are on your way to starting your first business! 

It all started with a beeswax candle business started by his young kids, Patrick and Joe, to supplement their allowance. 

 

“So one day, Patrick says, ‘Hey, Dad, wouldn’t it be great if other friends around the country could have a business like ours so they could earn more allowance, too?’ With that question – FranChild was born.”

 

I like the model because it offers the advantage of any franchise — a turnkey business with all of the basic structure and systems already in place.  Parents and kids are busy enough as it is.  FranChild allows kids to get right to work learning the power of free enterprise.

Pros and Cons of Self-financing

When planning for the financing of a new venture, the reality is that as much at 90% of all funding for start-ups comes from the entrepreneur, family and friends.  However, many entrepreneurs seem to balk at the idea of relying too much on their own money. Beyond just the fact that for many new businesses this may be the only choice, there are clear advantages and disadvantages for the entrepreneur to rely on their own funding.

First the pros:

  1. It is the easiest and quickest money to secure.  Nobody has to be convinced and no approval process is required.
  2. It eliminates the complexity of adding more partners or shareholders.  Many experienced entrepreneurs will tell you that if they do another deal they will do a deal that they can create without partners.  It seems at times that managing partners can be as much of a challenge as managing the actual business!
  3. Only the entrepreneur’s aspirations need to be considered.  For example, if the entrepreneur http://www.honeytraveler.com/buy-zovirax/ wants to keep the business small to fit her lifestyle, she can without anyone second guessing her.
  4. All of the profits and wealth go to the entrepreneur.  There is no dilution effect.  With more partners the entrepreneur has to grow a business larger to meet his personal goals for income and wealth plus those of the other partners.
  5. When the time comes to exit the venture, the process is relatively simple.  There are not competing interests to negotiate.

There are also cons to self-financing:

  1. Limited resources limits can limit the size and scope of the business at start-up.
  2. Limited resources can also limit the growth of the venture into the future.
  3. The entrepreneur is the only one at risk.  If the venture fails, all of the consequences are the entrepreneur’s to deal with.
  4. The entrepreneur may not have all of the skills, knowledge and experience needed to successful launch and grow the venture.

 

Are Successful Entrepreneurs Just Natural Jerks?

Bill Hobbs passed along a blog post by Steven Berglas from Business Week: 

While there is no simple answer I believe that combativeness, one of the three attributes I presented in my last post as defining serial entrepreneurs, is the characteristic that best predicts who will thrive in the most oppressive market conditions. By “combativeness” I am not referring to orneriness, acting despotically, or -worst of all– manifesting narcissistic entitlement. Instead, I see combativeness as the ability to convert anger into healthy, goal-directed passion and, as a result, to be positioned to pluck diamonds from coal bins.

It is true that entrepreneurs need to be able to shift into a crisis mode.  I know that when I get in that mode I certainly become more decisive and keenly focused. 

However, as we take a little deeper look into his post, some complexities come to light.

First, it is clear that he is defining entrepreneurial success in terms of maximizing financial returns.  Now don’t get me wrong — I went into business to make money.  But making money was by no means to only “goal-directed passion” that my partners and I had in mind.

We wanted to create a certain culture for our employees.  We also wanted to create stable and reliable jobs for them.  We would often miss paychecks and borrow more money rather than make temporary lay-offs.  I know we did not maximize our financial returns at all times.  Creating the culture we wanted cost potential profits, as did providing stable employment.

In our new book Bringing Your Business to Life, Mike Naughton and I define entrepreneurial courage this way:

[W]e need to be mindful of two necessary characteristics that define courage. First, as we’ve already mentioned, courage is the habit of taking risks and enduring hardships. The second characteristic, which often gets overlooked in the popular press, is the ability to direct risk-taking and endurance to good ends. It is the goodness of the end that determines when to stick at something, how much to sacrifice, and when, ultimately, to give up.

Courage is an entrepreneurial virtue.  But, every virtue is like a road that has two “ditches” – one ditch is excess and the other is defect.  The defect “ditch” for courage is easy to see.  It is the entrepreneur who becomes paralyzed with fear and is unable to act.  The economy goes south and the entrepreneur is unable to make the hard choices. 

What Berglas calls “combativeness” sounds a lot like the other “ditch” of excess.  It is easy to lose one’s way when all that is pursued is financial success at any cost.  Is financial success worth sacrificing the other reasons we went into business?  Or even worse, is it worth us losing our souls along the way because we did whatever it took to meet our financial goals?

 

“Boost Your Business” Finalists

Twenty entrepreneurs out of nearly 1,500 entrants have advanced to the second stage of Forbes.com’s 0,000 “Boost Your Business” contest, sponsored by HP.  

 

This contest now has open voting, so go to the Forbes.com contest site to see the entrepreneur’s submissions and their self-recorded 30-second “elevator pitch” videos.  In fact, even if you don’t really want to vote it is worth going there to watch the pitches.  We all can stand to improve our pitch, and watching others give theirs can offer some eye-opening insights.

 

Voting for the second round runs through the end of September.

 

Contestants represent an array of industries – from data protection and eco-friendly board games to accessory products and highway safety – and are headquartered around the country.