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We Can Lie Too
Tappening is run by a couple of guys who don’t like bottled water. The liquid is fine, but they worry about those small transparent bottles. First, the air gets polluted when they’re fabricated and then, after they’ve been emptied and tossed in the trash, the plastic doesn’t quickly break down and reenter the ecosystem.
The Tappening people also notice that bottled-water advertising can be deceitful. The labels and ad campaigns are known to feature mountain streams in forest paradises, breeding the idea that the water is pumped from pristine natural sources when the truth is a lot of it comes from the tap, usually with some filtering applied.
Faced with the distasteful situation—polluting water bottles and deceitful advertising—the Tappening crew could’ve put together some of their own ads revealing the true source of common bottled waters and the destiny of the containers, but they chose to mount a more aggressive campaign. One effort is a print ad with a crying polar bear drawn at the center, sitting on a melting arctic glacier. Under the title “Bottled Water,” the text says, “98% melted ice caps, 2% polar bear tears.” At the bottom, in small print, a message reads, “If bottled water companies can lie, we can too.” “New Tappening Ads Tell Lies—Honest,” Adweek, July 23, 2009, accessed June 2, 2011, www.adweek.com/aw/content_display/creative/news/e3i04ac5aa7296d367cc7c7c9623bc3df48.
Exercise \(1\)
1. In broad strokes, there are four types of deceitful advertising: those that make false claims, conceal facts, make ambiguous claims, and engage in puffery.
• The Tappening ad makes two apparently false claims. What are they, and what makes them seem false?
• What are the producers trying to communicate with their claims?
• Does the fact that the ad admits at the bottom that it’s a lie diminish (or entirely eliminate) the fact that false claims are made? Why or why not?
• The people at Tappening believe that bottled water ads featuring flowing natural streams can be deceitful because frequently the water comes (essentially) from a faucet. What specific kind of deceitful advertising is that? Explain.
• Is there any puffery in the Tappening print ad? If so, where?
2. Here’s one thing the Tappening polar bear ad neglects to inform people: Tappening isn’t just trying to get us to stop drinking bottled water; they’re also trying to sell something. Water bottles. They cost \$14.95 (plus \$3 shipping and handling). For the money you get a Tappening plastic bottle made for reuse and emblazoned with the company’s slogan: “Think Global. Drink Local.” You can also buy a message shoulder bag from the company. It announces that it’s “Made with 100% post-consumer recycled materials: yesterday’s discarded bottles and yogurt containers.” That costs \$49.95, plus the shipping and handling. Tappening, order page, accessed June 2, 2011, http://www.tappening.com/Order_Tappening_Bottle.
Make the case that Tappening is engaging in deceitful advertising by concealing facts in its polar bear ad. More broadly, what is the ethical case against Tappening?
3. No one doubts that reusable water bottles can be better for the environment than disposable ones. Does the fact that Tappening’s purpose is noble diminish the moral objection to the company’s deceitful advertising? Explain.
4. For consumers, water bottles are not high stakes. If some guy reads the Tappening ad, gets caught up in the message that bottled water is environmentally disastrous (“98% melted ice caps, 2% polar bear tears”), visits the web page and, in the passion of the moment, buys ten reusable water bottles and the shoulder bag, he’ll be out about \$250. It’s doubtful that his life will be significantly worsened by that kind of monetary loss. Later on, however, he may feel conned when he realizes that the air was polluted to make his presumably environmentally friendly water bottles, and most of the time when he needs bottled water, it’s not foreseen, and so he ends up just buying the disposable bottles anyway. The reusable containers with their enviro-friendly slogans get left at home and forgotten and the only thing that really changes is the guys at Tappening made some money.
• As considered against this background, do you believe the FTC should get involved to rein in Tappening’s deceitful advertising? In ethical terms, why or why not?
• The FTC can use one of two standards for deciding whether action is required to combat deceitful advertising: the ignorant consumer standard and the reasonable consumer standard. Could both standards lead to action against Tappening or only the ignorant standard? Explain.
5. Make the case that, in ethical terms, bottled water companies should be allowed to freely label their bottles with flowing, natural streams even though the water is taken from a city supply and filtered.
Consumerism
Source: Photo courtesy of Brent Moore, http://www.flickr.com/photos/brent_nashville/166218527/.
Two curious news stories. The first comes from the BBC and tells of a shopaholic, a woman who purchased so much she could hardly fit it all in her apartment. When she passed away from pneumonia, it took more than a day to find her body underneath all the purchases. A friend commented, “It gave her pleasure to buy things, she only bought things she really liked.” “Shopaholic Died under Purchases,” BBC, July 28, 2009, accessed June 2, 2011, http://news.bbc.co.uk/2/hi/uk_news/england/manchester/8173271.stm.
The second story relates that in India, according to a UN report, there are about 560 million cell phone users, but only 360 million people have access to toilets. “India Has More Mobile Phones Than Toilets: UN report,” Telegraph, April 15, 2010, accessed June 2, 2011, http://www.telegraph.co.uk/news/worldnews/asia/india/7593567/India-has-more-mobile-phones-than-toilets-UN-report.html.
Exercise \(2\)
1. Consumerism replaces the model of the consumer as someone who buys necessities in order to get on with their lives, with the model of the consumer as someone who buys in order to live. Can you put that definition in your own words?
2. How could the story of a woman buried and dead underneath her endless purchases be construed as an example of consumerism?
3. How could the story of India having more cell phones than toilets be construed as an example of consumerism?
4. One way of characterizing much of the work of advertising agencies is as nurturing consumerism. Can you make the ethical case that advertising agencies should be banned from society?
5. In ethical terms, make the case that consumerism is good.
She's Gotta Have It...or Maybe Not
Source: Photo courtesy of Angel Arcones, http://www.flickr.com/photos/freddy-click-boy/3215186647/.
Statistics aren’t available, but the amount of time guys spend spilling seduction lines—and the amount of time women spend dealing with them—is very high. Most women can deal with it coming from most guys, but what happens when the lines come from a powerful corporation?
The giant pharmaceutical company Boehringer Ingelheim has stumbled onto a drug (Flibanserin) that makes women want sex. That’s not going to earn them any money, though. To get sales, they’ve got to convince women that they want to want to have sex. The problem is interesting. The drug company has discovered the cure to a disease that, by definition, no one has. If a woman—or a man—doesn’t feel like having sex, then she doesn’t feel like she’s missing something by not doing it. The opposite is the case. She doesn’t want to do it, so the fact that she doesn’t feel like doing it isn’t a problem at all. It’s perfect, actually. What the company needs to do, therefore, is create a desire. It has to make women want (or even need) something they didn’t know they wanted.
According to the New York Times, “Boehringer has been trying to lay the consumer groundwork with a promotional campaign about women’s low libido, including a Web site, a Twitter feed and a publicity tour by Lisa Rinna, a soap opera star and former Playboy model who describes herself as someone who has suffered from a disorder that Boehringer refers to as a form of ‘female sexual dysfunction.’” Duff Wilson, “Push to Market Pill Stirs Debate on Sexual Desire,” New York Times, June 16, 2010, accessed June 2, 2011, http://www.nytimes.com/2010/06/17/business/17sexpill.html?src=me&ref=business.
That advertising campaign is geared to create a desire for a form of women’s Viagra by convincing women that they’re supposed to want sex, and there’s something wrong with them if they don’t. The effort has its critics. Here’s one argument: “Boehringer’s market campaign could create anxiety among women, making them think they have a condition that requires medical treatment. ‘This is really a classic case of disease branding,’ said Dr. Adriane Fugh-Berman, an associate professor at Georgetown University. ‘The messages are aimed at medicalizing normal conditions, and also preying on the insecurity of the patient.’” Duff Wilson, “Push to Market Pill Stirs Debate on Sexual Desire,” New York Times, June 16, 2010, accessed June 2, 2011, http://www.nytimes.com/2010/06/17/business/17sexpill.html?src=me&ref=business
Exercise \(3\)
1. Dr. Fugh-Berman says that Boehringer’s marketing campaign is “aimed at medicalizing normal conditions.”
• What does “medicalizing normal conditions” mean?
• How does “medicalizing a normal condition” serve Boehringer’s purpose?
2. The goal of Boehringer’s marketing is to create a desire for a product. There are a number of ethical objections to this kind of campaign.
• What does it mean to say that trying to convince low-libido women (or men) that they need a drug to want more sex is to treat them as a means and not an end?
• How could the attempt to sell the idea that women (or men) need to need sex be construed as a violation of their basic right to freedom?
3. Boehringer created a web page dedicated to its sex drug—http://www.sexbrainbody.com—which has since been taken down. On it, a successful actress and Playboy model left a testimonial. It concluded with her encouraging readers to learn about sexual health and to feel comfortable talking about it. “Both,” she asserted, “play an important role in overall health and well-being. It’s time to focus on you!” Melissa Castellanos, “Lisa Rinna on ‘Sex, Brain, Body’ Connection,” CBS News, May 18, 2010, accessed June 2, 2011, www.cbsnews.com/stories/2010/05/18/entertainment/main6496015.shtml?tag=mncol;lst;2.
• What are some of the ways this message—and the messenger—create the need for consumers to have sexual health the way the Boehringer pharmaceutical company defines the term?
• Justify, from an ethical perspective Boehringer’s use of these techniques.
• Boehringer has decided to take the page down. What ethical argument may have convinced them to do that?
4. A New York Times article relates that prestigious medical journals have published research affirming that low libido really is a problem, and one suffered by a large number of women. The article also notes that “such studies have been financed by drug companies.” Duff Wilson, “Push to Market Pill Stirs Debate on Sexual Desire,” New York Times, June 16, 2010, accessed June 2, 2011, http://www.nytimes.com/2010/06/17/business/17sexpill.html?src=me&ref=business.
• What is knowledge and resource exploitation by advertisers?
• Make the case that the knowledge and resources at the disposal of Boehringer and its advertising company are also an ethical obligation to not use that power to sell products.
5. Assume the critics are right. Assume that women (or men) with low libidos aren’t suffering any kind of medical problem; they’re just not that into sex, and there’s no reason why that condition should be “cured.” Make the case that even so, Boehringer is ethically justified in trying to create the need for their desire-enhancing pill.
6. A pharmaceutical company stumbles upon a drug that kills the sex drive for men and for women. The company devotes millions of dollars to a seductive advertising campaign designed to convince consumers that they really want to not want sex, and therefore they need this new medication. Make the case that this is not only ethically acceptable but laudable.
Hot Coffee
Source: Photo courtesy of Roger Karlsson, http://www.flickr.com/photos/free-photos/3375886335/.
In a world of get-rich-quick schemes, few are mentioned more frequently than lawsuits. One of the reasons is the infamous McDonald’s coffee case (Liebeck v. McDonald’s Restaurants). This is what happened in 1992 in Albuquerque, New Mexico. Stella Liebeck, seventy-nine, was riding in a car driven by her grandson. They stopped at a McDonald’s drive-through, where she purchased a Styrofoam cup of coffee. Wanting to add cream and sugar, she squeezed the cup between her knees and pulled off the plastic lid. The entire thing spilled back into her lap. The searing liquid left her with extensive third-degree burns. Eight days of hospitalization—which included skin grafts—were required.
Initially, she sought \$20,000 from McDonald’s, which was more or less the cost of her medical bills. McDonald’s refused. They went to court. There it came to light that about seven hundred claims had been made by consumers between 1982 and 1992 for similar incidents. This seems to indicate that McDonald’s knew—or at least should have known—that the hot coffee was a problem.
Most of the rest of the case turned around temperature questions. McDonald’s admitted that they served their coffee at 185 degrees, which will burn the mouth and throat and is about 50 degrees higher than typical homemade coffee. More importantly, coffee served at temperatures up to 155 degrees won’t cause burns, but the danger rises abruptly with each degree above that limit. So why did McDonald’s serve it so hot? Most customers, the company claimed, bought on the way to work or home and would drink it on arrival. The high temperature would keep it fresh until then. Unfortunately, internal documents showed that McDonald’s knew their customers intended to drink the coffee in the car immediately after purchase. Next, McDonald’s asserted that their customers wanted their coffee hot. The restaurant conceded, however, that customers were unaware of the serious burn danger and that no adequate warning of the threat’s severity was provided.
Finally, the jury awarded Liebeck \$160,000 in compensatory damages and \$2.7 million in punitive damages (about two days worth of McDonalds’ coffee sales). The judge, however, reduced the \$2.7 million to \$480,000. McDonald’s threatened to appeal, and the two sides eventually came to a private settlement agreement.Consumer Attorneys of California, “The Actual Facts About the McDonalds’ Coffee Case,” The ‘Lectric Law Library, 1995, accessed June 2, 2011, http://www.lectlaw.com/files/cur78.htm.
Exercise \(4\)
1. What does caveat emptor mean?
• According to this doctrine, who is responsible for Stella Liebeck’s burns? Explain.
• Does the fact that she’s seventy-nine years old make it more difficult to justify a caveat emptor attitude in this case?
• One aspect of the caveat emptor doctrine is that it maximizes respect for the consumer as an independent and autonomous decider. Could that be a reason for affirming that a seventy-nine-year-old is a better candidate than most for a caveat emptor ethics of consumption?
2. In general terms, what does it mean to claim that an implicit contract arises around a transaction? How does that contract protect the consumer?
3. From the information provided, and from your own experience, what are the main terms of the implicit contract surrounding the purchase of coffee at a fast-food drive-through?
• What does the restaurant owe the consumer?
• What does the consumer owe the restaurant?
4. In order for an implicit contract to arise, the following three conditions must be met:
• Both sides must enter the contract freely.
• Both sides must be reasonably informed of the agreement’s terms.
• Both sides must be honest.
Were these three conditions met in the McDonald’s coffee case? Explain.
5. Make the case that the original offer by Liebeck—\$20,000 from McDonald’s to cover the medical bills—is ethically recommendable within the structure of an implicit contract. Use the concept of an implied warranty.
6. The concept of manufacturer liability gives consumers the right to sue manufacturers for defective goods. There are three kinds of product defect:
• Design defects (errors in the product’s design)
• Manufacturing defects (errors in the production of one specific case of a generally safe product)
• Instructional defects (poor or incomplete instructions for a product’s safe use)
Which (if any) of these defects are applicable in the McDonald’s coffee case? Explain.
7. What is the concept of strict product liability, and how could it be applicable in this case?
8. In ethical terms, justify the original jury award to Liebeck: \$160,000 in compensatory damages, and \$2.7 million in punitive damages (about two days of McDonalds’ coffee sales).
9. Of these three ethical structures for conceiving of the coffee-buying consumer and her protections—caveat emptor, the implicit contract, and manufacturer liability—which do you believe is best? Why?
Cancel the Account
Source: Photo courtesy of abaporu, http://www.flickr.com/photos/abaporu/499864635.
This is a condensed version of a dialogue between Vincent Ferrari and AOL, an Internet services provider known especially for its e-mail.
AOL Rep: Hi, this is John at AOL. How may I help you today?
Vincent: I wanted to cancel my account.
AOL Rep: OK. You’ve had this account for a long time.
Vincent: Yep!
AOL Rep: You’ve used this quite a bit. What was the cause for turning this off today?
Vincent: I just don’t use it anymore.
AOL Rep: Do you have a high-speed connection like DSL or cable?
Vincent: Yep.
AOL Rep: OK.
AOL Rep: How long have you had that, the high speed?
Vincent: Years.
AOL Rep: Well, actually, I’m showing a lot of usage on this account.
Vincent: Yeah a long time ago, not recently.
AOL Rep: I’m looking at this account…
Vincent: Either way, whatever you’re seeing…
AOL Rep: Well, what’s the cause for turning this off today?
Vincent: I don’t use it.
AOL Rep: Well, OK. Is there a problem with the software itself?
Vincent: No. It’s just I don’t use it. I don’t need it. I don’t want it. I don’t need it anymore.
AOL Rep: So when you use it, the computer, is it for business or for school?
Vincent: Dude, what difference does it make? I don’t want the AOL account anymore. Can you please cancel it?
AOL Rep: Well, on June second this account was signed on. It’s been on for seventy-two hours.
Vincent: I don’t know how to make it any clearer.
AOL Rep: Last year was five hundred fou—last month was 545 hours of usage.
Vincent: I don’t know how to say this any clearer, so I am just going to say this one last time. Cancel the account please.
AOL Rep: Well explain to me what’s—wha—why?
Vincent: I am not explaining anything to you. Cancel the account.
AOL Rep: Wha—what’s the matter man? We’re just—I’m just trying to help.
Vincent: You’re not helping me. You’re not helping me.
AOL Rep: I am trying to, OK.
Vincent: Listen, I called to cancel the account. Helping me would be canceling the account. Please help me and cancel my account.
AOL Rep: No it wouldn’t actually.
Vincent: Cancel my account!
AOL Rep: Turning off your account would be the worst—
Vincent: Cancel the account! Cancel the account!
AOL Rep: Is your dad there?
Vincent: I’m the primary payer. I’m the primary person on the account, not my dad. Cancel the account!
AOL Rep: OK, ’cause I’m just trying to figure out—
Vincent: Cancel the account! I don’t know how to make this any clearer for you. Cancel the account. The card is mine, in my name. The account is mine and in my name. When I say, “cancel the account,” I don’t mean help me figure out how to keep it. Cancel the account.
This went on for almost five minutes. Part of the audio can be heard here:
Cancel AOL
(click to see video)
Back in the days before Internet, exchanges like this would’ve been entirely positive for AOL. The worst that could’ve happened is that the company would lose the client, who they were going to lose anyway. By dragging the cancellation out, they may have convinced him to stay on, so that’s what they did.
Today, with Internet, things are different. Ferrari (who, apparently, suspected that AOL would try some shenanigans) taped the conversation and posted it. The Slashdot effect—a website overwhelmed by a huge spike in traffic—followed immediately. It wasn’t long before Ferrari and his conversation were appearing on shows like Today. The damage to the AOL brand was catastrophic. Revenue plummeted, and with no hope for recovery, the company that owned and controlled AOL at the time, Time Warner, sold off the shriveled remains.
Certainly, the Ferrari tape didn’t alone bring down AOL, not even close, but it’s difficult for any company to be profitable when recordings like Ferrari’s are going out over national TV and available for anyone to hear, twenty-four hours a day, seven days a week, forever, online.
Exercise \(5\)
1. After listening to the Ferrari tape, what would consumers associate with the AOL brand? How is that brand different from a pure economic understanding of the value of AOL as a company?
2. In broad strokes, what is retributive justice? How did it work in this case? How is this case study in this textbook involved?
3. As an ethical theory, most conceptions of retributive justice highlight a notion of proportionality.
• What does proportionality mean?
• Just in general terms, and from the provided information, did Ferrari’s response to AOL satisfy the proportionality requirement? Why or why not?
4. Ferrari couldn’t have foreseen the how fast and how much his AOL-bashing would grow. Part of the reason is that much of the negative publicity wasn’t provided directly by him. NBC rebroadcast his tape through millions of TV sets. Countless blogs and websites excerpted sections and linked to the original. (Eventually, the transcript even turned up in a business ethics textbook.) Should Ferrari take responsibility for how far things went? Justify.
5. Two ethical values support consumer revenge in the marketplace: fairness and public welfare. Fairness is the idea that the company hurt the consumer, so the consumer ought to hurt the company. Public welfare is the idea that by publicly attacking companies, consumers actually do other consumers a favor by warning them away from poor service providers. Sketch an ethical justification for Ferrari’s action based on the idea that he’s serving the public welfare.
6. In ethical terms, what are some advantages of consumer revenge when compared with these other forms of consumer protection: the concept of the implied contract, the legal right to sue? | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/12%3A_The_Selling_Office-_Advertising_and_Consumer_Protection/12.05%3A_Case_Studies.txt |
Chapter 13 defines different legal structures for businesses and explores ways that individual companies may be understood not only as pursuing economic goals but also as possessing broad ethical responsibilities in society.
13: The Responsible Office- Corporations and Social Responsibility
Learning Objectives
1. Distinguish and define the principal ways of organizing a business.
2. Consider liability and ethical responsibility as they relate to different forms of businesses.
3. Sketch the organizational structure of a corporation.
Paramount Pictures
Movies from Paramount Pictures begin with an image of a mountain flashed onto the screen. That mountain, reputedly, was quick-sketched on a notepad by the company’s founder W. W. Hodkinson. Hodkinson got started in the movie business in the early 1900s when he opened a theater in Ogden, Utah. He shuffled films faster than his competitors (the town’s two other movie houses), and so came to dominate the local market. Soon he expanded to the big city of Salt Lake, then Los Angeles, and onward.
Looking to keep his enterprise growing, Hodkinson founded a company called Paramount to provide up-front money to cash-strapped movie producers. In exchange, he got exclusive rights to screen their work in theaters. Grateful for the help, for the trust, and above all for the cash, struggling moviemakers including Adolph Zukor, Samuel Goldfish (later Goldwyn), and Cecil B. DeMille signed on to the project in five-year deals. By 1915, they were all wealthier.
Now that they no longer needed his up-front money, Zukor and the rest started trying to squirm out of their deal. Having initially taken the risk to launch their careers, Hodkinson refused to let them go. So Zukor and friends hatched a plan. Pretending to have been faced down by Hodkinson, they not only embraced the deal they’d already inked, but they also extended it for twenty-five more years in exchange for a lump sum. They took that money, opened a line of credit, and began secretly buying Paramount stock. When they accumulated enough, they took it over, and in what would be a good premise for a revenge movie, they kicked Hodkinson out of his own company.
Types of Businesses
One lesson of Hodkinson’s story is that the way a business is organized is critically important. He left Paramount open to a financial sneak attack by not keeping the whole company in his name as a sole proprietorship. When he let shares go out—when he allowed others to buy part ownership in his enterprise—he was setting himself up for what happened. Of course it’s also true that he probably wouldn’t have had the money needed to get the enterprise going in the first place had he not gotten a capital injection from selling off pieces of ownership.
Every form of business organization comes with advantages and disadvantages, and the specific kinds of organization that may be formed are numerous and change from state to state. There are, however, a number of basic types:
• Sole proprietorship
• Partnership
• Limited liability company
• S corporation
• Nonprofit organization
• Corporation
A sole proprietorship is the easiest kind of business to start. All you need to do is go down to the county courthouse and fill out a DBA, which is a form officially registering that you’re opening a business with the name you choose. DBA means doing business as, so Jan Jones can go register her company as JJ’s Midnight Movie House, and she doesn’t need to do anything more: her tax ID number for the business is just her Social Security number, and when she’s filling out her IRS forms, she counts her profits as income, just like a paycheck. Benefits of a sole proprietorship include the speed and ease of getting it going. Further, sole proprietors can take advantage of tax accounting fitted to business reality. If you’re Jan Jones and you sign contracts to pay \$2,500 to rent a vacant warehouse along with the rights to show Paramount’s Mommie Dearest, and you receive \$3,000 from ticket buyers, you don’t pay income tax on the whole \$3,000, only on the \$500 profit. Finally, sole proprietorships have the advantage of belonging to their owner: she can do whatever she wants with her company without fear of being taken over by someone else.
The main disadvantage of a sole proprietorship is that the company really is an extension of you, and you’re on the hook for whatever it does. So if you screen your movie and no one shows up, you can’t just call the whole thing a bad idea, declare bankruptcy, and walk away. Your lenders can sue you personally for the \$2,500 you agreed to pay as JJ’s Midnight Movie House. Worse, if people do show up, but someone smokes in the theater, which starts a fire and causes injuries, those injured people can sue you personally, and maybe take everything you own. The fact that Jan Jones has to take full responsibility for what her company does is called unlimited liability. That liability, finally, is legal, but it’s also clear that there’s an ethical dimension to the responsibility. While few assert that it’s morally wrong to fail in business, there is a reasonable objection to be made when those who fail try to avoid paying the cost.
A partnership resembles a sole proprietorship. The main difference, obviously, is that there’s more than one owner: maybe there are two partners with 50 percent each, or one with 50 percent and then a group of smaller shareholders each owning 10 percent of the enterprise. The bookkeeping is pretty straightforward since profits are allotted in accordance with how great a share each partner owns. All partnerships must have, finally, at least one general partner who faces unlimited liability for the company’s actions. On the ethical front, responsibility starts getting murky as you move to multiple owners. If the theater burns down, and one individual partner had been assigned (and failed) the task of making sure there were a few fire extinguishers around, does that one partner bear the entire ethical burden of the injuries? Is it doled out in accordance with the percentage owned? What if one of the owners just kicked some money in as a favor to a friend, and wasn’t involved in the actual operation, does she bear any responsibility for what happened?
Limited liability companies (LLC) and S corporations are very similar. They’re both hybrids of partnerships and corporations. From the partnership side they take the tax structure. Called pass-through taxation, profits are divided among the partners or shareholders. Then those individuals pay taxes on the money like it’s income, a normal paycheck. What these two take from the corporate side—and the main reason people form an LLC or an S corporation—is that the enterprise’s legal status provides some protection against liability lawsuits. If you, Jan Jones, and a few others form an LLC and the theater burns and people get injured, you may get out without losing all you have. Creditors and lawyers for the injured will be able to sue the company and probably take any money left in the till, but they’ll have a harder time trying to take your personal car or the house you live in. Specific rules, it’s important to note, vary depending on the business and the location, but both options are typically limited to a certain number of participants.
On the responsibility front, this is the pressing ethical question: If the theater burns down for an LLC, the owners will likely enjoy some legal protection. Does that protection, however, extend to the ethics? Is there any difference in terms of moral responsibility between a partnership operating a burning theater and an LLC?
Nonprofit corporations exist in a class by themselves. Usually formed to serve a charitable or civic cause, they don’t have to pay taxes since they don’t make profits: they spend all their income promoting the cause they’re set up to serve. The operators of nonprofits often enjoy complete protection from liability claims. What about the ethics? If a nonprofit screens Mommie Dearest to raise money for the cause of orphans, and the theater burns, does the fact that the entire endeavor was arranged for the public good provide moral protection from guilt when people get hurt?
Technically, what most of us mean when we use the term corporation is a C corporation (as opposed to an S corporation). One financial difference between the two is that a C corporation is taxed twice. First, the government takes a chunk of the corporation’s profits before they’re distributed to the company’s owners, who are all those individuals holding shares. Then when the shareholders get their part, each must pay taxes on it again. Another difference is that C corporations are not limited in terms of number of shareholders. Finally, most of the corporations that people are familiar with are public, meaning that the company’s shares are available for purchase by anyone with the money to spend. There are, it should be noted, private corporations (and the similar “closely held” corporations) where share allocation is limited to a group or single person, but again, most of the commonly referenced incorporated companies are listed for public sale in places including the New York Stock Exchange, and you or I may become partial owners. In fact, and as the story of W. W. Hodkinson teaches, if we get enough money, we can buy the shares to take over the business.
Corporations step away from easier-to-form partnerships by providing protection to owners against liability claims. In the case of C corporations, that protection is significant. In many cases, the protection is total: completely insulated from liability, shareholders can lose their investment if the company does something it shouldn’t and gets sued, but their personal possessions are completely safe. This is the case, for example, with the mega movie chain Regal Cinemas. The price of one share of that company today was \$13.77. If you buy that, then no matter what the company does tomorrow, the most you could possibly lose is a little under \$15. No one likes to lose \$15, but still, there’s a very large freedom from responsibility here. If Regal tries to save some money (and therefore boost its share price and your profit) by intentionally not charging their fire extinguishers, and on the day a blockbuster gets released ten theaters in various states burn with accompanying human suffering and a major number of deaths, the company may go bankrupt under a flood of lawsuits and justifiable public outrage. But you, one of the owners, would be out three \$5 bills.
Corporations play a very large role in business ethics for two reasons. First, their independence from their specific owners opens questions about who—if anyone—should take moral responsibility for what the corporation does. Second, because corporations today have grown so large and powerful, because they touch all our lives in so many ways so often, the ethical questions they raise become hard to avoid. Both these dimensions of the modern corporation, the ethical ambiguity and the potentially huge size, relate to the history of the institution.
A Very Brief History and Description of the Corporation
Exxon Mobil’s market value is around \$450 billion. Just to compare, the GDP of Portugal—the total value of all goods and services produced in the country each year—is about \$250 billion (when converted to US dollars). Walmart’s revenues are climbing above \$375 billion, which is a full third of the total revenues (in the form of taxes) collected by the US federal government from individuals. If Walmart were a sovereign nation, it would be China’s fourth largest export market. Less abstractly, the size and penetration of the Ford Motor Company can be felt just by going out on the street and watching their products pass by. And if you go to a movie from Paramount, or laugh for a while with the Comedy Channel, or check out music videos on MTV, you’re patronizing the behemoth called Viacom.
All these businesses, along with the rest of the corporations on the Fortune 500 list and then the many that didn’t make the top tier, change our lives most every day. If you outfitted your dorm room or apartment at Walmart, it was a decision made by an executive buyer that determined the choices you’d have. If you’re thinking about voting this year, Jon Stewart at Comedy Central is doing all he can to guide the way you decide which lever to pull. If you go to see a concert next weekend, an MTV executive may have been the one who originally pulled that group out of obscurity. Publicly held corporations, all this means, aren’t just places where we go to work, or manufacturers that supply our necessities: they set the parameters and directions of our lives.
The first corporations extended directly from governments. In 1600, the English monarchy designated the British East India Company to manage international trade between the homeland and the Indian subcontinent. Shareholders did extremely well. By the 1800s, private enterprise was breaking away from tight governmental association; the corporation as we know it today began taking shape when individuals started claiming a right to freely associate for their economic benefit without direct governmental oversight and license.
Modern corporations are formed by a group of people who fill out the papers and register the name. Once it’s created, however, the business exists as a legally distinct entity. In the eyes of the law, it is
• perpetual—it can survive even after its founders have passed away;
• responsible—just like a person—in the narrow sense in that it holds specific legal obligations and rights.
In 1819, the US Supreme Court defined a corporation as “an artificial being, invisible, intangible and existing only in the contemplation of the law.”Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819). This legal independence clears the way for owners (shareholders) to escape liability claims made against the corporation. Because the business stands on its own, because it is a “being,” all claims must be made against it, not the shareholders standing behind.
Corporations are structured in diverse ways, but the basic governing form starts with the shareholders electing a board of directors. Walmart, for example, is governed by a fifteen-member board, which is elected each year. The board holds two main responsibilities. One is oversight; it keeps track of what’s going on and reports back to shareholders. The other responsibility is operational. The board selects individuals who’ll run the company on a day-to-day basis. Frequently, a chief executive officer (CEO) leads this team and is ultimately responsible for making sure Walmart is buying from suppliers at the lowest possible price, getting goods into the stores before stock runs out, and convincing customers to return and do more buying.
If the CEO and management team is good, there’s a decent chance the company will be successful and grow. Good leadership, however, can’t alone explain the megadimensions of today’s larger corporations. One critical element of the corporate structure that contributes to the size is the owner-as-shareholder model. The model allows businesses to collect large amounts of cash quickly. Simply by printing up and selling more shares, a corporation raises potentially huge sums. That capital can be reinvested in the business—maybe to build new Walmart stores in growing suburbs—and the corporation’s value goes up. It’s true that the original shareholders now own less of the company on a percentage basis (because there are more owners), but their shares are worth more because the company is worth more, so they’re unlikely to complain. As long as that virtuous cycle continues, well-run corporations can grow very quickly.
While all that growth is going on, the actual owners—shareholders—can be at home sitting in front of the TV. Many shareholders, actually, have almost no idea of what’s happening inside the company they partially own. With respect to business ethics, this adds another level of complexity to the question about who, if anyone, should be held morally responsible for what the corporation does. If you just go out in the street and ask a passerby, “Who do you think bears moral responsibility for what a company does?” the answer you’ll probably get is the owners. But in the case of corporations, they’re protected legally by a liability firewall, and now they’re also protected structurally by the fact that they—along with the multitude of other owners scattered all over the country and even the globe—aren’t necessarily involved in making the company’s operational decisions. These two factors combined have thrust this question to the forefront of questions about ethics in the economic world: can these artificial beings called corporations themselves have moral responsibilities to go along with their legal responsibility to operate within the law?
Key Takeaways
• Businesses can be organized in various ways.
• The way a business is organized affects economic questions about profits, legal questions about liability, and ethical questions about responsibility.
• In sole proprietorships and partnerships, owners take economic, legal, and moral responsibility for what the company does.
• In public corporations, owners are shielded from legal responsibility for the enterprise’s actions; the question about moral responsibility remains open.
• The structure of corporations—the ability to sell shares publicly—is instrumental in their ability to grow economically.
Exercise \(1\)
1. What are the main ways of organizing a business?
2. What kind of business organization might be suitable for a plumber? Explain.
3. Why might someone choose to organize as an LLC instead of a sole proprietorship?
4. In legal terms, what is the relation between a corporation and those individuals who found the corporation?
5. In what ways does the structure of a corporation protect its owners from absorbing ethical responsibility for the company’s actions?
6. How can corporations raise money? | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/13%3A_The_Responsible_Office-_Corporations_and_Social_Responsibility/13.01%3A_What_Kind_of_Business_Organizations_Are_There.txt |
Learning Objectives
1. Define and discuss the three main theories of corporate social responsibility.
Corporations as Responsible
A Civil Action was originally a novel, but more people have seen the movie, which was distributed by W. W. Hodkinson’s old company, Paramount. One of the memorable scenes is John Travolta playing a hotshot lawyer speeding up a rural highway to Woburn, Massachusetts. He gets pulled over and ticketed. Then he continues on his way to investigate whether there’s any money to be made launching a lawsuit against a company that allowed toxic industrial waste to escape into the town’s aquifer. The polluted water, Travolta suspects, eventually surfaced as birth defects. After checking things out, he races his Porsche back to Boston at the same speed. Same result. A Civil Action, directed by Steven Zaillian (New York: Scott Rudin, 1998), film.
One of the movie’s messages is that many corporations are like greedy lawyers—they have little sense of right and wrong, and their behavior can only be modified by money. The lesson is that you can’t make Travolta slow down and drive safely by appealing to the right of others to use the road without being threatened by speeding Porsches, or by pleading with him to respect general social well-being that is served when everyone travels at about the same speed. If you want him to slow down, there’s only one effective strategy: raise the traffic ticket fine. Make the money hurt. Analogously for companies, if you want them to stop polluting, hit them with harder penalties when they’re caught.
What if that’s not the only way for corporations to exist in the world, though? What if people who directed businesses began understanding their enterprise not only in financial terms (as profits and losses) but also in ethical ones? What if companies became, in a certain moral sense, like people, members of society bound by the same kinds of duties and responsibilities that you and I wrestle with every day? When companies are seen that way, a conception of corporate social responsibility comes forward.
Three Approaches to Corporate Responsibility
According to the traditional view of the corporation, it exists primarily to make profits. From this money-centered perspective, insofar as business ethics are important, they apply to moral dilemmas arising as the struggle for profit proceeds. These dilemmas include: “What obligations do organizations have to ensure that individuals seeking employment or promotion are treated fairly?” “How should conflicts of interest be handled?” and “What kind of advertising strategy should be pursued?” Most of this textbook has been dedicated to these and similar questions.
While these dilemmas continue to be important throughout the economic world, when businesses are conceived as holding a wide range of economic and civic responsibilities as part of their daily operation, the field of business ethics expands correspondingly. Now there are large sets of issues that need to be confronted and managed outside of, and independent of the struggle for money. Broadly, there are three theoretical approaches to these new responsibilities:
1. Corporate social responsibility (CSR)
2. The triple bottom line
3. Stakeholder theory
Corporate Social Responsibility (CSR)
The title corporate social responsibility has two meanings. First, it’s a general name for any theory of the corporation that emphasizes both the reponsibility to make money and the responsibility to interact ethically with the surrounding community. Second, corporate social responsibility is also a specific conception of that responsibility to profit while playing a role in broader questions of community welfare.
As a specific theory of the way corporations interact with the surrounding community and larger world, corporate social responsibility (CSR) is composed of four obligations:
1. The economic responsibility to make money. Required by simple economics, this obligation is the business version of the human survival instinct. Companies that don’t make profits are—in a modern market economy—doomed to perish. Of course there are special cases. Nonprofit organizations make money (from their own activities as well as through donations and grants), but pour it back into their work. Also, public/private hybrids can operate without turning a profit. In some cities, trash collection is handled by this kind of organization, one that keeps the streets clean without (at least theoretically) making anyone rich. For the vast majority of operations, however, there have to be profits. Without them, there’s no business and no business ethics.
2. The legal responsibility to adhere to rules and regulations. Like the previous, this responsibility is not controversial. What proponents of CSR argue, however, is that this obligation must be understood as a proactive duty. That is, laws aren’t boundaries that enterprises skirt and cross over if the penalty is low; instead, responsible organizations accept the rules as a social good and make good faith efforts to obey not just the letter but also the spirit of the limits. In concrete terms, this is the difference between the driver who stays under the speed limit because he can’t afford a traffic ticket, and one who obeys because society as a whole is served when we all agree to respect the signs and stoplights and limits. Going back to John Travolta racing his Porsche up and down the rural highway, he sensed none of this respect. The same goes for the toxic company W. R. Grace Incorporated as it’s portrayed in the movie: neither one obeys regulations and laws until the fines get so high they’ve got no choice. As against that model of behavior, a CSR vision of business affirms that society’s limits will be scrupulously obeyed, even if the fine is only one dollar.
3. The ethical responsibility to do what’s right even when not required by the letter or spirit of the law. This is the theory’s keystone obligation, and it depends on a coherent corporate culture that views the business itself as a citizen in society, with the kind of obligations that citizenship normally entails. When someone is racing their Porsche along a country road on a freezing winter’s night and encounters another driver stopped on the roadside with a flat, there’s a social obligation to do something, though not a legal one. The same logic can work in the corporate world. Many industrial plants produce, as an unavoidable part of their fabricating process, poisonous waste. In Woburn, Massachusetts, W. R. Grace did that, as well as Beatrice Foods. The law governing toxic waste disposal was ambiguous, but even if the companies weren’t legally required to enclose their poisons in double-encased, leak-proof barrels, isn’t that the right thing to do so as to ensure that the contamination will be safely contained? True, it might not be the right thing to do in terms of pure profits, but from a perspective that values everyone’s welfare as being valuable, the measure could be recommendable.
4. The philanthropic responsibility to contribute to society’s projects even when they’re independent of the particular business. A lawyer driving home from work may spot the local children gathered around a makeshift lemonade stand and sense an obligation to buy a drink to contribute to the neighborhood project. Similarly, a law firm may volunteer access to their offices for an afternoon every year so some local schoolchildren may take a field trip to discover what lawyers do all day. An industrial chemical company may take the lead in rehabilitating an empty lot into a park. None of these acts arise as obligations extending from the day-to-day operations of the business involved. They’re not like the responsibility a chemical firm has for safe disposal of its waste. Instead, these public acts of generosity represent a view that businesses, like everyone in the world, have some obligation to support the general welfare in ways determined by the needs of the surrounding community.
Taken in order from top to bottom, these four obligations are decreasingly pressing within the theory of corporate social responsibility. After satisfying the top responsibility, attention turns to the second and so on. At the extremes, the logic behind this ranking works easily. A law firm on the verge of going broke probably doesn’t have the responsibility to open up for school visits, at least not if the tours interfere with the accumulation of billable hours and revenue. Obviously, if the firm does go broke and out of business, there won’t be any school visits in any case, so faced with financial hardship, lawyers are clearly obligated to fulfill their economic obligations before philanthropic ones.
More difficult questions arise when the economic responsibility conflicts with the legal one. For example, to remain profitable, an industrial plant may need to dispose of waste and toxins in barrels that barely meet legally required strengths. Assuming those legal limits are insufficiently strict to guarantee the barrels’ seal, the spirit of the law may seem violated. The positive economic aspect of the decision to cut corners is the ability to stay in business. That means local workers won’t lose their jobs, the familial stresses of unemployment will be avoided, suppliers will maintain their contracts, and consumers will still be served. The negative, however, is the possibility—and the reality at Woburn—that those toxins will escape their containers and leave a generation of workers’ children poisoned.
Knowing what we do now about those Woburn children, there’s no real conflict; anything would have been better than letting the toxins escape. If necessary, the company should have accepted bankruptcy before causing the social damage it did. At the time of the decision, however, there may have been less certainty about exactly what the risks and benefits were. Even among individuals promoting a strong sense of corporate responsibility for the surrounding community, there may have been no clear answer to the question about the proper course of action. Regardless, corporate social responsibility means every business holds four kinds of obligations and should respond to them in order: first the economic, then the legal, next the ethical, and finally the philanthropic.
The Triple Bottom Line
The triple bottom line is a form of corporate social responsibility dictating that corporate leaders tabulate bottom-line results not only in economic terms (costs versus revenue) but also in terms of company effects in the social realm, and with respect to the environment. There are two keys to this idea. First, the three columns of reponsibility must be kept separate, with results reported independently for each. Second, in all three of these areas, the company should obtain sustainable results.
The notion of sustainability is very specific. At the intersection of ethics and economics, sustainability means the long-term maintenance of balance. As elaborated by theorists including John Elkington, here’s how the balance is defined and achieved economically, socially, and environmentally:
• Economic sustainability values long-term financial solidity over more volatile, short-term profits, no matter how high. According to the triple-bottom-line model, large corporations have a responsibility to create business plans allowing stable and prolonged action. That bias in favor of duration should make companies hesitant about investing in things like dot-coms. While it’s true that speculative ventures may lead to windfalls, they may also lead to collapse. Silicon Valley, California, for example, is full of small, start-up companies. A few will convert into the next Google, Apple, and Microsoft. What gets left out, however, of the newspaper reports hailing the accomplishments of a Steve Jobs or a Bill Gates are all those other people who never made it—all those who invested family savings in a project that ended up bankrupt. Sustainability as a virtue means valuing business plans that may not lead to quick riches but that also avoid calamitous losses.
Moving this reasoning over to the case of W. R. Grace dumping toxins into the ground soil, there’s a possible economic-sustainability argument against that kind of action. Corporations trying to get away with polluting the environment or other kinds of objectionable actions may, it’s true, increase their bottom line in the short term. Money is saved on disposal costs. Looking further out, however, there’s a risk that a later discovery of the action could lead to catastrophic economic consequences (like personal injury lawyers filing huge lawsuits). This possibility leads immediately to the conclusion that concern for corporate sustainability in financial terms argues against the dumping.
• Social sustainability values balance in people’s lives and the way we live. A world in which a few Fortune 500 executives are hauling down millions a year, while millions of people elsewhere in the world are living on pennies a day can’t go on forever. As the imbalances grow, as the rich get richer and the poor get both poorer and more numerous, the chances that society itself will collapse in anger and revolution increase. The threat of governmental overthrow from below sounds remote—almost absurd—to Americans who are accustomed to a solid middle class and minimal resentment of the wealthy. In world history, however, such revolutions are quite common. That doesn’t mean revolution is coming to our time’s developed nations. It may indicate, however, that for a business to be stable over the long term, opportunities and subsequently wealth need to be spread out to cover as many people as possible.
The fair trade movement fits this ethical imperative to shared opportunity and wealth. Developed and refined as an idea in Europe in the 1960s, organizations promoting fair trade ask businesses—especially large producers in the richest countries—to guarantee that suppliers in impoverished nations receive reasonable payment for their goods and services even when the raw economic laws of supply and demand don’t require it. An array of ethical arguments may be arranged to support fair trade, but on the front of sustainability, the lead argument is that peace and order in the world depend on the world’s resources being divided up in ways that limit envy, resentment, and anger.
Social sustainability doesn’t end with dollars; it also requires human respect. All work, the logic of stability dictates, contains dignity, and no workers deserve to be treated like machines or as expendable tools on a production line. In today’s capitalism, many see—and the perception is especially strong in Europe—a world in which dignity has been stripped away from a large number of trades and professions. They see minimum wage workers who’ll be fired as soon as the next economic downturn arrives. They see bosses hiring from temporary agencies, turning them over fast, not even bothering to learn their names. It’s certainly possible that these kinds of attitudes, this contempt visible in so many workplaces where the McJob reigns, can’t continue. Just as people won’t stand for pennies in wages while their bosses get millions, so too they ultimately will refuse to accept being treated as less dignified than the boss.
Finally, social sustainability requires that corporations as citizens in a specific community of people maintain a healthy relationship with those people. Fitting this obligation into the case of W. R. Grace in Woburn, it’s immediately clear that any corporation spilling toxins that later appear as birth defects in area children isn’t going to be able to sustain anything with those living nearby. Any hope for cooperation in the name of mutual benefit will be drowned by justified hatred.
• Environmental sustainability begins from the affirmation that natural resources—especially the oil fueling our engines, the clean air we breathe, and the water we drink—are limited. If those things deteriorate significantly, our children won’t be able to enjoy the same quality of life most of us experience. Conservation of resources, therefore, becomes tremendously important, as does the development of new sources of energy that may substitute those we’re currently using.
Further, the case of an industrial chemical company pouring toxins into the ground that erupt years later with horrific consequences evidences this: not only are resources finite, but our earth is limited in its ability to naturally regenerate clean air and water from the smokestacks and runoff of our industries. There are, clearly, good faith debates that thoughtful people can have about where those limits are. For example, have we released greenhouse gases into the air so heavily that the earth’s temperature is rising? No one knows for sure, but it’s certain that somewhere there’s a limit; at some point carbon-burning pollution will do to the planet what toxic runoff did in Woburn: make the place unlivable. Sustainability, finally, on this environmental front means actions must be taken to facilitate our natural world’s renewal. Recycling or cleaning up contamination that already exists is important here, as is limiting the pollution emitted from factories, cars, and consumer products in the first place. All these are actions that corporations must support, not because they’re legally required to do so, but because the preservation of a livable planet is a direct obligation within the triple-bottom-line model of business responsibility.
Together, these three notions of sustainability—economic, social, and environmental—guide businesses toward actions fitted to the conception of the corporation as a participating citizen in the community and not just as a money machine.
One deep difference between corporate social responsibility and the triple bottom line is cultural. The first is more American, the second European. Americans, accustomed to economic progress, tend to be more comfortable with, and optimistic about, change. Collectively, Americans want business to transform the world, and ethical thinking is there (hopefully) to help the transformations maximize improvement across society. Europeans, accustomed to general economic decline with respect to the United States, view change much less favorably. Their inclination is to slow development down, and to keep things the same as far as possible. This outlook is naturally suited to sustainability as a guiding value.
It’s important to note that while sustainability as a business goal puts the breaks on the economic world, and is very conservative in the (nonpolitical) sense that it favors the current situation over a changed one, that doesn’t mean recommending a pure freeze. Sustainability isn’t the same as Ludditism, which is a flat resistance to all technological change.
The Luddites were a band of textile workers in Britain in the 1800s who saw (correctly) that mechanized looms would soon rob them not only of their livelihood but also of their way of life. To stop the change, they invaded a few factories and broke everything in sight. Their brute strategy succeeded very briefly and then failed totally. Today, Ludditism is the general opposition to new technologies in any industry on the grounds that they tear the existing social fabric: they force people to change in the workplace and then everyplace, whether they like it or not. There’s an element of (perhaps justifiable) fear of the future in both Ludditism and the business ethics of sustainability, but there are differences between the two also. For example, sustainability concerns don’t always stand against technological advances. Actually, innovation is favored as long as advances are made in the name of maintaining the status quo. For example, advances in wind power generation may allow our society to continue using energy as we do, even as oil reserves dwindle, and with the further benefit of limiting air pollution.
Stakeholder Theory
Stakeholder theory, which has been described by Edward Freeman and others, is the mirror image of corporate social responsibility. Instead of starting with a business and looking out into the world to see what ethical obligations are there, stakeholder theory starts in the world. It lists and describes those individuals and groups who will be affected by (or affect) the company’s actions and asks, “What are their legitimate claims on the business?” “What rights do they have with respect to the company’s actions?” and “What kind of responsibilities and obligations can they justifiably impose on a particular business?” In a single sentence, stakeholder theory affirms that those whose lives are touched by a corporation hold a right and obligation to participate in directing it.
As a simple example, when a factory produces industrial waste, a CSR perspective attaches a responsibility directly to factory owners to dispose of the waste safely. By contrast, a stakeholder theorist begins with those living in the surrounding community who may find their environment poisoned, and begins to talk about business ethics by insisting that they have a right to clean air and water. Therefore, they’re stakeholders in the company and their voices must contribute to corporate decisions. It’s true that they may own no stock, but they have a moral claim to participate in the decision-making process. This is a very important point. At least in theoretical form, those affected by a company’s actions actually become something like shareholders and owners. Because they’re touched by a company’s actions, they have a right to participate in managing it.
Who are the stakeholders surrounding companies? The answer depends on the particular business, but the list can be quite extensive. If the enterprise produces chemicals for industrial use and is located in a small Massachusetts town, the stakeholders include:
• Company owners, whether a private individual or shareholders
• Company workers
• Customers and potential customers of the company
• Suppliers and potential suppliers to the company
• Everyone living in the town who may be affected by contamination from workplace operations
• Creditors whose money or loaned goods are mixed into the company’s actions
• Government entities involved in regulation and taxation
• Local businesses that cater to company employees (restaurants where workers have lunch, grocery stores where employee families shop, and similar)
• Other companies in the same line of work competing for market share
• Other companies that may find themselves subjected to new and potentially burdensome regulations because of contamination at that one Massachusetts plant
The first five on the list—shareholders, workers, customers, suppliers, and community—may be cited as the five cardinal stakeholders.
The outer limits of stakeholding are blurry. In an abstract sense, it’s probably true that everyone in the world counts as a stakeholder of any serious factory insofar as we all breathe the same air and because the global economy is so tightly linked that decisions taken in a boardroom in a small town on the East Coast can end up costing someone in India her job and the effects keep rippling out from there.
In practical terms, however, a strict stakeholder theory—one insistently bestowing the power to make ethical claims on anyone affected by a company’s action—would be inoperable. There’d be no end to simply figuring out whose rights needed to be accounted for. Realistically, the stakeholders surrounding a business should be defined as those tangibly affected by the company’s action. There ought to be an unbroken line that you can follow from a corporate decision to an individual’s life.
Once a discrete set of stakeholders surrounding an enterprise has been located, stakeholder ethics may begin. The purpose of the firm, underneath this theory, is to maximize profit on a collective bottom line, with profit defined not as money but as human welfare. The collective bottom line is the summed effect of a company’s actions on all stakeholders. Company managers, that means, are primarily charged not with representing the interests of shareholders (the owners of the company) but with the more social task of coordinating the interests of all stakeholders, balancing them in the case of conflict and maximizing the sum of benefits over the medium and long term. Corporate directors, in other words, spend part of the day just as directors always have: explaining to board members and shareholders how it is that the current plans will boost profits. They spend other parts of the day, however, talking with other stakeholders about their interests: they ask for input from local environmentalists about how pollution could be limited, they seek advice from consumers about how product safety could be improved and so on. At every turn, stakeholders are treated (to some extent) like shareholders, as people whose interests need to be served and whose voices carry real force.
In many cases transparency is an important value for those promoting stakeholder ethics. The reasoning is simple: if you’re going to let every stakeholder actively participate in a corporation’s decision making, then those stakeholders need to have a good idea about what’s going on. In the case of W. R. Grace, for example, it’s important to see that a stakeholder theory would not necessarily and immediately have acted to prohibit the dumping of toxins into the soil. Instead, the theory demands that all those who may be affected know what’s being dumped, what the risks are to people and the environment, and what the costs are of taking the steps necessary to dispose of the chemical runoff more permanently and safely.
As already noted, we know now what W. R. Grace should have done under most every ethical theory. At the time, however, stakeholders fully informed of the situation may have been less sure because it wasn’t so clear that the runoff would cause so many problems (or any problems at all). Given that, owners may have favored dumping because that increases profits. Next, what about workers in town? It’s important to keep in mind that the safe removal of the waste may have lowered company profits and potentially caused some layoffs or delayed wage hikes. As stakeholders, they may have been willing to agree to the dumping too. The same goes for community politicians who perhaps would see increased tax revenue as a positive effect of high corporate profits.
What’s certain is that stakeholder theory obligates corporate directors to appeal to all sides and balance everyone’s interests and welfare in the name of maximizing benefits across the spectrum of those whose lives are touched by the business.
Conclusion on the Three Forms of Corporate Social Responsibility
Traditionally, the directors of companies have had an extremely difficult but very narrowly defined responsibility: guide the enterprise toward money. The best companies have been those generating the highest sales, gaining the most customers, and clearing the largest profits. As for ethical questions, they’ve been arranged around the basic obligation to represent the owners’ central interest, which presumably is to profit from their investment. Consequently, the field of business ethics has mainly concerned conflicts and dilemmas erupting inside the company as people try to work together to win in the very competitive economic world. The idea of corporate social responsibility—along with the related ideas of the triple bottom line and stakeholder theory—opens a different kind of business ethics. Morality in the economic world is now about corporate directors sensing and responding to a broad range of obligations, ones extending through the town where the business is located and then out into surrounding communities and through society generally.
In Woburn, Massachusetts, in the early 1980s, this conflict between two ways of running a business played out in the Hollywood depiction of the lawyer played by John Travolta. At the movie’s beginning, right and wrong for a business got decided in dollars and without broader sensibility. Travolta’s law firm existed to make money and operated by accepting only cases that promised big payouts. That’s what brought Travolta to Woburn, the chance to sue deep-pocketed W. R. Grace for poisoning the land with toxic runoff and for destroying the lives of families living near the pools of contamination. Over the course of the movie, however, Travolta becomes attached to Woburn’s cause and the social good of fighting for a clean environment. By the end, he’s risking his firm’s high profits—and, according to his law-firm partners, all common sense—to make sure that harmed people living in town get their good lives back, and to ensure that a Woburn-like toxic disaster won’t happen again.
In terms of business ethics, it’s not difficult to interpret Travolta’s transformation from a businessman taking care of the bottom line, to one engaged by a broader vision of social responsibility. Each of the three discussed theories—corporate social responsibility, the triple bottom line, stakeholder theory—can be fit into the movie A Civil Action.
In terms of corporate social responsibility, Travolta came to believe that his job as the law firm’s leader obligated him to satisfy his economic responsibility to make money for the firm by suing for financial damages while also acting legally. Further, his firm needed to satisfy the ethical responsibility to help others in Woburn get their good lives back. Here, there is a basic duty to help others in need when you have the capability. Finally, there was an element of philanthropy in Travolta’s endeavor because his law firm pursued a case that served the greater good even though more profitable work opportunities were available.
In terms of the triple bottom line of economics, society, and the environment, Travolta came to believe that his job as the law firm’s leader obligated him to take account of and do well in all three areas. It was no longer enough to win money; his business had a moral responsibility to win for society and to win for the environment also. The long-term goal was to ensure the economic sustainability of his firm, the sustainability of healthy family life in Woburn, and the sustainability of clean earth and air in that part of Massachusetts.
In terms of stakeholder ethics, Travolta came to believe that his job as the law firm’s leader obligated him not only to work for the firm’s owners (including himself) but also to take direction from those who would be affected by the firm’s actions. That meant considering—trying to balance and to add up—the interests of his partners and all those who lived in Woburn.
Finally, because Travolta’s story was also a Hollywood story, his transformation on the big screen was presented as the change from an aloof bad guy to a caring good guy. It’s not clear, however, in the real world whether a corporate ethics based on social responsibility, the triple bottom line, or all stakeholders is actually recommendable. The debate between the two ways of thinking about business—the traditional, profit-centered view and the broader, socially responsible view—is hard-fought and intensified by good arguments on both sides.
Key Takeaways
• Corporations may have obligations that go beyond generating profits and include the larger society.
• Corporate social responsibility as a specific theory affirms that corporations are entities with economic, legal, ethical, and philanthropic obligations.
• Corporations responsible for a triple bottom line seek sustainability in the economic, social, and environmental realms.
• Corporate ethics built on stakeholder theory seek to involve all those affected by the organization in its decision-making process.
Exercise \(1\)
1. For corporate advocates of the specific CSR theory, what are the responsibilities the corporation holds, and how are conflicts between those responsibilities managed?
2. Create a hypothetical situation in which philanthropy would not be required of a corporation by CSR theory.
3. What does sustainability mean within each of the three columns of the theory of the triple bottom line?
4. How does the fair trade movement fit together with the triple-bottom-line theory of corporate responsibility?
5. Who are the stakeholders in stakeholder ethics?
6. What does it mean for a corporate director to “balance stakeholder interests”?
7. What basic elements do CSR, the triple bottom line, and stakeholder theory have in common? | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/13%3A_The_Responsible_Office-_Corporations_and_Social_Responsibility/13.02%3A_Three_Theories_of_Corporate_Social_Responsibility.txt |
Learning Objectives
1. Define and elaborate the major arguments in favor of corporations having social and environmental responsibilities.
Why Should Corporations Have Social Responsibilities?
Broadly, there are three kinds of arguments in favor of placing corporations, at least large and fully developed ones, within an ethical context of expansive social and environmental responsibilities:
1. Corporations are morally required to accept those responsibilities.
2. The existence of externalities attaches companies, in operational and economic terms, to those responsibilities.
3. Enlightened self-interest leads to voluntarily embracing those responsibilities.
The Moral Requirement Argument
The moral requirement that business goals go beyond the bottom line to include the people and world we all share is built on the following arguments:
• Corporations are already involved in the broad social world and the ethical dilemmas defining it. For example, factories producing toxic waste are making a statement about the safety and well-being of those living nearby every time they dispose of the toxins. If they follow the cheapest—and least safe—route in order to maximize profits, they aren’t avoiding the entire question of social responsibility; they’re saying with their actions that the well-being of townspeople doesn’t matter too much. That’s an ethical stance. It may be good or bad, it may be justifiable or not, but it’s definitely ethics. Choosing, in other words, not to be involved in surrounding ethical issues is an ethical choice. Finally, because companies are inescapably linked to the ethical issues surrounding them, they’re involved with some form of corporate social responsibility whether they like it or not.
• Corporations, at least well-established, successful, and powerful ones, can be involved in the effective resolution of broad social problems, and that ability implies an obligation. Whether we’re talking about a person or a business, the possession of wealth and power is also a duty to balance that privilege by helping those with fewer resources. Many accept the argument that individuals who are extraordinarily rich have an obligation to give some back by, say, creating an educational foundation or something similar. That’s why people say, “To whom much is given, much is expected.” Here, what’s being argued is that the same obligation applies to companies.
• Corporations rely on much more than their owners and shareholders. They need suppliers who provide materials, employees who labor, a town where the workplace may be located, consumers who buy, air to breathe, water to drink, and almost everything. Because a business relies on all that, the argument goes, it’s automatically responsible—to some extent—for the welfare and protection of those things.
• Because businesses cause problems in the larger world, they’re obligated to participate in the problems’ resolution. What kinds of problems are caused? Taking the example of an industrial chemical factory, toxic waste is produced. Even though it may be disposed of carefully, that doesn’t erase the fact that barrels of poison are buried somewhere and a threat remains, no matter how small. Similarly, companies that fire workers create social tensions. The dismissal may have been necessary or fully justified, but that doesn’t change the fact that problems are produced, and with them comes a responsibility to participate in alleviating the negative effects.
Conclusion. Taken together, these arguments justify the vision of any particular enterprise as much more than an economic wellspring of money. Businesses become partners in a wide world of interconnected problems and shared obligations to deal with them.
The Externality Argument
The second type of argument favoring corporate social responsibility revolves around externalities. These attach corporations to social responsibilities not morally but operationally. An externality in the economic world is a cost of a good or service that isn’t accounted for in the price (when that price is established through basic laws of supply and demand). For example, if a corporation’s factory emits significant air pollution, and that results in a high incidence of upper respiratory infections in the nearby town, then a disproportionately high number of teachers and police officers (among others) are going to call into work sick throughout the year. Substitute teachers and replacment officers will need to be hired, and that cost will be borne by everyone in town when they receive a higher tax bill. The corporation owning the pollution-belching factory, that means, gets the full amount of money from the sale of its products but doesn’t pay the full cost of producing them since the broader public is shouldering part of the pollution bill. This strikes many as unfair.
Another example might be a company underfunding its pension accounts. The business may eventually shut its doors, deliver final profits to shareholders, and leave retired workers without the monthly checks they’d been counting on. Then the government may have to step in with food stamps, welfare payments, and similar to make up for the shortfall, and in the final tabulation, the general public ends up paying labor costs that should have been borne by shareholders.
Externalities, it should be noted, aren’t always negative. For example, the iPhone does a pretty good job of displaying traffic congestion in real time on its map. That ability costs money to develop, which Apple invested, and then they get cash back when an iPhone sells. Apple doesn’t receive, however, anything from those drivers who don’t purchase an iPhone but still benefit from it: those who get to where they’re going a bit faster because everyone who does have an iPhone is navigating an alternate route. More, everyone benefits from cleaner air when traffic jams are diminished, but again, that part of the benefit, which should channel back to Apple to offset its research and production costs, ends up uncompensated.
Whether an externality is negative or positive—whether a company’s bottom line rises or falls with it—a strong argument remains for broad corporate responsibility wherever an externality exists. Because these parts of corporate interaction with the world aren’t accounted for in dollars and cents, a broad ethical discussion must be introduced to determine what, if any, obligations or benefits arise.
The Enlightened Self-interest Argument
The third kind of argument in favor of corporations as seats of social responsibility grows from the notion of enlightened self-interest. Enlightened self-interest means businesses take on broad responsibilities because, on careful analysis, that public generosity also benefits the company. The benefits run along a number of lines:
• Corporations perceived as socially engaged may be rewarded with more and more satisfied customers. TOMS shoes is an excellent example. For every pair of shoes they sell, they give a pair away to needy children. No one doubts that this is a noble action—one displaying corporate vision as going beyond the bottom line—but it’s also quite lucrative. Many people buy from TOMS because of the antipoverty donations, and those customers feel good about their footwear knowing that a child somewhere is better off.
• Organizations positively engaged with society or the environment may find it easier to hire top-notch employees. All workers seek job satisfaction, and given that you spend eight hours a day on the job, the ingredients of satisfaction go beyond salary level. Consequently, workers who select from multiple job offers may find themselves attracted to an enterprise that does some good in the world. This point can also be repeated negatively. Some organizations with more checkered reputations may find it difficult to hire good people even at a high salary because workers simply don’t want to have their name associated with the operation. A curious example to fit in here is the Central Intelligence Agency. Some people will accept a job there at a salary lower than they’d make in the private realm because it’s the CIA, and others won’t work there even if it’s their best offer in terms of money because it’s the CIA.
• Organizations taking the initiative in regulating themselves in the name of social betterment may hold off more stringent requirements that might otherwise be imposed by governmental authorities. For example, a lab fabricating industrial chemicals may wrap their toxic waste in not only the legally required single, leak-proof barrel but a second as well, to positively ensure public safety. That proactive step is not only good for the environment, but it may help the bottom line if it effectively closes off a regulatory commission’s discussion about requiring triple barrel protections.
Enlightened self-interest starts with the belief that there are many opportunities for corporations to do well (make money) in the world by doing good (being ethically responsible). From there, it’s reasonable to assert that because those opportunities exist, corporations have no excuse for not seeking them out, and then profiting from them, while helping everyone else along the way.
One basic question about enlightened self-interest is, “Are corporations making money because they’re doing good deeds, or are they doing good deeds because it makes them money?” In terms of pure consequences, this distinction may not be significant. However, if the reality is that social good is being done only because it makes money, then some will object that corporate social responsibility is twisting into a clever trick employed to maximize profits by deceiving consumers about a business’s intention. CSR becomes an example of cause egoism—that is, giving the false appearance of being concerned with the welfare of others in order to advance one’s own interests.
Key Takeaways
• There are three broad arguments in favor of corporate social responsibility: it is morally required, it’s required by externalities, it serves the interest of the corporation.
Exercise \(1\)
1. In your own words, what are a few reasons a corporation may feel directly required to respond to broad social obligations?
2. What is an example of an externality? How could the existence of that externality be transformed into an argument in favor of corporate social responsibility?
3. List three ways a corporate bottom line may be improved by serving the public welfare. | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/13%3A_The_Responsible_Office-_Corporations_and_Social_Responsibility/13.03%3A_Should_Corporations_Have_Social_Responsibilities_The_Arguments_in_Favor.txt |
Learning Objectives
1. Define and elaborate the major arguments in favor of the corporate purpose as limited to increasing profits.
2. Define and elaborate major arguments against corporations accepting broad social and environmental responsibilities.
The Only Corporate Responsibility Is to Increase Profits
In 1970, just as the idea of corporate social responsibility was gaining traction and influential advocates in the United States, the economist Milton Friedman published a short essay titled “The Social Responsibility of Business is to Increase its Profits.” Possibly the most provocative single contribution to the history of business ethics, Friedman set out to show that large, publicly owned corporations ought to be about making money, and the ethical obligations imposed by advocates of CSR should be dismissed. His arguments convinced some and not others, but the eloquent and accessible way he made them, combined with the fact that his ideas were published in a mainstream publication—the New York Times Magazine—ensured their impact.Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” New York Times Magazine, September 13, 1970, accessed June 7, 2011, www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html.
Businesses, as discussed at the chapter’s beginning, come in all shapes and sizes. When the topic is social responsibility, however, attention frequently fixes on very large corporations because they’re so big (and therefore able to do the most good) and powerful (the philosophies driving them tend to set the tone for business life in general). Friedman’s essay concerns these large, publicly held corporations. Here are his arguments.
The Argument That Businesses Can’t Have Social Responsibilities
A business can’t have moral responsibilities any more than a wrench can. Only humans have moral responsibilities because only we have consciousness and intentions: we’re the only things in the world that can control our actions, that can distinguish between what we want to do and what’s right to do. Therefore, only we can have responsibilities in the ethical sense. What, then, is a business? Nothing more than a tool, something we make to further our ends. It may work well or poorly, but no matter what, it doesn’t do what it wishes, so we can’t blame or credit the business, only those individuals who use it for one purpose or another.
In Woburn, Massachusetts, according to this argument, it makes no sense to say that W. R. Grace has some kind of corporate responsibility to keep the environment clean. A company doesn’t have any responsibilities. It’s like a wrench, a thing out in the world that people use, and that’s all. Would you accuse a wrench of being irresponsible if someone uses it to loosen the bolts on some truckers’ tires and so causes an accident and disastrous spill of toxins? You’d probably accuse the person who used the wrench of acting irresponsibly, but blaming the wrench for something would be madness.
The Argument That Corporate Executives Are Responsible Only to Shareholders
Corporate executives are employees of the owners of the enterprise. They’re contracted and obligated to conduct the business as the owners desire, not in accord with the wishes of some other people out in the world advocating broad social concerns. Executives in this sense are no different from McDonald’s burger flippers: they’re hired and agree to do a certain thing a certain way. If they don’t like it, they’re free to quit, but what they can’t do is take the job and then flip the hamburgers into the trash because their friends are all texting them about how unhealthy McDonald’s food is.
What do corporate owners desire? According to Friedman, the typical answer is the highest return possible on their investment. When you buy shares of the industrial chemical maker W. R. Grace, you check once in a while what the stock price is because price (and the hope that it’s going up) is the reason you bought in the first place. It follows, therefore, that executives—who in the end work for you, the owner—are duty bound to help you get that higher share price, and the quickest route to the goal is large profits.
What about the executive who decides to dedicate time and a corporation’s resources to social welfare projects (to things like reducing runoff pollution even further than the law requires or hiring released felons as a way of easing their passage back into society)? Friedman is particularly cutting on this point. It’s despicable selfishness. There’s nothing easier than generosity with other people’s money. And that’s what, Friedman hints, CSR is really about. It’s about corporate executives who like the idea of receiving accolades for their generous contributions to society, and they like it even more because the cash doesn’t come out of their paycheck; it’s subtracted from shareholder returns. There’s the seed of an argument here, finally, that not only is corporate social responsibility not recommendable, it’s reproachable: in ethical terms, corporate leaders are duty bound to refuse to participate in social responsibility initiatives.
The Argument That Society Won’t Be Served by Corporate Social Responsibility
One serious practical problem with the vision of corporate executives resolving social problems is it’s hard to be sure that their solutions will do good. Presumably, corporate executives got to be executives by managing businesses profitably. That’s certainly a difficult skill, but the fact that it has been mastered doesn’t automatically imply other talents. More, given the fact that corporate executives frequently have no special training in social and environmental issues, it’s perfectly reasonable to worry that they’ll do as much harm as good.
One example of the reversed result comes from Newsweek. Executives at the magazine probably thought they were serving the public interest when they dedicated space in their April 28, 1975, issue to the threatening and impending environmental disaster posed by global…cooling. Not a very enticing subject, they probably could’ve done more for their circulation numbers by running a story (with lots of pictures) about the coming summer’s bathing suit styles, but they did the science to stoke broad discussion of our environmental well-being. As for the stoking, they certainly succeeded. Today, many scientists believe that global warming is the real threat and requires corporations to join governments in reducing carbon emissions. They have a hard time getting their message out cleanly, though, when there’s someone around bringing up that old Newsweek article to discredit the whole discussion.
The Right Institution for Managing Social Problems Is Government
Social problems shouldn’t be resolved by corporations because we already have a large institution set up for that: government. If members of a society really are worried about carbon emissions or the disposal of toxic waste at chemical plants, then they should express those concerns to elected representatives who will, in turn, perform their function, which is to elaborate laws and regulations guiding the way all of us—inside and outside of business—live together. Government, the point is, should do its job, which is to regulate effectively, and those in the business world should do their job, which is to comply with regulations while operating profitably.
Underneath this division of labor, there’s a crucial distinction. Friedman believes that human freedom is based to some significant degree in economic life. Our fundamental rights to our property and to pursue our happiness are inviolable and are expressed in our working activities. The situation is complicated, however, because it’s also true that for us to live together in a society, some restrictions must be placed on individual action. No community can flourish if everyone is just doing what they want. There’s room for quite a bit of discussion here, but in general, Friedman asserts that while government (and other outside institutions) have to be involved in regulation and the imposing of limits, they shouldn’t start trying to mold and dictate basic values in the economic realm, which must be understood in principle as a bastion of individual liberty and free choices.
At this juncture, Friedman’s essay reaches its sharpest point. The notion of corporate social responsibility, Friedman asserts, is not only misguided; it’s dangerous because it threatens to violate individual liberty. Stronger, the violation may ultimately lead to socialism, the end of free market allocation of resources because rampant political forces take control in the boardroom.
The movement to socialism that Friedman fears comes in two steps:
1. Environmental activists, social cause leaders, and crusading lawyers will convince at least a handful of preening business executives that working life isn’t about individuals expressing their freedom in a wide-open world; it’s about serving the general welfare. The notion of corporate social responsibility becomes a mainstream concern and wins wide public support.
2. With the way forced open by activists, the risk is that government will follow: the institution originally set up to regulate business life while guaranteeing the freedom of individuals will fall into the custom of imposing liberty-wrecking rules. Under the weight of these intrusive laws, working men and women will be forced to give up on their own projects and march to the cadence of government-dictated social welfare projects. Hiring decisions, for example, will no longer be about companies finding the best people for their endeavors; instead, they’ll be about satisfying social goals defined by politicians and bureaucrats. Friedman cites as an example the hiring of felons. Obviously, it’s difficult for people coming out of jail to find good jobs. Just as obviously, it’s socially beneficial for jobs to be available to them. The problem comes when governments decide that the social purpose of reinserting convicts is more important than protecting the freedom of companies to hire anyone they choose. When that happens, hiring quotas will be imposed—corporations will be forced to employ certain individuals. This intrusive workplace rule will be followed by others. All of them will need to be enforced by investigating agents and disciplining regulators. As their numbers grow and their powers expand, freedom will be squeezed. Ultimately, freedom may be crushed by, as Friedman puts it, “the iron fist of Government bureaucrats.” Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” New York Times Magazine, September 13, 1970, accessed June 7, 2011, www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html.
It’s difficult to miss the fact that Friedman’s worries were colored by the Cold War, by a historical moment that now feels remote in which the world really did hang in the balance between two views of working life: the American view setting individual freedom as the highest value and the Soviet view raising collectivism and the general welfare above all personal economic concerns and liberties.
Still, and even though today’s historical reality is quite different from the 1970s, the essence of Friedman’s objection to CSR hasn’t changed. It’s that you and I get to be who we are by going out into the world and making something of ourselves. When our ability to do that gets smothered beneath social responsibility requirements, we may help others (or possibly not), but no matter what, we sacrifice ourselves because we’ve lost the freedom to go and do what we choose. This loss isn’t just an inconvenience or a frustration: it’s the hollowing out of our dignity; it’s the collapse of our ability to make ourselves and therefore the end of the opportunity to be someone instead of just anyone.
The Best Way for Corporations to Be Socially Responsible Is to Increase Profits
The final major argument against corporate social responsibility in its various forms is that the best way for most corporations to be socially responsible is to contribute to the community by doing what they do best: excelling in economic terms. When corporations are making profits, the money isn’t just disappearing or piling up in the pockets of the greedy super rich (though some does go there); most of it gets sent back into the economy and everyone benefits. Jobs are created, and those that already exist get some added security. With employment options opening, workers find more chances to change and move up: more successful corporations mean more freedom for workers.
Further, corporations don’t get to be successful through luck, but by delivering goods and services to consumers at attractive prices. Corporate success, that means, should indicate that consumers are doing well. Their quality of life improves as their consumer products improve, and those products improve best and fastest when corporations are competing against each other as freely as possible.
What about the public welfare in the most general sense, the construction of parks, schools, and similar? Here, too, corporations do the best for everyone by concentrating on their own bottom line. More hiring, sales, and profits all also mean more tax revenue flowing to the government. And since elected governmental entities are those organizations best equipped to do public good, the most a corporation can hope for with respect to general social welfare is to succeed, and thereby generate revenues for experts (or, at least democratically elected officials) to divide up wisely.
The term marketplace responsibility, finally, names the economic and social (and political) view emerging from Friedman’s arguments. The title doesn’t mean ethical responsibility in the marketplace so much as it does the specific conception of ethical responsibility that the open marketplace produces. It has two aspects: first, the notion of corporate social responsibility is misguided and dangerous, and second, the corporate purpose of profit maximization serves the social welfare while cohering with the value of human freedom that should be paramount in business ethics.
Conclusion: Corporate Social Responsibility versus Marketplace Responsibility
Advocates of corporate social responsibility believe corporations are obligated to share the burden of resolving society’s problems. They maintain that the responsibility stands on pure moral grounds. More, there are operational reasons for the responsibilities: if businesses are going to contaminate the environment or cause distress in people’s lives, they should also be actively working to resolve the problems. Finally, there’s the strong argument that even if the corporate purpose should be to make profits, social responsibility is an excellent way to achieve the goal.
Advocates of marketplace responsibility—and adversaries of the corporate social responsibility model—argue that by definition corporations can’t have moral responsibilities. Further, to the extent ethical obligations control corporate directors, the obligations are to shareholders. More, corporate directors aren’t experts at solving social problems, and we already have an institution that presumably does have expertise: government. Finally, there’s a strong argument that even if the corporate purpose should include broad social responsibilities, free individuals and corporations in the world making profits is an excellent way to achieve the goal.
Key Takeaways
• The first argument against theories of corporate social responsibility is corporations can’t have ethical responsibilities.
• The second argument is corporate executives are duty bound to pursue profits.
• The third argument is corporations are ill-equipped to directly serve the public good.
• The fourth argument is social issues should be managed by government, not corporations.
• The fifth argument is marketplace ethics reinforce human freedom and corporate social responsibility threatens society with socialism.
• The sixth argument against theories of corporate social responsibility is the best way for corporations to serve the public welfare is by pursuing profits.
Exercise \(1\)
1. What does it mean to say that, in ethical terms, a corporation is no different from a wrench?
2. What primary responsibility do corporate directors have to shareholders? Why do they have it?
3. Why should social issues be managed by government and not corporations?
4. What is the connection between corporate social responsibility and the threat to freedom posed by socialism? How does socialism limit freedom?
5. What is an example of a company doing good by doing well—that is, making profits—and for that reason improving the general welfare? How can the example be converted into an argument against the theory of the corporation as having social responsibilities? | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/13%3A_The_Responsible_Office-_Corporations_and_Social_Responsibility/13.04%3A_Should_Corporations_Have_Social_Responsibilities_The_Arguments_Against.txt |
Casinos and Crime
Source: Photo courtesy of emdot, http://www.flickr.com/photos/emdot/22751767.
Earl Grinols and David Mustard are economists and, like a lot of people, intrigued by both casinos and crime. In their case, they were especially curious about whether the first causes the second. It does, according to their study. Eight percent of crime occurring in counties that have casinos results from the legalized gambling. In strictly financial terms—which are the ones they’re comfortable with as economists—the cost of casino-caused crime is about \$65 per adult per year in those counties. Earl Grinols and David Mustard, “Measuring Industry Externalities: The Curious Case of Casinos and Crime,” accessed June 7, 2011, casinofacts.org/casinodocs/Grinols-Mustard-Casinos_And_Crime.pdf.
When casinos come to town, the following specific crimes increase:
• Robbery (in all three major categories: of individuals, of their homes, of their cars)
• Aggravated assault
• Rape
The crimes also increased to some extent in neighboring counties.
Situation: A casino regular runs out of money after a string of bad cards. She coasts out to the street and drops her purse in front of an out-of-towner. When the chivalrous guy bends over to pick it up for her, she picks his back pocket. With the \$100 stolen from the wallet, she heads back into the casino, spends \$40 on hard liquor, loses the rest at the roulette table, and goes home. She wakes up alone, though some underwear she finds on her floor makes her think she probably didn’t start the night that way. She can’t remember.
Exercise \(1\)
1. Sole proprietorship
• What is a sole proprietorship?
• What are the basic legal steps to take on the way to making a sole proprietorship?
• How are taxes paid in this kind of organization?
• In most casino states and counties, laws protect owners from liability claims arising from problems caused by gambling. In ethical terms, however, if you’re the sole proprietor of the casino, do you feel any responsibility for this episode? Why or why not? If you feel responsibility, to whom would it be? What could you do to set things right?
2. Partnership
• In business, what is a partnership?
• You own only 5 percent of a partner-owned casino, and don’t pay too much attention to what goes on inside. In fact, you don’t like gambling and only invested in the enterprise as a favor to a friend. Do you feel any ethical responsibility for this episode? Why or why not?
3. Nonprofit organization
• What is a nonprofit organization?
• You’re an equal partner in a nonprofit organization that runs the casino to support the cause of building schools for children in impoverished sections of Peru. You spend a few months every year down there building schools and giving free English-language classes. In ethical terms (and regardless of what the law allows), do you believe anyone involved in this episode should be able to sue you personally for their suffering? Why or why not?
4. Large, public corporation
• Large public corporations protect their owners from the ethical implications of what the corporation does through the business’s organizational structure. What is that structure, and how does it protect shareholders?
• Say that the casino under discussion in this set of questions is the MGM Grand Hotel and Casino in Las Vegas, which is owned by a large, public corporation. You have five shares of stock inherited a few years ago when a relative died. You are legally protected from liability claims. In ethical terms, however, do you believe that anyone involved in this episode should be able to sue you personally—or just plain blame you—for their suffering? Why or why not?
5. The woman in the story is your eighteen-year-old daughter. Does that change any of your answers?
6. What is an externality? What externalities probably belong to casinos? Are there any positive externalities that probably belong to casinos?
7. Pigouvian taxes (named after economist Arthur Pigou, a pioneer in the theory of externalities) attempts to correct externalities—and so formalize a corporate social responsibility—by levying a tax equal to the costs of the externality to society. The casino, in other words, that causes crime and other problems costing society, say, \$1 million should pay a \$1 million tax.
• In terms of casinos, would such a tax more or less satisfy any ethical claim that could be made against them for the social problems they cause? Why or why not?
• The way these social scientists measured the cost of each crime was, more or less, by totaling the quantifiable costs—that is, those things that could receive a price tag fairly readily. If, for example, your car gets stolen and sold for parts by a desperate gambler, you can put a price on the crime’s cost by checking the car’s Kelly Blue Book value. Added to that there are administrative costs—at the police station, the insurance company—and those too may be figured in terms of time and wages. Still, quite a bit of the cost of crime escapes (as the authors readily admit) their measure. Their calculations don’t include lost productivity, social service, and welfare costs. They also don’t include emotional costs, the tears, and distress of the victim. Is there any way for those costs—especially the emotional suffering—to be put into dollars and cents? If so, how? If not, is there some other kind of requirement that could be strapped onto casinos to help make them socially responsible for their activities?
Grace
Source: Photo courtesy of Andre Chinn, http://www.flickr.com/photos/andrec/2608065730.
The W. R. Grace Company was founded by, yes, a man named W. R. Grace. He was Irish and it was a shipping enterprise he brought to New York in 1865. Energetic and ambitious, while his company grew on one side, he was getting civically involved on the other. Fifteen years after arriving, he was elected Mayor of New York City. Five years after that, he personally accepted a gift from a delegation representing the people of France. It was the Statue of Liberty.
Grace was a legendary philanthropist. He provided massive food donations to his native Ireland to relieve famine. At home, his attention focused on his nonprofit Grace Institute, a tuition-free school for poor immigrant women. The classes offered there taught basic skills—stenography, typewriting, bookkeeping—that helped students enter the workforce. More than one hundred thousand young women have passed through the school, which survives to this day.
In 1945, grandson J. Peter Grace took control of the now worldwide shipping company. A decade later, it became a publicly traded corporation on the New York Stock Exchange. The business began shifting from shipping to chemical production.
By the 1980s, W. R. Grace had become a chemical and materials company, and it had come to light that one of its plants had been pouring toxins into the soil and water underneath the small town of Woburn, Massachusetts. The poisons worked their way into the town’s water supply and then into the townspeople. It caused leukemia in newborns. Lawsuits in civil court, and later investigations by the Environmental Protection Agency, cost the corporation millions.
J. Peter Grace retired as CEO in 1992. After forty-eight years on the job, he’d become the longest-reigning CEO in the history of public companies. During that time, he also served as president of the Grace Institute.
The nonfiction novel A Civil Action came out in 1996. The best-selling, award-winning chronicle of the Woburn disaster soon became a Hollywood movie. The movie, starring John Travolta, continues to appear on television with some regularity.
To honor the Grace Institute, October 28 was designated “Grace Day” by New York City in 2009. On that day, the institute defined its mission this way: “In the tradition of its founding family, Grace Institute is dedicated to the development of the personal and business skills necessary for self-sufficiency, employability, and an improved quality of life.” “Our Mission,” Grace Institute, accessed June 1, 2011, www.graceinstitute.org/mission.asp.
Exercise \(2\)
1. The specific theory of corporate social responsibility encompasses four kinds of obligations: economic, legal, ethical, and philanthropic.
• How are business leaders meant to organize these four responsibilities? Which ones take precedence over the others and why?
• Judging the man named W. R. Grace through the lens of CSR, how well did he respond to his obligations? Explain.
• Judging the company’s more recent activities in the 1980s through the lens of CSR, how well did it respond to its obligations? Explain.
2. The triple-bottom-line theory of corporate responsibility promotes three kinds of sustainability: economic, social, and environmental.
• What does the term sustainability mean within this theory and within each of the three categories?
• The W. R. Grace company has a long history. From the information provided, what are some of the steps the company has taken to become economically sustainable? Explain.
• What are some of the steps the W. R. Grace company has taken to promote social sustainability? Explain.
• What is environmental sustainability? How can the dumping of toxic waste in Woburn be categorized as unethical within the area of environmental sustainability concerns? Explain.
3. Stakeholder theory affirms that for companies to perform ethically, management decisions must take account of and respond to stakeholder concerns.
• What is a stakeholder?
• Looking back at the early company in New York in the 1800s, who would have been some of the stakeholders surrounding the Grace shipping company?
• Looking to more recent history, to the corporation as a producer of industrial chemicals in Woburn, Massachusetts, who were some of the major stakeholders surrounding Grace?
• Explain why the Grace Institute, which receives generous support from the W. R. Grace industrial chemical corporation—and the women receiving training there—are stakeholders in the W. R. Grace corporation.
• The Grace Institute—the people employed there and the women receiving free training—depend to some extent on the chemical company being profitable. Could you construct an argument in favor of the chemical company being environmentally irresponsible if that allows profits, and therefore necessary support for the Institute?
4. As this question is being written, the share price of W. R. Grace is \$26.17, and there are a total of 72,780,100 shares out there in the world. You’ve saved some money from a summer job and invested in Grace, 100 shares to be exact. That costs you \$2,617, and means you own a not-overwhelming 0.000137 percent of the company. Next, you e-mail this to the CEO: “I worked hard for my \$2,617, I bought stock to see that amount rise, and I want you to pour a little bit more of the profits into research and development of new products, and a little less into the Grace Institute.” Assuming the CEO is a proponent of stakeholder ethics, what do you suppose the response would be?
5. There are a number of arguments supporting the proposal that corporations are autonomous entities (apart from owners and directors and employees) with ethical obligations in the world. The moral requirement argument contains four elements:
• Corporations are already involved in the broad social world and the ethical dilemmas defining it, and therefore they are obligated to participate and help solve problems.
• Well-established, successful, and powerful corporations can be involved in the effective resolution of broad social problems, and that ability implies an obligation to do so.
• Corporations rely on much more than their owners and shareholders. They need suppliers, employees, a town in which to locate, consumers, air to breathe, and water to drink. That reliance implies an obligation to care for the welfare and protection of those things.
• Because businesses cause problems in the larger world, they’re obligated to participate in the problems’ resolution.
How can each of these general arguments be specified in the case of W. R. Grace?
6. Summarize the externality argument in favor of corporations having ethical obligations in the world. How can it be specified in the case of W. R. Grace?
The Body Shop
Source: Photo courtesy of the Italian Voice, http://www.flickr.com/photos/desiitaly/2254327579.
The Body Shop is a cosmetics firm out of England, founded by Anita Roddick. “If business,” she writes on the company’s web page, “comes with no moral sympathy or honorable code of behaviors, then God help us all.” “Our Values,” The Body Shop, accessed June 7, 2011, www.thebodyshop.com/_en/_ww/services/aboutus_values.aspx.
Moral sympathy and an honorable code of behaviors has certainly helped The Body Shop. Constantly promoted as an essential aspect of the company and a reason to buy its products, the concept of corporate social responsibility has been a significant factor in the conversion of a single small store in England to a multinational conglomerate.
Maybe it has been too significant a factor. That’s certainly the suspicion of many corporate watchers. The suspicion isn’t that the actual social responsibility has been too significant but that the actions of corporate responsibility have been much less energetic than their promotion. The social responsibility has been, more than anything else, a marketing strategy. Called greenwashing, the accusation is that only minimally responsible actions have been taken by The Body Shop, just enough to get some good video and mount a loud advertising campaign touting the efforts. Here’s the accusation from a website called thegoodhuman.com:
The Body Shop buys the palm oil for their products from an organization that pushed for the eviction of peasant families to develop a new plantation. So much for their concern about creating “sustainable trading relationships with disadvantaged communities around the world.” “Greenwash of the Week: The Body Shop Business Ethics,” The Good Human, September 30, 2009, accessed June 7, 2011, www.thegoodhuman.com/2009/09/30/greenwash-of-the-week-the-body-shop-business-ethics.
Exercise \(3\)
1. What is the enlightened self-interest argument in favor of corporate social responsibility? How does the case of The Body Shop illustrate and make that argument?
2. From the perspective of the enlightened self-interest argument in favor of corporate social responsibility, what can be made of the accusation that The Body Shop is a greenwasher? Explain.
3. With reference to Milton Friedman’s marketplace ethics—essentially the idea that corporations have only one ethical responsibility, to make money—what can be made of the greenwashing accusation? Is it possible that it’s not so much an accusation as a compliment?
4. If a corporation acts in a way that does good in the world, does motive matter, does it matter why the corporation does what it does? Justify your answer.
Greed is Good
Source: Photo courtesy of the Annie Mole, http://www.flickr.com/photos/anniemole/2750611025.
It’s probably the most repeated business ethics line in recent history. Michael Douglas—playing Wall Street corporate raider Gordon Gekko—stands in front of a group of shareholders at Teldar Paper and announces, “Greed is good.”
Teldar has been losing money, but the company, Douglas believes, is fundamentally strong. The problem’s the management; it’s the CEO and chief operations officer and all their various vice presidents. Because they don’t actually own the company, they only run it, they’re tempted to use the giant corporation to make their lives comfortable instead of winning profits for the actual owners, the shareholders. As one of those shareholders, Douglas is proposing a revolt: get rid of the lazy executives and put in some new directors (like Douglas’s friends) who actually want to make money. Here’s the pitch. Douglas points at the CEO and the rest of the management team up at their table:
All together, these men sitting up here own less than 3 percent of the company. And where does the CEO put his million-dollar salary? Not in Teldar stock; he owns less than 1 percent.
Dramatic pause. Douglas earnestly faces his fellow shareholders.
You own the company. That’s right—you, the stockholder. And you’re all being royally screwed over by these bureaucrats with their steak lunches, their hunting and fishing trips, their corporate jets and golden parachutes. Teldar Paper has 33 different vice presidents, each earning over 200 thousand dollars 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 dollars last year. 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.
He adds,
In the last seven deals that I’ve been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars.Wall Street, directed by Oliver Stone (Los Angeles: Twentieth Century Fox, 1987), film.
Exercise \(4\)
1. Douglas says, “In my book you either do it right or you get eliminated.”
• In economic terms, what does “do it right” mean?
• In ethical terms, and with reference to a marketplace morality resembling the one Milton Friedman proposes, what does “do it right” mean?
2. The structure of most large, publicly held corporations separates owners from actual managers who are hired to run the company. They’re employed agents of the owners. What does that mean as far as their ethical obligations go with respect to the purpose of the company they are leading?
3. In the real world, the paper company Weyerhaeuser promotes itself as socially and environmentally responsible. On their web page, they note that they log the wood for their paper from certified forests at a percentage well above that required by law. “Forest Certification,” Weyerhaeuser, accessed June 7, 2011, www.weyerhaeuser.com/Sustainability/Footprint/Certification. Carefully defining a “certified forest” would require pages, but basically the publicly held corporation is saying that they don’t just buy land, clear-cut everything, and then move on. Instead, and at a cost to themselves, they leave some trees uncut and plant others to ensure that the forest they’re cutting retains its character.
• How could Douglas’s speech at Teldar be rewritten as a criticism of the management at Weyerhaeuser?
• What specific criticism would Douglas launch at Weyerhaeuser managers who spend corporate money planting trees?
• If it turned out that the sustainable forest initiative cost Weyerhaeuser some money up front, but ultimately won them positive publicity and consequently more consumers, would Douglas approve of the practice? Explain.
4. One broad argument against the various ideas of corporate social and environmental responsibility is that corporations can’t have moral responsibilities at all. How could that argument be specified in the case of Weyerhaeuser?
5. According to the Weyerhaeuser web page, the US government sets certain rules for sustainability with respect to forests. Weyerhaeuser complies and then goes well beyond those requirements. According to Milton Friedman and the ideals of marketplace responsibility, broad questions about social and environmental corporate responsibilities should be answered by democratically elected governments because that’s the institution we’ve developed to manage our ethical life. Governments should try to succeed in the ethical realm by making good laws; companies should try to succeed in the economic realm by making good profits.
• Weyerhaeuser notes on its web page that in China and Uruguay it obeys local regulations with respect to logging. Apparently, however, the company isn’t doing quite as much in those places to avoid the environmental problem of deforestation. Land is very inexpensive in vast, poor nations like these two, and it looks like Weyerhaeuser more or less does what’s required and that’s it. Maybe the company simply buys acres, cuts them, and moves on. Make the case that in ethical terms, the corporate actions in Uruguay and China are more respectable than the actions here in the States.
6. The first part of Douglas’s speech concerned problems with the corporate organization’s structure, and with out-of-control managers: people employed to run a company who promptly forget who their bosses are. The speech’s second part is about what drives life in the business world:
The point is, ladies and gentleman, 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.
Greed, Douglas says, is an imperfect word for what he’s describing. What words might have been better? What words might advocates of marketplace ethics propose?
7. One word that might have worked better than greed is ambition. Whether the word is greed or ambition, it has, according to the Douglas character, marked the upward surge of mankind. Assume that’s true. Can you speculate about how the upward surge would play out in a developing nation like Uruguay when a multinational comes to town, brings money, creates jobs, and wrecks the forests? | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/13%3A_The_Responsible_Office-_Corporations_and_Social_Responsibility/13.05%3A_Case_Studies.txt |
Chapter 14 explores the multiple relations linking business, the environment, and environmental protection. The question of animal rights is also considered.
14: The Green Office- Economics and the Environment
Learning Objectives
1. Consider damage done to the environment in a business context.
2. Delineate major legal responses to concerns about the environment.
Cancun
Cancun, Mexico, is paradise: warm climate, Caribbean water, white sand beaches, stunning landscapes, coral reefs, and a unique lagoon. You can sunbathe, snorkel, parasail, shoot around on jet skis, and drink Corona without getting carded.
Hordes of vacationers fill the narrow, hotel-lined peninsula—so many that the cars on the one main street snarl in traffic jams running the length of the tourist kilometers. It’s a jarring contrast: on one side the placid beaches (until the jet skis get geared up), and on the other there’s the single road about a hundred yards inland. Horns scream, oil-burning cars and trucks belch pollution, tourists fume. Cancun’s problem is that it can’t handle its own success. There’s not enough room for roads behind the hotels just like there’s not enough beach in front to keep the noisy jet skiers segregated from those who want to take in the sun and sea quietly.
The environment hasn’t been able to bear the success either. According to a report,
The tourist industry extensively damaged the lagoon, obliterated sand dunes, led to the extinction of varying species of animals and fish, and destroyed the rainforest which surrounds Cancun. The construction of 120 hotels in 20 years has also endangered breeding areas for marine turtles, as well as causing large numbers of fish and shellfish to be depleted or disappear just offshore. “Cancun Tourism,” TED, Trade & Environment Database, case no. 86, accessed June 8, 2011, http://www1.american.edu/TED/cancun.htm.
For all its natural beauty, environmentally, Cancun is an ugly place. Those parts of the natural world that most tourists don’t see (the lagoon, the nearby forest, the fish life near shore) have been sacrificed so a few executives in suits can make money.
From its inception, Cancun was a business. The Mexican government built an airport to fly people in, set up rules to draw investors, and made it (relatively) easy to build hotels on land that only a few coconut harvesters from the local plantation even knew about. From a business sense, it was a beautiful proposition: bring people to a place where they can be happy, provide new and more lucrative jobs for the locals, and build a mountain of profit (mainly for government insiders and friends) along the way.
Everything went according to plan. Those who visit Cancun have a wonderful time (once they finally get down the road to their hotel). College students live it up during spring break, young couples take their children to play on the beach, older couples go down and remember that they do, in fact, love each other. So fish die, and people get jobs. Forests disappear, and people’s love is kindled. The important questions about business ethics and the environment are mostly located right at this balance and on these questions: how many trees may be sacrificed for human jobs? How many animal species can be traded for people to fall in love?
What Is the Environment?
Harm to the natural world is generally discussed under two terms: the environment and the ecosystem. The words’ meanings overlap, but one critical aspect of the term ecosystem is the idea of interrelation. An ecosystem is composed of living and nonliving elements that find a balance allowing for their continuation. The destruction of the rain forest around Cancun didn’t just put an end to some trees; it also jeopardized a broader web of life: birds that needed limbs for their nests disappeared when the trees did. Then, with the sturdy forest gone, Hurricane Gilbert swept through and wiped out much of the lower-level vegetation. Meanwhile, out in the sea, the disappearance of some small fish meant their predators had nothing to feed on and they too evaporated. What makes an ecosystem a system is the fact that the various parts all depend on each other, and damaging one element may also damage and destroy another or many others.
In the sense that it’s a combination of interdependent elements, the tourist world in Cancun is no different from the surrounding natural world. As the traffic jams along the peninsula have grown, making it difficult for people to leave and get back to their hotels, the tourists have started migrating away, looking elsewhere for their vacation reservations. Of course Cancun isn’t going to disappear, but if you took that one road completely away, most everything else would go with it. So economic realities can resemble environmental ones: once a single part of a functioning system disappears, it’s hard to stop the effects from falling further down the line.
What Kinds of Damage Can Be Done to the Environment?
Nature is one of nature’s great adversaries. Hurricanes sweeping up through the Caribbean and along the Eastern Seaboard of the United States wipe out entire ecosystems. Moving inland, warm winters in northern states like Minnesota can allow some species including deer to reproduce at very high rates, meaning that the next winter, when conditions return to normal, all available food is eaten rapidly at winter’s onset, and subsequent losses to starvation are massive and extend up the food chain to wolves and bears. Lengthening the timeline, age-long periods of warming and cooling cause desertification and ice ages that put ends to giant swaths of habitats and multitudes of species.
While it’s true that damaging the natural world’s ecosystems is one of nature’s great specialties, evidence also indicates that the human contribution to environmental change has been growing quickly. It’s impossible to measure everything that has been done, or compare the world today with what would have been had humans never evolved (or never created an industrialized economy), but one way to get a sense of the kind of transformations human activity may be imposing on the environment comes from extinction rates: the speed at which species are disappearing because they no longer find a habitable place to flourish. According to some studies, the current rate of extinction is around a thousand times higher than the one derived from examinations of the fossil record, which is to say, before the time parts of the natural world were being severely trashed by developments like those lining the coast of Cancun, Mexico. Kent Holsinger, “Patterns of Biological Extinction,” lecture notes, University of Connecticut, August 31, 2009, accessed June 8, 2011, darwin.eeb.uconn.edu/eeb310/lecture-notes/extinctions/node1.html.
In an economics and business context, the kinds of damage our industrialized lifestyles most extensively wreak include:
• Air pollution
• Water pollution
• Soil pollution
• Contamination associated with highly toxic materials
• Resource depletion
Air pollution is the emission of harmful chemicals and particulate matter into the air. Photochemical smog—better known simply as smog—is a cocktail of gases and particles reacting with sunlight to make visible and poisonous clouds. Car exhaust is a major contributor to this kind of pollution, so smog can concentrate in urban centers where traffic jams are constant. In Mexico City on bad days, the smog is so thick it can be hard to see more than ten blocks down a straight street. Because the urban core is nestled in a mountain valley that blocks out the wind, pollutants don’t blow away as they do in many places; they get entirely trapped. During the winter, a brown top forms above the skyline, blocking the view of the surrounding mountain peaks; the cloud is clearly visible from above to those arriving by plane. After landing, immediately upon exiting the airport into the streets, many visitors note their eyes tearing up and their throats drying out. In terms of direct bodily harm, Louisiana State University environmental chemist Barry Dellinger estimates that breathing the air in Mexico’s capital for a day is about the equivalent of smoking two packs of cigarettes. “Is Air Pollution Killing You?” Ivanhoe Newswire, May 2009, accessed June 8, 2011, www.ivanhoe.com/science/story/2009/05/572a.html. This explains why, on the worst days, birds drop out of the air dead, and one longer-term human effect is increased risk of lung cancer.
Greenhouse gasses, especially carbon dioxide released when oil and coal are burned, absorb and hold heat from the sun, preventing it from dissipating into space, and thereby creating a greenhouse effect, a general warming of the environment. Heat is, of course, necessary for life to exist on earth, but fears exist that the last century of industrialization has raised the levels measurably, and continuing industrial expansion will speed the process even more. Effects associated with the warming are significant and include:
• Shifts in vegetation, in what grows where
• Rising temperatures in lakes, rivers, and oceans, leading to changes in wildlife distribution
• Flooding of coastal areas, where many of our cities are located (Cancun could be entirely flooded by only a small rise in the ocean’s water level.)
Another group of chemicals, chlorofluorocarbons (CFCs), threaten to break down the ozone layer in the earth’s stratosphere. Currently, that layer blocks harmful ultraviolet radiation from getting through to the earth’s surface where it could cause skin cancer and disrupt ocean life. Effective international treaties have limited (though not eliminated) CFC emissions.
Coal-burning plants—many of which produce electricity—release sulfur compounds into the air, which later mix into water vapor and rain down as sulfuric acid, commonly known as acid rain. Lakes see their pH level changed with subsequent effects on vegetation and fish. Soil may also be poisoned.
Air pollution is the most immediate form of environmental poison for most of us, but not the only significant one. In China, more than 25 percent of surface water is too polluted for swimming or fishing. “More than 25% of China’s Surface Water Contaminated,” China Daily, July 26, 2010, accessed June 8, 2011, http://www.chinadaily.com.cn/china/2010-07/26/content_11051350.htm.
Some of those lakes may have been ruined in the same way as Onondaga Lake near Syracuse, New York. Over a century ago, resorts were built and a fish hatchery flourished on one side of the long lake. The other side received waste flushed by the surrounding cities and factories. Problems began around 1900 when the fish hatchery could no longer reproduce fish. Soon after, it was necessary to ban ice harvesting from the lake. In 1940, swimming was banned because of dangerous bacteria, and in 1970, fishing had to be stopped because of mercury and PCB contamination. The lake was effectively dead. To cite one example, a single chemical company dumped eighty tons of mercury into the water during its run on the coast. Recently, the New York state health department loosened restrictions slightly, and people are advised that they may once again eat fish caught in the lake. Just as long as it’s not more than one per month. Those who do eat more risk breakdown of their nervous system, collapse of their liver, and teeth falling out. The Upstate Freshwater Institute Onondaga Lake page, October 22, 2010, accessed June 8, 2011, www.upstatefreshwater.org/html/onondaga_lake.html; “2010–2011 Health Advisories: Chemicals in Sportfish and Game,” New York State Department of Health, 2011, accessed June 8, 2011, static.ongov.net/WEP/wepdf/2009_AMP-FINAL/Library/11_SupportingDocs/L11.10.11_HealthAdvisory2010-2011.pdf.
Like liquid poisons, solid waste can be dangerous. Paper bags degrade fairly rapidly and cleanly, but plastic containers remain where they’re left into the indefinite future. The metal of a battery tossed into a landfill will break down eventually, but not before dripping out poisons including cadmium. Cadmium weakens the bones in low doses and, if exposure is high, causes death.
At the industrial waste extreme, there are toxins so poisonous they require special packaging to prevent even minimal exposure more or less forever. The waste from nuclear power plants qualifies. So noxious are the spent fuel rods that it’s a matter of national debate in America and elsewhere as to where they should be stored. When the Chernobyl nuclear plant broke open in 1986, it emitted a radioactive cloud that killed hundreds and forced the permanent evacuation of the closest town, Pripyat. Area wildlife destruction would require an entire book to document, but as a single example, the surrounding pine forest turned red and died after absorbing the radiation storm.
Finally, all the environmental damage listed so far has resulted from ruinous substance additions to natural ecosystems, but environmental damage also runs in the other direction as depletion. Our cars and factories are sapping the earth of its petroleum reserves. Minerals, including copper, are being mined toward the point where it will become too expensive to continue digging the small amount that remains from the ground. The United Nations estimates that fifty thousand square miles of forest are disappearing each year, lost to logging, conversion to agriculture, fuel wood collection by rural poor, and forest fires. Rhett A. Butler, “World Deforestation Rates and Forest Cover Statistics, 2000–2005,” Mongabay.com, November 16, 2005, accessed June 8, 2011, http://news.mongabay.com/2005/1115-forests.html. Of course, most of those tree losses can be replanted. On the other hand, species that are driven out of existence can’t be brought back. As already noted, current rates of extinction are running far above “background extinction” rates, which is an approximation of how many species would disappear each year were the rules of nature left unperturbed.
Conclusion. Technically, there’s no such thing as preserving the environment because left to its own devices the natural world does an excellent job of wreaking havoc on itself. Disruptions including floods, combined with wildlife battling for territory and food sources, all that continually sweeps away parts of nature and makes room for new species and ecosystems. Still, changes wrought by the natural world tend to be gradual and balanced, and the worry is that our industrialized lifestyle has become so powerful that nature, at least in certain areas, will no longer be able to compensate and restore any kind of balance. That concerns has led to both legal efforts, and ethical arguments, in favor of protecting the environment.
The Law
Legal efforts to protect the environment in the United States intensified between 1960 and 1970. The Environmental Protection Agency (EPA) was established in 1970 to monitor and report on the state of the environment while establishing and enforcing specific regulations. Well known to most car buyers as the providers of the mile-per-gallon estimates displayed on the window sticker, the EPA is a large agency and employs a workforce compatible with its mission, including scientists, legal staffers, and communications experts.
Other important legal milestones in the field of environmental protection include:
• The Clean Air Act of 1963 and its many amendments regulate emissions from industrial plants and monitor air quality. One measure extends to citizens the right to sue companies for damages if they aren’t complying with existing regulations: it effectively citizenizes law enforcement in this area of environmental protection.
• The Clean Water Act, along with other, related legislation, regulates the quality of water in the geographic world (lakes and rivers), as well as the water we drink and use for industrial purposes. Chemical composition is important, and temperature also. Thermal pollution occurs when factories pour heated water back into natural waterways at a rate sufficient to affect the ecosystem.
• The Wilderness Act, along with other legislation, establishes areas of land as protected from development. Some zones, including the Boundary Waters Canoe Area in northern Minnesota, are reserved for minimal human interaction (no motors are allowed); other areas are more accessible. All wilderness and national park areas are regulated to protect natural ecosystems.
• The Endangered Species Act and related measures take steps to ensure the survival of species pressed to near extinction, especially by human intrusion. One example is the bald eagle. Subjected to hunting, loss of habitat, and poisoning by the pesticide DDT (which caused eagle eggs to crack prematurely), a once common species was reduced to only a few hundred pairs in the lower forty-eight states. Placed on the endangered species list in 1967, penalties for hunting were increased significantly. Also, DDT was banned, and subsequently the eagle made a strong comeback. It is no longer listed as endangered.
• The National Environmental Policy Act of 1969 requires that an environmental impact statement be prepared for many major projects. The word environment in this case means not only the natural world but also the human one. When a new building is erected in a busy downtown, the environmental impact statement reports on the effect the building will have on both the natural world (how much new air pollution will be released from increased traffic, how much water will be necessary for the building’s plumbing, how much electricity will be used to keep the place cool in the summer) and also the civilized one (whether there’s enough parking in the area for all the cars that will arrive, whether nearby highways can handle the traffic and similar). Staying with the natural factors, the statement should consider impacts—positive and negative—on the local ecosystem as well as strategies for minimizing those impacts and some consideration of alternatives to the project. The writing and evaluation of these statements can become sites of conflict between developers on one side and environmental protection organizations on the other.
Two major additional points about legal approaches to the natural world should be added. First, they can be expensive; nearly all environmental protection laws impose costs on business and, consequently, make life for everyone more costly. When developers of downtown buildings have to create a budget for their environmental impact statements, the expenses get passed on to the people who buy condos in the building. There’s no doubt that banning the pesticide DDT was good for the eagle, but it made farming—and therefore the food we eat—more expensive. Further, clean water and air stipulations don’t only affect consumers by making products more expensive; the environmental responsibility also costs Americans jobs every time a factory gets moved to China or some other relatively low-regulation country. Of course, it’s also true that, as noted earlier, around 25 percent of China’s surface water is poisonous, but for laid-off workers in the States, it may be hard to worry so much about that.
Second, these American laws, regulations, and agencies don’t make a bit of difference in Cancun, Mexico. Even though Cancun and America wash back and forth over each other (Cancun’s hotels were constructed, chiefly, to host American visitors), the rights and responsibilities of legal dominion over the environment stop and start at places where people need to show their passports. This is representative of a larger reality: more than most issues in business ethics, arguments pitting economic and human interests against the natural world are international in nature. The greenhouse gases emitted by cars caught in Cancun traffic are no different, as far as the earth is concerned, from those gases produced along clogged Los Angeles freeways.
Key Takeaways
• Ecosystems are natural webs of life in which the parts depend on each other for their continued survival.
• In a business context, the major types of pollution include air, water, soil, and contamination associated with highly toxic materials.
• Resource depletion is a type of environmental damage.
• Numerous laws regulate the condition and use of the environment in the United States.
Exercise \(1\)
1. What is an example of an ecosystem?
2. Explain one way that an ecosystem can resemble an economic system.
3. What are some effects of smog?
4. What’s an environmental impact statement?
5. Why are the business ethics of the environment more international in nature than many other subjects? | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/14%3A_The_Green_Office-_Economics_and_the_Environment/14.01%3A_The_Environment.txt |
Learning Objectives
1. Outline five attitudes toward environmental protection.
2. Consider who should pay for environmental protection and cleanup.
The Range of Approaches to Cancun
Cancun is an environmental sacrifice made in exchange for tourist dollars. The unique lagoon, for example, dividing the hotel strip from the mainland was devastated by the project. To construct the roadwork leading around the hotels, the original developers raised the earth level, which blocked the ocean’s high tide from washing over into the lagoon and refreshing its waters. Quickly, the living water pool supporting a complex and unique ecosystem clogged with algae and became a stinky bog. No one cared too much since that was the street side, and visitors had come for the ocean.
Still, one hotel developer decided to get involved. Ricardo Legorreta who designed the Camino Real Hotel (today named Dreams Resort) said this about his early 1970s project: “Cancun is more water than land. The Hotel Camino Real site was originally 70 percent water. It had been filled during the urbanization process. I wanted to return the site to its original status, so we built the guest room block on solid rock and the public areas on piles, and then excavated what was originally the lagoon. The difference in tide levels provides the necessary water circulation to keep the new lagoon clean.” Ricardo Legorreta, Wayne Attoe, Sydney Brisker, and Hal Box, The Architecture of Ricardo Legorreta (Austin: University of Texas Press, 1990), 108.
Specific numbers aren’t available, but plainly it costs more to dig out the ground and then build on piles than it does to just build on the ground. To save the lagoon, the owners of the Camino Real spent some money.
Was it worth it? The answer depends initially on the ethical attitude taken toward the environment generally; it depends on how much, and how, value is assigned to the natural world. Reasonable ethical cases can be made for the full range of environmental protection, from none (total exploitation of the natural world to satisfy immediate human desires) to complete protection (reserving wildlife areas for freedom from any human interference). The main positions are the following and will be elaborated individually:
• The environment shouldn’t be protected.
• The environment should be protected in the name of serving human welfare.
• The environment should be protected in the name of serving future generations’ welfare.
• The environment should be protected in the name of serving animal welfare.
• The environment should be protected for its own sake.
The Environment Shouldn’t Be Protected
Should individuals and businesses use the natural world for our own purposes and without concern for its welfare or continuation? The “yes” answer traces back to an attitude called free use, which pictures the natural world as entirely dedicated to serving immediate human needs and desires. The air and water and all natural resources are understood as belonging to everyone in the sense that all individuals have full ownership of, and may use, all resources belonging to them as they see fit. The air blowing above your land and any water rolling through it are yours, and you may breathe them or drink them or dump into them as you like. This attitude, finally, has both historical and ethical components.
The history of free use starts with the fact that the very idea of the natural world as needing protection at all is very recent. For almost all human history, putting the words environment and protection together meant finding ways that we could be protected from it instead of protecting it from us. This is very easy to see along Europe’s Mediterranean coast. As opposed to Cancun where all the buildings are pushed right up to the Caribbean and open to the water, the stone constructions of Europe’s old coastal towns are huddled together and open away from the sea. Modern and recently built hotels obscure this to some extent, but anyone walking from the coast back toward the city centers sees how all the old buildings turn away from the water as though the builders feared nature, which, in fact, they did.
They were afraid because the wind and storms blowing off the sea actually threatened their existences; it capsized their boats and sent water pouring through roofs and food supplies. Going further, not only is it the case that until very recently nature threatened us much more than we threatened it, but in those cases where humans did succeed in doing some damage, nature bounced right back. After a tremendously successful fishing year, for example, the supply of food swimming off the coastlines of the Mediterranean was somewhat depleted, but the next season things would return to normal. It’s only today, with giant motorized boats pulling huge nets behind, that we’ve been able to truly fish out some parts of the sea. The larger historical point is that until, say, the nineteenth century, even if every human on the planet had united in a project to ruin nature irrevocably, not much would’ve happened. In that kind of reality, the idea of free use of our natural resources makes sense.
Today, at a time when our power over nature is significant, there are two basic arguments in favor of free use:
1. The domination and progress argument
2. The geological time argument
The domination and progress argument begins by refusing to place any necessary and intrinsic value in the natural world: there’s no autonomous worth in the water, plants, and animals surrounding us. Because they have no independent value, those who abuse and ruin nature can’t be automatically accused of an ethical violation: nothing intrinsically valuable has been damaged. Just as few people object when a dandelion is pulled from a front yard, so too there’s no necessary objection to the air being ruined by our cars.
Connected with this disavowal of intrinsic value in nature’s elements, there’s high confidence in our ability to generate technological advances that will enable human civilization to flourish on the earth no matter how contaminated and depleted. When we’ve drilled the last drop of the petroleum we need to heat our homes and produce electricity to power our computers, we can trust our scientists to find new energy sources to keep everything going. Possibly solar energy technologies will leap forward, or the long-sought key to nuclear fission will be found in a research lab. As for worries about the loss of wildlife and greenery, that can be rectified with genetic engineering, or by simply doing without them. Even without human interference, species are disappearing every day; going without a few more may not ultimately be important.
Further, it should be remembered that there are many natural entities we’re happy to do without. No one bemoans the extinction of the virus called variola, which caused smallpox. That disease was responsible for the death of hundreds of millions of humans, and for much of history has been one of the world’s most terrifying scourges. In the 1970s, the virus was certified extinct by the World Health Organization. No one misses it; not even the most devoted advocate of natural ecosystems stood up against the human abuse and final eradication of the virus. Finally, if we can destroy one part of the natural world without remorse, can’t that attitude be extended? No one is promoting reckless or wanton destruction, but as far as those parts of nature required to live well, can’t we just take what we need until it runs out and then move on to something else?
To a certain extent, this approach is visible in Cancun, Mexico. The tourist strip has reached saturation, and the natural world in the area—at least those parts tourists won’t pay to see—has been decimated. So what are developers doing? Moving down the coast. The new hotspot is called Playa del Carmen. Extending south from Cancun along the shoreline, developers are gobbling up land and laying out luxury hotels at a nonstop rate and with environmental effects frequently (not in every case) similar to those defining Cancun. What happens when the entire area from Cancun to Chetumal is cemented over? There’s more shoreline to be found in Belize, and on Mexico’s Pacific coast, and then down in Guatemala.
What happens when all shoreline runs out? There’s a lot of it around the world, but when the end comes, it’ll also probably be true that we won’t need a real natural world to have a natural world, at least those parts of it that we enjoy. Already today at Typhoon Lagoon in Disney World, six-foot waves roll down for surfers. And visitors to the Grand Canyon face a curious choice: they can take the trouble to actually walk out and visit the Grand Canyon, or, more comfortably, they may opt to see it in an impressive IMAX theater presentation. There’s no reason still more aspects of the natural world, like the warm breezes and evening perfection of Cancun, couldn’t be reproduced in a warehouse. Of course there are people who insist that they want the real thing when it comes to nature, but there were also once people who insisted that they couldn’t enjoy a newspaper or book if it wasn’t printed on real paper.
Next, moving on to the other of the two arguments in favor of free use, there’s the idea that we might as well use everything without anxiety because, in the end, we really can’t seriously affect the natural world anyway. This sounds silly at first; it seems clear that we can and do wreak havoc: species disappear and natural ecosystems are reduced to dead zones. However, it must be noted that our human view of the world is myopic. That’s not our fault, just an effect of the way we experience time. For us, a hundred years is, in fact, a long time. In terms of geological time, however, the entire experience of all humanity on this earth is just the wink of an eye. Geological time understands time’s passing not relative to human lives but in terms of the physical history of the earth. According to that measure, the existence of the human species has been brief, and the kinds of changes we’re experiencing in the natural world pale beside the swings the earth is capable of producing. We worry, for example, about global warming, meaning the earth’s temperature jumping a few degrees, and while this change may be seismically important for us, it’s nothing new to the earth. As Robert Laughlin, winner of the Nobel Prize in physics, points out in an article set under the provocative announcement “The Earth Doesn’t Care if You Drive a Hybrid,” six million years ago the Mediterranean Sea went bone dry. Eighty-five million years before that there were alligators in the Arctic, and two-hundred million years before that Europe was a desert. Comparatively, human industrialization has changed nothing. George Will, “The Earth Doesn’t Care: About What Is Done to or for It,” Newsweek, September 12, 2010, accessed June 8, 2011, www.newsweek.com/2010/09/12/george-will-earth-doesn-t-care-what-is-done-to-it.html?from=rss.
This geological view of time cashes out as an ethical justification for free use of the natural world for a reason nearly the opposite of the first. The argument for free use supported by convictions about domination and progress borders on arrogance: it’s that the natural world is unimportant, and any problems caused by our abusing it will be resolved by intelligence and technological advance. Alternatively, and within the argument based on geological time, our lives, deeds, and abilities are so trivial that it’s absurd to imagine that we could seriously change the flow of nature’s development even if we tried. We could melt nuclear reactors left and right, and a hundred million years from now it wouldn’t make a bit of difference. That means, finally, that the idea of preserving the environment isn’t nobility: it’s vanity.
The Environment Should Be Protected in the Name of Serving Human Welfare
The free-use argument in favor of total environmental exploitation posits no value in the natural world. In and of itself, it’s worthless. Even if this premise is accepted, however, there may still be reason to take steps in favor of preservation and protection. It could be that the ecosystems around us should be safeguarded not for them, but for us. The reasoning here is that we as a society will live better and happier when lakes are suitable for swimming, when air cleans our lungs instead of gumming them up, when a drive on the freeway with the car window down doesn’t leave your face feeling greasy. Human happiness, ultimately, hinges to some extent on our own natural and animal nature. We too, we must remember, are part of the ecosystem. Many of the things we do each day—walk, breathe, find shelter from the elements—are no different from the activities of creatures in the natural world. When that world is clean and functioning well, consequently, we fit into it well.
Wrapping this perspective into an ethical theory, utilitarianism—the affirmation that the ethically good is those acts increasing human happiness—functions effectively. For visitors to Cancun, it seems difficult to deny that their trip will be more enjoyable if the air they breathe is fresh and briny instead of stinky and gaseous as it was in some places when the lagoon had decayed into a pestilent swamp. Understood in this way, we could congratulate Architect Legorreta for his expensive decision to carve out a space for the tides to reenter and refresh the inland lake. It’s not, the argument goes, that he should be thanked for rescuing an ecosystem, but that by rescuing the ecosystem he made human life more agreeable.
Another way to justify environmental protection in the name of human and civilized life runs through a rights-based argument. Starting from the principle of the right to pursue happiness, a case could be built that without a flourishing natural world, the pursuit will fail. If it’s true that we need a livable environment, one where our health—our breathing, drinking, and eating—is guaranteed, then industrialists and resort developers who don’t ensure that their waste and contamination are controlled aren’t just polluting; they’re violating the fundamental rights of everyone sharing the planet.
Bringing this rights-based argument to Cancun and Legorreta’s dredging of the lagoon, it’s possible to conclude that he absorbed a pressing responsibility to do what he did: in the name of protecting the right of others to live healthy lives, it was necessary to renew the dead water. Again, it must be emphasized that the responsibility isn’t to the water or the animals thriving in its ecosystem. They’re irrelevant, and there’s no obligation to protect them. What matters is human existence; the obligation is to human rights and our dependence on the natural world to exercise those rights.
The Environment Should Be Protected in the Name of Serving Future Generations’ Welfare
The idea that the environment should be protected so that future generations may live in it and have the choices we do today is based on a notion of social fairness. Typically in ethics, we think of fairness in terms of individuals. When applying for a job at a Cancun hotel, fairness is the imperative that all those applying get equal consideration, are subjected to similar criteria for selection, and the selection is based on ability to perform job-related duties. When, on the other hand, the principle of fairness extends to the broad social level, what’s meant is that groups taken as a whole are treated equitably.
One hypothetical way to present this notion of intergenerational fairness with respect to the environment and its protection is through the previously discussed notion of the veil of ignorance—that is, the idea that you imagine yourself as removed from today’s world and then reinserted at some future point, one randomly assigned. You may come back tomorrow, next year, next decade, or a hundred years down the line. If, the reasoning goes, that’s your situation, then very possibly you’re going to urge contemporary societies to protect the environment so that it’ll be there for you when your time comes around, whenever that might be. Stated slightly differently, it’s a lot easier to wreck the environment when you don’t have to think about others. Fairness, however, obligates us to think of others, including future others, and the veil of ignorance provides one way of considering their rights on a par with the ones we enjoy now.
What does this mean in terms of Cancun? We should enjoy paradise there, no doubt, but we should also ensure that it’ll be as beautiful for our children (or any randomly selected future generation) as it is for us. In this case, the redredging of the lagoon serves that purpose. By helping maintain the status quo in terms of the natural ecosystems surrounding the hotels, it also helps to maintain the possibility of enjoying that section of the Caribbean into the indefinite future.
There’s also a utilitarian argument that fits underneath and justifies the position that our environment should be protected in the name of future generations. This theory grades acts ethically in terms of their consequences for social happiness, and with those consequences projected forward in time. To the extent possible, the utilitarian mind-set demands that we account for the welfare of future generations when we act today. Of course the future is an unknown, and that tends to weigh decisions toward their effects on the present since those are more easily foreseen. Still, it’s not difficult to persuade most people that future members of our world will be happier and their lives fuller and more rewarding if they’re born onto an at least partially green earth.
The Environment Should Be Protected in the Name of Serving Animal Welfare
One of the more frequently voiced lines of reasoning in favor of ecosystem preservation starts with a fundamental shift from the previous arguments. Those arguments place all intrinsic value in human existence: to the extent we decide to preserve the natural world, we do so because it’s good for us. Preservation satisfies our ethical duties to ourselves or to those human generations yet to come. What now changes is that the natural world’s creatures get endowed with a value independent of humans, and that value endures whether or not we enjoy or need to fit into a web of healthy, clean ecosystems. Animals matter, in other words, regardless of whether they matter for us.
Ethically, the endowment of nonhuman animals with intrinsic worth is to treat them, to some extent, or in some significant way, as human. This treatment is a subject of tremendous controversy, one orbiting around the following two questions:
• Are nonhuman animals worthy of moral consideration? What do they do, what qualities do they possess that lead us to believe they should have rights and impose obligations on you and me?
• Granting that nonhuman animals do hold value in themselves and impose obligations on humans by their very existence, how far do the obligations go? If we’re given a choice on a speeding highway between running over a squirrel and hitting a person, do we have a moral obligation to avoid the person (and run down the squirrel)? If we do, then it seems that the intrinsic worth of an animal is less than that of a human being, but how much less?
Questions about whether animals have rights and impose obligations are among the most important in the field of environmental ethics. They will be explored in their own section of discussion that follows. In this section, it will simply be accepted that nonhuman animals do, in fact, have autonomous moral standing. It immediately follows that their protection is, to some extent, a responsibility.
In terms of an ethics of duties, the obligation to protect animal life could be conceived as a form of the duty to beneficence, a duty to help those who we are able to aid, assuming the cost to ourselves is not disproportionately high. Protecting animals is something we do for the same reason we protect people in need. Alternatively, in terms of the utilitarian principle that we act to decrease suffering in the world (which is a way of increasing happiness), the argument could be mounted that animals are, in fact, capable of suffering, and therefore we should act to minimize that sensation just as we do in the human realm. Finally, rights theory—the notion that we’re free and should not impinge on the freedom of others—translates into a demand that we treat the natural world with respect and with an eye to its preservation in order to guarantee that nonhuman animals may continue to pursue their own ends just as we demand that we humans be allowed to pursue ours.
With the obligation for the protection of—or at least noninterference with—nonhuman animals established, the way opens to extend the conservation to the natural world generally. Because animals depend on their habitat to express their existence, because their instincts and needs suggest that they may be free only within their natural environment, the first responsibility derived from the human obligation to animals is one to protect their wild and natural surroundings. As an important note here, that habitat—the air all animals breathe, the water where fish swim, the earth housing burrowing animals—is not protected for its own sake, only as an effect of recognizing the creatures of the natural realm as dignified and worthy of our deference.
What does this dignity conferred on animal life mean for Cancun? The dredging and revivifying of the lagoon by Legorreta fulfills an obligation under this conception of the human relation to the natural world. It’s a different obligation from those developed in the previous cases, however. Before, the lagoon was cleansed in the name of improving the Cancun experience for vacationers; here, it’s cleansed so that it may once again support the land and aquatic life that once called the place home. As for whether that improves the vacation experience, there’s no reason to ask; it’s only necessary to know that saving animals probably requires saving their home.
The Entire Environmental Web Should Be Protected for Its Own Sake
The environment as a whole, the total ecosystem including all animal and plant life on Earth—along with the air, water, and soil supporting existence—should be protected according to a number of ethical arguments:
• The least difficult to persuasively make is the case that the obligation flows from human welfare: we’re happier when our planet is healthy.
• It’s more difficult, but still very possible, to make a reasonable case that the obligation to protection attaches to the autonomous value and rights of nonhuman animals. In order to protect all of them, the reasoning goes, we should preserve all elements of the natural world to the extent possible because we can’t be sure which ones may, in fact, play an important role in the existence of one or another kind of creature.
• Finally, the most difficult case to make is that humans are obligated to protect the total environment—all water and air, every tree and animal—because all of it and every single part holds autonomous value. This Earth-wide value translates into an Earth-wide obligation: the planet—understood as the network of life happening above and under its surface—becomes something like a single living organism we humans must protect.
What distinguishes the third argument from the previous two is that we don’t save the greater natural ecosystem in the name of something else (human welfare or habitat preservation for nonhuman animals) but for itself.
It’s easy to trivialize the view that every element of the natural world demands respect and therefore some degree of protection. Do we really want to say that a child experimenting out in the driveway with worms, or pulling up plants to see the roots is failing a moral obligation to the living world? What about the coconut trees felled to make room for Cancun’s hotels? Perhaps if they were unique trees, or if a certain species of bird depended on precisely those limbs and no others for its survival, but do we want to go further and say that the standard trees—a few hundred out of millions in the world—should give developers pause before the cement trucks come wheeling in? For many, it will be easier to conclude that if a good project is planned—if there’s money to be earned and progress to be made—then we can cut down a few anonymous trees that happen to be standing in the way and get on with our human living.
On the other hand, sitting on the sand in Cancun, it’s difficult to avoid sensing a happening majesty: not a reason to pull out your camera and snap, but a living experience that can only be had by a natural being participating, breathing air as the wind blows across the beach, or swimming in the crisp water. There may be a kind of aesthetic imperative here, a coherent demand for respect that we feel with our own natural bodies. The argument isn’t that the entire natural ecosystem should be preserved because it feels good for us to jump in the ocean water—it feels good to jump in the shower too—the idea is that through our bodies we experience a substance and value of nature that requires our deference. Called the aesthetic argument in favor of nature’s dignity, and consequently in favor of the moral obligation to protect it, there may be no proper explanation or reasoning, it may only be something that you know if you’re in the right place at the right time, like Cancun in the morning.
The response to the aesthetic argument is that we can’t base ethics on a feeling.
If We Decide to Protect the Environment, Who Pays?
Much of the stress applied to, and the destruction wrought on the environment around Cancun could be reversed. That costs money, though. Determining exactly how much is a task for biologists and economists to work out. The question for ethical consideration is, who should pay? These are three basic answers:
1. Those who contaminated the natural world
2. Those who enjoy the natural world
3. Those who are most able
The answer that the costs should be borne by those who damaged nature in the first place means sending the bill to developers and resort owners, to all those whose ambition to make money on tourism got roads paved, forests cleared, and foundations laid. Intuitively, placing the obligation for environmental cleanup on developers may make the most sense, and in terms of ethical theory, it fits in well with the basic duty to reparation, the responsibility to compensate others when we harm them. In this case, the harm has been done to those others who enjoy and depend on the natural world, and one immediate way to compensate them is to repair the damage. A good model for this could be Legorreta’s work, the expense taken to raise a portion of a hotel and so once again allow tide water to freshen the lagoon. Similar steps could be taken to restore parts of the ruined coral reef and to replant the forest behind the hotel area.
The plan makes sense, but there’s a glaring problem: times change. Back when Cancun was originally being laid out in the 1960s, ecological concerns were not as visible and widely recognized as they are today. That doesn’t erase the fact that most hotel companies in Cancun laid waste to whatever stood in the way of their building, but it does allow them to note that they are being asked to pay today for actions that most everyone thought were just fine back when they were done. It’s not clear, finally, how fair it is to ask developers to pay for a cleanup that no one envisioned would be necessary back when the construction initiated.
The proposal that those who enjoy and depend on the natural world should bear primary responsibility for protecting and renewing it also makes good sense. This reasoning is to some extent implemented in America’s natural parks where fees are charged for entry. Those revenues go to support the work of the forestry service that’s required to ensure that visitors to those parks—and the infrastructure they need to enjoy their time there—don’t do harm to the ecosystems they’re coming to see, and also to ensure that harm done by others (air pollution, for example, emitted by nearby factories) is cleansed by nature’s organic processes.
On a much larger scale, a global one, this logic is also displayed in some international attempts to limit the emission of greenhouse gasses. The specific economics and policy are complicated and involve financial devices including carbon credits and similar, but at bottom what’s happening is that governments are getting together and deciding that we all benefit from (or even need) reduced emissions of waste into the air. From there, attempts are made to negotiate contributions various countries can make to the reduction effort. As for the cost, most economists agree that the expense of pollution control measures will, for the most part, be passed along as hikes in the cost of consumer goods. Everyone, in other words, will pay, which matches up with the affirmation that everyone benefits.
Finally, the response that those most able to pay should bear the brunt of the cost for protecting the natural world is a political as much as an environmental posture. One possibility would be a surtax levied on wealthy members of society, with the money channeled toward environmental efforts. This strategy may find a solid footing on utilitarian grounds where acts benefitting the overall welfare remain good even if they’re burdensome or unfair to specific individuals. What would be necessary is to demonstrate that the sum total of human (and, potentially, nonhuman animal) happiness would be increased by more than the accumulated displeasure of those suffering the tax increase.
Key Takeaways
• The attitude that the environment shouldn’t be protected has both historical and ethical roots.
• Confidence in the human ability to control the environment diminishes concerns about protecting its current state.
• The power of nature viewed over the very long term diminishes concerns about protecting its current state.
• Environmental protection in the name of serving human welfare values the natural world because it’s valuable for us.
• Environmental protection in the name of serving future generations’ welfare derives from a notion of social fairness.
• Environmental protection in the name of serving animal welfare connects with a notion of moral autonomy in nonhuman animals.
• Environmental protection for its own sake values the entire set of the world’s ecosystems.
• If the environment is protected, the costs may be made the responsibility of various parties.
Exercise \(1\)
1. Briefly, what is the history of the free-use attitude toward the natural world?
2. How can technology make environmental protection a wasted effort?
3. How can the idea of geological time become an argument against taking expensive steps to protect the natural world?
4. What are some reasons why our ethical obligations to ourselves may lead us to protect the natural world?
5. What is the difference between protecting the natural world because we humans are valuable, and because animals are valuable?
6. What kind of experiences with nature may result in the sensation that, as an interdependent whole, the natural world holds value?
7. If the decision is made to protect nature, who are some individuals or groups that might be asked to pay the cost? | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/14%3A_The_Green_Office-_Economics_and_the_Environment/14.02%3A_Ethical_Approaches_to_Environmental_Protection.txt |
Learning Objectives
1. Outline three business responses to environmental responsibility.
The Role of Businesses in Environmental Protection
Protecting the environment is itself a business, and many organizations, especially nonprofits, take that as their guiding purpose. The World Wildlife Fund, the Audubon Society, and National Geographic exemplify this. Their direct influence over the natural world, however, is slight when compared against all the globe’s for-profit companies chugging away in the name of earning money. Whether the place is Cancun, or China, or the United States, the condition of the natural world depends significantly on what profit-making companies are doing, the way they’re working, the kinds of goods they’re producing, and the attitude they’re taking toward the natural world. Three common attitudes are
1. accelerate and innovate,
2. monetize and count,
3. express corporate responsibility.
Business and Environmental Protection: Accelerate and Innovate
There’s a subtle difference between environmental conservation and protection. Conservation means leaving things as they are. Protection opens the possibility of changing the natural world in the name of defending it. One way for a business to embrace the protection of nature is through technological advance. New discoveries, the hope is, can simultaneously allow people to live better, and live better with the natural world. Looking at a stained paradise like Cancun, the attitude isn’t so much worry that we’re ruining the world and won’t be able to restore a healthy balance, it’s more industrially optimistic: by pushing the accelerator, by innovating faster we’ll resolve the very environmental problems we’ve created.
Examples of the progressive approach to environmental protection—as opposed to the conservative one—include solar and wind power generation. Both are available to us only because of the explosion of technology and knowledge the industrialized, contaminating world allows. Because of them, we can today imagine a world using energy at current rates without doing current levels of environmental damage. Here’s a statement of that aim from a wind power company’s web page: “Our goal has always been to produce a utility-scale wind turbine that does not need subsidies in order to compete in electricity markets.” The Wind Turbine Company home page, accessed June 8, 2011, http://www.windturbinecompany.com.
The idea, in other words, is that electricity produced by this company’s windmills will be as cheap (or cheaper) than that produced from fossil fuels, including coal. To reach that point, the development of very strong yet lightweight materials has been necessary, along with other technological advances. If they continue, it may be that American energy consumption can remain high, while pollution emitted from coal-burning electricity plants diminishes. One point, finally, that the wind turbine company web page doesn’t underline quite so darkly is that they’ll make a lot of money along the way if everything goes according to plan. This incentive is also typical of an accelerate-and-innovate approach: not only should industrialization go forward faster in the name of saving the environment, so too should entrepreneurialism and profit.
In broad terms, the business attitude toward employing innovation to protect the environment acknowledges that human activity on earth has done environmental damage, and that matters. The damage is undesirable and should be reversed. The way to reverse, however, isn’t to go backward by doing things like reducing our energy use to previous levels. Instead, we keep doing what we’re doing, just faster. The same industrialization that caused the problem will pull us out.
Business and Environmental Protections: Monetize and Count
A cost-benefit analysis is, theoretically, a straightforward way of determining whether an action should be undertaken. The effort and expense of doing something is toted on one side, and the benefits received are summed on the other. If the benefits are greater than the costs, we go ahead; if not, we don’t. Everyone performs cost-benefit analyses all the time. At dinner, children decide whether a dessert brownie is worth the cost of swallowing thirty peas. Adults decide whether the fun of a few beers tonight is worth a hangover tomorrow or, more significantly, whether getting to live in one of the larger homes farther out of town is worth an extra half-hour in the car driving to work every morning.
Setting a cost-benefit analysis between a business and the environment means adding the costs of eliminating pollution on one side and weighing it against the benefits of a cleaner world. The ethical theory underneath this balancing approach to business and nature is utilitarianism. The right act is the one most increasing society’s overall happiness (or most decreasing unhappiness), with happiness measured in this case in terms of the net benefits a society receives after the costs of an action have been deducted.
The most nettlesome problem for businesses adopting a cost-benefit approach to managing environmental protection is implementation. It’s hard to know exactly what all the costs are on the business side, and what all the benefits are on nature’s side. Then, even if all the costs and benefits are confidently listed, it’s equally (or more) difficult to weigh them against each other. According to a report promulgated by the nonprofit Environmental Defense Fund, North Carolina’s coal-fired electricity plants could install smokestack scrubbers to significantly reduce contaminating emissions. The cost would be \$450 million. The benefits received as a result of the cleaner air would total \$3.5 billion. “The North Carolina Clean Smokestacks Plan,” Environmental Defense Fund, March 2001, accessed June 8, 2011, apps.edf.org/documents/700_NCsmokestacks.PDF. This seems like a no-brainer. The problem is that when you dig a bit into the report’s details, it’s not entirely clear that the benefits derived from cleaner air add up to \$3.5 billion. More troubling, it looks like it’s hard to put any price tag at all on them. Here are a few examples:
• According to the report, “It is estimated that pollution from power plants triggers more than 200,000 asthma attacks across the state each year and more than 1,800 premature deaths.” The word estimated is important. Further, how do you put a dollar total on an asthma attack or a death?
• According to the report, “One should be able to see out 93 miles on an average day in the Smoky Mountains, but now air pollution has reduced this to an average of 22 miles.” How do you put a dollar total on a view?
• According to the report, “Air pollution contributes to significant declines in populations of dogwood, spruce, fir, beech, and other tree species.” What is “significant?” What’s the dollar value of a dogwood? “The North Carolina Clean Smokestacks Plan,” Environmental Defense Fund, March 2001, accessed June 8, 2011, apps.edf.org/documents/700_NCsmokestacks.PDF.
The list of items goes on, but the point is clear. A cost-benefit analysis makes excellent sense in theory, but it’s as difficult to execute as it is to assign numbers to human experiences. If the attempt is nonetheless made, the technical term for the assigning is monetization.
A final set of hurtles to clear on the way to implementing a cost-benefit approach to business and the environment involves formalizing mechanisms for paying the costs. Two common mechanisms are regulation and incentives.
Regulations are imposed by federal or local governments and come in various forms. Most directly, and staying with electrical plants in Carolina, the plants could be required to install smokestack scrubbers. Costs of the installation would, to some significant extent, be passed on to consumers as rate hikes, and the benefits of cleaner air would be enjoyed by all. It’s worth noting here that the contamination producers in question—coal-burning electricity plants—are pretty much stuck where they are in geographic terms. You can’t produce electricity in China and sell it in the States. Other kinds of businesses, however, may be able to avoid regulations by packing up and heading elsewhere. This, of course, complicates the already knotted attempt to tote up the benefits and costs of environmental protection.
A more flexible manner of regulating air and other types of pollution involves the sale of permits. There are multiple ways of mounting a permit trade, but as a general sketch, the government sets an upper limit to the amount of air pollution produced by all industry, and sells (or gives) permits to specific operating businesses. In their turn, these permits may be bought and sold. So an electric company may find that it makes economic sense to install scrubbers (limiting its pollution output) and then sell the remaining pollution amount on its license to another company that finds the cost of limiting its emissions to be very high. One advantage of this approach is that, while it does limit total contamination, it allows for the fact that it’s easier for some polluters than others to cut back.
As opposed to regulations that essentially force businesses to meet social pollution goals, incentives seek the same results cooperatively. For example, tax incentives could be offered for environmental protection efforts; money paid for the scrubbers a company places in their smokestacks may be deducted from taxes at a very high rate. Similarly, matching funds may be offered by government agencies: for every dollar the company spends, the government—which in this case means you and I and everyone who pays taxes—chips in one also.
Alternatively, government agencies including the Environmental Protection Agency may provide public recognition to anticontamination efforts undertaken by a business, and in the hands of a strong marketing department those awards may be converted into positive public relations, new consumers, and extra profits that offset the original pollution control costs.
Specific awards tied to government agencies may not even be necessary; the incentive can be drawn from a broad range of sources. A good example comes from the Washington Post. A long and generally quite positive news story recounts Walmart’s efforts to encourage suppliers in China to increase energy efficiency while decreasing their pollution output. Basically, Walmart told suppliers that they need to clean up or they’ll get replaced. According to the account, not only is the effort bearing fruit, but it’s working better than government regulations designed to achieve similar ends: “In many cases, Walmart is first trying to bring firms up to government standards. Suppliers may not care about government fines, but they care about orders from the buyers.” Steve Mufson, “Wal-Mart Presses Vendors in China to Meet Higher Standards,” Washington Post, February 26, 2010, accessed June 8, 2011, www.washingtonpost.com/wp-dyn/content/article/2010/02/26/AR2010022603339_pf.html.
As for Walmart, their cause is served by the free publicity of the story when it’s distributed to almost a million newspaper readers in the Washington, DC, area and then projected broadly on the Internet. Further down the line, the good publicity ended up getting cited here. Going back to the specific newspaper story, it finishes with a clear acknowledgment of the public relations dynamic. These are the article’s last lines: “Wal-Mart sees this not just as good practice but also good marketing. ‘We hope to get more customers,’ said Barry Friedman, vice president for corporate affairs in Beijing. ‘We’re not doing it solely out of the goodness of our hearts.’” Steve Mufson, “Wal-Mart Presses Vendors in China to Meet Higher Standards,” Washington Post, February 26, 2010, accessed June 8, 2011, www.washingtonpost.com/wp-dyn/content/article/2010/02/26/AR2010022603339_pf.html.
One notable problem with the incentive approach is identical to its strength: since participation is voluntary, some heavy polluters may choose not to get involved.
As a final point about incentives, many industrial plants already receive incentives to not protect the environment. To the extent they’re allowed to simply jet sulfur and other contamination into the air, they are, in effect, forcing society generally to pay part of their cost of production. Every time someone in Carolina falls ill with an asthma attack, the consequences are suffered by that individual while the profits from electricity sales go to the electric company. As previously discussed, these externalities—these costs of production borne by third parties—actually encourage businesses to follow any route possible to make outsiders pay the costs of their operations. One route that’s frequently possible, especially for heavy industry, involves letting others deal with their runoff and waste.
Business and Environmental Protections: Corporate Social Responsibility
The third posture an organization may adopt toward environmental protection falls under the heading of corporate social responsibility. The attitude here is that companies, especially large, public corporations, should humanize their existences: an attempt should be made to see the corporation, in a certain sense, as an individual person. Instead of being a mindless machine built to stamp out profits, the business is reenvisioned as a seat of economic and moral responsibility. Responding to ethical worries isn’t someone else’s concern (say, the government’s, which acts by imposing regulations), instead, large companies including Walmart take a leading role in addressing ethical issues.
The Washington Post’s flattering presentation of Walmart in China fits well here. The story actually presents Walmart as transitioning from a vision of itself as a pure profit enterprise to one exercising corporate citizenship. Originally,
Walmart only cared about price and quality, so that encouraged suppliers to race to the bottom on environmental standards. They could lose contracts because competition was so fierce on price.
Now, however,
Walmart held a conference in Beijing for suppliers to urge them to pay attention not only to price but also to “sustainability,” which has become a touchstone. Steve Mufson, “Wal-Mart Presses Vendors in China to Meet Higher Standards,” Washington Post, February 26, 2010, accessed June 8, 2011, www.washingtonpost.com/wp-dyn/content/article/2010/02/26/AR2010022603339_pf.html.
Sustainability means acting to protect the environment and the people surrounding an operation so that they may continue to contribute to the profit-making enterprise. As a quick example, a logging operation that clear-cuts forests isn’t sustainable: when all the trees are gone, there’s no way for the company to make any more money. Similarly in human terms, companies depending on manual labor need their employees to be healthy. If a factory’s air pollution makes everyone sick, no one will be able to come in to work.
For Walmart in China, one step toward sustainability involved energy efficiency. A supplier installed modern shrink-wrapping machines to replace work previously done by people wielding over-the-counter hair dryers. In theoretical terms at least, the use of less energy will help the supplier continue to produce even as worldwide petroleum supplies dwindle and energy costs increase. Steps were also taken, as the newspaper story notes, to limit water pollution: “Lutex says it treats four tons of wastewater that it used to dump into the municipal sewage line. That water was supposed to be treated by the city, but like three-quarters or more of China’s wastewater, it almost certainly wasn’t.” Steve Mufson, “Wal-Mart Presses Vendors in China to Meet Higher Standards,” Washington Post, February 26, 2010, accessed June 8, 2011, www.washingtonpost.com/wp-dyn/content/article/2010/02/26/AR2010022603339_pf.html.
More examples of Walmart suppliers making environmentally conscious decisions dot the newspaper story, and in every case these actions may be understood as serving the long-term viability of the supplier’s operations.
Stakeholder theory is another way of presenting corporate social responsibility. The idea here is that corporate leaders must make decisions representing the interests not only of shareholders (the corporation’s owners) but also of all those who have a stake in what the enterprise is doing: the company exists for their benefit too. Along these lines, Walmart encouraged farmers in China to abandon the use of toxic pesticides. The corporation contracted with farmers under the condition that they use only organic means to kill pests and then allowed their products to be sold with a label noting their Walmart-confirmed clean production. The real lives of locals who eat that food and live on the now less-contaminated land are markedly improved. As another farming-related example of dedication to the well-being of the Chinese making up their manufacturing base, Walmart sought “to help hundreds of small farmers build rudimentary greenhouses, made of wood and plastic sheeting, in which they grow oranges in midwinter to sell to Walmart’s direct farm program. Zhang Fengquan is one of those farmers; he gathers more than three tons of nectarines from more than 400 trees in his greenhouse. Asked what he did during the winter before the greenhouse was built, he said he worked as a seasonal laborer. Or played the popular Chinese board game mah-jongg.” Steve Mufson, “Wal-Mart Presses Vendors in China to Meet Higher Standards,” Washington Post, February 26, 2010, accessed June 8, 2011, www.washingtonpost.com/wp-dyn/content/article/2010/02/26/AR2010022603339_pf.html.
In both cases, Walmart is not simply abandoning its workers (or its suppliers’ workers) once they punch out. As stakeholders in the company, Walmart executives feel a responsibility to defend employees’ well-being just as they feel a responsibility to bring good products to market in the name of profit.
The fact that Walmart’s recent actions in China can be presented as examples of a corporation expressing a sense of responsibility for the people and their natural world that goes beyond immediate profit doesn’t mean that profit disappears from the equation. Shareholders are stakeholders too. And while corporate attitudes of social responsibility may well result in an increasingly protected environment, and while that protection may actually help the bottom line in some cases, there’s no guarantee that the basic economic tension between making money and environmental welfare will be resolved.
Conclusion. Businesses can react to a world of environmental concern by trusting in technological innovation, by trusting in governmental regulation, and by trusting in a concept of corporate responsibility. It is currently uncertain which, if any, of these postures will most effectively respond to society’s environmental preoccupations.
Key Takeaways
• One business response to concerns about the environment is to participate in the process of technological innovation to produce cleaner, more efficient ways of living.
• One business response to concerns about the environment is to participate in, and act on cost-benefit studies of environmental protection.
• One business response to concerns about the environment is to express corporate responsibility: to make the business a seat of economic and ethical decisions.
Exercise \(1\)
1. What’s the difference between environmental protection and environmental conservation?
2. How has industrialization caused environmental problems? How can it resolve those problems?
3. What is a cost-benefit analysis?
4. With respect to the environment, how can a cost-benefit analysis be used to answer questions about business and environmental protection?
5. What is practical problem with the execution of a cost-benefit analysis strategy for responding to environmental problems?
6. What’s the difference between a corporation guided by profit and one guided by a sense of social responsibility?
7. Why might a stakeholder theory of corporate decision making be good for the environment? | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/14%3A_The_Green_Office-_Economics_and_the_Environment/14.03%3A_Three_Models_of_Environmental_Protection_for_Businesses.txt |
Learning Objectives
1. Elaborate arguments in favor of and against the proposition that animals have ethical rights.
2. Distinguish questions about animal rights from ones about animal suffering.
Do Animals Have Rights?
Were this a textbook in environmental ethics, two further questions would be added to this subsection’s title: which rights, which animals? It’s clear that chimps and dolphins are different from worms and, even lower, single-cell organisms. The former give coherent evidence of having some level of conscious understanding of their worlds; the latter seem to be little more than reactionary vessels: they get a stimulus, they react, and that’s it. Questions about where the line should be drawn between these two extremes, and by what criteria, fit within a more specialized study of the environment. In business ethics, attention fixes on the larger question of whether animals can be understood as possessing ethical rights as we customarily understand the term.
There are two principal arguments in favor of understanding at least higher-order nonhuman animals as endowed with rights:
1. The cognitive awareness and interest argument
2. The suffering argument
And there are three arguments against:
1. The lack of expression argument
2. The absence of duties argument
3. The anthropomorphism suspicion argument
The cognitive awareness and interest argument in favor of concluding that animals do have ethical rights begins by accumulating evidence that nonhuman animals are aware of what’s going on around them and do in fact have an interest in how things go. As for showing that animals are aware and interested, in higher species evidence comes from what animals do. Most dogs learn in some sense the rules of the house; they squeal when kicked and (after a few occurrences) tend to avoid doing whatever it was that got them the boot. Analogously, anyone who’s visited Sea World has seen dolphins respond to orders, and seemingly understand that responding well is in their interest because they get a fish to eat afterward.
If these deductions of animal awareness and interest are on target, the way opens to granting the animals an autonomous moral value and standing. Maybe their ethical value should be inferior to humans who demonstrate sophisticated understanding of their environment, themselves, and their interests, but any understanding at all does bring animals into the realm of ethics because determinations about whose interests should be served in any particular situation are what ethical discussions concern. The reason we have ethics is to help those who have specific interests have them satisfied in ways that don’t interfere with others and their attempts to satisfy their distinct interests. So if we’re going to have ethical principles at all, then they should apply to dogs and dolphins because they’re involved in the messy conflicts about who gets what in the world.
Putting the same argument slightly differently, when the owner of a company decides how much of the year-end profits should go to employees as bonuses, that’s ethics because the interests of the owner and the employees are being weighed. So too when decisions are made at Sea World about how often and how intensely animals should be put to work in entertainment programs: the interests of profits (and human welfare) are being weighed against the interests of individual dolphins. As soon as that happens, the dolphins are granted an ethical standing.
The suffering argument in favor of concluding that animals do have ethical rights fits neatly inside utilitarian theory. Within this ethical universe, the reason we have ethical rules is to maximize happiness and minimize suffering. So the first step to take here is to determine whether dogs and similar animals do, in fact, suffer. Of course no dog complains with words, but no baby does either, and no one doubts that babies suffer when, for example, they’re hungry (and whining). When dogs would be expected to suffer, when they get slapped in the snout, they too exhibit clear signs of distress. Further, biological studies have shown that pain-associated elements of some animal nervous systems resemble the human version. Of course dogs may not suffer on the emotional level (if you separate a male and female pair, there may not be any heartbreak), and it’s true that absolute proof remains elusive, but for many observers there’s good evidence that some animals do, in fact, feel pain. If, then, it’s accepted that animals suffer, they ought to be included in our utilitarian considerations by definition because the theory directs us to act in ways that maximize happiness and minimize suffering. It should be noted that the theory can be adjusted to include only human happiness and suffering, but there’s no necessary reason for that, and as long as there’s not, the establishment of animal suffering is enough to make a reasonable case that they are entities within the ethical world, and ones that require respect.
On the other side, the arguments against granting animals a moral standing in the world begin with the lack of expression argument. Animals, the reasoning goes, may display behaviors indicating an awareness of the world and the ability to suffer, but that’s not enough to merit autonomous moral standing. To truly have rights, they must be claimed. An explicit and demonstrated awareness must exist of what ethics are, and why rules for action are attached to them. Without that, what separates animals from a sunflower? Like dogs, sunflowers react to their environment; they bend and twist to face the sun. Further, like dogs, sunflowers betray signs of suffering: when they don’t get enough water they shrivel. Granting, finally, animals rights based on their displaying some reactions to their world isn’t enough to earn a moral identity. Or if it is, then we end up in a silly situation where we have to grant sunflowers moral autonomy. Finally, because animals can’t truly explain morality and demand rights, they have none.
Another way to deny animal rights runs through the absence of duties argument. Since animals don’t have duties, they can’t have rights. All ethics, the argument goes, is a two-way street. To have rights you must also have responsibilities; to claim protection against injury from others, you must also display consideration before injuring others. The first question to ask, consequently, in trying to determine whether animals should have rights is whether they have or could have responsibilities. For the most part, the answer seems to lean toward no. Were a bear to escape its enclosure in the zoo and attack a harmless child, few would blame the bear in any moral sense; almost no one would believe the animal was guilty of anything other than following its instincts. People don’t expect wild animals to distinguish between their own interest and instinct on one side, and doing what’s right on the other. We don’t even expect that they can do that, and if they can’t, then they can’t participate in an ethical world any more than trees and other natural creatures that go through every day pursuing their own survival and little more.
The last argument against granting moral autonomy or value to animals is a suspicion of anthropomorphism. Anthropomorphism is the attribution of human qualities to nonhuman things. When we look at dogs and cats at home, or chimpanzees on TV, it’s difficult to miss the human resemblance, the blinking, alert eyes, the legs stretching after a nap, the howls when you accidentally step on a tail, the hunger for food, the thirst and need to drink. In all these ways, common animals are very similar to humans. Given these indisputable similarities, it’s easy to imagine that others must exist also. If animals look like we do (eyes, mouth, and nose), and if they eat and drink as we do, it’s natural to assume they feel as we do: they suffer sadness and boredom; they need affection and are happy being cuddled. And from there it’s natural to imagine that they think as we do, too. Not on the same level of sophistication, but, yes, they feel loyalty and experience similar inclinations. All this is false reasoning, however. Just because something looks human on the outside doesn’t mean it experiences some kind of human sentiments on the inside. Dolls, for example, look human but feel nothing.
Transferring this possibility of drawing false conclusions from superficial resemblances over to the question about animal rights, the suspicion is that people are getting fooled. Animals may react in ways that look like pain to us but aren’t pain to them. Animals may appear to need affection and construct relationships tinted with loyalty and some rudimentary morality, but all that may be just us imposing our reality where it doesn’t actually exist. If that’s what’s happening, then animals shouldn’t have rights because all the qualities those rights are based on—having interests, feeling pain and affection—are invented for them by us.
Corresponding with this argument, it’s hard not to notice how quickly we rush to the defense of animals that look cute and vaguely human, but few seem very enthusiastic about helping moles and catfish.
Dividing Questions about Animal Rights from Ones about Animal Suffering
The debate about whether animals should be understood as possessing rights within the ethical universe is distinct from the one about whether they should be subjected to suffering. If animals do have rights, then it quickly follows that their suffering should be objectionable. Even if animals aren’t granted any kind of autonomous ethical existence, however, there remains a debate about the extent to which their suffering should be considered acceptable.
Assuming some nonhuman animals do, in fact, suffer, there are two major business-related areas where the suffering is especially notable:
• Research
• Consumer goods
The case of research—especially medical and drug development—provides some obvious justification for making animals suffer. One example involves a jaw implant brought to market by the firm Vitek. After implantation in human patients, the device fragmented, causing extensive and painful problems. Later studies indicated that had the implant been tested in animals first, the defect would’ve been discovered and the human costs and pain avoided. Lauren Myers, “Animal Testing Necessary in Medical Research,” Daily Wildcat, November 6, 2007, accessed June 8, 2011, wildcat.arizona.edu/2.2255/animal-testing-necessary-in-medical-research-1.169288. From here, it’s easy to form an argument that if significant human suffering can be avoided by imposing on animals, then the route should be followed. Certainly many would be persuaded if it could be proven that the net animal suffering would be inferior to that caused in humans. (As an amplifying note, some make the case that testing on humans can be justified using the same reasoning: if imposing significant suffering on a few subjects will later help many cure a serious disease, then the action should be taken.)
The case of animal testing in the name of perfecting consumer goods is less easily defended. A New York Times story chronicles a dispute between the Perdue chicken company and a group of animal rights activists. The activists got enough money together to purchase a newspaper ad decrying poultry farm conditions. It portrayed chickens as crowded together so tightly that they end up fiercely attacking and eating each other. Even when not fighting, they wallow in disease and convulse in mass hysteria. Barnaby Feder, “Pressuring Perdue,” New York Times, November 26, 1989, accessed June 8, 2011, http://www.nytimes.com/1989/11/26/magazine/pressuring- perdue.html. Though Perdue denied the ad’s claims, many believe that animals of all kinds are subjected to extreme pain in the name of producing everything from cosmetics, to dinner, to Spanish bullfights. When animals are made to suffer for human comfort or pleasure—whether the result is nice makeup, or a tasty veal dish, or an enthralling bullfight—two arguments quickly arise against subjecting animals to the painful treatment. The utilitarian principle that pain in the world should be minimized may be applied. Also, a duty to refrain from cruelty may be cited and found persuasive.
Key Takeaways
• Cognitive awareness and directed interest by animals may be sufficient to grant them autonomous ethical rights.
• Accepting that animals suffer may be sufficient to grant them autonomous ethical rights.
• The fact that animals do not explicitly claim ethical rights may be sufficient to deny them those rights.
• The fact that animals don’t have duties may be sufficient to deny them ethical rights.
• Anthropomorphism may lead to erroneously seeing animals as possessing autonomous ethical value.
• The question about whether animal treatment causing suffering is ethically acceptable may be managed independently of the question about whether animals possess rights.
Exercise \(1\)
1. What are the basic steps of the cognitive awareness and interest argument?
2. What are the basic steps of the suffering argument?
3. What are the basic steps of the lack of expression argument?
4. What are the basic steps of the absence of duties argument?
5. What are the basic steps of the anthropomorphism suspicion argument?
6. In ethical terms, how is animal suffering for research reasons distinct from the suffering of a Spanish bullfight? | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/14%3A_The_Green_Office-_Economics_and_the_Environment/14.04%3A_Animal_Rights.txt |
Yahoo! Answers: Why Should We Save the Planet?
Source: Photo courtesy of Kim Woodbridge, http://www.flickr.com/photos/kwbridge/2541993688.
Some people argue that there’s no ethical requirement to protect the environment because the natural world has no intrinsic value. Against that ethical posture, here are four broad justifications for environmental protection. Each begins with a distinct and fundamental evaluation:
1. The environment should be protected in the name of serving human welfare, which is intrinsically valuable.
2. The environment should be protected in the name of serving future generations because they’re valuable and merit intergenerational fairness.
3. The environment should be protected to serve animal welfare because there’s an independent value in the existence and lives of animals.
4. The entire environmental web should be protected for its own sake because the planet’s collection of ecosystems is intrinsically valuable.
On a Yahoo! forum page, a student named redbeard_90 posts the question “why should we save the planet?” and partially explains this way: “With all the constant talk of ‘saving the planet’ and stopping global warming, should we actually try to stop it? Perhaps in a way, this is humans transforming the planet to better suit us?” “Why Should We Save the Planet?,” Yahoo! Answers, accessed June 8, 2011, answers.yahoo.com/question/index?qid=20080610193018AA7IQt2.
Exercise \(1\)
1. It sounds like redbeard_90 might think that humans doing damage to the environment is OK because it’s just a symptom of “humans transforming the planet to better suit us.”
• Where is redbeard_90 placing value?
• What might redbeard_90’s attitude be toward the free use conception of the human relation with the environment?
• What is the domination and progress argument against worrying about saving the planet? How could that argument fit together with what redbeard_90 wrote?
2. The response by a woman named Super Nova includes this reasoning: “We should try to save the planet because there would be less people with health problems. Did you know that there are more people with respiratory problems because of all the air pollution contributing to it? Also, we should think about future generations on Earth and how it would affect our future. Also, global warming is affecting our essential natural resources like food and lakes are drying up and it is causing more droughts in the world.”
The overall tone of her answer is strong with conviction.
• It sounds like Super Nova wants to save the planet. What values sit underneath her desire? Why does she think environmental protection is important?
• Does it sound like she believes nature in itself has value? Why or why not?
3. The poster named Luke writes an animated response, including these sentences:
The first thing we need to do is help make some changes in our national mind set from one that lets us believe that our earth can recover from anything, to one that lets us believe that our earth could use a little help.
Developing cleaner ways to produce electricity is not going to hurt a thing; if it does nothing but make the air we breathe cleaner it works for me.
Developing alternative fuels to power our transportation needs, again won’t hurt a thing, reduce the demand for oil you reduce the price we pay for it, I think everyone can say “that works for me” to this.
I’m a global warming advocate but, not because of some unfounded fear of Doomsday but (as you may have guessed by now) because it won’t hurt a thing to help our earth recover from years of industrial plunder.
• Some people are worried about human welfare, some people care a lot about the welfare of the planet, some people mix a little of both. Where would you say Luke comes down? Justify by specific reference to his words.
• Some people who are concerned about the earth’s welfare are most interested in helping nonhuman animals; others are more interested in the natural world in its totality. Where would you say Luke comes down here? Why?
• Environmental conservation efforts can be conservative in the sense that they try to undo damage to the earth by limiting industrialization. The idea of environmental protection leaves open the possibility of using industrial advances—the same forces that have been contaminating the earth—to help resolve the problem. Does Luke sound more like a conservationist or a protector? Explain.
4. The poster named scottsdalehigh64 is the most intense. He’s also fairly experienced: assuming his username is true and he graduated high school in 1964, he’s about retirement age now. He writes, “There is an alternate question: Why do we think we have a right to be so destructive to other life forms on the planet? Perhaps the best answer is that we want to leave a good place to live for the species that are left when we go extinct.”
Unlike most of the other posters, he doesn’t include any personal note or “best wishes” type line in his response. He’s focused and intense.
• How much value does scottsdalehigh64 place in human existence?
• Where does he place value? What does scottsdalehigh64 think is worth aiding and protecting?
• Just from his words, how do you imagine scottsdalehigh64 would define “a good place to live?”
5. Scottsdalehigh64 doesn’t seem to like those who are “destructive to other life forms on the planet.”
• Could an argument be built that, in preparing for our own eventual extinction, we should make sure that we eliminate all life-forms that are destructive to other life forms? What would that elimination mean? What would need to be done? How could it be justified?
• In a newspaper column, the philosopher Jeff McMahan appears to tentatively endorse scottsdalehigh64’s vision. He proposes that we “arrange the gradual extinction of carnivorous species, replacing them with new herbivorous ones.” Jeff McMahan, “The Meat Eaters,” New York Times, September 19, 2010, accessed June 8, 2011, opinionator.blogs.nytimes.com/2010/09/19/the-meat-eaters. If, in fact, we decided to wipe out meat-eating animals and leave the world to plants and plant eaters, would we be valuing most highly ourselves? Nonhuman animals? The entire natural world? Something else? Explain your response.
6. An excited poster, KiRa01, announces, “Just live like theres no tomorrow!!!!”
With respect to the environment, justify his attitude in ethical terms.
Going Green
Source: Photo courtesy of Elliott Brown, http://www.flickr.com/photos/ell-r-brown/4601959323.
Fifty years ago airports were designed to reward fliers with architecture as striking as the new experience of flight was rare and exciting. From those early days, only a few airports remain unspoiled by renovation and expansion. The Long Beach Airport south of Los Angeles is a survivor. The low lines of midcentury modern architecture captivate today’s visitors just as they did the first ones. The restaurant overlooking the tarmac remains as elegant and perfectly simple as always. Walking the concourse, it’s easy to imagine men in ties and women and children in their Sunday clothes waiting for a plane while uniformed porters manage their suitcases.
Flying is different today—no longer exciting and rare, it’s just frustrating and crowded. Recognizing that reality, when the large European nations combined to form an airplane manufacturer, they didn’t choose a distinguished and elevated name for their enterprise, they just called it Airbus: a company that makes buses that happen to go up and down.
Airplanes are tremendously polluting. In the United States, large passenger flights account for about 3 percent of released greenhouse gasses. That doesn’t sound like much, but when you compare the number of flights with car trips, it’s clear that each airplane is billowing massive carbon dioxide. And the problem is only getting worse, at least on the tourism front. Over the course of the next decade, global tourism will double to about 1.6 billion people annually.
Tourists aren’t the only fliers. Planes are also taken by people heading to other cities to talk about tourism. One of them, Achim Steiner, is the executive director of the United Nations Environment Program. At a recent conference in Spain, he said, “Tourism is an extraordinary growth industry, it’s the responsibility of operators—from hoteliers to travel companies—as well as governments to ensure that sites are sustainable.” James Kanter, “How Do You Measure Green Tourism?,” New York Times, October 6, 2008, accessed June 8, 2011, http://green.blogs.nytimes.com/2008/10/06/is-there-any-such-thing-as-green-tourism.
Sustainability has at least two sides. On one side, there’s the economic reality: revenue provided by visitors pays for needed services. An example comes from the Masai Mara park reserve in Kenya. In villages surrounding the park, schools were forced to close when political unrest scared away the tourists and their money. On the other side, sustainability also means environmental protection. According to Steiner, there’s the possibility that “Masai Mara could be overused to the point where it loses its value.”
Exercise \(2\)
1. According to Steiner, “Hoteliers, travel companies, and governments are responsible” for ensuring the sustainability of sites including Masai Mara. In most discussions about paying the costs of a clean environment, three groups are signaled:
• Those who contaminate the natural world
• Those who enjoy the natural world
• Those who are most able to pay
How do each of these three fit into Steiner’s vision?
2. Airplane exhaust contributes significantly to the damage currently being done to the environment. Steiner rode an airplane to a city to talk about that damage.
• What is a cost-benefit analysis?
• How could a cost-benefit analysis be used to show that his boarding the plane and going was actually an environmentally respectable act?
3. Fifty years ago, airplanes contributed almost no pollution to the environment because so few could afford to fly. One way to limit the amount of pollution into the air is through incentives. In the airplane case, a large tax could be attached to an airline ticket, thus providing an incentive to tourists to stay home or use alternate sources of transportation. Of course, for the very wealthy, the tax will be more absorbable and, presumably, airplane travel would tend toward its origins: flying would be something the rich do.
How could a utilitarian analysis be used to justify the action of, in essence, reserving plane flying for the rich in the name of helping the environment?
4. The airport at Long Beach is a low-ranking historical treasure. Tourists will never flock to see it, but it does incarnate and vivify a time in the recent past. The airport at Long Beach is also a business. That may lead its directors to initiate remodeling and expansion plans that will destroy the airport’s original essence.
• Is preserving the natural world like the preservation of a historical architectural treasure? If so, why? If not, why not?
• Using standard arguments against the business responsibility to preserve the natural world (free use, domination and progress, geological time), make the case that progress should be allowed to destroy the Long Beach Airport’s historical authenticity if that course of action is profitable.
• Using standard arguments in favor of the business responsibility to preserve the natural world (preservation for human welfare, for future generations, for the sake of the thing itself), make the case that the Long Beach Airport should be preserved.
• If the airport is preserved, who should pay? Why?
5. In ethical terms, make the case that it’s more important to preserve the Masai Mara park reserve in Kenya than the Long Beach Airport.
IBM and IBM
Source: Photo courtesy of p_a_h, http://www.flickr.com/photos/pahudson/2212158878.
Bernadette Patrick moved away from her home in Endicott, New York, saying this about the town: “It was very neighborly and well kept, with lots of kids and families. Then all of a sudden it seemed like they put a skull and crossbones on all the doors. It was like a scene from a science fiction movie.” Janet Gramza, “Life in the Plume: IBM’s Pollution Haunts a Village,” Post-Standard, January 11, 2009, accessed June 8, 2011, www.syracuse.com/specialreports/index.ssf/2009/01/life_in_the_plume_ibms_polluti.html.
The science fiction part is the large, white metal boxes attached to Endicott homes. With tubes burrowing down in the earth and shooting up high into the air, they’re wired to pump air from below and jet it above. The idea is to disperse toxic vapors rising up through the ground. The vapor’s source is industrial solvents poured down drains and dripped out of leaky pipes at the local IBM factory over the course of its seventy-five-year history.
Those seventy-five years have otherwise been good ones. IBM money and jobs drove the small town forward. As Wanda Hudak put it, “The IBM plant paid for a lot of college educations and cottages at Perch Pond.” Janet Gramza, “Life in the Plume: IBM’s Pollution Haunts a Village,” Post-Standard, January 11, 2009, accessed June 8, 2011, www.syracuse.com/specialreports/index.ssf/2009/01/life_in_the_plume_ibms_polluti.html. The good feelings ended when a company IBM hired started showing up at people’s homes to test the air and offer to install the mechanical ventilation systems.
Exercise \(3\)
1. IBM is paying millions for cleanup efforts. They’re installing air cleaners on homes and pumping contaminated groundwater to the surface for safe disposal. An IBM spokesman said this about the toxic pollution, “None of it was done intentionally, but we still are sticking around to take care of it. We feel obligated legally, ethically. We are not going anywhere.” Janet Gramza, “Life in the Plume: IBM’s Pollution Haunts a Village,” Post-Standard, January 11, 2009, accessed June 8, 2011, www.syracuse.com/specialreports/index.ssf/2009/01/life_in_the_plume_ibms_polluti.html.
• Make the ethical case that those who contaminated the environment—IBM—should pay all the cleanup costs.
• Make the case that those who benefit from a clean environment—the locals who work at the company and those who don’t—should pay for the cleanup.
2. When the extent of the environmental pollution became clear, it was also evident that the cleanup would be tremendously expensive. In general terms, how could a cost-benefit analysis be mounted to decide between going forward with the environmental cleanup or closing the factory, shuttering the town, and moving on?
3. One critical element of the notion of corporate social responsibility is the idea of sustainability.
• In both environmental and economic senses, what is sustainability?
• What would be sustained by a cleanup in this case? How?
4. One critical element of the notion of corporate social responsibility is the idea of stakeholder theory.
• Who are the obvious stakeholders in this case?
• Thinking about the situation from the directorship of IBM, what are the company’s responsibilities to each of the stakeholders?
5. The IBM of Endicott, New York, is an IBM of the past, one focused on factories and making business machines like typewriters and photocopiers. The IBM of today leaves most hard manufacturing to foreign firms in low-cost countries. What IBM now wants to do now, according to their advertising, is “build a smarter planet.” That means solving problems like this one reported by CNN:
Stockholm bogs down in rush-hour traffic. A series of bridges connecting Sweden’s capital creates bottlenecks that cause gridlock and air pollution, waste millions of gallons of fuel, hamper public transportation, and endanger pedestrians. Jeffrey M. O’Brien, “IBM’s Grand Plan to Save the Planet,” CNN Money, April 21, 2009, accessed June 8, 2011, money.cnn.com/2009/04/20/technology/obrien_ibm.fortune/index.htm.
The solution? Swede governmental officers decided on a congestion fee, on charging vehicles money for entering the city at peak traffic times. The aim was to seriously reduce the number of cars downtown at rush hours. That’s easier said than done, however. Stopping people at toll booths would just make the problem worse: it would add yet another air-polluting stop to the traffic through town. So IBM was hired to produce camera technology allowing license plate numbers to be recorded and recognized automatically. Then monthly bills were generated and mailed out to the car owners. As CNN reported, these were the results:
Traffic fell 35 percent almost immediately and stayed down 22 percent—and not just at peak times or solely downtown. Emissions also dropped by 14 percent. The streets became more pedestrian friendly, and the buses began finishing their routes so quickly that the city had to rewrite the schedules. The fee schedule makes it obvious when traffic will be the worst, so drivers who trek in during peak hours know they’ll pay more for what will probably be a maddening experience. As a result, people seem to be cutting out unnecessary trips: bundling afterschool pickups, say, with visits to the grocery store. In short, Swedes are driving smarter. Jeffrey M. O’Brien, “IBM’s Grand Plan to Save the Planet,” CNN Money, April 21, 2009, accessed June 8, 2011, money.cnn.com/2009/04/20/technology/obrien_ibm.fortune/index.htm
When IBM protects the environment by cleaning up Endicott, they’re losing money; when IBM protects the environment by selling smart systems to the Swedes, they’re profiting.
• Make the case that, ethically, IBM’s actions in Endicott are nobler than the actions in Sweden.
• Make the case that, ethically, IBM’s actions in Sweden are nobler than the actions in Endicott.
6. In the world of business ethics and the environment, one of the more spirited debates is this: should we slow down technology and industrialization to use less and pollute less, or speed up industrialization and technology in the hope that we’ll discover solutions to the environmental problems caused by industrialization and technology?
• How does the case of IBM incarnate that debate?
• Does the decision about where you come down depend on where you place value (human welfare versus environmental welfare)? Explain.
7. With respect to the environment and money, there are two formulas for thinking about IBM’s project in Sweden:
1. The aim was to clean up the environment, and money happened to be made along the way.
2. The aim was to make money, and cleaning up the environment happened to be a good strategy for profit.
In terms of basic values and ethics, outline the difference between these two visions.
8. Thinking about ethics and IBM in Endicott and in Sweden, what’s more important: the intentions of a company when it acts, or the consequences of the actions? Explain.
Windmills and Condors
Source: Photo courtesy of Tom Caswell, http://www.flickr.com/photos/caswell_tom/2426923924.
The wind farms of Northern California produce clean electricity. Every lightbulb illuminated by the giant turbines represents less destruction of the earth by mining and drilling operations, and less contamination of the air by coal- and oil-fired power plants. It also represents fewer California Condors.
The spinning blades of the windmills erected in spots including the Altamont Pass are proving deadly for the rare birds, which are a kind of vulture. Here’s a reaction by the environmental writer and activist Jim Wiegand: “For all the ‘green energy’ believers out there, this is a video you have to see. Each year across America thousands of eagles, hawks, owls, falcons, vultures and condors perish at green energy wind farms. This video will open your eyes and your mind when you see how easily a soaring vulture is smashed by the innocent looking blades of a prop wind turbine.” C. Taibibi, “California Condors, Wind Farms on Collision Course,” Examiner.com, August 30, 2009, accessed June 8, 2011, www.examiner.com/wildlife-conservation-in-national/california-condors-wind-farms-on-collision-course.
Fatal Accident with Vulture on a Windmill
(click to see video)
The video shows a large and calm vulture cycling slowly around a modern wind turbine and then getting struck by one of the spinning blades. The bird drops out of the air. Left on the ground beside the towering contraption, it drags and struggles to flap its broken wing.
Exercise \(4\)
1. Unlike single-cell creatures, vultures seem to have awareness and interest in their environment. They notice distressed animals, circle patiently, and in the end descend to eat the carcass.
• How can this behavior be translated into an argument that animals have ethical rights?
• How can the claim that aware and interested vultures have independent ethical rights be mustered into an argument against installing wind turbines in areas that threaten vultures, no matter how much clean electrical energy they may generate?
2. If you have a chance to see the video and watch the fallen bird struggling and dying on the ground, do the images change your feelings about the importance of protecting this creature?
• Assume the bird writhing on the ground is, in fact, suffering in a way not completely unlike human suffering. How can this behavior be translated into an argument that animals have ethical rights?
• Make the case that the video doesn’t allow the conclusion that birds suffer.
3. Assume that, for whatever reason, you’re convinced that those condors being cut down by California wind turbines have ethical rights comparable with the ones we deposit in human animals. Can you nonetheless outline an argument in favor of continued windmill use because of the clean energy it provides?
• Make your case by appeal to a utilitarian argument.
• Make your case by appeal to a cost-benefit analysis.
• Make your case by appealing to the idea that the environment should be protected in its entirety because, as an interlocked set of ecosystems, it holds autonomous value.
4. If you can make the case that some nonhuman animals that have autonomous ethical rights should be allowed to meet their end in the name of clean energy, could you make the same argument for human animals? Imagine, for example, that actually constructing these wind turbines leads to high worker fatalities, say, 10 times higher than any other kind of work. Could those deaths be justified ethically in the name of clean energy? Why or why not?
The PETA Homepage
Source: Photo courtesy of HaPe_Gera, http://www.flickr.com/photos/hape_gera/2929195528/.
People for the Ethical Treatment of Animals is possibly the most active animal-rights organization in the United States. On the day this case study was written, the organization’s home page featured pictures of a sad-eyed Dalmatian, a noble elephant, and a cuddly rabbit. There was also a tease to a story set underneath a picture of smiling, former President Clinton. It read, “What’s the secret behind this former president’s newly trim waistline, enhanced energy, and improved cardiovascular health? A vegan diet! Read more.” Peta.org, “Try Bill Clinton's New Diet!,” accessed June 8, 2011, secure.peta.org/site/Advocacy?cmd=display&page=UserAction&id=3315.
Exercise \(5\)
1. A vegan diet excludes all products derived from animals and promotes plant-based eating. In this PETA ad, what values probably underlie the strategy (is the appeal to protect animals made in the name of human welfare, animal welfare, or general environmental welfare)? Justify.
2. What is anthropomorphism? How could the phenomenon of anthropomorphism lead someone to posit autonomous ethical dignity, and rights, in nonhuman animals that really shouldn’t be considered worth protecting any more than trees?
3. From the description provided of the PETA home page, how could it be described as inviting anthropomorphism?
4. Were you in charge at PETA, an organization fighting for animal rights that depends on donations, would you use the phenomenon of anthropomorphism to boost your organization’s revenue?
• What is an argument in favor of the strategy?
• What is an argument against the strategy? | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/14%3A_The_Green_Office-_Economics_and_the_Environment/14.05%3A_Case_Studies.txt |
Chapter 15 investigates ethical issues raised by extreme disparities in income and wealth. Issues surrounding labor unions are also considered.
15: The Domination Office- The Star System and Labor Unions
Learning Objectives
1. Define and characterize the star system in contemporary business life.
Cash Break Zero
Hard times, according to the Los Angeles Times, have come to Hollywood: “Today, actors who used to make \$15 million are making \$10 million. The filmmakers who used to make \$10 million are making \$6 million. As one prominent agent put it, ‘Everyone is in free fall. It’s just brutal out there.’” Patrick Goldstein and James Rainey, “Hollywood Gets Tough on Talent: \$20-million Movie Salaries Go Down the Tubes,” Los Angeles Times, August 3, 2009, accessed June 9, 2011, http://latimesblogs.latimes.com/the_big_picture/2009/08/want-to- make-10-million-a-movie-forget-about-it-hollywood-gets-tough-on-talent.html.
The news isn’t all bleak, however, for Hollywood’s top actors, directors, and producers. Though they’re being forced to settle for these embarrassingly small up-front paychecks, they’re getting a higher percentage on the back end. The key concept is cash break zero—the point where the money a studio spent making, promoting, and distributing a film is balanced by the income from ticket sales in theaters, cable rights, home rentals, and similar. Once that break-even number has been hit, actors and film-makers who are being forced to cut their up-front salary are getting a large chunk of the profits. This arrangement can lead to huge rewards, but the talent only rakes it in if they’re willing to bet on themselves making a movie that generates more money than it cost.
According to the Times, one exemplary winner is director Michael Bay, who pocketed \$80 million for his successful—but not earth-shatteringly popular—movie Transformers. In the new Hollywood arrangement, just modest box-office success can translate into a giant payday. For those who make stinkers, however, they’re walking away with their reduced up-front salary and nothing more. One major result, finally, of tying compensation to profits is that the distance between the big winners and everyone else in Hollywood increases dramatically. Just like a few movies every year break through the clutter of entertainment options to become must-see shows, so too some paychecks rocket above the rest.
The question about whether stars should get less at the beginning but potentially much more later on is a hot topic in Hollywood, but it doesn’t connect with too many people’s actual lives. In the words of one successful producer, “The studio pays for the lead actor or actress, but after that, well, the talent is just getting grinded. Everyone else is lucky to be working.” Patrick Goldstein and James Rainey, “Hollywood Gets Tough on Talent: \$20-Million Movie Salaries Go Down the Tubes,” Los Angeles Times, August 3, 2009, accessed June 9, 2011, http://latimesblogs.latimes.com/the_big_picture/2009/08/want-to- make-10-million-a-movie-forget-about-it-hollywood-gets-tough-on-talent.html.
Young people stepping off the bus in Hollywood and getting grinded is a long tradition. Even the biggest names tell stories about working the restaurant night shift six times a week so they’re free to audition all day long, and then getting nothing but bit-parts for years. Once in a while someone catches a real break, but most of the time what breaks is the actor. After absorbing endless rejections, there’s no direction left but the one leading back to the bus station, and then a long ride back home. The Hollywood blogger T. R. Locke provides a list of the reasons why:
• There are 120,000 SAG (Screen Actors Guild) actors in Hollywood.
• At any given time 85 percent of them are out of work.
• The average salary of a SAG actor is less than \$10,000 a year.
• Most of them are just trying to earn the required \$7,500 a year to keep their health benefits.
• Less than 1 percent are the ones you read about and know: the real stars, the actors who make million-dollar salaries. T. R. Locke, “I’m an ACTOR… Should I Move to New York or Hollywood?,” T. R. Locke, October 16, 2009, accessed June 9, 2011, www.trlocke.com/2009/10/i’m-an-actor…-should-i-move-to-new-york-or-hollywood.
The reality is sobering. In Hollywood the real paycheck difference—the salary separation dividing top talent from just the average—is \$10,000 versus \$80 million. When Michael Bay cashed his Transformer’s check, he got enough to pay the yearly salary of eight thousand actors. That \$79,990,000 gap separating Bay from each one of those aspiring stars explains Locke’s good advice for Hollywood newcomers: “The best way to achieve your dreams is to wake up.” T. R. Locke, “I’m an ACTOR… Should I Move to New York or Hollywood?,” T. R. Locke, October 16, 2009, accessed June 9, 2011, www.trlocke.com/2009/10/i’m-an-actor…-should-i-move-to-new-york-or-hollywood.
Hollywood actors aren’t the only ones staring across giant wealth gaps. If a typical employee at Microsoft who has, like many Americans, a net worth of about \$100,000, spends \$150 at the bars on a big Friday night, it would be about proportional to what Microsoft chairman Bill Gates would do to his net worth (\$57 billion) were he to blow through…\$85 million. In fact, just one Bill Gates party night could pay a weekend-long bender for every single adult in Wyoming. And if Gates wanted to hire actors in Hollywood, he could get a year of services from six million of them. If every single man, woman, and child living in Rhode Island, Montana, Delaware, South Dakota, Alaska, North Dakota, Vermont, and Wyoming were actors, he could hire them all for a year.
Bill Gates is not the richest man in the world. The Mexican Carlos Slim is. Rounding the numbers off, and using the average Mexican per-capita earning, he could hire ten million people to work a year for him. In US terms, he could hire a personal assistant for every adult in Florida.
Wall Street executive Stephan Schwarzman earned \$702,440,573 in 2009: about enough to hire twelve thousand teachers for New York City’s public schools. Oracle CEO Larry Ellison earned \$560 million: enough to pay ten thousand junior-level software engineers. Occidental Petroleum CEO Ray Irani got \$223 million: enough to pay five thousand gas station attendants. The list goes on. Reality imitates Hollywood: nearly every field of work has its stars. David, “12 Highest Paid People of 2009,” Business Pundit, December 28, 2009, accessed June 9, 2011, http://www.businesspundit.com/12-highest- paid-people-of-2009.
What Is the Star System?
The star system in the economic world is a winner-take-almost-all structure for distributing wealth: those who are successful in any particular field take home a vastly disproportionate share of the revenue. This is easy to see in the movies and some other places (big-time professional sports, for example), but what makes the star system a pressing issue in business ethics is that it seems to be expanding through our economic lives. To begin getting a sense of the expansion—exactly what it is and means—two distinctions may be drawn:
1. Individual worth versus salary (or income)
2. Vertical versus horizontal expansion of the star system
Individuals can separate from the larger population mass in terms of individual worth, and in terms of salary. Loosely, the first is how much money someone would have if they sold everything they owned and concentrated the dollars in a single bank account; the second is the amount an individual gets paid each year to do something. These two measures may be very distinct—someone may be a star in one category and ordinary in the other. Indra Tamang is a Nepalese immigrant who served a wealthy New Yorker as butler for many years. In terms of salary, he could not be called a star. When his matron passed away, however, she left him just under \$10 million (and cut her own children out in the process). That rocketed Tamang into the upper end of the net-worth scale, even while his always-modest salary went to zero. Coryn Brown, “New York Butler’s \$8.4 Million Inheritance Includes 2 Dakota Apartments,” AOL Real Estate, aol.com, May 18, 2010, accessed June 9, 2011, http://www.housingwatch.com/2010/05/18/new-york-butler-inherits-8-4-million-and-dakota-condo.
At the other extreme, but still in New York, basketball player Eddy Curry received \$10 million to play a single year’s worth of basketball for the New York Knicks, clearly establishing him in the top echelon of earners. Still, he’s not worth much. In fact, he’s worth around zero: his house is in foreclosure, and creditors are suing for his cars. It’s not clear where all the money went, but a pretty good clue comes from the fact that one of his creditors is charging a jaw-dropping 85 percent interest rate, and that’s only legal in Nevada. Trey Kerby, “Eddy Curry Makes a Lot, Spends a Lot and Owes a Lot of Money,” Yahoo! Sports, May 25, 2010, accessed June 9, 2011, sports.yahoo.com/nba/blog/ball_dont_lie/post/Eddy-Curry-makes-a-lot-spends-a-lot-and-owes-a-?urn=nba-243600. Finally, it’s clear that the Nepalese butler and the high-rolling basketball player are extreme cases. More typically, individual worth and salary dovetail: those who make a lot end up having a lot. Still, the difference between them remains as two dimensions of a star system.
The second distinction to draw through an examination of gaping wealth differences is horizontal versus vertical. Vertical wealth imbalances measure the distance between top earners and typical ones. It’s the distance between the hyperrich, a Bill Gates in Seattle or a Carlos Slim in Mexico City, and the guy pouring cement at a Seattle construction site or the waitress serving tamales in a Mexico City restaurant.
According to Internal Revenue Services tax returns, in the fifteen years from 1992 to 2007, the four hundred wealthiest Americans have seen their average yearly income jump from about \$50 million a year, to \$350 million. That’s about \$300 million of extra space between the big earners and everyone else. Sam Gustin, “Super Rich Made \$345 Million Each in 2007 as Their Tax Rates Plummeted,” AOL DailyFinance, accessed June 9, 2011, www.dailyfinance.com/story/super-rich-made-344-million-each-in-2007-as-their-tax-rates-plu/19362705. As a parallel statistic, according to a Hofstra political science professor, “The ratio of executive salary to the average paycheck during the mid-twentieth century was about thirty to one. In the last decade it has ranged from three hundred to over five hundred to one.” David Michael Green, “America’s Race to the Bottom,” David Michael Greens (blog), The Smirking Chimp, December 12, 2009, accessed June 9, 2011.
Though there are many ways to measure the star system, there’s a common conclusion: in terms of pure dollars, the rich are getting richer relative to everyone else.
As against the star system’s vertical measure, horizontal expansion refers to the number of fields of activity where large wealth imbalances are prevalent. Some occupations fairly naturally lead to all or near-nothing incomes: wildcat oil drilling, hedge-fund managing, movie acting. Other fields seem naturally inclined to resist divergences. There aren’t many farmers on lists of the hyperwealthy. Plumbers frequently earn a solid income, but rarely climb above that. The idea of the star system’s horizontal expansion is that more and more careers resemble the first set of occupations, while fewer and fewer resemble the second set. It’s difficult to find raw statistics to prove this expansion, but it’s not hard to locate reasons for suspecting it.
One important reason the star system may be spreading is technological advancement. Justin Bieber, for example, is a cute adolescent boy from Canada with a nice singing voice and good instincts for catchy pop licks. Had he appeared forty years ago, he may have become known around his hometown of London, Ontario. With a lot of long drives and late nights, he may have become a star in his Canadian province and earned a nice concert income for a while. Thanks to YouTube, however, he was able to jump straight from singing a few songs a few times in remote Canadian towns to international superstardom. Similarly, lawyers that may once have become successful in a single courthouse can now buy cheap, late-night advertising on a cable network and set up branch offices around an entire state or even the nation. Anyone sitting at home with a laptop can use the camera to film themselves pitching some product or service and then display the commercial around the world using Google Ads for only a few pennies. What’s happening is that people who have a good product or service or pitch are today able to scale up their success very rapidly and inexpensively. No one is saying that it’s easy to become an overnight international sensation in any profession, but the opportunities to do that are expanding as our world becomes more interconnected.
One further point. Twenty years ago, if Justin Bieber had become successful in Ontario, he would’ve taken attention and economic opportunity away from some other aspiring singers in a Canadian province. Today, his success crowds out other potential preteen heartthrobs all around the world. Something similar has happened in corporate boardrooms as companies that used to operate in a state or a region have become international behemoths. It used to be that big-time CEOs managed hundreds of employees. The CEO of Walmart today is responsible for millions. For young and ambitious employees entering the Walmart company, that means, there’s a lot more competition than there used to be for that one slot on top of the pyramid.
Conclusion. The star system isn’t measured or defined by one specific statistic; it’s a constellation of ideas involving the increasing concentration of wealth within a profession—and within the economy generally—in the hands of a few individuals.
Key Takeaways
• The star system in the economic world is a winner-take-almost-all structure of wealth distribution.
• In the contemporary economic world, wealth imbalances are growing vertically and horizontally.
Exercise \(1\)
1. Name a field of economic activity characterized by the star system. Explain.
2. Name a field of economic activity that resists the star system. Why does it resist?
3. With an example, explain the difference between vertical and horizontal wealth imbalances in a society. | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/15%3A_The_Domination_Office-_The_Star_System_and_Labor_Unions/15.01%3A_What_is_the_Star_System.txt |
Learning Objectives
1. Discuss different formulas for distributing wages and wealth in society.
2. Consider different ways individuals are compensated for their labor.
3. Define cronyism and distinguish it from a star system.
4. Discuss theoretical notions of envy.
How Should Wages Be Distributed?
From a business ethics perspective, a modern society striated by extreme income or wealth imbalances provokes questions:
• How should wages be distributed?
• What counts as compensation?
• What’s the difference between a star system and crony capitalism?
• Why do we want to be stars?
Beginning with the question about wage distribution, in today’s economy a multitude of architectures may determine compensation levels for individuals at work. The appeal to market forces is the most straightforward. When the question is “How much should Bill Gates get?” the direct answer is whatever he can find a way to earn. This rationale has nothing to do with how hard Gates works. He may well struggle mightily, but it could also be that he sat down for a few mornings, jammed the lines of code composing the Windows operating system into his computer, and he hasn’t done a thing since. He’d still be fully justified in claiming his billions because people are willing to pay his company to get the product.
Expanding the logic that people should receive whatever they can get someone to pay them, no one thinks twice about applying that way of thinking to paintings. The worth of a Picasso that goes on sale tomorrow is no more or less than what the highest bidder offers. So too, the argument goes, should wages be determined.
This subject will be returned to later, but provisionally it may be stated that this method of apportioning money fits well with the contemporary star system. It fits because if some few people find ways of accumulating huge sums in the open marketplace, that’s not a problem or an injustice. If anything, it’s an indication that the market economy, which privileges individual initiative and freedom, is working as it should.
Another way of thinking about how wages and wealth should be distributed is value generated for society. Under this formula, few would deny that Bill Gates—whose software contributes mightily to making our lives easier—deserves healthy compensation. However, does he deserve more than the top-notch elementary school teacher who every year sends thirty children forward, ready to contribute to society? What about a paramedic? It’s true that Gates has touched most all our lives, but he hasn’t saved any.
With respect to ethically justifying this form of wealth distribution, it fits together well with the utilitarian ideal of acting in the name of the common welfare. When economic incentives are put in place to highly reward those performing tasks that provide for happiness when measured across an entire community, even those who don’t care about anyone but themselves will find their efforts channeled toward the general welfare.
On the question, finally, about gaping imbalances in income and wealth distribution, deciding to apportion money in terms of value added for society may not shrink the disparities. It’s true that Wall Street speculators may have a harder time justifying million-dollar bonuses, but others may claim their place on the spectrum’s upper end (Scientists? Teachers?). And with respect to someone like Gates, he’d stand on solid ground demanding huge riches based on his role in software development.
A third structure for dividing wealth is effort, measured by, say, number of hours toiling or amount of measurable work done. American Apparel employs this formula when dividing up wages among sewers at its Los Angeles factory. The sewers are grouped, and each member receives a respectable hourly base wage, and then a bonus depending on how many garments their team produces. Some groups produce faster than others and so make more money, but no individual rises above the pack as drastically as financier Stephan Schwarzman did on Wall Street when he earned \$702,440,573 in one year. To underline the difference, if Schwarzman worked twenty-four hours every day of the year, he’d be getting \$80,000 an hour. No sewer at American Apparel gets anything close to that.
Ethically justifying a structure for wealth distribution based on pure effort may lead toward the duty to fairness. If there’s broad agreement that all individuals should have an equal opportunity to pull down a big paycheck, then aligning the paycheck with effort makes sense. It works especially well by eliminating advantages some people have over others as a result of luck. Someone born with a knack for math may do better on Wall Street than another born without, but both have it in their power to work equally hard. If, consequently, we want to ensure that all society’s members have the same shot at becoming wealthy, setting paycheck decisions to accord with effort may function well.
With respect to a star system, finally, it’s immediately clear that this method of dividing wages drastically suppresses income differences. It may be that Wall Street maven Stephan Schwarzman works harder and longer than any sewer at American Apparel (or he may not), but there’s no way he works \$80,000 an hour harder.
A still flatter system of wealth distribution is precisely flat wealth distribution—that is, everyone gets the same check at the end of the month. Retirees collecting Social Security approximate this reality. Though it’s true that Social Security payments vary depending on factors including how much individuals contributed during their working lives and how early they began accepting benefits, there’s no room whatsoever for a star system. Near-blind equality across the board, in fact, is one of the main principles guiding the Social Security system.
Of course, one reason people are willing and, for the most part, happy to participate in Social Security’s relatively flat payment system is that they aren’t working. When people are working, when they receive a check for labors accomplished during preceding weeks, it becomes difficult to justify giving everyone the same amount regardless of how many hours they may have put in or effort exerted. In a certain sense, it actually becomes impossible because such a distribution breaks the link between work and payment (even someone who sucked their thumb all day would receive the same wage as the dedicated nurse) and so the entire discussion about dividing up salary levels evaporates. Dispersing money to the population becomes a political task more than an economic one. It is, it must be underlined, quite possible to ethically justify a flat wealth distribution system; it’s just that the justification would rest on social and political grounds, not economic and business ones.
The last structure for wealth division is in terms of need. Everyone gets the funding necessary to maintain a quality of life comparable with that of everyone else. A gesture in this direction is made in the United States by government welfare programs, a notable example being food stamps (about 40 million Americans, or 12 percent of the population, receive them). The idea behind the benefits is that those unable to afford the grocery store should receive a supplemental income to guarantee a sufficiently stocked kitchen cabinet. There are many and heated debates about the extent to which government institutions should be redistributing wealth by channeling tax revenue. It is clear, however, that giving to all members of society in accordance with their need will eliminate the star system. It may be true that some will receive vastly more than others (for example, those with serious physical disabilities), but there wouldn’t be any outsized accumulation of wealth; there wouldn’t be any Bill Gates out there with \$50 billion in the checking account.
Conclusion. The star system in American business life is not necessary; other systems of wealth distribution are possible and justifiable. However, the star system does fit together well with the proportioning of wealth through open market forces.
What Counts as Compensation?
The president of the United States receives “only” \$400,000 annually. Then again, he also gets a brass band striking up a tune in his honor every time he goes out the front door. Michael Bloomberg spent 108 million of his own dollars to be elected mayor of New York City in 2010. Since the job’s salary is \$225,000, he’d need to work 480 years just to break even. On the other hand, with a police escort he has a lot less trouble with the cross-town traffic frustrating so many New Yorkers, no matter how wealthy they may be. On Wall Street, quants are quantitative analysts: people who use mathematical algorithms (among other tools) to buy and sell stock. Their compensation can reach astronomical heights, which explains why some people who have the talent to be math professors at universities give up campus life for the world of finance. Others, however, decide against finance and in favor of the campus and a paycheck that struggles to reach six figures. In 1993, basketball superstar Michael Jordan left the game and signed up to play minor league baseball with the Birmingham Barons. Not everyone, reality teaches, wants to be a star, at least not in purely financial terms.
It’s also true, however, that most people who could be financial stars forgo that possibility only because they get what they perceive to be a better offer. The better offer may not appear so wonderful to many—it takes a certain kind of person to choose minor league baseball over the NBA, or campus life instead of glittering Wall Street—but the decision nonetheless makes sense for the deciders (and to enough outside observers for the choice to avoid being labeled insane). The point is that compensation, what you want to get back for doing your job, comes in many flavors, and it’s hard to put a universal price tag on them. Many would thoroughly enjoy the perks of being president, but probably few see why living a life of the mind at a remote university is preferable to being rich in New York City. Regardless, one of the difficulties in gauging and fully delineating the star system as it exists in professional life is accounting for the kinds of benefits that don’t appear on paychecks.
What’s the Difference between the Star System and Crony Capitalism?
Cronyism is partiality to others because they’re friends and allies. Normally, cronyism also includes some expectation of reciprocity: favors are exchanged. Crony capitalism is an insiders’ game in business, one where decisions are made on the basis of personal relationships and loyalties more than unbiased judgments and professional considerations.
About cronyism, everyone engages in it to some extent. When children come around in December selling gift wrap to raise money for their school, one girl may knock on the door and give a tremendous presentation along with some discount options, but you still buy more from the boy who mumbles and forgets most of the samples because he’s your sister’s son and also because you hope that when your children get older, your sister will do the same favor for you.
In the neighborhood and on a small scale, it’s difficult to object to outbreaks of personal allegiance at the cost of economic purity. In fact, an ethics of care—one that sets the preservation of social and family bonds as the highest moral good—actually endorses this kind of cronyism. The problem comes further up the scale when personal relations guide decisions about other people’s money, either directly or indirectly. One example is the bailout of Boston’s OneUnited Bank. It was located in the district of a powerful congressman and led at one point by the husband of a powerful congresswoman. When the bank collapsed under the weight of bad loans, it should’ve been put out of business. In fact, the Federal Deposit Insurance Corporation, a regulating arm of the US government, ordered the bank to stop making loans. Still, after a string of telephone calls stretching from the bank to the congresswoman and then on to the congressman in charge of doling out government bailout funds, a \$12 million check got written. The incompetent bankers at OneUnited got to keep working, and US taxpayers got a seven-figure bill. John Stossel, “Crony Capitalism,” John Stossel’s Take (blog), Fox Business News, December 23, 2009, accessed June 9, 2011, www.foxbusiness.com/on-air/stossel/blog/2009/12/23/crony-capitalism.
The purely economic description of this kind of bailout is “privatizing the profits and publicizing the losses,” meaning that when a company does well, the private sector people—the managers and shareholders—keep the profits, and when money is lost, the bill is charged to the public sector, to taxpayers. This kind of practice may well encourage wealth accumulation among a few people with powerful friends in government since their insider connections grant them a tremendous advantage on the economic playing field: they can bet everything knowing that if they lose, they’ll just get their stake back to try again.
Ethically, a number of arguments may be quickly mounted against cronyism:
• In terms of basic duties, including the duty to fairness, cronyism fails because economic players aren’t getting the same opportunity to succeed. In the banking example, the duty to fairness doesn’t mean all bankers necessarily succeed equally, but it does require that the difference between winning and losing gets determined in terms of the skills of banking (attracting depositors, correctly determining which loans are good and which should be avoided, and similar). Cronyism replaces banking expertise with social and political maneuverings at the core of success, which is unfair by definition, just as it would be to screen applicants for a bartending job by asking them all to participate in a running race.
• Another duty-based argument against cronyism is that it can be construed as a form of stealing. When political friends provide taxpayer dollars to a business, there’s no one person who can claim to have been robbed, but as a collective, taxpayers find someone has taken their money.
• A utilitarian argument against crony capitalism would succeed by showing that an economic system distorted by political favoritism is less efficient, and therefore, less supportive of the general welfare than one where only those who are best at one or another activity gain rewards.
Conversely, and in support of crony capitalism, an ethics of egoism could be mustered. Viewed from the perspective that whatever is best for me personally is also ethically recommendable, it’s hard to find fault with individuals in the world seeking to use all their resources—including friendships and discreet deals with government bigwigs—to succeed. An argument could even be made that if everyone simply accepted that we should all use every resource at our disposal, there might be a balance in the distribution of favors and underhanded advantages.
Regardless of the ethical defensibility of crony capitalism, there are important differences between it and a star system, at least a star system conceived in its purest form. The central contrasts:
• The concentration of income in the hands of a few within a working star system generally traces back to their professional talents, as opposed to their personal connections.
• The income concentration frequently results from an economic system allowing for successes to be transparently replicated on a tremendous scale, as opposed to sneaky, back-room deals.
An illustrative example of the difference comes from the top of the Forbes 400 list. The world’s two wealthiest individuals, according to the ranking, are Carlos Slim and Bill Gates. While everyone knows Gates, few people outside of Mexico have heard the name Carlos Slim, which isn’t remarkable given that he’s never invented anything, participated in the providing of an improved service, or even found a way to get typical goods and services to market more efficiently than anyone else. What Slim has done very well is pay off politicians.
In the early 1990s, Mexico, like many developing nations, was selling off inefficient state assets. One of them was Telefonos de Mexico (Telmex), the sole provider of telephone services for the country. Slim, together with a group of investors, bought the company in a shady deal (it’s not clear how much, if any, money the Mexican people received in exchange for the company their taxes built) and then got national legislators to grant them an effective monopoly. With no competition, the new directors of Telmex were free to charge whatever they wished for phone service, and they didn’t hesitate. They also didn’t bother investing in system improvements, so, until recently, multiline technology was not even introduced in the country. People and businesses who wanted to have more than one line had to have a second (or third, or fourth) line physically wired to their location. As the telecommunications industry around the world exploded—the demand for services including Internet shooting through the roof—people in Mexico had to wait for a crew to come out and run a wire. The wait was months or more. The people at Telmex were in no rush since their friends in the national legislature were busy assuring that no competitor could sweep in and take the client. The result, twenty years later, is that Slim is one of the world’s wealthiest individuals, and Mexicans pay among the world’s highest phone bills for abysmally poor service.
Except for the accrued wealth part, Slim’s story is completely different from Bill Gates’s. Though defenders of Apple enjoy pointing out that Microsoft’s Windows operating system came after, and looked suspiciously like the early Apple operating systems (almost as though it was a copy with just enough changes to claim originality), few deny that Windows, along with MS Office, have responded nimbly to consumer demands, and responded more skillfully than comparable offerings from competitors. And in a world where software can be mass-stamped as a small plastic disc or downloaded rapidly over the Internet, the Microsoft success has galloped across the economy: the Windows operating system along with MS Office almost immediately went to the extreme of creating a monopoly in America and elsewhere. No payoffs to politicians or other cronyism-stoking was necessary. The lesson is that in at least some parts of the interconnected world, quality differences (even small ones) between competing products can translate quickly into huge business success because consumers across the spectrum almost all make the same buying decision.
Something similar could be written about Walmart, as well as other companies. Though it’s true that the price difference between a Walmart cart of items and one from a competitor isn’t too great, the fact that there’s even an incremental difference quickly leads to a slaughtering of huge chunks of competition because there’s no difference between winning by a little and winning by a lot. In an interconnected world, most people hear very quickly that Walmart is cheaper, and overwhelmingly respond by going there. What’s important is that whether the company is Microsoft, Walmart, or a similar enterprise, market domination—along with the associated enrichment of a few individuals—has followed from genuine quality as determined by consumer decisions flocking together in an open market.
Both crony capitalists and the leaders in an economic star system build mountainous wealth, but the former do so at the cost of others by denying consumers choices or by short-circuiting the market’s natural functioning, while the latter do so by satisfying consumer demands and taking full advantage of a smooth-running market economy.
Do We Want to Want to Be Like the Stars? The Psychology of Envy
Though questions about envy—“What is it?” “What causes it?” “Is it OK to feel it?”—generally belong to studies in psychology, they’re inescapable in the economic world when a few participants have money flowing in so fast that it’s not worth the five seconds of their time required to bend down and pick up a twenty-dollar bill they dropped.
In sweeping terms, there are two broad emotional—as opposed to ethical—reactions to the hyperrich and the question about whether the rest of us want to be like them. The first response is, “Yes, obviously.” This makes sense. Most of us have lists of consumer goods we’d like to buy—an iPad, a new dress, a vacation trip—and it’d be nice to swipe the credit card without worrying about the balance. This reaction, it should be noted, isn’t just a pleasant thought: it may also contain traces of envy or, stronger, of resentment and even anger. Anyone who internalizes what it would mean (and how great it could be) to receive a wage that exceeds by thousands of dollars per hour the one we currently get, is going to be vulnerable to disliking or even hating those who have so much more.
The other way to make sense of the star system’s vast wealth disparities comes from a proposition on the subject found in Aristotle’s Rhetoric, book 2, chapter 10. There, Aristotle proposes that envy of others decreases as their distance increases. These distances may include years: few of us envy the medieval kings and queens of Europe. We know they had servants waiting on their every desire, but that doesn’t make us want to be them or get angry at their privileged lives. No one’s mad at Henry VIII; he’s just someone we see portrayed on the History Channel. Alternatively, the distance separating us from others who have more than we do could be measured in space and culture. We feel less envious of those people we hear about who may be tremendously wealthy but who live in some far-off place we’ve never visited and speak a language we’ll never understand. We may read about their exotic lives in a magazine, but it doesn’t affect us emotionally. Finally, the distance can also be economic: Aristotle’s proposition is that the hyperwealthy—Bill Gates, Warren Buffett—are so far away from us that we don’t feel stung and angry when confronted with statistics about their wealth. Their lives are just too different to relate with.
We only sense envy, Aristotle affirms, for those who come from similar backgrounds, for those who desire and chase similar things, and for those whose economic and social status isn’t too far above our own. We need, in other words, to already be like others in some ways in order to want to be like them in others. For this reason, it can drive you crazy when your next door neighbor gets a sparkling Mercedes, but when a Saudi prince buys his seventh Rolls Royce, you don’t bat an eye.
Why is envy distance limited? According to Aristotle, when those who are like us end up getting more than we do, it’s a reproach to us: it’s our fault that we didn’t get the promotion or the better-paying job at the start-up company. If we’re like our neighbors in most every way except for the fact that they’re bringing in more money, that means we somehow blew the chance to get that much ourselves.
Finally, these two very different reactions to astronomically wealthy members of our society have important consequences for the ethical verdict reached about the star system. One of the criticisms launched at modern economies characterized by extreme wealth disparities is that the disparities poison society with rancor and envy. No matter, the argument goes, how positive the inventions of a Bill Gates may be, the social welfare his work generates is cancelled by the sourness and resentment his personal wealth creates. If that’s true, then maybe we should impose limits on the economic success of individuals.
On the other hand, if Aristotle is right and we don’t rage when we find ourselves dwarfed by giant wealth, the star system becomes much easier to justify on the grounds that the prospect of endless money incentivizes people to invent goods and services that make all our lives better.
Key Takeaways
• Wages and wealth may be assigned in accordance with multiple formulas.
• The assignment of wages and wealth may be justified by reference to multiple theories.
• Money is only one of several ways people are rewarded for their work.
• Cronyism, which works through personal favors, may result in wealth disparities, but it is not synonymous with or necessary for a star system.
• A decision about how envy works affects ethical evaluations of an economic star system.
Exercise \(1\)
1. Name a field of work where market forces typically determine wages. Does the star system naturally take root there? Why or why not?
2. What’s the difference between wages based on “value generated for society” and “effort exerted”? Can you cite examples to indicate that one resists a star system more than another?
3. What’s a job where the main compensation isn’t money? Why do people want that job?
4. What are two ethical arguments against crony capitalism?
5. Why might someone be more envious of a neighbor whose house is slightly larger than their own than of a Saudi prince with eight luxury homes scattered around the world? | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/15%3A_The_Domination_Office-_The_Star_System_and_Labor_Unions/15.02%3A_Questions_Provoked_by_the_Star_System.txt |
Learning Objectives
1. Define and consider the main ethical arguments supporting a star system.
2. Define and consider the main ethical arguments reproaching a star system.
Justifying the Star System: Rights
In evaluating the ethics of the star system, three arguments are commonly mounted in favor of respecting vast wealth disparities:
1. The rights argument
2. The social welfare argument
3. The fairness argument
The rights argument defends the respectability of wealth concentrations by affirming that not allowing those accumulations is a violation of human freedom. From this perspective, all ethics centers on individual opportunity: right and wrong is about guaranteeing that free individuals can pursue whatever goals and as much money as they like on the way to finding their own happiness. Concerns about society’s overall welfare become secondary and derivative.
Ethics that make freedom the highest value can be used in a thought experiment inspired by the philosopher Robert Nozick to produce a substantial defense of an economic star system. It goes this way:
1. Imagine that everyone in our society has the same income, everything goes forward as perfect equality, and no one complains.
2. Next, imagine that NBA superstar Kobe Bryant proposes a new contract with his team. It stipulates that the ticket price for every home game will go up five dollars, and that extra five bucks goes directly to him.
3. The team owners say, “No.”
4. Kobe says, “I’m going to quit, and go get a job as a gym teacher at the school near my house.”
5. The owners change their mind.
6. Some season ticket holders, angry at the new price, cancel their purchase, but most say, “Yeah, it’s worth an extra five dollars to see Kobe.”
7. A total of 17,500 people fit into the Forum, the Los Angeles basketball arena where Kobe Bryant plays, and he plays forty-one games there each year.
8. Kobe pockets an extra \$3,590,000. Annually.
Does anyone have a problem with this? Is there someone who didn’t agree to the arrangement, to this new society where one guy—Kobe Bryant—is suddenly a lot richer than everyone else? Is there someone who’s being forced to do something they don’t want to do? Is anyone else being denied the chance to renegotiate their own contract or search for a different job? Are there any legitimate grounds someone can stand on to launch a complaint?
Further, if someone does complain, if they say Kobe shouldn’t have proposed the new contract, the owners shouldn’t have agreed to it, or the spectators shouldn’t have ponied up the extra money, then isn’t the complaint itself unethical? Isn’t anyone launching those criticisms really just trying to limit the freedom of someone else?
The rights-based argument affirming the star system’s respectability is powerful and hard to stop once it gets going. If you buy the premise—if you accept that business ethics is fundamentally about ensuring the right to individual freedom—it’s nearly impossible to break the chain of arguments against those who’d try to limit the choices Kobe Bryant and his adoring fans can make, no matter how much wealth piles up for the one player.
Moving the argument over to a broader consideration of the American star system, something like the Kobe Bryant thought experiment actually happens with respect to Hollywood celebrities, especially within the cash-break-zero reality currently gripping the movie capital. Big-name actors are essentially saying that they want a dollar (or whatever the relevant number is) from everyone who pays to see their movie. In this case, as in the Kobe example, the owners of the enterprise are perfectly free to find different actors if they don’t like the terms of the deal they’re being offered. And on the consumer side, moviegoers entering a theater are free to look up at the listings and choose another show if they don’t like the idea of padding the pockets of a particular Hollywood celebrity. Moviegoers are also perfectly free to walk out of the theater and redirect their entertainment dollars at museums, vacation travel, web browsing, or a novel. The list is interminable, and as long as it is, it becomes difficult to deny ethical acceptance to the movie attraction that’s making one star incredibly rich.
The Logic of Rights: License or Responsibility?
The Kobe Bryant thought experiment illustrates how a rights-based ethics licenses individuals to accumulate wealth without accumulating moral guilt. In the hands of its most dedicated defenders, however, the logic of rights goes further. It’s not just a license to accumulate; it’s something nearer to a responsibility. Taking the case of Bill Gates, when he piles up astronomical wealth, he isn’t only expressing his freedom; he’s inciting others to pursue their freedom: he’s providing them an example, he’s offering them products they may freely choose to purchase or reject, and he’s offering them tools they can use to pursue their own goals. With respect to those tools, many small businesses have gotten off the ground with the help of—and been able to get off the ground because of—the spreadsheet, publishing, and word-processing software found in MS Office. The fact, therefore, that Gates (and his fellow stars) are so rich in an open market economy shows that their ethical aptitude and performance is just as stellar as their economic one. They aren’t obnoxiously greedy; they’re the most dedicated servers of pure ethics because they’re living free and helping others be that way too.
Those who criticize Gates’s wealth in the name of spreading the money around to more needful members of society may sound noble, but they’re not. They should be reprimanded for distorting expressions of human freedom. Stronger, broad demands for wealth’s redistribution—which may occur, for example, through increased taxes levied on the wealthy or through pressure to donate to charitable causes—are not virtuous calls to social responsibility: they’re deplorable violations of basic human rights.
Justifying the Star System: General Welfare
The utilitarian argument defending the star system as ethically acceptable affirms that the general welfare can be served by wealth imbalances. If moral good and bad only reflect whether the general welfare is served, the argument builds this way:
1. Breakthrough developments of consumer goods are encouraged by a star system because it allows inventors to reap a significant portion of the economic reward.
2. Breakthrough developments can positively impact social welfare incrementally (Apple’s iPad), and sometimes be revolutionary (the invention of the assembly line).
3. The broad social happiness provided by these breakthroughs outweighs unhappiness attributed to giant wealth imbalances. (This is especially true if the imbalances are sufficiently great to preclude envy in the terms Aristotle proposed.)
This argument may be formulated slightly differently as a hypothetical question. Imagine you could have one of these two lives:
1. A typical middle-class European or American today. You’re far from rich but you can always afford decent food and a night out here and there. You’ve got a car that doesn’t break down too much. There’s a microwave to make popcorn in the kitchen, a TV in the main room, and some clothes you like in the closet. On the other hand, you need to go to work in the morning and clean grime out of the shower occasionally.
2. King of England. In 1600. You never have to clean the shower, but then again, the shower hasn’t been invented. There are no flush toilets either. You get whatever clothes you want, but they better be warm since there’s no heat for your castle except the fireplace. You don’t have a microwave, and even if you did, there’s no electricity to run it. You get from place to place fairly well on the country’s best horse.
This is a hard choice: live better in objective terms in the present or better in subjective terms in the past. It’s a way of asking, “What’s more important: how well you live, or, how well you live relative to everyone else?” There’s no right or wrong response here. This is a question that’s as much about psychology and economics as it is about morality. However, if you go for the first, you’re leaning toward the utilitarian argument justifying wealth imbalances. As long as those imbalances are functioning to encourage life-improving innovations, then the stark economic inequalities they leave in their wake become acceptable.
Justifying the Star System: Fairness
The fairness argument justifying the star system is increasingly persuasive as technological advances allow communication and operational organization to cover the globe instantly. That has opened the way for single individuals to amass tremendous responsibilities in vast organizations and then claim that it’s only fair that their reward be equally massive.
Only fifty years ago the largest department and grocery stores in the United States were mostly local concerns; crossing one or two state lines was a big deal. Of course expansive companies including the telegraph transmitter Western Union (which now specializes in international money transfers) and the Ford Motor Company have been around for more than a century, but neither compares in size, reach, or number of employees to today’s Walmart. With more than two million workers spread across the globe, CEO Michael Duke holds management responsibilities dwarfing the ones known by corporate heads in the past. To the extent that’s right, if it’s true that Duke’s responsibilities are astronomically high, then shouldn’t he receive a wage commensurate with the difference?
The fairness argument favoring the star system—at least in those cases where high salary reflects high responsibility—is that it would be arbitrary and unequal to simply put a lid on managers’ compensation if there’s no corresponding lid on the size of management responsibility. Concretely in Walmart’s case, a store manager overseeing the work of, say, a hundred employees makes about \$100,000. By that logic (the business pays \$1,000 of salary for every employee managed), Michael Duke, who oversees the work of two million people, should make about \$2 billion. That’s a hundred times what he actually makes.
When Walmart wanted to open a store in Chicago recently, a local alderman complained about the CEO’s salary this way: “How can you go to bed at night and sleep knowing you make this kind of money?” Alice Gomstyn, “Walmart CEO Pay: More in an Hour Than Workers Get All Year?,” ABC News, July 2, 2010, accessed June 9, 2011, http://abcnews.go.com/Business/walmart-ceo-pay-hour-workers-year/story?id=11067470.
One response allowed by an argument appealing to fairness is that it’s difficult for CEO Duke to sleep because he’s making so little. His wage is massively unfair in its paltriness.
Criticizing the Star System: Social Welfare
In evaluating the ethics of the star system, these arguments are commonly mounted against respecting vast wealth disparities:
• The social welfare argument
• The duty to beneficence argument
• The virtue argument
The social welfare argument against the star system is the most obvious and commonly cited, it’s that, essentially, Aristotle is wrong and wealth differences—especially extreme disparities—are ethically reproachable because of the emotional turmoil they cause within a community. While it may be true that allowing vast wealth accumulation motivates innovators and managers to perform exceptionally well, and while their work may benefit society significantly, the upside fails to outweigh the human cost of the resentment. The social rancor of inequality isn’t worth the benefits provided by highly paid innovators.
Criticizing the Star System: Duty to Beneficence
The beneficence argument against the star system operates from the duty to help others when doing so requires no unreasonable sacrifice of our own interests. Most discussions of beneficence revolve around acts. For example, if a man is drowning in a lake and you don’t know how to swim, you have no responsibility to jump in. But if you’re Michael Phelps in exactly the same situation, then the duty to save the flailing man applies.
Transposing the discussion into monetary terms, one basic question is, “At what point does my accumulated money translate into a responsibility to charity?” If a woman works a few overtime hours to buy a new pair of boots for the upcoming winter, there’s no clear duty to share the cash with a neighbor in similar circumstances. By contrast, when Alice Walton (daughter of Walmart founder Sam Walton) who’s worth \$18 billion walks down a street near her home outside of Forth Worth, Texas, she’d have a hard time convincing those passing by that she couldn’t establish, say, a generous college scholarship program for society’s neediest members without suffering any tangible loss. Probably, most people at the very top of the wealth pyramid could dedicate large chunks of cash to charitable causes without severely denting their quality of life. In these circumstances, the duty to beneficence becomes pressing.
With respect to the star system, it’s important to note that beneficence doesn’t form an argument against high incomes or even astronomical wealth accumulation; it does, however, argue against the maintenance of large disparities. A society oriented by the duty to beneficence would, in other words, tolerate a star system, but only a fleeting one, a reality where people could make tremendous amounts, but not without feeling a charitable responsibility (or something similar) that would significantly diminish the economic gap separating them from the general population.
Criticizing the Star System: Virtue
Virtue ethics eschews reliance on social outcomes (the utilitarian model) as well as strict rules for action (the duty model). Instead, decisions are left in the hands of those who’ve been taught to think and be virtuous, with the key to virtue frequently being located as those actions that take a middle road between extremes.
A virtue argument against wealth concentration begins by locating extreme situations. At one pole, the star system grows exponentially. Market rules function without reserve, and traditional wealth-redistribution measures are scuttled. The progressive income tax, for example, is replaced by a flat charge for all citizens. (The justification: everyone uses roads and other services more or less equally, so they should all pay the same tax dollars). Further, social attitudes could be adjusted. The idea of earning huge amounts and accumulating even more usually elicits both respect and also suspicion of greed. That could be changed: schools and other institutions could be adjusted to teach that getting extremely rich is an unmixed good, and suspicions by others of greed is nothing more than cloaked envy.
Toward the other extreme, there’s the vision of a broadly equitable society. Redistributive taxation is heightened. In Denmark, for example, the highest earners pay an eye-popping 68 percent of their salary. On top of that, estate taxes paid on an individual’s death could be hiked to ensure that money doesn’t build up over successive generations. Then, on the social level, attitudes could be bred in our schools, churches, and similar institutions that any significant wealth difference above the mean is worrisome, and their possessors aren’t admirable so much as ugly hoarders. These combined economic and social actions would almost certainly reduce wealth differences across the social spectrum.
Next, and building above this foundation of extremes, the virtue ethicist would navigate a moderate course. Redistributive measures undertaken by the government may not reach the 68 percent taxation rate, but they wouldn’t allow the wealthy to use accounting tricks and similar measures to drop their total payments to levels comparable with what middle class individuals pay. Then, with respect to social attitudes, a balanced sense of pride and shame would need to be instilled in the community, one that granted successful entrepreneurs like Bill Gates respect for their accomplishments, but one that also taints his (or anyone’s existence) when that wealth reaches a point where it’s enough to hire six million struggling Hollywood actors for a year.
Key Takeaways
• Arguments ethically justifying the star system may be based on rights and freedom, the general welfare, and appeals to fairness.
• Arguments criticizing the star system may be based on the general welfare, the duty of beneficence, and virtue.
Exercise \(1\)
1. Can you take the Nozick-inspired thought experiment concerning Kobe Bryant and re-create it in your own words and with a different example?
2. What is an example of the star system serving the general welfare by promoting innovation?
3. Why might the contemporary star system be considered fair?
4. Why does the star system harm the general welfare?
5. How might the duty to beneficence be applied to Bill Gates? Why would the duty tend to preclude an economic star system? | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/15%3A_The_Domination_Office-_The_Star_System_and_Labor_Unions/15.03%3A_Ethics-_Justifying_and_Criticizing_the_Star_System.txt |
Learning Objectives
1. Define a labor union.
2. Discuss the ethics of union membership.
Hollywood Writers
Movie theater lobbies are inevitably lined with advertising posters for upcoming attractions. A standard poster carries a recognizable celebrity face (or, if you don’t recognize it, the expression is so beaming and confident that you immediately assume you missed the news of a huge new star’s arrival). The movie’s title is there, and the lead actors’ names too. Sometimes the director gets big billing. The producer, the studio, they’re easy to locate. You need to go a long way down the poster, though, and into the fine print, to find the writer’s name.
Inside the industry’s day-to-day working life, writers don’t get much respect. Longtime agent Nancy Nigrosh writes that frequently they’re not invited to the screening or any other film-opening festivity. She paints the situation bleakly: “Unless you hire your own hardworking publicist you’ll be sitting at the kiddy table and arguing politely with security at the star’s tent at the premier because here’s the other thing: nobody cares.” Anne Thompson, “Screenwriting in Hollywood: A Modest Proposal,” Variety, October 2, 2008, accessed June 9, 2011, blogs.indiewire.com/thompsononhollywood/screenwriting_in_hollywood_a_modest_proposal#.
The heart of the reason no one cares is the way films are composed. It’s not like a novel or a poem or even journalism where one person more or less shepherds a work from beginning to end. Instead, scripts are written and then rewritten by someone else. Then another author is called in for some further adjustments and it’s all reworked while the filming actually happens, and by the time the movie’s done, it’s almost impossible to figure out who deserves credit for which words. In that kind of situation, writers find themselves in a bad spot when it comes to bargaining for money. It’s true that the studios need writers, and that provides some leverage, but they don’t usually need any particular writer. There are exceptions, but since movie scripting is usually an assembly-line process, substituting one with another probably won’t affect the final product too much in most cases.
One response to this reality is that workers organize and sell their labor collectively. Conceptually, the idea is simple. When employers threaten to replace individual workers with others who’ll perform the same services for even less credit and at a lower price, the other employees—seeing that they could be next in line to face replacement—stand together in support of their colleague.
Whether the workers are Hollywood writers, Detroit autoworkers assembling cars, or hotel maids cleaning the rooms and making up the beds, the strategy of forming an alliance to defend common interests can work by reversing the star system. The star system promotes the general welfare by freeing individuals to pursue their own interests. In labor unions, individuals promote their own interests by defending the general welfare or, at least, the collective welfare of their fellow laborers.
Unions: Definition and Quick History
A labor union is an organization of wage earners formed to promote job-related interests, especially with respect to wages and working conditions. A union can be as informal as a band of salespeople telling the boss they’re not going to come in the next morning unless the coffeemaker is fixed. Most discussion, however, surrounds larger and more formalized unions: members pay dues, hold elections to choose leaders, and in the largest instances, hire a professional management team to advocate for the laborers’ common interests.
Two inflection points mark the history of labor unions in the United States. The Wagner Act (more formally, the National Labor Relations Act) was approved in Washington, DC, in 1935. It blocked employers from mistreating or firing workers attempting unionize a shop’s workforce. The act also prohibited the summary firing of workers who’ve gone out on strike. The freedom to organize, along with the power to strike effectively, quickly translated into more unions, more walkouts, and two large organizations guiding the efforts of many smaller trade unions: the American Federation of Labor (AFL) and the Congress of Industrial Organizations (CIO). While it’s true that in the years after World War II business-damaging strikes grew more frequent, wages also rose and nourished a broad American middle class. Organized labor came to play a central role in business life.
The maturation of organized labor in the United States harmonized with world events. Political parties dedicated to workers—especially the hard labor sectors—swept the globe, frequently leading to socialist and communist societies. Those movements eventually reached US shores. In 1947, communists eager to maximize their influence took control of sectors of the United Auto Workers Union, the Detroit collective making nearly all the cars Americans drove. Pictures from the time—auto workers waving signs announcing they’re for “Tommie the Commie” seem far out of sync with today’s reality but serve to remind how quickly the world’s orienting values and ideologies can change. June 9, 2011, Life Magazine 22, no. 12 (March 24, 1947), 31, accessed June 9, 2011, http://books.google.com/books?id=AUoEAAAAMBAJ&pg=PA31&dq= uaw+membership+local+600+ford&hl=en&ei=5KbBTKbcNML98Ab01LGdBg&sa= X&oi=book_result&ct=result&resnum=6&ved=0CEoQ6AEwBQ#v= onepage&q=uaw%20membership%20local%20600%20ford&f=false.
In that same heated year, 1947, congress responded to sweeping unionization and complaints that the workers’ organizations had become too powerful with the Taft-Hartley Act. It prohibited the so-called closed shop, which is a workplace where being hired carries with it the requirement to already be a union member. It allowed, however, a union shop, a workplace where all employees are required to join or at least pay the dues associated with joining. Later, the US Supreme Court ruled that even though striking workers couldn’t be fired for walking off (in accordance with the Wagner Act), they could be permanently replaced. Over time, this significantly diminished union strength since those going on strike were now risking their jobs.
As decades rolled forward, the counterunion tide on the legal front eventually replicated as important changes in American industry. Many of the skilled and heavy laboring jobs involving cars, steel, and similar industries that had responded well to organizational efforts began drying up for at least two reasons. Increased international trade allowed companies to shift many labor-intensive tasks to other countries with lower wages. Also, jobs that remained Stateside faced the threat of machines taking over many functions. Detroit assembly lines formerly composed of blue-collar workers are now dominated by sophisticated robots. Politically, organized labor also dimmed over the second half of the twentieth century. In the 1980s, the nation’s air traffic controllers went on strike. President Reagan fired them all and hired new ones. Reagan also challenged the world’s communist nations; the collapse of countries explicitly guided by the collective welfare of laborers was rapid and nearly complete.
Today, organized labor unions play roles in most sectors of American economic life, but their influence is limited, except in a few areas. Government workers continue to be very highly unionized: more than half of all union laborers in the United States today have government jobs. Unions also remain in small fields that resist marketplace forces. The National Football League players, for example, are unionized: you can’t just send their jobs overseas. Also, workers in the health-care field have a fairly high unionization rate: you can’t replace a nurse with a machine (at least, not yet). In political terms, and though diminished, unions continue to be a notable force. The single largest outside spender in the 2010 election campaign was the American Federation of State, County and Municipal Employees. AFSCME spent a whopping \$90 million (much coming from workers’ dues) to support candidates around the country. Still, with only 1.6 million members, the group is no larger than the United Auto Workers union back in 1970 when US population was only two-thirds of today’s number. Currently, the UAW has about 400,000 active members.
Three questions asked about unions in the field of business ethics are:
1. Who should be a union member?
2. What kinds of demands should unions make?
3. What kinds of actions can unions justifiably undertake?
Membership
In principle, a unionized workplace incorporates all employees: the idea of a union is a united workers front presented to management when wages and conditions are discussed. In practice, however, the ideal often falls short. For example, the Writers Guild of America (WGA) represents Hollywood’s writers: they’re the people penning scripts for everything from TV sitcoms to big-budget movies to the annual Oscar Awards. With around twelve thousand members, the union members produce around one hundred scripts and rewrites a week through the major studios. Without their work, quite a bit of the showtime industry halts. It doesn’t all halt, though. According to the New York Times, in the 1980s, nearly all Hollywood’s writing came from Guild members, but the percentage has now dropped to about half. Union writers are being displaced by freelancers. Michael Cieply and Brookes Barnes, “Writers Say Strike to Start Monday,” New York Times, November 2, 2007, accessed June 9, 2011, http://www.nytimes.com/2007/11/02/business/media/02cnd-hollywood.html?pagewanted=all.
While the scriptwriting evolution from the 1980s to today is essentially the move away from—though not a complete departure from—unionization in Hollywood, there are three strong arguments in favor of reversing the trend and refortifying the writers’ collective. They’re based on
• fairness,
• solidarity,
• respect.
On the other side, there’s one main argument frequently set up against the proposal that the model workplace become something close to a union shop:
• the right to free agency, along with a derived duty to individuality
The first argument supporting broad union membership rests on fairness. Gains in wages and improvements in working conditions don’t come for free. Take, for example, the WGA demand that residuals go to writers. The union is saying that those receiving credit for the program script should receive money not only at filming but also later on if the show is a hit and ends up getting repeatedly shown into the indefinite future. On almost any night somewhere in the United States, one of the Die Hard movies is broadcast, and licensing rights are subsequently divvied up among those who made the film. The actors, the directors, the producers, everyone wants as much as they can get, and for writers to take a share, they need professional negotiators who can bargain hard, as well as lawyers and other experts who understand the complicated laws and dynamics of residual payments. The money to pay for these services comes from union dues, and if writers who aren’t in the union nonetheless receive these hard-bargained benefits, they’re free riders. They get the advantages of unionization without paying the cost. If, the argument concludes, freelance writers want to receive long-term benefits, then they should pay their fair share to the operation making them possible.
The second argument in favor of drawing workers into unions rests on a notion of solidarity. Solidarity, in this sense, is the moral obligation to share in the struggles of others facing challenges similar to those we face. For example, when William Russell Grace immigrated to New York in 1865 and set up a successful business (now called simply Grace Incorporated), one of the steps he took as an expression of solidarity with immigrants coming after him was to set up a free school where new arrivals could learn basic skills helping them find employment in their new country. Called the Grace Institute, there’s an ethical solidarity incarnated in the school, one uniting immigrants around their shared experiences and common hardships. Broad social movements also provide abundant examples of the ethics of solidarity. A case could be made, for instance, that women and African Americans have a special obligation to unite with homosexuals seeking workplace equality because women and African Americans too know, and have shared the suffering of discrimination.
It’s true that the case of Hollywood film writers isn’t so dramatic as immigration or broad job discrimination, but the ethics are the same. Because all scriptwriters share a common vocation, similar challenges, and common hardships, they have a duty to stand together. Unionization is an expression of that solidarity. People don’t sense the obligation to join up as a way of getting higher wages; instead, the union becomes a site of empathy, of mutual experience and support.
The third argument in favor of obligating new workers to join the union is based on a duty of respect. When a group of individuals have labored to form a cooperative in the name of their mutual benefit, those joining the occupation have a duty to honor those efforts by not undercutting them. The crucial point here is that, in many cases, there’s no middle ground. It’d be one situation if Hollywood writers could work on their own without affecting the efforts of unionized script producers, but that’s not usually the case. Workers who refuse to join and participate in the WGA and who forge their own contracts and reimbursements are also undermining union efforts because, presumably, the reason producers go outside the union to hire is that freelancers are cheaper. If that’s right, and if new writers coming to town don’t respect the existing union structure, then market forces are eventually going to put the union out of business: instigated by the need to maximize profits, owners and managers will hire nonunion workers to replace the more expensive, organized ones as fast as possible.
This is, in essence, what has started happening in Hollywood. To the extent the studios are funding independent projects pitched by freelancers, they’re replacing higher-cost union talent with writers who are willing to work for very little in exchange for the chance to get a break, be famous, and be a star (in the relatively dim world of script writing). There’s a problem here, obviously: if writers are allowed to work for something near slave wages to get a break, then as soon as they’re established in the industry, some younger dreamers are going to come along and undercut them just as they earlier undercut the WGA workers. That’s economics, though. The moral imperative is that respect for others’ unionization efforts is also an obligation to not undermine them.
Set up against these three arguments in favor of union shops, there’s the powerful rights-based argument. If ethical discussion starts from the premise that each of us owns ourselves, and we’re free to use and sell our abilities as we like, then no one can pressure us to sign up for a union without violating our intrinsic liberty. In terms of Hollywood scriptwriting, this is the right to free agency.
Derived from the right to free agency there is a right to self-definition: each of us is uniquely qualified to define who we are and which desires guide our working life. This derivative argument resists the entire concept of unionized activity because collective bargaining eliminates individuality. What allows labor unions to work, what gives them strength at the negotiating table, is precisely that they compact an entire workforce into a single model of interests and demands; it’s that focus and the united voice of the workers behind it that allow union leaders the strength they need to bargain effectively. This strategy can, no doubt, work, but only by forcing all scriptwriters to renounce their singularity and uniqueness in the business world: they all demand to be paid in accordance with the same pay structure, to be covered by the same set of benefits, to labor in the same working conditions, and so on.
The lynchpin, finally, to this argument is that because unions function by erasing the individuality of specific workers, we’re all morally prohibited from joining. Doing so is a violation of the fundamental obligation we all have to ourselves to express our freedom by being who we are. We are duty-bound to resist any nameless, faceless mass, whether that mass happens to be a labor union or any other collective.
The Card Check
One hot spot of union membership debate is the proposed Employee Free Choice Act or so-called card check legislation. If enacted, this law would make an important change to the process of forming a workplace union. As currently regulated, the process typically goes like this. It’s necessary to get at least 30 percent of the workforce to sign cards stating their preference to be represented in collective bargaining. Once the number has been reached, the list is forwarded to the National Labor Relations Board and to the employer. The list is checked. If the numbers are verified, a secret-ballot election follows: workers are asked to vote on whether they want to be represented by a labor union. The majority rules. What card check legislation changes is the secret ballot component. No longer necessary, if organizers can simply accumulate a list of 50 percent of the workers requesting unionization, then the structure will be applied.
The main objection to the secret ballot’s elimination is that workers may be intimidated into putting their names on the list. The reason for a secret vote in the current system is to allow those preferring not to be unionized a chance to express that without fear of retribution from their peers. Not surprisingly, the US Chamber of Commerce and other business groups lobby against the legislation. For their part, the major unions see card check as an opportunity to expand their membership and lobby in favor.
Regardless of the legislative value, the ethical debate underneath the card check parallels the one about a union shop. For those valuing solidarity, unionization—even with pressure—may seem recommendable. More, because a union draws its strength from forcibly uniting the divergent workers into a set of single demands, the greater good that’s served by the united front simply outweighs protests that may be expressed by individuals. So while it’s true that workplace pressures following the approval of card check legislation may make some employees uncomfortable, they should be more strongly guided by a sense of fairness (if they want to benefit, they’ve got an obligation to join), by a sense of solidarity (“we’re all workers”), and by a sense of respect (some workers are dedicating their energy to lead a cause serving everyone).
On the other side, for those whose ethical orientation begins from the idea of individual rights, self-ownership and the duty to self-definition, any organizational structure that presents the risk of violating individual freedom will, on principle, be rejected. The kinds of pressures on individuals that may be applied by peers in the attempt to get them to sign the union card are so fundamentally in violation of our deepest rights that the legislation must be voted down, even at the potential cost of power for workers at the bargaining table.
Union Demands: The Workplace and Public Policy
The two stalwart demands made by organized labor unions on behalf of employees are wage hikes and working conditions. The balance between these two concerns shifts depending on the kind of work being done. When a Hollywood writer arrives on a soundstage to straighten out final kinks in a script, the kinds of working-condition issues being faced may be trivial (Is the coffee hot? Are there some nonfattening snacks around somewhere?). When a coal miner takes the elevator down into the earth, the questions are more serious. What kind of emergency safeguards protect against a collapsed shaft? How careful are foremen to ensure that tired workers nearing the end of their shift aren’t assigned to work on the more dangerous of the heavy machines or set off dynamite charges? A coal miners union, clearly, is going to expend a greater effort bargaining for safe conditions than the WGA.
On the compensation side, one challenge unions face is melding the distinct interests of diverse members into a single bargaining strategy. If you check the WGA website, you’ll find union involvement on issues ranging from direct pay for work to health-care benefits and pensions. A twenty-five-year-old just breaking in is going to be more concerned, possibly, about getting as much cash now as possible for work done, while an older writer will begin asking about paying medical bills and living decently in retirement. In translating these diverse situations into a collective set of negotiating points, simple market forces will play a role (a union active in a field heavily stocked with younger workers will have to take account of that, or people will stop participating), but other structures may be erected to resolve problems also. A utilitarian structure, for example, may provide a way for union leaders to justify decisions making some members unhappy.
Finally, unions don’t only represent workers before employers; they can also carry labor issues into the political arena. As noted, AFSCME spent \$90 million supporting (and opposing) candidates around the country during the 2010 midterms. Unions can also—and frequently do—provide voting guides advising members on which candidates will better respond to their immediate interests. With respect to specific issues, and besides the already mentioned card check legislation, unions lobby elected representatives and government agencies in areas including workplace safety, the minimum wage, and health care.
Key Takeaways
• Labor unions allow workers to organize and bargain collectively for improvements in wage and working conditions.
• Ethical arguments in favor of workers joining unions may be built upon notions of fairness, solidarity, and respect.
• The right to free agency, along with a derived duty to individuality, forms the basis for an ethical stand against joining unions.
• Unions take sides in workplace issues, and broader political debates.
Exercise \(1\)
1. Why might the notion of fairness convince a worker to join a labor union?
2. In your own words, and with respect to labor unions, what does solidarity mean?
3. How does joining a union harm one’s sense of individuality? Why might that harm be an ethical argument against union membership?
4. What is card check legislation, and how might it advance the interests of labor unions?
5. How can a union represent the interests of members beyond negotiating with a specific employer? | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/15%3A_The_Domination_Office-_The_Star_System_and_Labor_Unions/15.04%3A_Unions.txt |
Learning Objectives
1. Define a labor strike.
2. Consider ethical justifications for striking.
3. Weigh responsibilities set against striking.
4. Consider the rights of employers and strikebreakers.
The Hollywood Writers’ Strike
The most contentious area, both economically and ethically, of union action involves strikes: workers collectively walking off the jobsite in an attempt to pressure employers to accede to their demands. The Writers Guild of America (WGA) led one of the most publicized recent walkouts when Hollywood script writers put down their pencils and closed their laptops—at least officially—in November of 2007. By the time they returned in early 2008, the economic damage wrought in the Los Angeles basin was massive, \$3.5 billion according to some estimates, but the resolution ultimately satisfied most members of the moviemaking community.
During the strike, two constellations of ethical issues came to the fore. First, questions involved
• the right for workers to not work,
• the right of employers to find someone who will work,
• the rights of third parties to go on with their lives and work.
The second set of questions involved responses to the strike:
• Who in Hollywood, if anyone, is obligated to support the writers?
• Is it OK to take a striker’s job?
Justifying Not Working
Some Hollywood writers are contracted by faceless studios to churn out rewrites for movies; others generate TV dramas and soap operas. There’s work to be done inventing jokes for sitcoms like The Office, and opening monologues for Jay Leno’s Tonight show need to be written a few days every week. As the writers’ strike extended, the walkout’s effects beamed into living rooms. Almost immediately, Leno went into reruns. The Office, which had a few episodes in the can, lasted several weeks. The moviemakers—many of whom live underneath piles of scripts submitted unsolicited by writers—kept going.
Out on the picket lines, Leno zipped around in his vintage sports car to support the stoppage, and occasionally stopped to chat with the strikers and crack good-humored jokes. Of course Leno, who makes millions a year, probably didn’t really need his paychecks. Others in Hollywood, however, live from day to day and without much room for unemployment. Set designers, prop companies, on-site catering services, all the people surrounding the now-halted industry saw their income wither. In the face of the injurious consequences, three arguments nonetheless favor and justify the writers’ walkout.
1. The rights argument in favor of the workers’ strike is direct and convincing for many: all individuals have a right to not go to work in the morning. Whether we’re talking about a union action or just someone who wakes up with a hangover, any ethical theory that takes its bearings from individual rights is generally going to turn in a verdict in favor of the worker’s right to stay home.
2. The last resort argument affirms that workers are justified in striking when three conditions are met: First, there must be a just cause. The driving issue cannot be petty angers or interpersonal conflicts of some kind; instead, the motive must be wages or working conditions that are out of step with industry norms or reasonable expectations. In the writers’ case, this condition may have been met because they represented one of the few talent sectors not benefitting from payments for programming broadcast over new media, especially the Internet. Second, there must be proper authorization, which means the workers themselves must support the action, and have reached a well-deliberated decision. In the writer’s case, most did support the action, which had been planned for months. Third, the strike must be a last resort, meaning attempts to find solutions must’ve been fully explored. Here too writers met the condition as long negotiations had explored most possible solutions.
3. The marketplace argument is the rawest of the justifications for striking, and it answers the ethical question with economic facts. If workers can get away with striking, the reasoning goes, then they’re justified. The argument is less flippant than it sounds. If workers really are being underpaid for their labors, then when an employer seeks others to replace those who’ve walked out, none will emerge, at least none capable of doing the work well. On the other hand, if market conditions determine that the striking workers are demanding more than they legitimately should within the current economic context, then when an employer tries to replace strikers with fresh hires, the cost of doing so will be less than the wage increase the strikers are demanding.
On the other side, the kinds of arguments normally set up to obligate striking workers to return to their stations involve responsibilities to the larger community:
1. The public safety argument applies only in selected situations. The famous air-traffic controllers’ strike in the 1980s involved the safety of fliers. Similarly, police officers, firefighters, and similar may find it difficult to justify a full-fledged strike given the serious suffering that may result. There are many borderline cases, however. For example, in Tennessee some fire departments collect fees directly from those they protect. In one case, a man who hadn’t paid found that his house was on fire and called the department; they responded, but only to protect nearby homes from the fire’s spread. They watched the flaming home burn to the foundation without intervening because the bill hadn’t been paid. Of course, the situation would’ve been different had a person been trapped inside. In this case, however, the loss and dispute was entirely about money. Jason Hibbs, “Firefighters Watch as Home Burns to the Ground,” WPSD, September 29, 2010, accessed June 9, 2011, www.wpsdlocal6.com/news/local/Firefighters-watch-as-home-burns-to-the-ground-104052668.html.
2. The public welfare argument against workers going on strike weighs in when strikes affect third parties, people outside the initial dispute. The scriptwriters’ walkout, for example, left a large chunk of Hollywood unemployed. The most rudimentary way to elaborate the argument is simply to note that the suffering caused across the entire industry by the five-month writers’ strike almost surely outweighed the benefits the writers finally obtained. It should also be remembered, however, that if some workers somewhere don’t draw the line against owners and employers, those employers will have no incentive to not push everyone’s wages down, ultimately affecting the welfare of most all the industry’s participants.
3. The immediate welfare argument against the writers’ strike finds support in an ethics of care. An ethics of care values most highly an individual’s immediate social web; concern for those people who are nearest outweighs abstract rules or generalized social concerns. In the case of the Hollywood writers’ strike, the suffering incurred by families and friends related to particular strikers may be taken to outweigh any benefits the broad union collective won from the action.
Finally, it’s important to note that strikes don’t need to be long-term walkouts. The dynamic and ethics surrounding the refusal to work change when, for example, a union decides to go on strike for only a single day as a way of pressuring management.
Standing in Line and Crossing It: The Ethics of Supporting Strikes and Breaking Them
The Hollywood writers’ strike featured some big-name backing. Jay Leno cruised around in his Bugatti; Steve Carell, star of The Office, refused to cross the picket lines; and Sally Field mingled with writers in the Disney Studios lot. These shows of support scored public relations points and provoked this question: what obligation do workers in related fields hold to support strikers?
The range of responses corresponds well with those already outlined to justify the unionization of workers in a particular shop.
• One way to oblige workers in related fields to support strikers is the argument from fairness. When workers in a certain industry strike and win concessions, those gains may be cited by other workers as justifying their own demands. In fact, in Hollywood the writers themselves had used this strategy in the past: instead of going on strike, they’d waited for the directors union (Directors Guild of America) to negotiate demands with the major studios and then used those results to make their own case for concessions. The argument for supporting striking workers based on fairness is that all workers for a particular company or across an industry may well benefit when one group makes gains, and if that’s so, then those other groups also have a responsibility to support the strikers when they’re sacrificing.
• A second argument is based on solidarity, on the idea that an alliance between workers in an industry is ethically natural: there’s an obligation to share in a struggle when facing similar challenges. Because other members of the Hollywood community are uniquely positioned to understand the realities and hardships of screenwriting life, they have a duty to act on that empathy.
As events transpired, the WGA did, in fact, receive wide support from across Hollywood, but the solidarity was far from complete. As this outburst from a writer’s blog shows, some network studios tried to keep their soap operas in production by hiring strikebreakers, or scabs, as they’re known to picketers:
The scab writers work under fake names, work from home and use different email addresses so only the executive producer knows the real identities of the scabs. These tend to be experienced soap writers who aren’t currently on a show. They are then promised employment after the strike is over. While they’re scabbing, they get paid less than union writers. John Aboud, “Scabbing Doesn’t Pay (For Long),” United Hollywood (blog), November 8, 2007, accessed June 9, 2011, http://unitedhollywood.blogspot.com/2007/11/scabbing-doesn-pay-for-long.html.
This under-the-table scripting captures a conflict inherent in the union’s attempt to use economic force against employers. On one side, by cutting off their labor, strikers are trying to win concessions through economic force. But their success depends on the suspension of basic economic rules: as this blogger is admitting, there are scriptwriters out there willing to work at current wages for the studios. It sounds like they may even be willing to work for less.
For these secretive scriptwriters, what ethical justifications can be mounted for what is, in essence, picket-line crossing? The blog post decrying scab workers actually rallied some to post arguments in the strikebreakers’ defense. One comes from a poster named Jake: “Maybe he [the blogger writing the original post complaining about strikebreakers] has unlimited funds somewhere and can stay out of work forever, but some need to support themselves now.” Jake, November 8, 2007 (6:44 a.m.), comment on John Aboud, “Scabbing Doesn’t Pay (For Long),” United Hollywood Blog, November 8, 2007, http://unitedhollywood.blogspot.com/2007/11/scabbing-doesn-pay-for-long.html.
The argument here is that we all have fundamental duties to ourselves that must be served before deferring to others. It’s not, in other words, that scriptwriters should feel no obligation to their colleagues, but all of us have a deeper responsibility to our own welfare (and possibly to that of our family members who may depend on us), and that responsibility takes precedence when the situation becomes extreme, when going without work represents more than just an inconvenience.
Another argument wraps through the following exchange between two blog readers. The first, who registers his comment anonymously, writes, “I’m a little amazed by some of these comments.…Do you guys [who support strikebreakers] not know about unions? Do you not understand what it means to cross a picket line?…People need to work for just (as in fair) pay.” Anonymous, November 8, 2007 (8:15 a.m.), comment on John Aboud, “Scabbing Doesn’t Pay (For Long),” United Hollywood Blog, November 8, 2007, http://unitedhollywood.blogspot.com/2007/11/scabbing-doesn-pay-for-long.html.
This response comes from a poster named Tim: “Anonymous said, ‘Do you not understand what it means to cross a picket line?’ Yes, it means you are trying to work for someone who wants to pay you. In moral terms, it’s just a voluntary mutually beneficial exchange that for the most part is no one else’s business. Members of a union do and should have the right to refuse to provide a service, but they don’t have a right to prevent others from providing the service.” Tim, November 8, 2007 (8:32 a.m.), comment on Anonymous, “Scabbing Doesn’t Pay (For Long),” United Hollywood Blog, November 8, 2007, http://unitedhollywood.blogspot.com/2007/11/scabbing-doesn-pay-for-long.html.
Tim’s argument is based on the principle of free agency and the ethics of freedom. According to him, what’s morally right is any action particular scriptwriters and studio owners agree to undertake. The only ethical obligation individuals have is to not violate the freedom of others and, according to Tim, everyone involved in this strikebreaking is acting freely without stopping others from doing the same. The strikers, like the strikebreakers, may go to work—or not go—whenever they like. To the extent that’s right, ethical objections shouldn’t be raised against either choice.
The key phrase in Tim’s response is that the strikebreaking writers’ actions are “no one else’s business.” Those defending the union could choose to intervene here and assert that the claim is fundamentally wrong. Ethics depends on compassionately taking account of others’ interests, and factoring them into your own decisions: what writers decide to do must serve not only their own but also the general welfare. Possibly, Tim could respond to this by asserting that in a market economy the best way to serve the general welfare is for individuals to pursue their own success. There are responses to this argument too, and the discussion continues.
Key Takeaways
• A rights argument and a marketplace argument may lend ethical support to workers’ decision to strike.
• Ethical arguments against striking may derive from broad social concerns, or justifiably privileging one’s own interests.
• Arguments in favor of supporting strikers from outside the union may stand on conceptions of fairness or solidarity.
• Both strikebreakers and employers may claim the right to bypass union demands based on economic realities, or their rights as free agents.
Exercise \(1\)
1. Explain the marketplace argument in favor of the right for workers to strike.
2. How could a union worker ethically justify not joining companions on the picket lines?
3. Outline an argument from fairness that could be made against strikebreakers.
4. Sketch two arguments that could be made in favor of independent writers swooping in and taking union jobs when the SGA goes out on strike. | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/15%3A_The_Domination_Office-_The_Star_System_and_Labor_Unions/15.05%3A_Union_Strikes.txt |
Jim Webb's Speech
Source: Photo courtesy of Mike Baird, http://www.flickr.com/photos/mikebaird/2202443907.
At the height of the American economic boom running from 2000 to 2008, a freshly elected senator from Virginia gave a sobering speech. He said,
When one looks at the health of our economy, it’s almost as if we are living in two different countries. The stock market is at an all-time high, and so are corporate profits. But these benefits are not being fairly shared. When I graduated from college, the average corporate CEO made 20 times what the average worker did; today, it’s nearly 400 times. In other words, it takes the average worker more than a year to make the money that his or her boss makes in one day. In short, the middle class of this country, our historic backbone and our best hope for a strong society in the future, is losing its place at the table. Our workers know this, through painful experience. Jim Webb, “Democratic Response of Senator Jim Webb to the President’s State of the Union Address,” New York Times, January 23, 2007, accessed June 9, 2011, http://www.nytimes.com/2007/01/23/washington/23webb-transcript.html?_r=1&oref=slogin.
Exercise \(1\)
1. What is the star system?
2. According to Senator Webb (and doing the math), when he was in college around 1966, a corporate CEO had to labor eighteen days to make the money the average worker earned in about a year. Now, CEOs only need a day to reach a worker’s yearly total.
• What is vertical wealth imbalance?
• In terms of the days a CEO must labor to net the average worker’s yearly pay, where does the star system line get drawn? Webb seems to think it’s somewhere between eighteen days and one day, but where would you draw the distinction? How would you justify your decision?
3. Webb says the “middle class of this country” is disappearing. How does this claim relate to the idea of horizontal wealth imbalances?
4. When Webb asserts that the benefits of a healthy economy aren’t being “fairly shared,” he’s making an ethical claim, saying the wealth concentration is wrong. He was speaking on national TV and so didn’t have time to flesh things out, but how could an argument be formulated to support his claim?
5. Jim Webb is a United States senator. When the United States was founded, there was about one senator for every twenty-five thousand people. Today, it’s one in three million. The salary of a US senator is \$175,000; the salary of the average American worker is about \$40,000.
• Besides money, what kinds of compensation do you imagine Webb gets for his job?
• Do you believe Webb’s compensation (salary plus other nonmonetary benefits) qualifies him as a star? Why or why not?
• Does the fact that Webb represents more constituents than the original senators convert into a case that Webb’s salary should be higher relative to his constituents than the salary granted to senators two hundred years ago? Explain.
• Make the case that Webb has an ethical responsibility to donate a significant part of his salary to public service causes.
6. Part of the reason Webb’s talk lacked specifics was that, as a US senator, he doesn’t want to offend any particular person or large company. (He probably wants their money for his reelection campaign, or at least he doesn’t want them funding his opponent.) Others, however, who share his opinion about wage imbalances aren’t similarly constrained. One notable example comes from the web page Daily Kos, a politically oriented site with a huge readership and located on the left fringe of American politics, somewhere between rowdy and rabid. On that page, the following point was added to Webb’s speech:
As an example of this inequality, look no further than Ford Motor Company. Just this week, Ford announced a staggering \$12.7 billion loss, the highest in company history. This came after a year in which the company announced that it was cutting more than 40,000 jobs (30,000 of them union jobs). So what to do in a company that’s failed to deliver innovative products to the market, completely misjudged consumer trends, and managed itself into a fiscal bind? You award bonuses to the top management. Mark Sumner, “Jim Webb and Economic Reform,” Daily Kos, January 26, 2007, accessed June 9, 2011, http://www.dailykos.com/storyonly/2007/1/26/295137/-Jim-Webb-and-Economic-Reform.
The web page went on to explain that Ford CEO Alan Mulally would be giving performance bonuses to his top executives because, according to Mulally, “You have to keep the talented people you really need.”
• Just from the provided facts, why might someone be suspicious that CEO Mulally participates in crony capitalism? How might he respond to the charge?
• Justify the Daily Kos attack on Mulally’s bonuses in terms of general social welfare, and in terms of the duty to beneficence.
• Make the case that the bonuses are justified in ethical terms with the language of rights.
• Through the language of rights, argue that those who criticize the bonuses—like writers at Daily Kos—are ethically despicable.
7. Consider these four jobs: US senator, political commentator on a widely read web page (regardless of whether it happens to tilt left or right), CEO of Ford, and union worker on a car assembly line.
• Who do you expect would earn most and least were wages divided only by market forces? Loosely, how would wages be apportioned? Would the differences reach star system proportions?
• How would you rank their wage order in terms of value generated for society? Loosely, how would wages be apportioned? Would the differences reach star system proportions?
• How would you rank their wage order in terms of effort? Loosely, how would wages be apportioned? Would the differences reach star system proportions?
First You Get the Money...
Source: Photo courtesy of xelusionx, http://www.flickr.com/photos/xelusionx/452851416.
The film Scarface cost \$25 million to make and has earned back about \$200 million so far. The story follows Tony Montana as he enters the cocaine dealing business. His mentor tells him that to survive over the long term you’ve got to fly under the radar and stay small. Comfortably wealthy, yes, but wildly rich, no. Montana isn’t so sure. Later he decides the advice is directly bad, kills the mentor who gave it to him, and expands his business as far and as fast as he can. As moviegoers learn at the film’s end, the mentor was probably right.
Exercise \(2\)
1. Though the initial reviews were mixed, time has proven the film’s popular appeal. More than twenty years after its release, Scarface continues to be a rental favorite, a standard campus feature, and a late-night TV standard.
• How can the notion of the general welfare be used to justify giving big bucks to the stars making the film: actor Al Pacino, director Brian De Palma, and writer Oliver Stone?
• Can you form an argument against the concentration of money in the hands of a very few people that would work equally well against Al Pacino’s (presumed) wealth and Tony Montana’s?
2. Given the way Montana got wealthy, can the duty to beneficence argument against the star system still be applied to him? Why or why not?
3. Possibly the movie’s most repeated line is Al Pacino as Tony Montana explaining that to be successful in America, “First you get the money, then you get the power, then you get the women.”
• What is Aristotle’s theory of envy?
• Does the story the movie tells about Montana’s life—coming to America with nothing as an immigrant and getting ahead by killing and drug dealing—make you more or less envious of his success (at least the money and power parts), or does it not make any difference?
• How does envy factor into ethical considerations of the star system?
4. Amado Carrillo Fuentes—better known as Lord of the Skies—was a serious innovator before he died in a Mexico City Hospital during a plastic surgery procedure to transform his appearance. While everyone else in his profession was flying small Cessna-like aircraft around Latin America and over the border into the States, he broke every limit by buying full-size Boeing passenger planes, hollowing them out, filling them with cocaine, and flying multimillion-dollar shipments. Though he never made the Forbes list of the world’s most powerful and wealthy (unlike other traffickers from the same Mexican state of Sinaloa, including Joaquín Guzmán), there’s no doubt that Carrillo Fuentes got extraordinarily wealthy by bringing innovation to the cocaine business.
Bill Gates got extraordinarily wealthy by bringing innovation to the software business. One argument frequently presented in favor of outsized rewards in the business world is that it can stimulate innovative ideas. Does the fact that creativity in the business world can do social good and social harm weaken this argument in favor of the star system? Explain.
The Delta Vote
Source: Photo courtesy of Anthony Easton, http://www.flickr.com/photos/pinkmoose/2955932263.
When Delta Airlines absorbed Northwest Airlines in 2008, the expanded Delta employed about twenty thousand flight attendants, or FAs as they’re called in the industry. The thirteen thousand Delta FAs weren’t unionized; the seven thousand that came over from Northwest were.
The nation’s largest flight attendant union, the Association of Flight Attendants (AFA) saw the opportunity to build membership numbers and lobbied the united workforce to unionize. The question went to a vote and the results were excruciatingly close: votes in favor fell 328 short out of 18,760 cast. Subsequently, the USA Today published a roundup of media reports and readers reactions. Ben Mutzabaugh, “Delta Attendants Vote Against Union,” USA Today, November 4, 2010, accessed June 9, 2011, http://travel.usatoday.com/flights/post/2010/11/delta-attendants-vote/129933/1.
Exercise \(3\)
1. One argument in favor of joining labor unions works from fairness, the idea that if workers are benefitting from the work done by a collective, they should sign up and contribute their share of the dues required to pay for the lawyers and the negotiators a major union needs to operate.
• How does the following reaction to the “no” vote intersect with the fairness argument? Flight attendant Cindy Hanks said, “I’m ecstatic. There is no reason for a union at Delta. I get paid more than my co-workers [who worked for Northwest before the merger]. I have an open-door policy with my management. Whenever I have a complaint, I am listened to, and there is always a resolution. I’m not left in the dark.” Ben Mutzabaugh, “Delta Attendants Vote Against Union,” USA Today, November 4, 2010, accessed June 9, 2011, http://travel.usatoday.com/flights/post/2010/11/delta-attendants-vote/129933/1.
2. One person added this comment below the story about the culture around Delta: “Nobody cares about workers’ rights, including the workers.” distinctM, November 4, 2010 (11:02 a.m.), comment on Ben Mutzabaugh, “Delta Attendants Vote Against Union,” USA Today, November 4, 2010, accessed June 9, 2011, http://travel.usatoday.com/flights/post/2010/11/delta-attendants-vote/129933/1.
One argument in favor of joining labor unions works from a notion of solidarity. With respect to labor unions, what’s the solidarity argument for joining the FA union at Delta?
3. Delta spokeswoman Betsy Talton reacted this way to the “no” vote, “We have said all along that we believe our direct relationship works well for our people and our company,”
• One argument against joining a labor union is the duty to individuality derived from the right to free agency. What is the right to free agency? What is the derived duty to individuality?
• How can Talton’s reaction be buttressed in ethical terms by reference to the right and derived duty?
4. The vote at Delta was a secret ballot. What is card check legislation, and what does it do? How might that law have changed the results at Delta?
5. Some of the responses to the Delta vote didn’t concern the specific FA union but the question of unions generally. For example, one commenter believes a stigma attaches to union membership, a bad one. As he puts it, “I have read pro union people are lazy and want protection.” Another commentator adds that unions have, “basically destroyed the auto industry and the steel industry.” Timatl2002, November 4, 2010 (10:08 p.m.), comment on Ben Mutzabaugh, “Delta Attendants Vote Against Union,” USA Today, November 4, 2010, accessed June 9, 2011, http://travel.usatoday.com/flights/post/2010/11/delta-attendants-vote/129933/1.
How can this criticism of unions and union workers be converted into an ethical argument in favor of an economic star system?
6. A person identified as dinstinctM wrote, “Labor unions BUILT the American middle class. The middle class that is shrinking as unions have been decimated.” distinctM, November 5, 2010 (3:17 p.m.), comment on Ben Mutzabaugh, “Delta Attendants Vote Against Union,” USA Today, November 4, 2010, accessed June 9, 2011, http://travel.usatoday.com/flights/post/2010/11/delta-attendants-vote/129933/1.
This is an economic claim. Assume it’s true. How can it be converted into an ethical claim in favor of the FA union?
Responding to a Transit Strike
Source: Photo courtesy of Neilhooting, http://www.flickr.com/photos/neilhooting/2424703385.
The web page titled “How to Commute By Bicycle, All of a Sudden” begins this way: “There is a transit workers’ strike in NYC today. If you need to get somewhere, consider riding your bike. Even though it’s 22 degrees right now (8:33 EST), this is not a crazy suggestion.” “How to Commute By Bicycle, All of a Sudden,” Days of Leisure (blog), accessed June 9, 2011, www.daysofleisure.com/writing/How_to_commute_by_bicycle,_ all_of_a_sudden.html.
When you need to preface a suggestion with the assurance that it’s not crazy, you can be pretty sure that the situation is bad.
The New York City transit strike began on December 20, 2005, and ran three days. Representing the subway operators, bus drivers, and some related personnel, there was the Transport Workers Union, Local 100 (TWU). On the other side, representing the city—and the traveling, tax-paying public—there was the Metropolitan Transit Authority (MTA). Wages and retirement age were the main issues. The MTA argued (correctly) that the transit workers’ wages were much higher than the national norm, and their retirement age extremely low. The workers argued (correctly) that the job of driving in New York City was more stressful than in most other places. When negotiations failed, public transportation stopped a few days before Christmas, leaving millions of daily commuters stranded.
For some commuters, the bike became an option. In the abstract—sitting in a warm room reading about it—the possibility doesn’t sound so bad, get some good exercise and brisk fresh air on the way to work and back. There are real problems, though. The air can be dangerously cold and streets in winter are icy. It also needs to be remembered that the sun goes down early in December, so people biking home at night along the roadside are pedaling in the dark. Falls are common. Falls in front of oncoming cars are especially bad.
Exercise \(4\)
1. The transit workers strike was actually illegal. After a similar walkout years before, the Taylor Law had been enacted; it barred transportation workers from leaving their posts and implemented arbitration methods for settling disputes. When the workers ignored the law, a judge hit them with fines and sentenced their leaders to short jail terms.
• In the face of the strike’s illegality, how can a rights argument be mounted to ethically justify the walkout?
• Is the rights argument affected by the fact that many commuters suffered?
2. The “last resort argument” justifying a workers strike is activated when three conditions are met: (1) There must be a just cause; (2) there must be proper authorization; and (3) the strike must be a last resort—that is, attempts to find solutions must’ve been fully explored.
In this case, the transport workers national union actually ordered the local to go back to work. The national union, in other words, didn’t authorize the strike, but the actual workers on the scene did. Does this count as proper authorization? In a union organization, who, ultimately, gets to decide whether a strike is appropriate, the organizing management selected to speak for the collective, or the individual workers on the ground? Explain.
3. What is the public safety argument against a union going out on strike? From the information provided, how could it be implemented in this case?
• How would the public safety argument against the strike differ from the public welfare argument?
• In general terms, is there public welfare argument that could be sketched in favor of the strike?
Air and Bus Traffic: Stars and Collectives
Source: Photo courtesy of Ekavet, http://www.flickr.com/photos/ekavet/3680866253.
The early 1980s were seismic years in American business. Newly elected President Reagan promoted waves of deregulation legislation, and the openness loosed a breed of entrepreneurs bringing innovative goods and services to the marketplace so rapidly that entire segments of business life erupted in disorder. One especially affected area was transportation, and one very affected transporter was the venerable Greyhound bus lines. This report from San Jose State University summarizes:
Deregulation of the transportation industry made the competition for passengers stiff. New entrepreneurs who paid low wages entered the business and offered fare prices much lower than the more established inter-city lines. The newly deregulated airline industry made things even worse for Greyhound. Low-cost passenger airline carriers sprang up. People Express, for example, charged only \$23 for a flight between New York City and Buffalo. Greyhound charged \$41 for the trip. A flight by Southwest Airlines from San Francisco to Phoenix was only \$60, compared to a Greyhound’s bus ticket to the same location costing \$79. Herbert Oestreich, “The Great Greyhound Strikes,” Mineta Transportation Institute College of Business, San Jose State University, September 2001, 2001, accessed June 9, 2011, http://www.angelfire.com/al/silverball/strikes.html.
When a higher-quality service (a fast plane ride) actually costs less than a lower-quality service (a slow bus trip), the simple rules of economics are, sooner or later, going to put the bus company out of its misery.
To survive, Greyhound had to cut its prices, which meant cutting costs. The prices of buses and gasoline and similar were fairly fixed, leaving wages to be targeted. Greyhound went to the workers collective, the local Amalgamated Transit Union, and proposed a 9.5 percent wage cut.
The answer was no. Greyhound insisted. A strike ensued.
Greyhound was prepared. They’d already recruited more than a thousand new hires in anticipation of the walkout, and agreed to pay them the salary the union had refused. A tremendous segment of business was lost while the company struggled to bring still more drivers aboard but, eventually, it became clear that the union would have to break, which it did.
In the aftermath, a stinging article was written: “Leave the Slave-Driving to Us.” That’s a play on the Greyhound advertising line “Leave the Driving to Us,” and it pretty clearly displays where the author comes down on the ethics of labor walkouts broken by replacement workers. Daniel, “1983: Leave the Slave-Driving to Us—Chris Fillmer,” Libcom.org, June 17, 2007, accessed June 9, 2011, http://libcom.org/library/1983-leave-slave-driving-us-chris-fillmer.
Exercise \(5\)
1. From the “Leave the Slave-Driving to Us” article: “After the strike got underway the Bus Lines tried to run scab buses. In response, the striking Greyhound workers carried out militant actions that were effective as far as they went. For example, pickets from Local 1225 in San Francisco, together with some supporters, tried to block the departure of buses from the 7th Street depot in downtown San Francisco. There was then a cop attack on the picket line and a melee ensued. Only one bus left the station. It soon experienced a collision with another vehicle (the driver of the other vehicle just happened to be a striking Greyhound driver) and it was forced to retreat to the S.F. depot.”
• When the striking Greyhound driver drove his car or pickup into the bus, he probably damaged his own vehicle. Who should pay for the repairs? Justify.
• Is it possible to argue that, ethically, Greyhound should pay? Explain.
• Who should pay to repair the damaged Greyhound bus? Why?
• The “cop attack” was, presumably, police officers clearing strikers from the public road. The police are frequently unionized. Do they have, as union workers, any responsibility to leave the strikers alone?
2. From the “Leave the Slave-Driving to Us” article: “During any strike material pressures (rent or house payments, utility bills, RV financing, etc.) may influence strikers’ decisions. Since Greyhound is not merely a bus line, but a conglomerate with revenues from many lines of business, its capacity to bear losses from a strike is much greater than that of individual strikers to bear the loss of wages. Even those who have substantial savings may run short during a long strike. To succeed, they had to convince other transport workers and their unions to strike in sympathy with them. But of course, that’s illegal under existing contracts and laws. But that only means that the ranks needed to take matters into their own hands from the very beginning. The rank and file did not have to respect the law.”
• What is Greyhound’s structural economic advantage over the workers?
• Does the Greyhound economic advantage provide an ethical justification for the workers to illegally (in terms of contractual commitments) try to get others in related fields to strike in support of the Greyhound workers? Explain.
3. The marketplace test showed the strike was, in purely economic terms of supply and demand, not justified. The company was able to find workers at the wages it wanted to offer.
• Ethically, does the economic reality justify the strikebreakers’ actions in crossing the picket lines? Explain.
• The “Leave the Slave-Driving to Us” author considers these strikebreakers to be slaves. What is the ethical argument behind this insult?
4. From the “Leave the Slave-Driving to Us” article: “‘Greyhound Lines Chair Frank Nagotte pulled down a hefty \$447,000 in salary and benefits’ in 1983 [that’s 1,004,000 in today’s dollars]. In general, Greyhound management was slated to receive a 7–10% salary/benefit increase. Despite the competition from lower air fares cited by Greyhound management, the Bus Lines division alone earned a profit that has been estimated at \$5 million in the first nine months of 1983.”
• The chairman’s salary and benefits were about one million in today’s dollars. In terms of basic rights, how could he justify taking that mountain of money home after firing the drivers?
• In terms of the value his work generated for society, how could chairman Nagotte justify taking the mountain of money home after firing the drivers?
• In terms of his responsibilities as chairman, how could Nagotte justify taking the mountain of money home after firing the drivers?
• What ethical argument could the drivers use to justify demanding that the chairman take a salary and benefit cut in line with the one he was asking from the drivers?
5. The fundamental cause of the Greyhound problem was competition from new transportation companies providing better service at lower cost, including Southwest Airlines, founded by Rollin King and Herb Kelleher. They’re both bright stars in the American economic star system.
• Make the case that King and Kelleher have an ethical obligation to support the Greyhound drivers who lost their jobs. What is the case? What kind of support do they owe?
• Convert the Greyhound experience into an ethical argument that no employee at Southwest should seek to unionize. | textbooks/biz/Business/Business_Ethics/Book%3A_The_Business_Ethics_Workshop/15%3A_The_Domination_Office-_The_Star_System_and_Labor_Unions/15.06%3A_Case_Studies.txt |
Learning Objectives
After completing this chapter, you will be able to
• Describe the purposes for business planning
• Describe common business planning principles
• Explain common business plan development guidelines and tools
• List and explain the elements of the business plan development process
• Explain the purposes of each element of the business plan development process
• Explain how applying the business plan development process can aid in developing a business plan that will meet entrepreneurs’ goals
Overview
This chapter describes the purposes, principles, and the general concepts and tools for business planning, and the process for developing a business plan.
Purposes for Developing Business Plans
Business plans are developed for both internal and external purposes. Internally, entrepreneurs develop business plans to help put the pieces of their business together. Externally, the most common purpose is to raise capital.
Internal Purposes
As the road map for a business’s development, the business plan
• Defines the vision for the company
• Establishes the company’s strategy
• Describes how the strategy will be implemented
• Provides a framework for analysis of key issues
• Provides a plan for the development of the business
• Helps the entrepreneur develop and measure critical success factors
• Helps the entrepreneur to be realistic and test theories
External Purposes
The business plan provides the most complete source of information for valuation of the business. Thus, it is often the main method of describing a company to external audiences such as potential sources for financing and key personnel being recruited. It should assist outside parties to understand the current status of the company, its opportunities, and its needs for resources such as capital and personnel.
Business Plan Development Principles
Hindle and Mainprize (2006) suggested that business plan writers must strive to effectively communicate their expectations about the nature of an uncertain future and to project credibility. The liabilities of newness make communicating the expected future of new ventures much more difficult than for existing businesses. Consequently, business plan writers should adhere to five specific communication principles.
First, business plans must be written to meet the expectations of targeted readers in terms of what they need to know to support the proposed business. They should also lay out the milestones that investors or other targeted readers need to know. Finally, writers must clearly outline the opportunity, the context within the proposed venture will operate (internal and external environment), and the business model (Hindle & Mainprize, 2006).
There are also five business plan credibility principles that writers should consider. Business plan writers should build and establish their credibility by highlighting important and relevant information about the venture team. Writers need to elaborate on the plans they outline in their document so that targeted readers have the information they need to assess the plan’s credibility. To build and establish credibility, they must integrate scenarios to show that the entrepreneur has made realistic assumptions and has effectively anticipated what the future holds for their proposed venture. Writers need to provide comprehensive and realistic financial links between all relevant components of the plan. Finally, they must outline the deal, or the value that targeted readers should expect to derive from their involvement with the venture (Hindle & Mainprize, 2006).
General Guidelines for Developing Business Plans
Many businesses must have a business plan to achieve their goals. Using a standard format helps the reader understand that the you have thought everything through, and that the returns justify the risk. The following are some basic guidelines for business plan development.
As You Write Your Business Plan
1. If appropriate, include nice, catchy, professional graphics on your title page to make it appealing to targeted readers, but don’t go overboard.
2. Bind your document so readers can go through it easily without it falling apart. You might use a three-ring binder, coil binding, or a similar method. Make sure the binding method you use does not obscure the information next to where it is bound.
3. Make certain all of your pages are ordered and numbered correctly.
4. The usual business plan convention is to number all major sections and subsections within your plan using the format as follows:
1. First main heading
1.1 First subheading under the first main heading
1.1.1. First sub-subheading under the first subheading
2. Second main heading
2.1 First subheading under the second main heading
Use the styles and references features in Word to automatically number and format your section titles and to generate your table of contents. Be sure that the last thing you do before printing your document is update your automatic numbering and automatically generated tables. If you fail to do this, your numbering may be incorrect.
5. Prior to submitting your plan, be 100% certain each of the following requirements are met:
• Everything must be completely integrated. The written part must say exactly the same thing as the financial part.
• All financial statements must be completely linked and valid. Make sure all of your balance sheets balance.
• Everything must be correct. There should be NO spelling, grammar, sentence structure, referencing, or calculation errors.
• Your document must be well organized and formatted. The layout you choose should make the document easy to read and comprehend. All of your diagrams, charts, statements, and other additions should be easy to find and be located in the parts of the plan best suited to them.
• In some cases it can strengthen your business plan to show some information in both text and table or figure formats. You should avoid unnecessary repetition, however, as it is usually unnecessary—and even damaging—to state the same thing more than once.
• You should include all the information necessary for readers to understand everything in your document.
• The terms you use in your plan should be clear and consistent. For example, the following statement in a business plan would leave a reader completely confused: “There is a shortage of 100,000 units with competitors currently producing 25,000. We can help fill this huge gap in demand with our capacity to produce 5,000 units.”
This statement might mean there is a total shortage of 100,000 units, but competitors are filling this gap by producing 25,000 per year; in which case there will only be a shortage for four years. However, it could mean that the annual shortage is 100,000 units and only 25,000 are produced each year, in which case the total shortage is very high and is growing each year. | textbooks/biz/Business/Entrepreneurship/Book%3A_Business_Plan_Development_Guide_(Swanson)/01%3A_Chapters/1.01%3A_Chapter_1__Developing_a_Business_Plan.txt |
Learning Objectives
After completing this chapter, you will be able to
• Apply analytical skills to assess how the nature of the entrepreneurial environment can influence entrepreneurial outcomes
• Apply the right tools to do impactful analyses at each of the societal, industry, market, and firm levels to evaluate entrepreneurial and other business opportunities
Overview
This chapter introduces the distinct levels of analyses that must be considered while stressing the importance of applying the appropriate tools to conduct the analyses at each level.
Figure 2 – Essential Initial Research (Illustration by Lee A. Swanson)
Support Information
It is important to conduct the essential initial research. All information and items in the plan should be backed with facts from valid primary or secondary sources. Alternatively, some entrepreneurs can make valid claims based on experience and expertise. As such, their background and experiences should be delineated to support the claims made in their business plan.
Evidence-based claims make the business plan stronger.
Levels of Analyses
When evaluating entrepreneurial opportunities—sometimes called idea screening—an effective process involves assessing the various venture ideas being considered by applying different levels and types of analyses. Entrepreneurs starting ventures and running existing businesses should also regularly analyze their operating environments at the societal, industry, market, and firm levels. The right tools, though, must be applied at each level of analysis (see Figure 3). It is critical to complete the essential initial research at all four levels (societal, industry, market, and firm). The initial scan should be high-level, designed to assist in making key decisions (i.e. determining if there is a viable market opportunity for the venture). Secondary scans should be continuously conducted to support each part of the business plan (i.e. operations, marketing, and finance). However, information should only be included if it is research-based, relevant, and adds value to the business plan. The results from such research (i.e. the Bank of Canada indicates that interest rates will be increasing in the next two years) should support business strategies within the plan (i.e. debt financing may be less favourable than equity financing). Often, obtaining support data (i.e. construction quotes) is not immediate, so plant a flag and move forward. Valid useful resources may include information from Statistics Canada, Bank of Canada, IBIS World Report, etc.
Societal Level
At a societal level, it is important to understand each of the political, economic, social, technological, environmental, and legal (PESTEL) factors—and, more specifically, the trends affecting those factors—that will affect a venture based on a particular idea. Some venture ideas might be screened out and others might be worth pursuing at a particular time because of the trends occurring with those PESTEL factors. When including this research in your business plan, avoid using technical jargon or informal language that may distract readers (i.e. rivalry among firms) and use simpler language (i.e. competitive environment).
Industry Level
Analysis of the industry level will focus on the sector of the economy in which you intend to operate. Because the right analysis tool must be used for the assessment to be effective, apply Porter’s (1985) Five Forces Model, or a similar tool, to assess industry-level factors. Again, avoid technical jargon (i.e. threat of new entrants) and use simpler wording (i.e. difficulty of entering the market) or flip to an analysis of the threat (i.e. strategies to establish and maintain market share).
Market Level
At the market level, you need to use a tool to generate information about the part of the industry in which your business will compete. This tool might be a set of questions designed to uncover information that you need to know to help develop plans to improve your proposed venture’s success.
Firm Level
At a firm level, both the internal organizational trends and the external market profile trends should be analyzed. There are several tools for conducting an internal organizational analysis, and you should normally apply many of them.
Analyzing the Trends at Each Level
Figure 3 – Different Levels of Analysis (Illustration by Lee A. Swanson)
Analyze Societal-Level Trends
Use an appropriate tool like the PESTEL Model to assess both the current situation and the likely changes that may affect your venture in the future:
• Political factors – federal & provincial & municipal government policy, nature of political decisions, potential political changes, infrastructure plans, etc.
• Economic factors – interest rates, inflation rates, exchange rates, tax rates, GDP growth, health of the economy, etc.
• Social factors – population characteristics like age distribution and education levels, changes in demand for types of products and services, etc.
• Technological factors – new processes, new products, infrastructure, etc.
• Environmental factors – effects of climate / weather, water availability, smog and pollution issues, etc.
• Legal factors – labour laws, minimum wage rates, liability issues, etc.
After assessing these factors, analyze the impact these trends have upon the venture:
• Do the trends uncover opportunities and threats?
• Can opportunities be capitalized on?
• Can problems be mitigated?
• Can the venture be sustained?
Analyze Industry-Level Trends
Use an appropriate tool like the Five Forces Model (Porter, 1985) to analyze the industry in which you expect to operate:
• Horizontal relationships – threat of substitutes, rivalry among existing competitors, threat of new entrants, etc.
• Vertical Relationships – bargaining power of buyers, bargaining power of suppliers, etc.
Analyze Market-Level Trends
Use an appropriate method like a market profile analysis to assess the position within the industry in which you expect to operate. To do so, determine the answers to questions like the following:
• How attractive is the market?
• In what way are competitors expected to respond if you enter the market?
• What is the current size of the market and how large is it expected to become?
• What are the current and projected growth rates?
• At what stage of the development cycle is the market?
• What level of profits can be expected in the market?
• What proportion of the market can be captured? What will be the cost to capture this proportion and what is the cost to capture the proportion required for business sustainability?
Prior to a new business start-up, the customers that the new business wishes to attract either already purchase the product or service from a competitor to the new business—or do not yet purchase the product or service at all. A new venture’s customers, therefore, must come from one of two sources. They must be attracted away from existing (direct) competitors or be convinced to make different choices about where they spend their money so they purchase the new venture’s product or service instead of spending their money in other ways (with indirect competitors). This means an entrepreneur must decide from which source they will attract their customers, and how they will do so. They must understand the competitive environment.
According to Porter (1996), strategy is about doing different things than competitors or doing similar things but in different ways. In order to develop an effective strategy, an entrepreneur must understand the competition.
To understanding the competitive environment, entrepreneurs must do the following:
• Determine who their current direct and indirect competitors are and who the future competitors may be
• Understand the similarities and differences in quality, price, competitive advantages, and other factors that exist between their proposed business and the existing competitors
• Establish whether they can offer different products or services—or the same products or services in different ways—to attract enough customers to meet their goals
• Anticipate how the competitors will react in response to the new venture’s entry into the market
Analyze Firm-Level Trends (organizational analysis)
There are several tools available for firm-level analysis, and usually several of them should be applied because they serve different purposes.
Tools like a SWOT Analysis or TOWS Matrix can formulate and evaluate potential strategies to leverage organizational strengths, overcome/minimize weaknesses, take advantage of opportunities, and overcome/minimize threats. You will also need to do a financial analysis and consider the founder fit and the competencies a venture should possess.
• SWOT Analysis – identify organizational strengths and weaknesses and external opportunities and threats
• TOWS Matrix – develop strategies to
• Leverage strengths to take advantage of opportunities
• Leverage strengths to overcome threats
• Mitigate weaknesses by taking advantage of opportunities
• Mitigate weaknesses while minimizing the potential threats or the potential outcomes from threats
To analyze a firm’s strategy, apply a VRIO Framework analysis, as Barney (1997) and Barney and Hesterly (2006) outline. While conceptualizing the resource-based view (RBV) of a firm, they identified the following four considerations regarding resources and their ability to help a firm gain a competitive advantage. Together, the following four questions make up the VRIO Framework, which can assess a firm’s capacity and determine what competencies a venture should have. To use this tool, you need to determine whether competencies are valuable, rare, inimitable, and organized in a way that they can be exploited:
• Value – Is a particular resource (financial, physical, technological, organizational, human, reputational, innovative) valuable to a firm because it helps it take advantage of opportunities or eliminate threats?
• Rarity – Is a particular resource rare in that it is controlled by or available to relatively few others?
• Imitability – Is a particular resource difficult to imitate so that those who have it can retain cost advantages over those who might try to obtain or duplicate it?
• Organization – Are the resources available to a firm useful to it because it is organized and ready to exploit them?
To assess the financial attractiveness of the venture, analyze
• Similar firms in industry
• Comparative ratio and financial analysis (Vesper, 1996, p. 145-148) can help determine industry norm returns, turnover ratios, working capital, operating efficiency, and other measures of firm success.
• Projected market share
• Analyzes the key industry players’ relative market share, and make judgments about how the proposed venture would fare within the industry.
• Uses information from market profile analysis and key industry player analysis.
• Margin analysis
• Involves projecting expected margins from venture
• Useful information might come from financial analysis, market profile analysis, and NAICS (North American Industry Classification System) codes (six digit codes used to identify an industry—first five digits are standardized in Canada, the United States, and Mexico—is gradually replacing the four digit SIC [Standard Industrial Classification] codes)
• Break-even analysis
• Involves using information from margin analysis to determine break-even volume and break even sales in dollars
• Is there sufficient volume to sustain the venture?
• Pro forma analysis
• Forecasts income and assets required to generate profits
• Sensitivity analysis
• What will be the likely impact if some assumed variable values change?
• Return on investment (ROI) projections
• Projects the ROI from undertaking the venture
• What is the opportunity cost of undertaking the venture?
Founder fit is an important consideration for entrepreneurs screening venture opportunities. While there are plenty of examples of entrepreneurs successfully starting all types of businesses, “technical capability can be an important if not all-important factor in pursuing ventures success” (Vesper, 1996, p. 149). Factors such as the experience, training, credentials, reputation, and social capital an entrepreneur has can play an important role in their success or failure in starting a new venture. Even when an entrepreneur can recruit expert help through business partners or employees, it might be important that he or she also possess technical skills required in that particular kind of business.
• A common and useful way to help screen venture options is to seek input from experts, peers, mentors, business associates, and perhaps other stakeholders like potential customers and direct family members.
Completing a TOWS Matrix develops strategies from the SWOT Analysis and strengthens your business plan.
Reference your technical skill, as this is a major factor in your venture’s success.
Lean Start-up
Ries (2011) defines a lean start-up as “a human institution designed to create a new product or service under conditions of extreme uncertainty” (p. 27). The lean-start-up approach involves releasing a minimal viable product to customers with the expectation that this early prototype will change and evolve frequently and quickly in response to customer feedback. This is meant to be a relatively easy and inexpensive way to develop a product or service by relying on customer feedback to guide the pivots in new directions that will ultimately—and relatively quickly—lead to a product or service with the appeal required for business success. It is only then that the actual business will truly emerge. As such, entrepreneurs that apply the lean-start-up approach—because their business idea allows for it—actually forgo developing a business plan, at least until they might need one later to get financing, because introducing a minimum viable product helps “entrepreneurs start the process of learning as quickly as possible” (Ries, 2011, p. 93). This is followed by ever improving versions of their products or services. However, all entrepreneurs must directly consult with their potential target purchasers and end users to assess if and how the market might respond to their proposed venture. The Essential Initial Research and Progressive Research stages should include purposeful and meaningful interactions between the entrepreneur and the target purchasers and end users.
Ries’s (2011) five lean-start-up principles start with the idea that entrepreneurs are everywhere and that anyone working in an environment where they seek to create new products or services “under conditions of extreme uncertainty” (p. 27) can use the lean-start-up approach. Second, a start-up is more than the product or service: it is an institution that must be managed in a new way that promotes growth through innovation. Third, start-ups are about learning “how to build a sustainable business” (p. 8-9) by validating product or service design through frequent prototyping that allows entrepreneurs to test the concepts. Forth, start-ups must follow this process or feedback loop: create products and services; measure how the market reacts to them; and learn from that to determine whether to pivot or to persevere with an outcome the market accepts. Finally, Ries (2011) suggested that entrepreneurial outcomes and innovation initiatives need to be measured through innovative accounting.
Figure 4 – Business Model and Lean Start-Up Books (Picture by Lee A. Swanson)
Chapter Summary
By applying the right tools to analyze the operating environment at each of the societal, industry, market, and firm levels, entrepreneurs screen venture ideas, plan new venture development, and potentially detect factors that might affect their business operations. The lean start-up is an alternative that can be used to circumvent the usual planning steps in favour of continuous innovation. See Figure 4 for other resources on business models and lean start-ups. | textbooks/biz/Business/Entrepreneurship/Book%3A_Business_Plan_Development_Guide_(Swanson)/01%3A_Chapters/1.02%3A_Chapter_2__Essential_Initial_Research.txt |
Learning Objectives
After completing this chapter, you will be able to
• Describe what a business model is
• Analyze existing and proposed businesses to determine what business models they are applying and what business models they plan to apply
• Develop and analyze alternative business models for new entrepreneurial ventures
Overview
In this chapter the concept of the business model is introduced. One concept of the business model in particular, the Business Model Canvas, is explored as a way to conceptualize and categorize elements of a business model.
Figure 5 – Business Model (Illustration by Lee A. Swanson)
What are Business Models?
Magretta (2002) described business models as “stories that explain how enterprises work” (p. 87) and Osterwalder, Pigneur, and Clark (2010) noted that they reveal “the rationale of how an organization creates, delivers, and captures value” (p. 14). Chatterjee (2013) said that “A business is about selling what you make for a profit. A business model is a configuration (activity systems) of what the business does (activities) and what it invests in (resources) based on the logic that drives the profits for a specific business” (p. 97).
Osterwalder et al. (2010) said that a start-up is something quite different than an ongoing venture. A start-up should not be viewed as a smaller version of a company because it requires very different skills to start up a company than it does to operate one. A start-up that is still a start-up after some time has passed—maybe after a couple of years for some kinds of start-ups—is actually a failed enterprise since it hasn’t converted into an ongoing venture. Entrepreneurs who develop a business model for their ventures that deliver value to the targeted customers and to the entrepreneur stand a better chance of converting their start-up into an ongoing venture.
The Business Model Canvas
The business model canvas is made up of nine parts that, together, describe the business model (see Figure 6).
Figure 6 – Business Model Canvas from https://strategyzer.com/ (Designed by: Strategyzer AG, strategyzer.com, Creative Commons Attribution-Share Alike 3.0 Unported License)
The following elements of the Business Model Canvas were taken, with permission, from http://www.businessmodelgeneration.com.
• Key partners
• Who are our key partners?
• Who are our key suppliers?
• Which key resources are we acquiring from partners?
• Which key activities do partners perform?
• Motivations for partnerships: optimization and economy; reduction of risk and uncertainty; acquisition of particular resources and activities
• Key activities
• What key activities do our value propositions require?
• Our distribution channels?
• Customer relationships?
• Revenue streams?
• Categories: production; problem solving; platform/network
• Key resources
• What key resources do our value propositions require?
• Our distribution channels?
• Customer relationships?
• Revenue streams?
• Types of resources: physical; intellectual (brand patents, copyrights, data); human; financial
• Value propositions
• What value do we deliver to the customer?
• Which one of our customer’s problems are we helping to solve?
• What bundles of products and services are we offering to each customer segment?
• Which customer needs are we satisfying?
• Characteristics: newness; performance; customization; “getting the job done”; design; brand/status; price; cost reduction; risk reduction; accessibility; convenience/usability
• Customer relationships
• What type of relationship does each of our customer segments expect us to establish and maintain with them?
• Which ones have we established?
• How are they integrated with the rest of our business model?
• How costly are they?
• Examples: personal assistance; dedicated personal assistance; self-service; automated services; communities; co-creation
• Customer segments
• For whom are we creating value?
• Who are our most important customers?
• Mass market; niche market; segmented; diversified; multi-sided platform
• Channels
• Through which channels do our customer segments want to be reached?
• How are we reaching them now?
• How are our channels integrated?
• Which ones work best?
• Which ones are most cost-efficient?
• How are we integrating them with customer routines?
• Channel phases:
• awareness – How do we raise awareness about our company’s products and services?
• evaluation – How do we help customers evaluate our organization’s value proposition?
• purchase – How do we allow customers to purchase specific products and services?
• delivery – How do we deliver a value proposition to customers?
• after sales – How do we provide post-purchase customer support?
• Revenue streams
• For what value are our customers really willing to pay?
• For what do they currently pay?
• How are they currently paying?
• How would they prefer to pay?
• How much does each revenue stream contribute to overall revenues?
• Types: asset sale; usage fee; subscription fees; lending/renting/leasing; licensing; brokerage fees; advertising
• Fixed pricing: list price; product feature dependent; customer segment dependent; volume dependent
• Dynamic pricing: negotiation (bargaining); yield management; real-time-market
• Cost structure
• What are the most important costs inherent in our business model?
• Which key resources are most expensive?
• Which key activities are most expensive?
• Is our business more cost driven (leanest cost structure, low price value proposition, maximum automation, extensive outsourcing) or value driven (focused on value creation, premium value proposition)?
• Sample characteristics: fixed costs (salaries, rents, utilities); variable costs; economies of scale; economies of scope
The idea is to keep adding descriptions or plans to the nine components to create the initial business model and then to actually do the start-up activities and replace the initial assumptions in each of the nine parts with newer and better information or plans and let the business model evolve. This model is partly based on the idea that the owner should be the one interacting with potential customers so they fully understands what these potential customers want. These interactions should not only be done by hired sales people, at least until the business model has evolved into one that works, because this evolution can only happen when the venture owner is completely engaged with the potential customers and the other business operations (Osterwalder et al., 2010).
A business plan shouldn’t be created until the above has been done because you need to know what your business model is before you can really create a business plan (Osterwalder et al., 2010). Thus, the Business Model Canvas is best suited to technology-based and other types of companies that can be started and operated in some way and later converted into an ongoing venture. By starting operations and making adjustments as you go along, you are actually doing a form of market research that can be compiled into a full business plan when one is needed.
According to Osterwalder et al. (2010), the things we typically teach people in business school are geared to helping people survive in larger, ongoing businesses. What is taught—including organizational structures, reporting lines, managing sales teams, advertising, and similar topics—is not designed to help students understand how a start-up works and how to deal with the volatile nature of new ventures. The Business Model Canvas tool is meant to help us understand start-ups better.
The Business Model Canvas tool is intended to be applied when business operations can be started on a small scale and adjustments can be made continually until the evolving business model works in real life. This contrasts the more traditional approach of pre-planning everything, going through the set-up and start-up processes, and ending up with a business venture that opens for business one day without having proven at all that the business model it is founded upon will even work. These traditional start-ups sometimes flounder along as the owners find that their plans are not quite working out and they try to make adjustments on the fly. It can be difficult to adjust, though, because the processes are already set up. For example, sales teams might be in the field trying to make sales and blaming the product developers for the difficulty they are having, and the product developers might be blaming the sales teams for not being able to sell the product properly. The real issue might be that the company simply isn’t meeting customers’ needs and they don’t have any good mechanism for detecting, understanding, and fixing this problem.
Chapter Summary
This chapter described business models and presented the Business Model Canvas as a tool that entrepreneurs can use to develop and define their own business models. | textbooks/biz/Business/Entrepreneurship/Book%3A_Business_Plan_Development_Guide_(Swanson)/01%3A_Chapters/1.03%3A_Chapter_3__Business_Models.txt |
Learning Objectives
After completing this chapter, you will be able to
• Develop a comprehensive business plan draft
Overview
This chapter describes an approach to writing your draft business plan. It also outlines the elements of a comprehensive business plan that can be used as a template for starting your business plan.
Figure 7 – Initial Business Plan Draft (Illustration by Lee A. Swanson)
Effective Business Plans
Effective business plans
• Provide statements that are backed by evidence or data
• Include context and references with every table, figure, or illustration
• Include relevant, clear, concise tables and financial information, and exclude unnecessary material
• Present timelines for distinct purposes
• Use clear sections customized to the particular business or its environment rather than generic sections
Evidence-based claims strengthen your business plan.
Providing context for tables and figures is critical.
Writing the Draft Business Plan
Although there are various ways to approach the task of writing a draft business plan, one effective approach is to do the following:
• Use the following sections of this chapter to prepare an outline for your business plan. You should use the headings feature in Word so that you can later automatically generate a table of contents
• This will provide you with a template for the information needed for your plan.
• Insert the relevant parts of the written work produced during essential initial research into your new business plan template. You can do this in one of two ways:
• You can copy and paste the results of your essential initial research into the sections of your business plan template where you believe that they can be used to support or justify the strategies and other decisions you will later describe in those sections. Of course, you can later move those parts of your environmental scan as needed as you develop your plan. In general, this strategy results in a stronger business plan.
• Or you can insert the results from your societal-level and industry-level analyses in an Operating Environment section as listed in the outline below. As described below, the market-level analysis will probably always fit best within the Marketing Plan and the firm-level analysis might fit across all of the plans within the business plan.
• Completing this step will give you the satisfaction of seeing some of your work so far taking shape in the form of a business plan.
• Also, inserting the results from your environmental scan into the relevant sections of your plan should later provide you with the stimulus and support you will need to develop solid, realistic, evidence-based strategies and decisions for those sections.
• Incorporate your business model into your new business plan template. As there is no section in a business plan in which you specifically describe your business model, you will need to incorporate your business model elements into appropriate sections of your plan.
• Fill in as much relevant information as you can under as many of the headings on your business plan template as possible.
• You will normally include both information that you got from particular sources and information based on an assumption you made (and that you might intend to replace later with more accurate information from valid sources).
Follow these practices as you develop your plan:
• Every time that you insert something into your business plan template that you got from a supplier’s catalogue, clearly indicate from where you got that information. For example, if you list the office equipment and furniture that you need along with their exact costs as taken from suppliers’ catalogue, clearly indicate from which catalogue(s) you got the information. Similarly, if you spoke to an industry expert who recommended that you manufacture your product in a particular way, clearly indicate who you spoke to and what their credentials are, if you got the person’s permission to do so.
• When you do this, you help establish your credibility as a business plan writer, and your business plan’s credibility. It also might save you time later when you discover that you need to add a similar item along with its cost to your list.
• Note: Do not reinvent the wheel by “inventing” your own method to reference your sources and do not use multiple methods. Use one (and only one) proper and well-established referencing method, like APA. This will improve the degree of professionalism of your plan.
• Every time that you insert something into your plan that did not come from a source, a best practice is to highlight that part of your plan, possibly by using a distinct font color. The objective will be to ultimately replace all of those assumptions with source-backed information. When you do so, change the font to its regular color so you can quickly and easily see what still needs to be sourced.
• Note: if you are an expert source on something—maybe you are a construction expert that business plan readers will trust to do estimates on building costs—you should establish your credentials and clearly indicate when some of the information in your plan is based on your own expert knowledge.
• When you flag your assumptions in this way, you can quickly and easily see what information needs to be replaced with sourced information before you finalize your business plan.
• Use the appropriate schedule in the spreadsheet templates to record estimated sales revenue for each month. You must base these sales projections on well-reasoned criteria and set them up in your spreadsheets using formulas so that if you need to change a criterion later, you can change a number in one cell or a limited number of cells rather than having to change all of them.
• Projecting realistic sales can be difficult, but setting up a method for doing so early gives business plan writers a significant start toward completing their business plan. A well-developed sales model that takes advantage of the powers of electronic spreadsheets gives business plan writers the opportunity to relatively quickly and easily make necessary changes to their assumptions and overall estimates when needed.
• Use the spreadsheet templates by filling in all of the numbers you have in the various schedules. As you are doing in the written part of your plan, use a distinct font to flag numbers that are based on assumptions. When you have actual numbers, be certain that it is clear to a reader what sources you used to get those numbers.
• When you use the schedules provided on the spreadsheet templates, and any others that you add, you will be well on your way to developing the financial component of your business plan.
Providing references strengthens the credibility of claims and makes the business plan stronger.
General Business Plan Format
Letter of Transmittal
A letter of transmittal is similar to the cover letter of a resume. The letter of transmittal should be tailored to the reader, clearly identifying the customized ask of the potential investor or lender. It should be short and succinct, delineating the ask (i.e. funding, specialized recruiting, purchasing a product or service, obtaining advice, etc.) within a few paragraphs. It should not summarize the business plan, as that is the job of the executive summary.
Title Page
• Includes nice, catchy, professional, appropriate graphics to make it appealing for targeted readers
Executive Summary
• Can be longer than normal executive summaries—up to three pages
• Written after remainder of plan is complete
• Includes information relevant to targeted readers as this is the place where they are most likely to form their first impressions of the business idea and decide whether they wish to read the rest of the plan
List of Tables
• References every table, figure, and appendix within the text of the plan so the relevance of each of these elements is clear.
Introduction
• Indicates the purpose for the plan
• Appeals to targeted readers
Business Idea
• May include description of history behind the idea and the evolution of the business concept if relevant
Value Proposition
• Explains how your business idea solves a problem for your expected customers or otherwise should make them want to purchase your product or service instead of a competitor’s
Vision
• Outlines what you intend for the venture to be
• Inspires all members of the organization
• Helps stakeholders aspire to achieve greater things through the venture because of the general direction provided through the vision statement
After articulating a good vision, the business plan writer should consider what achieving the vision looks like. Many business plan writers write their vision and leave it at that. The problem with this approach is that they often then do not take the necessary steps to illustrate how the strategies they outline in their plan will move them toward achieving their vision. If they make this mistake, their strategies might indicate that they are fulfilling their current mission, but are not taking steps to move beyond that.
Vision statements should be clear with context throughout the business plan. For example, if the goal is to be the premier business operating in that industry in Saskatchewan, does that mean you have one location and are considered the best at what you do it even though you only have a small corner of the market, or does it mean that you have many locations across the province and enjoy a large market share?
Vision statements should be clear with context throughout the business plan.
Mission
• Should be very brief—a few sentences or a short paragraph
• Indicates what your organization does and why it exists—may describe the business strategy and philosophy
Values
• Consists of five to ten short statements indicating the important values that will guide everything the business will do
• Outlines the personal commitments members of the organization must make, and what they should consider to be important
• Defines how people behave and interact with each other
• Should be reflected in all of the decisions outlined in the business plan, from hiring to promotions to location choices
• Helps the reader understand the type of culture and operating environment this business intends to develop
Major Goals
• Describes the major organizational goals
• Ensures each goal is
• Specific, Measurable, Action oriented, Realistic, and Timely [SMART]
• Realistic, Understandable, Measureable, Believable, and Achievable [RUMBA]
• Aligns with everything in plan
• Written, or re-written as the second last thing you do before finalizing your business plan by proofreading, polishing, and printing it (writing the Executive Summary is the final thing you should write)
SMART and RUMBA goals strengthen the business plan.
Operating Environment
Trend Analysis
• Usually includes an analysis of how the current and expected trends in the political, economic, social, technological, environmental, and legal (PESTEL) factors will impact the development of this business
• However, consider whether this is the right place for this analysis: it may be better positioned, for example, in the Financial Plan section to provide context to the analysis of the critical success factors, or in the Marketing Plan to help the reader understand the basis for the sales projections.
Industry Analysis
• Includes an analysis of the industry in which this business will operate
• Typically applies the Five Forces Model (Porter, 1985)
• As above, consider whether this is the right place for this analysis: it may be better placed, for example, in the Marketing Plan to enhance the competitor analysis, or in the Financial plan to provide context to the industry standard ratios in the Investment Analysis section.
Of course, your trend analysis will also include a market-level analysis (using a set of questions, like those listed in Chapter 2) and a firm-level analysis (using tools like a SWOT Analysis / TOWS Matrix, various forms of financial analyses, a founder fit analysis, and so on), but those analyses are usually best placed in other sections of your plan to support the strategies and decisions you present there. The market-level analysis will inevitably fit in the Marketing Plan section, but the firm-level analysis might be spread across some or all of the Operating Plan, Human Resources Plan, Marketing Plan, and Financial Plan sections.
Operations Plan
• Answers the following key questions :
• What constraints are you operating under that will restrict your capacity to produce and sell your product?
• Given these constraints, what is your operating capacity (in terms of production, sales, etc.)?
• What is the work flow plan for your operation?
• What work will your company do and what work will you outsource?
Operations Timeline
• Answers the following questions:
• When will you make the preparations, such as registering the business name and purchasing equipment, to start the venture?
• When will you begin operations and make your first sales?
• When will other milestone events occur such as moving operations to a larger facility, offering a new product line, hiring new key employees, and beginning to sell products internationally?
• Sometimes it is useful to include a graphical timeline showing when these milestone events have occurred and are expected to occur.
Completing the operation plans further adds to the overall business plan.
Business Structure and other Set-up Elements
• Indicates the legal structure your venture will take:
• Sole Proprietorship
• Partnership
• Limited Partnership
• Corporation
• Cooperative
Note: Your financial statements, risk management strategy, and other elements of your plan are affected by the type of legal structure you choose for your business. For example, all partnerships should have a clear agreement outlining the duties, expectations, and compensation of all partners as well as the process of dissolution. Spreadsheet templates are formatted for corporations and will need to be formatted for other forms of businesses.
• Describes your decisions related to the following:
• Naming
• Zoning, equipment prices, suppliers, etc.
• Location
• Leasing terms, leasehold improvements, signage, pay deposits, etc.
• Getting business license, permits, etc.
• Setting up banking arrangements
• Setting up legal and accounting systems (or professionals)
• Ordering equipment, locks and keys, furniture, etc.
• Recruiting employees, setting up the payroll system and benefit programs, etc.
• Training employees
• Testing the products/services that will be offered
• Testing the systems for supply, sales, delivery, and other functions
• Creating graphics, logos, promotional methods, etc.
• Ordering business cards, letter head, etc.
• Setting up supplier agreements and outlining why those sellers are preferred
• Buying inventory, insurance, etc.
• Revising business plan
• And many more things, including, when possible, attracting purchased orders in advance of start-up through personal selling (by the owner, a paid sales force, independent representatives, or by selling through brokers wholesalers, catalogue houses, retailers), a promotional campaign, or other means
Note: As part of your business set-up, you need to determine what kinds of control systems you should have in place, establish necessary relationships with suppliers prior to your start-up, and generally deal with a list of issues like those mentioned above.
Start-up
• Answers the following questions:
• What is required to start-up your business including the purchases and activities that must occur before you make your first sale?
• When identifying capital requirements for start-up, a distinction should be made between fixed capital requirements and working capital requirements.
Fixed Capital Requirements
• Answers the following question:
• What fixed assets, including equipment and machinery, must be purchased so your venture can conduct its business?
• May include a start-up budget showing the machinery, equipment, furnishings, renovations, and other capital expenditures required prior to operations commencing
• May also show the financing required, often in the form of longer-term loans
Working Capital Requirements
• Answers the following question:
• What money is needed to operate the business (separately from the money needed to purchase fixed assets) including the money needed to purchase inventory and pay initial expenses?
• May include a start-up budget showing the cash required to purchase starting inventories, recruit employees, conduct market research, acquire licenses, hire lawyers, and other operating expenditures required prior to starting operations
• May also show the financing required. Working capital is usually financed with operating loans, trade credit, credit card debt, or other forms of shorter-term loans
Risk Management Strategies
• Includes descriptions of the organization’s risk exposure
• Enterprise – liability exposure for things like when someone accuses your employees or products you sell of injuring them
• Financial – securing loans when needed and otherwise having the right amount of money when you need it
• Operational – securing needed inventories, recruiting needed employees in tight labour markets, operating when customers you counted on not purchasing product as you had anticipated, managing theft, arson, and natural disasters like fires and floods, etc.
• Always includes descriptions of the planned strategies for managing each of the risks identified. Identifies potential risk exposures, their consequences, risk potential, and mitigation strategies (Figure 8).
• Avoid – choose to avoid doing something, outsource, etc.
• Reduce – through training, assuming specific operational strategies, etc.
• Transfer – insure against, outsource, etc.
• Assume – self-insure, accept, etc.
Figure 8 – Risk Management Strategies (Illustration by Lee A. Swanson)
Completing a risk management plan further adds to the overall business plan.
Operating Processes
• Answers the following key questions:
• What operating processes will you apply?
• Depending upon the type of business, describes things like
• Retail and wholesale operations
• How will you ensure your cash is managed effectively?
• How will you schedule your employees?
• How will you manage your inventories?
• If you will have a workforce, how will you manage them?
• etc.
• Service operation
• How will you bill out your employee time?
• How will you schedule work on your contracts?
• etc.
• Manufacturing operation
• How you will manufacture your product (process flow, job shop, etc.?)
• How will you maintain quality?
• How will you institute and manage effective financial monitoring and control systems that provide needed information in a timely manner?
• How will you manage expansion?
• etc.
Facilities
• May include planned layouts for facilities
• Answers the following questions:
• What are your facility plans?
• Where will your facility be located?
• Expressed as a set physical location
• Expressed as a set of requirements and characteristics
• How large will your facility be and why must it be this size?
• How much will it cost to buy or lease your facility?
• What utility, parking, and other costs must you pay for this facility?
• What expansion plans must be factored into the facility requirements?
• What transportation and storage issues must be addressed by facility decisions?
• What zoning and other legal issues must you deal with?
• What will be the layout for your facility and how will this best accommodate customer and employee requirements?
Organizational Structure
• May include information on Advisory Boards or Board of Directors from which the company will seek advice or guidance or direction
• May include an organizational chart
• Can be a nice lead-in to the Human Resources Plan
Human Resources Plan
• Key questions answered by human resources plans:
• How do you describe your desired corporate culture?
• What are the key positions within your organization?
• How many employees will you have?
• What characteristics define your desired employees?
• What is your recruitment strategy? What processes will you apply to hire the employees you require?
• What is your leadership strategy and why have you chosen this approach?
• What performance appraisal and employee development methods will you use?
• What is your organizational structure and why is this the best way for your company to be organized?
• How will you pay each employee (wage, salary, commission, etc.)? How much will you pay each employee?
• What are your payroll costs, including benefits?
• What work will be outsourced and what work will be completed in-house?
• Have you shown and described an organizational chart?
Recruitment and Retention Strategies
• Includes how many employees are required at what times
• Estimates time required to recruit needed employees
• Estimates all recruitment costs including:
• Employment advertisements
• Contracts with employment agency or search firms
• Travel and accommodations for potential employees to come for interviews
• Travel and accommodations for interviewers
• Facility, food, lost time, and other interviewing costs
• Relocation allowances for those hired including flights, moving companies, housing allowances, spousal employment assistance, etc.
• May include a schedule showing the costs of initial recruitment that then flows into your start-up expense schedules
Leadership and Management Strategies
• Outlines your leadership philosophy
• Explains why it is the most appropriate leadership approach for this venture
Training
• Answers the following key questions:
• What training is required because of existing rules and regulations?
• How will you ensure your employees are as capable as required?
• In which of the following areas will you provide training for your employees?
• Health and safety (legislation, WHMIS, first aid, defibulators, etc.)
• Initial workplace orientation
• Management
• Financial systems
• Sales
• Contracts
• Product features
• Other
Performance Appraisals
• Identifies how you will manage your performance appraisal systems
Health and Safety
• Notes any legal requirements (and also legal requirements for other issues that may be included in other parts of the plan)
• Identifies accreditation you might pursue, such as ISO 9000, and if so, evaluates the costs, benefits, and time frame
• Outlines training for employees, such as WHMIS training or machinery handling training
Compensation
• Always justifies your planned employee compensation methods and amounts
• Always includes all components of the compensation (CPP, EI, holiday pay, etc.)
• Identifies how you will ensure both internal and external equity in your pay systems
• Describes any incentive-based pay or profit sharing systems planned
• May include a schedule that shows the financial implications of your compensation strategy and supports the cash flow and income statements shown later
Key Personnel
• May include brief biographies of the key organizational people
Completing the human resources plan further adds credibility to the overall business plan.
Marketing Plan
• Identifies the primary and secondary research you have done
• You must show evidence of having done proper research, both primary and secondary. If you make a statement of fact, you must back it up with properly referenced supporting evidence. If you indicate a claim is based on your own assumptions, you must back this up with a description as to how you came to the conclusion.
• Shows an effective analysis of the economic environment relevant to your business
• It is a given that you must provide some assessment of the economic situation as it relates to your business. For example, you might conclude that the current economic crisis will reduce the potential to export your product and it may make it more difficult to acquire credit with which to operate your business. Of course, conclusions such as these should be matched with your assessment as to how your business will make the necessary adjustments to ensure it will thrive despite these challenges, or how it will take advantage of any opportunities your assessment uncovers.
• Shows an effective assessment of the industry within which your venture will operate
• You must provide an assessment of the industry coupled with descriptions of how your venture will prosper in those circumstances. A common approach used to assess the industry is to apply Porter’s (1985) Five Forces Model.
• If you apply the Five Forces Model, do so in the way in which it was meant to be used to avoid significantly reducing its usefulness while also harming the viability of your industry analysis. This model is meant to be used to consider the entire industry, not a subcomponent of it (and it usually cannot be used to analyze a single organization).
• Your competitor analysis might fit within your assessment of the industry, or it might be best as a section within your marketing plan. Usually a fairly detailed description of your competitors is required, including an analysis of their strengths and weaknesses. In some cases, your business may have direct and indirect competitors to consider. Maintain credibility by demonstrating that you fully understand the competitive environment.
• Assessments of the economic conditions and the state of the industry appear incomplete without accompanying appraisals outlining the strategies the organization can/should employ to take advantage of these economic and industry situations. So, depending upon how you have organized your work, it is usually important to couple your appraisal of the economic and industry conditions with accompanying strategies for your venture. This shows the reader that you not only understand the operating environment, but that you have figured out how best to operate your business within that situation.
• Outlines an effective analysis of your venture (see the Organizational Analysis section below)
Primary and secondary data further add to the strength of the business plan.
Completing the marketing plan further adds to the overall business plan.
Market Analysis
• Usually contains customer profiles, constructed through primary and secondary research, for each market targeted
• Contains detailed information on the major product benefits you will deliver to the markets targeted
• Describes the methodology used and the relevant results from the primary market research completed
• If there was little primary research completed, justifies why it is acceptable to have done little of this kind of research and/or indicate what will be done and by when
• Includes a complete description of the secondary research conducted and the conclusions reached
• Describes the potential customers
• Define your target market in terms of identifiable entities sharing common characteristics. For example, it is not meaningful to indicate you are targeting Canadian universities. It is, however, useful to define your target market as Canadian university students between the ages of 18 and 25, or as information technology managers at Canadian universities, or as student leaders at Canadian universities. Your targeted customer should generally be able to make or significantly influence the buying decision.
• You must usually define your target market prior to describing your marketing mix, including your proposed product line. Sometimes the product descriptions in business plans seem to be at odds with the described target market characteristics. Ensure your defined target market aligns completely with your marketing mix (including product/service description, distribution channels, promotional methods, and pricing). For example, if the target market is defined as Canadian university students between the ages of 18 and 25, the product component of the marketing mix should clearly be something that appeals to this target market.
• Carefully choose how you will target potential customers. Should you target them based on their demographic characteristics, psychographic characteristics, or geographic location?
• Identify how your targeted customers make their buying decisions
• You will need to access research to answer this question. Based on what you discover, you will need to figure out the optimum mix of pricing, distribution, promotions, and product decisions to best appeal to how your targeted customers make their buying decisions.
Competition
• Fully describes the nature of your competitors
• However, this information might fit instead under the market analysis section.
• Describes all your direct competitors
• Describes all your indirect competitors
• If you can, includes a competitor positioning map to show where your product will be positioned relative to competitors’ products
• If you include a competitor positioning map, insure that the x-axis and y-axis are meaningful. Often, competitor maps include quality and price as axes. Unless you can clearly articulate the distinction between high quality and low quality, it may be more valuable to have more meaningful axes or describe your value proposition relative to your competitors in the absence of a positioning map.
Figure 9 – Competitor Positioning Map (Illustration by Lee A. Swanson)
• Identifies your competitive advantage, your venture`s value proposition, and what distinguishes your business from that of your competitors in a way that will ensure your sales forecasts will be met
• You must clearly communicate the answers to these questions in your business plan in order to attract the needed support for your business. One caution is that it may sound appealing to claim you will provide a superior service to the existing competitors, but the only meaningful judge of your success in this regard will be customers. Although it is possible some of your competitors might be complacent in their current way of doing things, it is very unlikely that all your competitors provide an inferior service to that which you will be able to provide.
Demonstrating a competitive advantage makes the business plan stronger. A competitor positioning map provides context as to where your venture fits in the competitive landscape.
Marketing Strategy
• Covers all aspects of the marketing mix: your promotional decisions, product decisions, distribution decisions, and pricing decisions
• Outlines how you plan to influence your targeted customers to buy from you (your optimum marketing mix, and why is this one better than the alternatives)
Organizational Analysis
• Leads in to your marketing strategy or is positioned elsewhere depending upon how your business plan is best structured
• Often applies a SWOT Analysis to analyze the organization
• If doing so, ALWAYS ensure this analysis results in more than a simple list of internal strengths and weaknesses and external opportunities and threats. A SWOT analysis should always prove to the reader that there are organizational strategies in place to address each of the weaknesses and threats identified and to leverage each of the strengths and opportunities identified.
• An effective way to ensure an effective outcome to your SWOT Analysis is to apply a TOWS Matrix approach to develop strategies to take advantage of the identified strengths and opportunities while mitigating the weaknesses and threats. A TOWS Matrix evaluates each of the identified threats along with each of the weaknesses and then each of the strengths. It does the same with each of the identified opportunities. In this way strategies are developed by considering pairs of factors.
• The TOWS Matrix is a framework with which to help you organize your thoughts into strategies. Most often you would not label a section of your business plan as a TOWS Matrix because this would not add value for the reader. Instead, you should describe the resultant strategies—perhaps while indicating how they were derived from your assessment of the strengths, weaknesses, opportunities, and threats. For example, you could indicate that certain strategies were developed by considering how internal strengths could be employed toward mitigating external threats faced by the business.
Product Strategy
• Identifies your product/service and why this particular product/service will appeal to your targeted customers more than the alternatives
• If your product or service is standardized, you will need to compete on the basis of something else—like a more appealing price, having a superior location, better branding, or improved service. If you can differentiate your product or service, you might be able to compete on the basis of better quality, more features, appealing style, or something else. When describing your product, you should demonstrate that you understand this.
Pricing Strategy
• Outlines your pricing strategies and explains what makes these strategies better than the alternatives
• If you intend to accept payment by credit card (which is probably a necessity for most companies), you should be aware of the fee you are charged as a percentage of the value of each transaction. If you don’t account for this you risk overstating your actual revenues by perhaps one percent or more.
• Identifies your sales forecasts and explains why these are realistic
• Sales forecasts must be done on at least a monthly basis if you are using a projected cash flow statement. These must be accompanied by explanations designed to establish their credibility for readers of your business plan. Remember that many readers will initially assume your planned time frames are too long, your revenues are overstated, and you have underestimated your expenses. Well crafted explanations for all of these numbers will help establish credibility.
Distribution Strategy
• Explains your distribution strategies and what makes these strategies better than the alternatives
• If you plan to use e-commerce, you should include all the costs associated with maintaining a website and accepting payments over the Internet.
Promotions Strategy
• Answers the following key questions:
• As a new entrant into the market, must you attract your customers away from your competitors they currently buy from or will you be creating new customers for your product or service (i.e. not attracting customers away from your competitors)?
• If you are attracting customers away from competitors, how will these rivals respond to the threat you pose to them?
• If you intend to create new customers, how will you convince them to reallocate their dollars toward your product or service (and away from other things they want to purchase)?
• In what ways will you communicate with your targeted customers? When will you communicate with them? What specific messages do you plan to convey to them? How much will this promotions plan cost?
• Outlines the anticipated responses competitors will have to your entrance into the market, especially if your success depends upon these businesses losing customers to you
• If your entry into the market will not be a threat to direct competitors, it is likely you must convince potential customers to spend their money with you rather than on what they had previously earmarked those dollars toward. In your business plan you must demonstrate an awareness of these issues.
• Often maps out your promotional expenditures according to method used and time frame
• Consider listing the promotional methods in rows on a spreadsheet with the columns representing weeks or months over probably about 18 months from the time of your first promotional expenditure. This can end up being a schedule that feeds the costs into your projected cash flow statement and from there into your projected income statements.
• If you phone or visit newspapers, radio stations, or television stations seeking advertising costs, you must go only after you have figured out details like on which days you would like to advertise, at what times on those days, whether you want your print advertisements in color, and what size of print advertisements you want.
• Carefully consider which promotional methods you will use. While using a medium like television may initially sound appealing, it is very expensive unless your ad runs during the non-prime times. If you think this type of medium might work for you, do a serious cost-benefit analysis to be sure.
• Some promotional plans are developed around newspaper ads, promotional pamphlets, printing business cards, and other more obvious mediums of promotion. Be certain to, include the costs of advertising in telephone directories, sponsoring a little league soccer team, producing personalized pens and other promotional client give-always, donating items to charity auctions, printing and mailing client Christmas cards, and doing the many things businesses find they do on-the-fly. Many businesses find it to be useful to join the local chamber of commerce and relevant trade organizations with which to network. Some find that setting a booth up at a trade fair helps launch their business.
• If you are concerned you might have missed some of these promotional expenses, or if you want to have a buffer in place in case you feel some of these opportunities are worthwhile when they arise, you should add some discretionary money to your promotional budget. A problem some companies get into is planning out their promotions in advance only to reallocate some of their newspaper advertisement money, for example, toward some of these other surprise purposes resulting in less newspaper advertising than had been intended.
Financial Plan
• Contains financial statements
• Also includes
• Various funding options and exit strategies for potential investors
• Business valuation (be cautious not to over value your business)
• Break-even analysis
Business Valuation
There are a multitude of sophisticated business valuation methodologies. A rule of thumb for business valuations is a multiple of its earnings. For example, if the chosen multiple is five and the business’ earnings before taxes are \$55M, the business’ valuation would be approximately \$275M.
Break-Even Analysis
Break-Even Point = FC/(P-VC)
• FC = Fixed Costs
• P = Unit Price
• VC = Variable Cost
Example: If the business’ total fixed costs are \$1,000,000.00, it costs \$5.00 to produce the widget, and the business sells the widget for \$7.00, the break-even point is 500,000 widgets.
• You will most certainly need to make monthly cash flow projections from business inception to possibly three years out. Your projections will show the months in which the activities shown on your fixed capital and working capital schedules will occur. This is nearly the only way to clearly estimate your working capital needs and, specifically, important things like the times when you will need to draw on or can pay down your operating loans and the months when you will need to take out longer-term loans with which to purchase your fixed assets. Without a tool like this you will be severely handicapped when talking with bankers about your expected needs. They will want to know how large of a line of credit you will need and when you anticipate needing to borrow longer-term money. It is only through doing cash flow projections that you will be able to answer these questions. This information is also needed to determine things like the changes to your required loan payments and when you can take owner draws or pay dividends.
• Your projected cash flows are also used to develop your projected income statements and balance sheets.
List of Items a Business May Need to Purchase
Set-up
• Business license
• Registration for name, etc.
• Domain name registration
• Initial product inventory
• Signage
• All the little things like curtains/blinds, decorations, microwave for staff room, etc.
• All the things needed to run the business from day #1 (like cutlery, plates, cooking pots, table settings etc. for restaurants; like towels, soap, etc. for gyms; like equipment and so on for manufacturing and service places)
• Set-up and testing of new facilities—new factories and offices do not operate at peak efficiency for some time after start-up because it takes time for the new systems to kick into high gear
• Professional services needed
• Lawyer’s fees to make sure agreements are solid
• Graphic designer or design company needed to develop visuals
• Accounting firm needed to set up initial systems
• Insurance—maybe not a direct cost to this one to account for
Office
• Accounting system software
• Computer, printer, other things needed like scanner
• Office furniture
• Initial office supplies—paper, pens, etc.
• Telephones
• Internet/wifi
• Microwave and coffee maker and similar supplies for staff room or coffee room
• Bank fees—business banking is normally not free—might also need to have business cheques
Customer Interaction
• Cash register
• Loyalty cards/system
Production/Operations
• Safety equipment (fire extinguishers, AED)
• First aid
• Security systems
• Equipment maintenance
• Janitorial services and cleaning supplies
• Bathroom supplies—toilet paper, soap, towels
• Membership costs for various associations, including the local chamber of commerce, any professional associations for the relevant industry, etc.
• Subscriptions for things like important trade publications, etc.
• Shelving and storage systems
• Even when not full restaurant, operations like coffee shops still require equipment like dishwasher
Training
• Safety—prior to start-up and ongoing and for new employees
Hiring
• Ads, travel expenses—flights, hotels, taxi rides, meal allowances, etc.—to recruit people through interviews, meeting meals, set up with real estate agents, etc.
Promotions
• Website development
• Costs for setting up and managing social media (can take a lot of an employee’s time)
• Grand opening costs
Property
• If buying, include property taxes and all utilities in cash flows and income statement and include building maintenance and maybe build up a reserve fund to pay for things like future roof repairs and needed renovations and upgrades
• If renting/leasing, include rental/least cost and whatever utilities are not included in rental/lease payment
Renovations
• Construction
• Plumbing
• Electrical
• Utility hookups
• Inspections
• Shelving
• Interior signage
• Fencing, parking lot, exterior lighting, other exterior things
Risk Management
• Insurance (need to choose the types needed)
• Training costs
• Things like snow removal, de-icing sidewalks, etc.
Chapter Summary
This chapter described the basic elements of a comprehensive business plan. | textbooks/biz/Business/Entrepreneurship/Book%3A_Business_Plan_Development_Guide_(Swanson)/01%3A_Chapters/1.04%3A_Chapter_4__Initial_Business_Plan_Draft.txt |
Learning Objectives
After completing this chapter, you will be able to
• Develop the second draft of the business plan by applying revision methods to improve the realism of the first draft
Overview
A first draft of a business plan will inevitably be unrealistic for a host of reasons. It is likely to include contradictions between sections of the written part. The financial and written parts will most likely not align, even though they must tell the same story, but in different terms. The sales projections might be unrealistic. The cash flow projections will probably be far from accurate. In general, work will be required to convert the first draft of the business plan into a realistic second draft.
Figure 10 – Making the Business Plan Realistic (Illustration by Lee A. Swanson)
How to Make the Plan Realistic
Replace Assumptions with Factual and Expert Information
A first step is to replace the assumptions you included in your business plan and flagged with the distinct colored font (review the Writing the Draft Business Plan section) with information you got from a valid source. Of course, to establish your and your business plan’s credibility, always include the references to the sources you used.
Review and Revise Sales Projections
Business plan writers should critically review and revise their sales projections while using the strategies below to improve the realism of the projected financial statements.
When reviewing, and possibly revising sales projections, business plan writers should consider both the sales projection model they used and the assumptions they fed into the model to generate the monthly sales figures. Additionally, it is important to compare the resulting projected sales with industry norms and any available comparative data with similar companies.
Adjust Strategies to Make Projected Financial Statements Realistic
If you used the financial spreadsheet templates as they are meant to be used, you will not have typed a single number into your projected cash flow statements, your projected income statement, and your projected balance sheet. You should have entered all of your numbers into a set of schedules that, in turn, automatically transfer the relevant numbers to the projected statements through formulas.
The cash flow statement estimates all of the money flowing in and out of the venture in each month. The cash inflows include cash collected from cash sales during the month and accounts receivable collections resulting from sales made in previous months. They also include proceeds from any assets you sell, loan proceeds, and other cash investments made into your business.
The cash outflows occur whenever something is purchased, an expense is paid (including loan payments and taxes), and cash is invested somewhere such that it is no longer available to be used to pay current obligations.
The cash available at the end of each month is the previous month’s cash balance plus all cash inflows minus all cash outflows (the exception might be the first month when the initial investments—and, possibly, initial sales—are made, and possibly some expenses are incurred or purchases made). When you complete your first business plan draft, you will inevitably have unrealistic cash balances at the end of some, if not all months.
You can never have a negative cash balance at the end of a month. If you are projecting negative balances, your planned venture cannot survive unless you do things like implement strategies to increase projected sales, seek new investments in your business, and reduce planned operating expenses.
Likewise, an overly high end-of-month cash balance is a signal of possible poor cash management strategies or overly optimistic sales forecasting. Another consideration if your month ending cash balances are high is whether you have applied realistic assumptions. After all, it is very rare to stumble upon a business opportunity that generates high amounts of excess cash. If such an opportunity existed, other entrepreneurs would have or will be poised to enter the market and reduce the appeal of the perceived opportunity.
To eliminate negative cash balances and to manage cash so you don’t have negative or overly positive end-of-month cash balances,
1. Determine what range of end-of-month cash balances is realistic for your type of business. For example, you might decide that, for your type of business, they should always be between \$8,000 and \$12,000.
2. Work forward from the first month that the ending balance falls out of that range. To do that, decide how to best manage your cash. You have several options, including the following (but be certain to make your changes in the schedules rather than on the projected statements in your financial spreadsheet templates):
• If you are short of cash, you might be able to increase cash inflows. For example, you could implement strategies (and, of course, include these in the written part of your plan) to increased projected sales at close to current planned prices, maintain projected sales levels while increasing prices, attract new investors to inject some cash in the business, use cash reserves to increase available cash, or to sell an asset that is no longer needed. Of course, you must be aware of the possible consequences from taking those actions. For example, increasing prices will lead to lower sales, and if the amount of the price increase is more than counterbalanced by the drop in sales, you might actually reduce the amount of cash you generate.
• As just noted, new investors can inject cash into the business. For this stage of business plan development, it is often best to focus on making the business plan realistic without worrying too much about where to secure the investments you need to start your business beyond the funding you are reasonably certain that you can get through personal money and from friends, family, and other ready sources (see the section on Starting Capital). Use this stage of development to help you determine the amount of money that you will need to secure from other sources, but adjust your plans and strategies to ensure that the amount of additional financing that you will need is realistic. It is in the next stage of business development that you will more seriously consider from what sources you can get the financing that you determined that you needed while in this stage of development.
• If you are short of cash, you might be able to decrease cash outflows by implementing cost-reduction strategies or reducing or deferring purchases. Again, all of these actions have consequences you must be aware of. For example, if you reduce your advertising expenses, you might suffer a large enough decline in sales to worsen your cash shortfall situation.
• If your projections show high cash balances in some projected high-sales months, some of that cash can be transferred to a cash reserve, used to pay down loans, used to purchase needed assets or to acquire resources to benefit the business, used to prepay expenses, and paid to investors as dividends.
• If projections show cash balances that are higher than is realistic, you should review your sales projections and your projected expenses and make any necessary adjustments to make them more realistic.
If your projected financial spreadsheet templates are set up effectively, your schedules should feed your numbers into your projected cash flow statement. From there, your projected cash flow statements should automatically populate your projected income statement and balance sheet.
Test the Realism of Projected Statements Using Financial Analysis Methods
The first steps to improving overall realism is to make your projected cash flow statement more realistic by (1) replacing as many assumed numbers in your schedules as possible with actual numbers; (2) improving the realism of your planned strategies and sales and other projections, and (3) adjusting your strategies and plans such that all month-end cash balances are within a target range. After that, you need to apply financial analysis methods, like ratio analysis, on the numbers in all of your financial statements to assess the realism of your numbers against industry standards and similar companies for which financial statements are available. That analysis should lead to further strategy adjustments to improve the realism of the planned financial positions for your venture during its first five years of business.
Synchronize the Written and Financial Parts of the Plan
Finally, you will need to rewrite parts of your operations, human resources, and marketing plans—and possibly the written introduction to your financial plan—to reflect all of the changes you made and to ensure that the written part of your business plan tells exactly the same story as does the financial part.
Chapter Summary
This chapter addressed the issue of making the first draft of the business plan realistic. To do so, replace as many of your assumptions as possible with factual and expert information, all properly referenced from valid sources to build and maintain your and your plan’s credibility. After that, review and revise the original sales projections to make them more realistic as informed by industry data and available numbers from companies similar to what you want your venture to be. Revise your strategies until all of the monthly closing balances in your cash flow statement fall within a realistic, reasonable, and predetermined target range. Perform financial analysis techniques to test the realism of your projected financial situation. Finally, rewrite your business plan so that the written and financial sections tell exactly the same story—one using words and the other using numbers. | textbooks/biz/Business/Entrepreneurship/Book%3A_Business_Plan_Development_Guide_(Swanson)/01%3A_Chapters/1.05%3A_Chapter_5__Making_the_Business_Plan_Realistic.txt |
Learning Objectives
After completing this chapter, you will be able to
• Develop the third draft of the business plan by applying revision methods to further improve the realism of the second draft while also making it desirable to the entrepreneur and appealing to targeted investors
• Describe the funding sources for start-ups
Overview
This chapter deals with adjusting the second business plan draft to retain, and hopefully improve, its realism, while also making it desirable to the entrepreneur and appealing to targeted investors. In some cases, a business plan should also be made to appeal to other targeted stakeholders, such as highly skilled employees who are needed, but who might not be easy to recruit unless they are offered a minority ownership position or receive reassurance from a well-written business plan.
Securing needed financing is one of the most important functions related to starting a business. This chapter describes some of the sources of financing available to start-ups.
Figure 11 – Making the Plan Appeal to Stakeholders and Desirable to the Entrepreneur (Illustration by Lee A. Swanson)
How to Make the Plan Appealing and Desirable
The second draft of your business plan should include realistic financial projections based on the plans outlined in the plan. As part of that exercise, you should have projected how much money you will require to start your business and to operate it over its first five years.
This stage of development focuses on the following tasks:
1. Determine your medium- and longer-term goals for your business as they relate to what you want to get out of it. As you read through the following questions, consider that the answers you provide should guide the financing decisions you make now.
• Do you want to start your business and rapidly grow its value so you can profit by selling it within a short period of time to an investor?
• Do you plan to operate your business for the rest of your working life? If so, how long will that be, and what will you do with your business when you want to retire? Will you want to sell it to an investor for as high a price as you can? Will you want to pass control, and possibly ownership, to family members? Do you want to retain ownership and hire people to manage it for you? Might you want to offer ownership interests in your business to your employees over time so that they will be majority shareholders and will take control of its operations by the time you retire? What other plans do you have for your business when you retire?
• Do you want to, or will you need to, offer ownership interests in your business to attract partners or other stakeholders whose help you will need to make it thrive?
• What other decisions should you make now to help guide the financing and other choices you face?
• Entrepreneurs must make the decisions required to make their ventures desirable to them. This includes choosing the right kinds of financing options.
2. Based on your goals for your business and on the amount of financing you require, identify the most desired sources of financing for your venture. You must consider how much control of your business you are willing to give up (and when you are willing to give it up), whether you expect to have adequate cash flow to be able to handle set obligations like loan payments, what financing sources will enable the growth and value accumulation you desire, and a host of other factors you need to consider to determine what financing methods will be best for you.
• An ideal business plan (1) is realisticin that it can be carried out,(2) clearly lays out plans that make the projected business outcomes desirable to the entrepreneur, and(3) is crafted to appeal to targeted investorsso that they will provide the amount of money that is needed at the times it is needed.
3. Incorporate the elements needed in your business plan to attract your targeted investors and make them want to invest in your company.
• It is not enough to simply identify the most desirable kinds of financing. The planned business must be structured in a way that entices targeted investors to invest in the business when the investments are needed. If you are seeking a loan, you must include the loan payments in the cash flow statement, but you might also need to identify what assets you have to pledge as security for the loan. If instead you are hoping to attract an angel investor, you should do some research to identify potential investors who have invested in your kind of business. Your business plan should then acknowledge the need for an exit strategy for angel investors and project how that exit strategy can materialize.
4. Identify and analyze your venture’s critical success factors by completing what-if analyses on your financial spreadsheets. Perform what-if analyses by making copies of your financial spreadsheets and changing some key numbers, like sales increase projections, to determine what happens if your projections are off. If your venture is particularly vulnerable to the potential effects of changes to critical success factors, make needed changes to your goals, strategies, and plans in your business plan to reduce your vulnerability to critical success factors changes. Or, adjust your goals, strategies, and plans to prepare for any changes that might occur to the critical success factors.
5. As you do the above, simultaneously adjust your goals, strategies, and plans in the written and financial projection parts of your plan until (1) you are satisfied that you are prepared to deal with issues that will affect your critical success factors, and (2) your projected cash flow statements, income statements, and balance sheets are realistic, consistent with healthy industry norms, and meet realistic expectations and aspirations for a healthy business.
6. Consider including three sets of projected financial statements in your business plan to reflect the following scenarios: most likely, optimistic, and pessimistic.
Providing context is essential in making the business plan appeal to various stakeholders.
Financing A Start-up
Starting Capital
Entrepreneurs almost always require starting capital to move their ideas forward to the point where they can start their ventures. Determining the amount of money that is actually needed is tricky because that requirement can change as plans evolve. Other challenges include actually securing the amount desired and getting it when it is needed. If an entrepreneur is unable to secure the required amount or cannot get the funding when needed, they must develop new plans.
Once a venture begins to make cash sales or it starts to receive the money earned through credit sales, it can use those resources to fund some of its activities. Until then, it must get the money it needs through other sources.
Bootstrap financing is when entrepreneurs use their ingenuity to make their existing resources, including money and time, stretch as far as possible—usually out of necessity until they can transform their venture into one that outside investors will find appealing enough to invest in.
Personal Money
Entrepreneurs will almost always have to invest their own personal money into their start-up before others will give them any financial help. Sometimes entrepreneurs form businesses as partnerships or as multi-owner corporations with other entrepreneurs who also contribute their own personal funds to the venture.
Love Money
Love money refers to money provided by friends and family who want to support an entrepreneur, often when they have no other ready source of funding after using as much of their own personal money as possible to support their start-up.
Grants and Start-up Prize Money
In some cases grants that do not need to be repaid might be provided by government or other agencies to support new venture start-ups. Sometimes entrepreneurs can enter business planning or similar competitions in which they might win money and other benefits, like free office or retail space or free legal or accounting services for a set period of time.
Debt Financing
From an entrepreneur’s perspective, the cost of debt financing is the interest that they pay for the use of the money that they borrow. From an investor’s perspective, their reward, or return on debt financing, is the interest that they gain in addition to the return of the money that they lent to an entrepreneur or other borrower.
To provide some protection for the investor (lender) to enable them to accept an interest rate that is also acceptable for the entrepreneur (borrower), the borrower must often pledge collateral so that, if they do not pay back the loan along with interest as arranged, the lender has a way to get all or some of the money they are owed. If a borrower defaults on a loan, the lender can become the owner of the property pledged as collateral. A key objective for an entrepreneur seeking debt financing is to provide sufficient collateral to get the loan, but to not pledge so much that they put essential property at risk.
When entrepreneurs borrow money, they must paid it back subject to the terms of the loan. The loan terms include the specific interest rate that will be charged and the time period within which the loan needs to be repaid. There are several other terms or features of the loan that can be negotiated between lenders and borrowers. One such feature is whether the loan can be converted to equity at a particular point in time and according to certain criteria and subject to specific terms.
Sometimes debt financing can be in the form of trade credit, where a supplier provides product to a business but does not require payment for a specific length of time, or perhaps even until the business has sold the product to a customer. Another form of debt financing is customer advances. This might involve a customer paying in advance for a product or service so that the business has those funds available to use to pay its suppliers.
Advantages of Debt Financing
One advantage of debt financing is that the entrepreneur does not sacrifice ownership when they take out a loan and lose some control of their venture.
Another advantage of debt financing is the certainty of the payments the borrower needs to make during the term of the loan. If the borrower takes out a loan for \$20,000 over a 5-year term at a fixed interest rate of 6.2% with a monthly payment schedule designed to pay off the entire loan by the end of its 5-year term, they know that each month they must pay \$389 and that over the 5 years, they will have paid back the entire \$20,000 loan amount plus a total of \$3,340 in interest. With this certainty, the business can accurately budget its payback amount for this loan over the 5 years.
Yet another advantage of debt financing is that it allows companies to tradeon equity. Trading on equity enhances the rate of return on common shareholders’ equity by using debt to financing asset purchases or to take other measures that are expected to cost less than the earnings generated by the action taken. For example, if a company borrows \$20,000 at 6.2% interest and uses that money to purchase a machine it will use to increase its return on equity by 20%, then it is trading on equity. In this case, the company is financially better off than it would be if it had not taken out the loan. Of course, the inherent risk involved with this strategy is lowered when income streams are relatively stable.
Disadvantages of Debt Financing
A disadvantage of borrowing money is the need to report to those from whom you borrowed the money. This might be particularly true when lenders, often bankers, have interests or are subject to incentives that might not fully align with those of the borrower. For example, a lender will want assurances that they will get all of the money back that they lent, plus all of the interest owed to them during the term of the loan. A start-up entrepreneur, however, might struggle to generate the cash flow necessary to pay back all of the money owed according to the terms of the agreement.
Another disadvantage of borrowing is that the business’s ownership of the property it pledged as collateral for the loan is placed at risk. For many new ventures, a loan is only possible to acquire if the owner provides their personal guarantee that the money will be paid back as determined in the loan agreement, thus putting personal property at risk.
The biggest disadvantage to debt financing for start-up entrepreneurs is that there are a limited number of lenders who are interested and able to provide loans to businesses during their early stages.
Equity Financing
From an entrepreneur’s perspective, the cost of equity financing is the loss of some control over their venture as they must now share ownership of the business. From an investor’s perspective, their reward for purchasing an ownership interest in the business is the potential to share in the business’s anticipated future success by possibly receiving dividends (a portion of the profit that is distributed to owners) and by possibly being able to sell their ownership interest to another investor (or back to the entrepreneur) for more than the amount they purchased that ownership interest for originally.
The protection for the investor, who might be a shareholder if the ownership interest is represented in the form of shares in the business, is in the influence they can exert in the company’s decision-making processes. This influence is normally proportionate to their share of the ownership in the overall business. Equity investors normally seek to earn a competitive return on their investment that is in line with the level of risk they assume by investing in the business. The riskier the investment, the higher the return the investor expects.
The following are some potential sources of equity financing for start-up entrepreneurs.
Equity Crowdfunding
Equity crowdfunding is a relatively new way for entrepreneurs to raise capital. This involves using online methods to promote equity interests in ventures to potential investors.
Angel Investors
Angel investors are wealthy individuals who on their own or often along with other angel investors in a network—like the Saskatchewan Capital Network—invest in new ventures in exchange for an ownership interest in the business. Sometimes angels invest in companies in exchange for convertible debt, an investment that starts off as a loan, usually in the form of a bond, that they can exercise as an option to convert to an equity interest in the company at a particular point in time for a pre-determined number of shares. Angel investors are generally less restricted in what kinds of investments they will consider than are venture capitalists, who are using other people’s pooled money. Like venture capitalists, however, they normally undertake a rigorous due diligence process to determine whether to invest in the opportunities they are considering.
Venture Capital
Venture capital is raised when investors pool their money. The venture capital fund is then used to very carefully invest in existing but usually young companies that are expected to experience high growth. The venture capital company does not expect to invest for long and it expects to generate a large return. For example, it might expect to invest in an opportunity for a period of up to five years and then get out of the investment with five times the money it originally invested. Of course, only some investment opportunities will generate the returns hoped for and others will return far less than expected.
Venture capitalists might exert some ownership control by influencing some business decisions in cases where they believe that by doing so they can protect their investment or cause the investment to produce greater returns, but they generally prefer to invest in companies that are going to be well-run and will not require them to be involved in decisions. Venture capitalists might also provide some assistance, such as business advice, to the companies in which they invest.
A venture round refers to a phase of financing that institutional investors like venture capitalists provide to entrepreneurs. The first phase (sometimes following a seed round in which entrepreneurs themselves provide the start-up capital and then an angel round where angel investors invest in the company) is called Series A. Subsequent venture rounds are called Series B, Series C, and so on.
In general, because venture capitalists normally invest money contributed by investors and have an obligation to assume a limited amount of risk, they usually do not invest in start-up companies.
Due Diligence
Investors follow due diligence processes to assess the risk and potential return associated with the investments they are considering. As such, entrepreneurs should maintain a due diligence file that they can quickly draw upon when a desirable potential investor expresses an interest in their venture.
A due diligence file will include copies of many of the legal papers and other important documents that a venture has accumulated and that tell the story of the enterprise. These documents will include those related to incorporation, securities it has issued or is in the process of issuing, loans, important contracts, intellectual property documents, tax information, financial statements, and other important documentation.
Advantages of Equity Financing
One important benefit to equity financing is that it does not normally require a regular payback from cash flow. Unlike with debt financing, equity investments do not usually give rise to a regular encumbrance that can increase the difficulty a young company might have in meeting its regular monthly expenses.
Second, when a firm uses equity financing, it does not need to pledge collateral, which means that the company’s assets are not placed at risk.
Another potential advantage with equity financing is that, depending upon the form of financing and who the investors are, a firm might gain valued advisers. In addition, investors who exercise their ownership rights to have a say in the operations of the company, or who otherwise provide advice and mentorship to entrepreneurs starting ventures, are usually highly motivated to help the company succeed. Investors expect to benefit only when the companies they invest in succeed, meaning that their financing incentives are aligned with those of the entrepreneur and other owners.
Disadvantages of Equity Financing
Equity financing is often more difficult to raise than debt financing. Second, when they share ownership in exchange for investment into their business, entrepreneurs give up a portion of the value that they create. If things do not go as planned, entrepreneurs can lose control of their companies to their investors.
Overview of Potential Sources of Start-up Financing
• Personal sources (savings and other income) contributed by the business founders
• Extended personal sources (family, friends, employees, partners)
• Strategic partners, including potential customers or potential suppliers who want to have access to a business like the one proposed (and therefore might fund part of its development). For example, a building owner (supplier) might help a business develop that it considers to be a desirable tenant. Another example is when a complementary business, like a hotel, invests in a start-up, like a spa located next door, that might attract more business.
• Business Development Bank of Canada (BDC) and other institutions that specialize in supporting entrepreneurs
• BDC calls itself “Canada’s business development bank and the only financial institution dedicated exclusively to entrepreneurs” (Business Development Bank of Canada, 2016, p. 1).
• Among the services provided by BDC is start-up financing for new ventures. They provide funding for the following:
• Working capital to supplement an existing line of credit
• Fixed assets
• Fund marketing and start-up fees
• A franchise purchase
• Consulting services
(Business Development Bank of Canada, 2016)
• Angel investors
• Customers (possibly)
• They might place orders for services or products and pay for them up-front, thereby providing financing for the new business
• They might want your business to succeed so it can support their business. For example, a general contractor (future customer) might help a new plumber get started if there is a shortage of plumbers affecting the building industry in the contractor’s community
• Venture Capitalists (possibly)
• These organizations acquire pools of money to invest, so they differ from angel investors in that those making the decisions are not investing their own money—this means they usually consider investment options that have shown some success already (which isn’t usually the case in the start-up phase)
• Asset-Based Lenders (possibly)
• Lend money secured by the assets of the borrower, like the plant and equipment
• Sometimes this can be done quite creatively. For example, they might accept assets that will turn into money—like accounts receivable and inventories—as security to back up a loan.
• Small Business Investment Companies (SBICs)
• An American idea developed to bridge the gap between when small businesses need money and the time when venture capitalists might provide financing to small businesses
• SBICs are privately owned companies in the United States that are licensed by the Small Business Administration (U.S. Government) to supply equity capital, longterm loans, and management assistance to qualifying small businesses
• The Canadian equivalent is the Community Futures Corporations
• Equipment Leasing Companies
• Suppliers through Trade Credit (possibly)
• The supplier provides product now without demanding immediate payment
• This supplier will provide the product to the retailer on terms so the retailer does not need to pay the supplier for perhaps 30 or 60 or 90 days
• The retailer then can sell the product and collect the money from the customer before the retailer needs to pay supplier for it
• Factoring (possibly)
• When a business sells its accounts receivable (its invoices) to a third party (called a factor) at a discount in exchange for immediate money
• Differs from bank loan in three ways:
• The factor is interested in the value of the receivables; a bank is interested in the firm’s credit worthiness
• Factoring is not a loan: it is the purchase of a financial asset (the receivables)
• A bank loan involves two parties (lender and borrower); factoring involves three (the business, the factor, and those who owe the money)
Chapter Summary
After developing a first draft of a business plan, an entrepreneur will inevitably need to make some major adjustments to the business model and to the plans they developed to make it realistic. After that, the entrepreneur needs to shift their attention to maintaining and potentially further improving the realism of the plan while making it desirable to the entrepreneur and appealing to targeted investors. Part of this exercise is deciding upon the best type of financing that is available to the entrepreneur (if any) to ensure that they can meet their longer term goals for their business. This chapter also described some of the sources of financing available to start-ups. | textbooks/biz/Business/Entrepreneurship/Book%3A_Business_Plan_Development_Guide_(Swanson)/01%3A_Chapters/1.06%3A_Chapter_6__Making_the_Plan_Appeal_to_Stakeholders_and_Desirable_to_the_Entrepreneur.txt |
Learning Objectives
After completing this chapter, you will be able to
• Develop the final draft of the business plan
Overview
The previous stages of business plan development focused on helping the business plan writer (1) start on the plan, (2) develop a reasonably complete and comprehensive first draft of the plan by focusing on developing the initial story without obsessing about its realism, (3) convert that into a second draft by adding realism, and (4) develop a third draft by preserving the realism and making needed changes designed to make the plan appealing to the entrepreneur and desirable to targeted investors. This stage is where the business plan writer puts the finishing touches on the plan to prepare it for use.
Figure 12 – Finishing the Business Plan (Illustration by Lee A. Swanson)
First Things Last
Finalize Major Goals
As contradictory as it might sound, it is only after the business plan is almost finished that the Major Goals section near the start of the plan should be completed. Replace the preliminary goals you have in that section with a limited set of goals, perhaps five to ten, which perfectly describe the outcomes you projected in certain sections of your plan. Write goals that will further improve the appeal of your plan for targeted investors and other important potential readers.
Your major goals should be substantive and relevant. They should also be written using a format designed to maximize their impact for targeted readers. The RUMBA formula (realistic, understandable, measurable, believable, and achievable) provides a useful guideline for developing major goals. The following is an example of a relevant major goal that follows that formula:
We will secure a \$56,050 short-term loan in September, 20 20, to finance inventory purchases needed to satisfy our projected increase in Christmas sales that year .
Write your Executive Summary
The last part of your business plan that you should write is the Executive Summary. Unlike most other types of documents, the executive summary at the start of a business plan can be up to about three pages in length.
As the executive summary might be the first section that targeted readers go through, it must be written to appeal to them. It should provide those readers with information that will encourage them to seriously consider taking the desired action, like investing in the venture. If they are not interested by the contents of the executive summary, they will not likely read any other part of the plan, and they won’t act—usually by investing in the business—as the business plan writer hopes they will.
Polish it Up!
Thoroughly proofread the completed business plan and fix all errors before submitting it to anyone. It is usually best to have other people proofread your work as they will catch errors that you will miss.
Never underestimate the negative consequences that can occur from distributing poor quality work.
Write A Letter of Transmittal
A letter of transmittal is to a business plan what a cover letter is to a resume. A letter of transmittal should briefly introduce the business plan accompanying it to the intended recipient and persuasively, but briefly, communicate the reasons why they should read it.
Chapter Summary
After all of the hard work involved with developing a high-power business plan, it must be finished properly to have the intended impact with its targeted readers. Before distributing it to targeted investors and other recipients, a limited number of major goals should be included in the Major Goals section near the start of the plan. Those goals should be carefully crafted to appeal to intended readers. The final writing task is to develop an executive summary that will entice targeted readers to examine the rest of the plan in detail for the purpose of deciding whether to potentially take the action—usually to invest in the venture—desired by the business plan writer. After that, the plan should be thoroughly proofread and revised to ensure that all errors are eliminated before the plan is used. After writing a customizedletter of transmittal to introduce the plan, it can be put to use. | textbooks/biz/Business/Entrepreneurship/Book%3A_Business_Plan_Development_Guide_(Swanson)/01%3A_Chapters/1.07%3A_Chapter_7__Finishing_the_Business_Plan.txt |
Learning Objectives
After completing this chapter, you will be able to
• Deliver an effective business plan pitch
Overview
Writing a good business plan will only get an entrepreneur so far. To achieve their goals, they must be prepared to pitch their plan effectively to targeted investors and other potential stakeholders. These are sometimes called elevator pitches because an entrepreneur should be prepared to effectively deliver one in the length of time it takes to ride up a few floors in an elevator with a potential investor. The goal of a pitch is not to fully describe a business idea, but to be able to convince a potential investor in five minutes or less that they should meet with the entrepreneur further to learn more about the idea because they might want to invest in it.
Your business plan pitch must be focused on what your targeted audience and business plan readers need to know. Usually your pitch will be designed to capture a potential investor’s interest so that they will want to talk to you about investing in your venture. In that case, your pitch should follow a process similar to the one described next.
Avoid the trap of telling the potential investors too much about how your business works. Instead, spend your time telling them what they need to know to become interested enough to possibly invest in your venture. That means allocating your time almost equally on each of the following elements of your pitch script.
1. Describe the market problem that your venture solves
• The problem you solve should be for an identifiable group of people or organizations who recognize that they have a problem and are willing to spend their money for a solution to the problem.
2. Describe how your venture solves the problem
• Your solution should be better than the alternative solutions offered by your competitors or by those who suffer from the problem. It should also be a solution that cannot or will not be readily copied by existing or new competitors.
3. Explain how and why you and your venture are capable of solving the problem while also generating a profit
• Your chances of being considered capable of delivering what you promise are enhanced if you have a strong team, relevant experience, or access to scarce or unique resources or networks.
4. Explain why you need the financing and anything else you want from the potential investors, like their expertise or access to their networks
• Your opportunities to get the financing you need improve when you can show that the money will increase your capacity to achieve what you promise.
5. Describe why the investors should invest in your venture
• Potential investors want to know how and when they will get their investment back and how much of a return they will earn on their money. You should be able provide them with an estimate of how much your venture is worth and will be worth in the future while telling them what that means for them.
Solving a market problem is a winning formula, so demonstrate how the business solves a problem and makes money makes for a strong pitch.
Providing context for individual investors and stakeholders is critical for their buy-in.
Chapter Summary
A simple five step business plan pitch format has five steps. When entrepreneurs have a chance to engage with targeted investors, they usually have a limited amount of time to convince those investors to consider their investment opportunity. The purpose of the business plan pitch is to capture the attention and interest of targeted investors within a very short time. A successful pitch should result in an invitation by the investor for the entrepreneur to provide more information about the business because they might want to invest in it. | textbooks/biz/Business/Entrepreneurship/Book%3A_Business_Plan_Development_Guide_(Swanson)/01%3A_Chapters/1.08%3A_Chapter_8_-_The_Business_Plan_Pitch.txt |
Essential Initial Research
Societal Level
• Apply a PESTEL analysis to learn about the overall factors that might affect your business concept
Industry Level
• Apply a Porter’s (1985) Five Forces Model analysis to examine the particular industry in which you intend to operate
Market Level
• Apply a market-level analysis by answering a set of questions about the particular market within your chosen industry in which your business will reside
Firm Level
• Apply a SWOT Analysis/TOWS Matrix to formulate and evaluate potential strategies
• Apply a VRIO Framework Analysis to analyze a firm’s strategy
• Analyze founder fit with venture idea
• To analyze financial attractiveness,
• compare estimates for proposed venture to what is known about similar firms in the particular industry and market in which the venture will operate
• analyze the firm’s projected margins (if possible)
• do a break-even analysis (if possible)
• do a pro forma analysis (if possible; requires pro forma financial statements)
• do a sensitivity analysis (if possible)
• do return-on-investment (ROI) projections (if possible)
• determine the projected operating capacity of the venture and at how much of that capacity the firm will operate at certain time intervals until it reaches full capacity (if possible)
• if possible and relevant, estimate the share of the market that the venture might capture and when it might reach various levels of market share
• Note: projected operating capacity is often a more relevant concern than market share
The Business Model
• Use the Business Model Canvas or a similar tool to describe and analyze the proposed venture’s business model
Initial Business Plan Draft
Create Your Template
• Prepare a template by using the business plan outline to create headings in Word from which to later automatically generate a table of contents
Insert Work from Essential Initial Research and The Business Model into The Business Plan Draft
There are two ways to include the results from your societal, industry, market, and firm-level analyses in your business plan. The best choice is usually to disburse the relevant parts of those analyses throughout the entire plan to support the decisions and strategies outlined in the plan. An alternative choice is to include the results from all or some of the relevant parts of those analyses as their own sections in the business plan. The first option tends to strengthen the business plan more than the second because it explicitly ties your analyses to the decisions influenced by those analyses.
• Integrate the relevant and important results from your societal-, industry-, market-, and firm-level analyses into your plan, either as distinct sections of the plan or embedded into the other sections to support the outlined decisions and strategies
• Ensure that all analyses are fully and properly referenced in the business plan to establish and ensure your and your plan’s credibility as an entrepreneur and to meet ethical requirements to cite the sources for the information used
• Avoid harming your plan’s credibility by failing to indicate the sources for all of the information you include. Whenever you make an assumption that you should later replace with a factual or expertly-based statement or number, flag the assumption by using a distinctly coloured font.
During the second stage of business plan development, you develop your business model. As no separate section in a business plan specifically describes a business model, you need to incorporate your business model elements into the plan wherever they fit best. Where the business model elements fit into a business plan will usually be fairly self-evident. The important thing is to ensure that all of the elements of your business model are reflected in your business plan.
• Include each element of your business model in the appropriate parts of your business plan
Fill in All of the Sections of the Business Plan Draft
Draft Introduction
• Write the following sections:
• a brief description of your business concept
• a brief description of the purpose for your business idea
• a brief history and description of the evolution of the business concept
• a vision
• a mission
• a values statements
• a first draft set of goals
Draft Operations Plan
• Write an operations plan
• Ensure that all numbers included in the operations plan are
• sourced so a reader knows from where it came,
• explained so they know how it was calculated, or
• flagged as being an estimate that will be replaced with a true number with a source
Draft Human Resources Plan
• Write a human resources plan
• Ensure that you show how you will earn a living while starting the business
• Ensure that all numbers included in the human resources plan are
• sourced,
• explained, or
• flagged as being an estimate that will be replaced with a true number with a source
Draft Marketing Plan
• Write a marketing plan
• Ensure that all numbers included in the marketing plan are
• sourced,
• explained, or
• flagged as being an estimate that will be replaced with a true number with a source
Draft Financial Plan
• Plan how you will back up every number through one or both of the following:
• Explanations in the body of your plan, maybe along with your schedules, or
• Notes included with your financial statements
• Only insert a number for a particular item once and flag this cell
• Very few numbers in your projected financial statements should be input directly and each directly inputted number should be flagged using cell shading or another means so it is easier to fix any errors in the statements.
• Whenever a number is required more than once, ensure it transfers forward by formula only
• Prepare all of the following schedules (if applicable) that you will need to feed numbers into your projected cash flow statements:
• Sales schedule, if you will sell more than one product
• Project schedule
• Cash from sales schedule, cash from receivables schedule, and accounts receivable schedule
• Cash purchase schedule, credit purchase schedule, and accounts payable schedule
• Credit card collections schedule, if you will need to calculate your costs for accepting credit card payments from customers (you can normally consider credit card payments as cash payments in your cash flow statement)
• Inventory schedules
• Start-up cost schedule
• Capital cost allowance schedule or depreciation schedule
• Payroll schedule
• Operating loan schedule
• Term loan schedule, especially if you may make extra payments toward it before the term expires
• Promotions schedule, if you expect to use several promotional methods
• Prepayment schedule, if you expect to prepay insurance and similar expenses
• Other schedules that are needed
• Prepare projected cash flow statements
• Input the numbers from your schedules by formula into the projected cash flow statements. You might also discover the need to develop a schedule after you have first tried inputting the numbers directly into the projected cash flow statements.
• Ensure that the written part and the financial part tell exactly the same story using the exact same numbers and sources.
• Note: you will almost certainly have to estimate some numbers while preparing the projected cash flows. Immediately upon estimating the numbers, go to the written part of your plan and include them there.
• Prepare your projected income statements and projected balance sheets by formula only
• Calculate your taxes owing and feed these back into your projected cash flow statement
• Calculate your retained earnings
• Correct your statements until your balance sheet balances
Making the Business Plan Realistic
At this stage, your projected financial statements in your draft business plan are almost guaranteed to be unrealistic and undesirable. Your projected cash balances and profit levels will be unrealistic, either too high or too low. The original amounts you had planned to invest in your business or to acquire through investors will probably be inadequate. In general, your draft plan will have many weak areas and many holes to fill, but it should provide you with a great foundation upon which to build a realistic and desirable business plan.
The purpose of this stage is to make your business realistic. You do this by adjusting your proposed business model and your plans and strategies as presented in both the written and financial parts of your plan.
• Replace as many of the assumptions (those items flagged with a distinctly coloured font) as possible with factual and expert information and numbers while always indicating the sources for the new information and numbers
• Review and revise the sales projections to make them more realistic by comparing the projections to industry norms and available comparative data with similar companies. Review and revise as necessary both the sales projections model used and the assumptions fed into the model to generate the monthly sales figures.
• Decide what the appropriate range of end-of-month cash balances is for your type of business
• Eliminate any negative end-of-month cash balances by taking steps to turn each of these into positive numbers that fall within your target range by adjusting one or more of the following:
• Planned loan amounts (operating and/or term loan amounts)
• Planned owner investment amounts (or draw from built-up investment accounts)
• Planned amounts in schedules (increase prices, increase sales amounts, decrease expenses)
• An excessive cash balance at the end of a month indicates poor cash management practices. Eliminate any excessive end-of-month cash balances by reducing each of these numbers so they fall within your target range by doing one or more of the following:
• Use the excess money to generate more profits (expand your business, purchase an asset you need, etc.)
• Use the excess money to pay down operating loans (and possibly term loans)
• Invest the excess money in financial investments
• Distribute some of the cash as dividends or owner draws
• Adjust planned amounts in schedules (decrease prices, decrease sales amounts, increase expenses)
• Simultaneously adjust your goals, strategies, and plans in your written and financial projections of your plan to make your projected financial statements realistic
• Analyze your projected financial statements and develop plans to correct the elements that are unrealistic and undesirable
• For example, if your planned start-up financing is too high to be realistic, you might choose to downscale some elements
• On the expense side, you might plan to start with a smaller facility, fewer employees, less inventory, and different advertising methods. On the revenue side, you might project lower sales because of your smaller facility, fewer employees, and so on.
• You might also plan to finance some of your expansion through retained earnings rather than by taking out a large initial loan or by giving up a higher amount of ownership to an investor.
• Continually adjust the written and financial sections of your draft plan to reflect your new goals, strategies, and plans. This will be an iterative process since everything is connected and each change will have a ripple effect throughout your plan.
• Adjust the amounts in your schedules to reflect your planned changes (increase prices, increase sales amounts, decrease expenses)
• Use a series of ratio analyses as you incorporate your new goals, strategies, and plans
• Continually compare your ratios to industry average ratios
• Continually compare your ratios to what is expected and desirable for a business like yours
• Continually adjust the written and the financial parts of your plan until your ratios are desirable and realistic relative to industry standards
Making the Business Plan Appeal to Stakeholders and Desirable to the Entrepreneur
You should now have a second full draft of your business plan. It should be much more realistic than your first draft, but is it unlikely to be desirable to you as an owner or appealing to your potential investors. The purpose of this stage is to retain, and possibly improve, the realism of your plan while making it desirable and appealing.
• Determine your medium- and longer- term goals for your business as they relate to what you want to get out of it
• Based on your goals and on the amount of financing you require, identify the most desired sources of financing for your venture and incorporate those into your plan to indicate how you will meet your financing needs
• As you fulfill the following requirements, incorporate all of the needed elements in your business plan to attract your targeted investors and make them want to invest in your company
• As you identify and analyze your critical success factors by completing what-if analyses on your financial spreadsheets, continue to simultaneously adjust your goals, strategies, and plans in your written and financial projections until
• you are satisfied that you are prepared to deal with issues that will affect your critical success factors, and
• your projected cash flow statements, income statements, and balance sheets are realistic, consistent with healthy industry norms, and meet realistic expectations and aspirations for a healthy business
• Use a copy of your spreadsheets and change some key numbers to see what happens
• For example, you might discover that you are particularly vulnerable if your sales end up being less than you had expected (and/or challenged if sales end up being higher than expected). Sales levels, then, is one critical success factor.
• Determine what the impact would be on your business if the critical success factors are impacted in a way you had not planned on
• For example, when you examine sales as a critical success factor, you might discover that if sales are 3% less than you had planned (maybe because of an economic downturn or the emergence of a new competitor), your entire profits evaporate
• It might also be true that you will run into cash flow or capacity problems if your sales end up being higher than you are planning for
• Decide whether you need to make adjustments to your goals, strategies, and plans in your business plan to reduce your vulnerability to changes to the critical success factors, or whether you can instead adjust your goals, strategies, and plans to prepare for any changes that might occur to the critical success factors
• For example, you might decide to change the pricing, distribution, and promotions strategies in your business plan so that you would still break even if your sales levels were 8% less than expected
• Alternatively, instead of changing your marketing strategy in your plan, you could describe sales levels as a critical success factor and include a description of how and at what point you will implement another strategy if sales levels are not as expected, and describe what your strategy is
• Decide how to present your analysis of your critical success factors
• If appropriate for your business, you can include three sets of projected financial statements in your business plan: most likely, optimistic, and pessimistic
Finishing the Business Plan
• Revise your goals section to ensure the included goals will best meet your purposes and will resonate with your target readers
• Note: your goals will have changed dramatically between when you first wrote them and how they should look once the plan is completed. Although not required, it can be effective to follow each goal with a note about where in the plan your strategies are located for achieving that goal.
• Write your executive summary
• Proofread to ensure that the written and financial parts of the plan are completely consistent
• Proofread to remove spelling, grammar, formatting, calculation, or other errors
• If required, have a skilled proofreader complete this task for you or with you
• Write a letter of transmittal and later customize it for targeted readers
Prepare to Pitch and Present your Business Plan
• Prepare and practice your pitch. Be clear on why you are pitching your plan and customize it to meet those goals
• Prepare a presentation using a tool like PowerPoint to use if you are asked to more formally present your plan
• Always have business cards with you to give to those who express an interest in your business and who you want to connect with later
03: 1: Appendix B - Business Plan Template
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04: 1: Appendix C - Business Plan Excel Template
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References
Barney, J. B. (1997). Gaining and sustaining competitive advantage. Reading, MA: Addison-Wesley.
Barney, J. B., & Hesterly, W. S. (2006). Strategic management and competitive advantage: Concepts and cases. Upper Saddle River, NJ: Pearson/Prentice Hall.
Business Development Bank of Canada. (2016a). Start-up financing. Retrieved from www.bdc.ca/en/about/who-we-are/pages/default.aspx
Business Development Bank of Canada. (2016b). Who we are. Retrieved from www.bdc.ca/en/about/who-we-are/pages/default.aspx
Chatterjee, S. (2013). Simple rules for designing business models. California Management Review, 55(2), 97-124.
Hindle, K., & Mainprize, B. (2006). A systematic approach to writing and rating entrepreneurial business plans. The Journal of Private Equity, 9(3), 7-23.
Magretta, J. (2002). Why business models matter. Harvard Business Review, 80(5), 86-92.
Osterwalder, A., Pigneur, Y., & Clark, T. (2010). Business model generation: A handbook for visionaries, game changers, and challengers. Hoboken, NJ: Wiley.
Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance. New York: Free Press.
Porter, M. E. (1996). What is strategy? Harvard Business Review, 74(6), 61-78.
Ries, E. (2011). The lean startup: How today’s entrepreneurs use continuous innovation to create radically successful businesses. New York: Crown Business.
Vesper, K. H. (1996). New venture experience (revised ed.). Seattle, WA: Vector Books. | textbooks/biz/Business/Entrepreneurship/Book%3A_Business_Plan_Development_Guide_(Swanson)/zz%3A_New_Page/02%3A_1%3A_Appendix_A_%E2%80%93_Business_Plan_Development_Checklist_and_Project_Planner.txt |
Whilst there is no universally accepted definition of entrepreneurship, it is fair to say that it is multi-dimensional. It involves analyzing people and their actions together with the ways in which they interact with their environments, be these social, economic, or political, and the institutional, policy, and legal frameworks that help define and legitimize human activities. – Blackburn (2011, p. xiii)
Entrepreneurship involves such a range of activities and levels of analysis that no single definition is definitive. – Lichtenstein (2011, p. 472)
It is complex, chaotic, and lacks any notion of linearity. As educators, we have the responsibility to develop our students’ discovery, reasoning, and implementation skills so they may excel in highly uncertain environments. – Neck and Greene (2011, p. 55)
Learning Objectives
• Examine the challenges associated with defining the concepts of entrepreneur and entrepreneurship
• Discuss how the evolution of entrepreneurship thought has influenced how we view the concept of entrepreneurship today
• Discuss how the list of basic questions in entrepreneurship research can be expanded to include research inquiries that are important in today’s world
• Discuss how the concepts of entrepreneurial uniqueness, entrepreneurial personality traits, and entrepreneurial cognitions can help society improve its support for entrepreneurship
• Apply the general venturing script to the study of entrepreneurship
• Overview
This chapter provides you with an overview of entrepreneurship and of the language of entrepreneurship. The challenges associated with defining entrepreneur and entrepreneurship are explored, as is an overview of how entrepreneurship can be studied.
The objective is to enable you to apply current concepts in entrepreneurship to the evaluation of entrepreneurs, their ventures, and the venturing environment. You will develop skills, including the capability to add value in the new venture sector of the economy. You will acquire and practice evaluation skills useful in consulting, advising, and making new venture decisions.
Entrepreneurs and Entrepreneurship
Considerations Influencing Definitions of Entrepreneur and Entrepreneurship
It is necessary to be able to determine exactly who entrepreneurs are before we can, among other things, study them, count them, provide special loans for them, and calculate how and how much they contribute to our economy.
• Does someone need to start a business from scratch to be called an entrepreneur?
• Can we call someone an entrepreneur if they bought an ongoing business from someone else or took over the operations of a family business from their parents?
• If someone starts a small business and never needs to hire employees, can they be called an entrepreneur?
• If someone buys a business but hires professional managers to run it so they don’t have to be involved in the operations, are they an entrepreneur?
• Is someone an entrepreneur if they buy into a franchise so they can follow a well-established formula for running the operation?
• Is someone an entrepreneur because of what they do or because of how they think?
• Can someone be an entrepreneur without owning their own business?
• Can a person be an entrepreneur because of the nature of the work that they do within a large corporation?
It is also necessary to fully understand what we mean by entrepreneurship before we can study the concept.
Gartner (1990) identified 90 attributes that showed up in definitions of entrepreneurs and entrepreneurship provided by entrepreneurs and other experts in the field. The following are a few of these attributes:
• Innovation – Does a person need to be innovative to be considered an entrepreneur? Can an activity be considered to be entrepreneurial if it is not innovative?
• Activities – What activities does a person need to do to be considered an entrepreneur?
• Creation of a new business – Does someone need to start a new business to be considered to be an entrepreneur, or can someone who buys a business, buys into a franchise, or takes over an existing family business be considered an entrepreneur?
• Starts an innovative venture within an established organization – Can someone who works within an existing organization that they don’t own be considered an entrepreneur if they start an innovative venture for their organization?
• Creation of a not-for-profit business – Can a venture be considered to be entrepreneurial if it is a not-for-profit, or should only for-profit businesses be considered entrepreneurial?
After identifying the 90 attributes, Gartner (1990) went back to the entrepreneurs and other experts for help in clustering the attributes into themes that would help summarize what people concerned with entrepreneurship thought about the concept. He ended up with the following eight entrepreneurship themes:
1. The Entrepreneur – The entrepreneur theme is the idea that entrepreneurship involves individuals with unique personality characteristics and abilities (e.g., risk-taking, locus of control, autonomy, perseverance, commitment, vision, creativity). Almost 50% of the respondents rated these characteristics as not important to a definition of entrepreneurship (Gartner, 1990, p. 21, 24).
• “The question that needs to be addressed is: Does entrepreneurship involve entrepreneurs (individuals with unique characteristics)?” (Gartner, 1990, p. 25).
2. Innovation – The innovation theme is characterized as doing something new as an idea, product, service, market, or technology in a new or established organization. The innovation theme suggests that innovation is not limited to new ventures, but recognized as something which older and/or larger organizations may undertake as well (Gartner, 1990, p. 25). Some of the experts Gartner questioned believed that it was important to include innovation in definitions of entrepreneurship and others did not think it was as important.
• “Does entrepreneurship involve innovation?” (Gartner, 1990, p. 25).
3. Organization Creation – The organization creation theme describes the behaviors involved in creating organizations. This theme described acquiring and integrating resource attributes (e.g., Brings resources to bear, integrates opportunities with resources, mobilizes resources, gathers resources) and attributes that described creating organizations (new venture development and the creation of a business that adds value). (Gartner, 1990, p. 25)
• “Does entrepreneurship involve resource acquisition and integration (new venture creation activities)?” (Gartner, 1990, p. 25)
4. Creating Value – This theme articulated the idea that entrepreneurship creates value. The attributes in this factor indicated that value creation might be represented by transforming a business, creating a new business growing a business, creating wealth, or destroying the status quo.
• “Does entrepreneurship involve creating value?” (Gartner, 1990, p. 25).
5. Profit or Nonprofit
• “Does entrepreneurship involve profit-making organizations only” (Gartner, 1990, p. 25)?
6. Growth
• Should a focus on growth be a characteristic of entrepreneurship?
7. Uniqueness – This theme suggested that entrepreneurship must involve uniqueness. Uniqueness was characterized by attributes such as a special way of thinking, a vision of accomplishment, ability to see situations in terms of unmet needs, and creates a unique combination.
• “Does entrepreneurship involve uniqueness?” (Gartner, 1990, p. 26).
8. The Owner-Manager – Some of the respondents questioned by Gartner (1990) did not believe that small mom-and-pop types of businesses should be considered to be entrepreneurial. Some respondents felt that an important element of a definition of entrepreneurship was that a venture be owner-managed.
• To be entrepreneurial, does a venture need to be owner-managed?
Examples of Definitions of Entrepreneur
An entrepreneur can be described as “one who creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying significant opportunities and assembling the necessary resources to capitalize on them” (Zimmerer & Scarborough, 2008, p. 5).
An entrepreneur is “one who organizes, manages, and assumes the risks of a business or enterprise” (Entrepreneur, n.d.).
Examples of Definitions of Entrepreneurship
Entrepreneurship can be defined as a field of business that
seeks to understand how opportunities to create something new (e.g., new products or services, new markets, new production processes or raw materials, new ways of organizing existing technologies) arise and are discovered or created by specific persons, who then use various means to exploit or develop them, thus producing a wide range of effects (Baron, Shane, & Reuber, 2008, p. 4)
A concise definition of entrepreneurship “is that it is the process of pursuing opportunities without limitation by resources currently in hand” (Brooks, 2009, p. 3) and “the process of doing something new and something different for the purpose of creating wealth for the individual and adding value to society” (Kao, 1993, p. 70)
The Evolution of Entrepreneurship Thought
This section includes an overview of how entrepreneurship has evolved to the present day.
The following timeline shows some of the most influential entrepreneurship scholars and the schools of thought (French, English, American, German, and Austrian) their perspectives helped influence and from which their ideas evolved. Schools of thought are essentially groups of people who might or might not have personally known each other, but who shared common beliefs or philosophies.
Figure 1 – Historical and Evolutionary Entrepreneurship Thought (Illustration by Lee A. Swanson)
The Earliest Entrepreneurship
The function, if not the name, of the entrepreneur is probably as old as the institutions of barter and exchange. But only after economic markets became an intrusive element of society did the concept take on pivotal importance. Many economists have recognized the pivotal role of the entrepreneur in a market economy. Yet despite his central importance in economic activity, the entrepreneur has been a shadowy and elusive figure in the history of economic theory (Hebert & Link, 2009, p. 1).
Historically those who acted similarly to the ways we associate with modern day entrepreneurs – namely those who strategically assume risks to seek economic (or other) gains – were military leaders, royalty, or merchants. Military leaders planned their campaigns and battles while assuming significant risks, but by doing so they also stood to gain economic benefits if their strategies were successful. Merchants, like Marco Polo who sailed out of Venice in the late 1200s to search for a trade route to the Orient, also assumed substantial risks in the hope of becoming wealthy (Hebert & Link, 2009).
The entrepreneur, who was also called adventurer, projector, and undertaker during the eighteenth century, was not always viewed in a positive light (Hebert & Link, 2009).
Development of Entrepreneurship as a Concept
Risk and Uncertainty
Richard Cantillon (1680-1734) was born in France and belonged to the French School of thought although he was an Irish economist. He appears to be the person who introduced the term entrepreneur to the world. “According to Cantillon, the entrepreneur is a specialist in taking on risk, ‘insuring’ workers by buying their output for resale before consumers have indicated how much they are willing to pay for it” (Casson & Godley, 2005p. 26). The workers’ incomes are mostly stable, but the entrepreneur risks a loss if market prices fluctuate.
Cantillon distinguished entrepreneurs from two other classes of economic agents; landowners, who were financially independent, and hirelings (employees) who did not partake in the decision-making in exchange for relatively stable incomes through employment contracts. He was the first writer to provide a relatively refined meaning for the term entrepreneurship. Cantillon described entrepreneurs as individuals who generated profits through exchanges. In the face of uncertainty, particularly over future prices, they exercise business judgment. They purchase resources at one price and sell their product at a price that is uncertain, with the difference representing their profit (Chell, 2008; Hebert & Link, 2009).
Farmers were the most prominent entrepreneurs during Cantillon’s lifetime, and they interacted with “arbitrageurs” – or middlemen between farmers and the end consumers – who also faced uncertain incomes, and who were also, therefore, entrepreneurs. These intermediaries facilitated the movement of products from the farms to the cities where more than half of the farm output was consumed. Cantillon observed that consumers were willing to pay a higher price per unit to be able to purchase products in the smaller quantities they wanted, which created the opportunities for the intermediaries to make profits. Profits were the rewards for assuming the risks arising from uncertain conditions. The markets in which profits were earned were characterized by incomplete information (Chell, 2008; Hebert & Link, 2009).
Adolph Reidel (1809-1872), form the German School of thought, picked up on Cantillon’s notion of uncertainty and extended it to theorize that entrepreneurs take on uncertainty so others, namely income earners, do not have to be subject to the same uncertainty. Entrepreneurs provide a service to risk-averse income earners by assuming risk on their behalf. In exchange, entrepreneurs are rewarded when they can foresee the impacts of the uncertainty and sell their products at a price that exceeds their input costs (including the fixed costs of the wages they commit to paying) (Hebert & Link, 2009).
Frank Knight (1885-1972) founded the Chicago School of Economics and belonged to the American School of thought. He refined Cantillon’s perspective on entrepreneurs and risk by distinguishing insurable risk as something that is separate from uncertainty, which is not insurable. Some risks can be insurable because they have occurred enough times in the past that the expected loss from such risks can be calculated. Uncertainty, on the other hand, is not subject to probability calculations. According to Knight, entrepreneurs can’t share the risk of loss by insuring themselves against uncertain events, so they bear these kinds of risks themselves, and profit is the reward that entrepreneurs get from assuming uninsurable risks (Casson & Godley, 2005).
Distinction Between Entrepreneur and Manager
Jean-Baptiste Say (1767-1832), also from the French School, advanced Cantillon’s work, but added that entrepreneurship was essentially a form of management. Say “put the entrepreneur at the core of the entire process of production and distribution” (Hebert & Link, 2009, p. 17). Say’s work resulted in something similar to a general theory of entrepreneurship with three distinct functions; “scientific knowledge of the product; entrepreneurial industry – the application of knowledge to useful purpose; and productive industry – the manufacture of the item by manual labour” (Chell, 2008, p. 20).
Frank Knight made several contributions to entrepreneurship theory, but another of note is how he distinguished an entrepreneur from a manager. He suggested that a manager crosses the line to become an entrepreneur “when the exercise of his/her judgment is liable to error and s/he assumes the responsibility for its correctness” (Chell, 2008, p. 33). Knight said that entrepreneurs calculate the risks associated with uncertain business situations and make informed judgments and decisions with the expectation that – if they assessed the situation and made the correct decisions – they would be rewarded by earning a profit. Those who elect to avoid taking these risks choose the relative security of being employees (Chell, 2008).
Alfred Marshall (1842-1924), from the English School of thought, was one of the founders of neoclassical economics. His research involved distinguishing between the terms capitalist, entrepreneur, and manager. Marshall saw capitalists as individuals who “committed themselves to the capacity and honesty of others, when he by himself had incurred the risks for having contributed with the capital” (Zaratiegui & Rabade, 2005, p. 775). An entrepreneur took control of money provided by capitalists in an effort to leverage it to create more money; but would lose less if something went wrong then would the capitalists. An entrepreneur, however, risked his own reputation and the other gains he could have made by pursuing a different opportunity.
Let us suppose that two men are carrying on smaller businesses, the one working with his own, the other chiefly with borrowed capital. There is one set of risks which is common to both; which may be described as the trade risks of the particular business … But there is another set of risks, the burden of which has to be borne by the man working with borrowed capital, and not by the other; and we may call them personal risks (Marshall, 1961, p. 590; Zaratiegui & Rabade, 2005, p. 776).
Marshall recognized that the reward capitalists received for contributing capital was interest income and the reward entrepreneurs earned was profits. Managers received a salary and, according to Marshall, fulfilled a different function than either capitalists or entrepreneurs – although in some cases, particularly in smaller firms, one person might be both an entrepreneur and a manager. Managers “were more inclined to avoid challenges, innovations and what Schumpeter called the ‘perennial torment of creative destruction’ in favour of a more tranquil life” (Zaratiegui & Rabade, 2005, p. 781). The main risks they faced from firm failure were to their reputations or to their employment status. Managers had little incentive to strive to maximize profits (Zaratiegui & Rabade, 2005).
Amasa Walker (1799-1875) and his son Francis Walker (1840-1897) were from the American School of thought, and they helped shape an American perspective of entrepreneurship following the Civil War of 1861-1865. These scholars claimed that entrepreneurs created wealth, and thus played a different role than capitalists. They believed that entrepreneurs had the power of foresight and leadership qualities that enabled them to organize resources and inject energy into activities that create wealth (Chell, 2008).
Entrepreneurship versus Entrepreneur
Adam Smith (1723-1790), from the English School of thought, published An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. In a departure from the previous thought into entrepreneurship and economics, Smith did not dwell on a particular class of individual. He was concerned with studying how all people fit into the economic system. Smith contended that the economy was driven by self-interest in the marketplace (Chell, 2008).
Also from the English School, David Ricardo (1772-1823) was influenced by Smith, Say, and others. His work focused on how the capitalist system worked. He explained how manufacturers must invest their capital in response to the demand for the products they produce. If demand decreases, manufacturers should borrow less and reduce their workforces. When demand is high, they should do the reverse (Chell, 2008).
Carl Menger (1840-1921), from the Austrian School of thought, ranked goods according to their causal connections to human satisfaction. Lower order goods include items like bread that directly satisfy a human want or need like hunger. Higher order goods are those more removed from satisfying a human need. A second order good is the flour that was used to make the bread. The grain used to make the flour is an even higher order good. Entrepreneurs coordinate these factors of production to turn higher order goods into lower order goods that more directly satisfy human wants and needs (Hebert & Link, 2009).
Menger (1950 [1871], p. 160) established that entrepreneurial activity includes: (a) obtaining information about the economic situation, (b) economic calculation – all the various computations that must be made if a production process is to be efficient, (c) the act of will by which goods of higher order are assigned to a particular production process, and (d) supervising the execution of the production plan so that it may be carried through as economically as possible (Hebert & Link, 2009, p. 43).
Entrepreneurship and Innovation
Jeremy Bentham (1748-1832), from the English School of thought, considered entrepreneurs to be innovators. They “depart from routine, discover new markets, find new sources of supply, improve existing products and lower the costs of production” (Chell, 2008).
Joseph Schumpeter’s (1883-1950) parents were Austrian, he studied at the University of Vienna, conducted research at the University of Graz, served as Austria’s Minister of Finance, and was the president of a bank in the country. Because of the rise of Hitler in Europe, he went to the United States and conducted research at Harvard until he retired in 1949. Because of this, he is sometimes associated with the American School of thought on entrepreneurship (Chell, 2008).
Whereas Menger saw entrepreneurship as occurring because of economic progress, Schumpeter took the opposite stance. Schumpeter saw economic activity as leading to economic development (Hebert & Link, 2009). Entrepreneurs play a central role in Schumpeter’s theory of economic development, and economic development can occur when the factors of production are assembled in new combinations.
Schumpeter (1934) viewed innovation as arising from new combinations of materials and forces. He provided the following five cases of new combinations.
1. The introduction of a new good – that is one with which consumers are not yet familiar – or of a new quality of good.
2. The introduction of a new method of production, that is one not yet tested by experience in the branch of manufacture concerned, which need by no means be founded upon a discovery scientifically new, and can also exist in a new way of handling a commodity commercially.
3. The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before.
4. The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created.
5. The carrying out of the new organisation of any industry, like the creation of a monopoly position … or the breaking up of a monopoly position (Schumpeter, 1934, p. 66).
Another concept popularized by Schumpeter – in addition to the notion of new combinations – was creative destruction. This was meant to indicate that the existing ways of doing things need to be dismantled – to be destroyed – to enable a transformation through innovation to a new way of doing things. Entrepreneurs use innovation to disrupt how things are done and to establish a better way of doing those things.
Basic Questions in Entrepreneurship Research
According to Baron (2004a), there are three basic questions of interest in the field of entrepreneurship:
1. Why do some persons but not others choose to become entrepreneurs?
2. Why do some persons but not others recognize opportunities for new products or services that can be profitably exploited?
3. Why are some entrepreneurs so much more successful than others (Baron, 2004a, p. 221)?
To understand where these foundational research questions came from and what their relevance is today, it is useful to study what entrepreneurship research has uncovered so far.
Entrepreneurial Uniqueness
Efforts to teach entrepreneurship have included descriptions of entrepreneurial uniqueness based on personality, behavioural, and cognitive traits (Chell, 2008; Duening, 2010).
• Personality characteristics
• Three personality characteristics of entrepreneurs that are often cited are:
• Need for achievement
• Internal locus of control (a belief by an individual that they are in control of their own destiny)
• Risk-taking propensity
• Behavioural traits
• Cognitive skills of successful entrepreneurs
Past studies of personality characteristics and behavioural traits have not been overly successful at identifying entrepreneurial uniqueness.
As it turned out, years of painstaking research along this line has not borne significant fruit. It appears that there are simply not any personality characteristics that are either essential to, or defining of, entrepreneurs that differ systematically from non-entrepreneurs…. Again, investigators proposed a number of behavioural candidates as emblematic of entrepreneurs. Unfortunately, this line of research also resulted in a series of dead ends as examples of successful entrepreneurial behaviours had equal counterparts among samples of non-entrepreneurs. As with the personality characteristic school of thought before it, the behavioural trait school of thought became increasingly difficult to support (Duening, 2010, p. 4-5).
This shed doubt on the value of trying to change personality characteristics or implant new entrepreneurial behaviours through educational programs in an effort to promote entrepreneurship.
New research, however, has resurrected the idea that there might be some value in revisiting personality traits as a topic of study. Additionally, Duening (2010) and has suggested that an important approach to teaching and learning about entrepreneurship is to focus on the “cognitive skills that successful entrepreneurs seem uniquely to possess and deploy” (p. 2). In the next sections we consider the new research on entrepreneurial personality traits and on entrepreneurial cognitions.
Entrepreneurial Personality Traits
While acknowledging that research had yet to validate the value of considering personality and behaviour traits as ways to distinguish entrepreneurs from non-entrepreneurs or unsuccessful ones, Chell (2008) suggested that researchers turn their attention to new sets of traits including: “the proactive personality, entrepreneurial self-efficacy, perseverance and intuitive decision-making style. Other traits that require further work include social competence and the need for independence” (p. 140).
In more recent years scholars have considered how the Big Five personality traits – extraversion, agreeableness, conscientiousness, neuroticism (sometimes presented as emotional stability), and openness to experience (sometimes referred to as intellect) – might be used to better understand entrepreneurs. It appears that the Big Five traits might be of some use in predicting entrepreneurial success. Research is ongoing in this area, but in one example, Caliendo, Fossen, and Kritikos (2014) studied whether personality constructs might “influence entrepreneurial decisions at different points in time” (p. 807), and found that “high values in three factors of the Big Five approach—openness to experience, extraversion, and emotional stability (the latter only when we do not control for further personality characteristics)—increase the probability of entry into self-employment” (p. 807). They also found “that some specific personality characteristics, namely risk tolerance, locus of control, and trust, have strong partial effects on the entry decision” (p. 807). They also found that people who scored higher on agreeableness were more likely to exit their businesses, possibly meaning that people with lower agreeableness scores might prevail longer as entrepreneurs. When it came to specific personality traits, their conclusions indicated that those with an external locus of control were more likely to stop being self-employed after they had run their businesses for a while. There are several implications for research like this, including the potential to better understand why some entrepreneurs behave as they do based upon their personality types and the chance to improve entrepreneurship education and support services.
Entrepreneurial Cognitions
It is only fairly recently that entrepreneurship scholars have focused on cognitive skills as a primary factor that differentiates successful entrepreneurs from non-entrepreneurs and less successful entrepreneurs. This approach deals with how entrepreneurs think differently than non-entrepreneurs (Duening, 2010; Mitchell et al., 2007).
Entrepreneurial cognitions are the knowledge structures that people use to make assessments, judgments or decisions involving opportunity evaluation and venture creation and growth. In other words, research in entrepreneurial cognition is about understanding how entrepreneurs use simplifying mental models to piece together previously unconnected information that helps them to identify and invent new products or services, and to assemble the necessary resources to start and grow businesses (Mitchell, Busenitz, et al., 2002, p. 97).
Mitchell, Smith, et al. (2002) provided the example of how the decision to create a new venture (dependent variable) was influenced by three sets of cognitions (independent variables). They described these cognitions as follows:
Arrangements cognitions are the mental maps about the contacts, relationships, resources, and assets necessary to engage in entrepreneurial activity; willingness cognitions are the mental maps that support commitment to venturing and receptivity to the idea of starting a venture; ability cognitions consist of the knowledge structures or scripts (Glaser, 1984) that individuals have to support the capabilities, skills, norms, and attitudes required to create a venture (Mitchell et al., 2000). These variables draw on the idea that cognitions are structured in the minds of individuals (Read, 1987), and that these knowledge structures act as “scripts” that are the antecedents of decision making (Leddo & Abelson, 1986, p. 121; Mitchell, Smith, et al., 2002, p. 10)
Cognitive Perspective to Understanding Entrepreneurship
According to Baron (2004a), by taking a cognitive perspective, we might better understand entrepreneurs and the role they play in the entrepreneurial process.
The cognitive perspective emphasizes the fact that everything we think, say, or do is influenced by mental processes—the cognitive mechanisms through which we acquire store, transform, and use information. It is suggested here that this perspective can be highly useful to the field of entrepreneurship. Specifically, it can assist the field in answering three basic questions it has long addressed: (1) Why do some persons but not others choose to become entrepreneurs? (2) Why do some persons but not others recognize opportunities for new products or services that can be profitably exploited? And (3) Why are some entrepreneurs so much more successful than others (Baron, 2004a, p. 221-222)?
Baron (2004a), illustrated how cognitive differences between people might explain why some people end up pursuing entrepreneurial pursuits and others do not. For example, prospect theory (Kahneman & Tversky, 1977) and other decision-making or behavioural theories might be useful in this regard. Research into cognitive biases might also help explain why some people become entrepreneurs.
Baron (2004a) also revealed ways in which cognitive concepts like signal detection theory, regulation theory, and entrepreneurial might help explain why some people are better at entrepreneurial opportunity recognition. He also illustrated how some cognitive models and theories – like risk perception, counterfactual thinking, processing style, and susceptibility to cognitive errors – might help explain why some entrepreneurs are more successful than others.
Cognitive Perspective and the Three Questions
• Why do some and not others choose to become entrepreneurs?
• Prospect Theory
• Cognitive Biases
• Why are some people better at recognizing entrepreneurial opportunities?
• Signal Detection Theory
• Regulation Theory
• Entrepreneurial Alertness
• Why are some people more successful at entrepreneurship than others?
• Risk Perception
• Counterfactual Thinking
• Processing Style
• Susceptibility to Cognitive Errors
Entrepreneurial Scripts
• Why do some people, or groups of people, achieve high performance economic results while others do not? Is there a relationship between the attainment of high performance economic results and transaction cognitions (a type of economic thought pattern)?
• “Cognition has emerged as an important theoretical perspective for understanding and explaining human behavior and action” (Dutta & Thornhill, 2008, p. 309).
• Cognitions are all processes by which sensory input is transformed, reduced, elaborated, stored, recovered, and used (Neisser, 1976).
• Cognitions lead to the acquisition of knowledge, and involve human information processing.
• Knowledge structure/script:
• Is a mental model, or information processing short-cut that can give information form and meaning, and enable subsequent interpretation and action.
• The subsequent interpretation and actions can result in expert performance … they can also result in thinking errors.
• Entrepreneurial scripting exercises are critical to giving learners an explicit understanding of:
• the processes that transfer expertise, and
• the actual expertise itself.
• The structure of scripts (based upon Mitchell (2000)
• Scripts are generally framed as a linear sequence of steps, usually with feedback loops, that can explain how to achieve a particular task – perhaps like developing a business plan.
• Sometimes scripts can be embedded within other scripts. For example, within a general venturing script that outlines the sequences of activities that can lead to a successful business launch, there will probably be sub-scripts describing how entrepreneurs can search for ideas, screen those ideas until one is selected, plan how to launch a sustainable business based upon that idea and including securing the needed financial resources, setting up the business, starting it, effectively managing its ongoing operations, and managing the venture such that that entrepreneur can extract the value that they desire from the enterprise at the times and in the ways they want it.
• The most effective scripts include an indication of the norms that outline performance standards and indicate how to determine when any step in the sequence has been properly completed.
General Venturing Script
Generally, entrepreneurship is considered to consist of the following elements, or subscripts (Brooks, 2009; Mitchell, 2000).
• Searching
• Idea Screening
• Planning and Financing
• Set-Up
• Start-Up
• Ongoing Operations
• Harvest
Searching (also called idea formulation or opportunity recognition)
• This script begins when a person decides they might be a potential entrepreneur (or when an existing entrepreneur decides they need more ideas in their idea pool).
• This script ends when there are a sufficient number of ideas in the idea pool.
• The scripting process involves a logical flow of steps (including feedback loops, actions which must occur in sequence, and actions which can be implemented at the same time as other actions) designed to:
• overcome mental blockages to creativity which might hinder this person’s ability to identify viable ideas;
• implement steps to identify a sufficient number of ideas (most likely 5 or more) which the person is interested in investigating to determine whether they might be viable given general criteria such as this person’s personal interests and capabilities;
Idea Screening (also called concept development)
• This script begins when the person with the idea pool is no longer focusing on adding new ideas to it; but is instead taking steps to choose the best idea for them given a full range of specific criteria.
• This script ends when one idea is chosen from among those in the idea pool.
• The scripting process involves a logical flow of steps to assess the current situation and the trends in the following areas. The right tools must be used for each level of analysis.
• Do the current societal-level factors indicate that a particular idea should be considered for implementation? Do the trends in these societal-level factors indicate that the idea will be viable and sustainable into the future?
• Evaluate the political, economic, social, technological, environmental, and legal climates
• Do the current industry/market-level factors indicate an idea is viable? Are the trends in these factors supportive of the idea?
• Evaluate the degree of competitiveness in the industry, the threat of substitutes emerging, the threat of new entrants to the industry, the degree of bargaining power of buyers, and the degree of bargaining power of suppliers.
• Do a market profile analysis to assess the attractiveness of the position within the industry that the potential venture will occupy.
• Do the current firm-level factors support the pursuit of the idea?
• Formulate and evaluate potential strategies to leverage organizational strengths, overcome/minimize weaknesses, take advantage of opportunities, and overcome/minimize threats;
• Complete financial projections and analyze them to evaluate financial attractiveness;
• Assess the founder fit with the ideas;
• Evaluate the core competencies of the organization relative to the idea;
• Assess advice solicited from trusted advisers
Planning and Financing (also called resource determination and acquisition)
• This script begins when the idea screening script ends and when the person begins making the plans to implement the single idea chosen from the idea pool, which is done in concert with securing financing to implement the venture idea.
• This script ends when sufficient business planning has been done and when adequate financing has been arranged.
• The scripting process involves a logical flow of steps to develop a business plan and secure adequate financing to start the business.
Set-Up (also called launch)
• This script begins when the planning and financing script ends and when the person begins implementing the plans needed to start the business.
• This script ends when the business is ready to start-up.
• The scripting process involves a logical flow of steps, including purchasing and installing equipment, securing the venture location and finishing all the needed renovations, recruiting and hiring any staff needed for start-up, and the many other steps needed to prepare for start-up.
• Start-Up (also called launch)
• This script begins when the set-up script ends and when the business opens and begins making sales.
• This script ends when the business has moved beyond the point where the entrepreneur must continually fight for the business’s survival and persistence. It ends when the entrepreneur can instead shift emphasis toward business growth or maintaining the venture’s stability.
• The scripting process involves a logical flow of steps needed to establish a new venture.
Ongoing Operations (also called venture growth)
• This script begins when the start-up script ends and when the business has established persistence and is implementing growth (or maintenance) strategies.
• This script ends when the entrepreneur chooses to harvest the value they generated with the venture.
• The scripting process involves a logical flow of steps needed to grow (or maintain) a venture.
Studying Entrepreneurship
The following quotations from two preeminent entrepreneurship and entrepreneurship education researchers indicate the growing interest in studies in this field.
Entrepreneurship has emerged over the last two decades as arguably the most potent economic force the world has ever experienced. With that expansion has come a similar increase in the field of entrepreneurship education. The recent growth and development in the curricula and programs devoted to entrepreneurship and new-venture creation have been remarkable. The number of colleges and universities that offer courses related to entrepreneurship has grown from a handful in the 1970s to over 1,600 in 2005 (Kuratko, 2005, p. 577).
Interest in entrepreneurship has heightened in recent years, especially in business schools. Much of this interest is driven by student demand for courses in entrepreneurship, either because of genuine interest in the subject, or because students see entrepreneurship education as a useful hedge given uncertain corporate careers (Venkataraman, 1997, p. 119).
Approaches to Studying Entrepreneurship
Entrepreneurship is a discipline, which means an individual can learn about it, and about how to be an effective entrepreneur. It is a myth that people are born entrepreneurs and that others cannot learn to become entrepreneurs (Drucker, 1985). Kuratko (2005) asserted that the belief previously held by some that entrepreneurship cannot be taught has been debunked, and the focus has shifted to what topics should be taught and how they should be covered.
Solomon (2007) summarized some of the research on what should be covered in entrepreneurship courses, and how it should be taught. While the initial focus was on actions like developing business plans and being exposed to real entrepreneurs, more recently this approach has been supplemented by an emphasis on technical, industry, and personal experience. “It requires critical thinking and ethical assessment and is based on the premise that successful entrepreneurial activities are a function of human, venture and environmental conditions” (p. 172). Another approach “calls for courses to be structured around a series of strategic development challenges including opportunity identification and feasibility analysis; new venture planning, financing and operating; new market development and expansion strategies; and institutionalizing innovation” (p. 172). This involves having students interact with entrepreneurs by interviewing them, having them act as mentors, and learning about their experiences and approaches through class discussions.
Sources of Information for Studying Entrepreneurship
According to Kuratko (2005), “three major sources of information supply the data related to the entrepreneurial process or perspective” (p. 579).
1. Publications (both research-based and those written for the general public)
1. Research-based publications:
1. Academic journals like Entrepreneurship Theory and Practice, Journal of Business Venturing, and Journal of Small Business Management
2. Proceedings of conferences like Proceedings of the Academy of Management and Proceedings of the Administrative Sciences Association of Canada
2. Publications written for practitioners and the general public
1. Textbooks on entrepreneurship
2. Books about entrepreneurship
3. Biographies or autobiographies of entrepreneurs
4. News periodicals like Canadian Business and Profit
5. Trade periodicals like Entrepreneur and Family Business
6. Government publications available through sources like the Enterprise Saskatchewan and Canada-Saskatchewan Business Service Centre (CSBSC) websites and through various government resource centers
2. Direct observation and interaction with practicing entrepreneurs
1. Data might be collected from entrepreneurs and about entrepreneurs through surveys, interviews, or other methods applied by researchers.
3. Speeches and presentations by practicing entrepreneurs | textbooks/biz/Business/Entrepreneurship/Book%3A_Entrepreneurship_and_Innovation_Toolkit_(Swanson)/1.01%3A_Chapter_1__Introduction_to_Entrepreneurship.txt |
Entrepreneurs see ways to put resources and information together in new combinations. They not only see the system as it is, but as it might be. They have a knack for looking at the usual and seeing the unusual, at the ordinary and seeing the extraordinary. Consequently, they can spot opportunities that turn the commonplace into the unique and unexpected. – Mitton (1989, p. 12)
In my opinion, all previous advances in the various lines of invention will appear totally insignificant when compared with those which the present century will witness. I almost wish that I might live my life over again to see the wonders which are at the threshold. – Charles H. Duell, Commissioner, U.S. Office of Patents, 1898-1901 (who has been incorrectly quoted as having said “Everything that can be invented has been invented”)
The significant problems we face cannot be solved at the same level of thinking we were at when we created them. – Albert Einstein
I think there is a world market for maybe five computers. – Thomas Watson, Chairman of IBM, 1943
Learning Objectives
After completing this chapter you will be able to
• Discuss opportunity recognition concepts and methods as developed and/or advocated by leading thinkers like Drucker, Mitchell, Schumpeter, and Vesper
• Describe what design thinking is
• Apply design thinking to develop and assess new venture ideas
Overview
This chapter introduces a sample of perspectives and tools designed to help individuals recognize potential business opportunities. The concept of design thinking is also examined in some detail.
The objective is to help you improve your ability to apply inspiration, ideation, and implementation as part of the design thinking process.
Opportunity Recognition
The following is a discussion of entrepreneurship theorists and practitioners who have developed the concept of opportunity recognition. While the tools introduced in the next sections can be applied for a variety of purposes, they are particularly useful for recognizing new venture opportunities.
Baron
Opportunity recognition is
the active, cognitive process (or processes) through which individuals conclude that they have identified the potential to create something new that has the potential to generate economic value and that is not currently being exploited or developed, and is viewed as desirable in the society in which it occurs (i.e. its development is consistent with existing legal and moral conditions). (Baron, 2004b, p. 52)
Because opportunity recognition is a cognitive process, according to Baron (2004b), people can learn to be more effective at recognizing opportunities by changing the way they think about opportunities and how to recognize them.
Drucker
Systematic innovation involves “monitoring seven sources for innovative opportunity” (Drucker, 1985, p. 35). The first four are internally focused within the business or industry, in that they may be visible to those involved in that organization or sector. The last three involve changes outside the business or industry.
• Internally Focused
• The unexpected (unexpected success, failure, or outside events)
• The incongruity between reality as it actually is and reality as it is assumed to be or as it ought to be
• Innovation based on process need
• Changes in industry structure or market structure that catch everyone unawares
• Externally Focused
• Demographics (population changes)
• Changes in perception, mood, and meaning
• New knowledge, both scientific and nonscientific
Mitchell
One of the components of Mitchell’s (2000) New Venture TemplateTM asks whether the venture being examined represents a new combination. To determine this, he suggests considering two categories of entrepreneurial discovery: scientific discovery and circumstance.
• Scientific Discovery
• Physical/technological insight
• New and valuable way
• Circumstantial Discovery
• Specific knowledge of time, place, or circumstance
• When and what you know
The second set of variables to consider are the market imperfections that can create profit opportunities: excess demand and excess supply. This gives rise to the following four types of entrepreneurial discovery.
• Invention I
• Uses science to exploit excess demand (a market imperfection)
• Becomes an opportunity to discover and apply the laws of nature to satisfy excess demand
• Inventions in one industry have ripple effects in others
• Example: invention of airplane
• Observation
• Circumstances reveal opportunity to exploit excess demand (a market imperfection)
• Not necessarily science-oriented
• Example: airline industry = need for food service for passengers
• Invention II
• Uses science to exploit excess supply (a market imperfection)
• Example: Second most abundant element on earth after oxygen = silicon microchips
• Coordination
• Circumstances reveals opportunity to exploit excess supply (a market imperfection)
• Example: Producer’s capacities to lower prices = Wal-Mart
Schumpeter
Schumpeter’s (1934) five kinds of new combinations (see page 13) can occur within each of the four kinds of entrepreneurial discovery (Mitchell, 2000):
• New or improved good/service
• Distinction between true advances and promotional differences
• New method of production
• Example: assembly line method to automobile production, robotics, agricultural processing
• Opening of a new market
• Global context: Culture, laws, local buyer preferences, business practices, customs, communication, transportation all set up new distribution channels
• Example: Honda created a new market for smaller modestly powered motorbikes
• Conquest of a new source of supply of raw materials
• Enhance availability of products by providing at lower cost
• Enhance availability by making more available without compromising quality
• Reorganization of an industry
Murphy
Murphy (2011) claimed that there was a single-dimensional logic that oversimplified the approach taken to understand entrepreneurial discovery. He was bothered by the notion that entrepreneurs either deliberately searched for entrepreneurial opportunities or they serendipitously discovered them. Murphy’s (2011) multidimensional model of entrepreneurial discovery suggests that opportunities may be identified (a) through a purposeful search; (b) because others provide the opportunity to the entrepreneur; (c) through prior knowledge, entrepreneurial alertness, and means other than a purposeful search; and, (d) through a combination of lucky happenstance and deliberate searching for opportunities.
Vesper
According to experimentation research, entrepreneurial creativity is not correlated with IQ (people with high IQs can be unsuccessful in business and those with lower IQs can be successful as an entrepreneur). Research has also shown that those who practice idea generation techniques can become more creative. The best ideas sometimes come later in the idea-generation process—often in the days and weeks following the application of the idea-generating processes (Vesper, 1996).
Vesper (1996) identified several ways in which entrepreneurs found ideas:
• Prior job
• Recreation
• Chance event
• Answering discovery questions
Although would-be entrepreneurs usually don’t discover ideas by a deliberate searching strategy (except when pursuing acquisitions of ongoing firms), it is nevertheless possible to impute to their discoveries some implicit searching patterns. (Vesper, 1996, p. 60)
Vesper (1996) categorized discovery questions as follows:
• Search questions, which might prompt venture ideas by placing one’s mind into a mode where the subconscious will work to push ideas into the conscious mind
• What is bothering me and what might relieve that bother?
• How could this be made or done differently that it is now?
• What else might I like to have?
• How can I fall the family tradition?
• Questions based on encounters with a potential customer request, someone else’s idea, or another event
• Can I play some role in providing this product or service to a broader market?
• Could there be a way to do this better for the customer?
• Questions based on evaluative reactions to ideas
• Could I do this job on my own instead of as an employee?
• If people elsewhere went for this idea, might they want it here too?
Vesper (1996) also highlighted several mental blocks to departure. He suggested that generating innovative ideas involved two tasks: to depart from what is usual or customary and to apply an effective way to direct this departure. The mental blocks in the way of departure include the following:
• Perceptual blocks
• difficulty viewing things from different perspectives
• seeing only what you expect to see or think what others expect you to see
• Emotional blocks
• intolerance of ambiguity
• preference for judging rather than seeking ideas
• tunnel vision
• insufficient patience
• Cultural blocks
• a belief that reason and logic are superior to feeling, intuition, and other such approaches
• thinking that tradition is preferable to change
• disdain for fantasy, reflection, idea playfulness, humor
• Imagination blocks
• fear of subconscious thinking
• inhibition about some areas of imagination
• Environmental blocks
• distrust of others who might be able to help
• distractions
• discouraging responses from other people
• Intellectual blocks
• lack of information
• incorrect information
• weak technical skills in areas such as financial analysis
• Expressive blocks
• poor writing skills
• inability to construct prototypes
Understanding these mental blocks to departure is a first step in figuring out how to cope with them. Some tactics for departure include the following (Vesper, 1996):
• Trying different ways of looking at and thinking about venture opportunities
• Trying to continually generate ideas about opportunities and how to exploit them
• Seeking clues from business and personal contacts, trade shows, technology licensing offices, and other sources
• Not being discouraged by others’ negative views because many successful innovations were first thought to be impossible to make
• Generating possible solutions to obstacles before stating negative views about them
• Using idea generating tricks like
• Brainstorming
• Considering multiple consequences of possible future events or changes
• Rearranging, reversing, expanding, shrinking, combining, or altering ideas
• Developing scenarios
Design Thinking
Design thinking is a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success – Tim Brown, president and CEO (IDEO, 2015, para. 5)
The Hasso Plattner Institute of Design at Stanford University, called the d.school (http://dschool.stanford.edu/), is an acknowledged leader at promoting design thinking. You can download the Bootcamp Bootleg manual from the d.school website at https://dschool.stanford.edu/resources/the-bootcamp-bootleg. The following description of design thinking is from the IDEO website:
Design thinking is a deeply human process that taps into abilities we all have but get overlooked by more conventional problem-solving practices. It relies on our ability to be intuitive, to recognize patterns, to construct ideas that are emotionally meaningful as well as functional, and to express ourselves through means beyond words or symbols. Nobody wants to run an organization on feeling, intuition, and inspiration, but an over-reliance on the rational and the analytical can be just as risky. Design thinking provides an integrated third way.
The design thinking process is best thought of as a system of overlapping spaces rather than a sequence of orderly steps. There are three spaces to keep in mind: inspiration, ideation, and implementation. Inspiration is the problem or opportunity that motivates the search for solutions. Ideation is the process of generating, developing, and testing ideas. Implementation is the path that leads from the project stage into people’s lives (IDEO, 2015, para. 7-8). | textbooks/biz/Business/Entrepreneurship/Book%3A_Entrepreneurship_and_Innovation_Toolkit_(Swanson)/1.02%3A_Chapter_2__Opportunity_Recognition_and_Design_Thinking.txt |
Since idea generation and screening are relatively less costly stages in the new product development process (in terms of investment in funds, time, personnel, and escalation of commitment), it makes sense to manage the process in the most efficient and effective manner for the organization. – Rochford (1991, p. 287)
The most serious mistakes are not being made as a result of wrong answers. The truly dangerous thing is asking the wrong question. – Peter Drucker
I have no data yet. It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts. – Arthur Conan Doyle
Learning Objectives
After completing this chapter you will be able to
• Apply analytical skills to assess how the nature of entrepreneurial environment can influence entrepreneurial outcomes
• Apply the right tools to analyze each of the societal, industry, market, and firm levels to evaluate entrepreneurial and other business opportunities
Overview
This chapter introduces the idea that there are different types of economies while providing examples of ways to consider how economies can differ. It also introduces the distinct levels of analyses that must be considered while stressing the importance of applying the appropriate tools to conduct the analyses at each level.
Types of Economies
When studying entrepreneurship, it is important to understand the foundations upon which the area of study stands. One way to do this is to consider perspectives on different kinds of economies. In the next sections we will consider two such perspectives. The first describes the idea of the bazaar, firm, and new economies, and the second examines the idea of the sharing economy.
Bazaar, Firm, and New Economies
Entrepreneurship has existed as long as individuals have specialized in the production of a good or service to exchange with other individuals for products they needed, but did not produce themselves. Dana, Etemad, and Wright (2008) distinguished between bazaar-type economies, firm-type economies, and the new economy.
The Bazaar-Type Economy
The Bazaar-type Economy is a social, cultural and economic system in which the physical clustering of vendors facilitates the consumer’s comparative information search, by eliminating displacement time. Business is strongly affected by relationships and networks; relationships and preferential treatment are integral to business. Consumers are not treated equally. Different people pay unlike prices. The price paid and the level of service provided is a function of status and relationships. Products and services are personalised, and this leads to customer loyalty. (Dana et al., 2008, p. 110-111)
Bazaars have been around for thousands of years and, as Dana et al. (2008) note, have several distinctive features:
• It is a way of life, a cultural and social system.
• Although it is a mode for commercial activity, relationships and alliances are the focus of the activities, not the financial transactions.
• The lowest price and the best quality are less important to purchasers because they often consider the vendor as a friend they wish to help and someone who will help them in return.
• Buyers and sellers seek to maintain long-term relationships with each other; there is little or no concern with maximizing profits.
• Vendors do not consider other vendors to be rivals and there is little interest or advantage in differentiating the products offered from those sold by others.
• Prices are established through negotiation, with buyers often making the first offer of a price. Competitive tensions are between buyers and sellers rather than between sellers.
• Once relationships are established (which reduces transaction costs), both buyers and sellers tend to have high degrees of satisfaction with the transactions.
The Firm-Type Economy
The Firm-type Economy is an economic institution in which location is a competitive advantage. In the shopping mall, for instance, an exclusivity clause protects the vendor, limiting competition. The consumer’s comparative information search involves displacement time, and an opportunity cost is involved when seeking perfect information. Business takes place primarily within a set of impersonally defined institutions. The flow of commerce is a function of strategy based on optimisation models. The purpose of transactions is to maximise wealth efficiently, and the means to this is rational and unbiased decision-making that treats buyers as equals. The price paid and the level of service provided is established by the seller. Products and services are standardised, and this leads to efficiency that in turn allows competitive pricing. (Dana et al., 2008, p. 111)
In Canada, we are more familiar with the firm-type economy. Dana et al. (2008) highlighted the following differences between it and the bazaar.
• Firm-consumer transactions are impersonal. The focus is on the interaction between the buyer and the product rather than between the buyer and seller. Product attributes are considered to be important. Relationships between buyers and sellers are trivial and secondary as compared to the transaction itself.
• Firms engage in transactions while attempting to maximize profits through rational decision-making.
• Competition is between sellers who attempt to segment the market based on types of consumers.
• Sellers generally set prices consumers are expected to accept and pay.
• The premise is that firms treat all customers equally.
The New Economy
The New Economy is a cultural and economic system in which the virtual clustering of vendors facilitates the consumer’s comparative information search, by eliminating displacement time. The flow of commerce is strongly affected by relationships and networks; relationships and preferential treatment are integral to business. Consumers are not treated equally. Different people pay unlike prices. The price paid and the level of service provided is a function of status and relationships. Products and services are customized. (Dana et al., 2008, p. 111)
Dana et al. (2008) have observed the following norms they claim are currently in place or are developing:
• Firms no longer treat all consumers equally. Some customers receive special promotional offers, preferential treatment, and other benefits over other customers.
• Differentiation is less evident than it used to be.
• The focus has shifted (back) toward establishing relationships with consumers. Different prices are charged depending upon the nature of the relationship the firm has with the customer.
• There is now less competition than before with former rivals now cooperating through networks and global alliances.
• The internet has become a medium through which transactions occur, reducing searching costs for consumers and, in some cases, inventory handling and production costs for firms. In some cases, consumers suggest the starting price in a negotiation process.
• In many ways, this new “reality is shared with the Bazaar-type Economya social and cultural system, a way of life and a general mode of commercial activity such that most of the flow of commerce is centred on relationships” (Dana et al., 2008, p. 115).
The Sharing Economy – Collaborative Consumption
One trend that has become more prominent of late, perhaps because new information technologies have enabled new developments in this area, involves individuals and businesses seeking new ways to share underutilized resources and develop new business models that focus on selling the use of something rather than selling the item itself. This arises from the desire to generate value from items that are not being used to their full potential by their owners: “Instead of buying and owning products, consumers are increasingly interested in leasing and sharing them. Companies can benefit from the trend toward ‘collaborative consumption’ through creative new approaches to defining and distributing their offerings” (Matzler, Veider, & Kathan, 2015).
For instance, when people have space available in their houses and wish to generate revenue from that unused or underused area, they can use Airbnb Inc. (https://www.airbnb.com/) to rent rooms. The Airbnb business model is interesting in that it facilitates the rental of spaces that it does not own. The service essentially created a new supply of accommodations for travelers in addition to the traditional hotel, motel, and bed and breakfast providers.
Uber (uber.com) provides people who have both a vehicle and available time with the opportunity to turn those resources into revenue by providing rides to people who need them.
Saskatoon CarShare Co-operative (http://saskatooncarshare.com/) purchases cars that its members can book online at any time. It attracts people who only need vehicles occasionally, like when they have to get groceries or run other errands:
It’s a win for you because you save money by not having to own a car.
Being a CarShare member helps you save money. A typical car-owner spends an average of \$6,400 per year. That comes out to about \$533 per month or \$17.64/day to maintain and operate an efficient vehicle (e.g. Honda Civic). By making simple changes to integrate walking, biking, busing and CarSharing into your traveling habits you can save some serious cash. That means you can invest your money in other things, even a down payment for a home!
It is a win for the environment, the city of Saskatoon and your community.
For every CarShare vehicle out there, another five cars are taken off the road. That means fewer vehicles need to be driven, fuelled and maintained. Besides, less vehicles on the road also means less traffic on our streets. Now there’s something City Hall can get behind! (Saskatoon CarShare Co-operative, 2015)
The transaction costsin terms of money and timeused to be very high when someone who needed something had to find a way to connect with someone else who could provide that something, and vice versa. Those transaction costs have plummeted because of the internet, and entrepreneurs are developing new methods for making unused or underused resources available to people who want them. This has formed the basis for the sharing economy.
Matzler et al. (2015) identified six ways that companies could benefit by engaging in the sharing economy:
1. Sell the use of a product rather than ownership of it.
• For instance, Nova Rentals, tool and equipment rental company located in Mississauga, Ontario, rents tool and equipment for construction, landscaping, renovations, and contractors. Their customers range from large construction companies to small contractors, service businesses, and homeowners. (NOVA Rentals, 2015).
2. Provide customers with the opportunity to resell products they purchased.
• Patagonia is an innovative outdoor apparel company operating under the mission to “build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis” (Patagonia, 2015a). Although counter intuitive for many traditional business owners who strive to sell new or replacement products rather than promote less consumption, the company runs a program to “make it easy to buy, sell or trade Patagonia gear” (Patagonia, 2015b, Reuse & Recycle). They explicitly ask their customers to use the tools that Patagonia makes available to “decrease the environmental impact of their stuff over time by repairing it, finding ways to reuse it, recycling it when it’s truly ready. By buying only what they need, customers can reduce their overall consumption in the long run” (Patagonia, 2015b, para. 10). In the past, Patagonia has even partnered with companies like eBay to encourage its customers to resell used Patagonia products rather than throw them out (PR Newswire, 2011).
3. By exploiting unused resources and capacities
• Airbnb essentially takes advantage of unused space to generate revenues for homeowners. An example of exploiting unused capabilities is when homeowners who generate more energy than they need through solar, wind, and other means can sell the excess back to the electricity companies.
4. By providing repair and maintenance services.
• Companies like Patagonia supply repair services or make it easy for customers to repair their own apparel so that fewer new products need to be produced and less is thrown away.
5. By using collaborative consumption to target new customers.
• Wolf Willow Cohousing organized in “January 2008 to explore the possibility of creating a cohousing community in Saskatoon” (Smillie, 2015, para. 1). The idea was to attract a group of like-minded older adults who would collectively developwith the aid of project manager, architect, and construction professionalsa unique condominium housing initiative with self-contained living units and common spaces. In 2012, the 21-unit, four-level, environmentally-conscious, energy-efficient cohousing building located in a central area of Saskatoon opened with unique in-door and outdoor common areas designed specifically for the residents who were involved with designing the facility.
• The Canadian Cohousing Network (Network, 2015) provides a list of “architects, developers, facilitators, development consultants, marketers, trainers, and others” (para. 1) who can deliver services for groups wishing to develop cohousing projects.
6. By developing entirely new business models enabled by collaborative consumption
• New business models, including those supporting the businesses and business types listed above, have emerged to take advantage of the current trend toward collaborative consumption.
Levels of Analyses
When evaluating entrepreneurial opportunitiessometimes called idea screeningan effective process involves assessing the various venture ideas being considered by applying different levels and types of analyses. Entrepreneurs starting ventures and running existing businesses should also regularly analyze their operating environments at the societal, industry, market, and firm-levels. The right tools, though, must be applied at each level of analysis (see Figure 5). It is critical to complete an Essential Initial Researchat all four levels (societal, industry, market, and firm). The initial scan should be high-level, designed to assist in making key decisions (i.e. determining if there is a viable market opportunity for the venture). Secondary scans should be continuously conducted to support each part of the business plan (i.e. operations, marketing, finance). However, information should only be included if it is research-based, relevant, and value-adding. The results from such research (i.e. the Bank of Canada indicates that interest rates will be increasing in the next two years) should support business strategies within the plan (i.e. debt financing may be less favourable than equity financing). Often, obtaining support data (i.e. construction quotes) is not immediate, so plant a flag and move forward. Useful resources may include information from Statistics Canada, Bank of Canada, IBIS World Report, etc.
Societal Level
At a societal level, it is important to understand each of the political, economic, social, technological, environmental, and legal (PESTEL) factorsand, more specifically, the trends affecting those factorsthat will have an impact on a venture based on a particular idea. Some venture ideas might be screened-out and others might be worth pursuing at a particular time because of the trends occurring with those PESTEL factors. Avoid the use of technical jargon that may distract readers (i.e. rivalry among firms) and use simpler language (i.e. competitive environment).
Industry Level
Apply Porter’s (1985) Five Forces Model, or a similar tool designed to assess industry-level factors. This analysis will focus more specifically on the sector of the economy in which you intend to operate. Again, the right analysis tool must be used for the assessment to be effective and avoid technical jargon (i.e. threat of new entrants) and use simpler wording (i.e. difficulty of entering the market) or flip to an analysis of the threat (i.e. strategies to establish and maintain market share).
Market Level
At the market level, use a tool to generate information about the part of the industry in which your business will compete. This tool might be in the form of a set of questions designed to uncover information that you need to know to help develop plans to improve the success of your proposed venture.
Firm Level
At a firm level, both the internal organizational trends and the external market profile trends should both be analyzed. There are several tools for conducting an internal organizational analysis, and normally you should normally apply several of them.
Analyzing the Trends at Each Level
Figure 2 – Different Levels of Analysis (Illustration by Lee A. Swanson)
Analyze Societal-Level Trends
• Use an appropriate tool like the PESTEL model to assess both the current situation and the likely changes as they may affect you.
• Political factors federal & provincial & municipal government policy, nature of political decisions, potential political changes, infrastructure plans, etc.
• Economic factors interest rates, inflation rates, exchange rates, tax rates, GDP growth, health of the economy, etc.
• Social factors population characteristics like age distribution and education levels, changes in demand for types of products and services, etc.
• Technological factors new processes, new products, infrastructure, etc.
• Environmental factors effects of climate/weather, water availability, smog and pollution issues, etc.
• Legal factors labour laws, minimum wage rates, liability issues, etc.
• Assess the impact these trends have upon the venture:
• Do the trends uncover opportunities and threats?
• Can opportunities be capitalized on?
• Can problems be mitigated?
• Can the venture be sustained?
Analyze Industry-Level Trends
• Use an appropriate tool like the Five Forces Model (Porter, 1985) to analyze the industry in which you expect to operate.
• Horizontal relationships threat of substitutes, rivalry among existing competitors, threat of new entrants
• Vertical Relationships bargaining power of buyers, bargaining power of suppliers
Analyze Market-Level Trends
• Use an appropriate method like a market profile analysis to assess the position within the industry in which you expect to operate.
• Determine the answers to questions like the following:
• How attractive is the market?
• In what way are competitors expected to respond if you enter the market?
• What is the current size of the market and how large is it expected to be?
• What are the current and projected growth rates?
• At what stage of the development cycle is the market?
• What level of profits can be expected in the market?
• What proportion of the market can be captured? What will be the cost to capture this proportion and what is the cost to capture the proportion required for business sustainability?
Prior to a new business start-up, the customers that the new business wishes to attract either already purchase the product or service from a competitor to the new businessor they do not yet purchase the product or service at all. A new venture’s customers, therefore, must come from one of two sources: they must a) be attracted away from existing (direct) competitors or b) be convinced to make different choices about where they spend their money so they purchase the new venture’s product or service instead of spending their money in other ways (with indirect competitors). An entrepreneur must decide from which source they will attract their customers, and how they will do so. They must understand the competitive environment.
According to Porter (1996), strategy is about doing different things than competitors or doing similar things but in different ways. To develop an effective strategy, an entrepreneur must understand the competition.
To understanding the competitive environment, entrepreneurs must do the following:
• determine who their current direct and indirect competitors are and who the future competitors will be
• understand the similarities and differences in quality, price, competitive advantages, and other factors their proposed business and the existing competitors
• establish whether they can offer different products or servicesor the same products or services in different waysto attract enough customers to meet their goals
• anticipate how the competitors will react in response to the new venture’s entry into the market
Analyze Firm-level Trends (organizational analysis)
There are several tools available for firm-level analysis, and usually several of them should be applied because they serve different purposes.
• Use an appropriate tool like a SWOT Analysis/TOWS Matrix to formulate and evaluate potential strategies to leverage organizational strengths, overcome/minimize weaknesses, take advantage of opportunities, and overcome/minimize threats. You will also need to do a financial analysis and take into account the founder fit and the competencies a venture should possess.
• SWOT analysis identify organizational strengths and weaknesses and external opportunities and threats
• TOWS matrix develop strategies to:
• leverage strengths to take advantage of opportunities
• leverage strengths to overcome threats
• mitigate weaknesses by taking advantage of opportunities
• mitigate weaknesses while minimizing the potential threats or the potential outcomes from threats
For analyzing a firm’s strategy, apply a VRIO Framework analysis.
• While conceptualizing the resource-based view (RBV) of the firm, Barney (1997) and Barney and Hesterly (2006) identified the following four considerations regarding resources and their ability to help a firm gain a competitive advantage. Together, the following four questions make up the VRIO Framework, which can help assess a firm’s capacity, determine what competencies a venture should have, and determine whether competences are valuable, rare, inimitable, and exploitable.
• Value Is a particular resource (financial, physical, technological, organizational, human, reputational, innovative) valuable to a firm because it helps it take advantage of opportunities or eliminate threats?
• Rarity Is a particular resource rare in that it is controlled by or available to relatively few others?
• Imitability Is a particular resource difficult to imitate so that those who have it can retain cost advantages over those who might try to obtain or duplicate it?
• Organization Are the resources available to a firm useful to it because it is organized and ready to exploit them?
Assess the financial attractiveness of the venture:
• Analyze similar firms in industry.
• Comparative ratio and financial analysis (see Vesper, 1996, p. 145-148) can help determine industry norm returns, turnover ratios, working capital, operating efficiency, and other measures of firm success.
• Project market share.
• Analyze the key industry players’ relative market share, and make judgments about how the proposed venture would fare within the industry.
• Use information from market profile analysis and key industry player analysis.
• Analyze Expected Margins.
• Involves projecting expected margins from venture
• Useful information might come from financial analysis, market profile analysis, and NAICS (North American Industry Classification System) codes (six digit codes used to identify an industryfirst five digits are standardized in Canada, the United States, and Mexicois gradually replacing the four digit SIC (Standard Industrial Classification) codes)
• Analyze break-even point.
• Involves using information from margin analysis to determine break even volume and break-even sales in dollars
• Is there sufficient volume to sustain the venture?
• Analyze Pro forma.
• Forecasting income and assets required to generate profits
• Analyze Sensitivity.
• What will be the likely impact if some assumed variable values change?
• Project Return on Investments (ROI).
• Projecting the ROI from undertaking the venture
• What is the opportunity cost of undertaking the venture?
Founder fit is an important consideration for entrepreneurs screening venture opportunities. While there are plenty of examples of entrepreneurs successfully starting all types of businesses, “technical capability can be an important if not all-important factor in pursuing ventures success” (Vesper, 1996, p. 149). Factors such as the experience, training, credentials, reputation, and social capital an entrepreneur has can play an important role in their success or failure in starting a new venture. Even when an entrepreneur can recruit expert help through business partners or employees, they may also need to possess technical skills required in that particular kind of business.
A common and useful way to help screen venture options is to seek input from experts, peers, mentors, business associates, and perhaps other stakeholders like potential customers and direct family members. | textbooks/biz/Business/Entrepreneurship/Book%3A_Entrepreneurship_and_Innovation_Toolkit_(Swanson)/1.03%3A_Chapter_3__Evaluating_Entrepreneurial_Opportunities.txt |
A startup is a temporary organization in search of a scalable, repeatable, profitable business model. – Blank and Dorf (2012, p. xvii)
Today countless innovative business models are emerging. Entirely new industries are forming as old ones crumble. Upstarts are challenging the old guard, some of whom are struggling feverishly to reinvent themselves.
How do you image your organization’s business model might look two, five, or ten years from now? Will you be among the dominant players? Will you face competitors brandishing formidable new business models? – Osterwalder, Pigneur, and Clark (2010, p. 4)
Learning Objectives
After completing this chapter you will be able to
• Describe what a business model is
• Analyse existing and proposed businesses to determine what business models they are applying and what business models they plan to apply
• Develop and analyze alternative business models for new entrepreneurial ventures
Overview
In this chapter, the concept of the business model is introduced. One concept of the business model in particular, the Business Model Canvas, is explored as a way to conceptualize and categorize elements of a business model.
What are Business Models?
Magretta (2002) described business models as “stories that explain how enterprises work” (p. 87) and Osterwalder, et al. (2010) said that they describe “the rationale of how an organization creates, delivers, and captures value” (p. 14). Chatterjee (2013) said that “A business is about selling what you make for a profit. A business model is a configuration (activity systems) of what the business does (activities) and what it invests in (resources) based on the logic that drives the profits for a specific business” (p. 97).
The Business Model Canvas
The Business Model Canvas tool is based on the premise that a start-up is something quite different than an ongoing venture. A start-up should not be viewed as a smaller version of a company because starting-up a company requires very different skills than operating one does. A start-up that is still a start-up after some time—maybe after a couple of years for some kinds of start-ups—is actually a failed enterprise since it hasn’t converted into an ongoing venture (Osterwalder et al., 2010).
The business model canvas is made up of nine parts that, together, end up describing the business model.
Figure 3 – Business Model Canvas from http://www.businessmodelgeneration.com (Designed by: Strategyzer AG, strategyzer.com, Creative Commons Attribution-Share Alike 3.0 Unported License)
The following elements of the Business Model Canvas were taken, with permission, from http://www.businessmodelgeneration.com.
• Key partners
• Who are our key partners?
• Who are our key suppliers?
• Which key resources are we acquiring from partners?
• Which key activities do partners perform?
• Motivations for partnerships: optimization and economy; reduction of risk and uncertainty; acquisition of particular resources and activities
• Key activities
• What key activities do our value propositions require?
• Our distribution channels?
• Customer relationships?
• Revenue streams?
• Categories: production; problem-solving; platform/network
• Key resources
• What key resources do our value propositions require?
• Our distribution channels?
• Customer relationships?
• Revenue streams?
• Types of resources: physical; intellectual (brand patents, copyrights, data); human; financial
• Value propositions
• What value do we deliver to the customer?
• Which one of our customer’s problems are we helping to solve?
• What bundles of products and services are we offering to each customer segment?
• Which customer needs are we satisfying?
• Characteristics: newness; performance; customization; “getting the job done”; design; brand/status; price; cost reduction; risk reduction; accessibility; convenience/usability
• Customer relationships
• What type of relationship does each of our customer segments expect us to establish and maintain with them?
• Which ones have we established?
• How are they integrated with the rest of our business model?
• How costly are they?
• Examples: personal assistance; dedicated personal assistance; self-service; automated services; communities; co-creation
• Customer segments
• For whom are we creating value?
• Who are our most important customers?
• Mass market; niche market; segmented; diversified; multi-sided platform.
• Channels
• Through which channels do our customer segments want to be reached?
• How are we reaching them now?
• How are our channels integrated?
• Which ones work best?
• Which ones are most cost-efficient?
• How are we integrating them with customer routines?
• Channel phases:
• Awareness – How do we raise awareness about our company’s products and services?
• Evaluation – How do we help customers evaluate our organization’s value proposition?
• Purchase – How do we allow customers to purchase specific products and services?
• Delivery – How do we deliver a value proposition to customers?
• After sales – How do we provide post-purchase customer support?
• Revenue streams
• For what value are our customers really willing to pay?
• For what do they currently pay?
• How are they currently paying?
• How would they prefer to pay?
• How much does each revenue stream contribute to overall revenues?
• Types: asset sale; usage fee; subscription fees; lending/renting/leasing; licensing; brokerage fees; advertising
• Fixed pricing: list price; product feature dependent; customer segment dependent; volume dependent
• Dynamic pricing: negotiation (bargaining); yield management; real-time-market
• Cost structure
• What are the most important costs inherent in our business model?
• Which key resources are most expensive?
• Which key activities are most expensive?
• Is your business more: cost driven (leanest cost structure, low price value proposition, maximum automation, extensive outsourcing); value driven (focused on value creation, premium value proposition).
• Sample characteristics: fixed costs (salaries, rents, utilities); variable costs; economies of scale; economies of scope
The idea is to keep adding descriptions or plans to the nine components to create the initial business model and then to actually do the start-up activities and replace the initial assumptions in each of the nine parts with newer and better information or plans to let the business model evolve. This model is partly based on the idea that the owner should be the one interacting with potential customers so he or she fully understands what these potential customers want. These interactions should not only be done by hired sales people, at least until the business model has evolved into one that works, which can only happen when the venture owner is completely engaged with the potential customers and the other business operations (Osterwalder et al., 2010).
A business plan shouldn’t be created until the above has been done because you need to know what your business model is before you can really create a business plan (Osterwalder et al., 2010). This seems to imply that the Business Model Canvas is best suited to technology-based and other types of companies that can be basically started and operated in some way that can later be converted into an ongoing venture. By starting operations and making adjustments as you go, you are actually doing a form of market research that can be compiled into a full business plan when one is needed.
According to Osterwalder, et al. (2010), the things we typically teach people in business school are geared to helping people survive in larger, ongoing businesses. What is taught—including organizational structures, reporting lines, managing sales teams, advertising, and similar topics—is not designed to help students understand how a start-up works and how to deal with the volatile nature of new ventures. The Business Model Canvas idea is meant to help us understand start-ups.
The Business Model Canvas tool is intended to be applied when business operations can be started on a small scale and adjustments can continually be made until the evolving business model ends up working in real life. This is in contrast to the more traditional approach of pre-planning everything and then going through the set-up and start-up processes and ending up with a business venture that opens for business one day without having proven at all that the business model it is founded upon will even work. These traditional start-ups sometimes flounder along as the owners find that their plans are not quite working out and they try to make adjustments on the fly. It can be difficult to make adjustments at this time because the processes are already set up. For example, sales teams might be in the field trying to make sales and blaming the product developers for the difficulty they are having, and the product developers might be blaming the sales teams for not being able to sell the product properly. The real issue might be that the company simply isn’t meeting customers’ needs and they don’t have any good mechanism for detecting and understanding and fixing this problem.
Lean Start-up
Consistent with the Business Model Canvas approach, Ries (2011) advanced the idea of the lean start-up. His definition of a startup is “a human institution designed to create a new product or service under conditions of extreme uncertainty” (p. 27), and the lean start-up approach involves releasing a minimal viable product to customers with the expectation that this early prototype will change and evolve frequently and quickly in response to customer feedback. This is meant to be a relatively easy and inexpensive way to develop a product or service by relying on customer feedback to guide the pivots in new directions that will ultimately—and relatively quickly—lead to a product or service that will have the appeal required for business success. It is only then that the actual business can truly emerge.
Ries’s (2011) five lean start-up principles start with the idea that entrepreneurs are everywhere and that anyone working in an environment where they seek to create new products or services “under conditions of extreme uncertainty” (27) can use the lean start-up approach. Second, a start-up is more than the product or service; it is an institution that must be managed in a new way that promotes growth through innovation. Third, startups are about learning “how to build a sustainable business” (p. 8-9) by validating product or service design through frequent prototyping that allows entrepreneurs to test the concepts. Forth, startups must follow this process or feedback loop: create products and services; measure how the market reacts to them; and learn from that reaction to determine whether to pivot or to persevere with an outcome the market accepts. Finally, Ries (2011) suggested that entrepreneurial outcomes and innovation initiatives need to be measured through innovative accounting.
Figure 4 – Business Model and Lean Start-up Books (Photo by Lee A. Swanson)
Growth Wheel
According to its website, GrowthWheel® (http://www.growthwheel.com/) is a decision-making tool for start-up and growth companies to help business advisers and entrepreneurs focus, set agendas, make decisions, and take action (GrowthWheel, 2015). It is effectively a more complex and detailed tool than the Business Model Canvas for describing a business model. A web search will yield a variety of tools, like the Business Model Canvas and the GrowthWheel®, that can be used to describe business models.
Franchises as Business Models
Franchises are basically business models developed by others (franchisors) that have been proven to work in multiple contexts and that are sold to entrepreneurs (franchisees) who will implement the business model in contexts that the franchisor believes will result in a successful enterprise. Franchises apply various business models. Some are turnkey franchises, like McDonald’s, where the entire business structure is set up from the design of the stores to the supply system, and the franchisor sets up virtually everything for the new franchisee. Other franchise models, like that defining Tap ‘N’ Pay Canada (www.tapnpay.ca/)—a business that provides debit and credit card machines and point of sale equipment—advertise relatively low fees charged to franchisees and quick set-ups in as little as two weeks (http://www.betheboss.ca/franchises/tap-n-pay). | textbooks/biz/Business/Entrepreneurship/Book%3A_Entrepreneurship_and_Innovation_Toolkit_(Swanson)/1.04%3A_Chapter_4__Business_Models.txt |
Business planning is an important precursor to action in new ventures. By helping firm founders to make decisions, to balance resource supply and demand, and to turn abstract goals into concrete operational steps, business planning reduces the likelihood of venture disbanding and accelerates product development and venture organizing activity. – Delmar and Shane (2003, p. 1165)
We always plan too much and always think too little. We resent a call to thinking and hate unfamiliar argument that does not tally with what we already believe or would like to believe. – Joseph Schumpeter
Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window. – Peter Drucker
Learning Objectives
After completing this chapter you will be able to
• Describe the purposes of business planning
• Describe common business planning principles
• List and explain the elements of the business plan development process outlined in this book
• Explain the purposes of each of the elements of the business plan development process outlined in this book
• Explain how applying the business plan development process outlined in this book can aid in developing a business plan that will meet entrepreneurs’ goals
• Describe general business planning guidelines and format
Overview
This chapter describes the purposes of business planning, the general concepts related to business planning, and guidelines and a format for a comprehensive business plan.
Business Planning Purposes
Business plans are developed for both internal and external purposes. Internally, entrepreneurs develop business plans to help put the pieces of their business together. The most common external purpose for a business plan is to raise capital.
Internal Purposes
• The business plan is the road map for the development of the business because it
• defines the vision for the company
• establishes the company’s strategy
• describes how the strategy will be implemented
• provides a framework for analysis of key issues
• provides a plan for the development of the business
• is a measurement and control tool
• helps the entrepreneur to be realistic and to put theories to the test
External Purposes
The business plan is often the main method of describing a company to external audiences such as potential sources for financing and key personnel being recruited. It should assist outside parties to understand the current status of the company, its opportunities, and its needs for resources such as capital and personnel. It also provides the most complete source of information for valuation of the business.
Business Planning Principles
Business Plan Communication Principles
As Hindle and Mainprize (2006) note, business plan writers must strive to communicate their expectations about the nature of an uncertain future. However, the liabilities of newness make communicating the expected future of new ventures difficult (more so than for existing businesses). They outline five communications principles:
• Expectations
• Translation of your vision of the venture and how it will perform into a format compatible with the expectations of the readers
• Communicate that
• you have identified and understood the key success factors and risks
• the projected market is large and you expect good market penetration
• you have a strategy for commercialization, profitability, and market domination
• you can establish and protect a proprietary and competitive position
• Milestones
• Anchoring key events in the plan with specific financial and quantitative values
• Communicate that
• your major plan objectives are in the form of financial targets
• you have addressed the dual need for planning and flexibility
• you understand the hazards of neglecting linkages between certain events
• you understand the importance of quantitative values (rather than just chronological dates)
• Opportunities
• Nothing lasts forever—things can change to impact the opportunity: tastes, preferences, technological innovation, competitive landscape
• Communicate these four aspects to distinguish the business concept, distinctive competencies, and sustainable advantages:
• the new combination upon which venture is built
• magnitude of the opportunity or market size
• market growth trends
• venture’s value from the market (% of market share proposed or market share value in dollars)
• Context
• Four key aspects describing context within which new venture is intended to function (internal and external environment)
• Communicate
• how the context will help or hinder the proposal
• how the context may change & affect the business & the range of flexibility or response that is built into the venture
• what management can or will do in the event the context turns unfavourable
• what management can do to affect the context in a positive way
• Business Model
• Brief and clear statement of how an idea actually becomes a business that creates value
• Communicate
• Who pays, how much, and how often?
• The activities the company must perform to produce its product, deliver it to its customers and earn revenue
• And be able to defend assertions that the venture is attractive and sustainable and has a competitive edge
Business Plan Credibility Principles
Business plan writers must strive to project credibility (Hindle & Mainprize, 2006), so there must be a match between what the entrepreneurship team (resource seekers) needs and what the investors (resource providers) expect based on their criteria. A take it or leave it approach (i.e. financial forecasts set in concrete) by the entrepreneurship team has a high likelihood of failure in terms of securing resources. Hindle and Mainprize (2006) outline five principles to help entrepreneurs project credibility:
• Team
• Without the right team, nothing else matters.
• Communicate
• What do they know?
• Who do they know?
• How well are they known?
• Elaboration
• Break down individual tasks into their sub-parts so each step maximizes the upside and minimizes the downside:
• sub-strategies
• ad-hoc programs
• specific tactical action plans
• Scenario Integration
• Claiming an insuperable lead or a proprietary market position is naïve.
• Venture building is like chess:
• Anticipate several moves in advance
• View the future as a movie vs. snapshot
• Financial Link
• Key assumptions related to market size, penetration rates, and timing issues of market context outlined in the business plan should link directly to the financial statements.
• Income and cash flow statements must be preceded by operational statements setting forth the primary planning assumptions about market sizes, sales, productivity, and basis for the revenue estimate.
• The Deal
• If the main purpose is to enact a harvest, then the business plan must create a value-adding deal structure to attract investors.
• Common things: viability, profit potential, downside risk, likely life-cycle time, potential areas for dispute or improvement
General Business Plan Guidelines
Many businesses must have a business plan to achieve their goals. The following are some basic guidelines for business plan development.
• A standard format helps the reader understand that the entrepreneur has thought everything through, and that the returns justify the risk.
• Binding the document ensures that readers can easily go through it without it falling apart.
• Be 100% certain that
• everything is completely integrated: the written part must say exactly the same thing as the financial part
• all financial statements are completely linked and valid (make sure all balance sheets validly balance)
• the document is well formatted (layout makes document easy to read and comprehend—including all diagrams, charts, statements, and other additions)
• everything is correct (there are NO spelling, grammar, sentence structure, referencing, or calculation errors)
• the document easy to read and comprehend because it is organized well with no unnecessary repetition
• It is usually unnecessary—and even damaging—to state the same thing more than once. To avoid unnecessarily duplicating information, you should combine sections and reduce or eliminate duplication as much as possible.
• all the necessary information is included to enable readers to understand everything in your document
• the terms you use in your plan are clear
• For example, if your plan says something like “there is a shortage of 100,000 units with competitors currently producing 25,000. We can help fill this huge gap in demand with our capacity to produce 5,000 units,” a reader is left completely confused. Does this mean there is a total shortage of 100,000 units, but competitors are filling this gap by producing 25,000 per year (in which case there will only be a shortage for four years)? Or, is there an annual shortage of 100,000 units with only 25,000 being produced each year, in which case the total shortage is very high and is growing each year? You must always provide the complete perspective by indicating the appropriate time frame, currency, size, or another measurement.
• if you use a percentage figure, you indicate to what it refers, otherwise the figure is completely useless to a reader.
• if your plan includes an international element, which currencies the costs, revenues, prices, or other values are quoted in
• This can be solved by indicating up-front in the document the currency in which all values will be quoted. Another option is to indicate each time which currency is being used, and sometimes you might want to indicate the value in more than one currency. Of course, you will need to assess the exchange rate risk to which you will be exposed and describe this in your document.
• credibility is both established and maintained
• If a statement is included that presents something as a fact when this fact is not generally known, always indicate the source. Unsupported statements damage credibility
• Be specific. A business plan is simply not of value if it uses vague references to high demand, carefully set prices, and other weak phrasing. It must show hard numbers (properly referenced, of course), actual prices, and real data acquired through proper research. This is the only way to ensure your plan is considered credible.
Developing a High Power Business Plan
The business plan development process described next has been extensively tested with entrepreneurship students and has proven to provide the guidance entrepreneurs need to develop a business plan appropriate for their needs; a high power business plan.
The Stages of Development
There are six stages involved with developing a high power business plan. These stages can be compared to a process for hosting a dinner for a few friends. A host hoping to make a good impression with their anticipated guests might analyze the situation at multiple levels to collect data on new alternatives for healthy ingredients, what ingredients have the best prices and are most readily available at certain times of year, the new trends in party appetizers, what food allergies the expected guests might have, possible party themes to consider, and so on. This analysis is the Essential Initial Research stage.
In the Business Model stage, the host might construct a menu of items to include with the meal along with a list of decorations to order, music to play, and costume themes to suggest to the guests. The mix of these kinds of elements chosen by the host will play a role in the success of the party.
The Initial Business Plan Draft stage is where the host rolls up his or her sleeves and begins to assemble make some of the food items, put up some of the decorations, send invitations, and generally get everything started for the party.
During this stage, the host will begin to realize that some plans are not feasible and that changes are needed. The required changes might be substantial, like the need to postpone the entire party and ultimately start over in a few months, or less drastic, like the need to change the menu when an invited guest indicates that they can’t eat food containing gluten. These changes are incorporated into the plan to make it realistic and feasible in the Making the Business Plan Realistic stage.
Making A Plan to Appeal to Stakeholders stage involves further changes to the party plan to make it more appealing to both the invited guests and to make it a fun experience for the host. For example, the host might learn that some of the single guests would like to bring dates and others might need to be able to bring their children to be able to attend. The host might be able to accommodate those desires or needs in ways that will also make the party more fun for them—maybe by accepting some guests’ offers to bring food or games, or maybe even hiring a babysitter to entertain and look after the children.
The final stage—Finishing the Business Plan—involves the host putting all of the final touches in place for the party in preparation for the arrival of the guests.
Figure 5 – Business Plan Development Process (Illustration by Lee A. Swanson)
Essential Initial Research
A business plan writer should analyze the environment in which they anticipate operating at each of the societal, industry, market, and firm levels of analysis (see pages 51–60). This stage of planning, the essential initial research, is a necessary first step to better understand the trends that will affect their business and the decisions they must make to lay the groundwork for, and to improve their potential for success.
In some cases, much of the essential initial research should be included in the developing business plan as its own separate section to help build the case for readers that there is a market need for the business being considered and that it stands a good chance of being successful.
In other cases, a business plan will be stronger when the components of the essential initial research are distributed throughout the business plan as a way to provide support for the plans and strategies outlined in the business plan. For example, the industry or market part of the essential initial research might outline the pricing strategies used by identified competitors and might be best placed in the pricing strategy part of the business plan to support the decision made to employ a particular pricing strategy.
Business Model
Inherent in any business plan is a description of the business model chosen by the entrepreneur as the one that they feel will best ensure success. Based upon their essential initial research of the setting in which they anticipate starting their business (their analysis from stage one) an entrepreneur should determine how each element of their business model—including their revenue streams, cost structure, customer segments, value propositions, key activities, key partners, and so on—might fit together to improve the potential success of their business venture (see Chapter 4 – Business Models).
For some types of ventures, at this stage an entrepreneur might launch a lean start-up (see page 68) and grow their business by continually pivoting, or constantly adjusting their business model in response to the real-time signals they get from the markets’ reactions to their business operations. In many cases, however, an entrepreneur will require a business plan. In those cases, their initial business model will provide the basis for that plan.
Of course, throughout this and all of the rounds in this process, the entrepreneur should seek to continually gather information and adjust the plans in response to the new knowledge they gather. As shown in Figure 8 by its enclosure in the progressive research box, the business plan developer might need conduct further research before finishing the business model and moving on to the initial business plan draft.
Initial Business Plan Draft
The Business Plan Draft stage involves taking the knowledge and ideas developed during the first two stages and organizing them into a business plan format. An approach preferred by many is to create a full draft of the business plan with all of the sections, including the front part with the business description, vision, mission, values, value proposition statement, preliminary set of goals, and possibly even a table of contents and lists of tables and figures all set up using the software features enabling their automatic generation. Writing all of the operations, human resources, marketing, and financial plans as part of the first draft ensures that all of these parts can be appropriately and necessarily integrated. The business plan will tell the story of a planned business startup in two ways by using primarily words along with some charts and graphs in the operations, human resources, and marketing plans and in a second way through the financial plan. Both ways must tell the same story.
The feedback loop shown in Figure 8 demonstrates that the business developer may need to review the business model. Additionally, as shown by its enclosure in the progressive research box, the business plan developer might need conduct further research before finishing the Initial Business Plan Draft stage and moving on to the Making Business Plan Realisticstage.
Making Business Plan Realistic
The first draft of a business plan will almost never be realistic. As the entrepreneur writes the plan, it will necessarily change as new information is gathered. Another factor that usually renders the first draft unrealistic is the difficulty in making certain that the written part—in the front part of the plan along with the operations, human resources, and marketing plans—tells the exact same story as the financial part does. This stage of work involves making the necessary adjustments to the plan to make it as realistic as possible.
The Making Business Plan Realistic stage has two possible feedback loops. The first goes back to the Initial Business Plan Draft stage in case the initial business plan needs to be significantly changed before it is possible to adjust it so that it is realistic. The second feedback loop circles back to the Business Model stage if the business developer need to rethink the business model. As shown in Figure 8 by its enclosure in the progressive research box, the business plan developer might need conduct further research before finishing the Making Business Plan Realistic stage and moving on to the Making Plan Appeal to Stakeholders stage.
Making Plan Appeal to Stakeholders and Desirable to the Entrepreneur
A business plan can be realistic without appealing to potential investors and other external stakeholders, like employees, suppliers, and needed business partners. It might also be realistic (and possibly appealing to stakeholders) without being desirable to the entrepreneur. During this stage the entrepreneur will keep the business plan realistic as they adjust plans to appeal to potential investors and to themselves.
If, for example, investors will be required to finance the business start, some adjustments might need to be relatively extensive to appeal to potential investors’ needs for an exit strategy from the business, to accommodate the rate of return they expect from their investments, and to convince them that the entrepreneur can accomplish all that is promised in the plan. In this case, and in others, the entrepreneur will also need to get what they want out of the business to make it worthwhile for them to start and run it. So, this stage of adjustments to the developing business plan might be fairly extensive, and they must be informed by a superior knowledge of what targeted investors need from a business proposal before they will invest. They also need to be informed by a clear set of goals that will make the venture worthwhile for the entrepreneur to pursue.
The caution with this stage is to balance the need to make realistic plans with the desire to meet the entrepreneur’s goals while avoiding becoming discouraged enough to drop the idea of pursuing the business idea. If an entrepreneur is convinced that the proposed venture will satisfy a valid market need, there is often a way to assemble the financing required to start and operate the business while also meeting the entrepreneur’s most important goals. To do so, however, might require significant changes to the business model.
One of the feedback loops shown in Figure 8 indicates that the business plan writer might need to adjust the draft business plan while ensuring that it is still realistic before it can be made appealing to the targeted stakeholders and desirable to the entrepreneur. The second feedback loop indicates that it might be necessary to go all the way back to the Business Model stage to re-establish the framework and plans needed to develop a realistic, appealing, and desirable business plan. Additionally, this stage’s enclosure in the progressive research box suggests that the business plan developer might need conduct further research.
Finishing the Business Plan
The final stage involves putting all of the important finishing touches on the business plan so that it will present well to potential investors and others. This involves making sure that the math and links between the written and financial parts are accurate. It also involves ensuring that all the needed corrections are made to the spelling, grammar, and formatting. The final set of goals should be written to appeal to the target readers and to reflect what the business plan says. An executive summary should be written and included as a final step.
General Business Plan Format
Title page
Include nice, catchy, professional, appropriate graphics to make it appealing for targeted readers
Executive summary
• Can be longer than normal executive summaries, up to three pages
• Write after remainder of plan is complete
• Includes information relevant to targeted readers as this is the place where they are most likely to form their first impressions of the business idea and decide whether they wish to read the rest of the plan
List of Tables
Each table, figure, and appendix included in the plan must be referenced within the text of the plan so the relevance of each of these elements is clear.
Introduction
• Describes the business concept
• Indicates the purpose of the plan
• Appeals to targeted readers
Business Idea
• May include description of history behind the idea and the evolution of the business concept if relevant
Vision
• Generally outlines what the owner intends for the venture to be
• Should inspire all members of the organization
• Should help stakeholders aspire to achieve greater things through the venture because of the general direction provided through the vision statement
Mission
• Should be very brief—a few sentences or a short paragraph
• Indicates what your organization does and why it exists—may describe the business strategy and philosophy
Values
• Indicates the important values that will guide everything the business will do
• Outlines the personal commitments members of the organization must make, and what they should consider to be important
• Defines how people behave and interact with each other.
• Should help the reader understand the type of culture and operating environment this business intends to develop
Major Goals
• Describes the major organizational goals
• Ensures each goal is:
• Specific, Measurable, Action-Oriented, Realistic, and Timely [SMART]
• Realistic, Understandable, Measurable, Believable, and Achievable [RUMBA]
• Perfectly aligns with everything in plan
Operating Environment
Trend Analysis
• Includes an analysis of how the current and expected trends in the political, economic, social, technological, environmental, and legal (PESTEL) factors will impact the development of this business
• Consider whether this is the right place for this analysis: it may be better positioned in, for example, the Financial Plan section to provide context to the analysis of the critical success factors, or in the Marketing Plan to help the reader understand the basis for the sales projections.
Industry Analysis
• Includes an analysis of the industry in which this business will operate
• Commonly uses the Five Forces Model (Porter, 1985)
• consider whether this is the right place for this analysis: it may be better placed in, for example, the Marketing Plan to enhance the competitor analysis, or in the Financial Plan to provide context to the industry standard ratios in the Investment Analysis section
Operations Plan
• Answers several key questions:
• What are your facility plans?
• Where will your facility be located?
• expressed as a set physical location
• expressed as a set of requirements and characteristics
• How large will your facility be and why must it be this size?
• How much will it cost to buy or lease your facility?
• What utility, parking, and other costs must you pay for this facility?
• What expansion plans must be factored into the facility requirements?
• What transportation and storage issues must be addressed by facility decisions?
• What zoning and other legal issues must you deal with?
• What will be the layout for your facility and how will this best accommodate customer and employee requirements?
• What constraints are you operating under that will restrict your capacity to produce and sell your product?
• Given these constraints, what is your operating capacity (in terms of production, sales, etc.)?
• What is the workflow plan for your operation?
• What work will your company do and what work will you outsource?
Operations Timeline
• Outlines several key questions:
• When will you make the preparations, such as registering the business name and purchasing equipment, to start the venture?
• When will you begin operations and make your first sales?
• When will other milestone events occur such as moving operations to a larger facility, offering a new product line, hiring new key employees, and beginning to sell products internationally?
• May include a graphical timeline showing when these milestone events have occurred and are expected to occur
Business Structure and other Set-up Elements
Somewhere in your business plan you must indicate what legal structure your venture will take. Your financial statements, risk management strategy, and other elements of your plan are affected by the type of legal structure you choose for your business:
• Sole Proprietorship
• Partnership
• Limited Partnership
• Corporation
• Cooperative
As part of your business set-up, you need to determine what kinds of control systems you should have in place, establish necessary relationships with suppliers and prior to your start-up, and generally deal with a list of issues like the following. Many of your decisions related to the following should be described somewhere in your business plan:
• Naming
• Zoning, equipment prices, suppliers, etc.
• Location
• Lease terms, leasehold improvements, signage, pay deposits, etc.
• Getting business license, permits, etc.
• Setting up banking arrangements
• Setting up legal and accounting systems (or professionals)
• Ordering equipment, locks and keys, furniture, etc.
• Recruiting employees, set up payroll system, benefit programs, etc.
• Training employees
• Testing the products/services that will be offered
• Testing the systems for supply, sales, delivery, and other functions
• Deciding on graphics, logos, promotional methods, etc.
• Ordering business cards, letter head, etc.
• Setting up supplier agreements
• Buying inventory, insurance, etc.
• Revising business plan
• And many more things, including, when possible, attracting purchased orders in advance of start-up through personal selling (by the owner, a paid sales force, independent representatives, or by selling through brokers wholesalers, catalog houses, retailers), a promotional campaign, or other means
Start-up
• What is required to start up your business, including the purchases and activities that must occur before you make your first sale?
• When identifying capital requirements for start-up, a distinction should be made between fixed capital requirements and working capital requirements.
Fixed Capital Requirements
• What fixed assets, including equipment and machinery, must be purchased so your venture can conduct its business?
• This section may include a start-up budget showing the machinery, equipment, furnishings, renovations, and other capital expenditures required prior to operations commencing.
• If relevant you might include information showing the financing required; fixed capital is usually financed using longer-term loans.
Working Capital Requirements
• What money is needed to operate the business (separately from the money needed to purchase fixed assets) including the money needed to purchase inventory and pay initial expenses?
• This section may include a start-up budget showing the cash required to purchase starting inventories, recruit employees, conduct market research, acquire licenses, hire lawyers, and other operating expenditures required prior to starting operations.
• If relevant you might include information showing the financing required … working capital is usually financed with operating loans, trade credit, credit card debt, or other forms of shorter-term loans.
Risk Management Strategies
• Includes descriptions of the organization’s risk exposure
• enterprise – liability exposure for things like when someone accuses your employees or products you sell of injuring them.
• financial – securing loans when needed and otherwise having the right amount of money when you need it
• operational – securing needed inventories, recruiting needed employees in tight labour markets, customers you counted on not purchasing product as you had anticipated, theft, arson, natural disasters like fires and floods, etc.
• Always includes descriptions of the planned strategies for managing each of the risks identified
• avoid – choose to avoid doing something, outsource, etc.
• reduce – through training, assuming specific operational strategies, etc.
• transfer – insure against, outsource, etc.
• assume – self-insure, accept, etc.
Operating Processes
• What operating processes will you apply?
• Depending upon the type of business for which you are creating your plan, you will need to describe different things:
• Retail and wholesale operations
• How will you ensure your cash is managed effectively?
• How will you schedule your employees?
• How will you manage your inventories?
• If you will have a workforce, how will you manage them?
• etc.
• Service operation
• How will you bill out your employee time?
• How will you schedule work on your contracts?
• etc.
• Manufacturing operation
• How you will manufacture your product (process flow, job shop, etc.?)
• How will you maintain quality?
• How will you institute and manage effective financial monitoring and control systems that provide needed information in a timely manner?
• How will you manage expansion?
• etc.
Facilities
• May include planned layouts for facilities
Organizational Structure
• May include information on Advisory Boards or Board of Directors from which the company will seek advice or guidance or direction
• May include an organizational chart
• Can nicely lead into the Human Resources Plan
Human Resources Plan
• Answers key questions:
• How do you describe your desired corporate culture?
• What are the key positions within your organization?
• How many employees will you have?
• What characteristics define your desired employees?
• What is your recruitment strategy? What processes will you apply to hire the employees you require?
• What is your leadership strategy and why have you chosen this approach?
• What performance appraisal and employee development methods will you use?
• What is your organizational structure and why is this the best way for your company to be organized?
• How will you pay each employee (wage, salary, commission, etc.)? How much will you pay each employee?
• What are your payroll costs, including benefits?
• What work will be outsourced and what work will be completed in-house?
• Have you shown and described an organizational chart?
Recruitment and Retention Strategies
• Includes how many employees are required at what times
• Estimates time required to recruit needed employees
• Estimates all recruitment costs including
• employment advertisements
• contracts with employment agency or search firms
• travel and accommodations for potential employees to come for interviews
• travel and accommodations for interviewers
• facility, food, lost time, and other interviewing costs
• relocation allowances for those hired including flights, moving companies, housing allowances, spousal employment assistance, etc.
• may include a schedule showing the costs of initial recruitment that then flows into your start-up expense schedules
Leadership and Management Strategies
• What is your leadership philosophy?
• Why is it the most appropriate leadership approach for this venture?
Training
• What training is required because of existing rules and regulations?
• How will you ensure your employees are as capable as required?
• In which of the following areas will you provide training for your employees?
• Health and safety (legislation, WHMIS, first aid, defibulators, etc.)
• Initial workplace orientation
• Management
• Financial systems
• Sales
• Contracts
• Product features
• Other
Performance Appraisals
• How will you manage your performance appraisal systems?
Health and Safety
• Any legal requirements should be noted in this section (and also legal requirements for other issues that may be included in other parts of the plan)
Compensation
• Always completely justifies your planned employee compensation methods and amounts
• Always includes all components of the compensation (CPP, EI, holiday pay, etc.)
• Outlines how will you ensure both internal and external equity in your pay systems
• Describes any incentive-based pay or profit sharing systems planned
• May include a schedule here that shows the financial implications of your compensation strategy and supports the cash flow and income statements shown later
Key Personnel
• May include brief biographies of the key organizational people
Marketing Plan
• What primary and secondary research have you done?
• You must show evidence of having done proper research, both primary and secondary. If you make a statement of fact, you must back it up with properly referenced supporting evidence. If you indicate a claim is based on your own assumptions, you must back this up with a description as to how you came to the conclusion.
• Somewhere in your plan have you done an effective analysis of the economic environment relevant to your business?
• It is a given that you must provide some assessment of the economic situation as it relates to your business. For example, you might conclude that the current economic crisis will reduce the potential to export your product and it may make it more difficult to acquire credit with which to operate your business. Of course, conclusions such as these should be matched with your assessment as to how your business will make the necessary adjustments to ensure it will thrive despite these challenges, or how it will take advantage of any opportunities your assessment uncovers.
• Somewhere in your plan have you done an effective assessment of the industry within which your venture will operate?
• You must provide an assessment of the industry coupled with descriptions of how your venture will prosper in those circumstances. A common approach used to assess the industry is to apply Porter’s (1985) Five Forces Model.
• If you apply the Five Forces Model, do so in the way in which it was meant to be used to avoid significantly reducing its usefulness while also harming the viability of your industry analysis. This model is meant to be used to consider the entire industry—not a subcomponent of it (and it usually cannot be used to analyze a single organization).
• Your competitor analysis might fit within your assessment of the industry or it might be best as a section within your marketing plan. Usually a fairly detailed description of your competitors is required, including an analysis of their strengths and weaknesses. In some cases, your business may have direct and indirect competitors to consider. Be certain to maintain credibility by demonstrating that you fully understand the competitive environment.
• Assessments of the economic conditions and the state of the industry appear incomplete without accompanying appraisals outlining the strategies the organization can/should employ to take advantage of these economic and industry situations. So, depending upon how you have organized your work, it is usually important to couple your appraisal of the economic and industry conditions with accompanying strategies for your venture. This shows the reader that you not only understand the operating environment, but that you have figured out how best to operate your business within that situation.
• Have you done an effective analysis of your venture? (See the Organizational Analysis section below.)
Market Analysis
• Usually contains customer profiles, constructed through primary and secondary research, for each market targeted
• Contains detailed information on the major product benefits you will deliver to the markets targeted
• Describes the methodology used and the relevant results from the primary market research done
• If there was little primary research completed, justifies why it is acceptable to have done little of this kind of research and/or indicate what will be done and by when
• Includes a complete description of the secondary research conducted and the conclusions reached
• Describes potential customers
• Define your target market in terms of identifiable entities sharing common characteristics. For example, it is not meaningful to indicate you are targeting Canadian universities. It is, however, useful to define your target market as Canadian university students between the ages of 18 and 25, or as information technology managers at Canadian universities, or as student leaders at Canadian universities. Your targeted customer should generally be able to make or significantly influence the buying decision.
• You must usually define your target market prior to describing your marketing mix, including your proposed product line. Sometimes the product descriptions in business plans seem to be at odds with the described target market characteristics. Ensure your defined target market aligns completely with your marketing mix (including product/service description, distribution channels, promotional methods, and pricing). For example, if the target market is defined as Canadian university students between the ages of 18 and 25, the product component of the marketing mix should clearly be something that appeals to this target market.
• Carefully choose how you will target potential customers. Should you target them based on their demographic characteristics, psychographic characteristics, or geographic location?
• Identifies how your targeted customers make their buying decisions
• You will need to access research to answer this question. Based on what you discover, you will need to figure out the optimum mix of pricing, distribution, promotions, and product decisions to best appeal to how your targeted customers make their buying decisions.
Competition
• Fully describes the nature of your competitors
• However, this information might fit instead under the market analysis section.
• Describes all your direct competitors
• Describes all your indirect competitors
• If you can, includes a competitor positioning map to show where your product will be positioned relative to competitors’ products
Figure 6 – Competitor Positioning Map (Illustration by Lee A. Swanson)
• Identifies your competitive advantage
• What distinguishes your business from that of your competitors in a way that will ensure your sales forecasts will be met?
• What is your venture’s value proposition?
• You must clearly communicate the answers to these questions in your business plan to attract the needed support for your business. One caution is that it may sound appealing to claim you will provide a superior service to the existing competitors, but the only meaningful judge of your success in this regard will be customers. Although it is possible some of your competitors might be complacent in their current way of doing things, it is very unlikely that all your competitors provide an inferior service to that which you will be able to provide.
Marketing Strategy
• Covers all aspects of the marketing mix including the promotional decisions you have made, product decisions, distribution decisions related to how you will deliver your product to the markets targeted, and pricing decisions
• Outlines how you plan to influence your targeted customers to buy from you (what is the optimum marketing mix, and why is this one better than the alternatives)
Organizational Analysis
• Leads in to your marketing strategy or is positioned elsewhere depending upon how your business plan is best structured
• Often applies a SWOT Analysis
• If doing so, always ensure this analysis results in more than a simple list of internal strengths and weaknesses and external opportunities and threats. A SWOT analysis should always prove to the reader that there are organizational strategies in place to address each of the weaknesses and threats identified and to leverage each of the strengths and opportunities identified.
• An effective way to ensure an effective outcome to your SWOT Analysis is to apply a TOWS Matrix approach to develop strategies to take advantage of the identified strengths and opportunities while mitigating the weaknesses and threats. A TOWS Matrix evaluates each of the identified threats along with each of the weaknesses and then each of the strengths. It does the same with each of the identified opportunities. In this way strategies are developed by considering pairs of factors
• The TOWS Matrix is a framework with which to help you organize your thoughts into strategies. Most often you would not label a section of your business plan as a TOWS Matrix. This would not normally add value for the reader. Instead, you should describe the resultant strategies—perhaps while indicating how they were derived from your assessment of the strengths, weaknesses, opportunities, and threats. For example, you could indicate that certain strategies were developed by considering how internal strengths could be employed toward mitigating external threats faced by the business.
Product Strategy
• Identifies your product/service and why this particular product/service will appeal to your targeted customers more than the alternatives
• If your product or service is standardized, you will need to compete on the basis of something else – like a more appealing price, having a superior location, better branding, or improved service. If you can differentiate your product or service you might be able to compete on the basis of better quality, more features, appealing style, or something else. When describing your product, you should demonstrate that you understand this.
Pricing Strategy
• Outlines your pricing strategies and explains what makes these strategies better than the alternatives
• If you intend to accept payment by credit card (which is probably a necessity for most companies), you should be aware of the fee you are charged as a percentage of the value of each transaction. If you don’t account for this you risk overstating your actual revenues by perhaps one percent or more.
• Identifies your sales forecasts and explains why are these realistic
• Sales forecasts must be done on at least a monthly basis if you are using a projected cash flow statement. These must be accompanied by explanations designed to establish their credibility for readers of your business plan. Remember that many readers will initially assume that your planned time frames are too long, your revenues are overstated, and you have underestimated your expenses. Well crafted explanations for all of these numbers will help establish credibility.
Distribution Strategy
• Describes your distribution strategies and explains what makes these strategies better than the alternatives
• If you plan to use e-commerce, you should include all the costs associated with maintaining a website and accepting payments over the Internet.
Promotions Strategy
• Answers the following key questions:
• As a new entrant into the market, must you attract your customers away from your competitors they currently buy from or will you be creating new customers for your product or service (i.e. not attracting customers away from your competitors)?
• If you are attracting customers away from competitors, how will these rivals respond to the threat you pose to them?
• If you intend to create new customers, how will you convince them to reallocate their dollars toward your product or service (and away from other things they want to purchase)?
• In what ways will you communicate with your targeted customers? When will you communicate with them? What specific messages do you plan to convey to them? How much will this promotions plan cost?
• Outlines the anticipated responses that competitors will have to your entrance into the market, especially if your success depends upon these businesses losing customers to you
• If your entry into the market will not be a threat to direct competitors, it is likely you must convince potential customers to spend their money with you rather than on what they had previously earmarked those dollars toward. In your business plan you must demonstrate an awareness of these issues.
• Maps out your promotional expenditures according to the method used and time frame
• Consider listing the promotional methods in rows on a spreadsheet with the columns representing weeks or months over probably about 18 months from the time of your first promotional expenditure. This can end up being a schedule that feeds the costs into your projected cash flow statement and from there into your projected income statements.
• If you phone or visit newspapers, radio stations, or television stations seeking advertising costs, you must go only after you have figured out details like on which days you would like to advertise, at what times on those days, whether you want your print advertisements in color, and what size of print advertisements you want.
• Carefully consider which promotional methods you will use. While using a medium like television may initially sound appealing, it is very expensive unless your ad runs during the non-prime times. If you think this type of medium might work for you, do a serious cost-benefit analysis to be sure.
• Some promotional plans are developed around newspaper ads, promotional pamphlets, printing business cards, and other more obvious mediums of promotion. Be certain to, include the costs of advertising in telephone directories, sponsoring a little league soccer team, producing personalized pens and other promotional client give-always, donating items to charity auctions, printing and mailing client Christmas cards, and doing the many things businesses find they do on-the-fly. Many businesses find it to be useful to join the local chamber of commerce and relevant trade organizations with which to network. Some find that setting a booth up at a trade fair helps launch their business.
• If you are concerned you might have missed some of these promotional expenses, or if you want to have a buffer in place in case you feel some of these opportunities are worthwhile when they arise, you should add some discretionary money to your promotional budget. A problem some companies get into is planning out their promotions in advance only to reallocate some of their newspaper advertisement money, for example, toward some of these other surprise purposes resulting in less newspaper advertising than had been intended.
Financial Plan
• Outlines financial projections
• It is nearly certain you will need to make monthly cash flow projections from business inception to possibly three years out. Your projections will show the months in which the activities shown on your fixed capital and working capital schedules will occur. This is nearly the only way to clearly estimate your working capital needs and, specifically, important things like the times when you will need to draw on or can pay down your operating loans and the months when you will need to take out longer-term loans with which to purchase your fixed assets. Without a tool like this you will be severely handicapped when talking with bankers about your expected needs. They will want to know how large of a line of credit you will need and when you anticipate needing to borrow longer-term money. It is only through doing cash flow projections will you be able to answer these questions. This information is also needed to determine things like the changes to your required loan payments and when you can take owner draws or pay dividends.
• Your projected cash flows are also used to develop your projected income statements and balance sheets. | textbooks/biz/Business/Entrepreneurship/Book%3A_Entrepreneurship_and_Innovation_Toolkit_(Swanson)/1.05%3A_Chapter_5__Business_Planning.txt |
Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations. – Tim O’Reilly, founder and CEO of O’Reilly Media
Chase the vision, not the money; the money will end up following you. – Tony Hsieh, CEO of Zappos
Learning Objectives
After completing this chapter you will be able to
• Describe the financing considerations for entrepreneurs
• Describe the advantages and disadvantages of debt financing and of equity financing
• List and describe the forms of financing appropriate for the different phases of business development
Overview
Securing needed financing is one of the most important functions related to starting a business. It is important, then, to understand what sources of financing exist at various stages of venture development. It is also important to determine what kinds of financing provide the most value for the entrepreneur and the new venture. Debt and equity financing decisions must be considered in relation to the cost of the financing and the amount of control that the owner is willing to sacrifice to get the needed resources.
Financing
Starting Capital
Entrepreneurs almost always require starting capital to move their ideas forward to the point where they can start their ventures. Determining the amount of money that is actually needed is tricky because that requirement can change as plans evolve. Other challenges include actually securing the amount desired and getting it when it is needed. If an entrepreneur is unable to secure the required amount or cannot get the funding when needed, they must develop new plans.
Once a venture begins to make cash sales or it starts to receive the money earned through credit sales, it can use those resources to fund some of its activities. Until then, it must get the money it needs through other sources.
Bootstrap financing is when entrepreneurs use their ingenuity to make their existing resources, including money and time, stretch as far as possible—usually out of necessity until they can transform their venture into one that outside investors will find appealing enough to invest in.
Personal Money
Entrepreneurs will almost always have to invest their own personal money into their start-up before others will give them any financial help. Sometimes entrepreneurs form businesses as partnerships or as multi-owner corporations with other individual entrepreneurs who also contribute their own personal funds to the venture.
Love Money
Love money refers to money provided by friends and family who want to support an entrepreneur, often when they have no other ready source of funding after using as much of their own personal money as possible to support their start-up.
Grants and Start-up Prize Money
In some cases, grants that do not need to be repaid might be provided by government or other agencies to support new venture start-ups. Sometimes entrepreneurs can enter business planning or similar competitions in which they might win money and other benefits, like free office or retail space, or free legal or accounting services for a set period of time.
Debt Financing
From an entrepreneur’s perspective, the cost of debt financing is the interest that they pay for the use of the money that they borrow. From an investor’s perspective, their reward, or return on debt financing, is the interest that they gain in addition to the return of the money that they lent to an entrepreneur or other borrower.
To provide some protection for the investor (lender) to enable them to accept an interest rate that is also acceptable for the entrepreneur (borrower), the borrower must often pledge collateral so that if they do not pay back the loan along with interest as arranged, the lender has a way to get all or some of the money they are owed. If a borrower defaults on a loan, the lender can become the owner of the property pledged as collateral. A key objective for an entrepreneur seeking debt financing is to provide sufficient collateral to get the loan, but not pledge so much that they put essential property at risk.
When entrepreneurs borrow money, they must pay it back subject to the terms of the loan. The loan terms include the specific interest rate that will be charged and the time period within which the loan needs to be repaid. Several other terms or features of the loan that can be negotiated between lender and borrowers. One such feature is whether the loan can be converted to equity at a particular point in time and according to certain criteria and subject to specific terms.
Sometimes debt financing can be in the form of trade credit, where a supplier provides product to a business but does not require payment for a specific length of time, or perhaps even until the business has sold the product to a customer. Another form of debt financing is customer advances. This might involve a customer paying in advance for a product or service so that the businesses has those funds available to use to pay its suppliers.
Advantages of Debt Financing
One advantage of debt financing is that the entrepreneur is not sacrificing ownership and some control of their venture when they take out a loan.
Another advantage of debt financing is the certainty of the payments the borrower needs to make during the term of the loan. If the borrower takes out a loan for \$20,000 over a five-year term at a fixed interest rate of 6.2% with a monthly payment schedule designed to pay off the entire loan by the end of its five-year term, they know that each month they must pay \$389 and that over the five years they will have paid back the entire \$20,000 loan amount plus a total of \$3,340 in interest. With this certainty, the business can accurately budget its payback amount for this loan over the five years.
Yet another advantage of debt financing is that it allows companies to tradeon equity. Trading on equity enhances the rate of return on common shareholders’ equity by using debt to financing asset purchases or to take other measures that are expected to cost less than the earnings generated by the action taken. For example, if a company borrows \$20,000 at 6.2% interest and uses that money to purchase a machine it will use to increase its return on equity by 20%, then it is trading on equity. In this case, the company is financially better off than it would have been if it had not taken out the loan. Of course, the inherent risk involved with this strategy is lowered when income streams are relatively stable.
Disadvantages of Debt Financing
A disadvantage of borrowing money is the need to report to those from whom you borrowed the money. This might be particularly true when lenders, often bankers, have interests or incentives—mainly getting their money back plus at all of the interest owed to them during the loan term through regular monthly blended loan payments—that might not fully align with the interests and incentives of the borrower, which might include being able to pay the money back when they are best able to do so without also impacting other parts of their business, like the need to pay their employees or their facility lease payment at the end of a month when an expected customer payment did not arrive as planned.
Another disadvantage of borrowing is that the business’s ownership of the property it pledged as collateral for the loan is placed at risk. For many new ventures, a loan is only possible to acquire if the owner provides their personal guarantee that the money will be paid back as determined in the loan agreement, thus putting personal property at risk.
Equity financing
From an entrepreneur’s perspective, the cost of equity financing is the loss of some control over their venture as they must now share ownership of the business. From an investor’s perspective, their reward in exchange for purchasing an ownership interest in the business is the potential to share in the business’s anticipated future success by possibly receiving dividends (a portion of the profit that is distributed to owners) and by possibly being able to sell their ownership interest to another investor for more than the amount they purchased that ownership interest for originally.
The protection for the investor, who might be a shareholder if the ownership interest is represented in the form of shares in the business, is in the influence they can exert in the company’s decision-making processes. This influence is normally proportionate to their share of the ownership in the overall business. Equity investors normally seek to earn a competitive return on their investment that is in line with the level of risk they assume by investing in the business. The riskier the investment, the higher the return the investor expects.
Public Offering
Stock investors might invest in a public offering where the company’s shares are made available to the public—and by which the company becomes a public company. An initial public offering (IPO) is where a company’s stock (its shares) are sold to institutional investors who then resell them to the public, usually through a securities exchange like the Toronto Stock Exchange (TSX).
When an IPO occurs, a company goes through a legal process to sell shares in its company for the purpose of raising capital. This is called going public. An important part of going public is setting the initial price for the shares being offered for sale (the offering price). The amount that the company will raise is the price they sell the new stock at multiplied by the number of shares they sell less any fees and other expenses incurred to make the sale. If they set the initial selling price of the shares too high, they might not sell all of the shares and the company won’t raise as much capital as anticipated. If they happen to sell all of the overvalued shares, the share price will fall once it begins trading on the exchange. Setting the offering price too high indicates that the company and its agents helping it with its IPO, called underwriters, have valued the company higher than investors in the marketplace value it. If the company sets the offering price too low, it will raise the amount of money planned, but will find out too late that it could have raised much more capital by setting the offering price higher. In this case, the company and its underwriters have undervalued the company and the initial investors will make all of the gains that the company could have when they sell the shares on the exchange almost immediately after they purchased them for more money than they purchased them for.
Private Offering
Stock investors might also invest in a private offering (or private placement) where the shares are sold to a few investors rather than to the general public through an exchange. Institutional private placements involve selling the shares to institutional investors like insurance companies. Private offerings cost less and are subject to less stringent regulation than public offerings, mainly because it is expected that private investors will be more diligent on their own and require less regulatory protection than do public investors.
Venture Capital
Venture capital is raised when investors pool their money. The venture capital fund is then used to very carefully invest in existing but usually young companies that are expected to experience high growth. The venture capital company does not expect to invest for long and it expects to generate a large return. For example, it might expect to invest in an opportunity for a period of up to five years and then get out of the investment with five times the money it originally invested. Of course, only some investment opportunities will generate the returns hoped for and others will return far less than expected.
Venture capitalists might exert some ownership control by influencing some business decisions in cases where they believe that by doing so they can protect their investment or cause the investment to produce greater returns, but they generally prefer to invest in companies that are going to be well-run and will not require them to be involved in decisions. Venture capitalists might also provide some assistance, such as business advice, to the companies in which they invest.
A venture round refers to a phase of financing that institutional investors like venture capitalists provide to entrepreneurs. The first phase (sometimes following a seed round in which entrepreneurs themselves provide the start-up capital and then an angel round where angel investors invest in the company) is called Series A. Subsequent venture rounds are called Series B, Series C, and so on.
Angel Investors
Angel investors are wealthy individuals who on their own, or often along with other angel investors in a network—like the Saskatchewan Capital Network—invest in new ventures in exchange for an ownership interest in the business. Sometimes angels invest in companies in exchange for convertible debt, an investment that starts off as a loan, usually in the form of a bond, that they can exercise an option to convert to an equity interest in the company at a particular point in time for a pre-determined number of shares. Angel investors are generally less restricted in what kinds of investments they will consider as opposed to venture capitalists, who are using other people’s pooled money. Like venture capitalists, however, they normally undertake a rigorous due diligence process to determine whether to invest in the opportunities they are considering.
Equity Crowd Funding
Equity crowd funding is a relatively new way for entrepreneurs to raise capital. It involves using online methods to promote equity interests in ventures to potential investors.
Due Diligence
Investors follow due diligence processes to assess the risk and potential return associated with the investments they are considering. As such, entrepreneurs should maintain a due diligence file or binder that they can quickly draw upon when a desirable potential investor expresses an interest in their venture.
A due diligence file or binder will include copies of many of the legal papers and other important documents that a venture has accumulated that tell the story of the enterprise. These documents will include those related to incorporation, securities it has issued or is in the process of issuing, loans, important contracts, intellectual property documents, tax information, financial statements, and other important documentation.
Advantages of Equity Financing
One important benefit to equity financing is that it does not normally require a regular payback from cash flow. Unlike with debt financing, equity investments do not usually give rise to a regular encumbrance that can increase the difficulty a young company might have in meeting its regular monthly expenses.
Second, when a firm uses equity financing, it does not need to pledge collateral, which means that the company’s assets are not placed at risk.
A potential advantage with equity financing is that, depending upon the form of financing and who the investors are, a firm might gain valued advisers. In addition, investors who exercise their ownership rights to have a say in the operations of the company, or who otherwise provide advise and mentorship to entrepreneurs starting ventures, are usually highly motivated to help the company succeed. Investors expect to benefit only when the companies they invest in succeed, meaning that their financing incentives are aligned with those of the entrepreneur and other owners.
Disadvantages of Equity Financing
Equity financing is often more difficult to raise than debt financing. Second, when they share ownership in exchange for investment into their business, entrepreneurs give up a portion of the value that they create. If things do not go as planned, entrepreneurs can lose control of their companies to their investors.
Sources of Financing for Different Phases of Development
Different financing sources are used at different phases of business development. The appropriate and available financing sources depend upon the risks and opportunities available to both the entrepreneur and to the investors.
Idea Development Phase
• Personal sources (savings and other income)
• Extended personal sources (family, friends, employees, partners)
• Angel investors (possibly)
• also called informal investors
• wealthy individuals interested in investing their own money in early-stage companies as convertible debt holders or equity investors
• convertible debt (convertible bond, convertible note, convertible debenture) allows the bondholder to convert their debt into an equity interest at an agreed-upon price
• can be a win-win arrangement
• If the company is successful, investor has opportunity to participate as equity investor, but if company is only marginally successful, they get their money back with interest.
• If entrepreneurs have difficulty borrowing money, they can add the convertible feature as a sweetener.
• Strategic partners
• might include potential customers or potential suppliers who want to have access to a business like the one proposed (and therefore might fund part of its development)—i.e. a building owner (supplier) might help a business develop which will be a tenant
• might include complementary businesses who feel helping the new business get started might help their own businesses—i.e. a hotel investing in a spa next door to their facility
Start-Up Phase
• Angel investors
• Strategic partners
• Customers (possibly)
• They might place orders for services or products and pay for them up-front, thereby providing financing for the new business.
• They might want your business to succeed so it can support their business. For example, a general contractor (future customer) might help a new plumber get started if there is now a shortage of plumbers affecting the building industry.
• Venture Capitalists (possibly)
• These organizations acquire pools of money to invest, so they differ from angel investors in that those making the decisions are not investing their own money; this means they usually consider investment options which have shown some success already (which isn’t usually the case in the start-up phase).
• Asset-Based lenders
• lend money secured by the assets of the borrower – i.e. plant and equipment
• sometimes this can be done quite creatively – i.e. secure a loan with assets that will turn into money … like through accounts receivable or inventories, etc.
• Equipment Leasing Companies
• Suppliers
Early Operations
• Venture Capitalists (possibly)
• Asset-Based Lenders
• Equipment Leasing Companies
• Suppliers
• Small Business Investment Companies
• U.S. term – developed to bridge the gap between when small businesses need money and the time later on when venture capitalists might provide financing to small businesses
• SBICs are privately owned companies in the United States that are licensed by the Small Business Administration (U.S. Government) to supply equity capital, long-term loans, and management assistance to qualifying small businesses
• Canadian equivalent = Community Futures Corporations
• Trade Credit
• The supplier provides product now on terms so the retailer does not need to pay the supplier for perhaps 30 or 60 or 90 days
• The retailer can then sell the product and collecting the money from the customer before the retailer needs to pay supplier for it the product.
• Factoring
• when a business sells its accounts receivable (its invoices) to a third party (called a factor) at a discount in exchange for immediate money
• differs from bank loan in three ways
• The factor is interested in the value of the receivables; a bank is interested in the firm’s creditworthiness.
• Factoring is not a loan; it is the purchase of a financial asset (the receivables).
• A bank loan involves two parties (lender and borrower); factoring involves three (the business, the factor, and those who owe the money).
Growth Phase
• Venture Capitalists
• Asset-Based Lenders
• Equipment Leasing Companies
• Suppliers
• Small Business Investment Companies
• Trade Credit
• Factoring
• Mezzanine Lenders
• used to fill the financing gap between relatively expensive equity financing and less expensive forms of financing like secured loans
• structured either as an unsecured or subordinated debt instrument or as preferred stock
• represents a claim on assets which is senior only to that of the common shares
• mezzanine debt holders require a higher return than is the case with holders of secured debt (maybe close to 20% or more – because the risk is higher)
• usually issued as private placements (i.e. fewer legal requirements than with public placements)
• can be used by smaller companies
• mezzanine lenders might have right to convert the debt instrument to an equity instrument
• mezzanine lenders work with companies to ensure the high return they require doesn’t cripple the company, so they might take an equity interest or might defer loan payments until the end of loan term or until the company is sold
Exit or Harvest Phase
• Mezzanine Lenders
• Public Debt
• Initial Public Offerings (IPOs)
• issuing common stock or shares to the public
• used by companies seeking capital to expand (or by privately-owned companies wanting to become publicly traded)
• a major challenge is to figure out how to value the shares offered so underwriting firms are often used to help deal with this challenge
• if the price is set too high maybe all the shares will not be sold (and the desired amount of money will not be raised)
• if the price is set too low the company might lose out on money it could have had (if all the shares sold had of been sold at a higher price)
• money from initial sale of shares goes to the company, but after that the shares are traded between shareholders (the company doesn’t get any of this money)
• the money never has to be repaid, but the owners of the shares have a right to any distributed profits (dividends declared) and to residual dissolution proceeds (what is left over after the debt holders and everyone else is paid off if the company assets are sold)
• Acquisition, Leveraged Buy-Outs (LBO), Management Buy-Outs (MBO)
• LBOs are when the controlling interest in the company is purchased using mainly borrowed money (the assets of the company being purchased are often used as the loan collateral).
• MBOs are often a form of LBOs where the purchasers are the current managers of the company. | textbooks/biz/Business/Entrepreneurship/Book%3A_Entrepreneurship_and_Innovation_Toolkit_(Swanson)/1.06%3A_Chapter_6__Financing_Entrepreneurship.txt |
Learning Objectives
After completing this chapter you will be able to
• Explain the considerations entrepreneurs face during the set-up phase of their business development
• Explain the considerations entrepreneurs face during the start-up phase of their business development
• Explain the considerations entrepreneurs face during the growth phase of their business development
Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover. – Mark Twain
This defines entrepreneur and entrepreneurship—the entrepreneur always searches for change, responds to it, and exploits it as an opportunity. – Peter Drucker
Overview
This chapter introduces entrepreneurship topics related to the business set-up phase, start-up phase, and growth phase. These phases are relevant for most start-ups other than those that follow the lean start-up approach in which the elements of the phases described in this chapter are blended together in a process that involves releasing and continually revising product or service prototypes in response to customer feedback.
Set-Up
The goal of the venture set-up phase is to implement the plans needed to start the business prior to its actual start-up. This might include developing and testing the products or services the entrepreneur anticipates selling. It also includes planning around protecting any intellectual property that the venture might have and determine how to gain competitive advantages over its rivals.
Protecting Intellectual Property
Intellectual property refers to the ideas, goods, and services that can be legally protected by copyrights, patents, trade secrets, and trademarks.
Copyright
Copyrights provide protection to original software created by someone. They also protect music, literature, and dramatic and other artistic works for the life of the author of the work plus another 50 years (there are some modifications to this rule for some works). Copyright arises when someone creates a work whether or not they register the copyright. It is also not required in Canada to indicate that a work is copyrighted, although works—like this book—might include the © symbol to remind people that they are copyrighted (even if they are not registered). A copyright can be registered in Canada for a nominal fee—around \$50—but most works that are created are not registered.
The Canadian Intellectual Property Office provides a searchable Copyrights Database (http://www.ic.gc.ca/app/opic-cipo/cpyrghts/dsplySrch.do?lang=eng) of the copyrights that have been registered.
The Canadian Intellectual Property Office (2015a) website lists the following categories of copyright protection:
Copyright applies to all original literary, dramatic, musical and artistic works provided the conditions set out in the Copyright Act have been met. Each of these general categories covers a wide range of creations, including:
• literary works such as books, pamphlets, computer programs and other works consisting of text
• dramatic works such as motion picture films, plays, screenplays and scripts
• musical works such as compositions with or without words
• artistic works such as paintings, drawings, maps, photographs, sculptures and plans
Copyright also applies to other subject-matter consisting of:
• performers’ performances, meaning any of the following:
• a performance of an artistic, dramatic or musical work, whether or not the work was previously recorded and whether or not the work’s term of copyright protection has expired
• a recitation or reading of a literary work, whether or not the work’s term of copyright protection has expired
• an improvisation of a dramatic, musical or literary work, whether or not the improvised work is based on a pre-existing work
• sound recordings, meaning recordings consisting of sounds, whether or not a performance of a work, but excluding any soundtrack of a cinematographic work where it accompanies the cinematographic work
• communication signals, meaning radio waves transmitted through space without any artificial guide, for reception by the public (Canadian Intellectual Property Office, 2015a)
Patents
Patents provide protection for 20 years (from date of filing patent application) to inventors by giving them recourse if others make, use, or sell their invention without permission: “Patents apply to newly developed technology as well as to improvements on products or processes. Patents provide a time-limited, legally protected, exclusive right to make, use and sell an invention. In this way, patents serve as a reward for ingenuity” (Canadian Intellectual Property Office, 2015d).
Patents must be filed in order to provide patent protection to new inventions. It can be time-consuming and expensive to file patents. The Canadian Intellectual Property Office (2015d) says the following about them:
Patents can have a great deal of value. You can sell them, license them or use them as assets to attract funding from investors.
In exchange for these benefits, you must provide a full description of the invention when you file a patent. This helps enrich technical knowledge worldwide. Details of patent applications filed in Canada are disclosed to the public after an 18-month period of confidentiality.
To be eligible for patent protection, your invention must be:
• new—first in the world
• useful—functional and operative
• inventive—showing ingenuity and not obvious to someone of average skill who works in the field of your invention
The invention can be:
• a product (e.g., door lock)
• a composition (e.g., chemical composition used in lubricants for door locks)
• a machine (e.g., for making door locks)
• a process (e.g., a method for making door locks)
• an improvement on any of these (Canadian Intellectual Property Office, 2015d)
You can search the Canadian Patents Database from the Canadian Intellectual Property Office website. If you use this search engine, notice the level of detail included with each patent entry.
Trademarks
When registered, trademark protection lasts for 15 years and can be often be renewed for another term. The Canadian Intellectual Property Office (2015c) website lists the three kinds of trademarks:
• An ordinary mark is made up of words, sounds, designs or a combination of these used to distinguish the goods or services of one person or organization from those of others. For example, suppose you started a courier business that you chose to call Giddy-up. You could register these words as a trademark (if you met all the legal requirements) for the service that you offer.
• A certification mark can be licensed to many people or companies for the purpose of showing that certain goods or services meet a defined standard. For example, the Woolmark design, owned by Woolmark Americas Ltd., is used on clothing and other goods.
• A distinguishing guise is about the shape of goods or their containers, or a way of wrapping or packaging goods that shows they have been made by a specific individual or firm. For example, if you manufactured butterfly-shaped candy you could register the butterfly shape as a distinguishing guise. (Canadian Intellectual Property Office, 2015c)
Industrial Designs
Original industrial designs can be registered for up to 10 years. They “are about how things look. More technically speaking, they are the visual features of shape, configuration, pattern or ornament, or any combination of these features, applied to a finished article. For example, the shape of a table or the shape and decoration of a spoon may be industrial designs” (Canadian Intellectual Property Office, 2015b).
Product/Process/Trade Secrets
Product/process/trade secrets come into play when patents are not filed, but instead innovations are kept secret. For example, the formula for Coca-Cola and the recipe for the KFC herbs and spices are not registered anywhere, but instead are kept secret by their owners. This protection lasts for as long as the secret is kept.
Competitive Performance
While entrepreneurs must always strive to establish competitive performance advantages, it is particularly important when the potential protection afforded by patents, copyrights, trade secrets, or trademarks is weak. In these cases the best protection is to out-compete rivals with production, pricing, distribution, selling, and other strategies.
Other Set-Up Considerations
Among the other set-up activities for new ventures are the following:
• Attract purchase orders or otherwise line up initial sales
• Set up organizational and legal structure
• Sole Proprietorship
• Partnership
• Limited Partnership
• Corporation
• Cooperative
• Set up control systems
• Set up relationships with suppliers and others
• Set up everything else in preparation for start-up
• Choose name
• Check zoning, equipment prices, suppliers, etc.
• Choose location
• Arrange lease terms, leasehold improvements, signage, pay deposits, etc.
• Get business license, permits, etc.
• Set up banking arrangements
• Set up legal and accounting systems (or professionals)
• Order equipment, locks and keys, furniture, etc.
• Recruit employees, set up payroll system, benefit programs, etc.
• Decide on graphics, logos, promotional methods, etc.
• Order business cards, letterhead, etc.
• Set up supplier agreements
• Buy inventory, insurance, etc.
• Revise business plan
Start-Up
The goal of the venture start-up phase is to implement the plans needed to sustain the venture from the time when it begins making sales until when the business has moved beyond the point where the entrepreneur must continually fight for the business’s survival and persistence. It ends when the entrepreneur can instead shift emphasis toward business growth or maintaining the venture’s stability.
A major consideration during the start-up phase is making the needed sales to establish an adequate cash flow.
Another important consideration is ensuring that the venture is adaptable enough to productively respond to when things do not proceed as planned. Part of this involves implementing appropriate leadership and management strategies.
Growth
The goal during the growth phase is to grow or maintain the venture until the time when the entrepreneur chooses to harvest the value they generated by starting and running the venture. To do this entrepreneurs must continually monitor their operating environment at all levels: at the societal level using analysis tools like a PESTEL analysis; at the industry level using a tool like Porter’s Five Forces Model; at the market level using tools like market profile analyses; and at the firm level using tools like a SWOT Analysis/TOWS Matrix, VRIO, financial analysis methods, and stakeholder analyses. They must also continually strive to be innovative to generate new ideas and to maintain their competitive advantages. | textbooks/biz/Business/Entrepreneurship/Book%3A_Entrepreneurship_and_Innovation_Toolkit_(Swanson)/1.07%3A_Chapter_7__Business_Set-Up_Start-Up_and_Growth.txt |
Learning Objectives
After completing this chapter you will be able to
• Describe the considerations associated with a variety of strategic approaches to entrepreneurship
However beautiful the strategy, you should occasionally look at the results. – Winston Churchill
Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different. – Michael Porter
All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved. – Sun Tzu
Overview
There are many strategic considerations for entrepreneurs, including a few big strategic issues like determining their exit strategies, planning for succession, and embracing ideas like sustainable entrepreneurship.
Exit Strategies
When entrepreneurs decide to exit their business, they follow one or more of the following exit strategies, sometimes called harvest methods. As any chosen exit strategy will have major implications for the decisions an entrepreneur makes regarding almost all other aspects of their business, it is important to determine the exit strategy early.
Private Sale
A private sale involves selling a business to another individual or group. They can be done quite informally, although it is prudent to seek legal, financial, and sales help to ensure the sale goes smoothly. Selling an ongoing business can be a fairly complex process that requires expertise that only experienced professionals, like a business broker, have. One challenge in selling any business is to determine its valuation.
Depending upon when an entrepreneur plans to sell their business, the exit strategy may mean that the business owner will want to take actions designed to increase the value of the enterprise prior to the sale. It might also impact the forms of financing the entrepreneur is willing to pursue. For example, an entrepreneur might want to borrow money to purchase machinery needed to expand the business and increase its value. This might be more appealing than raising the desired capital by selling ownership interests in the company because, if the entrepreneur is sharing ownership, they won’t get as much of the sale proceeds when the company is sold.
Public sale
During a public sale, the business is sold to anyone in the general public who can and wants to purchase an ownership interest in the company.
An initial public offering (IPO) transforms a private company into a public one when shares of stock in the company are created through a legal process and are sold to members of the general public through a securities exchange. IPOs are used to raise needed capital for a company. They can also be used to transfer the value that an entrepreneur has built up in a company into cash for the entrepreneur in exchange for ownership interests for the investors. In other words, an IPO can be used to sell all or part of a company. Using an IPO to transform a private company into a public company can also be done for other reasons, like to gain increased exposure.
An IPO process is time-consuming and expensive because of the legal requirements to produce and disclose all of the required information so that the public can make informed choices when they consider buying the shares. Working with an underwriter through an investment banking company is essential to try to set the best share price. If the initial share price is set too high, not all of the shares will be sold and the company won’t raise as much capital as it had planned. If the initial share price is set too low, the company will end up giving value away. This happens when the purchasers of the shares buy them at the low initial price and then immediately sell them in the market at the higher price the market is willing to pay. That profit made by the initial purchaser of the shares could have instead been realized by the company had the initial share price been set at the right level.
Like with a private sale strategy, a strategy to sell all or part of a business publicly might lead an entrepreneur to pursue other strategies to increase the value of the firm in the eyes of potential buyers. As public sales usually apply to companies that are larger in size, it might be possible to for owners to sell part of their company prior to when they want to sell all of it while retaining control—provided they keep at least 51% of the shares for themselves.
Hold
A hold situation might involve setting up systems so that the venture can operate without the day-to-day involvement of the entrepreneur. This often means that the owner must hire and train the right people to operate the business in their absence.
Unlike a private or public sale where the owner might sell the entire company in exchange for cash, a hold situation often means that the owner retains some or all of the ownership interest and continues to receive their share of the distributed profits along with complete or partial say in how the company runs. Sometimes hold situations are most appropriate for family businesses that intend to stay family businesses when new generations of family members take over the business operations.
Combination Sale and Hold
Sometimes it is prudent and advantageous for a business owner to sell some of the business and hold some of it. This might form part of a succession planning strategy.
Succession Planning
A good succession plan will help make the transfer of a business go smoothly, and allow the entrepreneur to maintain good relationships with employees and business partners. Succession planning helps
• Protect the legacy of your business
• Maintain a service to your community
• Build value for your business
• Provide financial security for your family and your stakeholders
• Deal with unexpected events (illness, accident or death)
• Prepare for the future (Canada Business Network, 2013)
Business owners should begin their succession planning as soon as they are able because the process takes time and the decisions made now can affect the opportunities for achieving succession and exit strategy goals later. The process for succession planning should include the following considerations (Canada Business Network, 2013):
• The owner should establish their goals for the business up to and post-retirement, including whether they wants to retain an ownership interest in the company after stepping aside from the day-to-day operations of the business.
• Decision-making processes should be established, especially for when or if the current owner decides to pass the business on to a successor.
• Any potential successors should be trained in the business operations.
• The owner should prepare a good estate plan so that all income tax and financial factors and implications are considered.
• The owner should have a contingency plan in place in case the original plans do not turn out as intended.
• The owner should plan how to transfer the business, should valuate it, and should determine their exit strategy.
Sustainable Entrepreneurship
The relatively recent focus by businesses on their corporate social responsibility initiatives began as a defensive reaction to societal pressures to become better corporate citizens, but has evolved to become a more proactive approach by managers. This evolution has given rise to the sustainable entrepreneurship management concept (Weidinger, Fischler, & Schmidpeter, 2014):
The term “Sustainable Entrepreneurship” recently emerged in the business world to describe this latest very entrepreneurial and business-driven view on business and society. Current definitions for Sustainable Entrepreneurship focus on new solutions or sustainable innovations that aim at the mass market and provide value to society. Entrepreneurs or individuals or companies that are sustainability-driven within their core business and contribute towards a sustainable development can be called sustainable entrepreneurs, according to Schaltegger and Wagner (2011). Others argue that sustainable entrepreneurship stands for a unique concept of sustainable business strategies that focuses on increasing social as well as business value – shared value (Porter and Kramer 2011) – at the same time (Weidinger et al., 2014, p. 1). | textbooks/biz/Business/Entrepreneurship/Book%3A_Entrepreneurship_and_Innovation_Toolkit_(Swanson)/1.08%3A_Chapter_8__Strategic_Entrepreneurship.txt |
While the idea of the entrepreneur and entrepreneurship has evolved to include the attributes of innovation, opportunity discovery (or construction) and value creation, my sense of the basic gist of the term continues to focus on this facet of human behavior: initiative taking. The process of entrepreneurship invariably involves an individual or individuals investing effort into something they had not previously done before. – Fayolle (2007, p. ix)
Learning Objectives
After completing this chapter you will be able to
• Describe how innovation and entrepreneurship are interrelated concepts
• Describe the building blocks for both innovation and successful entrepreneurship
• Explain the elements of innovation
Overview
This chapter introduces the building blocks for both innovation and successful entrepreneurship while describing how innovation and entrepreneurship are interrelated concepts. It continues with a discussion about competencies—and specifically core competencies—as necessary building blocks for both innovation and successful entrepreneurship. The elements of innovation are also discussed.
Innovation and Entrepreneurship
The concepts of innovation and entrepreneurship are undeniably interrelated:
Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service. It is capable of being presented as a discipline, capable of being learned, capable of being practiced. Entrepreneurs need to search purposefully for the sources of innovation, the changes and their symptoms that indicate opportunities for successful innovation. And they need to know and to apply the principles of successful innovation (Drucker, 1985, p. 19).
Drucker (1985) argued that innovation should be viewed as an economic or social phenomenon rather than a technological term. Innovation is not about making new inventions, but rather about recognizing how to take advantage of opportunities and changes: “Systematic innovation therefore consists in the purposeful and organized search for changes, and in the systematic analysis of the opportunities such changes might offer for economic or social innovation” (p. 35). This is consistent with Schumpeter’s (1934) view that innovation arises from new combinations of materials and forces.
To better understand the interrelationship between innovation and entrepreneurship, we will consider some of the building blocks for both innovation and successful entrepreneurship.
Competencies and Core Competence
Competencies are the necessary ingredients for entrepreneurial competence:
Individual competencies are the combination of learnable behaviors that encompass attitudes (wanting to do), skills (how to do), knowledge (what to do), practical experiences (proven learning), and natural talents of a person in order to effectively accomplish an explicit goal within a specific context.
Collective competencies are the synergistic combination of the individual competencies of team members within organizations. There is a continuum that exists from low-functioning teams to high-functioning teams. High-functioning teams, although very rare, are those that apply collective competencies the most effectively (Matthews & Brueggemann, 2015, p. 10).
Core competencies are those that are collectively held and that include “the learnable behaviors the entire organization must practice in order to achieve competence in relation to the organization’s purpose and its competitive environment. A core competency encompasses the knowledge, skills, and technology that create unique customer value” (Matthews & Brueggemann, 2015, p. 11):
Organizations need to identify what core competencies they need to cultivate in their precious human resources in order to meet a competence level that rises above the competition. The three tests to identify a core competence are:
1. First, a core competence provides potential access to a wide variety of markets.
2. Second a core competence should make a significant contribution to the perceived benefit of the end product.
3. Finally a core competence should be difficult for competitors to imitate (Matthews & Brueggemann, 2015, p. 12).
Entrepreneurs must assess their and their organization’s individual competencies to better understand how to fill competency gaps and build collective and core competencies.
Elements of Innovation
Matthews and Brueggemann (2015) identified the following 12 elements of innovation. They argued that innovation is best understood by first examining each of the following elements.
Innovation Degrees
Incremental innovations are small-scale improvements on what is already being done, often with the intention to improve efficiencies to reduce costs, or improve products or services offered: “Both Six Sigma and Lean are well-regarded managerial quality improvement programs that explicitly target the removal of many types of organizational waste and variability…. An incremental innovation can be used to differentiate products for marketing purposes” (Matthews & Brueggemann, 2015, p. 34).
Evolutionary innovations involve doing new things for existing customers and markets, and also doing things that extend product offerings to new customers and new markets (Matthews & Brueggemann, 2015).
Revolutionary innovations are when businesses pursue new products, businesses, customers, and markets. The impacts from these types of innovations can be much higher than from either incremental or evolutionary innovations (Matthews & Brueggemann, 2015).
Innovation Types
There are many types of innovations. “Organizing innovation into types makes it is easier to understand how you can use multiple types of innovation simultaneously. The fundamental innovation types include products, customer experiences, solutions, systems, processes, and business and managerial models” (Matthews & Brueggemann, 2015, p. 37). Matthews and Brueggemann (2015) combined the innovation degrees with the innovation types to develop The Innovation Matrix.
Innovation Direction
Innovation direction is a concept that encompasses forward and reverse innovation. Innovation direction is a notion that is based on the source and target of the innovation. A forward innovation would have its source in country X and the target in country X. A reverse innovation would have its source in country Y and later targeted to a different country such as country X. Country X or Y could be a developed or developing country (Matthews & Brueggemann, 2015, p. 40).
Innovation Risk
The entrepreneurial ecosystem described earlier in this book indicated that individuals, firms, and organizations are interconnected in ways that impact each other. According to Matthews and Brueggemann (2015), co-innovation risk occurs when multiple actors in the ecosystem attempt to innovate, which leads to the possibility that a new innovation developed by one company is ready at a different time than a dependent second innovation developed by another firm. For example, it can be disastrous for a computer hardware company to release a new product that is dependent upon new software if the company developing that software does not make it available on time.
Adoption chain risk also occurs when multiple firms in the value chain are simultaneously developing new products and services. If one firm, for example, releases a product that must be serviced by a different company before that other company is prepared to offer that service, the product release can fail (Matthews & Brueggemann, 2015).
Innovation Principles and Tenets
Both non-profit and for-profit organizations are governed by principles that dictate how they operate. Non-profits often strive to alleviate social problems while for-profits attempt to satisfy the desires of their shareholders. An increasing number of organizations are adopting alternative measures of performance that include not only economic outcomes, but also social and environmentally responsible results: a triple bottom line (Kneiding & Tracey, 2009). This can—and should—lead to organizations redefining themselves as pursuing the creation of shared value rather than just profits (Matthews & Brueggemann, 2015; Porter & Kramer, 2011):
Companies must take the lead in bringing business and society back together. The recognition is there among sophisticated business and thought leaders, and promising elements of a new model are emerging. Yet we still lack an overall framework for guiding these efforts, and most companies remain stuck in a “social responsibility” mindset in which societal issues are at the periphery, not the core.
The solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking. …
The purpose of the corporation must be redefined as creating shared value, not just profit per se. This will drive the next wave of innovation and productivity growth in the global economy. It will also reshape capitalism and its relationship to society. Perhaps most important of all, learning how to create shared value is our best chance to legitimize business again (Porter & Kramer, 2011, p. 4).
Innovation Thresholds
Organizations should strive to achieve their innovation threshold:
An innovation threshold is a marker that each business sector needs to achieve in order to be competitive. To thrive, an organization cannot under-innovate, while over-innovation would be wasteful and ineffectual. Innovation thresholds range from low to high, and are different for each business sector. Once an organization achieves the innovation threshold, additional innovation may not matter (Matthews & Brueggemann, 2015, p. 52).
After achieving their innovation threshold such that more innovation might not generate enough extra value to make the effort worthwhile, organizations must rely on other innovation competencies. For example, some industries like insurance and airlines have a relatively low product innovation threshold, so after reaching it they must rely on other forms of innovation and entrepreneurship competencies “such as creativity, culture, strategy, leadership, and technology” (Matthews & Brueggemann, 2015, p. 53) to further advance their goals. Higher technology fields normally have higher product innovation thresholds and can gain much by striving for more product innovations.
Innovation Criteria
Matthews and Bruggemann (2015) argue that a design should be judged based on its desirability, feasibility, and viability: “An innovative design needs to be desirable, feasible, and aligned with a sustainable business model” (Matthews & Brueggemann, 2015, p. 53).
Innovation Processes
Another element of innovation is the set of planned innovation processes that are required to make innovation happen. These processes must balance the need to provide customers with what they want with what is technologically feasible and financially viable. One example of an innovation process is design thinking.
Innovation Diffusion
Lundblad (2003) defined diffusion of innovation as “the adoption and implementation of new ideas, processes, products, or services” as she studied the diffusion of innovation “within and across organizations” (p. 51). This concept is particularly important because many sectors of the economy strive for organizational improvement, but “innovations often are not diffused within and across organizations to achieve improvement” (p. 51). To illustrate her point, she described how research in the healthcare sector has led to the development of new advancements in clinical practice and process improvements, yet—despite the relatively low cost to implement many of these process innovations—it often takes many years before these improvements are adopted into practice, if they ever are. This means that often there is a gap between when an innovation is developed and when it is implemented in practice.
The Theory of the Diffusion of Innovation can help us understand what we must do in terms of implementing steps and processes for innovations to be diffused into the areas of practice where they are needed. There are four main elements of the theory.
The first element of the theory is the innovation itself, whether that be an idea, a product, a process, or something else that is new to the potential adopters. The theory says that there are several characteristics of the innovation that affect its rate of adoption, including its complexity and its compatibility with whatever it will be connected within some manner (Lundblad, 2003).
The second element is communication, specifically the processes used by people to share the information needed to develop a common understanding. The rate of adoption will depend upon the sources of communication, even more so than the technical information contained in the messages (Lundblad, 2003).
Time is the third element of the theory. According to Rogers (2003), who developed the Theory of the Diffusion of Innovation, three considerations are related to the time element. The first is the innovation-decision process that describes the gap in time between when a potential early adopter learns about an innovation and either adopts it or doesn’t. There are several stages that the potential adopter goes through during this time frame. Second, Rogers (2003) classified potential adopters as “innovators, early adopters, early majority, late majority, and laggards” (Lundblad, 2003, p. 54) based upon how early they were likely to adopt an innovation. Finally, the rate of adoption describes how quickly the innovation is adopted. As Lundblad (2003) noted,
Innovation adoption tends to follow an S-shaped curve, meaning that only a few individuals initially adopt the innovation; but as time moves on and more and more individuals adopt, the rate increases. Eventually, though, the adoption rate levels off and begins to decline. (p. 54)
The final element of the theory is social system. Rogers (2003) said that diffusion of innovation occurs within a social system, which might be somewhat limited, like the members of an organization, or widespread, like all of the consumers in a country. Some members within a social system, such as “opinion leaders, change agents, and champions” (Lundblad, 2003, p. 55), influence others.
Innovation Pacing
Innovation pacing refers to the speed with which an organization delivers innovations, and how that impacts its ability to compete: “Pacing is influenced by your innovation capability and the ability of your customers to adopt those innovations” (Matthews & Brueggemann, 2015, p. 60).
Innovation Value
Red ocean strategies focus on competing with other players for market share within industries that currently exist. This type of thinking can be a constraint if it restricts organizations’ abilities to adapt to change and to figure out ways to pursue blue ocean strategies, namely entirely new markets, business models, industries, and other opportunities that others have not yet been conceptualized or pursued. Blue ocean strategies are not about competing with others; they are about rendering competitors irrelevant because they are not playing in the same field as your organization, and, more importantly, they are not matching the value that you create for customers in the new market that you opened up: “Value without innovation is an improvement that may not be sufficient for organic growth. Innovation without value does not provide the utility that customers would be willing to purchase. Innovation needs to be aligned with value comprised of utility, price, and cost” (Matthews & Brueggemann, 2015, p. 62).
Disruptive Innovation
The last element is disruptive innovation:
Disruptive innovations are different than incremental, evolutionary, and revolutionary innovation degrees. A disruptive innovation is not a revolutionary innovation that makes other innovations, such as products and services, better. Rather, a disruptive innovation transforms any type of innovation that historically was expensive and complicated into an innovation that is affordable, simple, and available to broader markets (Matthews & Brueggemann, 2015, p. 63). | textbooks/biz/Business/Entrepreneurship/Book%3A_Entrepreneurship_and_Innovation_Toolkit_(Swanson)/1.09%3A_Chapter_9__Innovation_and_Entrepreneurship.txt |
Entrepreneurs adopt the ways of the adept and adapt to a changing environment. Actually, entrepreneurs are more entrepreneurs, because they are forever entering into new territory. – Jarod Kintz
Entrepreneurship rests on a theory of economy and society. The theory sees change as normal and indeed as healthy. And it sees the major task in society—and especially in the economy—as doing something different rather than doing better what is already being done. That is basically what Say, two hundred years ago, meant when he coined the term entrepreneur. It was intended as a manifesto and as a declaration of dissent: the entrepreneur upsets and disorganizes. As Joseph Schumpeter formulated it, his task is “creative destruction. – Peter Drucker
Learning Objectives
After completing this chapter you will be able to
• Explain what an entrepreneurial ecosystem is as a form of complex adaptive system while explaining its relevance to the study of entrepreneurship
• Describe various entrepreneurship concepts, such as intrapreneurship and social entrepreneurship, while explaining their relevance to the study of entrepreneurship
Overview
In this chapter several entrepreneurship topics are introduced, including: entrepreneurial ecosystems, intrapreneurship, social entrepreneurship, Indigenous entrepreneurship, community-based entrepreneurship, and family business. This overview of just a few of the branches of entrepreneurship thought and research is intended to provide the reader with an idea of the breadth of this field of study. There are many other categories of entrepreneurship, from women entrepreneurs to technology entrepreneurs, which provide interesting and important study topics.
The Entrepreneurial Environment
Entrepreneurial Ecosystems
An entrepreneurial ecosystem might be viewed as a complex adaptive system that can be compared to a natural ecosystem, like a forest. This complexity theory perspective can help us better understand the nature of an entrepreneurial ecosystem.
A forest is a complex adaptive system made up of many, many different elements, including the plants and animals that live in it or otherwise influence how it works. Those many different elements behave autonomously from each other in most ways; but as they do what is necessary to ensure their own survival—and as they attempt to thrive—the end result of their collective behaviours is a forest that exists in a somewhat stable state of being.
The forest is in a somewhat stable state because it is ever evolving and changing to some degree as variables change. Changing variables include new insect species that move in and out, new plants that try to establish roots there, and similar changes that regularly happen to cause some change, but that don’t necessarily change the fundamental nature of the forest.
Sometimes, however, a parameter change occurs when something more substantial happens, like a forest fire. When a fire burns down the plants and chases many of the animals away, the forest fundamentally changes to a very different state (the change from the first state to a new and very different one is called bifurcation).
An entrepreneurial ecosystem is similar in that the nature of entrepreneurship—thriving or not—across a geographic region remains in a somewhat stable state of being even though it is made up of a complex network of independent elements that continually adapt to the organizational environments in which they operate; it is a complex adaptive system. The variable changes, including new leaders that replace the old ones, new rules and regulations, and entrepreneurial support systems that come and go do not necessarily change the fundamental nature of the entrepreneurial ecosystem (although the residents of the region might actually want substantial change leading to a more vibrant economic situation). A parameter change, however, might cause a bifurcation that leaves the system in a very different state—maybe one where entrepreneurship thrives and prosperity prevails much more than it did before. The introduction of a major new project that, in turn, spawns new spin-off businesses and gives the region a needed economic boost, and maybe even leaves it with a new entrepreneurial culture, is an example of a parameter change.
In a more formal sense, an entrepreneurial ecosystem can be described as
a set of interconnected entrepreneurial actors (both potential and existing), entrepreneurial organisations (e.g. firms, venture capitalists, business angels, banks), institutions (universities, public sector agencies, financial bodies) and entrepreneurial processes (e.g. the business birth rate, numbers of high growth firms, levels of ‘blockbuster entrepreneurship’, number of serial entrepreneurs, degree of sell-out mentality within firms and levels of entrepreneurial ambition) which formally and informally coalesce to connect, mediate and govern the performance within the local entrepreneurial environment (Mason & Brown, 2014, p. 5).
Definitions of entrepreneurial ecosystems can include the suppliers, customers and others that any particular firm in that ecosystem directly interacts with as well as other individuals, firms, and organizations that the firm might not directly interact with, but that play a role in shaping the ecosystem. While framing it as an innovation ecosystem rather than an entrepreneurial ecosystem, Matthews and Brueggemann (2015) described an internal ecosystem as a company’s activities that are independent of other companies and an external ecosystem that includes all of the other actors that the company is dependent upon in some way.
While some researchers have studied how entrepreneurial ecosystems can generate geographic clusters of technology-based ventures, like in Silicon Valley (Cohen, 2006) or how these ecosystems can facilitate growth in entrepreneurship in cities and similarly defined regions (Neck, Meyer, Cohen, & Corbett, 2004), Mason and Brown (2014) suggest that even traditional industries can “provide the platform to create dynamic, high-value-added entrepreneurial ecosystems” (p. 19).
Types of Entrepreneurship
Intrapreneurship
According to Martiarena (2013) “the recognition of intrapreneurial activities has widened the notion of entrepreneurship by incorporating entrepreneurial activities undertaken within established organisations to the usual view of entrepreneurship as new independent business creation.” (p. 27). Intrapreneurship, then, is a form of entrepreneurship that occurs within existing organizations, but intrapreneurs are generally considered to be “significantly more risk-averse than entrepreneurs, earn lower incomes, perceive less business opportunities in the short term and do not consider that they have enough skills to succeed in setting up a business” (Martiarena, 2013, p. 33).
Merriam-Webster (n.d.) defines an intrepreneur as “a corporate executive who develops new enterprises within the corporation” (Intrapreneur, n.d.); however some might consider some employees who are not corporate executives to also be intrapreneurs if they demonstrate entrepreneurial behaviour within the company they work for.
Social Entrepreneurship
Social entrepreneurship involves employing the principles of entrepreneurship to create organizations that address social issues.
Martin and Osberg (2007) defined a social entrepreneur as an individual who
targets an unfortunate but stable equilibrium that causes the neglect, marginalization, or suffering of a segment of humanity; who brings to bear on this situation his or her inspiration, direct action, creativity, courage, and fortitude; and who aims for and ultimately affects the establishment of a new stable equilibrium that secures permanent benefit for the targeted group and society at large. (p. 39)
Martin and Osberg’s (2007) definition encompasses for-profit and not-for-profit organizations created by these entrepreneurs and also some government initiatives, but it excludes entities that exist solely to provide social services and groups formed to engage in social activism.
An idealized definition of social entrepreneurship developed by Dees (2001) is informative in that it supports Martin and Osberg’s (2007) definition while complementing it with a set of criteria against which organizations can be assessed to determine whether they are socially entrepreneurial.
Social entrepreneurs play the role of change agents in the social sector, by
• adopting a mission to create and sustain social value (not just private value)
• recognizing and relentlessly pursuing new opportunities to serve that mission
• engaging in a process of continuous innovation, adaptation, and learning
• acting boldly without being limited by resources currently in hand
• exhibiting heightened accountability to the constituencies served and for the outcomes created (Dees, 2001, p. 4)
Social entrepreneurs “use their skills not only to create profitable business ventures, but also to achieve social and environmental goals for the common good” (Zimmerer & Scarborough, 2008, p. 25). They are “people who start businesses so that they can create innovative solutions to society’s most vexing problems, see themselves as change agents for society” (Scarborough, Wilson, & Zimmer, 2009, p. 745).
Social entrepreneurship
• addresses social problems or needs that are unmet by private markets or governments
• is motivated primarily by social benefit
• generally works with—not against—market forces (Brooks, 2009, p. 4)
A social entrepreneur might
• start a new product or service
• expand an existing product or service
• expand an existing activity for a new group of people
• expand an existing activity to a new geographic area
• merge with an existing business (Brooks, 2009, p. 8)
What social entrepreneurship is not: it is not anti-business:
• Many social entrepreneurs came from the commercial business world.
• Sometimes commercial and nonprofit missions align for mutual benefit.
• The difference between it and commercial entrepreneurship is not greed.
• There is no evidence commercial entrepreneurs are especially greedy—they are more likely to be goal-obsessed than money-obsessed.
• Social entrepreneurs are also commercial entrepreneurs.
• Social entrepreneurs do not only run non-profits.
• Social entrepreneurship can occur in any sector and with any legal status. (Brooks, 2009, pp. 16-17)
The social entrepreneurship zone:
From Swanson and Zhang (2010, 2011, 2012)
Figure 7 – The Social Entrepreneurship Zone (Illustration by Lee A. Swanson)
Aboriginal (Indigenous) Entrepreneurship
Swanson and Zhang (2014) described a range of perspectives on what Indigenous entrepreneurship means and what implications it holds for social and economic development for Indigenous people.
Indigenous entrepreneurship might simply be entrepreneurship carried out by Indigenous people (Peredo & Anderson, 2006), but it can also refer to the common situation where Indigenous entrepreneurs—sometimes through community-based enterprises—start businesses that are largely intended to preserve and promote their culture and values (Anderson, Dana, & Dana, 2006; Christie & Honig, 2006; Swanson & Zhang, 2011). Dana and Anderson (2007) expanded upon that notion when they described Indigenous entrepreneurship as follows:
There is rich heterogeneity among Indigenous peoples, and some of their cultural values are often incompatible with the basic assumptions of mainstream theories. Indigenous entrepreneurship often has non-economic explanatory variables. Some Indigenous communities’ economies display elements of egalitarianism, sharing and communal activity. Indigenous entrepreneurship is usually environmentally sustainable; this often allows Indigenous people to rely on immediate available resources and, consequently, work in Indigenous communities is often irregular. Social organization among Indigenous peoples is often based on kinship ties, not necessarily created in response to market needs. (p. 601)
Lindsay (2005) described Indigenous entrepreneurship as something even more complex:
Significant cultural pressures are placed on Indigenous entrepreneurs. These pressures will manifest themselves in new venture creation and development behavior that involve the community at a range of levels that contribute toward self-determination while incorporating heritage, and where cultural values are an inextricable part of the very fabric of these ventures. Thus, the Indigenous “team” involved in new venture creation and development may involve not only the entrepreneur and the business’ entrepreneurial team but also the entrepreneur’s family, extended family, and/or the community. Thus, in Indigenous businesses, there are more stakeholders involved than with non-Indigenous businesses. For this reason, Indigenous businesses can be regarded as more complex than non-Indigenous businesses and this complexity needs to be reflected in defining entrepreneurship from an Indigenous perspective. (p. 2)
Community-Based Enterprises and Community-Based Entrepreneurship
Peredo and Chrisman (2006) described community-based enterprises (CBEs) as emerging from “a process in which the community acts entrepreneurially to create and operate a new enterprise embedded in its existing social structure” (p. 310). CBEs emerge when a community works collaboratively to “create or identify a market opportunity and organize themselves in order to respond to it” (p. 315). These ventures “are managed and governed to pursue the economic and social goals of a community in a manner that is meant to yield sustainable individual and group benefits over the short and long term” (p. 310). CBEs are positioned in a sector of the economy that is not dominated by a profit motive, often because there is little profit to be made, or by government. As illustrated in the next paragraphs, they also serve what we can refer to as the social commons.
Modern societies are comprised of three distinct, but overlapping sectors (Mook, Quarter, & Richmond, 2007; Quarter, Mook, & Armstrong, 2009; Quarter, Mook, & Ryan, 2010). Businesses operating in the private sector primarily strive to generate profits for their owners by providing goods and services in response to market demands. “While this sector provides jobs, innovation, and overall wealth, it is not suited to addressing most social problems because there is usually no profit to be made by doing so” (Swanson & Zhang, 2012, p. 177). The public sector redistributes the money it collects in taxes to provide public goods and to serve needs not met by the private sector. “While this sector provides defence, public safety, education and a range of other public needs and social services, it has limited capacity to recognize and solve all social needs” (Swanson & Zhang, 2012, p. 177). The remaining sector—referred to by a variety of names including the third sector, the citizens’ sector, the voluntary sector, the non-profit sector, and more recently by Mintzberg, the plural sector (Mintzberg, 2013; Mintzberg & Azevedo, 2012)—is comprised of organizations that deliver goods and services the other sectors do not provide and are either owned by their members (with limited or no potential for individuals or small groups to gain a controlling interest in the organization) or not owned by any individuals, governments, businesses, other organizations, or any particular entity at all.
Bollier (2002) used the term the commons to distinguish the collaborative community-based concern for particular kinds of resources from the management interests in resources assumed by the markets and governments. He pointed out that “people have interests apart from those of government and markets” (p. 12). One of his categories of the commons is the social commons, which involves “pursuing a shared mission as a social or civic organism” (p. 12). The social commons is comprised of community members who contribute energy and resources as they work together to create value.
Scholars have studied CBEs’ role in promoting socio-economic development in developing countries (Manyara & Jones, 2007; Torri, 2010) and some have conceptualized Indigenous entrepreneurship as based on a community-based orientation (Kerins & Jordan, 2010; Peredo & Anderson, 2006; Peredo, Anderson, Galbraith, Honig, & Dana, 2004). Social enterprises are sometimes considered to be a form of CBE (Leadbeater, 1997); however, Somerville and McElwee (2011) interpreted Peredo and Chrisman’s (2006) work to mean that a CBE is “a special kind of community enterprise where the community itself is the enterprise and is also the entrepreneur. Consequently, a CBE is an enterprise whose social base (the social structure of the community) lies in the CBE itself” (Somerville & McElwee, 2011, p. 320). This interpretation might distinguish CBEs from some types of social enterprises.
Some scholars refer to CBEs as being owned by the community while others indicate they can be owned by individuals or groups of people on behalf of the communities they serve. Lehman and Lento (1992) referred to “owners and managers” (p. 70) of CBEs when they argued that the value generated by these types of enterprises often benefit neighbouring residents and businesses more so than the direct owners.
While CBEs in the form of cooperatives have proven to be both prominent and resilient in many parts of the world (Birchall & Hammond Ketilson, 2009), there are also other forms of community-based or mutually owned enterprises as described by Woodin, Crook, and Carpentier (2010). They identified five general models of community-based or mutual ownership while explaining that new models continue to develop.
CBEs involved with housing developments, energy production initiatives, financial services, retail and wholesale trade, health care and social services, education, and other types of activities is relatively well documented (Woodin et al., 2010). There are also examples of symphony orchestras (Boyle, 2003) and other arts organizations that are community-based, sometimes through direct community ownership. Examples of community-owned sports franchises in Canada include the Saskatchewan Roughriders (Saskatchewan Roughrider Football Club Inc., 2012), Edmonton Eskimos (Edmonton Eskimos, 2011), and Winnipeg Blue Bombers (Winnipeg Blue Bombers, 2012) of the Canadian Football League. The Green Bay Packers, a professional American football team in the United States is also community-owned (Green Bay Packers, 2012). In the association football (soccer) world, the Victoria Highlanders’ F. C. (Dheensaw, 2011) and F. C. Barcelona (Schoenfeld, 2000) are examples of community-owned teams.
The Role of Community-Based Enterprises
According to Gates (1999), the free enterprise system that has dominated the economic landscape of many developed countries since the end of the Cold War has often proven to be insensitive to the needs of communities. “The result is to endanger sustainability across five overlapping domains: fiscal, constitutional, civil, social and environmental” (p. 437). He suggested that the policy environment should be adjusted to encourage more connection between people and the results from the investments they make. With a revised capitalist goal to improve societal well-being rather than the current imperative to maximize financial returns with little or no regard for the associated public outcomes, the current and growing divide between our richest and poorest should narrow and we should end up with a more sustainable economic system.
Gates (1999) suggested that one approach to establishing a closer connection between people and the effects from their investments is to re-engineer capitalism in a way that encourages a shift in ownership types toward more members of society directly and collectively owning elements of the organizations that affect their lives through the social, environmental, and other impacts they have. CBEs appear to be one form of organization that can fulfill part of the role advocated by Gates (1999).
Community context plays an important role in how entrepreneurial processes evolve and in their resulting outcomes. According to Hindle (2010), to understand the community context requires an “examination of the nature and interrelationship of three generic institutional components of any community: physical resources, human resources and property rights, and three generic human factors: human resources, social networks and the ability to span boundaries” (p. 599). When communities face social and economic challenges, some are able to mobilize physical and human resources, particularly when these communities “are rich in social capital and are able to learn from collective experiences” (Ring, Peredo, & Chrisman, 2010, p. 5). Communities within this context are often equipped to identify opportunities and capitalize on them. This can give rise to CBEs that can contribute to capacity building in their communities (Peredo & Chrisman, 2006).
Community Capacity Building through Community-Based Enterprises
Similar to entrepreneurial capacity in that it refers to evaluating and capitalizing upon the potential to create value (Hindle, 2007), community capacity “is the interaction of human capital, organizational resources, and social capital existing within a given community that can be leveraged to solve collective problems and improve or maintain the well-being of a given community” (Chaskin, 2001, p. 295). Borch et al. (2008) indicated that CBEs play a community-capacity-building role when they mobilize physical, financial, organizational and human resources. Their role in organizing “voluntary efforts and other non-market resources” (p. 120) is also of particular importance in this regard.
Economists have generally suggested that for-profit, privately held organizations occupy different market segments than publicly funded and community-based organizations. For-profit entities normally seek markets that are easiest to access and profit from, but their activities in these markets do not necessarily generate social return beyond that provided by increased employment and the services that are funded by the taxes they pay. On the other hand, publicly funded and community-based organizations generally serve a different market segment focused on generating some sort of social return (Abzug & Webb, 1999).
For-profit entities are usually subject to significant influence from the suppliers of the capital used to support the organization’s operations. Sometimes these supply-side stakeholders have little interest in the service or product delivered provided that it generates an adequate financial return for them. CBEs and not-for-profit organizations primarily answer to demand-side stakeholders who might use the products or services these organizations deliver or who will benefit from their provision. This can mean that CBEs play an important role in building community capacity when their demand-side stakeholders turn to them when “for-profit organizations fail to provide products and services that stakeholders trust; and where they provide insufficient quantity or quality, and government provision fails to compensate for this market failure” (Abzug & Webb, 1999, p. 421).
One major difference between for-profit and CBEs and not-for-profit organizations is in the distribution of the accounting profit. Unlike for-profits, CBEs and non-profits generally do not distribute profits to equity holders and they enjoy some competitive advantages, including tax exemptions and the ability to receive private donations (Sloan, 2000). Transparency in reporting financial returns is especially important in community-held entities. These entities must report to a vast group of stakeholders who evaluate the organization’s success based on social return as well as financial efficiency (De Alwis, 2012).
CBEs can also represent an extension of the private sector that plays an important role in supporting them (Abzug & Webb, 1999). In the case of the Lloydminster Bobcats, the private sector supported the team by providing volunteers, advertising dollars, financial resources, and management and board expertise because it believed the team made the community more attractive. The team provided a form of entertainment that could help attract private sector employees to the community and retain them after they arrived.
Family Businesses
Chua, Chrisman, and Steier (2003) reported that “family-owned firms account for a large percentage of the economic activities in the United States and Canada. Estimates run from 40 to 60 percent of the U.S. gross national product (Neubauer & Lank, 1998), in addition to employment for up to six million Canadians (Deloitte & Touche, 1999). Their influence is likely even larger elsewhere” (p. 331). Besides the significant component of Canadian and other economies that are made up of family-owned businesses, these entities might be distinct from other forms of entrepreneurship in several ways. While more research is required to better understand the distinctions, family businesses might be characterized by the unique influences family members have on how their firms operate and by the distinctive challenges they face that make them behave and perform differently than other categories of businesses (Chua et al., 2003).
One of the unique and most important challenges faced by family businesses is managing succession so that leadership can be transferred to future generations to preserve family ownership while maintaining family harmony. This is particularly important as the survival rate of family businesses decline as new generations take over (Davis & Harveston, 1998). | textbooks/biz/Business/Entrepreneurship/Book%3A_Entrepreneurship_and_Innovation_Toolkit_(Swanson)/1.10%3A_Chapter_10__The_Entrepreneurial_Environment.txt |
Thumbnail: pixabay.com/photos/board-ide...-head-3699939/
01: Opportunity
A mindset
You might have already heard about something called "the entrepreneurial mindset." You know it has something to do with entrepreneurs and starting your own business, but what is it, really? What does it mean to be entrepreneurial? What are entrepreneurs like, and what do they do?
The entrepreneurial mindset is marked by imagination, initiative, and a readiness to undertake new projects. It is perseverance and determination, risk-taking and daring, integrity and honesty. Entrepreneurs change the world in concrete ways through their inventions, their businesses, their social and economic impacts[1]. The term "entrepreneurial" can apply to individuals, teams, or entire organizations.
What are entrepreneurs like?
While entrepreneurs have widely varying personalities and don't fall into a cookie-cutter mold, most successful entrepreneurs share a set of common characteristics. These include:
• A participatory management style—they're willing to share power
• A high need for achievement
• Supervisory and/or sales experience or skills
• Persistence—they're not easily discouraged
• Willingness to live with uncertainty, particularly financial uncertainty
• Open-minded—willing to listen to constructive criticism
• Flexibility—they have the ability to change when data shows they're going down the wrong path
Of course, another thing entrepreneurs have in common is the ability to bounce back from failure. Since it is entrepreneurs who are out there pushing the boundaries and changing the world, it's inevitable they will make mistakes. An important characteristic of entrepreneurs is that they are good at failure: the entrepreneur sees failure as a temporary setback, an investment in education, an opportunity to learn and to do better next time. Winston Churchill summed this up best when he said, "Success is the ability to go from failure to failure with no loss of enthusiasm."
What do they do?
Here's a standard definition of what entrepreneurs do:
Entrepreneurs habitually create and innovate to build something of recognized value around market opportunities.
There's a lot to those fourteen words; let's take apart the definition and investigate each term.
• Habitually— they cannot stop being entrepreneurial
• Create— they start from scratch and bring into being something that was not there before
• Innovate— they're able to overcome obstacles that would stop most people, turn problems and risks into opportunities, deliver, and see ideas through to final application
• Build something— the output of the innovation process
• Of recognized value— encompasses economic, commercial, social, or aesthetic value
• Market opportunities— to exploit a recognized market need
It's all about opportunity
Note the one word we keep harping on: opportunity. Entrepreneurs are opportunity-driven. Opportunity comes from changes in the environment, and one central characteristic of entrepreneurs is that they excel at seeing patterns of change. Also, entrepreneurs are not resource-driven; while the manager asks, "Given the resources under my control, what can I achieve?" the entrepreneur asks "Given what I want to achieve, what resources do I need to acquire?"
It is the entrepreneur's drive to acquire resources in order to exploit opportunities that creates the high correlation between entrepreneurship and economic growth.
More than one kind of entrepreneur
Let's be honest: not everyone reading this book will go on to form their own company. Up to this point we've defined an entrepreneur in just that manner-as someone who starts his or her own business-but in today's rapidly changing world the concept of entrepreneurship has been broadened to include a very important, new kind of entrepreneur: the corporate entrepreneur. Corporate entrepreneurship, also called intrapreneurship, is entrepreneurship practiced by people within established organizations. It is the process that goes on inside companies that leads to new business ventures; the development of new products, services or processes; and the renewal of strategies, leading to increased competitiveness. As such, it can be seen as the sum of a company's innovation, venturing and renewal efforts.
Read this book with the understanding that you can think and act like an entrepreneur whether you start your own business or contribute your skills to an existing business. Being entrepreneurial is the centerpiece.
The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.
—George Bernard Shaw
Develop success from failures. Discouragement and failure are two of the surest stepping stones to success. No other element can do so much for a man if he is willing to study them and make capital out of them.
—Dale Carnegie
As competition intensifies, the need for creative thinking increases. It is no longer enough to do the same thing better... no longer enough to be efficient and solve problems. Far more is needed. Now business has to keep up with changes... And that requires creativity. That means creativity both at a strategic level and also on the front line, to accompany the shift that competitive business demands... from administration to true entrepreneurship.
—Edward de Bono
One corporate entrepreneur’s story
Chris Consorte had no intention of taking the job. But after launching his own marketing agency a year earlier, he met with a mortgage banking firm to get a foot in the door and, he hoped, to snag a new client. Then, as they say, they made him an offer he couldn’t refuse. “They were willing to pay me my asking price, [which was] more than I was making at my own company,” says Consorte.
But soon enough, the surprise job gave Consorte even more than he ever expected. The boss, “an intuitive guy,” saw that his new hire wanted more out of his job and work life than the average employee and started bouncing ideas off of him for new products and divisions. “Giving people opportunities was a big thing for him,” says Consorte. “They were embracing my salesmanship and entrepreneurial ways.” The best part? His boss made it clear that he wasn’t just giving Consorte the chance to learn a new thing or two (and take on hours and hours more work); he was going to share the wealth if all went well.
Eventually, among other responsibilities, Consorte was made head of the firm’s internal advertising agency, where he was free to take on outside clients so long as they weren’t competitors of the firm and it didn’t interfere with his full-time job. “I’m the type of person that if I have unlimited potential in front of me, I’m going to put in extra hours,” he says. “I’m all in—especially if I can see the results.”
Innovate or else
While corporate entrepreneurship can be good for the employee’s bottom line, it’s become a must-do for companies that don’t want to get left behind. “I don’t think there are any companies right now who can afford to rest on their laurels,” says Rita Gunther McGrath, associate professor at the Columbia Business School and author of The Entrepreneurial Mindset (Harvard Business School Press). “As the pace of competition gets faster and faster, yesterday’s winner can very easily become tomorrow’s roadkill.” | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/01%3A_Opportunity/1.01%3A_Entrepreneurship_Is.txt |
Defining the Opportunity
Finding the intersection of technology and market
So where is the next million-dollar idea hiding, just waiting to be discovered? The answer: within you. Truly. In fact, you might believe you've got a million-dollar idea in your head already. But a great idea alone doesn't guarantee success: you also need to be able to recognize when a concept has the potential to become something tangible and hit it big. It all comes down to opportunity recognition (there's that word again).
How do you recognize an opportunity? What exactly does one look like? It has to do with analyzing both the product and the market and seeing if they intersect. What you're looking for is a product that fulfills (or creates) a need at just the right time, in just the right place. Opportunities are built using a combination of your ideas and entrepreneurial creativity mixed with market need and good situational timing.
Think about your idea as you read the rest of this chapter—or, if you don't have an idea yet (which is perfectly fine), let it inform your idea generation process—and ask yourself these questions:
• Is my idea realistic? Is it technically and financially feasible?
• Is there a strong need for my potential product?
• Is this a need I passionately want to address?
• Does pursuing this opportunity meet my goals as an entrepreneur?
Where's the pain?
There's an old metaphor about meeting customer needs:.Come up with a product that scratches a customer's itch, and maybe they'll buy it. Come up with a product that relieves a customer's pain, and you've got a winner. "Pain," of course, is a relative term and could describe just about anything-a toothache, a slow computer, a boring job-but the idea behind the metaphor is that it's the entrepreneur's responsibility to find out what the customer needs most, then fulfill that need. It goes without saying that if your product isn't grounded in reality and serves no need at all-doesn't even scratch an itch-it has no chance. No one buys useless products.
On the cutting edge
Quite a few products and services out there simply fulfill a pre-existing need. Returning to the previous example, if you have a toothache, you go to the dentist and she fulfills your (painful, immediate) need. Simple. But when you're talking about high-tech products, things get a lot more complex. You may very well come up with an idea so new and innovative that it addresses a need that doesn't even exist yet. This is a difficult spot to be in as your product may have a hard time gaining traction.
When you're on the cutting edge:
• Get into your customers' heads as much as possible
• Develop cheap, easy-to-test prototypes
• Put the prototypes into people's hands and listen to what they say
• Be open to your product perhaps being useful in a market you never originally imagined
The last point is particularly instructive. When 3-M chemist Spence Silver invented a new adhesive that would not dry or permanently bond to things, he had no idea what to do with it. When another 3-M chemist, Arthur Fry, needed a bookmark for his choir book the idea for applying the glue to small pieces of paper emerged, and Post-It Notes were born.
What you know
Understandably, the majority of entrepreneurs found businesses based on ideas gathered from jobs and activities and lifestyles they're familiar with. For one thing, the entrepreneur understands what target customers want because she's part of the group. Two, because the entrepreneur is familiar with the products currently on the market, she can usually introduce a product that trumps the competition. And finally, when selling the product to customers, the entrepreneur appears not as a salesperson, but rather as "one of us." It's a powerful situation that doesn't guarantee success, but definitely gives you a good chance.
Levels of need
But now let's reverse the situation and talk about what you don't know, what you aren't familiar with. It can be a very good thing to actually go beyond what you know-to keep an open mind about opportunity and think broadly about the needs of the world beyond your comfort zone. Undoubtedly a new mp3 player or a new snowboard boot addresses the needs of a certain population and has a chance at success. But UV water purification systems for villages in the developing world address the needs of an entirely different population, and have just as good a chance at success, whether measured in terms of profits or lives saved, or both. What we're talking about are levels of need. If you haven't already, what you need to do is figure out your priorities as an entrepreneur. Whose needs to do you want meet? Those of the US market, or the basic human needs of the developing world, people with disabilities, the elderly? How about products designed with the environment in mind? Your answers to these questions will shape your business from the very beginning. Weigh them carefully.
When is an idea an opportunity?
An idea is an opportunity when it is attractive, durable and timely and is anchored in a product or service that creates or adds value for its end buyer or user. The most successful entrepreneurs are opportunity-focused; that is, they start with what customers and the marketplace want and do not lose sight of this.
You have a chance
Don't think you can't possibly compete with large, multibillion dollar players. The high-tech industry welcomes small business like no other. The performance of smaller firms in technological innovation is remarkable: 95% of the radical innovations since WWII have come from new small firms. A National Science Foundation study found that smaller firms generated 24 times more innovations per research and development dollar than firms with 10,000 or more employees.
New venture realities
• Success is highly situational
• Starting a company is a lot harder than it looks, or you think it will be.
• Most new ventures are works in process.
• Speed, adroitness of reflex, and adaptability are crucial.
• The key to succeeding is failing quickly and recouping quickly.
• The best entrepreneurs specialize in making "new mistakes" only.
Quotes from "New Venture Creation," 2004, by Timmons and Spinelli
Newton’s recipe for failure: Ignoring customer needs
For a high-tech product to succeed it must be polished and refined until its technological capabilities and features meet the needs of the market. Two examples from the dawn of the Personal Digital Assistant (PDA) era in the late 90s illustrate how—and how not—to bring a high-tech product to market.
Apple’s Newton belongs in the “how not” category. Despite a high-quality handwriting recognition system, the Newton was large and cumbersome, expensive, and prone to problems. Larry Tesler, a former member of the Newton development group, says that although Apple had learned about key customer needs during market research, it ignored these needs when it came to developing the product, opting instead to push ahead and beat its competitors to launch. Tesler says, “In the end, we cut corners and ignored problems to try to meet a price range and a ship date that we had prematurely announced to gain an edge in a reckless public relations battle.” (from “Why the Apple Newton Failed,” by Larry Tesler, CEO and chief scientist, Stagecast Software) With promotional materials boasting that “Newton can read your handwriting,” Apple launched its product on a platform of unsubstantiated claims and inflated expectations, dooming the product to consumer disappointment, ridicule, and elimination from the Apple product line in 1998.
The other side of the story is the PalmPilot. Introduced in 1996, the PalmPilot 1000 won PC Computing’s MVP Usability Achievement of the Year Award and led to a revolution in handheld computing. Jeff Hawkins, one of the original creators of the PalmPilot, suggests that the device’s commercial success has a lot to do with responding to consumers’ needs, since the major market for handhelds was and is the individual purchase. He maintains that it’s important to make tradeoffs on “what to put in and what not to put in,” so that the product maintains the correct balance of techno-logical features, usability, and affordability. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/01%3A_Opportunity/1.02%3A_Defining_the_Opportunity.txt |
Social Entrepreneurship
Making a difference through business
If you’re one of those entrepreneurs who wants to help solve some of the world’s problems, this section is for you. And you’re making a wise choice: more and more entrepreneurs are finding that business ventures can make money and improve the world at the same time.
As discussed in the previous section, a traditional entrepreneur sees an opportunity to make money by fulfilling a consumer or business need, usually in an area they’re familiar with. A social entrepreneur sees an additional opportunity to improve quality of life by fulfilling a social need.
What does it mean?
The term “social entrepreneur” is used in many different ways. Ashoka’s and The Schwab Foundation’s definitions (see below) aim high. Others define social entrepreneurs as leaders of non-profit organizations that use best business practices to create social change. In for-profit social ventures, a social entrepreneur typically garners the title by simultaneously seeking financial and social returns.
According to J. Gregory Dees, adjunct professor of social entrepreneurship and nonprofit management in Duke University’s Fuqua School of Business, what distinguishes social entrepreneurs is their “explicit and central” mission. They are driven not only by the bottom line, but by a distinct social goal. To quote Dees, “Social entrepreneurs play the role of change agents by:
• Adopting a mission to create and sustain social value (not just private, financial value),
• Recognizing and relentlessly pursuing new opportunities to serve that mission,
• Engaging in a process of continuous innovation, adaptation, and learning,
• Acting boldly without being limited by resources currently in hand, and
• Exhibiting a heightened sense of accountability to the constituencies served and for the outcomes created.”1
Simply put, social entrepreneurs find innovative ways to create better outcomes for society.
Focus on impact
Success in a social venture is achieved by maximizing financial returns and impact to the cause, known as Social Return on Investment (SROI). SROI can come in the form of improving people’s lives or reducing environmental harm. Just as any competitive business must create a product to best satisfy its customer’s needs, a social venture must focus on superior quality for both its customers and its cause (and these may be the same). A worthwhile social venture opportunity should include a marketable idea that also provides non-financial returns to the community you intend to serve. Idealism will help you construct a vision of what you want to achieve, but to create social value you must find viable ways to produce results. This involves a mix of passion and practicality. As an entrepreneur, you need to shape your plan around what’s realistically possible, even if you continually redefine what is possible. Entrepreneurship is challenging. Adding social aims increases the complexity, but also increases the rewards.
The triple bottom line
No matter what your goals are for your business—to accomplish social change, earn high profits, improve the environment, or all three—it’s useful to think about how you will reach them. To that end, corporate social responsibility (CSR) practices can be integrated throughout your business’ operations. The Business for Social Responsibility defines CSR as, “achieving commercial success in ways that honor ethical values and respect people, communities, and the natural environment.”2
This is what’s called the triple bottom line: expanding the spectrum of values and criteria for measuring organizational success to include not only economic, but also environmental and social concerns. For some, a commitment to CSR brings with it a need to institute triple bottom line reporting.
A good beginning
It can be helpful to incorporate your values from the start. Evidence shows that CSR can help maximize bottom line financial and social benefits. Incorporating your values into the process during the product development stage of your business will help you think of better ideas and evaluate your options more carefully. A philosophy that incorporates respecting people and the environment can be useful in guiding your venture’s growth. Good corporate citizenship will not only give you personal satisfaction, but can resound with employees, funders, customers, suppliers, and your community.
Case studies
Integrating values
Seth Goldman founded Honest Tea to fill the gap between the too sweet and the tasteless bottled drinks on the market. He also sought to improve society. Goldman designed a business that completely integrated his philosophy of social responsibility, from the product he sells to the ways it's produced.
Goldman believes that Honest Tea has many social benefits. "Every time someone picks up our product instead of one of the sweet teas out there, they are cutting back on the sugar and calories they put into their bodies. Plus, almost all of our line is organic. Every time a tea state or garden switches to organic production from conventional it means there are less toxins being put into the water, land and consumer's bodies. We are also creating relationships with our supplier and partners that enable us to create wealth with them. Tea is one of the few products enjoyed in some of the wealthiest nations but produced by some of the poorest. The disparity really enables you to create wealth through this business."
"Define why your venture is important to you and what is important about it," Goldman recommends. "Once you get out there it's kind of easy to lose your way or lose your purpose. I think that's something we have always been very clear about and it's helped us stay disciplined in our approach."
Aiming high
Ashoka and the Schwab Foundation, organizations committed to supporting major social change around the world, see social entrepreneurs as revolutionaries.
Ashoka’s definition: The job of a social entrepreneur is to recognize when a part of society is stuck and to provide new ways to get it unstuck. He or she finds what is not working and solves the problem by changing the system, spreading the solution and persuading entire societies to take new leaps. Social entrepreneurs are not content just to give a fish or teach how to fish. They will not rest until they have revolutionized the fishing industry.
Identifying and solving large-scale social problems requires social entrepreneurs because only they have the committed vision and inexhaustible determination to persist until they have transformed an entire system. The scholar comes to rest when he expresses an idea. The professional succeeds when she solves a client’s problem. The manager calls it quits when he has enabled his organization to succeed. Social entrepreneurs go beyond the immediate problem to fundamentally change communities, societies, the world.
The Schwab Foundation’s definition: A social entrepreneur is a different kind of social leader who identifies and ap-plies practical solutions to social problems by combining innovation, resourcefulness and opportunity; innovates by finding a new product, a new service, or a new approach to a social problem; focuses first and foremost on social value creation and in that spirit, is willing to share openly the innovations and insights of the initiative with a view to its wider replication; doesn’t wait to secure the resources before undertaking the catalytic innovation; is fully accountable to the constituencies s/he serves; resists being trapped by the constraints of ideology or discipline; continuously refines and adapts approaches in response to feedback; has a vision, but also a well-thought out roadmap as to how to attain the goal. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/01%3A_Opportunity/1.03%3A_Social_Entrepreneurship.txt |
Why Be a Social Entrepreneur?
Look inside
What might drive you to social entrepreneurship? While there's no question you can create positive social results simply by participating in the market and being your entrepreneurial self, you need to look inside and see if you want to go further than that. Do you feel a fundamental desire to help people? Do you want to improve the lives of others-give them better chances? Do you want to change the human condition? If so, today's global environment puts you in a unique position to do just that.
Opportunity
Now more than ever, the world needs your help. Through pollution, overpopulation and abuse of natural resources we're threatening to undercut our own survival. While a small percentage of the world's population lives better than ever before, the majority of people struggle to live through the day. As a student living in America you have an unprecedented opportunity to end the inequity. You can apply your skills -design, technical, business, entrepreneurial-to any number of areas in need: the developing world, the environment, the disabled, the poor, etc. Now is your time.
The developing world
It has been estimated that 80% (five billion people) of the world's population live in poverty. Statistics show that we're living off our support systems in an unhealthy, degrading, inequitable, and unsustainable manner. Examples of worldwide problems include:
• 20% of the world's population lack clean water
• 40% lack adequate sanitation
• 20% lack adequate housing
• 70% unable to read
• 20% earn less than one dollar a day
• 20% underfed and 20% overfed
• 20% suffer from malnutrition (35% under age five)
• 35,000 people die every day from hunger-related causes
• 250,000 children die each week of malnutrition and preventable diseases
• 40% of population are at risk of malaria
• Deaths from AIDS increased more than six times over the 1990s
Communities facing these challenges include developing countries, indigenous groups, the handicapped and the elderly. Stakeholders and non-governmental organizations can articulate these community needs but often lack the technical expertise and facilities to solve them. Local entrepreneurs with innovative solutions often lack the expertise to implement solutions and commercialize them on a large scale.
This is where you come in. You are a member of a privileged community of thousands of students-a group with the skills and ability to make a difference, but who often aren't aware of their capacity to create change in underserved communities. Be aware!
The environment
As documented in Al Gore's film, "An Inconvenient Truth," human activity is contributing to a steady increase in the average temperature of the Earth's atmosphere through the buildup of heat-trapping greenhouse gases. Over time, this increase may be sufficient to cause climatic change. According to the National Academy of Sciences, the Earth's surface temperature has risen by about one degree Fahrenheit in the past century, with accelerated warming during the past two decades.
Rising global temperatures are expected to raise sea level, change precipitation, and other local climate conditions. Changing regional climate could alter forests, crop yields, and water supplies. It could also affect human health, animals, and many types of ecosystems.
What can you do to stop this phenomenon with potentially disastrous effects? You can become a social entrepreneur specializing in sustainable development. Sustainable development is meeting the needs of the present without compromising the ability of future generations to meet their own needs. Sustainable development implies economic growth together with the protection of environmental quality, each reinforcing the other. The essence of this form of development is a stable relationship between human activities and the natural world, which does not diminish the prospects for future generations to enjoy a quality of life at least as good as our own.
High-tech help
What role can you play as a technological innovator in this struggle? You may have ideas for new technologies that can meet basic needs. You may pursue technology for developing countries (water purification, sanitation, power production, shelter, site planning, infrastructure, food production and distribution, communication), assistive technology for the disabled/elderly (improved wheelchairs, crutches, prosthetics, pharmaceuticals), or technology for the environment (alternative energy and quite a lot more). There are many opportunities to make a difference and make a good living doing it.
How big is your footprint?
A person's "ecological footprint" is a measurement of their impact on nature. The average American uses thirty acres to support his or her current lifestyle-that's thirty football fields put together. In comparison, the average Canadian lives on a footprint one-third smaller, and the average Italian on 55% less.
How much can nature provide? With a global population of over six billion, nature provides an average of five acres of bioproductive space for every person in the world. When the population grows to ten billion, the available space will be reduced to three acres. This should also give room for at least twenty-five million other species. Already, humanity's footprint may be over 30% larger than our fair share.
What can we do? We can become part of the sustainability movement and make it possible for everybody to secure their quality of life within the means of nature.
Case Studies
Loan man
Muhammad Yunus is the world's best-known social entrepreneur. Thirty-some years ago, he was a young professor of economics in his native Bangladesh. He was driven to find a way to convince banks to give loans to the poorest people in his country. He was thought to be mad. The poor have no collateral, he was told. Loaning them money is folly. They will never be able to pay you back. So Yunus decided to start a bank for the poor. The first loan was for about 30 US dollars. Today millions, women in particular, have been able to pull themselves out of poverty thanks to the Grameen Bank. The Grameen Bank was the first micro-lending institution in the world. Today, microcredit is mainstreamed even into the most conservative institutions. Yunus changed forever the myth that being poor was synonymous with being a high-risk investment. Grameen's repayment rate over the years has been between 95 and 98%. Other micro-finance institutions across the world that emulated Grameen report the same returns.
Land man
Roy Prosterman had a rising career with one of the oldest and most prestigious law firms in New York City. Initially, he found the work fascinating. But, increasingly disheartened by the expenditure of vast sums of money by corporations on legal fees to defend their interests against consumers, he left the firm, and at the invitation of the University of Washington, started teaching. Soon thereafter, Prosterman came upon a law review article about land reform in Latin America that changed his life forever. Inspired by a new life mission, Prosterman founded the Rural Development Institute (RDI) on a shoestring. Its objective was to reform the rural land policies of the world's poorest countries so that farmers could gain land ownership.
Today, Prosterman, a true social entrepreneur, is 65 years old. He has been working in land reform for 35 years, focused on building legal capacity in the 35 countries that have sought his help. Because of RDI, 70 million farmers have received land ownership to about 62 million acres, close to 2% of the world's arable land. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/01%3A_Opportunity/1.04%3A_Why_Be_a_Social_Entrepreneur.txt |
The Idea Factory
Brainstorming
The starting point of any entrepreneurial venture, social or otherwise, is the idea. In many ways, the quality of your idea determines the success of your venture. So how do you come up with a good one? One way to jumpstart your mind and get thinking creatively is by brainstorming.
Brainstorming is probably the best-known creative tool. When you brainstorm, you focus on a particular problem and try to come up with many solutions, pushing the outer limits of what is possible. When brainstorming, it's essential for the critics in your group (or in your head) to keep quiet. They can speak up later.
Rules for group brainstorming
Assuming that you're working as part of a team, we start you off here with a how-to guide on brainstorming together. Sit down with your group, follow these rules and see if you come up with a couple of ideas worth pursuing.
1. Choose a leader who defines the problem and keeps the session on course, discouraging evaluation of the ideas and limiting the time used.
2. Make sure the participants are diverse.
3. Make the session fun, welcoming wildly impractical ideas along with practical ones.
4. Spark off one another's ideas with new ideas.
5. Keep some record of the session.
Brainstorming has its limitations: it should only be used for generating new ideas and solutions, not for decision-making. It should be targeted to a specific "probortunity" (problem/opportunity). Don't bother brainstorming if you already have several solutions to the problem and are just trying to choose between them.
Creating the right environment for brainstorming
Most of us have hundreds of good ideas waiting to come out. The challenge is creating an environment where those ideas can come out without fear of making mistakes. This requires the group to actively decide not to judge what anyone puts forward. Here, making "mistakes" and putting forward ideas that don't work is not only acceptable but encouraged. Your ideas are never criticized because they can be used either as a solution or a stimulus for other ideas.
Brainstorming should remove, or at least reduce, the fear of making mistakes. The professionalism and attitude of the participants is the key to how much inhibitions are reduced. Sticking to the rules is vital to the success of the session.
More tools
Brainstorming isn't the only way to get those juices flowing. Creative thinking guru Edward de Bono offers a myriad of creative "attention-directing tools." A few of them include:
The PMI Working intensely for two or three minutes, examine the Pluses (good points), Minuses (bad points) and Interesting points of a given option. Don't evaluate the options, but scan them objectively, challenging your initial reactions.
The CAF For this exercise, Consider All the Factors in a given situation, without evaluating them. For example, when buying a used car, consider price, previous history, previous owner, condition of the car, mileage, resale value, gas consumption, serviceability, etc.
Mind-mapping This is a technique in which you begin with a central word or concept. Write it on a piece of paper, and around it draw the five to ten main ideas that relate. From each of those, again draw five to ten ideas that relate.
Don't fall for the first good-lookin' idea that comes along
The success or failure of your project does not depend on your team generating the perfect solution on the first try. On the contrary, falling in love with your first idea can get you into big trouble and cause you to miss out on the seemingly dumb idea that might follow immediately in its path.
Edward de Bono writes that it's important to explore alternatives, because alternatives prevent the mind from settling too quickly on a solution. Working with alternatives certainly doesn't simplify the creative process. Rather, having a lot of alternatives creates confusion and opens the door for brilliant things to happen.
Techniques for idea generation
The "Classical Invention" approach helps you discover connections by asking questions about your idea. Ask yourself questions about:
• A physical object: what are its physical characteristics? What sort of structure does it have?
• Events: exactly what happened? What was the cause? The consequences?
• Abstract concepts: how do others define the concept or term? How do you define the term?
• Propositions: what must be established before people believe the proposition? What counter-arguments must be refuted?
Even more techniques
• The journalistic six (who, what, when, where, why, how?)
• Historical examination
• Block busting
• Uses for
• Improvements to
• What-iffing
• Reversal
• Analogy and metaphor
• Trigger concepts
• Checklists
and many more!
For explanations, visit http://www.virtualsalt.com/crebook2.htm
Brainstorming tips from Ideo
Silicon Valley-based Ideo has sparked some of the most innovative products of the past decade - the Apple mouse, the Polaroid I-Zone Pocket Camera, and the Palm V, among others. But Ideo staffers don't just sit around waiting for good ideas to pop into their heads. The company has institutionalized a process whereby ideas are coaxed to the surface through regular, structured brainstorming sessions. At Ideo, idea-generation exercises are "practically a religion," product development manager Tom Kelley says. Here's a short list of tips from the pros:
1. Sharpen the focus
Start with a well-honed statement of the problem at hand. The best topic statements focus outward on a specific customer need or service enhancement rather than inward on some organizational goal.
2. Write playful rules
Ideo's primary brainstorming rules are simple: "Defer judgment" and "One conversation at a time." The firm believes in its rules so strongly that they're stenciled in eight-inch letters on conference-room walls. "If I'm the facilitator and somebody starts a critique or people start talking, I can enforce the rules without making it feel personal," Kelley says. Other rules include, "Go for quantity," "Be visual," and "Encourage wild ideas."
3. Build and jump
Most brainstorming sessions follow a power curve: they start out slowly, build to a crescendo, and then start to plateau. The best facilitators nurture the conversation in its early stages, step out of the way as the ideas start to flow, and then jump in again when energy starts to peter out.
4. Get physical
At Ideo, brainstorming sessions are often occasions for show-and-tell. Participants bring examples of competitors' products, objects that relate to the problem, or elegant solutions from other fields as springboards for ideas. Ideo also keeps materials on hand—blocks, foam core, tubing—to build crude models of a concept.
http://www.fastcompany.com/articles/2001/03/kelley.html | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/01%3A_Opportunity/1.05%3A_The_Idea_Factory.txt |
Evaluating Your Idea
Who's gonna buy this?
In the business world, good ideas must pass one test: can they generate a profit? No idea is good, ultimately, if it can't pass this test. This means that someone, somewhere has to pay you more money for your product or service than it costs to produce it. Really, it's that simple-and that challenging. Perhaps the most important part of any business plan is an articulation of the customer. Why will they buy it? When? Where? For how much?
Of course other characteristics are important too: does the idea have a social good or at least do no harm? How challenging is it to make? Is it within the capabilities of the team? Sometimes student teams have great ideas but no way in the world of executing them. You may want to save your great idea until you've had a little more experience with something that's more manageable. Can you raise enough money to finance your idea? Often great ideas fail this test: simply put, they require too much capital to prove themselves.
You're not the only genius out there
So you've got a great, and maybe realistic, idea. You know what? Somebody else is probably working on a solution to the same problem. That's not necessarily a bad thing. A problem is only worth solving if it's a real problem that affects a real population. And you're probably not the only one who's noticed this problem. If you are, your product might be ahead of its time and have a hard time gaining acceptance in the marketplace. The best ideas don't happen in isolation; they're the result of a shared need. The need is what creates the market for your idea. The fact that others may have worked on addressing the same need heightens the importance of finding your own unique slant on the idea.
Talk about it
Talk about your idea with a lot of people, especially people with varied perspectives. But talk with people you trust. (And if you have any concerns about protecting your idea, talk to an intellectual property attorney-see the section "Your Intellectual Property.") It's good to surround yourself with positive people who will give you a lot of encouragement, but don't limit your conversations to people already on your side: talk with people who will challenge your ideas and give you creative suggestions. Talk with people with very different backgrounds from yours. Investigate companies that are doing work similar to yours, and visit some who are doing things that are totally different, and doing them well. See what you can learn from them. Listen to everyone responding to your idea. You may not agree with them, and you definitely don't have to take their advice, but there may be a gem hidden in even the most mundane or unpleasant piece of feedback.
Try it out
Experiment with your ideas while they're still in the raw stage. Don't wait until you've come up with a perfect plan. Depending on the nature of your enterprise, your experimentation can take the form of actually making the product over and over until it comes out the way you want it, or running your ideas by a test audience to gauge its reaction.
Equip yourself
Take advantage of all the tools and resources available to you. Spend time in your school's library or entrepreneurial research center. Read books and magazines, watch videos (visit eclips.cornell.edu for a wealth of entrepreneurship-related video clips), and find out what experienced entrepreneurs have to say. Subscribe to an entrepreneurship magazine (Entrepreneur, Fast Company, Inc.), and spend time reading online articles. Find out what other resources they recommend, and if your school library doesn't have them, try inter-library loan. Join an entrepreneurship club or a similar community-based organization. Most importantly, get to know experienced entrepreneurs face-to-face, and listen to their stories.
Check in with yourself
Now why are you doing this again? Review your purpose in this project-what you hope to achieve, and what problem you hope to solve. It's okay if your purpose has changed since the project's outset. It will probably change many more times before you're through.
The validation phase
Once you've tested your idea with constituents, colleagues and mentors, and adjusted the idea to the point where you feel ready to take it to the public, seek external validation to get the funding and other support necessary to move ahead. Validation is the main purpose of a business plan. A business plan lays out your idea in a holistic manner so that prospective funders can enter into a partnership with confidence. See section 4, The Plan, for much more information on business plans.
Trial and error
Thomas Edison wasn't interested in theory, using instead a painstaking method of trial and error. An example is his perfection of the light bulb. Numerous individuals had worked on the light bulb in the past, but the major stumbling block had been the short lifespan of the filaments. Over the course of 1878-79 Edison and his staff tested literally thousands of different substances as filaments and sent men all over the world to try to find better materials. On October 21-22, 1879, he carbonized a piece of sewing thread to form a filament. It burnt 13.5 hours - a huge breakthrough. Changing the shape of the filament to a horseshoe increased the life span to over 100 hours. Through trial and error Edison and his colleagues had invented a practical light bulb, paving the way for the establishment of the electrical power system.
Great ideas have three key elements
All big ideas share at least one of three business objectives: improved efficiency, greater effectiveness, or innovations in products or processes. In a way, it's an exhaustive set of possibilities. You do things right, you do the right thing, or you do something new.
From "Hidden Asset," by Bill Breen, Fast Company, March 2004 www.fastcompany.com/magazine/80/davenport.html
A drive to fly
In perfecting a heavier-than-air flying aircraft and revolutionizing transport in the process the Wright brothers, Wilbur and Orville, made numerous errors and created hundreds of failed prototypes. Yet they kept pushing and innovating and eventually made history on Kitty Hawk beach December 17, 1903. Here's how they did it.
Research
First, the Wright brothers performed a literature search to find out the state of aeronautical knowledge at the time. They wrote to the Smithsonian and obtained technical papers regarding aerodynamics. They read about the works of Cayley and Langley and the hang-gliding flights of Otto Lilienthal.
Idea generation
Soon they (correctly) realized that control of the flying aircraft would be the most crucial and hardest problem to solve. They observed large gliding birds and started putting down some ideas about roll, pitch, and yaw.
Testing
They tested their ideas on a series of unpowered aircraft between 1900 and 1902, but these early kite and glider experiments failed to meet the brothers' performance goals. So they built a wind tunnel and tested over two hundred different wings and airfoil models to improve performance. Their very successful 1902 aircraft was based on the new data and led directly to the historical 1903 run at Kitty Hawk.
Nonstop improvements
While the design of the airframe of the Wright aircraft remained nearly the same for years, the brothers continually improved and upgraded their engine design. Between 1903 and 1913 the engine power increased from 12 horsepower to nearly 75 horsepower.
They moved their flight testing from Kitty Hawk to their home town of Dayton, Ohio, and flew their new aircraft at Huffman's Field on the edge of town. With new, more powerful aircraft, they were able to stay aloft for up to a half hour, fly figure eights, and even take passengers up for a ride. The age of the airplane had arrived. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/01%3A_Opportunity/1.06%3A_Evaluate_Your_Idea.txt |
Intellectual property defined
Once you and your team have a great, well-evaluated idea, you need to make sure no one steals it before you can get it to market. Unfortunately, the only way to keep your idea totally safe is to keep it locked up inside your brain. Probably the best approach is somewhere between total secrecy and publicly broadcasting your idea. As ex-Apple evangelist Guy Kawasaki puts it, if it's really a good idea, lots of people have probably already thought of it. To turn your idea into a commercially viable product, you'll need to judiciously share it with others.
A note on lawyers
Intellectual property lawyers are specialists. If you're serious about patenting an idea, you probably need one. They're generally not cheap, but they do focus on particular scientific disciplines, making it worth your while to find a good one. You also need a general business lawyer or corporate counsel who can advise you on everything from incorporation to sales contracts
Knowledge is power
Naturally, you want to take whatever steps you can to protect your ideas. The following definitions will help you understand the differences between various types of intellectual property protection.
The patent
When you patent a product or an idea in the US, the government prohibits others from making your invention for up to twenty years. To get a patent, you have to file an application that describes your invention thoroughly, and explains why it should be considered novel. If the patent is granted, your invention is made public, so only the law prevents others from copying it. Patents can only be granted to inventors (not companies), so companies usually require their employees to sign over patent rights when they take up employment.
Patenting isn't the ideal solution for every product-it can be complicated and expensive. Sometimes it's a better decision just to keep your idea or formula as secret as possible. An intellectual property attorney can advise you on whether filing for a patent is the best approach for protecting your idea.
Copyrights
Copyrights protect written materials of all kinds, including software. They don't protect trade secrets. For example, if you publish information about your product, and the information that you publish is copyrighted, only the expression of the information, or the particular phrasing you choose, is protected-not the information itself. Once again, seek the advice of an intellectual property attorney regarding the correct procedure for copyrighting your work under federal law.
Trademarks
Trademarks are words or design elements, registered with the US Patent and Trademark Office, that represent a company or product. They must be registered to be protected. Usually before you can register a trademark, you need to conduct a search-both through the USPTO and among unregistered usage-to see if any other company is already using it. Talk to your intellectual property attorney!
Trade secrets
Coca-Cola is an example of a company that uses trade secrets rather than a patent to protect its secret formula. If the Coke formula had been patented, the information would have been made public, and the patent would have protected the product for only twenty years. A company that uses trade secret protection has to make efforts to prevent disclosure of its important ideas-once ideas have leaked, nothing will prevent other companies from using them. Companies keeping trade secrets require employees and investors to sign confidentiality agreements. Trade secret laws and protections vary from state to state. You need to know the limits of trade secret law within your state-again, an intellectual property lawyer can help.
Keep a journal
The major patent systems in use worldwide include those of the US, the EU, and now China and India. Although the systems are getting closer, there is still one key difference between the US system and the others: the US awards a patent to the "first to invent" while the others award it to the "first to file." "First to invent" means that even if someone files with the USPTO before you do, you can still be granted the patent if you can prove that you came up with the idea first. Thus, in the US you need to keep bound notebooks recording the substance and date/time of your daily work, and make sure the pages are signed and kept in a safe place. A number of other things to remember: don't publish a paper and forget to file a patent application within a year; don't talk about the specifics of your invention in a meeting without having the attendees sign confidential disclosure agreements; don't show the embodiment of the invention (e.g., a prototype) at a trade show before filing a patent application. A discussion with an IP attorney, a mentor or faculty member, or with the technology transfer office at your university can provide additional details.
Our source for these and many other useful definitions is http://www.growco.com.
Adventures in IP
Professional inventor Bob Shomo knows IP troubles. In the 1970s, Shomo developed and patented a vibration-free tennis racket. Wilson, the largest US manufacturer of tennis rackets, was interested. Shomo met with Wilson representatives in Chicago, giving them full know-how, engineering and test data, and a dozen rackets. They settled on a royalty rate, and scheduled a final meeting.
Then the meeting was cancelled. Wilson went through a major management shakeup, and when things settled down, Shomo got back in touch with his only contact left. "Yes, Wilson's still interested. Yes, they still have his data and his rackets."
After several months of trying to prod Wilson into action, they said, "Well, our patent attorney thinks you have a weak patent-we're going to go ahead and do our own version." That version came on the market as the Wilson Air-Shell. Wilson's design was identical, except that they used one piece for the handle, whereas Shomo's racket used two pieces. Technically, they weren't infringing his patent.
From "Inventor Paranoia," by Ed Zimmer, TEN Magazine, 1994. TENonline.org/art/9405.html
Protecting your intellectual property
Protecting your intellectual property can get complex-and expensive. You probably don't want to spend endless hours sorting through legalisms with attorneys and paying huge fees to do so. On the other hand, you certainly don't want to leave yourself legally exposed or squander a competitive advantage because you didn't do what was legally necessary. So here are some tips for maximizing your protection at the lowest possible cost.
Patent only what is important. If patent office examiners or competing individuals or companies challenge your patent, the legal fees can soar. You must conclude first that you need the protection, and second that you will recover much more than your expenditure in additional long-term sales.
Get the best trademark protection as early as possible. Registering a trademark is a much simpler procedure than getting a patent. A trademark search can usually be done for a few hundred dollars.
Choose the right form of protection. Don't assume that because copyright protection is cheaper to obtain than patent protection you should automatically go the less expensive route. Spend the \$200 or \$300 it might cost to get sound legal advice.
Warn potential violators that you are serious. You should warn everyone who has access to important information that the nondisclosure and other agreements they sign are not just a formality. If someone does violate your IP, be prepared to take legal action to set an example that will become known to others.
Plan for information protection. In the start-up phase, be prepared to make various disclosures of important information. That information may be contained in a business plan, lists of prospects, supplier names, production specifications, and various other data essential to starting your business.
From "How to Really Start Your Own Business," by David E. Gumpert, Inc. Magazine, 1999. http://www.inc.com/articles/1999/11/15345.html | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/01%3A_Opportunity/1.07%3A_Your_Intellectual_Property.txt |
A sense of success: John Osher
What do Hasbro, Gerber, and Proctor & Gamble have in common? They all bought businesses started by John Osher. Toys, baby products, and the bestselling SpinBrush toothbrush are only some of the concepts that Osher has launched into successful ventures. He's been starting businesses since the age of eight, and believes he possesses a unique worldview-just as a comedian sees humor in the everyday, Osher sees opportunity.
People have caught on, and now Osher is surrounded by great ideas-aspiring inventors send him their plans and he mentors student teams. However, Osher is quick to point out that it's the opportunity that matters, not the idea. There are tons of good ideas, Osher says, that shouldn't be pursued.
Osher has developed a long list of criteria to distinguish a worthwhile opportunity, but the essence is captured in three points: (1) there must be a need which will be satisfied; (2) there must be a way to satisfy the need; and (3) there must be a way to communicate the product's value.
These three criteria guided him in the development of the SpinBrush.
According to Osher, the electronic toothbrush was a superior innovation, but one that only rich people could afford; he realized there was a need for an inexpensive version for ordinary consumers. But such an innovation would only be accepted if it could sell for just a few dollars more than a manual brush, and there had to be an easy way to connect the product with customers. After his design team came up with a model that could retail for five dollars or less, they developed "try me" packaging, enabling shoppers to observe the spinning action in the store. The product took off, and the two separate elements were crucial in that success: if the cost had been higher, or expensive advertising was needed to promote it, Osher is convinced that the opportunity would have been lost.
Along with an idea, an entrepreneur must have guts and skills (and a skilled team) to execute it. According to Osher, people driven to start new ventures are born with a personality that makes them inclined to say, "I'm going to do it, and lead, and find a way." They are natural leaders who organize others and garner the resources to make things happen. However, it's ultimately not drive that matters the most. Osher believes that a flawed product, rather than poor execution, is the demise of most failed businesses. Paradoxically, one can make mistakes only if the idea is truly feasible.
This notion of viability is the pinnacle of Osher's product development philosophy. Too often, inventors rush to commercialize an idea. More time and energy should be focused on understanding the market and adapting the product until it is a perfect fit. This process involves examining current products and testing the atmosphere in the industry and the retail environment. The inventor must be open to criticism and be willing to continually shift and make changes in response to better information.
Although Osher has sold many of his businesses, he doesn't focus on creating good acquisition targets. His advice is to build value. "Don't build a one-shot wonder product. A valuable business will have a good product, a proprietary position, and will be profitable, with staying products. Once this is achieved, the owner can choose how to proceed." If the choice is to sell, Osher advises to "do your homework to find the right match." In the case of SpinBrush, Osher examined the industry and discovered that Crest, one of Proctor & Gamble's most prominent brands, had fallen behind its competitor, Colgate. This made SpinBrush a good strategic fit for P&G, who paid handsomely for the opportunity to revive its brand with the popular product.
The SpinBrush journey was unique for Osher because it was almost flawless. His experience makes him an expert in business creation; but he expects future ventures will run less smoothly. Despite that reality, you can look for Osher's next product on the shelf soon...when the opportunity is just right. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/01%3A_Opportunity/1.08%3A_A_Sense_of_Success.txt |
Ideals on wheels: Ross Evans and Xtracycle
As a college student, Ross Evans was a reluctant to become an entrepreneur because he believed idealism and business didn't mix. Years later his innovations haven't made him rich, but they have promoted his ideals by creating economic prosperity in the developing world and changing attitudes in the US.
As an undergraduate with a passion for bicycles and their potential role in economic development, Evans went to Nicaragua after his freshman year at Stanford to teach local people how to build cargo bikes. His experience there as well as his prior research convinced him there were better alternatives to the cargo bike designs used in the developing world.
Evans noted that cargo bikes, with two front wheels and big baskets, were not ideal for the average user. He compares the cargo bike to a UHaul truck in the US: most people don't drive them on a regular basis and instead opt for SUVs, station wagons, and minivans to carry things on a daily basis. In the same way, Evans determined that an intermediate form of bicycle was missing from the developing world. He began designing prototypes of a bike extension kit that would enable users to modify their existing two-wheel bikes to carry cargo. "The idea was to look at the available resources, adapt them to make this concept of a longer bike that could carry cargo, and make it as cheap as possible, really maneuverable, easy to load, and able to carry the loads that people needed to carry." Evans began with a welded-on attachment and developed it into a bolt-on design during a Hampshire College entrepreneurship fellowship.
It was the faculty mentors at Hampshire College that first pushed Evans to turn his product into a company. Evans says that one advisor "opened my mind to the possibility of business as a mechanism or tool, and using the market to figure my ideas out. Up until this time I was really an idealist about how I wanted to get this out there. I was more into the non-profit mentality and thought that the bad guys were out there in business and we were trying to find ways to get around that."
Evans was also tired of applying for grants. He decided to create a business that would sell the bike attachments to those who could afford them in developing countries and use the proceeds to fund his developing world distribution.
The venture has been a success. Over time, the business split into two arms-Xtracycle is the for-profit company selling to US customers, and Worldbike is the nonprofit selling in the developing world. Evans is involved in the day-to-day management of Xtracycle, and is a board member of Worldbike. The product concept for each company is similar, although the developing world product costs \$25 while the US counterpart, with a more sophisticated design, costs around \$300. The for-profit side has not reached the point of financially supporting the other, but it has helped by leveraging contacts.
In the US, sales are strong for a niche product, but Evans isn't satisfied with that status. "Our whole intention is to go big," he says. Just as Worldbike has a mission to improve transportation options in poor countries, Xtracycle has a mission to improve transportation options in the US. However, this requires fundamentally changing American culture to embrace more sustainable ways of getting around. It's a formidable task, as most Americans don't even consider a bicycle as an alternative to a car.
Xtracycle is trying to accomplish the task not by selling a better bicycle, but selling a better lifestyle. Evans and his team believe that "most people would like to get back to a simpler life. They would like to be healthier. They would like to interact with people more, look thinner, be more adventurous. These are intangible but real values that people have lost." Evans admits it would have been much easier to start a business with a product people know they need. The process of educating potential customers and convincing them of the product's life-changing impact is challenging.
With limited resources, Xtracycle relies on a core of volunteers who "believe deeply in the vision and want to see it happen." They are continually thinking of innovative ways to create awareness. Evans believes the acceptance of his product may one day exceed that of the mountain bike, which seemed novel when most bikes had skinny tires. "It took about ten years to catch on, but now most people have mountain bikes. Mountain bikes aren't even inherently useful."
For more information, see http://www.worldbike.org and http://www.xtracycle.com. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/01%3A_Opportunity/1.09%3A_Ideas_on_Wheels.txt |
Thumbnail: pixabay.com/photos/ecommerce...nline-2140604/
02: Market
Know who you’re selling to
Every entrepreneur has, in the back of her mind, a mental picture of the prototypical customer. The question is whether this image is based in reality. Does this ideal customer exist? What if she does, but it turns out that she doesn’t want to buy your product?
As you learn more about your market,you may need to be flexible and willing to change your image of both the customer and the product itself. Professor Kathleen Siders of Babson College says, “Entrepreneurs think they have divine intuition, which is fine if you’re part of the audience you are trying to reach. But when you move outside that market, your gut instinct can let you down.”
Basic market identification
Identifying your customer begins with formulating a value proposition. It’s from here that the most important work starts. You have to be able to answer the question “To whom is this proposition of value?” The end user might be consumers, operations, or development. The proposition might be valuable to industry, education, or government. Companies intending to make a profit need to ask themselves,
• Will the proposition reduce costs?
• Will it improve efficiency?
• Will it add value to what’s already out there?
• Will it eliminate waste?
• Will it serve as a replacement technology, or eliminate the need for something?
• What is the potential market value of the proposition to investors?
This line of questioning also has to address the scale of the market. Will it be a family-owned business or a lifestyle business with limited growth? Or does the team have an appetite to think bigger—regional, national or global?
Make it simple
Your value proposition should be easy to understand. If you have a hard time describing the benefits of your product to potential users, they probably won’t figure it out for themselves.
Market segmentation
When trying to answer the question “To whom is this proposition of value?” it helps to simplify things by breaking the market down into components. There are three broad categories of customers who could buy your product: individuals, channels (covered later), and organizations. Each of these categories can be further broken down into smaller segments. This is called market segmentation—picking out the particular groups of people/organizations that benefit from your product, and selling to them. Individuals can be segmented by:
• Geography
• Income
• Age
• Interests
• Gender
• Nationality/ethnicity
Whereas organizations can be segmented by:
• Industry
• Size
• Function
• Level and type of individuals within the organization
Many segmentation schemes are combinations of the above lists. For example, let’s say a venture developing an innovative digital storage product decides to sell only to organizations, not individuals. It segments its potential market by size of organization, size of data storage requirements, and need for speed of retrieval. That leads to a focus on large financial institutions and large medical centers. Within those targeted organizations, the importance and cost of the purchase dictates that the venture focuses on selling only to “C-level” executives: the CIO, CFO, etc. Finally, as the technology is very new, the venture team chooses to target the executives that are technology enthusiasts—people who love new technology for its own sake, and are often willing to look at it in preliminary form.
Distribution
Inexperienced teams often neglect the question of distribution: How will the product get to the end user? We cover this in more detail in section 2.3, but for now, in order to develop a complete marketing plan your team must determine what the revenue scale and cost structure will be over a five-year period.
The second part of distribution is secondary expenses, or selling costs. What will it cost you to get the product to the end user? Relevant questions include: What distribution channels will you use? What threats or opportunities does this proposition offer to the industry? Will the product use a technology similar to one already in existence, or will it replace current technologies?
Awareness of the market is crucial to new businesses that want to convince investors that they have an opportunity worth funding. The only way to gather this information is through thorough market research.
Failure to research customers can be costly
Darlene Mann, serial entrepreneur and General Partner of Onset Ventures, has some wisdom to share with new entrepreneurs.
“In 1990, I was a director of product marketing at Verity, Inc., which made sophisticated software for document search and retrieval. We made the assumption that our product would be managed by high-caliber technicians at the companies that used it, but because of our software’s complexity, it was difficult to set up and maintain. We thought the product was important enough to our customers for them to justify using highly-skilled personnel to run it, but actually our customers felt they had scarce resources and that it was difficult to get people with the skills needed to use it. In fact, we had only one customer that successfully installed the software on their own: NASA’s Jet Propulsion Labs. A clear sign to us that maybe you did have to be a rocket scientist to use it.
Our solution was to reengineer the software to make it simpler to install and use. We did that, and the product was very successful, but the delay cost us a year and we lost significant repeat sales early on because we didn’t do our homework. Had we simply started by asking ourselves and our customers the questions we should have, we wouldn’t have wasted all that time and money.” | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/02%3A_Market/2.01%3A_Identifying_Your_Customers.txt |
Evaluating the Market
It only sounds scary
Market research sounds like something reserved for the Coca-Colas of the world—corporate giants trying to learn whether a new product will make them millions overnight. In fact, good market research is not only accessible to you, but critical to your product’s success. So what is it? Market research takes on many different forms, but a standard, broad definition is the following: market research is the systematic collection, analysis, and reporting of data about the market and its preferences, opinions, trends, and plans.
There are a wide variety of affordable market research techniques for you to choose from.
Secondary research
Although the name might lead you to think otherwise, most people begin with secondary research. Secondary research involves consulting published reports to find out:
• Who makes up your target market
• The needs of your market
• The size of the potential market
The information needed to perform secondary research is easily available, and it’s often free. The most accessible sources include:
• Web-based directories and resources
• Nonprofit agencies
• Government agencies
• Back issues of magazines and newspapers
Secondary research can sometimes lead you to contradictory or inaccurate conclusions. It can be helpful, however, in forming a preliminary research strategy.
Primary research
Primary research is more expensive than secondary research, but the results are more accurate and conclusive. Primary research helps you get up close with your customers, finding out who they are and what they want. There are two broad categories of primary research: qualitative and quantitative.
Using small groups of people, qualitative research helps answer a specific question about your product or your customers, and may include one-on-one interviews or focus groups. Focus groups typically gather about ten people together to discuss or react to a product. The session may be moderated by a professional facilitator who can ask probing questions and help stimulate rich data. Holding more than one session is useful; focus group participants are usually paid.
While qualitative research isn’t particularly useful for predicting sales, it is a very effective tool in getting to know your customer.
Quantitative research involves surveys of large numbers of people, and can be statistically validated. It makes a better tool than qualitative research for predicting sales.
A survey targets customers or potential customers, and can be administered via phone, mail, e-mail, or the Web. Surveys get the best response when there is some kind of reward for participating. It may be worthwhile to hire a professional firm to both administer the survey and analyze the data. Phone and mail surveys are expensive and are not cost-effective unless a significant number of people are motivated to respond. E-mail and online surveys are much cheaper, but they limit the target population to computer users (which may or may not be problematic, depending on the nature of your product).
Beyond tradition
Sometimes traditional market research doesn’t meet the mark. Some of the most successful companies opt for creative market research methods that bring them face-to-face with consumers on their own turf. Focus groups and surveys create a laboratory-like environment where people may have trouble expressing their true feelings (for example, says Growing Healthy baby food founder Julia Knight, “What mother, especially in front of other mothers, would really tell you that she spent more on cat food than on baby food?”); using newer methods, companies watch customers in stores and in their homes to observe how they purchase and use products.
Data and more data
No matter how you go about it, performing market research is not a one-time activity. There will be a back-and-forth between modes of research: you’ll do a bit of secondary research so you can talk to people, then do primary, then go back to secondary. The primary helps orient you and allows you to pick up key concepts and words for searching.
Above all, you need to keep a steady flow of data coming in to help you make decisions about next steps. The type of data you collect depends on exactly what you need to learn about the market. Market research is a worthwhile investment which, if you do it right, will enable you to avoid fatal missteps.
Research Tips and Techniques
I can’t afford formal market research
Looking for a cheap and easy way to do market research? Contact would-be customers for advice.
When Karen Scott got started in the mail-order baby products business, she put together her own focus group -- using the local newspaper. After clipping 250 birth announcements, Scott contacted the new moms. She sent them surveys and conducted phone interviews, asking what products they would find interesting or useful. Based on the responses, Scott added more travel products at her company, Chelsea & Scott, in Lake Bluff, Ill. Ten years later, travel products are top sellers at the \$28 million business.
Research tips
For good secondary research resources, visit your school library. There you can access online fee-for-service data sets, including referred literature, trade literature, and large data bases of newspapers from around the globe. Government sites like the Census, USDA (for food and agriculture), DoE (energy), EPA (environment), and CDC and NIH (medical) are all very helpful as well.
Innovative market research techniques
The following are examples of ways that companies are breaking away from traditional market research techniques by getting out of the laboratory and into the space where people live.
No babies in frozen foods
Julia Knight, founder of frozen baby food company Growing Healthy, dressed like a shopper and cruised the frozen food aisle to watch parents at work. She discovered that children didn’t like that cold area of the store, and pressured their parents to move on before the parents had a chance to carefully observe and consider the product. Knight lobbied supermarkets to place cutaway freezers in the baby food section, thus creating a more hospitable market for her product.
The truth about toys
Brendan Boyle and Fern Mandelbaum of Skyline Products, Inc. set up focus play groups for 6-8 children. With the kids, they got down on the ground and learned firsthand what was appealing or not appealing about the toys they planned to market. Although they found that the children were pretty frank in their responses, the pair learned even more by asking parents what the children said in the car on the ride home. In some cases, the children revealed more about their true likes and dislikes to their parents than they would to strangers.
Creating a native habitat
Judy George, CEO and founder of furniture chain Domain Stores, placed a video camera in one of her stores to observe customer behavior. Her tapes revealed that nearly all of the customers arrived in pairs. The male partners seemed uncomfortable in the environment, creating pressure on the females to leave the store before they had an opportunity to make purchasing decisions. George was able to combat this situation by creating comfortable spaces for men to sit and watch sports on television while the women explored.
From “The New Market Research,” by Joshua D. Macht, Inc. Magazine, July 1, 1998. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/02%3A_Market/2.02%3A_Evaluating_the_Market.txt |
Reaching the Customer
Where to sell
You may have figured out who your customers are and what they like, but now you have to figure out how your product will get into their hands. That means determining where your customers buy items like yours, or how they would buy them if they could. Some of the options are:
• On the shelf of a store
• Online
• Through a distributor
• In a catalog
• Directly from a salesperson
In deciding among your options, consider how your customers will recognize the value of your product, whether the conditions will be favorable for purchasing, and what it will cost you. Direct sales methods enable you (or a salesperson working for you) to tailor the message to the individual customer and allow you to answer questions and get feedback during the sales process. But be aware: using one-on-one techniques are expensive. Catalogs and websites might be cheaper options, but they make connecting with individual customers more difficult. Your sales methods should be appropriate for the complexity of the product and the message you are trying to convey.
Products are easier to sell when consumers clearly recognize their benefits. Buyers may resist buying your product if you try to make them alter their habits. Greater convenience, lower cost, or higher quality can convince customers to change their buying behavior. In fact, some businesses are successful simply because they sell something in a different way (like Amazon.com and eBay). You should weigh the tradeoffs when you consider any distribution choice that requires the customer to think differently or take a risk.
Links in the chain
There might be many links between you and the ultimate customer. This means you will have more than one type of customer—such as a distributor or salesperson—that you have to think about. Your product has to create value for them, too.
Examples of these links in the chain include distributors, Value Added Resellers (VARs) and Value Added Distributors (VADs), Systems Integrators (SIs), Manufacturer’s representatives, Original Equipment Manufacturers (OEMs), and strategic partners. See the glossary at the back of the book for more information on each of these middle men.
Every one of the above will want its own profits, so consider the benefits your products will gain from intermediaries. Understanding their incentives is the key to building the right relationships. You don’t want the layers to make it harder to connect with your customer. Offer intermediaries a compelling value so they will be as aggressive selling your product as you would be. Find out how you can benefit from their customer relationships and market knowledge in return.
What to charge
The price of your product is, of course, extremely important. Price too high and few will buy, price too low and you lose money. Pricing is also a form of communication between you and your customer; price it wrong, and the customer might come away with a bad impression of you and your product. Consider the following factors in pricing your product:
Willingness to pay
Think about how many customers you will gain if you lower the price, or how many you will lose if you raise the price. Be careful about the distinction between “worth” and “willingness to pay.” Just because people tell you that they think the product is worth \$50 doesn’t mean they’ll actually buy it at that price.
Cost To make a profit, you must charge the customer more than it costs you to make the product. That’s obvious. But also consider all of the mark-ups through the chain before the product gets to your customer. Salespeople, distributors, retail outlets, and all the other links in the chain need to make a profit too.
Competing products Consider what alternatives the customer has and how your price will influence his buying decision.
Sticker shock This is when someone looks at the price of a product and says, “No way I’d buy at that price!” Different markets have different sticker shock points (writing utensils vs. cars, for instance). Know your market’s sticker shock point.
Perfect for you or the customer?
The product is supposed to satisfy the customer. That means if the cost of making the product exceeds the price that your customers will pay for it, you must rework it. You may have to find alternative solutions to the problems you solved in the design phase. If that doesn’t work, consider what features are least important to the customer and cut costs by weakening or eliminating them. This process may be frustrating, but for a product to be viable in the market, the design and the price have to be desirable to the customer.
A low-risk distribution model for a start-up
Fluent Systems found an effective model for product distribution. The Fluent E-Team, originally formed at the University of Madison Wisconsin, devised the Wireless NH3 Monitor to help farmers apply ammonia nitrate fertilizer more efficiently to fields. The team relied on free product publicity provided by trade journal articles to pique the interest of end users. They then made the product available to consumers through a network of distributors. In the end, after less than a year of product sales, Fluent sold to Raven Industries for \$1 million.
Fluent president Chad Sorenson says that in the product’s first season, a handful of fertilizer dealers were offered exclusive regional distributorship of the NH3 Monitor. In exchange, these distributors were required to purchase a minimum inventory of monitors. Sorenson says, “We had the luxury of selling a product not available anywhere else. If you create a product of value and you’re convinced that distributors will make money, you have some bargaining power, even though you’re a small producer. We wanted our distributors to have a vested interest in moving the product like we did. If we had distributed the units on a consignment basis, our distributors wouldn’t have had any stake, and we would have had to finance our own inventory.
Diversification = Survival
In 1999, former economics professor and entrepreneur Dick Sabot co-founded eZiba, an e-commerce company selling handcrafted products made by individuals in the developing world. After the dotcom bubble burst, eZiba was listed by Forrester Research as one of the companies that would not only survive but benefit from the Darwinian shakeout (along with amazon.com, Wal-Mart and e-Bay). Why the success? Sabot points to the fact that eZiba didn’t remain exclusively an e-commerce business for long. As soon as possible, the company diversified its channels, reaching the customer through an award-winning catalog and retail stores on top of the website. Says Sabot:
“EZiba was one of the first e-commerce businesses to recognize it needed to go multi-channel. We had to find ways to generate traffic, and the portal sites just weren’t doing the job. So we experimented with a catalog that would arouse people’s interest in eZiba and bring them to the website; the catalog worked well and became increasingly cost-effective. Then the opportunity to expand into brick and mortar stores presented itself, and we jumped on it. So we now view ourselves as a multi-channel retailer. There is an online side to the business, but there’s also the catalog—millions of copies of which are distributed every year to households all over the country. The catalog is the biggest driver of eyeballs to the website and the biggest driver of business overall, so we’re very much a multi-channel retailer.”
Having a company with social goals also went a long way in ensuring eZiba’s durability. “Our customers are very aware that not only are they are buying beautiful products at good prices, but when they buy one of these products they’re also having a positive impact on a low-income community,” says Sabot. “One of the reasons eZiba has been so successful is because it’s offering a positive and potentially quite large social rate of return on investment.”
Sabot says the future is bright for other companies with social aims. “I believe that as the buying public becomes more sophisticated, social responsibility will increase profitability because the public will vote with its dollars for products they view as socially responsible. So in terms of generating demand and a marketing message, I think being socially responsible as we move ahead is going to be a big plus.” | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/02%3A_Market/2.03%3A_Reaching_the_Customer.txt |
Start Spreading the News
Advertising and promotions
It’s very simple: for people to buy your product, they have to know it exists. There are a number of ways to go about getting the word out, but most of them can be classified either as an advertising strategy or promotional technique.
Advertising is bringing a product to the attention of potential and current customers. This is typically done through signs, brochures, commercials, direct mailings or e-mail messages, personal contact, etc.
Promotions keep the product in the customer’s mind and help stimulate demand for the product. This involves publicity (free mention in the press), rewards programs, community involvement and public relations.
Marketing on the cheap
In all likelihood you won’t have a huge marketing budget right at the start. So here’s a list of things you can do to sell your product without breaking the bank.
Your website is the easiest and most widely accessed form of marketing. It’s where people come to find out who you are, what you’re about, and what you sell. Websites can range from extremely cheap to very expensive; all you need, though, is a clear, clean, professional site that gets across the right message.
Fliers and brochures are not only affordable, they offer you more budget flexibility and greater selectivity in choosing prospects than most other kinds of advertising. Make sure the flier or brochure starts with straightforward, no-nonsense copy. Be specific and accurate. A clever, catchy phrase can help customers remember your business, but a clumsy slogan will deter them quickly.
Direct marketing is a cost-effective way to attract customers. It involves sending hand-picked individuals mail containing, for example, a brochure and letter.
Business cards are one of the most effective (and cheapest) ways of promoting your business. It tells customers a great deal. You are only limited by your imagination when it comes to creating business cards: more and more businesses are straying from the traditional small rectangle-style card and are shooting instead for something a little more individual.
Testimonials from satisfied customers show how you can do a better job than your competitor. Testimonials are powerful. Show the person’s photo if you can. Use the most important sentence or phrase (i.e., the one most flattering to your business), plus the customer’s name. Use multiple testimonials if you can.
Trade shows and conferences are great places to make contacts and advertise your product—that’s what they’re all about. Keep in mind, your first foray into a trade show is your introduction to the business community. During the show, project a professional image and demeanor. And remember, while you’re there to sell your invention, trade shows are essentially about making human connections. Ask questions, collect quality information, and find out as much as possible about your prospects.
Networking is a powerful and indispensable tool for marketing your business. In fact, it’s so essential we dedicated a separate chapter to it. See “Networking” (3.5).
Word-of-mouth is an extremely important promotional tool. Customers talking about you with friends, family, and acquaintances have much more influence and credibility than any other kind of advertisement.
Bad word-of-mouth travels at least four times faster than good word-of-mouth, so make sure your customer service is spot-on right from the start. Many small businesses have survived without a huge advertising budget due to good word-of-mouth.
Promotional teasers such as freebies or give-aways are a great way to catch the attention of a potential customer. Use this tool to attract customers through coupons, vouchers, frequency rewards, competitions, and samples.
Set clear goals and objectives
No matter which of the above tactics you use, make sure you set goals and expectations for what you want to accomplish before you get started. For example, do you want to drive qualified traffic to your site, increase sales by 5%, sign up X-number of new customers, or just generate awareness? You can think big, but with a small budget you have to be realistic. Setting goals from the onset will help you determine what and how much you need to do.
Name game
Struggling to come up with a catchy business name and tag line? Visit http://www.yudkin.com/generate.htm and follow the nineteen-step process that takes you from brainstorming to legal checks.
Get out of the cave
Networking expert Ivan Misner on how to spark good word-of-mouth buzz surrounding your business:
“I believe that most business professionals are cave dwellers. They get up each morning in a large cave with a big-screen TV called their home. They go out to their garage and get into a little cave with four wheels called their car. They go to another cave with plenty of computers called their office. At the end of the day, they get back into their little cave with four wheels and drive back to the large cave with the big-screen TV, and they can’t figure out why no one is referring them. If you want to build your business through word-of-mouth, you have to be visible and active in the community by participating in various networking groups and/or professional associations."
From “Word of Mouth: The World’s Best-Known Marketing Secret”
Visit customers where they live
Advertising doesn’t have to cost a fortune. Ad expert Roy H. Williams talks about the strategies of a few of his clients:
“I have a young mechanic friend who specializes in older model BMW automobiles. In his glove box are several dozen five-by-seven flyers that say “I specialize in fixing BMWs just like this one. Is it running like it should?” Whenever work is slow, he drives through big parking lots where there are hundreds of cars and looks for older BMWs. When he finds one, he slips the flier under the windshield wiper after scribbling a personalized note to the owner, such as “Arctic blue has always been my favorite color on this model. You should be proud of it.” He usually gets calls on his cell phone while he’s still out distributing fliers. Another friend specializes in replacing old picture windows with fancy bay windows. Guess where he puts his fliers? You guessed it: on the front doors of old houses with big picture windows. Works like a charm.”
Give it away
Williams continues:
“A few years ago, I began working with a client in the frozen custard business who said he’d be happy to invest \$10,000 in advertising if he were guaranteed 500 new customers. When I pointed out that this was twenty dollars per new customer, he reminded me that anytime a new customer tried his product, they were usually hooked for life and he would soon make back his investment. It was the middle of winter, and his two custard stands had no inside dining. I told him to prepare all the custard mix he could use if he kept his machines running nonstop from nine a.m. until midnight and to get a good night’s sleep. The next day, I began airing a sixty-second radio ad twice every hour on a midsized station in his town. I offered a free, full-sized cone to everyone in town—all they had to do was get there before midnight. We gave away more than 11,000 cones that day at a total cost of \$1,900 for custard mix and \$1,200 for advertising. His business literally exploded after that, and now he’s franchising nationally.” | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/02%3A_Market/2.04%3A_Start_Spreading_the_News.txt |
Show Me the Numbers
It’s time for a reality check
Once you’ve identified your market, figured out the range of possible customers you might pursue, how to reach them and how to sell to them, it’s time to find out if your plans match up with reality. As we’ve already discussed, you can discover this, at least to a certain extent, via market research. Consider hiring a market research expert to help you through this important validation phase. Or get someone with market research experience to serve as a mentor or adviser to your team.
Establishing market size
If you’re counting on venture capitalists to finance your business, be aware that some potential funders won’t be interested until you reach a certain market scale. Sometimes the total market is impossible to guess (IBM first predicted it would sell about two computers), but once again good market research will help you get a realistic idea of the actual size of the market you’re hoping to reach.
According to marketing expert Jeff Dobkin, you can’t establish the market size simply by quoting the total revenue of the industry. “To me,” says Dobkin, “establishing market size isn’t the amount of money spent. For example, to say the motorcycle industry is a four billion dollar industry doesn’t tell me very much. This figure is meaningless to small businesses—and it’s especially harmful to say, ‘This market does four billion a year, if we can just get a 1% share…’ As far as I know, no effective marketing plan correctly takes the industry figure and figures a percentage of what they will receive in revenue. When I look at a market I need to know how easy or difficult it is to introduce a product or service to that industry. I need to see how entrenched the competition is, what the entrance barriers are, etc.”1
Market research on the cheap
Dobkin reveals an inexpensive way to effectively gauge market size: visit your local library. “When trying to figure out market size,” says Dobkin, “the first place I check is the magazine directories such as Bacon’s Magazine Directory, Burrelle’s Media Directory, Oxbridge Communications Directory of Periodicals, and SRDS Magazine Media Source, to name a few. You can find out in a few minutes just how many different magazines serve this market. The number of magazines is a good indication of market size. Remember, the advertising revenue supports the magazines and the industry buyers support the advertisers.”
“Note how expensive the ad space is in the magazines. A good way to see the comparative figures for magazines is to look in Oxbridge Communications Magazine Directory—they give you a CPM or Cost Per Thousand for each magazine. This shows you the cost to reach a thousand people with a full-page black and white ad in that magazine. It makes comparing magazine advertising costs much easier. Hmm…thanks, Oxbridge!”
“Next check the circulation of each magazine: how large is their circulation? This is probably the single best method of assessing market size. There will be some pretty consistent figures showing how many copies are distributed to industry personnel. If you really want to see just where all those magazines are being sent, call the publisher and ask for a ‘media kit.’ This free package is how the publishers themselves market their own magazines to advertisers. In the package will be a copy of an independent audit showing who qualifies to receive the magazine, how they are qualified, and shows the circulation breakdown of exactly where all the copies are sent.”2
What does it cost you to get a customer?
Knowing precisely how much it costs you to get a customer in comparison to how much you expect that customer to spend is crucial to your company’s survival. If you spend \$40 to get a customer who goes on to spend \$15, you’re in trouble. How, then, can you know with certainty how much your customers spend? And how much, therefore, you should spend to get them? As usual, market research.
Tom Bergman, an associate professor of management at the University of Central Oklahoma, suggests: “What you need to know is how many [repeat customers] you have among all the anonymous customers who bought from you in the past twelve months. Here is how you can find out: ask them. No, you do not have to ask all of your customers. You can ask just a few, and you get a surprisingly good idea of the makeup of your customer base. You can ask as many questions as you like, but I suggest that you ask at least the following two:
• During the past year, approximately how many purchases have you or any members of your family made from this company?
• On average, what did you spend on each purchase you or your family members made from this company?
When you have this information about customer behavior, you can develop a promotional plan that recognizes these limits. Every promotional tactic you adopt that is designed to bring in new customers ought to be analyzed carefully to determine what that tactic will cost you for each new customer it brought in.”3
1. From http://www.zeromillion.com
2. From http://www.informit.com
3. Ibid.
Refining dot.com metrics
During the initial stages of irrational exuberance about the dot.com phenomenon, number of “clicks” changed to attracting “eyeballs,” which changed to “page view.” Many investors got caught up in the false metrics. Those who survived the NASDAQ crash of 2000-01 understood that dot.com survivors would be the ones who executed transactions. Number of customers, amount of the transaction and repeat transactions became the recognized standards.
From New Venture Creation, 2004, by Timmons and Spinelli, page 91.
Counting customers
Sometimes the market may be plenty deep, but not broad enough. Researchers at Hampshire College in Massachusetts developed a corn oiler to protect corn against destructive pests without the use of harmful pesticides. Preliminary market research indicated that New England farmers were willing to pay about \$1000 for such a device. \$1000 was an adequate selling price to make production of the corn oiler profitable for the manufacturers. The problem came in the breadth of the market: New England doesn’t have an infinite number of organic corn farmers. Once every organic corn farmer in the region bought the corn oiler, sales would screech to a halt.
Tapping a new market
Here’s the story of how a small, niche market, high-tech company made it big by identifying market needs and molding the product around them.
The company is Silver Lake Research, a fifteen-person biotech firm based in Monrovia, California. They developed Watersafe, an at-home tap water testing kit sold in 3,000 retail stores nationwide. The science behind the product was brand new, but even more revolutionary than the product itself was how the company took a specialty store product and transformed it into a lowest-common-denominator supermarket product.
The technical challenges that Silver Lake had to tackle to bring about the identity shift bordered on the existential. For starters, US geography dictates that a mass-market product be multi-functional. “A person in Manhattan might worry about lead in their water, while a person in Omaha worries about agricultural pesticides,” explains Tom Round, Silver Lake’s vice-president. “We designed our product so it would have equal appeal in urban and rural areas.” At the same time, Watersafe had to be fast-acting, because consumers demand quick results. It had to be compact enough to fit in the tight shelf space reserved for impulse buys at the supermarket. And it had to be simple and easy to use.
Watersafe met all those requirements. It can detect seven types of contaminants, from chlorine to traces of bacteria like E. coli. Yet the box it comes in is unintimidatingly small—about the size of a DVD. All the tests can be conducted in ten minutes, and all render their results in an obvious, color-coded way reminiscent of a standard at-home pregnancy test.
Silver Lake plans to take advantage of the growing mainstream acceptance of what was once a niche trend: consumer interest in the purity of consumables. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/02%3A_Market/2.05%3A_Show_Me_the_Numbers.txt |
Beating the competition
Competition is a good thing. It forces you to perform at a high level, and sometimes it can even legitimize your product or technology, like when IBM entered the PC market and made computers specifically for individual use. But you still want to beat the competition, and that becomes much easier when your product is significantly better along an important performance characteristic—and you can demonstrate it—or if you can solve a problem that the competition cannot. When you’re clearly the best, you make it harder for the naysayers not to choose you, and easier for supporters to promote your product. The challenge is to be clearly the best.
Who are your competitors?
For some types of products, this question is relatively easy to answer. Maybe you’re planning to do what someone else is already doing, but you’re going to do it better. In some cases, however, it can be harder to name the competition, or to figure out what, specifically, will differentiate your business.
The danger of complacency
Never believe that you have no competitors. Even if your product is one of a kind, you have competition. Your competition (not to be taken lightly) is the status quo, or the belief that your product is not especially necessary to people’s lives.
Keeping tabs on the competition: Lessons from a retail giant
Tom Stemberg, founder of office supply superstore Staples, made weekly, unannounced visits to his own stores, competitors’ stores, and others to get ideas of ways to improve what Staples does. Some of the lessons can be transferred to any new product or venture.
Says Stemberg: “I’ve never visited a store where I didn’t learn something.” When Stemberg visited a store, he looked for what the store was doing right. “You’ve got to see what they do better and learn from them. You must never take your competition for granted, because that can come back and hurt you.” In 1987, Office Depot was for sale. After visiting numerous stores, two Staples representatives declared that the business was on its way out and not worth buying. “Well,” Stemberg says, “Office Depot went on to become the biggest company in the industry, and we were still playing catch-up with them ten years later.”
Seeing through a customer’s eyes
When visiting a store, Stemberg says, “You try to see exactly what the customer sees. I carried a little pad and I wrote notes. Then I e-mailed them around to our management team.”
Know the competition, focus on the consumer
Stemberg maintains that you have to pay attention to the competition’s successes without forgetting that it’s the customer you’re aiming to please. “One of my great fears always was that our people would try to rationalize why we did things better, smarter, whatever, and stop the learning experience. One of the things you can do is lose sight of the customer. Lots of times I find companies overly focused on one another and ignoring what the customer wants, and therefore losing the market to some new entrant who truly focuses on the customer. Barnes & Noble spent all its time looking at Borders and Borders spent all its time looking at Barnes and Noble, when both of them should have paid attention to Amazon.com.”
Some ethical guidelines
When you’re sizing up the competition, act with integrity. It might be tempting to get a leg up by doing something unethical, but the truth will come out sooner or later. Fuld & Company offers the following Ten Commandments of Legal and Ethical Intelligence Gathering.
1. Thou shalt not lie when representing thyself.
2. Thou shalt observe thy company’s legal guidelines as set forth by the legal department.
3. Thou shalt not tape record a conversation.
4. Thou shalt not bribe.
5. Thou shalt not plant eavesdropping devices.
6. Thou shalt not deliberately mislead anyone into an interview.
7. Thou shalt neither obtain from nor give price information to thy competitor.
8. Thou shalt not swap misinformation.
9. Thou shalt not steal a trade secret (or steal employees away in hopes of learning a trade secret).
10. Thou shalt not knowingly press someone for information if it may jeopardize that person’s job or reputation.
Hopefully most of these “thou shalt nots” are far from your consideration. If you have any legal or ethical questions about your methods of gathering competitive intelligence, however, consult with your lawyer.
Know thy competition
First, Direct Competitors
Check the Yellow Pages or call the Chamber of Commerce to uncover local competition. Visit a library and try Gale Research’s Encyclopedia of Associations, Ulrich’s Guide to International Periodicals, and the Thomas Register of Manufacturers guides that can put you in touch with professionals in related industries.
Indirect Competition
Find the businesses with missions unrelated to yours that are competing for the dollars you want. Find out what else your potential customers spend their money on, and learn how you can woo them to spend it on your product.
More Resources
• Business publications, directories and databases at the library
• Back issues of community newspapers—competitor ads, employment ads, executives’ participation in community associations
• Annual reports
• Online databases
• The competitors themselves
Competitive intelligence
Gathering information on the competition is not about spying or stealing secrets. Rather, it’s about carefully analyzing and learning from what the competition is doing.
In its Competitive Intelligence Guide, Fuld & Company states that “wherever money is exchanged, so is information.” Any company that deals with the outside world “inadvertently throws down informational bridges over the moat, allowing outsiders to peek into its operations…The world’s mightiest multinationals hire and fire, open facilities, deal with suppliers, negotiate with national, state and local governments, attend scientific conferences and present papers.” Electronic databases, CD-roms and other new information vehicles give everyone virtually equal access to corporate intelligence.
Some guidelines:
• You must find information; it does not find you. You can’t wait until the last minute to seek out the information you need.
• Intelligence is constant. You must track your competition constantly, otherwise you may misinterpret what you find.
• Competitive assessment is a 3-D picture. Just as competitors change, so does their competitive environment.
Full text at Fuld & Company's website
Needs and competition
Phyl Speser of Foresight Science & Technology agrees that there are always competitors out there. “If there is a need, the odds are people are doing something to meet it already. There is always a competing technology or product or way. It may just be hand labor—hiring immigrants as an alternative to mechanized picking.
The point is, if there is no need, there is no market and the product doesn’t stand a chance. If there is a need, people are usually try to address it, and you just have to hope they are doing so poorly. Then people are open to change. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/02%3A_Market/2.06%3A_The_Competition.txt |
Art Rogers is trying to make the supermarket cleaning aisle a little cleaner. According to Rogers, most of the household products we use contain “elements that you would not want to have in your personal environment or the environment in general.” After assuming the CEO position at Sun & Earth, a natural cleaning products company, his objective was to convince retailers to move the company’s detergents and spray bottles out of the organic section and into the cleaning aisle.
To do this, Rogers tailored his pitch to his audience, and didn’t try to stand on a soapbox (no pun intended). “The product worked,” said Rogers, “and I sold it to retailers based on that. The other things are in the background. Most consumers are concerned only with products that work.”
He admits that people are skeptical about Sun & Earth products’ performance because environmentally friendly cleaners introduced in the 1980s didn’t work very well and were more expensive. Sun & Earth is different: all products are 3-5% better to 97% as good as the name brands on the market, and cost only 10% more.
Sun & Earth began in a Pennsylvania garage where its founders developed cleaners without harmful chemicals as alternatives to existing products. They convinced local stores to carry their products, then bigger stores in New York, Boston, and Washington DC. This strategy allowed them to successfully grab “highly enlightened” consumers who were strongly environmentally and health conscious. As the company grew and was partially acquired by Ben Cohen’s Barred Rock investment fund (his first investment after the sale of Ben & Jerry’s), it strove to gain a wider consumer base.
Rogers believes that the key to reaching this objective was understanding the “ripple effect.” A pebble thrown into a pond creates a splash—this splash represents core customers who understand the product’s value and currently buy it (the “highly enlightened”). But the pebble also creates ripples. The ripples closest to the splash represent customers who are predisposed to buy the product (such as those with chemical sensitivities in the case of Sun & Earth). The further the ripple from the splash, the further the customer group is from understanding and relating to the product’s message.
Sun & Earth tries to reach the ripples closest to the splash and continue moving out to spread its message. While grocery store coupons and promotions yield higher sales, they do not necessarily create repeat customers because they entice bargain hunters rather than groups that identify with the Sun & Earth’s values. Rogers tries to focus on marketing at events, like Race for the Cure, a breast cancer research fundraiser, that draw people who are more likely to be health conscious or environmentally concerned.
Although his objective is to mainstream Sun & Earth’s products, the company itself is anything but mainstream. Their sense of social good extends far beyond the ingredients in their products. Located in a transformed argyle sock factory, the company employs workers from the surrounding low-income community and promotes community building through volunteer projects. Consistent with the company’s environmental focus, its plant is the first in Pennsylvania to be run completely on wind power.
Rogers notes that while 99.8% of for-profit companies measure themselves with one P (profit) Sun & Earth uses 3 P’s: profit, people, planet. His investors, all social venture funds, demand returns in each of the three areas. Besides sharing similar values, an advantage of being funded this way is the network that Sun & Earth has built. The company has used its connections to reach important players and gain accounts from companies that are also committed to sustainable and socially responsible business, such as Starbucks.
With his experience boosting sales at major companies like Saucony and Proctor & Gamble as well as Sun & Earth, Rogers has simple advice for aspiring entrepreneurs. “Make sure your product has a unique selling proposition. And make sure it works.” | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/02%3A_Market/2.07%3A_Cleaning_Up.txt |
Marketing to the poor: International Development Enterprises (IDE)
Paul Polak didn’t have to do any of this. At age forty-seven, Polak was a successful Colorado psychiatrist with a wife, three daughters and \$3 million in real estate. But in his extensive world travels Polak witnessed more and more the debilitating effects of extreme poverty on the world’s rural poor—who often make less than one dollar a day—and became curious about ways to help. Gradually it became clear to Polak that in order to improve the lives of hundreds of millions of subsistence farmers, there was only one place to start: water.
“You could see how essential water was to alleviating poverty,” says Polak. “If you wanted to do anything, you had to start with these small farmers and irrigation. The power to control water is absolutely crucial to them. That fact should shape all development policy.”
Inspired to help however he could, in 1981 Polak formed International Development Enterprises (IDE), a nonprofit that develops and facilitates the sale of affordable, simple, income-enhancing products to the poor, with a special expertise in water technologies for small-scale irrigation and safe drinking water. Over the years IDE has helped millions of rural farmers in the world’s poorest countries increase their agricultural productivity, providing them with a basis for food security, income generation, integration with markets, and the beginnings of an upward spiral out of poverty.
Needless to say, IDE would be nowhere if they couldn’t sell their products. But how do you sell to the world’s poorest people? How do you design products for them, and then get them to buy them? As with any business, marketing is essential to IDE’s success and at the same time comes fraught with challenges.
The first challenge, according to Polak, is molding IDE’s products around customer need—that is, making them so cheap that the world’s poorest people can afford them. Says Polak, “We focus on people who make less than one dollar a day. If things aren’t extremely cheap, they can’t afford them. Affordability is the key issue; it’s the absolute bottom line. In just about every product we sell to the poor there seems to be a threshold point of about one-fifth the conventional price; when we reach that threshold, sales take off.”
To reach that threshold, IDE develops products that can be made inexpensively by using locally available materials. An example is the IDE treadle pump, two million of which have been installed worldwide since its introduction in 1985. The pump consists of two metal cylinders with pistons operated by a natural walking motion on two treadles, like a stairmaster; the individual walks up and down on the treadles and in the process brings water up to the surface. The pump is manufactured locally in simple metalworking shops, and the treadles and support structure are made of bamboo or other inexpensive, locally available material. The unit sells for \$25-50, and enables farmers to generate more than \$100 a year in extra income.
A second challenge has to do with the attitudes and inclinations of the poor themselves. Many poor people aren’t willing to cough up what is to them a large sum of money for devices they’re not sure will work. Says Polak, “We feel that the best way for poor farmers to prosper is by growing labor-intensive, high-cash crops. But if the farmers grow rice like they usually do, they’ll have enough to eat; they’re averse to risk because they want to avoid going hungry. Poor farmers are very risk averse. So we have to lower the risk—find ways to show them that moving to a high-income crop is a good thing.”
IDE goes about this in a variety of ways. “First, we don’t ask them to give up rice and move straight to high-value crops right away. We start off by helping them improve their yield on staple crops through procedures like the use of urea granules planted in the ground between rice plants, which give them bigger yields and cost less than fertilizer because they don’t wash away. Once they’ve seen that we can help them grow enough rice to feed their family, they’re much more open to growing higher-value crops.”
Another IDE risk-mitigation strategy involves the marketplace itself. Because a poor farmer can never predict the market price of any crop she grows, IDE doesn’t promote just one high-value crop, instead promoting packages of four or five. “That way,” says Polak, “even though you can’t predict the final value at market, farmers can play the odds. Maybe on one crop they’ll make out like bandits, three will do OK, and one they’ll feed to the pigs.”
And what about getting the word out? How do you make poor rural farmers aware of your product? When it comes to promotional techniques and advertising, IDE takes the only route available to them: they get out in the village streets and push the product. “Let’s say that we want to sell treadle pumps,” says Polak. “We’ll put on a demonstration in a village fair that draws a lot of people. We’ll have a three-rickshaw procession: I’ll be on the first rickshaw, and I’ll have a microphone and will shout, ‘Come see this demonstration!’ The second rickshaw will have someone demonstrating how to work a treadle pump, and a third rickshaw has somebody handing out leaflets.”
“In Bangladesh we sometimes use a troubadour group. It’s a little three-person orchestra that plays a song about a treadle pump. And also in Bangladesh, because there’s a very big market there, we made a ninety-minute movie with the treadle pump as the main part of the story. We played that movie to an audience of over one million in a year.”
Indeed, numbers in the millions frequently come up when talking about Polak and IDE. IDE’s efforts around the world are estimated to create more than \$200 million of additional income each year for the rural poor, and the number of lives touched reaches the tens of millions. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/02%3A_Market/2.08%3A_Marketing_to_the_Poor.txt |
Thumbnail: pixabay.com/photos/board-cha...agree-4862180/
03: Team
First, some context
Let’s start by explaining why we think teamwork is essential—especially when it comes to technology entrepreneurship. It has to do with adopting what works in the corporate world, all with the notion of preparing you to do as well as possible.
Within the last ten to fifteen years, teamwork has become an omnipresent phenomenon in corporate America. Companies have transitioned to teamwork as a vehicle to increase effectiveness, competitiveness, and productivity (read: working in teams improves performance). The Center for the Study of Work Teams reports that in the year 2000, 80% of all Fortune 500 companies are expected to have fully half of their employees working in teams.
This increased need for employees to function in teams has forced engineering colleges and universities to change the way they teach. In a study conducted by the American Society of Mechanical Engineers (ASME), teamwork was ranked as the single most important skill for undergraduate engineering students. Schools now need to provide their graduates not only with intellectual development and superb technical capabilities, but also the ability to work as part of teams, communicate well, and understand the economic, social, environmental and international context of their professional activity.1Promoting and developing teamwork is a big reason why the NCIIA exists; whether you start a company or go work for one, it’s important for you to get experience working in teams.
Where it all starts
Your team is the lifeblood of your venture. The strength of your team determines how thoroughly you analyze the problem, how many different angles you see, and how complete and competent your solution will be. As a student, you may not have a lot of background in building teams; college tends to be a solo experience. While some of your professors may have given you group assignments, you may still feel like a team-building beginner. With student entrepreneurial projects, determining who’s responsible for can be a big challenge. Sit down early with your team make sure everyone is fairly clear about her or his role(s).
Be strong. Be diverse.
An excellent team is diverse. If you’re an idea person with an eye on the big picture, fill out your team with detail-oriented people. If you’re an expert on the technical aspects of your idea, find teammates with business experience. If you know a lot about the business end, but aren’t sure how machines work, look for teammates with technical training. A creative guru, a numbers-cruncher, a people-person with loads of natural charm…all of these personalities add strength and dimension to your team, and enhance your chances for success. And working with people who are different from you, in terms of gender, race, ethnicity, background and personal traits, will broaden your scope and help your team prepare for the real world.
Starting solo
Are you a team of one? Your situation may not be ideal, but it may also not be impossible. Maybe the nature of your project lends itself better to working alone in the initial planning and production stages. Just don’t limit yourself. Build a network of mentors and advisors, keeping in mind the skills and knowledge that they, and possibly future team members, might bring to your new venture. Get to know faculty members who might be interested in your work. Contact your college’s innovation incubator, technology development office, or entrepreneurship club. Reach out beyond your college and find out who else is working on the same type of project as you. Beat the streets for people whose interests are similar, or complementary, to yours.
Leadership
Your team may come together in a very democratic way, and for some teams relationships necessitate keeping that democratic feeling intact. But leadership is also critical—someone has to make sure that the team keeps its momentum going and that the work stays on track. Figure out whether you’re the best person for that role, or whether someone else needs to take charge.
Clarify your purpose
Know why you’re creating a team and begin with a vision of how you want the team to work. Jon Katzenberg, Senior Partner in Katzenberg Partners, LCC says, “Teams work when they are created for the right reasons, and when they are created in the right way…The critical decision for any manager or leader who wants to get higher performance from a small group of people is determining whether the group should try to work as a team, or whether they should be satisfied with what I call ‘single-leader unit’ discipline…Most organizations proliferate with groups that call themselves teams but aren’t…it’s disturbing how many managers and leaders assume that being a team is what a group effort is all about. If a group tries to become a team when the performance challenge requires a single-leader approach, performance and morale suffer. The opposite is equally true.”
On diverse teams
“Divergent thinking is an essential ingredient of creativity. Diverse groups produce diverse thinking. Ergo, diversity promotes creativity. This logic applies to corporations, research teams, think tanks, and other groups of creators. Those who rely on diverse people are more likely to innovate than those who rely on platoons of similar people.”
From “Mighty is the Mongrel,” by Gregg Pascal Zachary. Fast Company, July 2000.
“If I could solve all the problems myself, I would.”
—Thomas Edison, on why he had twenty-one assistants
“Ideally, your team should have seven to nine people. If you have more than fifteen or twenty, you’re dead: the connections are too hard to make.”
—Ray Oglethorpe, President, AOL Technologies
From “What Makes Teams Work,” by Regina Fazio, Maruca, Fast Company, November 2000.
The myth of the lone ranger
“Great groups have shaped our world, from the gathering of young geniuses at Los Alamos who unleashed the atom to the youthful scientists and hackers who invented a computer that was personal as well as powerful. That should hardly surprise us. In a society as complex and technologically sophisticated as ours, the most urgent projects require the coordinated contributions of many talented people. Whether the task is building a global business or discovering the mysteries of the human brain, one person can’t hope to accomplish it, however gifted or energetic he or she may be. And yet, even as we make the case for collaboration, we resist the idea of collective creativity. Our mythology refuses to catch up with our reality. And so we cling to the myth of the Lone Ranger, the romantic idea that great things are usually accomplished by a larger-than-life individual working alone…
We must turn to great groups if we hope to begin to understand how that rarest of precious resources—genius—can be successfully combined with great effort to achieve results that enhance all our lives. It is in such groups that we may also discover why some organizations seem to breed greatness, freeing members to be better than anyone imagined they could be.”
From “The Secrets of Creative Collaboration,” by Warren Bennis and Patricia Ward Biederman, Inc. Magazine, December 1, 1996.
Be real
Find at least one ally who is also a helpful critic—someone who will react honestly to your work and give you realistic, constructive advice. The last thing you want is to pour huge amounts of time, money, and passion into an idea with flaws that are obvious to everyone in the world but you. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/03%3A_Team/3.01%3A_Teams_Make_It_Happen.txt |
Teams, though they may not be hierarchical in structure, have a natural layering of levels of involvement among their various players. You can think of a team as a series of concentric circles, with the most central players at the core, and those with more fleeting or peripheral involvement in the outer layers. As needs and roles shift through the life of a venture, so do individuals’ location in the concentric layers of the team.
The core: you and other major stakeholders
The core of the team might consist of you alone, or you and several other people who have been central to the project from its outset. You are the ones with the most at stake. You’ve invested a lot in this venture, and your investment is not necessarily financial. In fact, you’re more likely earning sweat equity: the energy and hours you invest in a venture that give you a personal stake in its success. You are the ones who care most whether or not this venture succeeds.
The outer layers
These are the people who have less of a stake in the project’s success but will contribute to make it work. They might include advisors, mentors, and people who will perform concrete tasks for you along the way without taking a central role in the planning. As your project progresses, you may want to draw some of the more peripheral people closer to the project’s core. It may become more important for them to be stakeholders and to benefit directly from the project’s success. Likewise, some of the original stakeholders may draw away from the project’s core, and take more peripheral roles. A team is dynamic, constantly in flux.
Defining roles
To be effective, team members need clear roles and responsibilities. It is important to hash out the details of what needs to be done and who is responsible for each task. Early in your team’s formation, discuss how individual team members’ talents will best be put to use and the kinds of people you want to bring in to fill leadership roles. This discussion is an important part of clarifying your shared organizational vision. Here are a few typical roles in a company, briefly defined.1 (See section 5, The Company, for a more detailed discussion of company structures.)
The Board of Directors is a group elected by a company’s shareholders to oversee management of the corporation. Directors may work voluntarily, or they may be paid in cash and/or stock. They assume legal responsibility for the corporation.
The Board of Advisors is a less formal working alternative to a board of directors, often used by smaller companies that want to bring in senior people but aren’t yet ready to ask them for a commitment. The board of advisors usually has 3-7 members and meets periodically, but doesn’t have legal responsibility for the company. Legally, a board of directors is still required.
The CEO (Chief Executive Officer) is the highest level executive, other than the board Chair. Typically, a company brings in a CEO after it has achieved financing or some other level of success. At this point, the CEO lends experience to the management team, and helps provide broad strategic direction.
The President runs the company day-to-day, and understands both the details and the big picture. The President is often the company’s founder, and sometimes also serves as the CEO, particularly in smaller companies.
The VP Sales and the VP Marketing fill critical roles in any company, but particularly in early stage companies. Well-connected people dedicated to sales and marketing make all the difference, especially if they can influence the product people.
The CFO (Chief Financial Officer) is responsible for the company’s financial planning and record-keeping. Many CFOs supervise people like the controller and bookkeeper, and set the company’s strategic financial direction.
The COO (Chief Operating Officer) is responsible for the day-to-day management of a company.
The CTO (Chief Technical Officer), in a technology company, is usually a founder, in charge of the core product. The CTO and COO develop the company’s product offering.
Whose company is this, anyway?
It’s never too early to begin talking about ownership. The issue of who owns the venture and how much of it each person owns can lead you to disastrous conflict when things change (e.g., someone leaves the company). Work together to devise a model of ownership that everyone is comfortable with.
You can choose from several possible models, including vested ownership, where people gain a certain percentage of financial interest with each passing year, and milestone-driven ownership, where milestones in the company’s development dictate who owns what percentage of the company’s shares. When you devise your ownership plan, allow for changes in the company structure. Set up a system for treatment of new people at different levels. When you bring someone new on board, will she have ownership? How will you transfer shares from one person to another, should the need arise?
Tapping talent
British Design firm Imagination Ltd. has a unique approach to teamwork. In their company, representatives from all twenty-six catalogued disciplines meet weekly. All of the firm’s employees are invited to these meetings, where they raise new ideas, look at problems, and assess progress. Production people and client-contact people are considered as much a part of the planning team as the creative-type people. In such an egalitarian environment, disbursement of power means equal disbursement of responsibility.
From “Total Teamwork—Imagination, Ltd.” by Charles Fishman. Fast Company, April 2000.
On setting norms
“What are the norms of a team? It includes everything from how do we select a leader or do we need a formal leader? Is the leader better, equal, less than the rest of us? What are the roles of respective team members? Effective teams talk about setting up norms and how we as a team will maximize contributions of individual members…They also develop norms about how to deal with conflict.”
—Joseph Weintraub, Professor, Babson College and President, Organizational Dimensions
The importance of mentoring
The people in the outer layer of your team can go a long way in helping your venture succeed. Experienced mentors have been there before. A good mentor uses that experience to guide you away from pitfalls, help you make crucial decisions, and even show you how best to run your business. Here are some examples of entrepreneurs who were helped along the path to success by good mentors.
Tom Stemberg, founder, chairman, and CEO of Staples, a \$5.2 billion chain of office supply superstores
• Mentor: Harvard Business School professor Walter Salmon
• Best advice given: “Apply your supermarket efficiency skills in a new business that’s underserved by modern distribution channels.”
Lynn Frydryk, founder of \$1-million-plus J&L Peaberry’s Coffee & Tea Co., in Oakland, Calif.
• Mentor: Alfred Peet, specialty coffee guru
• How they met: Frydryk worked for Peet at a company he founded, called Peet’s Coffee and Tea. She never solicited him as a mentor. She says he adopted her.
• How often they meet: Frydryk and Peet used to visit about once a month. Now they meet irregularly.
• Best advice given: Peet told Frydryk, “Before starting your own business, you really would be wise to make your mistakes on the payroll of someone else’s business. It’s a very sound theory.”
Steve Leveen, cofounder and president of Levenger, a catalog business in Delray Beach, Fla.
• Mentor: Stanley Marcus, chairman emeritus of Neiman Marcus
• How they met: Leveen read Marcus’s book, Minding the Store, and wrote him a fan letter. Marcus wrote back.
• Best advice given: “No sale is a good sale unless it’s a good value for the customer.”
From “Mentees on Mentors,” by Various Inc. Staff, Inc. Magazine, June 1998. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/03%3A_Team/3.02%3A_The_Layers_of_a_Team.txt |
Embrace those differences
As we’ve mentioned, a healthy team is a diverse team. And in a diverse team, not everyone thinks alike. This is a good thing, and the whole reason for having a diverse team in the first place. You really want the varied points of view brought in by people with different backgrounds and talents. The flip side of this, of course, is that diversity brings its own set of challenges. Don’t expect, or even hope, for your team to work together smoothly all the time. Instead, establish a set of norms for communication and team operations that will equip your team well for managing conflict when it arises.
Setting team goals
Early in your team’s formation, discuss the following issues: What is your vision for this project? What are your most important goals? Making a lot of money? Learning new skills? Helping people? Building your résumés? Do any individual goals conflict with team goals? How will you deal with that?
Communication practices
In addition, you should decide how (and how often) you’ll interact:
• How often will you hold regularly scheduled meetings?
• Who will lead the meetings?
• What will the agenda look like, and how will team members control meeting topics?
• How will the team make decisions on controversial issues—by consensus, hierarchically, or using some method in-between?
• What procedures will team members follow for disseminating information from the meetings?
• Who will get the information?
Be sure that your team has all the people it needs to make decisions and take action quickly once the decisions are made. Ray Oglethorpe, President of AOL Technologies, recommends that teams have “no delegates. You don’t want people who have to take the team’s ideas back to someone else to get authorization. You want the decision makers.”
Healthy relationships
A team can only function in an atmosphere of trust and respect. Build it from the start, by working toward common ground and a shared vision. Look for honest and enthusiastic people who are assertive, yet humble—people with both a sense of humor and a driving work ethic. Balance Type A and Type B personalities—people who want to get the job done, and people who value the process.
When conflict erupts
What will you do when team members start to have problems with each other? (this is inevitable—it happens to everyone!) Will you talk about it in a group meeting, or talk individually among the people concerned? Will you go so far as to ask someone to leave the group? How will the team decide issues like that?
When someone new comes on board
You’ve balanced work styles and communication styles to perfection, and everyone is getting along fabulously, and moving the project ahead. Then the team realizes that it needs someone new with a particular skill set. How will team members cope with this shift in the balance? Will you be taken off guard when everything changes in your perfect world?
Tony DiCicco, coach of the gold medal-winning US Women’s Olympic Soccer Team says, “The natural inclination is to protect what you have and not allow a new star to rise to the top. Team members have to fight against that. The bottom line is that new talent can force everyone to play at a higher level.”
And common corporate wisdom dictates that a good leader always hires people who are smarter than herself.
Get help
Support is never far away. Human resource units at some schools will facilitate team building workshops. You may also be able to hire an outside team-building facilitator for a minimal cost through a local chamber of commerce. Your college may have a mediation team to assist with conflict resolution. Another alternative is to invite a wise, neutral, mentor-type person with experience in team dynamics to sit in on a meeting and help assess what is going wrong in team communications.
Every team encounters unexpected conflicts or dysfunction. Catch it and do something about it before it disrupts the achievement of your goals.
Key ingredients for building a successful team
• The mission must be clearly defined and articulated, and everyone must understand it.
• All team members must be positive thinkers.
• Each team member must have enough self-confidence and self-respect to respect other team members.
• The team leader must always be on the lookout for distractions, tangents, and unproductive or ancillary issues.
• Each member must trust the motives of the other members.
• The team has to be as small as possible.
—H. David Aycock, former Chairman of Nucor
“If everyone on the team is able to say ‘I can work with this person’ about everyone else on the team, then you’ve got a good thing going. Generally, a good fit starts with shared values…If everyone on the team isn’t clear about the product (whatever it is that you’re trying to create) and the process (how you’re going to get where you need to be, who drives what, who is the ultimate decision maker), then there are going to be people problems.”
—Jonathan Roberts, Managing Director and Partner, Ignition Corp.
From “What Makes Teams Work? Unit of One,” by Regina Maruca, Fast Company, November 2000.
The stages of team development
The Tuckman Model, created in 1965 by Bob Tuckman, lists the classic four stages of team development: forming, storming, norming, and performing.
Forming—Team members are introduced. They state why they’re a part of the team and what they hope to accomplish within it. Members cautiously explore the boundaries of acceptable group behavior. This is a stage of transition from individual to member status, and of testing the leader’s guidance both formally and informally.
Storming—Storming is the most difficult stage for the team. Members begin to have their own ideas as to how the process should look; personal agendas are rampant. They begin to realize the tasks ahead are more difficult than they imagined. Impatient about the lack of progress, members argue about what actions the team should take. They try to rely solely on their personal and professional experience, and resist collaborating with most of the other team members.
Norming—Members reconcile competing loyalties and responsibilities and find a focus. Everyone wants to share the newly found focus. Enthusiasm is high, and the team is tempted to go beyond the original scope of the process. They accept the team, team ground rules, their roles in the team, and the individuality of fellow members. Emotional conflict is reduced as previously competitive relationships become cooperative.
Performing—The team settles its relationships and expectations. They begin performing by diagnosing, solving problems, and choosing and implementing changes.
From “Forming, Norming, Storming, Performing,” by Ingrid Bergner. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/03%3A_Team/3.03%3A_Building_a_Healthy_Team.txt |
Now let’s move on to talk about an activity that’s absolutely central to your team’s commercial success: networking. Networking consists of exchanging information and establishing personal connections. People network in many different settings: on the telephone, in hallways, in company lunchrooms, at professional conferences, at trade shows, company meetings, classrooms, lounges, hallways, elevators, airplanes, trains, buses, hotel lobbies, and waiting rooms. Some networking is carefully planned and some just happens. Networking is friendly, low-key—and essential.
Why network?
You network because it opens doors for you. When you know a lot of people, you can turn to them when you need help with anything and everything related to your venture: hiring new staff, marketing, supplies, getting funding. It’s nearly impossible to succeed in business without a good network.
Get out there
The only way to network is to get out there and talk to people. According to networking guru Joan Gillman, a lot of entrepreneurs “get very involved in their businesses and their ideas and don’t get out of their shop. They’re very busy doing what they do well, and I applaud them for that, but they need to get out into the community. Those community contacts through Rotary, through the Elks, through the Chamber of Commerce, through other non-profit organizations, are really important for success in business.”
You may be wondering, “Where do I start?” It’s OK if you don’t personally know any CEOs, lawyers, or business executives. Chances are someone close to you does, or perhaps someone close to someone close to you. “Every person has a network they can hook into,” says Gillman. “We’re all born with networks, a set of contacts.” She recommends first delving into your F & R (Friends and Relatives) network to connect with people who can help you.
Opportunities to network exist outside of friends and family as well. Your college or university keeps detailed alumni information. Feel free to get in touch with these invaluable contacts by writing letters and making telephone calls. Many alumni are more than happy to help out students of their alma mater. Also, seek out trade organizations and conventions that link people in your field of interest. Your competitors are likely to participate in these associations; by networking with them, you can gain priceless information.
Sell yourself
Every time you meet a new person, you are essentially pitching yourself. If you are shy or intimidated by meeting strangers, ask an extraverted friend to help introduce you to others until you gain more confidence. The only way to overcome introversion is through practice. Exercise your networking skills by engaging strangers and starting simple conversations in ordinary places like the park or supermarket.
When you are ready to network for business do not underestimate what you have to offer as a new, ambitious entrepreneur. More experienced individuals may even take you under their wing. The closer you are to your mentor, the more that person will want to see you succeed. Your best asset is your freshness; by confidently and sincerely approaching people you will make contacts with ease.
As a budding entrepreneur, you’re also offering others the unique opportunity to share in your vision at the beginning. Everyone is interested in new and innovative ideas. Even if you’re reaching out to friends and family, talk about your vision with conviction and explain why it’s important. Buzz spreads quickly, and if the people you speak with aren’t interested in becoming involved in your business, perhaps they know people who would be.
Keep in touch
As you build up a network, says Gillman, be careful not to overextend yourself. Says Gillman, “You have to be selective. When I go to a meeting, I try to meet two people who are going to be influential and whom I want to stay in contact with. Not fifty, because you can’t manage fifty relationships.” Keep in touch with the contacts you make. Gillman keeps a calendar with birthdays on it. “My most important contacts and I go out for lunch about once a month, once every six weeks. We never leave that lunch without scheduling the next one.”
Use your network
Getting help from your network is as easy as making a phone call or writing a letter. All you have to do is ask in order to raise capital, discover opportunities, and connect with people that can help you with your business venture. But don’t forget that networking involves reciprocal relationships to which you are also expected to contribute. Do your part by lending a hand to others where you can—share your contacts, make yourself available for informal meetings or lunches, and always nurture your relationships. “You just never know where your contacts are going to take you,” says Gillman.
Mind your manners
The contacts you make while networking might be colleagues, friends of colleagues, relatives, friends or just acquaintances. Regardless, always maintain proper etiquette when interacting with people. If you offend someone, word may travel. Also, remember that your actions reflect on the person who introduces you. Keep that person in mind when dealing with the contacts he or she gives you. Here are some etiquette tips:
• Make eye contact and shake hands with every person you meet
• Present yourself professionally
• Send handwritten thank you cards whenever someone helps you in any way
• Always pay for the meal if you invite someone to lunch or dinner
Networking stories
Networking guru Joan Gillman shares the following personal experiences that reinforce the basic tenets of networking.
Network to get what you want
When Joan’s daughter wanted to break into Hollywood, she took her mother’s advice and made the rounds at a party asking friends of the family and even strangers if they knew anyone working in film or television. She ended up with a long list of contacts, including her mother’s friend’s brother, who was executive producer of a popular prime time sitcom.
Befriend the competition
One of Joan’s clients, a husband and wife team, were worried about a competing business, also ran by a husband and wife team. Joan suggested the concerned couple take the competition out to dinner, their treat. The other couple had such a good time, they shared everything about their business, including their financial position.
Ask and ye shall receive
Joan met a young woman at a meeting in Strasbourg, France, who loved her unique dangling cow earrings and asked where she got them. As they were a gift from her daughter, Joan didn’t know what shop they came from. She promised, however, to get the woman the earrings if she promised to remember that you don’t get anything unless you ask for it. After looking in eighteen different jewelry stores, Joan finally found the cow earrings, and sent them to the young woman. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/03%3A_Team/3.04%3A_Networking.txt |
Think chickens
A good way to get to the heart of what incubators are and what they do is to tease out the metaphor behind the word “incubator.” Incubators are self-contained environments that regulate the lives of chicks so they only need worry about eating and growing. Business incubators are exactly the same: they provide fledgling ventures with office space, basic equipment, access to various professionals (accountants, lawyers, marketing experts, mentors), and in some cases seed money so the businesses can focus on getting the venture off the ground.
Why bother incubating? Why can’t young businesses just go at it alone, like they used to (and for the most part, in fact, still do)? The answer has three parts.
Making the local scene vibrant Stimulating the local economy is a prime reason for the existence of most incubators. These programs want to produce mature, successful businesses—“graduates” of the program—that will go on to create jobs and offer products and services that enhance the local economy.
The “new” economy The world is changing in terms of how business is conducted. In the past, traditional economic transactions consisted of an exchange of money for goods, materials, or services, but more and more often the important economic transactions of today involve knowledge. Incubators—particularly technology business incubators—facilitate these academic, government and business collaborations that produce leading-edge, next-generation systems and in the process get a leg-up in a hypercompetitive, knowledge-based marketplace.
High-tech help While there has been a rapid and spontaneous burgeoning of technology-based start-up companies in recent years, quite a few of the entrepreneurs behind them have negligible experience in managing and growing a small enterprise. Assisting emerging high-tech entrepreneurs with this process is a fundamental motivation driving incubators.
What incubators look like
Incubators can be private or public, for-profit or non-profit. They can focus on high-tech, life sciences, manufacturing, service, or niche markets. Some charge a fee for their services, while others require an equity share in the company. A typical incubator, like Baltimore-area InfoAge, has wired space for rent on a monthly or hourly basis, and offers fundamental business support services such as fax/copy machines, networking seminars and forums, voice mail, a mailbox and address, Website space, and conference and multimedia presentation room use.
Finding the right match
Before committing to an incubator, ask yourself these questions:
Does the incubator offer the services and contacts you need?
What services do you need to make your venture successful? Business plan development, legal/accounting advice, marketing, laboratory space, manufacturing facilities? Be sure the incubator offers what you need or can connect you to service providers who can meet those needs.
Do you meet the incubator’s criteria?
Find out the incubator’s qualifications for accepting clients before applying—some incubators expect prospective clients to have fully developed business plans, whereas others require a less developed idea and offer business plan development assistance.
Is the fee structure right for you?
Most for-profit incubators exchange space and services for an equity share in their client companies, whereas most non-profits charge fees for space and services. If a large cash infusion and speed to market are essential for your success, then giving up equity in your company in order to secure quick cash might be the way to go. But if you don’t want to give up equity and are willing to build your company more slowly, then paying fees for services and space may be a better choice.
Ups and downs
As with just about everything, there are advantages and disadvantages to incubating your business. Some advantages are:
• Reduced rent (on average, business incubators charge 25-50% less than normal rents)
• Access to business and entrepreneurial wisdom
• Ease of networking
• Sharing ideas and a culture of innovation with peers
• Legitimacy, which can go a long way toward luring investors
Some disadvantages:
• Some business incubators are more successful at accomplishing their goals than others
• Subsidized rent, camaraderie, expert advice, and free help are hard to beat. Some companies graduating from incubators aren’t sufficiently battle tested.
• You may not need to incubate at all. Why give away equity to get services you can seek independently? In many instances, it is not clear what value the incubator adds.
Innovating the incubator
Institutions like the University of Maryland are finding new ways to incubate businesses. One example is the Hinman Campus Entrepreneurship Opportunities (CEOs) program at UM, the nation’s first “living-learning” entrepreneurship initiative, which brings students from diverse majors together under one roof to learn how to start their own businesses. A specialized, high-tech “e-Dorm,” seminars and workshops from venture capitalists and successful businesspeople, industry-student mentoring, and unique entrepreneurship education courses give students a stimulating “living incubator” environment in which to realize their ideas.
Business Incubation Center at CBP
Is a non profit based incubator which offers not only office space but the innovative "virtual" services, allowing clients to look and communicate professionally to their clients. The resident incubees have unlimited access to free one on one counseling and have hours of professional services from an accountant, lawyer, marketing expert and others. Home based businesses can rent an office for a day, a week or even a month. There are also hourly meeting room rental facilities to conduct meetings in a professional environment. The clients are able to enjoy a variety of training workshops, specifically designed for small businesses.
Incubation at Rensselaer
The Rensselaer Incubator Program at Rensselaer Polytechnic Institute has nurtured technology start-ups for twenty-three years, graduating a number of successful student-run companies. Simon Balint, the Interim Director of the RPI incubator, told us how university relationships and the incubator network benefit fledgling companies.
The Rensselaer Incubator Program is university-run, as are one-third of the incubators in the US. “That is a large draw,” said Balint, “because universities provide access to talented workforces (students and faculty), access to sophisticated equipment and expertise, and the potential for joint research and grant funding.” Balint coordinates student projects in which MBAs write business plans, engineers produce CAD drawings, and computer science majors build Websites, assistising incubator clients for credit.
The program is great at helping students find advisors and build their networks. The on-site incubator staff is always available to provide advice and help clients resolve issues on an informal basis. More formally, area consultants volunteer to hold one-on-one mentoring sessions weekly at the incubator. Finally, clients can benefit from the wider community. The incubator has “deep relationships with the campus and the external community and can help the companies build advisory boards. “We draw on graduate incubator entrepreneurs and executives, civic leaders, and business leaders and pull them together to act as mentors and advisors to the companies,” says Balint. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/03%3A_Team/3.05%3A_Incubators.txt |
Choosing team players over superstars: SolemteX
As Owen Boyd grew his business, he picked the most impressive résumés from the pile to build his management team.
This, he says, was his biggest mistake.
“I wish I had known at the time how important building a team was rather than building a company,” said Boyd. “I hired everyone based on their resume rather than how they would fit together.”
Boyd’s hiring strategy gave him a very intelligent group of people, each with their own big ego. The ability to work well together is critical for a small start-up team, and Boyd found that all the egotism stifled collaboration, prompted managers to exaggerate their progress, and caused them to make the same mistakes again and again.
Boyd now knows that mutual respect, honesty, and the ability to learn from mistakes are crucial traits for a team. It took five years and a complete staff turnover for Boyd to find the right people, but the current staff has been in place for three years and the company has doubled revenues each year.
Boyd thought of the idea for SolmeteX, which develops and manufactures specialized technology for the safe and economic removal of heavy metal contaminants, while he was working with his father in power plant development. He noticed that industrial water treatment systems, like those in power plants, used 100 year old technology. He had recently read an article about a new technology for drug separations and believed that its principles could be applied to modernize water purification.
Beginning with money from family and friends, Boyd rented a basement and began to test chemical separation techniques. He warned his funders that they had little chance of getting their money back. After the early stage, he wrote a business plan and secured venture capital money to continue. Although using venture capital meant ceding some power (as Boyd explains, no matter how much stock share they have, “they have the cash, which means they have control”) he became more comfortable with them over time, realizing that they were also relying on him.
His initial strategy was to market the chemical separation technology for large projects. Holding lunches at engineering firms brought in sales, but not profits. Boyd notes that to succeed in unprofitable times, “you have to have the idea that you will be successful and understand why you are not making money.”
Boyd responded by shifting his focus to smaller applications in markets with dominant distributors, including a device he developed to trap mercury during dental procedures. The large dental supply distributors pushed SolmeteX products to dentists. Demand was mostly driven by regulatory standards for pollutants, so SolmeteX concentrates on educating regulators about the need for and availability of better technology. In regulated markets, SolmeteX has achieved 50-70% of the market share.
This will be the first profitable year for SolmeteX, a feat that can be enjoyed by the current management of the company. Now that the egos are gone, SolmeteX has a team that feels like a family and demonstrates mutual respect. Boyd says “people really have to enjoy what they are doing. It’s like sports: they want to be on a winning team.” | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/03%3A_Team/3.06%3A_Choosing_Team_Players.txt |
The right team at the right time: Keen Mobility
Often, the best teams don’t form as a result of careful planning: good teams synthesize when the right people work on the right project at the right time. Such is the story of Vail Horton and the Keen Mobility E-Team.
Born without legs, Horton learned determination and perseverance at a young age. At four he pleaded with his parents for prosthetic legs, and got his wish when a team of biomedical engineers at the Rusk Institute of New York University designed a pair of custom titanium legs for use with ordinary wooden crutches.
While glad to be free of a wheelchair, over the years the jolting of the crutches caused tremendous discomfort in Horton’s back, shoulders, and arms. In college he was diagnosed with osteoarthritis in his shoulders, and when the incessant pain became severe his doctors prescribed a wheelchair. Horton refused; he had experienced an independent lifestyle, and for him, going back to a wheelchair wasn’t an option.
One day, Horton, then a business student at the University of Portland, walked into the engineering department and asked if someone could build him a crutch with a shock absorber. A professor who happened to be in her office at the time spoke with him about it. “A few days later,” said Horton, “three engineering students called me and said, ‘We’ve been assigned to build your crutch for our senior year project.’ I said, ‘Oh, cool’.”
Just like that, the team was formed.
The group was soon accepted into UP’s E-Scholar program, in which students form teams and pursue a business venture funded partly by the university and partly by themselves. Horton and his team began a venture based around a new, improved crutch—one that wouldn’t be detrimental to long-term users.
But the team wasn’t complete. Horton soon realized they needed more information about how the crutch would affect the human body, and took steps to add a life sciences major to the ranks. Horton, the three engineers and the life sciences major met once a week over the course of their senior year and, aided by NCIIA Advanced E-Team funding, eventually came up with a product: the Keen Krutch. The improved crutch featured underarm cushioning that conformed to the curvature of the body; a contour shape to redistribute pressure; adjustable, mobile handgrips to prevent carpal tunnel; shock absorbers, and a pivoting ankle joint for increased mobility. The crutch was awarded a US Patent, and was on its way to being sold on the marketplace.
Then everyone graduated. Horton decided to try and commercialize the Keen Krutch, but the engineers didn’t join him. Says Horton, “They didn’t see entrepreneurship in the same light as myself. I gave them every opportunity to stay and form part of the company, but I didn’t have the resources to offer and they weren’t willing to accept the risk associated with running a startup.”
Horton decided to call on an old friend and former roommate, Jerry Carleton. Carleton had already accepted a job in northern California, but jumped at the chance to join Horton. Says Carleton, “Just knowing Vail, I was already caught up in the vision and I knew he was going to take the company as far as it could go. I knew he was the kind of guy that would never say die—that he was putting his mind to this company and was going to make it a huge success. So when the moment came and I was sitting there at lunch and he offered me the job, I didn’t hesitate.”
August 2002, with a US Patent for his revolutionary set of Crutches in hand, Vail hired Jerry, and he became the first employee for Keen Mobility, now officially a small startup company. After a grueling, exhausting, and ultimately rewarding startup process, today, now called Keen Healthcare, is a leading national manufacturer and provider of medical equipment and supplies. Alongside their first innovative product Keen 'Navigator' Shock Absorbing Crutches and Aventure Pivoting tips, , the company manufactures over 52 lines of technologically advanced, innovative, medical equipment, ambulatory aids and other progressive products selling direct to long term care and acute facilities nationwide passionate to ensure that the elderly and disabled are provided greater mobility, safety, independence and healing options. For more information on Keen Healthcare visit www.keenhealthcare.com, and to learn more about their founder and CEO Vail Horton visit www.vailhorton.com. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/03%3A_Team/3.07%3A_The_Right_Team.txt |
Thumbnail: pixabay.com/photos/board-cha...ation-4858827/
04: Plan
Business Plans and Why You Need One
What is a business plan?
A business plan is a twenty- to forty-page document that serves the dual role of being an internal road map for your team and an external sales tool for potential investors, customers, and partners. Your business plan describes the entirety of your venture: the problem you’re solving, your solution, the technology behind it, the size of your target market, the customers, the competition, your business model, team, financial needs, and exit strategy.
A business plan forces you to think things through early; it ensures you have well-defined venture goals. Clear goals help generate a clear path for you and your team to follow as you begin to implement your venture.
The elements of a business plan
Business plans vary widely, but most consist of:
• The executive summary
• The problem you’re solving or the need you’re filling
• Your solution
• Technology and IP
• Size of opportunity/market
• Customers and how you will reach them
• Competition
• Business model
• Team
• Financial needs
• Exit strategy
The executive summary is a 2- to 5-page section that summarizes the plan’s main points. In a few pages, the executive summary conveys the essence of the venture. It should contain only the key points from the important sections of the full plan.
The problem you’re solving or the need you’re filling is stated in an introductory section. Don’t shy away from aggressive terms and phrases in this section—you want to grab the reader’s attention.
Your solution, or how you will alleviate the pain, is stated in general terms.
Your technology and IP are described in more detail in the next section. Explain specifically how the technology works, but don’t overdo it; the explanation should be comprehensible to an intelligent layperson with some knowledge of the field. State whether the technology is yours or licensed, and, if so, from whom and under what conditions. Describe the status of your IP protection. What patents have been granted, applied for, will be applied for? Supply the patent numbers or the application numbers if you have them. State if you’re protected by other forms of IP.
Size of opportunity/market If you’re creating a new market it can be difficult to gauge its potential size, whereas if you’re introducing a better technology into an existing market, the estimate can be more accurate. Regardless, you and your potential investors need to feel comfortable that the potential market is large enough to sustain a profitable business.
Customers and how you will reach them Points to discuss include who your target customers are, your strategy for selling to them, what channels you will use, and when. Demonstrate an understanding of your target customers.
Competition Demonstrate knowledge of your competitors. Who are they? Are they selling the same or different technology? Who are the likely new entrants? Are they both domestic and foreign? What are their strengths and weaknesses?
Business model is a general outline of the way your company will make a profit. We go into more detail on business models later in this section.
Team This section should convince potential investors that they can trust your team with their money. Does your team:
• Have the knowledge, experience, diverse skill sets, integrity, drive, persistence, and passion required to make it happen, in spite of the adversity and obstacles that are likely to arise along the way?
• Understand its limitations? Are you willing to seek help and listen?
• Work with solid, experienced directors and advisors?
Although important, this section of the plan is only the first step in the convincing process. Personal interactions with investors and the due diligence process also play an important role.
Financial needs including the amount of money the venture is seeking and over what time frame; how the money will be used; the major assumptions involved; and when you will achieve cash flow break-even and profitability.
Exit strategy details how investors will get their money back (hopefully with a healthy return) and exit your company. Some exit strategies are Initial Public Offering (IPO), merger/acquisition, and buyout by a strategic partner
Nine questions every business plan should answer
1. Who is the customer?
2. How does the customer make decisions about buying this product or service?
3. To what degree is the product or service a compelling purchase for the customer?
4. How will the product or service be priced?
5. How will the product reach all the identified customer segments?
6. How much does it cost (in time and resources) to acquire a customer?
7. How much does it cost to produce and deliver the product or service?
8. How much does it cost to support a customer?
9. How easy is it to retain a customer?
From “How to Write a Great Business Plan” by William A. Sahlman. Harvard Business Review, July-August, 1997.
The real benefits of a business plan
Jeremie Spitzer and Paul G. Silva talked to us about their experience creating a business plan for Zform, a software entertainment company that creates fully accessible games for both blind and sighted communities.
Spitzer says that before actually sitting down to write the business plan for Zform, he hadn’t thought at all about marketing. He soon realized that he needed to do some research and identify the competition.
“Don’t just jump into a new venture [without planning] because you will drown in the small details and won’t even realize that you’re way off base. A business plan forces you to think of all the details that you wouldn’t normally think about. When you write your plans down on paper, you have to be clear. The process of writing forces you to work out the details.”
Spitzer emphasizes that there is no such thing as a final plan. “You need to accept and be comfortable with the fact that your business plan is a live document that will always be changing.”
Silva suggests looking to others for advice. “Planning is essentially answering questions that have already been laid out for you by people that are experienced and know exactly what will hurt your venture if you don’t plan. The process of planning was ten times more valuable than the actual business plan itself.”
Silva believes in learning from others’ mistakes. He regularly reads the “Postmortem” section of Game Developer magazine, which talks about games that have failed and why they have failed.
Silva advises new venture seekers, “Talk to an industry veteran who has experienced failure, and ask why.“
Another viewpoint on business plans comes from Phyl Speser of Foresight Science & Technology. “Most folks will disagree with me, but I think [business plans] are highly overrated. Boeing never had a business plan until late in the last century. They knew what they did: they built airplanes. If you’re going out for venture capital money, you need a twenty+ page plan. If you’re not, you usually need a much smaller one. Essentially, you need as much of a plan as is necessary for your team or your investors. Otherwise, don’t waste the time.” | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/04%3A_Plan/4.01%3A_Business_Plans.txt |
A business model is a general outline of the transactions needed for your idea to make a profit. The most basic business model involves simply producing a product or service and selling it directly to customers. The company makes a profit if revenues are greater than production and business costs.
Business models are goal-driven
When developing your business model, clearly define the type of business you are pursuing and your goals for your business venture. Once you have a well-defined business idea and specific goals, you can establish the method by which you are going to make your profit.
First, identify your venture type. Is it a product, a service, or a business? If it’s a business, is it a service business or a product business? Is it a lifestyle business or a high growth business? A lifestyle business prioritizes lifestyle issues such as independence, location, and hours. A high-growth business gives priority to growth, expansion, and money back to investors.
If you have an idea for a product, do you have the means to produce and sell this product or do you plan to license it to another company? Ask yourself if your team is capable of getting the product or service to market. If not, who will help you, and how will you make money using their help?
Some model models
Your business model generically defines the product or business you are proposing, your customers, and the transaction mechanism(s) that will allow you to make money. This is an important step before you begin creating your formal business plan. Your business plan will describe your model in more detail.
Subscription-based and advertisement-based models are examples of business models found both on- and off-line. Many companies combine two or more business models or create their own unique model.
In a subscription-based business model, the provider charges a fee for access to the service. An example of this is Consumer Reports magazine. Consumer Reports relies solely on its subscription sales. It can do this because it carries a well-known brand name, and provides high quality print and online content, for which people are willing to pay.
An exclusively advertisement-based model provides free content to attract users, and is financially supported by advertisers. Network television is the most obvious model. The more successful a show is at attracting eyes, the more advertisers are willing to pay. Another example of an advertising-based business model, Yahoo!, provides free access to useful online resources. Users accept the presence of advertisements throughout the Yahoo! site. (Note: Yahoo! is gradually incorporating more subscription-based services.)
A licensing model is used by most software companies and some specialty product companies to create products, then license them to other companies. The Bagel Biter in Northampton, MA manufactures a bagel-slicing machine, and gets others to sell it in their catalogs and stores. This model works for companies that have a narrow product line and can sell a limited number of units.
What happened to the dotcoms?
The most talked about business models in recent memory are based in e-commerce. Dotcoms held the promise of unlimited wealth production with minimal overhead. Most businesses today offer a way for consumers to access their product or service online, but the surge of exclusively online businesses has faded. Many sites that thrived in the late 90s are now defunct. What happened?
Paul A. Greenberg writes, “Many of the young dot-commers rejected traditional business models in favor of rampant spending, over-extension of debt and high-risk ventures backed by adventurous investors.”1 Colin Duguid and Caroline Tresman add, “A solid business is not maintained just by its shop front or by its product, but by basic business skills through its management and staff. If the management has little or no skills but ‘a great idea,’ how long would it last and could they see what would otherwise be simple business problems?”
To survive, plan your venture and evaluate your team’s financial capabilities as well as your business management experience. Also, analyze the market to determine if your model can make a profit. Lastly make sure that you are aware of your competitors and your possible risks (more on these issues in the section 2, “The Market”).
About business models
“Business models themselves do not offer solutions; rather, how each business is run determines its success. So the success of e-commerce businesses will hinge largely on the art of management even as it is enabled by science and technology.”
From “The Truth about Internet Business Models,” by Jeffrey F. Rayport.
“A business model is quite simple: it is a brief statement of how an idea actually becomes a business that makes money. It tells who pays, how much, and how often. The same product or service may be brought to market with several business models..”
From “Anatomy of a Business Model” by Steve Robbins.
Differentiating your business: A real life example
Frank Hertz, Co-founder of Newmediary.com, founded in 1999, says that unlike many of its fellow dotcoms his business is surviving. Hertz, Newmediary’s vice president of operations, told us about his company’s business model and what makes it different.
“We build, host, and manage private-label online directories for leading publishers and portals. We sell companies enhanced subscriptions (listings in the directories), and access to sales leads, or RFPs (Requests for Proposals) on behalf of those directories, and return a portion of that revenue to the partner.
The partner gets a no-cost revenue stream; we get to sell a product with an established brand name on it, and keep a large portion of that revenue, as opposed to having to build our own brand.
So, this is how we’ve differentiated ourselves in the market: essentially, by not caring if people (other than partners) know who we are. It’s worked up to this point. And all those dotcom companies that raised, in some cases, hundreds of millions, to establish a brand name, are now out of business. So we’re happy we embarked on the ego-less business model of what’s termed Application Service Provider (ASP).”
“In the most basic sense, a business model is the method of doing business by which a company can sustain itself—that is, generate revenue. The business model spells out how a company makes money by specifying where it is positioned in the value chain.”
From “Business Models on the Web” by Michael Rappa. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/04%3A_Plan/4.02%3A_Business_Models.txt |
When is this going to make money?
In the typical business world, profits are the ultimate measure of success. Investors look to the financial statements to find the story of how the company performed. Projected financials are also important. If you don’t know how to create financial statements, ask a business major or accountant to help you.
Cash is king
For a start-up business, or any business, having cash when you need it is crucial. In fact, many profitable businesses fail because they grow too quickly and run out of cash along the way. You could face this problem too if the payments to your suppliers are due before you get paid by your customers. Predict the timing of your cash inflow and outflow, and make sure you have the cash to cover yourself when you make decisions.
In operating your company, keep close track of your cash position. While you’re working to make your venture viable, you should probably estimate your cash flow on a daily basis. The term burn rate refers to how quickly a company is using up its available cash. If you don’t have a perfect picture of how you are using money, estimate your burn rate to determine how many days you have until you need more funding or have to cease operations.
Your original business plan might include a rough cash flow estimation. Your financiers will use it to determine when they will begin getting a return on their investment, and how high the return will be.
The balance sheet reports the position of the company at a point in time. It is divided into three parts: assets, liabilities, and owner’s equity. Assets represent everything of value in the firm, such as property, inventory, cash, and payments owed by customers. Typically the assets are listed in order of decreasing liquidity, meaning that the ones easiest to convert cash are first. Liabilities represent debts owed to customers, employees, and banks. These are listed roughly in order of when they come due. Owner’s equity is what’s left over when liabilities are subtracted from assets. It’s the value of the owner’s (or stockholder’s) share of the company if it were to cease operations. The actual value of the company is based on its future potential (and should be higher than owner’s equity on the balance sheet).
The income statement reports the revenues and expenses of the company over a specified time period, culminating in a profit or loss. Income is reported based on accounting rules and often does not reflect cash changing hands. Revenues can be reported when a product is sold and delivered to the buyer even if they have not paid (but will pay in the future). The income statement also follows the “matching principle,” which requires expenses to be matched to revenues and reported at the same time. This means that expenses incurred to produce a product are not reported in the income statement until that product is sold.
The cash flow statement documents the sources and uses of cash over a specified time period. Each activity where cash is gained or lost is listed, along with the amount. The activities are typically divided into operations, investment, and financing. Positive cash flow from operations is a sign that the business is making money from the goods and services it’s selling. The investment section documents cash used to purchase assets or gained in the sale of assets. The financing section represents cash borrowed from banks or gained through the sale of stock, and cash used to pay back loans or repurchase stock.
More than one bottom line
You and your investors may want to achieve other returns on your venture. Again, we’re referring to the triple bottom line. While the first bottom line, profit, is shown in your financial statements, you must create metrics to report your other bottom lines (see the sidebar on the bottom left). Committing to goals that improve the environment or the human condition should be coupled with establishing a system to track your progress. It’s difficult to see how far you have come if you don’t have consistent ways to measure your impact.
The National Social Venture Competition recommends two different options for quantifying social impact in dollar terms. One, based on project valuation techniques at the International Finance Corporation, involves thinking of the best alternative solution that exists to meeting the social need you are tackling. To find the monetary benefit of your method, subtract your expenses to meet this need from the expenses that would be incurred if the alternative solution was used instead. The second is based on the approach used by Roberts Enterprise Development Fund to value its social venture returns. The monetary return is calculated by adding the savings to society (in governmental program costs that do not have to be spent) and the gains to society (in tax revenues) from your work, and subtracting your business expenses that are related to implementing the social purpose (and would not be otherwise incurred).
The Inexact Science of Social Return on Investment (SROI)
How do you know that your social venture is achieving its goals? It’s important not only that your venture promote a “good cause,” but also that its social returns argue for increasing investments.
Social Return on Investment (SROI) measures social impact in dollar terms. Whereas financial return is relatively straightforward, differences in personal values and definitions of “social impact” require varying measures of social return. In fact, many social returns are impossible to quantify, making this a necessarily inexact science.
SROI can be thought of in terms of jobs created, houses built, or lives saved. But to start a social venture, you need to come up with a model to measure your particular social impact. A working SROI model helps investors determine the attractiveness of a potential investment. Documenting meaningful social returns is crucial; without an understanding of the tangible and measurable effect created through an investor’s activity, the reasons to engage in this critical work are merely anecdotal.
Developing a cash flow budget
Your cash flow budget is one of the most important financial statements you have. Done correctly, it provides your business with the necessary checks, balances, and financial controls to guide performance, win bankers’ hearts, and keep spending and investment impulses in check. Developing a budget is simple, and when created with solid sales and expense forecasts in mind, you can ensure that your budget will stand up to the daily demands of your business.
Here are some steps you can take to create a cash flow budget you can rely on:
• Set business guidelines and goals.
• Review current economic and business conditions; consider how they will affect your business.
• Forecast sales for the budget period.
• Forecast expenses for the budget period.
• Prepare a profit-and-loss projection.
• Run a reality check on the numbers. Compare them to your goals, trade figures, and historical figures.
• Project monthly cash inflows for the budget period.
• Project monthly cash disbursements (outflows) for the budget period.
• Project operating data. Move controllable items around to achieve the best positive cash flow possible.
• Prepare your cash flow budget: the “finished”cash flow projection. Look for periods of negative cash flow, as well as unusually positive periods.
• Compare budgeted with actual performance monthly.
• Review performance and recast forecasts (both P&L and cash flow) annually or as needed.
From “Financial Troubleshooting,” Inc. Magazine, August 2000, by Michael Pellecchia | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/04%3A_Plan/4.03%3A_Measuring_Your_Success.txt |
If everything goes right, at some point you’ll find yourself presenting your plan to potential investors. This can be nerve-wracking for anyone, especially first-timers, but you can do a number of things to ensure your presentation comes off well.
Your objective: inspiration and distillation
When you present your plan, be enthusiastic, be confident and clearly illustrate the need for the product or service you plan to provide. Quickly evoke substantial interest in your venture. Once you’ve captured attention and interest, the audience will ask questions that allow you to expand on your ideas.
Think about your audience
How you present your business plan depends both on your audience and your situation. You really have two pitches: one for end-users (customers) and one for investors. The first focuses on price, performance, and ease of use that provides a sustainable competitive advantage. The second explains why the first one generates substantial return on investment (ROI) for investors or licensees.
And, although you may be formally presenting your plan to venture capitalists, don’t overlook the opportunity to present your ideas to the people you meet every day. In both cases it’s important to be socially astute and to recognize the needs and interests of the people with whom you are speaking.
Elevator pitch
Regardless of the situation, you have about thirty seconds to get the audience’s attention. One of the most important skills you need is to be able to explain your plan, out loud or in writing, in 30 seconds or less (the amount of time you might have riding an elevator with a prospective funder). Your elevator pitch is a clear, articulate, and concise description of your purpose that should also relay your passion for your venture. When you use the elevator pitch in a written document, the audience should immediately understand what your venture is about.
Brevity is key
Thoughtfully prepare your elevator pitch. You have about thirty seconds to grab the attention of your audience regardless of the situation. Bill Joos from Garage Technology Ventures1 (www.garage.com) recommends that you begin your pitch with an engaging tag line that incorporates your business’s product or service and purpose. A clever tag line can directly and simply convey your idea, and when you have a captive audience you can elaborate on your business. Your ability to clearly, concisely and passionately state your purpose establishes that you have well-defined goals and are adequately prepared to promote your ideas. This also allows you to get your point across before your listener has time to get bored.
Rules of public speaking
Make sure that you tell your audience what you are going to tell them, tell them what you want them to know and then tell them what you told them. Emphasize a few key points throughout your presentation and do not overwhelm your audience with too much information. Help the audience retain what you’ve said by strategically repeating the most important information. If you’ve covered a few main points, you’ve probably given your audience enough information—again, if members of the audience are interested in learning more, they will ask questions.
Main points of a presentation
Bill Joos recommends using the following outline for your business plan presentation:
Summary—a modified version of your elevator pitch. Tell your audience your mission, quickly describe the product and, if appropriate, tell them how much funding you need.
Market—Establish your market by introducing the problem that you will solve with your product or service.
Solution—Explain your proposed venture and how it will solve the problem. Include a description of your idea, a brief description of how you are going to implement this idea, your awareness of major competitors, how you will market this service or product and how you plan to profit from this venture.
Team—Establish that you have a competent team with past experience that makes them ideal for your business venture.
Use of Funds—Explain how you plan to use acquired funds to implement your venture.
Recap—Briefly summarize the main points of what you just finished telling your audience, leaving key points of your presentation fresh in their minds as you ask them to invest in your venture.
End with action
At the end of your presentation, tell your audience what you want them to do. Directly invite your listeners to become a part of your venture and let them know how to go about getting involved.
Example of a great pitch
Here’s an example of a solid elevator pitch that proposes selling construction boots over the Internet. Read the pitch out loud and time yourself—you’ll see that it can be done in 60 seconds or less.
“ConstructionBoots.com is an e-commerce website that sells construction boots on a b2c and a b2b basis. Our primary market consists of construction workers, with secondary markets including other individuals and companies in the construction trade. We offer the highest quality products and drive traffic to the site by linking to other websites related to the construction industry. We believe the customer would find purchasing and direct delivery of construction boots through our website easier than purchasing via traditional retail outlets.
We believe we will be the only pure e-commerce construction boot site, but will face indirect competition from traditional brick and mortar b2b retailers who target the trade as well as traditional mass merchandisers. If all goes as planned, we would look to sell ConstructionBoots.com to an industry retailer who sells construction gear.”
Tips for your elevator pitch
Betsy Komjathy recommends these five tips for presenting your plan to potential customers:
1. Never open with “What do you do?” It’s a lazy question, and it leads to a dead-end conversation.
2. Listen for clues that tell you how the person looks at the world. The better you understand a potential customer’s experience and values, the better you can customize your pitch.
3. Don’t carry on about yourself. Top business developers are succinct, natural, and compelling: Whatever they say about themselves is relevant to the listener.
4. Don’t be too quick to direct the conversation to business. Chat about a general business topic—perhaps something in the day’s news—before making a segue into your agenda.
5. If someone is disinclined to chat, act accordingly. It’s better to show restraint, to exchange business cards, and to leave a good impression.
From “How to Deliver the Big Pitch,” by Todd Balf. Fast Company, June, 1999.
“Prepare what you’re going to say—don’t wing it! Once you get the material down, and say it out loud, try it in front of your co-workers—but make sure they are able to give (and that you are able to take) criticism.”
—Steven Bruner
“I didn’t have time to write you a short letter, so I wrote you a long one.”
—Mark Twain | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/04%3A_Plan/4.04%3A_Presenting_Your_Plan.txt |
Licensing as Part of the Plan
Consider licensing
Let’s say you have a promising venture idea but find yourself without the funds or experience to produce and commercialize the product or service. You have the option of licensing the patent rights for your intellectual property to a company rather than starting your own business. A license is a formal agreement made between an inventor (the licensor) and a company (the licensee). The inventor gives a company certain rights to produce, market, sell and/or use his or her invention or idea in exchange for either royalties from product sales or a fixed payment.
Sometimes it makes more sense to license a product to a company that already makes similar products. Let’s say, for example, you’ve perfected the design for a dusting apparatus that can reach into tight spaces without knocking things over. If you can market your idea to a well-known company that already makes small household cleaning devices, you might do better than if you launch a whole new enterprise revolving around your duster. If the invention succeeds in the marketplace, and if you have a well-structured licensing agreement, licensing can be very profitable.
If you think licensing is right for you, include your licensing strategy in your business plan.
Advantages of licensing
Both starting a company and manufacturing a product involve a great deal of time, money, responsibility, and risk. By licensing your venture idea you transfer all of those responsibilities and risks to someone else. Licensing is ideal for the person or team that wants to keep inventing rather than starting and running a company. By choosing to license, you also have the advantage of presenting your venture ideas to well-established companies that are set up to manufacture and market products similar to yours; such compatibility can increase your chances for success in the market.
What a license looks like
A license agreement usually describes in detail what is being licensed and the circumstances in which the licensee can use the technology. The latter includes the kind of license it will be. In exclusive licenses, only one licensee can use the technology under a specific set of conditions (this also excludes the owner of the technology from using it within the specific conditions of the license). In partially exclusive licenses, either the total number of permitted licensees is spelled out or the exclusivity ends after a certain specified time period. A non-exclusive license means you may license your technology to an unlimited number of licensees at any time. Exclusive licenses are generally more expensive than the other types (higher up front payments, royalty rates, minimums, etc.).
Aside from deciding the exclusivity of the license, you can also spell out the specific activities the licensee may engage in. They may only be licensed to manufacture or sell the product, or both; perhaps the licensee may only conduct additional product development. Also, you can construct the license for specific circumstances; for example, the licensee may only distribute the product in three distinct geographic regions, may only use it for medical purposes, may only use it in certain industries or in certain products, etc. The license agreement should spell out whether or not the licensee has the right to sub-license the technology to others, and if so, under what circumstances.
Negotiate the terms of your license carefully. Don’t “give away the store” by granting an exclusive worldwide license for all uses with low minimum payments, rather than a number of non-exclusive licenses for individual uses at reasonable minimums for each. At the same time, don’t place undue limits on the licensee, as it could become impossible for your product to be profitable.
Finding the right company or companies
Do some research to determine what companies can best produce, market and sell your product or service. First, identify companies that have products similar to those you are proposing. Eliminate companies where your product would compete with any of the products the company is already producing. Go to the library and consult the Thomas Registrar of American Manufacturers, trade journals, Standard Rates and Data, and/or the Dun & Bradstreet Million Dollar Database.
Now figure out which companies would be most interested in your product and can produce and sell it most efficiently. Check the company’s position on the Fortune 500 list of the most successful businesses in the United States and check its ranking on the Standard and Poors listing. This type of research is essential for finding reputable companies that have the technology to both produce and sell your product.
Defining your property
Before you can negotiate the terms of your licensing contract, precisely define the intellectual property you are licensing. See the sidebar on the right for important questions to ask when laying out your definitions. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/04%3A_Plan/4.05%3A_Licensing_as_Part_of_the_Plan.txt |
Innovation in the bag: Bob DeMatteis
Whether you know it or not, you’re connected to Bob DeMatteis. This leading packaging systems innovator holds the patent and license on the self-opening plastic bags used in supermarkets and national giants like Wal-Mart, Sears, and Kroger. Nearly everyone has likely used his product.
We spoke with DeMatteis about inventing, the reasons for his success, and the advice he has for inventors looking to license their technology.
When inventing, look to increase productivity
Before I developed the self-opening plastic bag, paper bags were the standard because they were very easy to use and could carry a lot. I was in the plastics packaging industry at the time, and I knew that plastic bags were more cost effective than paper. But there were issues with plastic: at that point plastic bags came in boxes, and you’d have to reach into the box to pull out a bag—sometimes you’d pull out three or four because they would stick together—and then you’d have to stick your finger inside the bag and swab it around to open it up, and only then start loading it. It was very inefficient, very unproductive. I knew that if plastic bags weren’t made easier to use, they would never replace paper.
I got to thinking about it, and one day when I was driving down the highway it struck me: a self-opening bag. You mount the bags on a hook and swipe your finger across the bag and it automatically opens. It’s faster and cheaper than paper—more efficient, more productive. That’s why plastic has replaced paper, by and large, as the bag of choice.
Make it “people friendly”
A lot of innovations are more pure science than anything else: new plastics, new medical breakthroughs, etc. Those are great and needed, but they aren’t products in themselves. They only give you the opportunity to use them in new products. For instance, one of my new products is a plastic valve bag for the concrete industry. We needed a very strong plastic for this application, and we found out that Exxon had developed a durable resin that was perfect for us. Exxon had spent \$800 million developing it, but essentially had no market for it. When they found out about our plastic cement bags they were very, very interested in helping us out.
But the key thing is that there were already a lot of plastic bag systems being used in the concrete industry, and many of them tried to emulate paper, which made them expensive to use. And, more importantly, many of the employees in the actual concrete filling plants had difficulty using the bags. So using Exxon’s resin we designed a bag that’s very easy for employees to use, and we’re now licensing the technology all across North America. And that’s what I mean by “people friendly”: develop the technology with the user in mind; make it simple, easy, intuitive.
Licensing is a team effort
The teamwork concept is paramount in licensing. If an invention is going to be licensed successfully, it has to be a team effort. It has to be manufactured cost effectively, it has to have the “Wow” factor, it has to be protected with patents, and most importantly, it has to be marketed. Nothing happens until your invention gets sold.
You have four partners on your team: the inventor, the lawyer, the manufacturing partner, and the marketing expert. The most important member of the team is your marketing expert. And almost invariably your marketing expert is your licensee. You really want your licensee to embrace your product. As long as that licensee embraces your invention, you know that you’ve got something—that you’re a team.
Two things to look for in licensees
The first thing you look for in a licensee is whether or not the company is established in the field of your invention. They have to have experience. They have to be at a point where they can start marketing your innovation right away.
The second thing to look at is the quality of product the company puts out. Your licensee has to be a company that sells and markets the same level of quality that you’re offering. In other words, if your licensee makes Timex watches, and your invention is a Rolex, they won’t understand how to reap benefit from the value you add. And most innovations are added quality, added value, making something more workable. That’s the essence of innovation—these small layers of improvements. Make sure your licensee can appreciate that.
Knowing when your invention is licensable
To me, it comes down to what I call the Four Magic Words. You know you’ve got something special when your licensee tells you, “I can sell it.” | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/04%3A_Plan/4.06%3A_Innovation_in_the_Bag.txt |
Open to learn: Evan Edwards and EpiCard
EpiPlan
Evan Edwards knows a thing or two about business plans. The recipient of an NCIIA Advanced E-Team grant in 2000, Edwards has been working toward commercializing his invention—a credit-card-sized epinephrine injector for people with severe allergies, dubbed the “EpiCard”—for the past few years. We spoke with Edwards about what goes into a business plan, the lessons he’s learned about writing them, and his advice for nascent inventors looking to build a company around a new technology.
You can do it
The fact is that if you’re smart enough to come up with a worthy invention or a worthy product, you’re smart enough to write a business plan. All you have to do is take advantage of the resources out there, and there are a ton of them. The first and best resource is people you know: mentors, professors, entrepreneurs, people who have been there before. Beyond personal help, there’s a multitude of online help sites, books, etc. When Eric [Evan’s twin brother, who is vice president of EpiCard] and I were looking to polish up our plan for the Darden Business Plan competition at the University of Virginia, we went to Barnes & Noble, and ended up finding several books on writing effective business plans that really helped us out. We were the only student engineering entry, and undergrads at that, and we finished in the top four and won a period of incubation with Darden.
It’s gonna change—a lot
Business plans are ever-changing. The first business plan we wrote for EpiCard was about ten pages. But as the scope of the company expanded we included more and more in the plan; for instance, we started looking to find ways to tap into the military market, so we included more of a military bent into it. And then we realized we didn’t have to stick to injecting epinephrine alone, and incorporated into the business plan our research into other drugs and pharmaceuticals that could be used in EpiCard—insulin, and nerve gas, smallpox, and anthrax antidotes. And we’ve continually revised and updated the market analysis and financial projection sections, refining, adding content. It’s a constant process.
You’ll learn more than you think
When we started writing the business plan for the Darden competition we found competitors we never even knew existed. Knowing those competitors were out there was critical for us, and it’s critical for a lot of NCIIA E-Teams. Many E-Team inventions are an improvement to what’s already out there; you say, “I like this device, and I know a way I can make it better.” And you assume that one device is your only competition. But as you start researching you find other patents, other companies that are looking into the same things you’re looking into. These might be global companies, so that even if you have a patent in the US you might have to worry about international companies entering into the market. So it’s important to understand that while you’re developing the business plan you’re also finding out about things that are extremely important to your venture’s chances of success.
Act on the feedback you get
You’ll learn a lot about your company’s strengths and weaknesses when you go to present your business plan to venture capitalists and angel investors. We’ve made the rounds and presented our plan, and the feedback we received from the angels and VCs was very specific and very helpful. We’ve been a family-run business, but the VCs pointed out that it looks bad if your entire board consists of family members, and recommended we look into that and reformulate the company. So we went out and talked to key people in the pharmaceutical industry, some doctors, and got them on board, and that’s definitely helped solidify our credibility.
As you’re developing your business plan, and you start presenting it to these certain groups, you realize the areas of your business you need to focus on the most.
Lean on others
I come from an engineering background, and my brother from biology, so we knew we had a good product and knew the market, but we had no idea when it came to the financial data. If you go to investors with data that’s questionable or inaccurate, they’ll call you out. They’ll say, “Where did you get that number from?” You need to know your information; you need to know your sources. When we incubated with Darden they provided us with a panel of experts that really helped us with the financial side.
And that brings me to the real piece of advice I want to give: you have to interact with people. Talk with local businesses, join a venture group, join an on-campus entrepreneurship club. By going to their meetings and attending their seminars you’ll gain an understanding of how to write a business plan, or how to valuate your company, or how to do the financials. Whatever you need. You’ll make your strengths even stronger and you’ll shore up your weaknesses. By being in the company of businesspeople at Darden, by being around entrepreneurs, I was able to feed off them and really learned a lot about how to run a business. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/04%3A_Plan/4.07%3A_Open_to_Learn.txt |
Thumbnail: pixabay.com/photos/office-st...-wind-3801758/
05: Company
Getting Started in the US of A
So you’ve got a great new idea and want to put it into action? Here’s some good news to get you started: a combination of unique characteristics make the United States an ideal place for innovators and entrepreneurs to launch their ventures. The advantages reach a spectrum of business models, so no matter what your ambitions, you’re starting out in a great place.
Risk is rewarded
The United States’ business environment fosters and nurtures the growth of new businesses. Many elements of this environment are encouraging to entrepreneurs like you who are considering starting a company.
For example, legal structures in the US provide a range of options for different sizes and types of businesses, allowing their owners to take on varying levels of liability. This flexibility also creates a distinction between the individual and the corporation, further encouraging you to take business risks without fear of getting into too much serious trouble. Unless you do something illegal, or fail to make payroll taxes, you as an individual will not be held personally liable for the failure of a business.
And it’s not just US laws that reward you for taking risks. Our culture and society also reward the adventurous entrepreneur. We see it as acceptable, even courageous, to give a new venture your best shot and make lots of beginner’s mistakes, even if your business fails because of it.
The entrepreneur-friendly culture of the US tells us that making mistakes is just part of the process, and that success is all about taking the risk, and learning from your mistakes.
It’s who you know
US business culture puts a heavy emphasis on networking—making interpersonal connections and using them to your advantage. As we’ve already said, getting to know people in your field and beyond can help you immeasurably; in fact, you can’t get far without that kind of help. Establishing a relationship with a mentor can help you avoid some painful and damaging mistakes. Additionally, a person with an established reputation can open doors for you. Take every opportunity to get to know people who might have the tools to help you out.
Calculated debt is OK...mostly
Unlike many countries around the world, US culture approves the decision to borrow money to fund a new business. Getting a loan is okay, and being in debt is just fine. A few stories circulate about successful companies that launch themselves entirely on credit card debt (which, as you hopefully know, is about the worst loan deal around). Some credit card companies are even setting up special plans and incentives for the small business owner, further propagating the notion that debt carries no shame.
Of course, we hear a lot less about the failures in this approach, which are proportionally much, much greater. Be very careful about personally guaranteeing any kind of loan. You could be personally obligated for a long time to come. And remember: use full disclosure when you get any kind of financing. You don’t want to get money based on false pretenses, no matter how desperate you or your company are at the time.
Your team is ultimately responsible for the business decisions you make, for borrowing wisely, and for doing what it takes to help your company succeed. Every decision you make along the way has risks and consequences. It’s up to you to educate yourself thoroughly and decide whether they are smart and worthy risks.
A rich history of failure
Many of America’s most successful businessmen failed in early business endeavors at least once, including ketchup magnate John Henry Heinz, Henry Ford of Ford Motor Company, and Phineas Barnum, founder of the American circus. All of them eventually became very rich, in part because they were given a chance to try a business, fail, and start over.
The philosophy behind this tolerant regulatory structure is to encourage people to create businesses, with the hope that they will succeed, hire employees, pay taxes, and improve the economy as a whole. These ideas are not new. As a society, Americans have always encouraged economic activity through the extensive use of credit. As early as the 1700s, when the US economy was competing with much more developed European economies, it grew faster than anyone could have imagined, partly through extensive use of credit, with some people being paid for goods and supplies months and even years after the credit was granted. This allowed people to start businesses without much money in their pockets. The availability of credit caused economic activity to soar, and a strong credit-based economy was born.1
1. From usinfo.state.gov/journals/ites/0106/ijee/martin.htm
A kinder, gentler bankruptcy
Business failure in the United States, unlike in many other countries, is not regarded negatively. In fact, US bankruptcy laws are structured so that those who fail in business are encouraged to continue entrepreneurial pursuits. “If a business in the United States fails, the individual can move on with his or her life without living in shame or total poverty,” says Nathalie Martin, Dickason Professor of Law at the University of New Mexico. “The ability to start over is what makes some Americans willing to take risks in business, which can be good for the overall economy.”
There are two main types of bankruptcy for businesses. Some can stay in business under Chapter 11 while they reorganize their debts. Thus, unlike most bankruptcy systems around the world, US laws allow a bankrupt company to continue in operation, with the same management, while it tries to restructure its debts. In other words, typically, no trustee or custodian is appointed. Some people think this system, known as a debtor-in-possession system, promotes economic and job growth because more companies remain in business and their assets are protected. Businesses can also simply liquidate their assets under Chapter 7 and use the sale proceeds to pay creditors.
From usinfo.state.gov/journals/ites/0106/ijee/martin.htm
One confident risk-taker
“Looking back at some of the earlier times I can’t believe we stayed in business. There have been several moments when we looked at each other and said is enough enough?...We have failed 5 million times! We have made many mistakes such as having inventory stolen, using the wrong glass for packaging, incorrect inventory counts, delivery trucks stolen, delivery trucks vandalized, and even our product formulas stolen from our offices.”
“We did not have any capital or a business plan. We did not have a marketing strategy. We did not have one damn thing. All I did was get on the phone and convince people that we were going to be a huge beverage company one day so why don’t you sell me the resources I need. Give two guys that have absolutely no credit, the credit to buy 200,000 cases of glass—and I did it. Nobody in their right mind would think they could do that.”
Tom First, Co-founder of Nantucket Nectars. From “Keynote Entrepreneurs – Nantucket Nectars,” http://www.benlore.com.
The entrepreneurial passion
“My first real job was at a business that I started at boarding school when I was 16. At that time, the Vietnam War was going on and the Paris student uprising had just occurred. I felt that school was a place where grown-ups were just trying to keep us busy. I decided to start a magazine that would address some of those issues. I didn’t even have a phone, so I used a public telephone at school to sell advertising for my magazine. Over a six-month period, I managed to raise about \$6,000, which was enough to cover the cost of printing and paper, so I decided to leave school to start the magazine. Being a precocious, overly enthusiastic young boy, I managed to get a lot of big celebrities—James Baldwin, Vanessa Redgrave, Jean-Paul Sartre—to write or be interviewed for the magazine....
I started the magazine because I had a passion for what I was doing. That’s also why I went into the airline business, even though everybody I talked to told me that there was no money to be made there. I felt that I could make a difference. That’s the best reason to go into business—because you feel strongly that you can change things.”
Richard Branson, Chairman of the Virgin Group. From “Training to Work: Unit of One,” by Jill Rosenfeld. Fast Company, August, 2000. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/05%3A_Company/5.01%3A_Getting_Started.txt |
Building a company is an experience that varies widely, depending on the nature of the product or service. If you’re a student, your company may share some of the challenges encountered by other student organizations. This section describes some coming-together experiences of companies, both student and non-student.
Two E-Teams
The NCIIA supports the development of E-Teams—teams of faculty and students working to move an invention or innovation from creative idea to commercial venture. To illustrate some of the key factors in creating a successful business from a bare-bones idea, and how a company’s attributes can change as the company grows, we’ll look at two E-Team-based companies: the 2Cam Rock Anchor team, led by Seth Murray, and the Guardian 2000 team, led by Steven Rhodes.
These teams each originated in a class or program at their universities. Once the initial framework for the product was set for the class exercises, the teams began to evolve into serious, revenue-seeking ventures.
Being a student
“Being students has really helped us through the project,” claims Seth Murray. Both Murray and Guardian 2000’s Steven Rhodes said that access to campus facilities was key to their success. Both teams worked with specially trained faculty, used campus labs and machines, and could choose from a field of students with a broad range of backgrounds and talents. (Note: intellectual property rights vary from school to school, so make sure you’re clear on your school’s policies before you get started.)
Transition can be tough
The two teams agree that the transition from a student-run activity to a real-world business is difficult. Some institutions, like the University of Colorado at Boulder, have an entrepreneurship program that helps students find angel investors—affluent individuals who provide capital for a start-up, usually in exchange for ownership equity. But Rhodes points out that one of the more realistic challenges of the transition is that some of the students working on the project need paying, full-time jobs, and although the experience of working in an E-Team is unmatched, not everyone can afford to dedicate themselves full-time.
Team effort
A startup is a team effort. Hopefully you’re working with a group of people of diverse backgrounds and training. Initially, it’s likely that people on your team will share responsibilities. Starting out is a great time for team members to get familiar with all aspects of the business, and manage it together.
Lonely at the top
At some point—and you’ll know it when you reach it—the one-big-happy-team won’t be the best organizational model for your company. Someone needs to take charge and lead the pack. Steven Rhodes looked for a natural leader with motivating qualities, someone who wasn’t afraid to take on responsibility. Sometimes, leaders are chosen from the original team, but sometimes the right match comes from the outside.
The best leader may just need strong business experience. Or she may need to both reflect and complement the skills of the rest of the team. It’s crucial for the team to carefully determine what it needs in a leader.
Communication
Another essential component of your startup days is communication. This may seem obvious, but it can’t be overemphasized. The idea people and the action people need to work consistently to keep communication lines open. Rhodes encourages everyone on his team to remain in contact through email so that problems get immediate solutions, and don’t build up until they’re unmanageable.
Advisors and mentors
Mentoring plays a huge role in any young company. Faculty advisors or outside mentors can speak from experience on manufacturing, marketing, and other key issues. Rhodes says of his advisor, “He has allowed the group to remain independent and learn from our mistakes. If he senses anything catastrophic is going to happen, he’ll step in, but it has been a big plus to have someone who lets the group learn and grow on their own.”
So what makes an innovative company?
In summer of 2006, Boston Consulting Group released its annual Innovation study, in which they determined that innovation remains a top strategic focus for many companies: 72% of the 1,070 executives in sixty-three countries ranked it a top-three strategic priority. Furthermore, they demonstrated that innovation translates into superior long-term stock market performance: the twenty-five most innovative companies had a median annualized return of 14.3% from 1996 through 2005, a full 300 basis points better than that the S&P Global 1200 median.
How do they do it? All of the innovative companies (Apple, Google, and Toyota among them) share one trait: they focus on their employees, their customers, and the people who constitute the market in which they operate. They realize that innovation comes from people, that these people need to be supported, and that everyone with an idea should be heard. They encourage creativity and free-thinking, even if it means that company employees will wander down the wrong path now and again. After all, the harsh reality is that experience is the greatest teacher, and learning from mistakes is a heck of a lot better than not learning at all.
The entrepreneurial passion
“My first real job was at a business that I started at boarding school when I was 16. At that time, the Vietnam War was going on and the Paris student uprising had just occurred. I felt that school was a place where grown-ups were just trying to keep us busy. I decided to start a magazine that would address some of those issues. I didn’t even have a phone, so I used a public telephone at school to sell advertising for my magazine. Over a six-month period, I managed to raise about \$6,000, which was enough to cover the cost of printing and paper, so I decided to leave school to start the magazine. Being a precocious, overly enthusiastic young boy, I managed to get a lot of big celebrities—James Baldwin, Vanessa Redgrave, Jean-Paul Sartre—to write or be interviewed for the magazine....
I started the magazine because I had a passion for what I was doing. That’s also why I went into the airline business, even though everybody I talked to told me that there was no money to be made there. I felt that I could make a difference. That’s the best reason to go into business—because you feel strongly that you can change things.”
Richard Branson, Chairman of the Virgin Group. From “Training to Work: Unit of One,” by Jill Rosenfeld. Fast Company, August, 2000.
Comfortable work cultures
“I think it’s incumbent upon business leaders to honor such [emotional and relational] needs by creating work cultures that are caring and frank, and that encourage people to grow both emotionally and socially—if only because such cultures create employee loyalty and increase productivity. Work should be a place of community, where people can be honest and genuine in their interactions. If you want people to care about carrying out your company’s mission, create a workplace that cares about them through policies as well as through relationships.”
Nathan Baxter, Dean, Chief Priest, CEO of Washington National Cathedral. From “Training to Work: Unit of One,” by Jill Rosenfeld. Fast Company, August, 2000. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/05%3A_Company/5.02%3A_What_Makes_it_a_Company.txt |
Be frugal
One of the hardest-hitting errors of startups is that when people get overconfident, they spend their capital on luxuries that they could have done without. When your company is young and there is no revenue coming in, the burn rate of your capital can break you. Even seemingly essential expenses like office space and advertising can suck your funds into a black hole. After working hard to raise your capital, don’t blow it on unnecessary stuff.
Keeping your company lean is one of the hardest, but wisest, things you can do. Plan for long-term success. Stay focused on your initial product or service. Almost anyone who has made the mistake of growing a company too fast will tell you that it can be an expensive lesson to learn.
Hire wisely
Running your business frugally also means hiring just the right number (and just the right kind) of people to do the work at hand. Analyze your product or service and where it’s going, and decide who the key people are. You may need engineers, you may need customer service reps, or you may need finance managers.
When hiring anyone who will hold a position of leadership in your company, analyze how well they know the culture of your business, their connections to funding, and whether they have the personal chemistry to attract other employees to work with them. It’s also important to find someone with the entrepreneurial passion that will keep them loyal from a bare-bones startup to a successful company.
Another thing to realize is that, as an entrepreneur, you are essentially a jack of all trades: you take part in every aspect of the business, but are the master of no single aspect of the business. As your company grows, you want to professionalize and enhance company expertise by finding people who are better at certain tasks than you are: a marketing expert, perhaps, or a financial manager, office manager, etc.
Hire higher
Many times, entrepreneurs who bring an idea to life stay on as the company’s president or CEO, and hire to fill in other roles. But there are occasions when the entrepreneur either doesn’t want to or admittedly can’t handle the responsibilities of being an officer. It’s good to know your limits.
Hiring your boss can be a great experience. How often do you get to be responsible for hand-selecting who you’re going to work for? You get to decide what qualities make a great officer, and better yet, who has those qualities. Consider a person’s attitude, their experience in a related field or market, what kind of business philosophy they have, and any other special skills or qualities they can bring to the table.
Frank Hertz, VP of Operations at Massachusetts-based Newmediary, Inc., talks about hiring your own boss:
“First things first, you have to recognize that you do indeed need a boss. Many entrepreneurs think they can be a CEO right away, and, while some can, others need to realize the combination of honed and practiced skill and years of experience in a CEO goes a long way. Whether it’s raising funding, making tough staffing and strategic decisions, or dealing with a Board of Directors, an experienced CEO is an extraordinarily huge factor in a successful business venture. Your product could be best-of-breed, but if you don’t have someone who knows how to grow and run a business, you could fail, and fail quickly.” | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/05%3A_Company/5.03%3A_Nuts_and_Bolts_of_Company_Formation.txt |
As you learned earlier, a social entrepreneur is an innovator seeking social benefits. But the story doesn’t end there. Social entrepreneurs can be found in the for-profit and non-profit sectors. Non-profits have traditionally been tasked, along with government, with providing public benefit. But an increasing number of for-profit companies are also tackling social and environmental issues. If your innovative spirit, business skills and social values align, you may wonder whether you should run a non-profit or for-profit organization.
Non-profit doesn’t mean “no profit”
If your business serves a cause or does a public good, it can earn a profit and still be a non-profit organization. The US government rewards some organizations that perform services to the community by letting them operate tax-free. This is to recognize the fact that the government itself would have to spend more money to tackle social problems without the help of these groups. Many charitable groups rely solely on donations for funding, and pay no taxes on the money they take in. However, groups that want to fund their cause by selling items or providing services for a fee can make profits (i.e., “earned income”), benefit from this tax status, and call themselves non-profits, too. Non-profit groups with earned income strategies often refer to their money-making activities as “social ventures” and to their founders as “social entrepreneurs.”
Money to the mission
“Non-profit” is short for “not-for-profit,” meaning that money earned (through any means) is reinvested towards a mission. This contrasts with for-profit companies which divide income, after expenses, among owners or shareholders. In a good year, the owners of a for-profit company get richer, while a non-profit has more resources to devote to its cause. Non-profits are considered to be owned by the public, and cannot be used for the personal gain of individuals.
The most common type of charitable organization is a “501(c)3,” as identified by the IRS. Companies that meet this classification are exempt from state and federal income, sales, and property taxes. However, they must have a clearly defined mission from which they operate. All income must be generated in a way that relates to the mission, and after expenses, must be devoted to that mission. This prevents charities from using their tax-free status to compete with other merchants who have higher expenses due to taxes. 501(c)3 organizations cannot support political causes as part of their operation.
A non-profit must have a board of directors. As with for-profit companies, which maintain boards to insure that management acts according to shareholder interests, non-profit boards insure that management works in the best interest of the targeted community.
Profit and mission
You can incorporate socially beneficial elements into your company, but still run it as a for-profit. This allows you to use profits to motivate owners, financers, and employees (through stock options) and have market discipline while keeping a strong focus on mission-related results. You can consider yourself a for-profit, socially responsible business, or a for-profit social venture. If you want to focus on your ideals, articulate them in your corporate mission statement and find ways to measure progress beyond financial statements. See the Plan section for ideas.
Other considerations
Now that you know how the IRS defines for-profit and non-profit companies, consider other factors besides tax benefits to decide where your company fits. In their paper “Blurring Sector Boundaries: Serving Social Purposes through For-Profit Structures,” J. Gregory Dees and Beth B. Anderson at The Fuqua School of Business of Duke University consider the following:
• Public view of organization/mission
• Availability of financing
• Incentives for employees and owners
• Ability to stick with mission
• Market discipline
The non-profit sector has a reputation for being mission-oriented—having this status makes the organizational focus more believable to the public. Their inability to reward owners, employees, and financiers with financial returns tied to performance may restrict sources of money and people, but removes the temptation to sacrifice the cause for higher profits.
Economists believe that a well-functioning market is the best way to determine the value of an entity. For-profit companies issue stocks that are publicly traded, which enables their worth to be determined by the stock price. The stock price represents the investors’ appraisal of the future value of the company’s profits. Fluctuations send a signal to managers that the market thinks they’re making good or bad decisions. This feedback is termed market discipline. Arguably because investments in for-profit entities can be publicly traded, they must be more attentive to their owners and the signals in the market. Some see a disadvantage in the fact that non-profits cannot get these signals as efficiently from the stakeholders that “own” them.
Board basics: Overview of a nonprofit board
The function of your board of directors depends on the size and goals of the organization. The larger your organization and the greater your support staff, the less “hands-on” the board will be. On the other hand, directors or trustees of smaller organizations may, by necessity, find themselves more involved in day-to-day operations. Basic board responsibilities include:
• Determining the organization’s mission and purpose
• Selecting the chief executive
• Supporting the chief executive and assessing his or her performance
• Ensuring effective organizational planning
• Ensuring adequate resources
• Managing resources effectively
• Determining and monitoring the organization’s programs and services
• Enhancing the organization’s public image
• Ensuring legal and ethical integrity and maintaining accountability
• Recruiting new board members and assessing the board’s own performance
From www.ascs.org
Starting a non-profit
Here are three major areas of concern when starting a non-profit:
Staff
Someone has to do the work. Do you need a staff? Can you pay a staff? Can you retain volunteers? You need workers for two general responsibilities: administrative and service. Administrative workers run the organization, raise funds, manage budgets, and handle business operations. Service workers are responsible for the mission of the organization, for accomplishing the purpose for which the nonprofit was formed. In small nonprofits, one staff member may do it all. This is where volunteers become critical to the success of the nonprofit.
Budget
Do you have a budget? Where will funding come from? Nonprofits can earn income through program and service fees, but raising funds is usually an essential activity. Fundraising is simply the result of matching a compelling cause or need with a philanthropically minded individual, organization, or company. Philanthropy is a massive industry in the United States. The key to successful fundraising is, quite simply, asking. It may seem strange, but most people fear talking about or asking for money. Do not wait for donors to come to you. Ask and ye shall receive.
Partnering
If you don’t receive enough funding to provide for all of your operational and service needs, consider partnering with a similar organization. A trend in the nonprofit industry is sharing resources that many nonprofits need: office space, administrative tasks, fundraising and other tasks that do not require a full-time employee. You may be able to partner with an organization that could use the services you provide within the scope of their larger mission. Research your local nonprofit community to determine if a similar organization exists and if your services would complement their mission. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/05%3A_Company/5.04%3A_For_Profit_or_Not.txt |
Know your options
Before you start your own company, consider legal variables, like how many shareholders you will have, or what kind of taxes you will pay. Companies in the US have a variety of legal, financial, and ownership attributes. The US legal structure encourages company ownership, and knowing what kind of company is best suited to your needs is crucial to both short and long-term success.
Finding a good lawyer
What makes a lawyer “good”? No, this isn’t a lawyer joke. Any lawyer can incorporate your company, but you want someone who is both seasoned and well-versed in business law, and has a good track record when it comes to dealing with business issues. So ask around, do your research, and take the time to sort through your options.
Why do I need a lawyer, anyway?
Lawyers know what paperwork to file, when to file it, and how. They know how to negotiate and draft business agreements. They know how to protect your company so all your hard work won’t be lost. It’s worth the money to appoint a good corporate counsel. A lawyer can also help you decide what type of business to form.
Types of corporation
Corporations come in four main categories: Sole Proprietorship, Partnership, Corporation, and Limited Liability. Ownership, liability, management, tax treatment, and source of capital are all factors to consider when choosing your structure.
Sole Proprietorship
In a Sole Proprietorship company, you and you alone are the owner. This makes you responsible for providing all capital, and also makes you personally liable for any of the company’s debts. Income and losses are passed from the company to you, so you are taxed, not the company. You have full control of all management decisions and responsibilities.
Partnerships
General Partnership companies are owned by two or more partners. Like proprietorships, the owners are responsible for the entire company. Partners are personally liable for the company’s finances, credit, and debts. The company is not taxed because profits and losses are passed through and claimed by the partners, not the company. The partners share management equally, unless otherwise stated. The capital is contributed by the partners.
Limited Partnership works like General Partnership except that some members become limited partners. Unless you’re in real estate or another limited lifespan business, this model probably won’t apply to you. An example of a limited partnership is a venture capital fund, which typically has a seven to ten year lifespan.
Corporations
S Corporations have many of the advantages of partnerships. They can have many shareholders, but generally don’t expect to make a lot of money. They can’t accept institutional investments—only money from individuals, such as friends and family. Income and losses are passed through to the shareholders, so the corporate entity is not taxed. This special tax status limits the number of shareholders to seventy-five, and restricts the class of stock.
C Corporation is the model used by nearly all big companies. A C corp exists separately from its owners. While the shareholders are the primary financial contributors, they are not liable for the corporation’s debts. The corporation, rather than the shareholders, is taxed. The shareholders elect a board of directors to manage the company, and officers to oversee day-to-day decisions. A C corps’ profits are taxed twice—to the company and to the individual shareholders.
Limited Liability Companies
Limited Liability Companies (LLCs) are neither partnerships nor corporations. Members are not personally liable for the company’s finances, credits, or debt. The company is not taxed because profits and losses are passed through and claimed by the members, not the company. An operating agreement outlines management structure. Members generally contribute capital.
The LLC model is complex and relatively costly. It’s often used for consulting companies, and is increasingly used by entrepreneurial companies. Angel investors may prefer an LLC. More sophisticated and institutional investors are likely to favor a C Corp, because of its straightforward, transparent structure.
Choose a lawyer carefully
Get a personal reference from someone you trust before you retain a lawyer. Many websites offer help finding lawyers, but use caution when trusting a website. Make sure the source is reputable.
It’s also important for you to know what to look for. You want a lawyer who:
• Is ethical
• Knows the field and is familiar with related patents
• Is accomplished with a good track record
• Knows and understands what the Patent Examiner wants and needs to approve your application
• Understands the language of the field to give you the most complete and broad protection you deserve
Many colleges and universities have some sort of legal services program for students. See if your school does, and start there. They can give you some tips and likely some names of local lawyers who specialize in business or intellectual property law.
Questions for a prospective lawyer
Once you get a list of candidates, consider putting these questions to your potential lawyers when you have them on the phone:
• How long have you been in practice?
• How much experience do you have?
• Is this a standard issue with a basic fee or more complex with an hourly fee?
• Is there a fee for the initial consultation?
Review the answers from each phone interview. Make an appointment with a lawyer who can deal with your legal issue in a timely matter, has an interest in your business, and makes you feel comfortable.
Patent agent vs. patent lawyer
The US Patent and Trademark Office sets forth requirements for individuals who will represent it. However, because of these requirements in legal, scientific, and technical fields, there is a shortage of lawyers who are qualified to represent. To make up for this gap in the demand of representatives, the office allows “any citizen of the United States, who is not an attorney, and who fulfills the requirements…to be registered as a patent agent to practice before the office.” However, patent agents are limited in their roles—they are not allowed to practice law, but they are perfect for helping an applicant through the process.
“Academic institutions are sending work to patent agents in solo practice. The sole practitioner, on average, charges lower fees than a larger firm and provides more personalized service. For the startup Corporation or an institution on a tight budget, using the services of a patent agent in solo practice may be a plausible solution.”
From “The Role of the Patent Agent in the Patent Process” by Joy Bryant. Cafezine, January 1, 1999. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/05%3A_Company/5.05%3A_Legal_Structures.txt |
A Failure Success Story: John Fabel
The story of John Fabel teaches us that when it comes to entrepreneurial endeavors, failure isn’t always a bad thing: new opportunities arise, lessons are learned, people move forward. In this profile we take you through John’s story, from invention to incorporation to bankruptcy to eventual success, and find out what he learned along the way.
Suspension bridges and backpacks
After long hours of cross-country skiing, Fabel, an outdoor enthusiast, noticed that his backpack bruised his shoulders. A lifelong designer and inventor with a knack for looking at things differently, Fabel began to wonder if he could create a better, less taxing backpack.
While marveling at the suspension bridges on a trip to New York City, he found the answer.
“When I used a hip belt to transfer the backpack’s weight to my hips, I still got sore shoulders. So the problem wasn’t the shoulder straps. The problem was how the weight wanted to fall back, away from your body. So I started thinking, ‘What if I could design a backpack that would get the weight to pull toward your back rather than away from it?’”
“After I saw the Brooklyn Bridge, I started thinking about how to build a hip pack that would distribute the weight evenly, like a suspension bridge.”
In a suspension bridge, huge main cables extending from one end to the other hold up the roadway. The cables rest on top of towers and are secured at each end by anchorages. Instead of relying on shoulder straps to carry the load, Fabel designed a backpack that transfers much of the weight to the hips. When wearing it, your hips act like a tower on a suspension bridge, the backpack is similar to the roadway, and the triangular flap between the backpack and the hip belt—like the cables on the bridge—distributes the weight evenly.
Fabel called the invention BioSpan, patented it, and in 1993 began work in earnest on a company built around the technology, EcoTrek.
I don’t care if it’s made from uranium, I want one
Fabel went through the standard steps in creating EcoTrek: he performed a feasibility study, formed a management team, put together a business plan, did research and development, created a core line of products, found a manufacturing partner, and secured seed financing. By the time he was starting EcoTrek, Fabel had for years been interested in environmental sustainability, and he designed EcoTrek’s product line accordingly: the equipment was made from 85% recycled materials (the fabric was made from soda bottles, the buckles from recycled industrial nylon, etc.), and the products were made to be recycled themselves, designed for disassembly in such a way that everything could be broken down into individual parts in about three steps. This “green” approach, Fabel reasoned, would surely resonate with backpackers and outdoor enthusiasts. “The products were designed for use in the environment by people who love being in the environment,” said Fabel. “So our idea was, ‘Let’s make our products both fun and coherent within that larger notion.’”
Fabel received plenty of positive feedback. EcoTrek was featured in several prominent publications, environmentalists were happy there was a green alternative in outdoor equipment, and people truly enjoyed wearing the BioSpan backpack. Once, when Fabel was hiking with Everest IMAX film creator David Breashears, he asked David how he liked the backpack and if he appreciated that it was made from 85% recycled materials. “I don’t care if it’s made from uranium,” Breashears said. “I want one.”
Because Fabel put the green aspect of EcoTrek first, he decided to go forward with an unusual marketing strategy for outdoor equipment: direct marketing. “It’s very difficult to market green products in that, in the retail environment where most outdoor equipment is sold, it’s very hard to communicate the green attributes,” said Fabel. “More customer education than usual needs to take place, and the retail environment doesn’t lend itself very well to that. So we made the decision to concentrate on direct marketing because we thought we would be able to much more powerfully communicate our green values to our target customers.”
“But unless you hit your target, it’s very expensive.”
Misfire
EcoTrek’s sales flopped the first time out. According to Fabel, this happened for several reasons: “Number one, people don’t buy backpacks through the mail. Oops! Second, we misjudged the greenness of the outdoor market. It’s no greener than any other market. Although they may appreciate the green values more, it’s still a tertiary value: performance comes first. We had our message exactly wrong.”
The team shifted to a retail strategy and immediately started gaining traction, going through three rounds of manufacturing with still more orders to fill. “We couldn’t make them fast enough,” said Fabel. But by that time they were out of money. “We had so much debt load, we didn’t have the resources to adequately pull off the retail marketing strategy even though we were getting signs that everything was turning around. We were constantly scrabbling behind. Combined with insufficient startup capital, our failed initial marketing strategy cost us the company. The initial marketing strategy was fundamentally flawed because when you put on the BioSpan backpack, you ‘get it’ in a very visceral way: people almost inevitably smile when they put it on. Yet we initially had a marketing strategy that took that experience totally out of the loop.”
“When we closed the company down we had orders we couldn’t fill because we didn’t have the money to manufacture them.”
The quick rebound
Despite EcoTrek’s failure it was clear Fabel had something in BioSpan. About a month after he put the company down Fabel got a phone call from Marmot, a leader in the outdoor equipment industry. Said Fabel, “Every time Marmot introduces a new product line they want a flagship innovation that strengthens their brand image of being innovators. They saw BioSpan as a technology that fit within their brand image.” Marmot hired Fabel to build a backpack line around BioSpan, and because he had developed the technology and still owned the patent rights, he licensed the patent to the company. The line of products exceeded Marmot’s expectations, with one of the backpacks earnings the highest ratings in its category.
So EcoTrek certainly wasn’t a total loss. “A lot of the value of the BioSpan product concept was developed through the work of EcoTrek,” said Fabel. “Even though EcoTrek itself wasn’t successful, the idea was. It had some very successful outcomes.” | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/05%3A_Company/5.06%3A_A_Failure_Success_Story.txt |
Chemical Attraction: Griffin Analytical
Griffin’s success
How do you take a high-tech prototype developed in a university lab and build a successful company around it? What are the steps? If experience is a teacher, we can take the story of Garth Patterson and his company, Griffin Analytical Technologies, as a rough blueprint.
Beginnings
In 2001, Patterson was enrolled at Purdue University, working toward his PhD in analytical chemistry with a specialization in mass spectrometry (a method of identifying the chemical makeup of a substance by means of the separation of gaseous ions according to their differing mass and charge). Purdue researchers, Patterson among them, were developing a prototype of an improved mass spectrometer that was smaller, cheaper, and better than the existing systems. By using cylinders as the chemical analyzer, the device was made easy to miniaturize, thereby taking up less lab space, costing less, and making the device more sensitive and more accurate.
With the market for chemical detection instrumentation estimated at \$1-1.5 billion—and growing, due to homeland security concerns—Patterson knew there was an opportunity. To take advantage of it, he and a colleague, Dennis Barket, enrolled in Purdue’s Innovation Realization Lab, whose main task, according to Patterson, is “linking technology students with MBAs to affect a hands-on learning experience for both sides.” Two graduate MBAs joined Patterson and Barket, and then two advisors from analytical chemistry and business came on board—and suddenly the E-Team was formed.
Success followed. The team won NCIIA Advanced E-Team funding to continue developing a prototype, wrote a business plan, and won three of the four major business plan competitions they entered, earning \$35,000 in funding. The team was successful in the competitions because, Patterson said, “Firstly, our product and our business idea were robust. Secondly, the plan itself was thorough and thoughtful. Everyone intends to be thoughtful, but we put a lot of effort into backing up our claims and putting as much legitimate research into it as we could get.”
More money came in: the team was awarded funding from the Purdue Research Foundation’s Trask Fund; they completed one Phase I SBIR contract with the Army and started an EPA Phase I SBIR contract; they acquired private funding, and negotiated an exclusive license from Purdue for the mass spectrometry technology.
In November 2001, Patterson and Barket defended their PhDs, and later that month they incorporated, calling the company Griffin Analytical Technologies. Their work had just begun.
Making the company work
First the E-Team changed: they lost the MBAs, Enrique Vazquez and Jeff Scott. “Enrique and Jeff didn’t come along with us for personal reasons—primarily geographic,” said Patterson. “Neither of them was from the Midwest. Had we started the company on the west coast I think things would’ve been different, but Dennis and I wanted to stay in Purdue, as the university has one of the world’s best analytical chemistry departments.”
Human resources
Hiring decisions suddenly came to the forefront. Who would they go after now? “One of the hardest parts of going from an E-Team to a company, said Patterson, “was knowing what resources we needed to bring in early on—do we need an engineer first? A finance person? It was hard to know what resources to use where, and when.”
Patterson and Barket decided to hire two chemists from Purdue, people they knew and got along with. But then the company was too “chemist-heavy,” and they still needed technical work done before they could have a sellable product. “We needed to get past the remaining technical hurdles,” said Patterson, “so the next thing we decided to do was concentrate our efforts on the technology, and put together a product development team: electrical engineers, software developers, mechanical engineers, manufacturing specialists, etc. The instrument we were developing is relatively complex; we knew we needed people who had insight into all those aspects of design.”
Then there was the matter of deciding who would be president. In the case of Griffin, this wasn’t a hard decision: it would be Dennis Barket, with Patterson taking on the title of VP of Research and Development. Why Barket and not Patterson? Back when they were students, the two enrolled in an intensive, two-week mini-MBA for science and technology PhDs, called Applied Management Principles (AMP), at Purdue’s business school. According to Patterson, “Coming out of the program Dennis had a pretty good understanding of the vocabulary involved in business and leadership: he gravitated toward it. And I certainly had an understanding of the technology because it’s based on my PhD research, so making Dennis president and myself vice president of R&D came about naturally.”
Steps toward success
They must have gotten something right, as the good news kept rolling in: they won a Phase II SBIR contract from the Army; their innovative technology was featured in several prominent science journals; they won a Phase III contract from the Marines, and in late 2003 they closed on a round of funding that brought in \$2.4 million.
What’s the key to Griffin’s future? According to Patterson, communication. “There’s more work than could possibly be done. What we’re doing is working as a group, communicating effectively, identifying what to work on, what’s most important. It’s absolutely necessary to be on the same page with everyone so that we can divide and conquer, focus on the goals, simply so that we can get through the sheer mass of work and end up producing quality work, a quality product. That’s our aim.” | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/05%3A_Company/5.07%3A_Chemical_Attraction.txt |
Thumbnail: pixabay.com/photos/achieveme...s-chart-18134/
06: Money
What is it?
Bootstrapping is funding a new business with a minimum of outside investment. Ideally, everyone would like to start their new venture with a solid and reliable supply of money, preferably obtained by winning the lottery or inheriting a vast sum from a previously unknown relative. The reality is that many people (if not the majority of people) start their businesses with nothing. No savings, no big gifts from relatives, and no lucky breaks. This is bootstrapping.
By definition, bootstrapping involves running your start-up as cheaply and efficiently as possible, constantly finding ways to minimize your expenditures and squeezing the most out of what you have. Bootstrapping is hard work, but it’s good for your business. It teaches you valuable lessons about how to run the business on a shoestring budget, preparing you to make good financial decisions in the future.
Bootstrapping tips that work
University of Maryland business professor Andrew J. Sherman offers ten proven tips for bootstrapping a business:
1. Wear multiple hats in managing your business to save personnel costs.
2. Buy or lease used furniture and equipment, and don’t overpay for unnecessary service warranties.
3. Share office space with (or sublease from) a large company that will offer you access to conference rooms, office equipment, reception, or administrative services.
4. Apply for several credit cards at once, and use the available portions as your operating line of credit.
5. Hire student interns willing to forego a salary in exchange for work experience. Better yet, hire a retired executive or family member who may be willing to help out just to stay busy or serve as a mentor. A wonderful resource for this is the Small Business Administration’s SCORE (Service Core of Retired Executives) program.
6. Work hard to maintain excellent customer relationships to encourage or require early payment.
7. Commit only to short-term leases and other obligations to maintain maximum flexibility and cost controls.
8. Ask major clients to purchase the key equipment that you’ll need to service their account and then lease it back from them.
9. Offer shares in your company to vendors, landlords and key employees in lieu of cash, subject to federal and state securities law and acceptable dilution ratios. (Sam Walton used this tactic when starting Wal-Mart, and his former secretaries and office workers are now multi-millionaires!)
10. Join a commercial barter exchange and use it to acquire key products and services. In some cities, even alternative currencies have emerged as a type of barter exchange and bootstrapping technique. These local currencies have stimulated economic development in small towns and rural areas that haven’t yet been affected by the regional gluts of venture capital or where commercial lending dollars aren’t flowing freely.
Stay focused
Bootstrapping isn’t easy. It requires discipline, diligence, and hard work. It’s unreasonable to expect everything to fall effortlessly into place. Be prepared for bumps in the road. No matter how tough things get, stay focused on the mission at hand: successfully starting your business.
Find a mentor
Experience counts. As Sherman points out in tip number six, having a good, experienced mentor can be a boon to you and your venture. Entrepreneurship expert Jerry Mitchell says, “So much depends on the industry and your contacts in it. I believe very strongly in mentors. Mentors can advise you on the nontraditional methods in order to be successful within your targeted industry.”
That’s just what happened to Luke Pinkerton and his Advanced E-Team, Polytorx. Pinkerton was looking to commercialize his product—a twisted fiber that, when mixed with concrete, creates extraordinarily strong, shock-resistant blocks—and attended an event hosted by a local non-profit organization supporting entrepreneurship. There he met veteran businessman Bill Orabone, who would not only become his angel investor and primary source of funding, but also an invaluable mentor. “Bill has been absolutely instrumental in showing me how to run a business,” says Pinkerton. He cites Orabone’s guidance in creating a focused business plan, ordering machinery for a low-cost manufacturing line, and securing raw materials for a sound supply strategy as essential to Polytorx’ success.
Bootstrap origins
The term "bootstrapping" comes from the German legend of Baron Munchhausen, in which he pulled himself out of the sea by pulling on his own bootstraps. The term has generally come to mean the use of a special process to perform a task that one would be unable to do otherwise.
For this and other interesting boostrapping content, visit Guy Kawasaki's blog, How to Change the World at http://blog.guykawasaki.com/.
Incremental growth
Small business expert Peter Hupalo defines bootstrapping as using whatever resources you have available to gradually build your company and reach your goal. He offers the following allegory:
"Imagine trying to get a whiffle ball out of a tree. You cannot reach it, so you toss another ball up there to knock it down. But now, the second ball is trapped up there also. You look around for something to stand on, and see a picnic table and benches. You bring one of the benches over. But it's not high enough. So you bring over the table. It's not high enough, either. Then you stack the bench on top of the table, and, voila, you can reach the balls. That's bootstrapping in a nutshell."
From "Thinking Like an Entrepreneur," by Peter Hupalo, 1999, http://www.thinkinglike.com
It's good for you
When discussing his philosophy on bootstrapping, Greg Gianforte (who retired at the age of 33 after he and his partners sold their software business, Brightwork Development Inc., to McAfee Associates for more than \$10 million) stated, "A lot of entrepreneurs think they need money...when actually they haven't figured out the business equation." According to Gianforte, lack of money, employees, equipment, even lack of product, is actually a huge advantage because it forces the bootstrapper to concentrate on selling to bring cash into the business.
From "New Venture Creation," 2004, by Timmons and Spinelli, page 348.
Bootstrapping resources
For a wealth of tips on every aspect of bootstrapping, from market research to office space to finance and capital, check out Great Bootstrapping Secrets: 45 Ideas that Can Save Your Business Money at http://www.inc.com/articles/2000/06/19351.html. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/06%3A_Money/6.01%3A_Bootstrapping.txt |
Where do I find money?
As your parents have helpfully pointed out, it doesn’t grow on trees. But here are a few leaves you can turn over to find potential investors.
Business plan competitions
Numerous colleges, universities and companies offer business plan competitions open to students from all institutions. Browse the Internet and check out entrepreneurship web sites for more resources. If your school runs a business plan competition, get involved. Not only do you get a chance to win some hard cash for your business, you have a motive to get your business plan written, and probably some guidelines to help you make it work.
Venture forums
A venture forum is an educational program designed to help entrepreneurs at various stages of business development. One of the best-known examples is the MIT Enterprise Forum. The Forum has twenty-three chapters nationally and internationally and offers seminars and online publications.
Search the Internet for more venture forums, or call your local Chamber of Commerce to find out what’s happening in your area.
Venture fairs
Venture fairs have been around for years, but, according to David Freschman, President of the Delaware Innovation Fund and chairman of a venture fair known as Early Stage East, an increasing number of venture capital fairs are catering to early-stage businesses. These fairs are attended by individual angel investors, and early-stage venture capitalists. They help entrepreneurs increase the number of investors exposed to their companies, and compress the time frame for raising critical early-stage financing.
Venues for pitching to investors at venture fairs include social receptions, display booths, meals where tables are clearly marked as “owned” by entrepreneurs (investors get to choose who they sit with), and formal presentations.
Talk to your professors
Although academics aren’t known for having access to a boatload of cash, try talking to your professors. Some professors are in fact interested in investing in student projects. Others may have contacts in the business world and may be able to introduce you to potentially interested funders.
Talk with alumni
Ask the alumni relations office for help in contacting people in your field. If your school has an entrepreneurship club, some of these contacts may already have been made. Even if you don’t find immediate funding through alumni, the contacts you make may lay fertile ground for the future.
Your friends, your parents, your friends’ parents
Tell everyone what you’re up to. Getting the word out is key to getting what you need for funding. Let people know that you’re looking for funding resources, and make it clear what you’re expecting to give in return. People like to help people, and many people are natural connection-makers. The more you talk about your work and your funding needs, the greater the chances that you’ll stumble upon the right person.
Grants
Grants are inexpensive: there is no interest charged, no need to pay it back, and you don’t give up any equity (more on equity in the next section). There are two popular government programs that give grants to high-tech companies: SBIR (Small Business Innovation Research Program) and STTR (Small Business Technology Transfer Program). These grants are distributed in two major phases, with the first providing up to \$100K to pay for a proof of concept, and the second up to \$1 million for prototype development. Solicitations are usually twice a year; many workshops around the country provide information on applying for the grants. (For a good explanation and more information on SBIR/STTR, visit their website.)
A Cooperative Research & Development Agreement (CRADA) is a grant in which a government lab works with a company to develop or test a particular technology/product. The government doesn’t provide any money to the company, but CRADAs can be an excellent way to obtain skills and equipment, and to test a product. For more information on CRADAs, see their website.
And then of course there is the world of private grants. There are numerous foundations and other organizations around the country (including the NCIIA) that provide funds to technology entrepreneurs. Several websites are devoted to this topic—The Foundation Center is a good starting place. Also, see below to start learning about what an NCIIA grant can do for you.
How one E-Team found the money
A recent E-Team success story comes from Huntington, West Virginia. Vandalia Research, Inc., founded by two Marshall University undergraduates and funded in part by NCIIA, is in the process of successfully commercializing technology for the mass production of DNA sequences. Team leader Derek Gregg on how they got through their initial seed round:
"We got all of our funding from local investors in Huntington. We worked on a business plan with a Marshall alum for about nine months, then took the plan to a community forum of about fifty angel investors. We were able to secure all of our funding in that one three-hour meeting! We were shooting for 500k in funding, actually, and ended up oversubscribing substantially."
"The first round money is going to be used primarily for renovations and equipment purchases to get the manufacturing facility up and running. We also hired our first full-time employee, a lab technician who will also head up the research end. We've started discussions with some local regional venture capital firms for our next round of funding. As far as long-term goals go, our business model is to use our technology to do custom, in-house DNA manufacturing for anyone who needs it."
About NCIIA Advanced E-Team grants
Advanced E-Team grants provide student teams with the support they need to bring an innovative product or technology from idea to prototype, and eventually to market. Successful E-Team grant proposals demonstrate an idea's technical feasibility, social value, and potential for commercialization. Advanced E-Team grants range in size from \$1,000 to \$20,000; the grant period is twelve to eighteen months. Annual application deadlines are in December and May.
We favor Advanced E-Team grant proposals that:
• Show a strong likelihood of developing innovations with realistic, well-documented technological and commercial promise
• Lead to the development of a product or technology designed for affordability, that directly benefits human health or the environment, or that follows a sustainable, socially motivated business model
• Demonstrate knowledge of the market and evidence of consumer interest
• Involve a balanced, multidisciplinary E-Team, including students, faculty, and advisors from technical, business, and humanities disciplines
• Reflect the diversity of the home institution, and actively engage faculty and students from groups traditionally underrepresented in invention, innovation, and entrepreneurship, including women and minorities
• Create opportunities for high-quality group learning experiences
• Create viable collaborative opportunities for participants from both academe and industry
• Incorporate a plan and a budget that are reasonable, achievable, and sustainable
• Demonstrate strong team commitment and faculty and institutional support
Visit www.nciia.org for more details! | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/06%3A_Money/6.02%3A_Finding_the_Money.txt |
What’s the difference?
Let’s start by making the distinction between debt and equity. It’s pretty simple. Debt is an obligation, on the part of the company, the entrepreneur, or both. Over a certain period of time, the company is obligated to repay the debt, at a specified interest rate.
Equity financing is the purchase of shares of stock in a company in return for money invested in the company. A company typically has no formal obligation to repay equity. You give your investor a piece of paper called a stock certificate. They give you money. Of course there’s a catch: the investor expects that at some point there will be a liquidation event. This means that at some point your company will be sold or go public. The investors will sell their stock, either to the new owners, or on the public stock exchanges—hopefully at a big profit either way.
So, not only do you need to understand your company’s appetite for financing and the type of financing you need to get where you’re going, you also need to understand that the type of financing you secure will determine your business’ growth direction.
Because equity investors are taking such a risk with no specific obligation of repayment, they are also going to expect—or perhaps demand—that the company take a route that will lead it to fast growth and a significant increase in its value over a relatively short period of time. Debt-holders on the other hand, be they banks or individuals, will pretty much stay out of the affairs of your business, as long as you’re making your loan payments and your periodic financial reports seem to be on target.
Which does your company need?
Types and sources of debt vary widely, from simple loans from friends and family to complicated transactions dreamed up by Wall Street wizards. But it basically comes down to one thing—they give you the money, you pay it back. Of course, the miracle of compound interest is on their side. To feed this miracle, you need cash flow. You need some kind of revenue stream so you can repay the loan. Sometimes a lending source will get creative and give you a grace period during which no payments are required and interest accrues. But a rule of thumb—that certainly has a fair share of real life exceptions—is that a technology company that needs development time, and is expecting to grow rapidly, will neither be able to fulfill debt obligations nor secure enough money in the early stages from debt sources to fuel the company.
Another rule: It’s when you don’t need the money that banks are happy to lend it to you. If your need is great, your ability to pay back probably isn’t so good, and then they’re less likely to lend to you. Technology growth companies typically have a different appetite. They’re hungry for equity.
Some debt and equity pros and cons
Equity Pros
Investors share your viewpoint because they take the risk with you. They get their reward when you do—usually when the company is sold or goes public. If you need additional equity to grow, investors often have extensive contacts and can help. Investor cash can help attract top-notch management teams.
Equity Cons
Founders give up a percentage of their companies’ ownership. Owners lose some control of their companies, and the outsiders even have a say over the founders’ salary. (Although this is not always bad, as giving up control can help keep you on your toes!) Companies can get into the “more where that came from” syndrome, always looking for investors but never making a profit.
Debt Pros
There’s no dilution of ownership; original owners keep it all. As long as the debt payments are made, the original owners give up no operational control. The company turns a profit sooner because owners must make cash to serve the debt and have access to additional credit.
Debt Cons
Not all companies have access to debt financing; lenders want collateral in land, equipment, or a patent. If the company doesn’t make payments, it loses everything. Growth is limited to internally generated cash flow, or additional credit based on the company’s profitability. Lenders want equity and convertible debt dilutes ownership. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/06%3A_Money/6.03%3A_Debt_and_Equity.txt |
The fabulous Fs
Your first taste of equity will likely come from your family and friends and maybe some fools. In a university environment, faculty frequently add to the mix, though some argue that they fit into one of the first three categories. When these people invest money in the early stages of your company, it’s called a seed round of investment. Seed money helps pay for the business plan and the prototype, and supports you while you find additional management talent and secure the next round of financing.
Angel investors
In the wake of friends and family come angel investors. As we mentioned previously, angel investors are affluent individuals who provide capital for a start-up, usually in exchange for ownership equity. The friends and family round of financing comes from your own personal relationships with people. But angel investors are typically not people you know. They’re people who are judging you based on the business concept, the team and the opportunity for their capital to propel the company to the next level.
Building your credibility
To secure angel financing, you need to make a credible case for your business. You may not have tremendous successes under your belt, but if your business concept is worth anything, and if your entrepreneurial skills are up to the task, you’ll find a way to assemble a team of advisors who have more experience and credibility than you do, and will let you borrow a piece of their reputation as currency when you present your business to the angels.
Typically, a group of angel investors contribute less than \$1 million. Often that amount is significantly less with an unproven team and an early stage concept. Your task is to make that money work. You need to hit such significant milestones with that capital that you can use your accomplishments to secure the next round of money.
Venture capital
How do I apply? People often assume that venture capital funding is akin to a bank loan process. Recently, online firms have made moves to democratize the venture capital process, but a fair number of these have failed. In reality, securing venture capital remains a complicated process without a specific formula for success.Venture capital access is a networking game. It is not democratic, and because of several factors, it is inherently elitist. If you live in a major metropolitan area, you have better access to VC resources (though www.villageventures.com) is aiming to change that. Unfortunately, if you look like the VCs you’re targeting (who are frequently white, male, Ivy Leaguers), that may also up your chances of success.
That said, VCs are also hungry. Once you’re in the door, your presentation will stand or fall on its own merits. Alternative VC sources and investor networks are a good resource if you don’t fit the above profile. A source for venture capital for women is www.springboard2000.org. Entrepreneurs from the Indian-American community should investigate www.indianceo.com. If you’re affiliated with a college or university, visit www.universityangels.com.
Here’s a general framework for thinking about your business, the type of capital that is appropriate, and some of the key criteria that may help secure the jet fuel of a high growth business. (Of course you have to do something productive with the money and provide a return to your investor.) Here are some basic questions that an investor asks to assess a business.
Is the management team proven? Does its experience reflect its competence? If it’s not proven, what are its attributes? How can the missing elements be filled with additional seasoned managers? How committed is this team to the business?
How big is the market for this product or service? Typically, an equity investor wants to see a market for a technology product that is, in total, greater than \$1 billion. A good market is one in which customers feel real pain, where they will readily adopt your product because of an immediate and urgent need.
What does the competition look like? Is this company the first to market? Is it defining the market? Will it be able to quickly gain market share?
Is the product/technology difficult to replicate? Does it have some proprietary position (meaning patents or other intellectual property protection)? Will it take the competition a long time to replicate what the company does?
Does the business plan present a credible story that suggests that the company can forecast results? The financial plan is a financial expression of your business strategy. It shows the interrelation of timelines, functions, and hires, and reflects a detailed understanding of the business.
Capital intensity. Is the business appropriately scaled to the money that might be available? Your business can’t require too much money to be successful.
Playing the money game
Bo Peabody, who founded Tripod, one of the first dotcoms, when he was a 19-year-old Williams College student, says that raising money is like a video game. In order to get from one level to the next you have to accumulate power and weapons, and in the money-raising game the analogous power and weapons are the milestones of success and credibility.
The father of venture capital: J.H. Whitney
Venture capital is a post-World War II phenomena. The idea is credited to J.H. Whitney, founder of Whitney & Co., the first venture capital firm, now headquartered in Stamford, Connecticut. Prior to Whitney, new ventures were typically funded by wealthy private individuals. The development of a more formal, institutionalized investment process, embodied in professional venture capital firms, has played a major role in an expansion of access to growth capital for innovators and entrepreneurs with good ideas and the creative means to execute a successful business.
Advice for before you go to the VC
1. Choose the appropriate audience. If you're looking for financing under, say, \$5 million, don't go to a professionally managed venture-capital fund. Find angel investors instead.
2. No NDAs. Never ask professional investors to sign a nondisclosure agreement (NDA) up front. They won't do it. VCs will immediately view you as a rookie. Don't provide sensitive information in your business plan. Once you've garnered investors' interest, you can start to let them in on the secret.
3. Forget cold calling. Find a contact who knows the investor to introduce the opportunity. Unsolicited business plans are returned just as quickly as first-time novels.
4. Keep it short. The longer the plan, the more likely it will be put aside for later reading that often never occurs. Never submit a full business plan. A three-page executive summary is the outer limit that they will read.
5. VC money is nervous money. VCs look for a low burn rate, a solid revenue model, grizzled management, and partnerships with genuine strategic value.
6. Follow through. Don't count on the VCs to get back to you.
7. Don't stop looking.
From "What to Know Before You Go to the VCs" by Joseph Bartlett, Fast Company, November, 2000.
The oyster and the pearl
In a poetic metaphor, Ray Smilor of the Ewing Marion Kauffmann Foundation compares an entrepreneur's persistent interactions with a venture capitalist to the formation of a pearl inside an oyster. The entrepreneur can be an irritant in the body of an established VC firm. Though a gem does not always form, it takes an entrepreneur to be the catalyst that helps a venture capitalist form a pearl of great value. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/06%3A_Money/6.04%3A_Your_Equity_Circle.txt |
Funding pitfalls
What the heck is valuation and dilution? How much equity should you give up? What are the different kinds of equity? How does all this affect the pie? Watch out! This is where budding entrepreneurs often trip up.
The company pie
A company has shareholders, and those shareholders collectively own 100 percent of the pie. Each shareholder has a slice of the pie. These slices may be the same size or they may be very different. When you start your company, you start it with several partners who each take a certain number of shares. This is what’s called common stock. Here’s an example of how it works:
Let’s assume you’re ready to get started. Your attorney helps you file the paperwork to incorporate your company. In this process, maybe you authorize 200,000 shares. This means that the company has the authority to issue up to 200,000 shares (you can always go back and re-authorize additional shares). But you don’t issue all of those shares. Instead, you issue, say, 50,000, dividing them up equally among the four founders. The founders all get stock certificates saying they each hold 12,500 shares in the company. At the beginning therefore, these founders own 100% of the company, as defined by the 50,000 shares issued. Got it so far?
Now, you want to raise some money. You find an investor who wants a third of your company and is willing to pay you \$250,000 for that stake—seed money. You issue that investor a stock certificate for 25,000 shares. Now your total pool of issued shares is 75,000. Your company is valued at \$750,000, since \$250,000 will buy one-third of the company. This is what’s called a post-money valuation, meaning that it’s calculated after the investment. Your pre-money valuation would be \$500,000. So far so good.
You slog along, building your company. You don’t sleep for weeks, months. You make progress. Oops—you need more money. You’ve done well with the first investor’s money. You’ve reached critical milestones. You have a working demo of your product. Now you want some big money to really take this to the moon.
You do the circuit with the venture capitalists. After some heart-wrenching meetings, you’ve found one willing to put in first round money. You’ve hit the big time. You celebrate. And then they fax you a term sheet. Can you believe it? They want fifty percent of your company! Damn. But you need the \$3 million they’re offering. So, after some quick consultation with your seed investors and the four founders you decide to take the deal.
Let’s assume that they’re talking common stock (they’re not, but we’ll get to that in a minute). If they’re buying fifty percent of your company for \$3 million, that means that you’ll give them a stock certificate for 75,000 shares. Now you’ve issued 150,000 shares. The founders have 50,000 shares, so their stake, in the seed round, got diluted from 100% to 66% and in the first round, from 66% to 33%. Ah, but now (at least on paper) the company is worth \$6 million, since \$3 million bought 50%. Therefore, the founders’ share, which at 100% wasn’t worth much of anything, is now (at 33%) worth \$2 million. In this case, a smaller piece of a bigger pie is better than a bigger piece of nothing.
The catch
But, and here’s the rub, sophisticated investors, venture capitalists, never invest by purchasing common stock. No, they want what’s called preferred stock. This means they have a preference upon liquidation. In other words, if the company has to be sold at fire sale prices, the investors will get the first money out. So, let’s say your product bombs—you and your investors decide that you can’t continue to run the company, and you need to sell it quickly. You get an offer, which you accept, to sell the company for \$3.1 million.
If your first round investors have preferred stock, they’ll take \$3 million (what they originally paid) of that \$3.1 million, even though they only own 50% of the company. The remaining \$100,000 will be split among the common stockholders. In this case, your seed round investor, who put in \$250,000, will only get back \$33,000, as represented by that investor’s 33% of common stock.
On the other hand, if your company does well, common and preferred stock investors will benefit on an equal basis…assuming you didn’t accept participating preferred stock. But that’s enough for now.
Reserving stock for stock options
When you raise money, you reserve some pool of stock to be issued to additional employees, and also to founders as incentives and bonuses. So there is a way that you can get some additional shares of the company as a founder, if your Board of Directors agrees that you deserve some additional stock compensation. However, you won't actually get stock. You'll get stock options, or the right to buy stock, rather than the stock itself. Hopefully you'll get the right to buy stock at a price that is lower than the price the stock is selling for when you exercise the stock option.
For example, if you got options to buy 1,000 shares of stock at \$1 per share, and after a few years the stock was worth \$10 per share, you'd then be able to pocket \$9,000—you'd exercise your options for \$1,000 total and immediately turn around and sell the stock at \$10,000. You're issued stock options (and not stock) for tax reasons. If you were just issued \$1,000 in stock, from the IRS' perspective that would be as good as getting \$1,000 in cash, and you would be taxed accordingly, even though you didn't have the actual money. A stock option is not taxable as income until you exercise it.
Who should get what?
What percentage of the company should each partner in a new venture receive? This is a tough question with no easy answer. In terms of percentage points, what's an idea (or invention or patent) worth? What's five years of low salary, sweat and intense commitment worth? What is experience and know-how worth? "Who should get what" is best determined by considering who brings what to the table.
Suppose Bill Gates said he'd serve on your Board or give you some help. What share of the company should he get? Just think about the value that his name would bring to your company! If a venture capitalist thought your company was worth \$1 million without Gates, that value would increase several-fold with Gates' involvement. Yet, what has he "done" for you?
Often, company founders give little thought to this question. In many cases, the numbers are determined by what "feels good," i.e., gut feeling. For example, in the case of a brand-new venture started from scratch by four engineers, the tendency might be to share equally in the new deal at 25% each. In the case of a single founder, that person may choose to keep 100% of the shares and build by bootstrapping in order to maintain total ownership and control. It may be possible to defer dealing in new partners until later, at which point the business has some inherent value, thus allowing the founder to maintain a substantial ownership position.
So in general, the answer to the question "Who should get what?" is this: it depends on the relative contributions and commitments made to the company by the partners at that moment in time. Take your time in your decision. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/06%3A_Money/6.05%3A_Pieces_of_the_Pie.txt |
It’s out there
Let’s assume for a minute you’ve decided to become a social entrepreneur. Getting money for your socially beneficial startup isn’t so different from the standard process, save one thing: there are many organizations that exist primarily to give social entrepreneurs money. They’re part of a vast and fast-growing network of people dedicated to change through Socially Responsible Investing (SRI).
Investing for the cause
At a basic level, SRI is the marriage of social responsibility and environmental sustainability to investment. It includes all the financial decision-making processes that go into a prudent investment management approach, but also includes the selection and management of investments based on issues of sustainability and social responsibility.1 There are three general investment strategies at work in SRI:
Screening
Screening means investing in companies that do good and avoiding ones that do bad. Socially responsible investors ask their investment advisors to overlay a qualitative analysis of corporate policies, practices, attitudes and environmental impacts on top of the traditional quantitative analysis of profit potential. This means investing in enterprises with outstanding employee and environmental policies that make and sell safe, useful products and demonstrate respect for human rights worldwide. Companies on the outs typically include child labor law violators, tobacco, manufacturers of environmentally damaging products, and other who potentially inflict social harm.
Community investing
Community investing provides capital to people in low-income, at-risk communities who have difficulty getting money through conventional channels. Many social investors earmark a percentage of their investments to community development financial institutions (CDFIs) that work to alleviate poverty, create jobs, and provide affordable housing and small business development financing in disadvantaged communities.
Shareholder advocacy
Also called shareholder activism, this means engaging in dialogue with companies and submitting and voting on shareholder resolutions. Action is focused on positively influencing corporate behavior. Socially conscious investors often work to steer management on a course they believe will improve financial performance over time and enhance the well-being of all of the company’s stakeholders—customers, employees, vendors, communities, the environment and stockholders.
One serious growth industry
SRI is hot. In 2003, the Social Investment Forum, in its bi-annual Report on Socially Responsible Investing Trends in the US, cited \$2.16 trillion involved in one or more of the three primary socially responsible investment strategies—nearly four times the \$639 billion the Forum identified in 1995.
Assets under professional management involved in social screening, shareholder advocacy, and community investing have grown nearly 40% faster than all professionally managed investment assets in the US. Between 1995 and 2003, SRI experienced 240% growth versus 174% general market growth.
The growth of socially screened portfolios is even more dramatic: from \$165 billion in 1995 to over \$2 trillion in 2003. In 2003, socially responsible portfolios accounted for 11.3% of the investment assets under professional management in the US.
Fellows programs, venture philanthropy
Many people want to invest in good causes, but SRI funds invest in established companies. How do you, as a fledgling social entrepreneur, get funded? Check out the following organizations:
Acumen Fund is a non-profit enterprise focused on improving the lives of the poor around the world. They operate like a venture capital firm—investing philanthropic resources in innovative social entrepreneurs with a goal of social change rather than financial return.
Investors’ Circle (IC) is a non-profit national network of angel and institutional investors, foundation officers and entrepreneurs who seek to achieve financial, social and environmental returns.
Ashoka is a global organization that searches the world for social entrepreneurs—extraordinary individuals with unprecedented ideas for change in their communities.
Echoing Green’s mission is to spark social change by identifying, investing in and supporting the world’s most exceptional emerging leaders and the organizations they launch. Through a two-year fellowship program, they help develop new solutions to society’s most difficult problems.
More resources
Check out http://www.audeamus.com for plenty of links and information on the world of social entrepreneurship.
High tech social entrepreneurship
Jim Fruchterman, an electrical engineer-turned-entrepreneur, has made a living adapting cutting-edge technologies into affordable devices for the visually impaired and other underserved populations. As a student, Fruchterman designed a reading machine for the blind originally intended for military purposes. He was determined to keep the cost of his reading machine within reach of the largest number of users, however, and eventually founded a non-profit, Arkenstone, to develop and manufacture the system. The reading tool has now been used sixty countries, and Fruchterman has created a steady stream of other inventions for the visually impaired, including Open Book, Atlas Speaks map software, and Strider, a talking GPS locator. In 2000, Fruchterman founded another non-profit, Benetech, as an incubator for socially oriented technology applications.
Useful links
The Social Investment Forum offers comprehensive information and contacts related to socially responsible investing at http://www.socialfunds.com.
Non-profit boom
Though no exact estimate exists on the size of the field, tax records indicate that the number of non-profits grew by 60% between 1989 and 1998. About 250 colleges and universities offer courses or degree programs for students interested in jobs with a social focus. Most major MBA programs now offer courses or concentrations on social entrepreneurship. And there are forty-two funds or foundations that invest primarily in social entrepreneurs, according to a 2002 study by Venture Philanthropy Partners.
From www.fastcompany.com/social/intro.html
It's a real career David Bornstein, author of How to Change the World: Social Entrepreneurs and the Power of New Ideas, speaks on the bright future of the social entrepreneurship industry:
"One thing for individuals to think about is that this field has become a legitimate career path. For those who are still in school, or considering a career change, the field of social entrepreneurship is rapidly growing to encompass all sorts of jobs with all sorts of job descriptions. As an individual, you have plenty of opportunities to work in a way that is challenging, impactful, and deeply meaningful."
From www.fastcompany.com/social/ideas.html | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/06%3A_Money/6.06%3A_Social_Money.txt |
Waiting a While for the Payoff: Insitutec
High-tech bootstrapping
Imagine trying to bootstrap a company that makes industrial positioning and measuring systems with nanoscale resolution. Sound tough? It’s exactly what Shane and Bethany Woody, co-founders of Charlotte-based InsituTec, Inc., have been doing since incorporating in 2001.
Shane, a University of North Carolina at Charlotte mechanical engineering PhD candidate, first started working on industrial measuring systems to meet a need articulated by Boeing. Shane studies and works at the Center for Precision Metrology at UNCC, which brings in corporations that have specific needs they want addressed by university researchers. Boeing’s military and commercial aircraft have millions of small rivet holes; at the time they contacted Shane they measured the holes by transferring samples to a metrology laboratory: a slow, expensive, and time-consuming process. Boeing needed a faster, cheaper way to measure the size and form of the holes in real time. Shane met the challenge, designing a prototype of a vector-based probe that would allow the measuring to take place within the manufacturing process itself, with comparable accuracy and at a lower cost. Timing was bad, however, as the economy went on a downswing—Boeing pulled out.
But the technology was too promising to leave behind. In 2001 Shane won Advanced E-Team funding from the NCIIA to optimize the probe and move toward commercialization, and the team officially incorporated as InsituTec, Inc. Bootstrapping began.
How have they done it? According to Shane, the most important factor in InsituTec’s high-tech bootstrapping success has been their incubator. The Office of Technology Transfer at UNCC provides high-tech startups with office space and access to laboratory equipment based on a fixed-fee agreement in which they pay based on what facilities and office space they use. Since both Bethany and Shane are graduate students they receive free office space; they’re charged only for InsituTec-related use of university equipment. And that equipment is extremely expensive.
“One of the instruments we use to test our devices costs about sixty to eighty thousand dollars,” says Shane. “That’s why without the incubator InsituTec wouldn’t really be possible.”
“If it wasn’t for the university incubator program we would have no hope of even having this company right now,” adds Bethany. “That we pay for the equipment on an hourly basis instead of having to buy it is absolutely invaluable.”
The second major factor in their bootstrapping success is salary. That is, the big salaries they don’t pay themselves. Shane pays himself far less than what the typical engineering graduate makes. “I make a tiny fraction of what I could be paying myself,” he says. “But we just have to do that right now.”
Bethany works for no pay. She has a second job that pays the bills and offers her services to InsituTec at no cost. “My time is free to the company,” she says. “I get paid at my regular job and then I spend my afternoons, evenings, and weekends working on InsituTec. We’re in this to build the company and be successful, so a little sacrifice now for success later is worth it to us.”
Another source of savings comes in the form of materials used in making the devices themselves. Says Bethany, “We spend every penny wisely. When we put together systems and devices we pinch every penny and do it cheaper and leaner than bigger companies. We watch everything we order. We look for the best deals. If we can get something two dollars cheaper elsewhere, we take it.”
If all goes well, they’ll be out of bootstrapping mode in a year. “Four months ago we received a Phase I SBIR grant,” says Shane. “We’re writing several proposals for other grants. We’re working on a development contract with a large industrial equipment company. We’re getting there.”
In the meantime Bethany offers some advice to young student inventors who may be facing years of tough bootstrapping: “If you have a company and you have a stake in it you should be willing to sacrifice early on. Don’t expect to pay yourself top dollar and succeed. If everything works out, you’ll get a big payoff later.” | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/06%3A_Money/6.07%3A_Waiting_a_While.txt |
Student-run, their way: EcoTech Marine
Amid all the talk in this section about elevator pitches and equity, burn rate and liquidation, preferred stock and venture fairs, we present to you one simple and reassuring fact: you don’t have to get fancy angel or VC funding to succeed. In fact, in certain situations you might be better off without it. Such is the story of EcoTech Marine: a team of students with enough entrepreneurial spirit and drive to take a product all the way to market themselves, with a minimum of private investment. This profile follows EcoTech’s story from idea to prototype to successful company, detailing exactly how they got the money at each step along the way.
Humble beginnings
But first we need to back up—way up, to when EcoTech co-founder Tim Marks was in eighth grade. After getting “fish fever” and maintaining freshwater aquariums for several years, Marks set up a ten-gallon “reef” aquarium, nurturing live corals and other organisms in a saltwater environment. But Marks soon discovered that maintaining a reef aquarium is a complex task that practically requires a chemistry degree, to say nothing of time and effort invested. When the demands of the tank overwhelmed his eighth-grade education, Marks dismantled it and quit the hobby altogether.
Fast-forward to his senior year in high school, when, thanks in part to the Internet, Marks caught fish fever again. He was mentored online by Rick Dickens, webmaster of reefs.org, a popular online resource for reef keepers. The following year, as a freshman at Lehigh University, Marks met Justin Lawyer, a physics student at Oklahoma State University, in a chat room for reef enthusiasts. The two students realized they shared a vision of equipment that would automate the difficult task of reef aquarium maintenance, and they traded ideas and 3-D models of potential products. Before Marks finished his freshman year, using nothing but small amounts of their own personal funding he and Lawyer launched a full-fledged company, calling it EcoTech Marine.2 Their goal? Become a provider of innovative, high-end, automated equipment for serious aqua hobbyists.
Hard work and grant writing
There was much work to be done, however. Doing most of the prototyping in the basement workshop of Marks’ home, the team built a prototype of its first product: the Kalkwasser Reactor, a device that automatically replenishes and maintains an aquarium’s calcium and alkalinity levels, vital to the health of corals.3 It was a rough alpha version, though: they needed several thousand more dollars to develop the device fully. “We’d been funding the venture ourselves for several years,” said Patrick Clasen, a fellow student entrepreneur at Lehigh who quickly caught reef fever and joined EcoTech. “But that was no longer cutting it.”
The team decided to submit the reactor in the Invitation to Innovate contest sponsored by the Integrated Product Development (IPD) program at Lehigh. IPD is a comprehensive entrepreneurship training program in which teams of engineering, arts, and business students collaborate for one year to make and market products. EcoTech won the contest, getting \$2,000 and the chance to work with business and engineering students for two semesters, all in preparation to submit an NCIIA Advanced E-Team grant proposal.
They did submit, and received \$8,380 in NCIIA funding, mostly for prototyping. By the end of his sophomore year at Lehigh, Marks and his team had sold twenty reactors and seemed well on their way. But at the same time Marks knew that EcoTech needed more than just one product to be a viable business. “As it turned out,” says Marks, “the reactor project didn’t go as far as we hoped. But it did get our foot in the door in terms of business, manufacturing, and design experience. And, most importantly, it was the stepping-stone in terms of the next product we developed, which has been very successful.”
VorTech™ to the fore
Like so many other entrepreneurial successes, the turning point for EcoTech came when it made contact with an industry player. At a local reef club meeting Marks met Andy Howard, President of IceCap, Inc., a well known name in the reef aquarium hobby. Marks and Howard connected, and Marks mentioned an idea for what he called the VorTech, a new circulating pump for aquariums that would mimic a natural wave-like water flow and minimize the intrusion of heat and bulky equipment inside the tank. Howard, it turned out, was working on an idea for a battery-powered backup circulating system for aquariums, which would require a pump. The two ideas meshed: as a new company, EcoTech needed industry support to launch the product successfully, and IceCap wanted a discrete, high-end pump for their backup system. Marks and Howard arranged a formal meeting, signed nondisclosure agreements, and Marks brought to the table two different pump ideas. Says Marks, “IceCap immediately gravitated toward the VorTech, saying, ‘We want that, build us that!’ That’s when we really turned it into high gear and started product development.”
Meanwhile
In the meantime the EcoTech team members had completed their undergraduate degrees. But the project was far from over: they both stayed at Lehigh and continued to work on EcoTech, with Marks enrolled in the master of engineering in mechanical engineering program with a focus in IPD, while Clasen pursued a master’s in materials science and engineering. Their tuition was paid for, and they received stipends. Marks even became an IPD teaching assistant, helping undergraduates with their entrepreneurial projects.
More news came in on the money front: EcoTech received another Advanced E-Team grant from the NCIIA, this time for \$18,738; through Lehigh they won a \$9,000 “Agile Manufacturing” grant to help with tooling and production; they won \$15,000 from the State of Pennsylvania as part of the Keystone Innovation Zone (KIZ) program, designed to prevent brain-drain and keep Pennsylvania-based ideas within state boundaries; and lastly, they secured a line of credit from a local bank. The line of credit, Marks says, is especially nice as a fall-back plan. “Because of the line of credit, we’re assured that if we need more money, we can get it. If we need to increase production quantities, or if things slow down, the line of credit gives us that insurance. It’s a good thing to have.”
And while not every team at Lehigh receives free office space and lab equipment, EcoTech did. According to Marks, EcoTech secured the space and equipment “just based on the fact that we had been doing this so long and were so dedicated.”
The ramp-up
In partnership with IceCap, EcoTech developed a polished prototype of the VorTech pump and debuted it on the market successfully in 2005. The specialized pump is now sold through a variety of online reef equipment companies, and the future of the product and the company is bright. “We’re getting our first product out the door now,” says Marks. “Product has shipped and more product will ship soon.”
And EcoTech isn’t stopping at the VorTech. “We’re developing a remote control for the VorTech right now,” says Marks, “and we have a number of other products in mind. Eventually we want to launch a complete line of products for advanced aquarists, a line of products that will completely automate the reef-keeping experience.”
Using a mish-mash of funding sources—NCIIA grants, personal money, Lehigh prize money, State of Pennsylvania money, bank money, and finally corporate partner money—EcoTech grew their venture from the ground up, their way. | textbooks/biz/Business/Entrepreneurship/Book%3A_Getting_Started_as_an_Entrepreneur_(Wikibook)/06%3A_Money/6.08%3A_Student-Run_Their_Way.txt |
“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” —ABRAHAM LINCOLN, 16th President of the United States
“Mastering others is strength. Mastering yourself is true power.”—LAO TZU, Chinese philosopher
01: Theory
EVERY ENTREPRENEUR I KNOW STARTED with an itch they couldn’t scratch. A tiny voice in their head that kept getting louder and louder until one day they could no longer ignore it.
Something needed to be done.
Every person I know who wanted to start a business and didn’t pull the trigger had the same set of hesitations.
“I’d love to quit my job but can’t right now.”
“There are too many competitors.”
“I don’t have time.”
“It’s too expensive.”
You may have had these thoughts yourself. It’s not unusual to be intimidated and conjure up every excuse why you can’t do it:
you’re not prepared, your idea isn’t good enough, or you’re too busy with work and family.
The fact is, like starting a family, it will never be the perfect time to start a business. You’ll never be completely prepared and you won’t have every skill needed in advance to run your business successfully.
But fear not! You’ll pick up the skills and insights you need to be successful along the way. And timing? Well, that’s the main point of this book.
The best time to start a business is now. Right now.
The first part of the book, Theory, will explain why this is true.
1.02: Chapter 1 What is Parallel Entrepreneurship
What Is Parallel Entrepreneurship?
Meet Cornelius Vanderbilt
YOU CAN’T GET MORE PARALLEL than railroad tracks.
Cornelius Vanderbilt became famous as a railroad tycoon, but he built his first fortune in shipping. He owned both shipping and railroad companies until the age of 70, when he sold his last ship and focused solely on railroads.
Born poor, he quit school at age 11 and became the wealthiest person in all of American history. His fortune in today’s money would be over \$220 billion dollars. That’s more than Bill Gates, Mark Zuckerberg, and Warren Buffett combined.
His first business was a ferry service between Manhattan and Staten Island, where he was born. It was while sailing in the waters around New York in the early 1800s that he earned the nickname “The Commodore,” which stuck with him throughout his life.
Vanderbilt quickly found additional income streams. He entered the goods trade with his father, and worked as a captain for another entrepreneur in the ferry business who taught him how to run a complex business and fight in the courts to expand his market.
For a decade, he worked a day job as a ship captain while building his own side businesses. Finally, at age 35, he went full-time into his side projects. The scope of those side projects, now his sole focus, would expand enormously.
Vanderbilt noticed that ferries and steamboats were just one piece of a larger freighting ecosystem. The booming cotton economy drove expansion of rail lines between the Southern states and New England, where his ships connected to railroads at ports all along the Eastern Seaboard.
Seizing this opportunity, Vanderbilt began to take over the railroads too. The railroad business led to other opportunities that didn’t exist at sea: real estate. He bought large tracts of land in Manhattan and Staten Island to protect and expand his railroads, further increasing his influence and wealth. He bought shipyards and passenger steamboats, and consolidated his railroad companies into the first giant corporation in America.
Vanderbilt was an extraordinary parallel entrepreneur, one of many whom we will study in this book.
Indeed, parallel entrepreneurship is nothing new. Among internet entrepreneurs today, parallel entrepreneurship is discussed at conferences, on podcasts, and in many other business books. It’s most commonly referred to as “side hustling.” Google that and you’ll see there’s already a lot of people talking about it.
The unique thing about parallel entrepreneurship today is that it’s easier than ever to do it online, and you don’t need to stick with traditional side businesses like real estate investing, consulting, and producing online courses. You can have an e-commerce business on the side. You can even have a modern software subscription business (a.k.a. “SaaS business”) as a side hustle.
In fact, you can build not just one internet business but multiple internet businesses while still keeping your day job.
The main difference between you today and Vanderbilt 200 years ago is that you don’t need to be rich to build a software company. You don’t need a huge team, massive servers, and a Ph.D. in computer science to become a software tycoon. You can do it all from your couch with a bowl of popcorn and your favorite Spotify station playing in the background.
From trash to treasure
I didn’t start out as an internet entrepreneur. I got my first taste of entrepreneurship while picking up trash in high school.
I’ve always had an environmental bent. I remember riding up into the Sierra Nevada Mountains in my grandpa’s white Toyota pickup truck feeling a twinge of anger every time I saw a logging truck rolling down the highway in the opposite direction with a pile of pine logs in tow.
I didn’t know what else to do so I reacted the way any eight-year-old might react. I stuck my tongue out at them. Each and every one. If my grandpa noticed, he never said anything.
Back at home in the San Francisco Bay Area, I sketched imaginary machines that would suck down and store greenhouse gases underground. These contraptions had huge floating fans connected to pipes that ran to buried storage containers and would safely store the carbon dioxide to keep it from escaping.
I had an early interest in science. My freshman year biology class was taught by Mr. Stoehr. As luck would have it, he was also the sponsor of my high school’s Environmental Club. I did well in his class and started going to Environmental Club meetings every week, befriending the student leadership and getting to know Mr. Stoehr (“Greg”) on a first-name basis.
I made a name for myself by deciding to tackle the littering problem at my school. This too harkens back to those summers spent with my grandpa. He’d never walk by a piece of trash without picking it up and stuffing it into his pocket, lamenting the laziness of the person who dropped it.
Years later my high school friends would tease me about picking up trash. They would ride their bikes ahead of me, call out my name, hold up the 7-11 Slurpee they’d just finished and drop it. Without fail, I’d groan and pick it up, carrying it with me until we came upon the next trash can.
There was a lot of litter at Los Altos High School. I’d see it in the bushes, under the covered hallways, even around the bases of the many trash cans on campus. It drove me crazy!
I was able to recruit two other guys to help me pick up trash every Wednesday after school. We called it “Mission: Trash Pickup,” and for the better part of three years we met and picked up trash every week after school.
Needless to say we didn’t get a lot of attention from the girls on campus, but the custodians sure loved us. They bought us our own green rolling trash bin that we branded with a spray-painted “MTP.” That trash can, which we called the “MTP-mobile,” was my first brand, my first logo, and the first thing I ever started and got people to join.
A couple of years later I was invited to participate in a new community service program that my high school was launching. Mrs. Beman, the leader of this new program, asked if I’d like to include MTP in the list of volunteer activities. I agreed but worried that no one would choose our program. It took a special kind of person to choose to pick up trash. How many of us could be out there?
I was happily mistaken. I convinced a few dozen people to choose my activity and sent them all around the school to pick up litter. When we were done the campus never looked so clean.
I learned later that the main draw of MTP was not the elation of seeing a litter-free campus. They picked MTP because they were forced to choose something and they didn’t want to get onto a bus and travel anywhere.
That too proved to be an important lesson in entrepreneurship. Sometimes you can’t predict demand.
I began my senior year of high school as senior class president and co-president of the Environmental Club. Looking back, this was my first brush with parallel entrepreneurship.
I wanted to take both responsibilities seriously and figured I could manage it because there were no conflicts of interest. Nothing I would do with the Environmental Club would detract from the important responsibilities of a senior class president, which above all else was organizing the prom and fundraising to get ticket prices as low as possible.
I found ways to play both jobs off of each other. I used the familiarity I got with the high school administration as class president to organize an Earth Week that coincided with the national Earth Day 2000 festivities. As class president I also had access to the display case near the main office. One week I filled it with all the litter that MTP collected. Stapled to the wall, using pieces of trash that my fellow students had dropped, I spelled out, “We can do better.”
Likewise, the seniors benefited from my improved organizing skills, respect from school authorities, and admission to the University of California. My admission essays were all about my parallel entrepreneurship experiences. So after I received my acceptance letter I was able to focus full time on organizing the senior prom (which we held at a science museum in San Francisco, obviously) and it was awesome!
That prom turned out to be the highlight of my high school experience. Right up there with the custodians buying me a rolling trash can.
Some nerdy, introverted people like me don’t enjoy high school. But I thrived. I didn’t know it then but I’d already discovered the many varied benefits of parallel entrepreneurship.
Taken after I graduated, it’s the only picture I have of the “MTP-mobile”
Don’t quit your day job and then build a startup
Don’t quit your job to build a startup. Build a startup and then quit your day job. Or keep it and treat it like another income stream. It’s totally up to you. That’s the big idea here.
One of my favorite parallel entrepreneurs, Marcia Kilgore, says, “You don’t give up your day job because you think that your side hustle or whatever it is is going to actually pay off. You always do two things at the same time because one of them may not work, and you want to make sure that you’ve got another one.”
There’s no reason anymore to go full-time into any one thing. If you have the itch to try your hand at starting a business, then you should do it while your employer limits your risk with a regular paycheck.
The thing a lot of people seem to forget is that you can start, run, and grow a real business that makes a meaningful amount of money just by working during nights and weekends.
It does mean some amount of sacrifice. You won’t be able to do this and keep up with the latest Warriors trades and This Is Us episodes.
Still, it’s worth the sacrifice. Here’s why.
It’s getting harder and harder to do traditional Silicon Valley fundraising. The bar is so high that by the time you actually checked all the investors’ boxes you wouldn’t need their money anymore. When you’re a new entrepreneur the finance guys need to de-risk as much as possible, and they do that by expecting you to be flawless.
Similarly, it’s getting harder and harder to earn revenue. Customers are getting harder to grab because starting internet businesses is getting easier. Simply put, there’s more competition.
At the time of this writing, I’ve launched six web applications in the last 12 months. Of those six, only two are making money. I support my family primarily with one of them. With every new project I start, I’m grateful to have even one business that works.
It took three years of nights and weekends to get my side business to a point where I can live comfortably off of it. When I launched it, though, the market for online businesses was much less saturated. These days it might take longer to yield the same result, but it’s still possible.
You need more than one source of income
Having multiple income streams is the ultimate insurance. It’s the same idea that financial fund managers use. It’s always better to diversify your investments. Don’t be all in on tech stocks or bonds or index funds. You should mix high risk and low risk investments whenever possible.
Think about it. Investors don’t move their money serially. They don’t go 100% into stocks, then 100% into bonds, and then move everything into some other instrument.
Not even close. They hold a mixture of all of these securities simultaneously. In parallel. Spread across multiple markets and in businesses of different sizes and risk profiles.
In short, the portfolio theory simply suggests you should not be a serial entrepreneur with 100% of your entrepreneurial time invested in one business. You should diversify and be a parallel entrepreneur instead.
I go a step further and suggest that you should do the same with your career. You don’t need to rely on a spouse or partner to have the stable or high-risk job. You can have them both by yourself. You can have a low-risk day job and high-risk startup without sacrificing anything from either one.
Parallel entrepreneurs start businesses all at once
Serial entrepreneurs start one business after another. Parallel entrepreneurs start them all at once. It’s not for the faint of heart, but the rewards are tremendous.
One of the most successful and prolific parallel entrepreneurs I know is Jonathan Siegel, author of The San Francisco Fallacy, co-founder of RightSignature, and owner of Xenon Ventures. When I asked him about parallel entrepreneurship, he lamented that he talks to “fallen angels” every day. These are entrepreneurs who raised anywhere from \$4 to \$40 million and their companies didn’t work out. They didn’t necessarily do anything wrong. As we’ll see in this book, building a business is hard and a lot of it is unpredictable.
These entrepreneurs had to fully invest 100% of their time into one company while the people who invested in them got to spread their money across dozens of investments. The investors aren’t surprised when a business they invested in fails. The entrepreneurs, on the other hand, are stunned. Some never recover.
Starting a business is risky because it takes a lot of time and at least a little bit of capital, and it may take years before you know if it will pay off. There will be a lot of noise along the way, and indicators that you’re failing faster or soaring higher than you really are. It just takes time until the ultimate arbiter of truth—cash in the bank—shows its pretty face.
Until then, you keep toiling away, losing out on the low-risk paycheck you might get from a day job or a higher-yielding opportunity that you set aside in favor of the business you’ve already started.
You’re an entrepreneur. You have a million ideas, but you have to pick just one of them and then fully commit to it.
Or do you?
Actually, there’s no rule saying you can’t do more than one small business at a time. There’s no physical constraint preventing it.
Look at it this way. You can work a day job and be married, have kids, get a pilot license, binge watch Game of Thrones, and play on an intramural softball team. That’s pretty normal to do outside of your day job.
So why can’t you also start a business? Or two? Or three? If you can have a personal life outside of your day job, why can’t you have a professional life outside of your day job too?
The answer, of course, is you can do both. Some of the greatest entrepreneurs of our time are parallel entrepreneurs.
What if Elon Musk had to choose between Tesla, SpaceX, and The Boring Company (his enterprise devoted to digging tunnels)? What if Jack Dorsey decided not to start Square, his payment company, while he was still at Twitter?
We’d all be worse off if these guys decided not to be parallel entrepreneurs because they believed it violated some mysterious unwritten rule that you can’t start and run multiple companies at once.
Musk and Dorsey are exceptional businessmen. They’ve made accomplishments at the highest levels, higher than I will ever reach, and the extent of their successes actually contradicts a lot of what I suggest in this book.
But that’s okay. Let’s not compare ourselves to the superhumans among us. My point is, the path has already been paved not only by Musk and Dorsey but also by a thousand others like myself who are not brand-name entrepreneurs.
The theories, tools, and techniques are proven and available. Now come on. Let’s go.
There’s work to be done!
MARCIA KILGORE
Bliss, Beauty Pie, Soap & Glory, FitFlop
I learned about Marcia Kilgore on the “How I Built This” podcast published by National Public Radio. Her story is incredible.
Raised by a single mother in a rural Canadian town, Marcia decided at a young age to earn her own money. She worked hard and was accepted to Columbia University in New York, where her sister lived and worked as a model.
Unfortunately, Marcia wasn’t able to make her tuition payments and never attended Columbia as full-time student. Instead, she earned money providing personal fitness training while taking classes at NYU at night. She noticed her skin health deteriorating, and one fateful day Marcia went to get an expensive facial. She had a terrible experience. This was the unlikely event that set in motion her career as a parallel entrepreneur.
After taking a crash course in skin care, Marcia started giving facials to her sister’s model friends in her apartment. She maintained her personal training practice too, working those gigs in parallel with her growing skin care business.
Word of her outstanding facials spread and a couple of years later, in 1993, she opened her first small office. In 1996 she expanded into a first three-room spa and named it Bliss. Three years after that, in 1999, Marcia sold Bliss to Louis Vitton. She stayed through the acquisition and remained for a couple of years after Louis Vitton sold Bliss to Starwood in 2004.
Marcia took some time off and in 2006 launched Soap & Glory, a distributor of affordable designer cosmetics. The following year, while still running Soap & Glory, Marcia launched FitFlop, a shoe designed to properly align your body ergonomically as you walk.
Marcia sold Soap & Glory in 2014 to Boots, a large department store in the United Kingdom. She continued to launch more businesses, building Soaper Duper in 2015 and Beauty Pie just last year, in 2017.
Today Marcia is actively working on FitFlop, Soaper Duper, and Beauty Pie. This is parallel entrepreneurship executed to perfection. | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/01%3A_Theory/1.01%3A_Prelude_to_Theory.txt |
Personal Rationale
IF YOU READ THIS THEORY section in its entirety and follow the simple rules, I can’t imagine why you’d regret giving this a shot.
If your business doesn’t take off, you’ll have lost time, maybe some money, but gained it back tenfold in new skills and shareable experiences. You’ll probably also meet some incredible people along the way.
Parallel entrepreneurs like to find and help each other. Once you put yourself out there, you’ll see.
Here are seven reasons to be a parallel entrepreneur. I’ll cover each of them in detail.
1. Develop new skills so you de-risk your career. There’s a price to pay for specialization. The more skills you have, the easier it will be to weather a major economic shift.
2. See the forest and the trees. You’ll see your day job through a new lens when you spend time working on something else.
3. Explore a new career. If you’re not sure your current job is right for you, dip your toe into a new career by exploring a side project while you maintain the comfort of your regular paycheck.
4. Pursue a passion. If the skill you develop in your side project isn’t marketable, that’s okay too. Do it if you enjoy it.
5. Make yourself more marketable for transfers. You may find a new career within your current company. That’s also an accomplishment, and the fastest way to get there is to teach yourself those skills by running a side business.
6. Structure your evenings and become more productive. Side businesses force you to use your time wisely. This skill will help you in all aspects of your life.
7. Gain financial leverage. You can also start a side business simply for the extra money. When you don’t need someone else to sign your paychecks then and only then can you call your own shots.
1. Develop new skills so you de-risk your career
In Rich Dad Poor Dad, Robert Kiyosaki writes, “The most important specialized skills are sales and marketing.” He mentions this several times throughout his best-selling personal finance book.
Most people don’t get the opportunity to develop sales and marketing skills. They’re too busy running something, whether it’s an Excel spreadsheet, an espresso machine, or a research project. That’s what most jobs are: a narrow set of activities in which you entrench yourself throughout your career. You become specialized. The problem with specialization is that your skills may not transfer very well when you lose your job.
It should therefore be no surprise that the most common reason people become parallel entrepreneurs is to develop a new skill set and de-risk their careers. More than two-thirds of the individuals I interviewed gave this response.
The first thing you’ll discover as you dive into starting your business is the sheer breadth of skills needed. I started Toofr because I wanted to learn web software development. I didn’t know that it would also improve my writing, digital marketing, and public speaking skills.
The more time you spend starting and running your own business, the more professional “merit badges” you earn. The more merit badges you earn, the more valuable you become, both inside and outside of your day job.
So rather than paying for classes at a community college or quitting your job to join an incubator, use your current paycheck to finance your entrepreneurial ambitions. Use your current paycheck to give you the freedom you need to learn and build.
This way you can work for years to build your business on the side and build a great foundation all while benefiting from the security of a full-time job.
Don’t feel guilty about it, either. The skills you’ll develop on this journey will benefit your employer too.
Rapid new skill development is the top reason to start a new company while you’re already working full-time.
You might be surprised to find that the most common set of skills that parallel entrepreneurs have isn’t coding and product development. It’s writing blog posts and building and analyzing financial statements and models.
Roughly one-third of parallel entrepreneurs I interviewed know how to query a database. If that’s not something you want to learn, that’s okay. You don’t have to. Even fewer can build a website application themselves.
Every single one of them can write their own blog posts, though. Most could write their own ebooks. Nearly two-thirds are comfortable enough with Excel and financial software to build revenue and financial models to use to run their businesses.
Those financial skills are the most common and arguably the most valuable to your business. You can outsource the bookkeeping and financial statement development but you can’t outsource the ability to understand your own business quantitatively. If you don’t have that skill now, it’s something you can learn. Take an online course or ask a friend who knows how to use spreadsheet software. Regardless of where you ultimately land, whether it’s at your own company or someone else’s, a working knowledge of Excel or Google spreadsheets will make you more valuable, increase your salary, and improve your ability to succeed.
These are skills you need. If you don’t have them already, a great way to learn them is by trying to set your own entrepreneurial destiny.
2. See the forest and the trees
The counterargument to “focus, focus, focus” is that myopia can sap creativity. More commonly, you’ll “miss the forest for the trees.”
Sometimes you need to take a few steps back and take the long-range view in order to see your business in a new way and gain valuable, game-changing insights.
I’ve found that the best way to do that is to have another professional project running simultaneously. Toggling back and forth between projects is a great way to force yourself out of your old way of thinking. When you have to change contexts and wrap your mind around a completely different business problem for a few hours, you’ll find that you’ll see the first problem in a completely different way.
To illustrate this point, I’ll tell you about a very important business model change we were considering for Scripted, my investor-backed marketplace for written content.
I really wanted Scripted to have a software subscription. This revenue model was just beginning to bring in meaningful income for Toofr, and I knew that Scripted could do even better because of its resources, brand, and my team.
But just mentioning this concept at my office job elicited rolled eyes and raised eyebrows.
Everyone was either a nay or an abstention on this one. I couldn’t get a single ally. It was a touchy subject because the implications were huge. Everyone was right about that. A subscription model would change every part of our business and make some teams obsolete. It also would sink our revenue temporarily while the subscriptions grew.
At the time, Scripted made money by taking a large percentage of the marketplace transaction between businesses that purchased writing and the writers who sold it. Often this high transaction fee rubbed people the wrong way.
If we moved to a software subscription model we could lower that transaction fee by eighty or ninety percent! I knew this is what our customers wanted, but I couldn’t convince anyone that it made business sense.
Yes, it might cannibalize our other revenue. Yes, it might upset the sales reps. (I was sensitive to this because I managed the sales team at the time, but I wanted to try it anyway.) Yes, it could lower our average revenue per user and throw our unit economics out of whack.
I still advocated for the flexible, month-to-month subscription model because I saw that our traditional sales-driven enterprise approach was not working. Our customers didn’t want to purchase our writing with lengthy, verbose contracts. The customers who signed, and we did get a lot of signatures, would not renew. The numbers were telling the story but my team didn’t want to change.
I said in meetings that not giving our customers what they wanted was wrong. We had to listen to them and then figure out how to make it work. Conversation would ensue, and the conclusion would always be made that my idea was too risky, would create too much change, the board would never approve it, and that we shouldn’t give up on the status quo yet.
One afternoon, in the midst of all of this, I was sitting in a conference room with our product manager. We had just gone through another grueling series of meetings debating the features and pricing for our newest contracts. We looked at the whiteboard full of notes and I said, “I promise you, we’re eventually going to be a simple monthly subscription company. It’s going to happen.”
Then he laughed. I laughed too. We both laughed. Sadly, when we shifted to the monthly subscription model a few months later, he was one of the guys we had to lay off.
Eventually I was able to convince our stakeholders of the wisdom of the subscription model. Today, Scripted is stronger than it’s ever been. Monthly recurring revenue has tripled in the preceding year and the business is profitable.
Moving Scripted to a subscription model was the right move and I have Toofr, my little side project at the time, to thank for that insight.
3. Explore a new career
I’m now in my mid-thirties. My friends are too, and many of them are feeling stuck in careers they chose after college or after graduate school, and they’re realizing they’re too old to make a switch.
Your thirties are when your income is supposed to accelerate. As my friend and author, Max Altschuler, writes in his latest book, Career Hacking for Millenials, “Your twenties are for learning. Your thirties are for earning.” You get more raises and promotions in this decade than any other point in your life. Sacrificing that gravy train for a shot in the dark in a new career could be disastrous.
So they stay in jobs they don’t like and waft back and forth between numbness and misery. That doesn’t sound like a life any of us want to live.
And there’s no reason for it. You can have your cake and eat it too!
Let’s say you’re working in public policy but have always wanted to be an interior designer. You’re doing really well at your job. Great boss, great pay, great perks, and you actually like the work, but it’s not what you would do if you could choose a career all over again.
What are your options? The How To Do It section in this book has the details, but the teaser is simply to just…do it. Get immersed, start building a brand, and find the intersection between what you love and what other people need. It will take you some time to find it, so you might as well do it while you’re getting paid by somebody else.
Importantly, interior design and public policy have nothing in common, so they work in parallel. Remember that when you work for someone else, you have to maintain a fire wall. When you’re working at your public policy job and taking their paycheck, you cannot do anything with your side job. You must do it on your free time.
You’ll read in the Staying Out of Trouble section that keeping your side projects separate from each other is critical. You can’t start your own public policy consultancy while you’re working at a public policy company. That will eventually create legal friction and backfire.
When you’re the owner of both your day job and your side project, you can seek out synergies between the two. We’ll cover this distinction with some real examples from the entrepreneurs I interviewed.
Most of the time there’s no reason why you can’t put the building blocks in place to not just explore a new career, but to start a new business while still getting paid in your day job.
CASE STUDY: John Zimmer, Co-founder of Lyft
John Zimmer studied hospitality management at Cornell. He graduated in 2006 and joined Lehman Brothers in order to get a better finance background, but during the first year of a two-year analyst program he became bored.
When Logan Green, a friend of a friend, posted on Facebook that he was building a carpooling website, John got interested. A course he had taken in college emphasized that overconsumption of resources will ultimately threaten human survival. The lessons stuck with him but he wasn’t inspired yet to work on a solution. The carpooling service idea struck a chord.
At the time, Logan was in Santa Barbara and John was working in New York City. The two connected online and met for the first time in person when Logan traveled to New York a few weeks later. They hit it off and decided to collaborate on Logan’s idea.
John stayed at Lehman Brothers for another year while Logan built the website and John hammered away on marketing campaigns and partnerships at college campuses. He kept his day job while working on a side project that had no overlap or potential conflicts.
In 2008, when Zimride, the carpooling site, was running and making money, he quit Lehman Brothers.
Friends and family thought he was crazy. “Why would you quit on a sure thing like Lehman?” they’d ask.
Three months later, Lehman Brothers went bankrupt.
As COO of Zimride, John Zimmer is now a major shareholder of a business with 1,500 employees that is worth north of \$5 billion.
4. Pursue a passion
Another rationale for parallel entrepreneurship is simply to explore a passion. Since half of the parallel entrepreneurs I interviewed gave this reason for starting a second or a third business at once, I’m going to share two stories.
Josh Pigford is the founder of Baremetrics, a Birmingham-based software company that captured the subscription analytics market by storm. Josh is one of my favorite parallel entrepreneurs. I love his writing and respect his business philosophy.
Since he launched it in 2013, Josh’s business has consistently grown about 50% every year. His annual revenue is now over \$1.1 million. Not bad for a business that has raised only \$800,000 from outside investors and still runs lean with a small team.
Josh’s story is particularly interesting during the time prior to launching Baremetrics, when he was essentially a serial parallel entrepreneur. He’d start and stop dozens of businesses, which ranged from consulting projects to software applications. Baremetrics, in fact, was one of those many businesses that Josh was inspired to build back in 2012 and 2013.
It was because of his experience starting and stopping multiple businesses that Josh could tell Baremetrics was different.
“It was like, ‘Oh, so that’s what it feels like to have something that just works!’” he told me.
Baremetrics, unlike his other ventures, saw immediate fast traction. Soon it consumed all of his time, so he folded his other ventures and for several years was dedicated completely to Baremetrics.
Then, in January 2017, I saw this tweet from Josh:
“I’m launching a super non-digital thing this month: @CedarandSail! Stay in the loop + get 20% off when it launches: http://cedarandsail.com.”
The tweet included several pictures of small, geometric plant vases.
Why would the CEO of a hot software startup publicly launch an e-commerce company? I was curious, so I asked him.
He told me it’s because he loves the products. He writes on the Cedar & Sail blog, “Separate from business, I make a point to do things that aren’t digital…things that require me to use my hands and build actual, real, tangible objects. That manifests itself in everything from gardening to woodworking to electronics to designing home decor.”
You don’t start a handmade craft business in order to scale rapidly and make a bunch of money quickly. It doesn’t work that way. Josh also acknowledged to me that there is no synergy between Cedar & Sail and Baremetrics. None.
But that’s what it means to have a passion project. He’s not doing it for fortune or fame or any reason other than simply because he loves it, it makes him feel good, and it’s an outlet for the roller coaster ride he’s on at Baremetrics.
In a previous example I described someone who was working in public policy and was passionate about interior design, so she started a blog. There’s a clean, clear line between public policy, which is her day job, and interior design, which is her parallel entrepreneurship project. They have to be separate because of legal consequences with her day job.
Josh’s case is different. He’s the CEO of Baremetrics and also the CEO of Cedar & Sail. He therefore could blend his projects together a bit, perhaps by selling to the same customers or using the same software. Many parallel entrepreneurs I spoke to scaled up multiple businesses simultaneously by riffing them off of each other.
Again, when you wholly own all the businesses you’re working on, you can do that. Josh could have done this too, but instead, he kept them separate simply because he’s passionate about building beautiful physical products.
Max Altschuler took a similar parallel trajectory. He’s the CEO of Sales Hacker, a media company that hosts conferences on multiple continents and is a fast-growing content destination for information-hungry sales and marketing professionals. He has a small team with revenues north of three million dollars a year.
Let’s start at the beginning of Max’s career with Sales Hacker. I know it well because I was there.
I met Max via email when he messaged me in late 2012 about a couple of articles I wrote on the Scripted Blog titled “Hacking for Sales.” Max was working at the time in Business Development at an online course startup called Udemy.
I filled these posts with programming code to pull names, emails, and other data from public websites that might be useful in email campaigns. He liked them and encouraged me to develop them into a course to host on Udemy. I balked but we became friends and started hosting dinners and meetups with other technology-minded sales people in San Francisco.
The interest grew and Max saw an opportunity to expand our group beyond the handful of regulars and into the broader sales and technology community in the Bay Area. In November 2014 he hosted and organized the very first Sales Hacker Conference. It was magnificent, well-attended in a beautiful theater close to the vibrant North Beach district in San Francisco.
Max sold the tickets, got the sponsors, and lined up the speakers. The rest of us just watched and enjoyed the conference. He would go on to host another conference, and then another, and then he did them in Europe and partnered with other sales training organizations to have smaller meetups similar to the early days of our friendly sales hacker group.
He built a team and the revenue kept growing. Just over four years after launching that first conference he is financially free, traveling to and working from anywhere in the world.
So what would compel him to start SUTRA, a natural, energy-boosting alternative coffee product? It’s simple. Passion.
As he put it, “I quit drinking coffee since it was killing me, so I built an alternative.”
It’s also a pattern in Max’s career. When he launched that first Sales Hacker conference he wasn’t doing it full-time. He still had a job at another startup as leader of its business development team. And while he was making a lot of money running Sales Hacker, he saw opportunities to invest in sales technology companies and cryptocurrencies. He built several significant parallel income streams.
SUTRA is merely an extension of that trend. He loves the challenge of building a physical product and adapting his many years of hustling in sales and marketing to help SUTRA enter the very competitive beverage market.
I have great respect for Max and Josh. They both founded successful online businesses and passion caused them to throw their hats into the offline ring too. They are true parallel entrepreneurs.
5. Make yourself more marketable for transfers
Taking the policy and design parallel story a bit further, let’s say you dove into interior design for six months and either determined that the interior designer market is too saturated or you’re just not committed to seeing your new career in interior design all the way through.
But you discovered that you love social media. In the process of immersion, you discovered how to use Instagram and Twitter and interact with strangers in ways you never knew were possible. You then noticed flaws (or just a downright gap) in your employer’s social media strategy.
You strike up a conversation with the marketing team at work. You didn’t know them before, but now you’re friends. It turns out there’s budget to bring someone on to manage your employer’s social media accounts full time.
You describe what you’ve been doing in the interior design market, what your ideas are for your employer’s accounts, and you get the job.
It wouldn’t have happened if you never tried to be a parallel entrepreneur. If you’d never set out to explore, you’d still be wafting back and forth, back and forth, back and forth.
6. Structure your evenings and become more productive
About a third of the parallel entrepreneurs I surveyed were able to keep their day jobs and find time at nights and on weekends to develop other income streams. The most common sources of that extra income are investments like real estate, startups, stock, and cryptocurrencies.
As Kiyosaki suggests in Rich Dad Poor Dad, becoming rich is as simple as taking whatever is left after you’ve paid your monthly bills and putting it into assets that generate cash. You can start by buying stocks. When you’ve accumulated enough money, you can buy a multi-family house, renovate it, and rent it. And with some good planning and a little bit of luck, in a couple of years you might earn a 50% return and do it again.
At this point you may be able to quit your job or reduce your hours to put more time into your side business. Getting there, though, will require discipline. You will need to structure your non-working hours to maximize productivity. You’ll see the best results if you just do a little bit of work each day.
I personally enjoy it. Side hustling means a long, slow grind. You’re working all day and then you get home and work into the night. It suits me. I’m not an adrenaline junky. I don’t like to drive fast or ski fast or run fast. When I was into road biking I preferred the climbs to the descents. And now when I jog, it’s usually with a stroller in one hand and a dog leash in the other. I’m not moving very fast, but a long slow jog is actually my favorite type of workout.
If you love it, it’s wonderful. You’ll know if you’re meant for this path by how long you can sustain that schedule.
Does the extra work give you energy or does it sap it from you? Be honest with yourself.
Regardless of the outcome, you’ll find that your productivity increases with the amount of structure you put into your day. And when you’re your own boss, you can optimize that structure in the way that works best for you.
7. Gain financial leverage
I saved the most obvious reason for last. You can also start a side business for the money.
Kyle Duck has been an SEO consultant for a long time. I met him last year when I was researching new growth channels for my business. We became internet friends and I became one of his first customers for a new SEO product he launched. It’s called Alli AI, and by using it I have dramatically improved the organic traffic to my sites.
Prior to building Alli, Kyle was an SEO and growth consultant. He taught himself software development so he could improve his SEO consulting abilities. He spent a decade consulting and honing his knowledge of SEO, what works, and where the opportunities for automation are hidden. He came up with Alli to streamline his consulting and get financial leverage through passive income.
“I always wanted to build something scalable that I could live on,” he told me. “I always wanted to have passive income and develop new skills from growing that income.”
With Alli open for business, Kyle is well on his way. He passed \$1,000 of monthly recurring revenue (MRR) in his first month after launching, grew to \$4,000 the following month and is on track after just four months to break \$10,000 MRR. He’ll soon have enough passive income flow to focus on building a very large business, which is his ultimate goal. Without funds to hire engineers, Kyle will have to build that business himself, which will take time. His SEO software opens up the time he’ll need to build it.
That’s the financial leverage I’m talking about. One passive income stream is great. Two passive income streams is much, much better. It means you can sell the first one, liquidate it, pay down your mortgage, and you still have money coming in.
Once you’re comfortable with one stream, you don’t put up your feet or play golf. Instead, you start another one.
That’s the parallel entrepreneur way.
ELON MUSK
Telsa, SpaceX & The Boring Company
I think of Elon Musk as the real-life Tony Stark. The fictional Tony Stark, industrialist wizard by day and Iron Man by night, was a parallel entrepreneur as well.
The breadth and success of Musk’s parallel ventures are staggering. He became extremely wealthy at 28 after selling Zip2 for \$60 million, a company he had started with his brother just four years earlier. Zip2 was an online yellow pages directory that had morphed into an online publishing portal by the time Compaq purchased it.
Elon did all the original programming for Zip2, a skill he learned on his own by reading books. He used his share of the sale, \$22 million, to start X.com, an online bank, which he merged with a competitor to form PayPal in 2000. He wasn’t even 30 years old yet. While on his honeymoon a few months later, he was thrown out as CEO. Still believing in the opportunity, he invested more of his own money into PayPal and earned \$250 million when it sold to eBay.
This is when Musk started a parallel entrepreneurship path. He launched SpaceX in 2002 after reading about rockets and traveling to other countries to learn about how they’re made, bought, and sold. Later that same year, he became interested in electric cars and started meeting the engineers and entrepreneurs who were building them. He actually introduced the founding team ofTelsa to each other and made a large investment into their company. He became Tesla’s CEO in 2008, two years after co-founding Solar City.
For ten years Musk toiled away as the founder and chief executive officer of two major companies, each facing growing pains and setbacks. Fortune would favor this parallel entrepreneur in the long run, and he has recently expanded his portfolio to include OpenAI, Neuralink, and The Boring Company.
He is prolific, ambitious, and successful beyond comparison. A true decathlete of parallel entrepreneurship. | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/01%3A_Theory/1.03%3A_Chapter_2_Personal_Rationale.txt |
Business Rationale
THE PERSONAL BENEFITS I DESCRIBED could apply to having just one additional income stream. But I’m arguing for more than that. Let’s consider why it’s best not to stop at just one. Entrepreneurs and solo founders these days should have several.
You might already be thinking, “Wait a second, I’m supposed to focus on one, maybe two things, and get those to work before doing anything else. And one of those things is my day job.”
Sure, a day job and some stocks is a fine way to do things. You can focus on investing and you may get rich, but it won’t happen very quickly and your gains could get wiped out during a down market. You could also work hard every day, toiling away for a promotion while you build someone else’s generational wealth and you get what’s left over.
I’m not saying it’s a bad thing. In fact that’s how most people do it. But there is another way.
Instead of tying your wagon to someone else’s company (via the stock market and your day job) you can invest in yourself (via new skills) and get equity in your own business at the same time.
Instead of hoping that your first idea turns out to be the best idea, you can test multiple ideas at once, build them, launch them, and even run them for a while. I’ll describe this process in much greater detail in the second half of the book.
Instead of banking on one business replacing your day job salary and falling short, you can stack the revenues of multiple businesses until in aggregate you’re making more than your old paycheck.
This is ultimately why you should run multiple side businesses at once. It increases the likelihood of success and each new business you add takes less additional time than the last one.
Why Growth Plateaus Happen in SaaS
There is a natural limit on how much money you can make as a solo founder without outside capital.
Given that there is a cap on the income stream from any one business, in order to continue your growth, you’ll need to start more businesses. If you can’t grow up, you have to grow out.
I’ve found this to be especially true in the software-as-a-service (SaaS) industry. There are growth plateaus that you hit along the way and they are notoriously difficult to break out of. In fact, you may never break out of them. You may hit one and be stuck there for months or even years.
When that happens you have two options: sell the business or keep it and start a new one.
This has happened to me several times throughout my career in SaaS, both with Scripted and Toofr. In fact, I’m experiencing it right now. Toofr’s revenue has plateaued for the last several months and I’m actively working to break through it. It gets harder and harder.
The logic behind why this happens goes like this.
Your subscription software business grows when the increase in new revenue exceeds the decrease in churned revenue. New revenue is just what it sounds like: a new customer signing up for a monthly subscription of your product. They’re coming in and paying you for the first time. Churned revenue is the opposite. It’s an existing customer cancelling their subscription.
There are also the forces of upgrades and downgrades, but for most businesses those movements are a fraction of the volume, 15% at most, of new and churned revenue amounts. So let’s just focus on acquisition and churn.
If you get \$1,000 of new subscriptions and lose \$250 of existing subscriptions, then you grow \$750 in monthly recurring revenue. I’m intentionally not saying how many customers those revenue numbers represent. It could be four customers paying you \$250 each or 1,000 customers each paying you \$1. For the purposes of sheer revenue growth, it doesn’t matter. (I’d argue it’s safer to have more customers paying a smaller amount, but let’s table that for later.)
The problem every SaaS business eventually runs into is when churn catches up to acquisition. If you keep acquiring \$1,000 of new revenue each month, then inevitably, and I do mean inevitably, churn will reach \$1,000. And there you’ll sit, in limbo land, not growing, not shrinking, until you can do something to reduce that churn (better customer support, fewer bugs) or acquire more revenue (advertisements and promotions, new features).
The reason every business eventually hits this plateau can be explained with basic math. Churn is a relatively constant percentage of revenue. It’s very difficult to dramatically change your churn rate and it is influenced by two main factors: the industry you’re in (e.g. marketing vs healthcare) and the average customer size (e.g. small business vs enterprise).
Most B2B entrepreneurs will sell to small businesses. Both of my companies sold primarily to small businesses. The nice thing is there are literally millions of them in the United States alone, and millions more worldwide. The bad thing is they churn pretty fast and prefer to be on monthly rather than annual contracts. When you charge someone every month instead of every twelve months, your customer gets twelve more opportunities to churn. Therefore, monthly contracts will always churn at higher rates than annual contracts.
So why not just do annual contracts? Because annual deals have longer sales cycles and involve more paperwork. Your customers will want more diligence, they’ll want to try before they buy, and they’ll want to customize your contract every time. As solopreneurs, we don’t have time for all of that.
That’s why I take the higher churn and a faster sale every time.
Here’s what higher churn looks like. This chart represents the net monthly growth of a business that adds \$1,000 of new revenue every month and churns 10% of existing revenue every month. You can see the drop-off in net new revenue. Within twelve months it falls 75% and drops at the same rate after that.
Within two years if you’re still just adding \$1,000 of new customers your churn, still at 10% of existing revenue, is \$920. You’re working harder to get that \$1,000 of new revenue (because it always gets harder to acquire new revenue over time) and keeping less than 10% of it.
Ouch. It hurts.
On the bottom line revenue side, here’s what it looks like. This is what we call a plateau. You’re capping out at \$10,000 of monthly recurring revenue (MRR). In fact, there’s a pretty simple formula you can use to quickly get at this revenue cap:
New revenue / Churn rate = MRR. In this example, that’s \$1,000 / 10% = \$10,000.
So \$10K per month is your upper bound on how much money you’ll make with this business. Not bad, but not great. If you want to break past a \$120K salary you’ll need to think outside the box and either lower your churn or increase revenue.
You have two choices: Go from good to great, which I’ll discuss shortly, or build another new box and stack your plateaus.
Stacking Your Plateaus
Parallel entrepreneurship means stacking your plateaus on top of each other. It’s admitting that SaaS businesses have an upper bound in MRR and to break out of it you need to hire more people, which may mean taking on debt or equity financing and spending more money on marketing.
You may decide not to do that.
Doubling down on your business means greater risk for an unknown reward. I would assume that at the plateau you’re not working very hard. The business is humming along, it’s just not really going anywhere. Like I said, not growing, but not shrinking. You’re making \$10,000 per month and doing very little work.
That’s great, congrats! Why mess with that? You have an ATM machine spitting out \$330 every day into your pockets. Don’t risk losing it. Leave it be. If you want more money, start another business and stack the plateaus.
If you followed this advice and started your second business one year after your first one and it had the same growth parameters of \$1,000/mo of new revenue and 10% churn, your combined MRR chart will look like this:
Whether that base plateau is your own business or the salary from your day job, the stacking plateaus concept still applies. That’s the business rationale for parallel entrepreneurship.
From Good to Great
If you can get your business up to \$10,000 in monthly recurring revenue (MRR), then that’s really good. Most entrepreneurs never get there.
It’s good but not great.
Jonathan Siegel gave me advice that I’ll never forget. I use this bit of wisdom to fire up my drive. He says, “Any \$10,000 per month business can be a \$100,000 per month business.” These are crumbs, he says, compared to what the larger companies are earning. The hard growth steps, he argues, happen beyond that first \$100,000 per month. Less than that is just discipline and some creativity.
He also argues that if your monthly churn is 3% and your net monthly growth is 4% then you will have a phenomenal business. This Rule of 34 (I’ll name this rule on his behalf) is what we should all strive for. You may only get there once in your entrepreneurial career, so to increase the likelihood of doing this, you have multiple businesses running at once.
Finally, a great business has what’s known as “net negative churn.” This is the holy grail of SaaS businesses, when revenue growth from your retained customer base consistently offsets the revenue lost from cancellations.
To make this point clearer, let’s look at this table.
Let’s say you’re adding \$1,000 of new customers every month. You’re also getting another \$1,000 from upgrades and \$500 reactivations (customers who canceled and then came back). That’s bringing \$2,000 of new monthly revenue into your business.
On the flipside, let’s say you’re losing \$500 from cancellations and downgrades each month. This means on net you’re adding \$1,500 of revenue to your business each month.
Net negative churn is when, setting new customer revenue aside, you’re still adding revenue every month. In this case, you would be making \$1,500 from upgrades and reactivations and losing \$1,000 from cancellations and downgrades. You’re adding \$500 each month from existing customers.
If you’re able to grow a business before you’ve added a single new customer then you’re in great shape. You can stop reading now, shut your other businesses down, and focus on that one.
I haven’t experienced this yet myself, but I’m working on it. It’s why I still have multiple businesses running today.
Exploiting Synergies
Nobody can run a pizza parlor, a nail salon, and a grocery store at the same time. Even the most ambitious local businessperson couldn’t do that.
But can you open more than one restaurant? Sure, it happens all the time. I think of Tyler Florence and his restaurants El Paseo in Mill Valley and Wayfare Tavern in San Francisco. Same chef, two different restaurants within a few miles of each other.
Can you open multiple cafes? Absolutely. Look no further than the dominance of Philz Coffee, which began in San Francisco’s Mission District and spread throughout the city and then to every corner of the San Francisco Bay Area. (By the way, here’s a fun fact: Phil Jaber spent seven years perfecting his first blend, Tesora, which means “treasure” in Italian.)
I was delighted when a Philz popped up within walking distance of my house in the suburbs 20 miles outside of the city. It’s a perfect example of parallel entrepreneurship applied to brick and mortar businesses.
So what’s the difference between running a chain of cafes and running a slough of disparate shops?
It’s this word: synergy.
Synergy is one of those cliche business terms that gets mocked because it shows up on corporate HR posters and is said around the table in boardrooms. I think it gets an unfair rap. Synergy is a critical concept to embrace if you’re going to be a successful parallel entrepreneur.
As Andrej Danko, VP of product at an artificial intelligence studio that builds and runs multiple companies at once told me, “Doing completely mutually exclusive businesses is very hard. There are no economies of scale. You can’t leverage IP or operational skills across businesses.”
CASE STUDY: Philz Coffee
When you have a busy cafe, some name recognition, and a cult following like the founder of Philz Coffee did, opening the second cafe is a lot easier than opening the first one. Let’s take a high-level look at what’s required to open a new Philz cafe:
Financial needs
• Point of sale terminal
• Cash transfers and security
• Accountant and bookkeeping
Product needs
• Coffee supply and storage
• Coffee brewing devices
• Milk, sugar, honey, and other condiments
• Baked goods supply
Personnel needs
• Management
• Staff
• Hiring and training resources
Marketing needs
• Grand opening
• Ongoing local outreach
Facility
• Renovation
• Lease
Looking at the above list, there are both direct and indirect synergies with the existing cafes. The direct synergies are financial. Phil can use the same point of sale and accounting team. If the second cafe is in the same city then he can also use the same bank for cash deposits.
Product needs are the same. Since Phliz doesn’t bake its own muffins, he’ll need a new supplier unless they’ll distribute out of the city. Same with the coffee roasting. Philz wants only the best, freshest coffee beans (they grind their proprietary blends on the spot) so some supply chain logistics may also be required for coffee beans if the second cafe is too far away.
Indirect synergies are personnel, marketing, and facility needs. Although they won’t be exactly the same (they’ll need a new location, obviously, and new people) the playbook is the same. If it’s not written down then it can be transferred by Phil or one of his first employees at the Mission District cafe.
Let’s imagine, for a second, that Phil decided instead to open a pizza parlor. What synergies would he have then?
Very few.
It would be incredibly difficult if not impossible to launch and run a pizza parlor while simultaneously running a cafe. That kind of parallel entrepreneurship is destined to fail.
When you have a profitable and growing SaaS business, it’s like having one cafe. The nice thing about cafes is they can get more revenue simply by replicating themselves in another location. But you can’t do that on the web. You can’t clone a SaaS business in another location (by giving it a new domain name) and expect to double your revenue. That’s just not how the internet works.
The internet equivalent to opening that second cafe is to start another SaaS business that is separate from the first profitable one but still benefits from synergies.
CASE STUDY: Sheel Mohnot
Sheel Mohnot is another parallel entrepreneur par excellence. After selling his online payments business to Groupon, he started Thistle, a food company that delivers sustainable plant-based meals to homes in major cities throughout California. He also runs a podcast, an auction platform, and a financial technology fund within 500 Startups, a prestigious startup incubator with offices around the world.
He does this all in parallel because he’s found ways to exploit synergies across his projects, delegate his way out of daily management, and turn his cost centers into profit centers.
Let’s dive into Thistle to really see what I mean.
Thistle competes in a very difficult market. Blue Apron, the market leader, went public in June 2017 and its stock price has had a precipitous 70% decline since the public offering. Another major competitor, Plated, sold to Albertsons for \$200 million. Other meal delivery services including Sprig, which raised \$59 million and was valued at over \$150 million, had to shut down.
So what did Sheel do differently? How has Thistle thrived while his well-heeled competitors failed or exited? He successfully approached the problem like a parallel entrepreneur.
First of all, he only raised \$1 million for Thistle. He forced his business to run lean, operating profitably from the beginning. Even if you’re small, you won’t be forced to shut down while you’re minting money.
This profitability constraint in turn forced Sheel to be creative. Meal delivery is a complex business, and arguably the hardest part is packaging and delivering meals on time. This cost is often higher than the cost of the food itself. To keep costs down, Sheel found a commercial kitchen that someone else was paying \$20,000 per month to use. He negotiated a deal to sublease the kitchen from 9pm to 5am for just \$5,000 per month.
Startups that raise gobs of money usually don’t make smart decisions like this. Thistle now serves tens of thousands of customers each week and is profitable with 220 employees.
For Sheel personally, he is a co-founder of Thistle but is not the CEO. That gives him the flexibility to run his auction business, a fund in 500 Startups, and other personal investments that generate meaningful monthly revenue streams. | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/01%3A_Theory/1.04%3A_Chapter_3_Business_Rationale.txt |
Staying Out of Trouble
THERE ARE FOUR BASIC rules to follow when you’re leading a double (or triple or quadruple) life as an entrepreneur. I’ll describe them here.
Rule #1: Unless you own 100% of all of your businesses, you need to maintain a firewall between them.
Your ambitions and assets can be shattered in one swift blow if you don’t follow this rule. Never, ever, ever mix your side projects with your day job. That means don’t use the same laptop, code snippets, or even the same printing paper. If you think I’m being overkill on this point, think again. I’ll illustrate this point using two very different examples from my own career.
Common example: You work for someone else and have a business on the side
Even though I am a co-founder of Scripted, it stopped being “my” company almost as soon as we launched it. That ownership dynamic shifted when we took in venture capital, hired a larger team, moved into an office, and started really cranking on our growth targets.
Also, I was not the CEO of Scripted until the year before we sold it. So even though I was a co-founder, my day-to-day work life was pretty normal. I reported to the CEO and could have been laid off or fired just like anyone else at the company.
Toofr was running on a nights and weekends schedule on the side, without conflicting with Scripted, except for a daytime phone call or an email here or there. When there was money on the line and I needed to take a call, I’d step out of the office or schedule them on my lunch breaks.
I admit to doing some Toofr support emails in the office, but I did them in the only place it seemed appropriate: on the toilet in the bathroom using my personal iPhone. (For those of you reading this who might have received a Toofr support email from me during this time and are now stuck with that visual, I’m sorry.)
For these phone calls and emails I always used my own iPhone and not the company laptop. Scripted paid a portion of my phone bill because we all used our personal phones for work. Nobody wanted to carry around a separate device just for Scripted, so the company paid roughly half of our phone bills because we figured half the data usage, if not the voice fees, could be work related. Therefore the other half of the bill could be personal, and in this context my Toofr emails and calls were personal. I felt fine with that.
One thing I never did was have a byte of Toofr code on my Scripted laptop. I was paranoid about this. I knew how messy this could get if my relationship with Scripted were to suddenly sour. I couldn’t imagine what would cause it, but I knew if it did and Toofr code was found on company property, I could be forced to hand all of Toofr over to Scripted. All those long nights of hair-pulling programming would be for nothing.
I had a MacBook Air for work and I loved it. My home laptop was an Asus eePc, a tiny Windows laptop that was awful for programming.
MacBooks are Unix-based, giving you roughly the same environment as a website server. That made it easy to have your local environment mimic your production environment, reducing bugs and setup time.
I couldn’t figure out how to make it work on my tiny Windows PC, so my solution was to log into a server and do all my work there. It was annoying but it worked. As tempting as it was to use my Scripted laptop instead, I didn’t do it. You shouldn’t either.
As soon as I had the money, I splurged on a top-of-the-line MacBook Pro with a 15-inch screen. I spent about \$3,000 on it, but after years of hacking on Toofr with a tiny laptop, I deserved it. It’s still my main machine. I’m writing this book with it today.
It’s been about a year since I left Scripted, and I’ve been very public about Toofr’s success and how much of my time working on it overlapped with Scripted. I’ve had no problems because I followed my own rules.
Alternate example: You own all your businesses 100%
If you’re the sole owner of every business that you’re working on and see it staying that way for the foreseeable future, then you have nothing to worry about. Mix and match, share code, paperclips, everything. It’s that synergy word again. This is the key to being a successful parallel entrepreneur, actually. To run multiple businesses at once you need to share resources. To share resources, you need to own the businesses fully.
This is what I’m doing now with each of my online businesses. Toofr, Inlistio, eNPS, and Thinbox share a lot of the same code. Everything from front-end templates to back-end subscription libraries are shared and tweaked between them. Why should I write another subscription feature when the one from my other business will work perfectly well? Why design a brand new pricing page when I’ve already optimized one for my other business?
Same goes with software. I use Sketch to manipulate text and images for banners and remarketing ads. I don’t use a separate license for each business I run today.
This is the goal. This is where you want to be. Parallel entrepreneurship gets a lot easier as soon as you’re legally able to share resources between the companies you’re working on.
As Buddy Arnheim, a partner at the prestigious law firm Perkins Coie reminded me, the caveat is you may ultimately decrease the value of one or both of your companies by obfuscating which company owns which intellectual property (IP). It can be confusing to future investors and acquirers, which will complicate your liquidity prospects.
So before you irrevocably tie your businesses together by sharing critical IP or even trivial code snippets, think it through. Can you easily explain the relationship between your two businesses to someone who wants to put money into just one of them? Can you surgically remove the IP from one if you wanted to sell the other?
The point is to be very clear about what you’re doing. Whether or not you fully own both businesses, you need to have clear documentation of the flow of IP.
In fact, even if you’re the co-founder and CEO of your day job, as I was at Scripted even while I had Toofr running on the side, you have to be aware of the “corporate opportunity doctrine” or COD.
Stimmel, Stimmel, and Smith, a law office in San Francisco, writes that COD means that a fiduciary (which you would be as an employee or CEO) “can not take for him or herself a business opportunity that should, instead, be reported and given to the company.”
In other words, when you’re running your side business, you can’t take business opportunities away from your day job and funnel them to yourself. It would be like a support engineer offering up a consulting engagement outside of the office to a customer needing help. That kind of business belongs to the employer.
Finally: Do not mix funds
Importantly, even though Scripted actually used Toofr quite a bit, Scripted never paid for Toofr. I gave free accounts to Scripted employees who wanted to use Toofr and did a fair amount of prospecting for Scripted using Toofr myself.
There were real costs for this activity but I never charged for it. Not a single penny. I thought this was really important so whenever I broke up with Scripted there would be no awkward money trail to follow.
And this should be obvious, but if you have access to a charge account or credit card for your day job, never use it for your side business. Not even for a cup of coffee. It’s not worth it. Little mistakes like that can change your day job’s perspective from “Oh, whatever” to “What a jerk, let’s take what’s ours.”
Inevitably there will be some awkwardness with your previous employer when you’re public about your side venture. But if you follow this rule then there will be no reason for them to be upset.
You might even find that they’ll be happy for you. That’s the goal.
CASE STUDY: Google and Uber
This story, documented all over the internet in 2017, is a study in exactly what not to do when you launch a side business.
The case involves a star engineer who worked in Google’s self-driving car division, which later spun out as its own company, Waymo. Google alleges that this engineer downloaded 14,000 documents, nearly 10 gigabytes of data, prior to quitting to start his own autonomous vehicle company.
Google claims the stolen documents described Google’s proprietary lidar system, the technology that self-driving cars use to “see” the world around them. It’s a critical technology and the major companies in this market, including Google and Uber, have each developed their own systems.
That theft alone would be a major issue, but it became a huge problem when Uber acquired the former Google engineer’s company a mere six months after he launched it. Google alleges that the stolen documents went with the acquisition, an allegation that Uber denies.
This is what happens when you launch a new business that is competitive with your old employer. It gets really messy really fast.
In February 2018, Google and Uber reportedly settled out of court. Under the reported terms of the agreement, Waymo will receive at least a .34 percent equity stake in Uber, which would be worth around \$245 million. Meanwhile, Uber will not use any of Google’s intellectual property in its own self-driving efforts. There are a few takeaways for you from this story.
1. Be very careful if you launch a business similar to your day job while you’re employed or even shortly afterwards. The law is generally on the employer’s side if your new business overlaps in any way. Better yet, don’t overlap at all.
2. Never, ever, ever take anything from your employer and use it for your own business. And the worst thing you can do is take intellectual property, as alleged in this Google case. It’s a surefire way to get sued.
Rule #2: Your side projects should be very different than your day job.
While I was working at Scripted, I would not have been able to start a marketplace for content managers, or editors, or built an inbound marketing analysis tool, while claiming any of them as a side project, separate from Scripted.
Any of those projects would be way too similar to my day job. Scripted would not have been happy about that. Tables turned, as a Scripted executive if I caught wind of an engineer spinning up an inbound marketing subscription tool on the side, I’d be bothered by it.
There’s simply no way to maintain the firewall when your day job and your side business are a similar product, a similar market, or have similar customers.
The details here boil down to the legalese, which I’ll get to in the next section, but suffice to say that “intellectual property” is a fairly broad term. When you sign the paperwork at a new job, you invariably sign something called a Proprietary Information and Inventions Agreement.
The “information” part is the tricky part. You may claim that your invention was distinct, that you followed my Rule #1 to the letter, but it will be very difficult to claim a distinction of information. If what you learn at your day job is used to benefit your side project in material ways, then there’s a conflict.
To avoid the conflict, you have a few options:
• Quit your job. And when you do, read very carefully what you can and can’t do with the confidential information from your employer. You may need a cooling off period before you can launch your company. You don’t want to start a new venture only to be immediately sued by your old boss.
• Be an intrapreneur. In other words, start the product within your company. Convince the leadership that your idea is great, and see if you can get the resources to launch it internally. You won’t own the product, but you can ask for compensation if the new product takes off.
• Spin it out. Ask your employer to let you take some IP out of the company with you. There is a legal cost here and the employer will likely want to keep some equity in the spinoff, but this tactic has worked wonderfully for many entrepreneurs.
CASE STUDY: iCIMS
My favorite example of a spinoff is by an entrepreneur named Colin Day. Most people haven’t heard of him.
In 1999 Colin was your typical college graduate working at his first real job. He had landed at a staffing company for IT professionals in New Jersey called Comrise. He woke up, went to work, and did his job. He was great at it and developed a rapport with the owner. But when he got home at the end of the day, he felt something was missing. There was an itch he couldn’t scratch.
He channeled that extra energy into writing business plans. He was looking for an idea that he could quit his job and run with. Then a unique opportunity to land his entrepreneurial dream came from the unlikeliest of places: his boss.
Comrise had recently begun to build a software product for recruiters. Colin was able to convince the CEO to let him quit, take that product with him, and run it as a separate business.
This was nearly twenty years ago when web technology wasn’t nearly as inexpensive and available as it is today. Colin would need a significant amount of funding to pay the engineers to complete the project. Because Colin had already proven himself as a trustworthy employee, the CEO provided him with \$2.5 million in loans over two years to build it.
Now Colin’s business, iCIMS, is one of the fastest-growing private internet companies in the world and makes more than \$100 million revenue every year.
Colin made the leap from employee to parallel entrepreneur the right way. Unlike the engineer in the middle of the Google / Uber lawsuit, Colin did everything above board. He didn’t sneak around and try to copy the recruiting software. He saw the opportunity, asked permission, and was rewarded for it.1
RICH BARTON
Expedia, Zillow, and Glassdoor
Rich Barton appeared on my radar a few years ago when I saw him speak at a Goldman Sachs conference. He was introduced as the founder of Zillow, Glassdoor, and Expedia. That blew my mind. The same guy did all of that? Indeed, he did. And a lot of it was done in parallel.
Rich started at Microsoft in 1991, a couple years after graduating from Stanford with a degree in engineering. By 1994, Rich sparked the idea for Expedia, suggesting to none other than Bill Gates himself that the CD-ROM travel guidebook they were slated to create should instead be an online destination for booking travel. Gates approved the change and allowed Rich to lead the charge, ultimately launching Expedia online in 1996.
Expedia expanded and spun out of Microsoft with a separate IPO in 1999. It sold four years later for \$3.6 billion to InterActiveCorp. Rich took a year off and joined Benchmark, a prestigious venture capital firm, as a partner just as he launched Zillow in February 2005. Two years later, in 2007 while still active with Zillow, Rich co-founded Glassdoor.
According to his LinkedIn profile, today Rich is chairman of each of Zillow Group, Glassdoor, and a new travel website called Trover. He sits on the boards of Netflix and Nextdoor among several others. Although not as well-known as Elon Musk and Jack Dorsey, I put Rich’s ambition and execution right up there with both of them.
Rule #3: Keep it quiet, but if you’re asked about it, don’t lie.
Most of my friends knew I was running Toofr while I was working at Scripted. I even did a quick demo of Toofr in the final meeting with one of the venture capital firms who invested in Scripted. The partner loved it and saw it as an indicator that I was the kind of entrepreneur in whom he’d like to invest: scrappy, clever, and able to move fast and build cool things.
Over the years when Scripted and Toofr overlapped, I didn’t hide Toofr from view or lie about it. But I also didn’t gloat about how much money it was making. For my last two years at Scripted, Toofr generated more revenue than my Scripted salary. Only my wife knew that.
When Scripted employees saw it on my LinkedIn profile, I told them it was a side project, something I worked on to learn how to program, which is 100% true.
It’s hard to grow a side business when you can’t be very public about it. I never posted about Toofr on my Facebook page and rarely mentioned it on LinkedIn. Toofr had a blog, a Twitter account, and a Facebook company page, so I’d push content up there but did so anonymously.
I also had a newsletter with distribution to nearly 20,000 people who registered for Toofr over the years. I was careful to scrub it for Scripted employees and others in my Scripted universe who may have signed up to explore.
I removed them because I didn’t want them to receive a newsletter describing all these new features in the middle of the day and get confused. They wouldn’t know that in my newsletters I’d intentionally make Toofr look bigger and busier than it is. I’d also write the newsletter the night before and then use MailChimp to schedule the delivery for the middle of the following day.
I wanted to boost my appearance to the people on my newsletter list, not to the people who were depending on me to help Scripted succeed. Filtering where I could helped avoid unnecessary confusion.
CASE STUDY: Josh Pigford
I mentioned Josh’s story earlier. He’s the CEO of a hot subscription analytics company who decided to also publicly launch an e-commerce company.
So I asked him if he were concerned about how his Baremetrics customers might perceive his side business. Here’s what he told me.
“I address the negative perception by blocking trolls on Twitter and email,” he said.
He’ll even cancel Baremetrics accounts of customers who are rude to his staff, especially when they blame downtime or other problems that every internet business has on Josh’s attention to his side business.
“Everybody has a different way of running a business and staying sane running a business,” he told me.
For Josh, Cedar & Sail is a creative outlet, basically a hobby, and he believes that just because his hobby has a website and makes money it shouldn’t be treated differently than anyone else’s hobby. Some people play pickup basketball. Some people knit, work on cars, or plant a vegetable garden.
Josh has a lifelong habit of turning his hobbies into businesses and he’s unapologetic about it. He gives his employees the same opportunity.
“I encourage people on my team to have side projects. One of my customer support guys recently competed on Master Chef. He works at a restaurant on some nights. Baremetrics has always had a culture of side projects. I even give feedback on my employees’ side projects during our one-on-ones.”
It’s ingrained into his company’s culture and he doesn’t pretend to be purely altruistic about it. There are tangible benefits.
“It’s a healthy thing to flex new parts of your brain. It comes back and benefits Baremetrics. Doing other projects gives your brain a break or gives a new skill set or perspective that makes Baremetrics better in the long run.”
His advice for other entrepreneurs is pretty simple: “The idea that you can’t have hobbies is absurd. Ignore those people.”
So go ahead. Start a business and keep your day job.
Rule #4: Complete your PIIA and know what it means.
If you included your side projects in the Proprietary Information and Inventions Agreement (PIIA) that you probably signed when you started your day job and followed the three rules above, then you should be fine. It’s still important that you understand what a PIIA is and why you had to sign it.
The easiest way to explain a PIIA is from the perspective of your company’s founder.
Entrepreneurs don’t start their own businesses to lead normal lives. They don’t want to go to the office every day, do some work, come home, sleep, and do it all again. No, they want a pay day. They want to liquidate that equity and chill out for a while, pay off debts, and maybe do it all again. Entrepreneurs are a special breed.
You should know! If you’re reading this book, then you’re probably one of them.
One thing that can prevent your day job employer from selling their business is a rogue employee who claims ownership of the business. Consider how they’d feel receiving an email like this:
“Hey Boss, you know that widget that everyone likes so much which is the whole reason you’re able to sell your business for millions of dollars? I designed that thing. It’s mine. If you sell this business and don’t pay me for it, I’m going to sue you.”
A rogue employee threatening litigation is a very fast way to sink an acquisition deal. The PIIA you signed prevents you from claiming any ownership whatsoever for the work you did while employed for the company. It also goes further than that and says anything you worked on during your employment belongs to the company.
Anything? Really? What about your side projects?
Don’t worry: there’s a section in the PIIA that allows you to explicitly exclude something you worked on outside of your employment.
So long as you didn’t use company property or company information in building your side project, you’re clear. Just describe your project, play by the rules above, and you’re fine.
There’s more to the PIIA than assignment of rights, though. Buddy Arnheim, counsel to many startups and a partner at Perkins Coie, says there are three elements to the PIIA:
1. Intellectual property assignment;
2. Confidentiality agreement; and
3. Non-solicitation
Let’s briefly discuss each of these elements.
Intellectual property (IP) assignment
This is the critical piece and the one that causes the most headaches for both employers and employees when they start side businesses. Whatever you work on, invent, produce, or create while an employee at someone else’s business belongs to them. Full stop, end of story. If you use something you made at work for your side business and your employer challenges you, you’ll probably lose. The law is against you in this case.
Buddy suggests, “If you’re running a side project then you have to do it without any contamination of your employers resources. You shouldn’t do it during working hours. Don’t use your company-issued laptop or phone. Keep them as separate as possible. Don’t even have email correspondence or other data going through your company office network.”
Follow the rules above and you should be fine. The hard thing is to stick to it, don’t cut corners, and do it 100% of the time. The one time you back down and tell yourself, “It’s okay, I’ll send this one email from my work computer or take this one call using the office phone in the conference room,” is the one time that will get you. And then it won’t matter that you followed the rules the other 99% of the time.
Another thing to consider if you own both of your businesses is how the intellectual property and source code rely on each other. Andrej, head of product at the AI studio I mentioned earlier, is running several companies, and one of them is planning to share parts of its source code publicly. The other will not. There are very specific rules about this practice of “open sourcing” a project and he is consciously keeping the IP completely separate even though the studio runs both companies.
Confidentiality agreement
Also known as a non-disclosure agreement (NDA), this part of the PIIA assumes you will learn trade secrets, intellectual property, and knowledge and techniques while employed at your day job. You have to keep these to yourself and not share them with other companies.
So if your side project is a contracting job with another company, you can’t share what you know from your day job. Some employers go so far as to restrict side projects and contracting engagements simply because they recognize how difficult it can be to keep this firewall up. So rather than litigate it, they just outright restrict it.
In summary, not only can you not use IP that you created for your employer outside of work, you also can’t use IP that other people created or that you learned while at work.
Non-solicitation agreement
This agreement typically states that if you leave your job you won’t attempt to hire your former colleagues for a period of twelve months. If you leave and go full-time onto your side project, you won’t be able to explicitly recruit others to join you. They may leave and work with you on their own volition, but it better be very clear that you didn’t influence their departure.
When the tables turn
If any of this sounds harsh, put yourself in your employer’s shoes. Or better yet, actually go out and start that business. If you hire anyone else, part-time or full-time, you will rest easier if you have them sign a PIIA for you. It’s prudent and most contractors or employees won’t object to the terms. If you ever sell your business you’ll be rewarded for having the foresight to get these documents signed.
A quick plug for investing in real estate
The same proportion of parallel entrepreneurs I interviewed who ran SaaS companies also owned income-generating real estate.
Real estate is an evergreen investment. Yes, there are downturns, but it’s a very safe bet that in the long run you will make good money. If you accumulate a lot of cash, property is a great place to park it.
And more importantly, unless you currently work in a real estate company, there will be no conflicts. You can safely run your own real estate holding company at nights and on weekends and keep your day job. If you have to respond to the one-off emergency call from a tenant (or better yet, a management company you pay to run your properties and support your tenants), then take it outside the office.
Income properties are a fine and potentially very lucrative way to earn income outside of your job and not have to worry about PIIAs, CODs, or getting in any sort of trouble with your boss or their lawyers.
JACK DORSEY
Co-founder of Twitter and Square
On October 4, 2015, Jack Dorsey was named Twitter’s permanent CEO. Ten days later, Square was listed on the New York Stock Exchange. He was CEO of that company too.
If that’s not parallel entrepreneurship then I don’t know what is.
Twitter itself was born from a parallel track within Odeo, a once-popular podcasting service. Dorsey approached the founders with his idea for a status updating service that would fit within the constraints of the SMS text messaging system.
In March 2006, after several iterations on their product, Jack Dorsey posted the first-ever tweet: “just setting up my twttr.” He became Twitter’s first CEO and over the next ten years he would be its chairman, interim CEO, and once again its permanent CEO.
Dorsey originally lost his CEO position for leaving work early to do yoga and explore fashion design. So in May 2010, while he was chairman of Twitter, Dorsey launched Square with a co-founder. Square allowed shop owners to accept debit and credit card payments by swiping cards on a device attached to a smartphone.
In July 2015, Dorsey was promoted from chairman to interim CEO of Twitter and he continues to serve both Twitter and Square as CEO.
___________________
1 For more about his story, listen to his interview with Nathan Latka here: http://nathanlatka.com/thetop724/ | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/01%3A_Theory/1.05%3A_Chapter_4_Staying_Out_of_Trouble.txt |
When to Quit
TOOFR IS NOW MY DAY job. It’s my regular, low-risk salary and I’m continuing to build other businesses on the side.
My side businesses include a customer email tracker, an employee satisfaction surveyor, and a customer job change tracker. After several months of these web applications being live, however, only one of them has customers.
I will give these businesses a few more months of marketing support and then I will shut down the ones that aren’t working. If a business is going to work, you should know within the first six months. You should be able to get people to use it regularly, which then gets people talking, which then generates inbound leads.
Here are three conditions for when you should quit your side business and start a different one.
When it drains rather than energizes you
If it’s hard to muster the energy to work on it then you should probably stop, take a breather, and consider starting again on something else.
If your side business doesn’t make you excited then you will have to be extremely lucky for it to work. Side projects that don’t have your full creativity and enthusiasm are doomed to fail. It’s as simple as that.
You, your family, and your friends are all better off if you spend that time watching TV, reading a book, or doing something else that makes you happy. Chances are far greater you’ll find the right business to work on when you’re happy than when you’re stressed.
That’s a universal truth in entrepreneurship.
When the market responds poorly
Most businesses fail. You’ll hear this again and again, from MBAs, entrepreneurs, and the institutions who finance them, because it’s true. Starting a business is hard and it usually doesn’t work out.
This is all the more reason to start multiple businesses. The more you create, the better your odds are of finding success.
It’s not just my advice. Jonathan Siegel says so too. Here’s what he told me about parallel entrepreneurship and failure:
“Persistence helps you meet objectives, but I don’t believe you can just persist through making a great company. Failure can take a long time. Success can happen very quickly. I always want to fail fast. Running more than one thing simultaneously reduces your amount of persistence on any one thing but gives you more tickets to find success.”
It’s worth noting that Jonathan runs a private equity fund with dozens of employees who operate a half dozen businesses. He is a pilot, owner of a chain of Irish pub restaurants, and a husband and father of eight. He has offices in Las Vegas, San Francisco, and Tokyo. We can’t all be like Jonathan Siegel, but we can follow his advice about when to quit.
Let’s say you’re completely jazzed about this project. You tell everyone you know about it. You’ve built landing pages using Instapage or Unbounce and ran Google Ads to drive traffic to them and see how people respond.
And then…crickets. No one’s clicking, signing up, or pressuring you to launch. Or maybe you were able to build the service yourself and even then, with a fully functioning application, the market says no.
It hurts. You don’t want to give up, but even after iterating on taglines, pricing, and finding some clever ways to reach your target audience online, there are still no takers. When that happens you know at least one of these things is true:
• Your product is not differentiated enough; there are too many other players making too much noise for you to be heard.
• Your product isn’t needed. Maybe it’s a vitamin and not medicine, or maybe it’s just a plain bad idea.
• You’re wrong about who the customer is. Maybe your target customer isn’t willing to pay, is hard to find online, or there actually aren’t very many of them.
All of these cases are deadly. It’s best to figure it out soon and take action. Six months is a good timeframe, given that you’re only thinking about this right now on nights and weekends.
When the cost is too high
There are two kinds of costs to consider.
The first is tangible. It’s the hard money cost of paying for servers, marketing, development, and sometimes data. Most of the time all of this is pretty cheap. You can get a year’s worth of all of it for less than you might spend on an overseas vacation.
The other cost is much harder to pin down. It’s the opportunity cost of not doing something else. Let me explain.
When you’re in the throes of launching and running your side business, you don’t have time for much else. You can’t also be an overachiever at work, the first in and last to leave, even impressing your boss by showing up on the weekends. You need to spend those hours on your side business.
Because you will not be able to give it your all, you may lose out on rewards from your day job. Having a side business will keep you off the path to promotions because your nights and weekends will be spent on your side job instead of on projects at your current job. Be honest if your goal is to be promoted in your current position.
I still believe you should scrape together what little time you have left to become a parallel entrepreneur, even if it’s just keeping a journal with notes and ideas. Accumulate those thoughts while you shoot for those promotions and bonuses.
If you prepare, you’ll build your side business faster when the timing is better.
I think back on the time at Scripted when I was on-site during the day and building Toofr at home at night. I knew that I could have spent that time putting more effort into Scripted. But I also was aware that it wouldn’t have mattered. I wasn’t going to not get married, not have children, not have any sort of other life so I could work more.
I knew back then that it was about working smarter, not working longer hours. It was running a marathon, not a sprint. Toofr gave me energy and fresh ideas and actually made me more excited about going to work at Scripted. | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/01%3A_Theory/1.06%3A_Chapter_5_Knowing_When_To_Quit.txt |
When Not to Quit
—or—
How I Made a 5,000% Return
on a Fancy Two-Day Vacation
IN LATE 2013, I WAS facing a bit of a crisis. I had just launched Toofr a few months earlier and it was failing.
Earlier that year, I found a way to automate email guessing using a public but hidden data source provided by a large social network. It worked amazingly well. It was fast, the data was terrific, and best of all, it was free.
But there was a catch. It was free because it wasn’t supposed to be used for guessing emails.
Unfortunately, I wasn’t alone in leveraging this harmless little hack. On November 23, 2013, another programmer wrote about it. About a week later, the source was effectively shut off and Toofr’s primary data stream was gone.
My customers complained about poor data quality and many of them had been referred by my friends in the sales community. These friends caught wind of the problems and kept pinging me, asking what was going on. My delay in fixing the problem was making them look bad.
I was working full-time on Scripted so I stayed up late and worked all of the following weekend trying to get the source to work again. In the meantime, I fell back to my pattern database but it was early and the data wasn’t great yet. As December 2013 progressed, I felt increasingly guilty for continuing to charge my customers the same rates for an inferior product. They knew it too. The cancellations were piling up.
My wife and I planned to visit her family that December and take a two-day vacation at a nice resort south of Los Angeles. It was our third “personal retreat” where we’d go together to a fancy resort but maintain completely independent schedules. We might overlap for meals and drinks, but that’s it. I would be free to work and stay up as late as I wanted, geeking out and tackling these Toofr problems. Likewise she could read, lie by the pool, and do her own projects. The idea was to give each other the creative freedom to do anything!
This retreat timing was perfect because I had a feeling that if I could just focus on the data source problem for 36 hours straight then I’d find a solution. I tried and failed to do it in the four-hour increments I was piecing together, so I used Scripted’s winter shutdown to visit family and resolve my growing Toofr headache.
I remember sitting in the large, beautiful veranda overlooking the ocean and giving myself an ultimatum. If I couldn’t get Toofr back on track and feel proud of my product, then I’d fold it up and dissolve the company. I’d have to do it before the year was up so I could save the additional \$800 California LLC tax filing fee. I had these two days and then another two weeks to make the final decision.
With that singular focus in mind, I got to work.
My first plan of attack, admittedly, was to find a way back into the original data source. I tried all my tricks and made some progress but I couldn’t get it to scale. I tossed out that approach.
The next morning I began to research other companies that provided this data for a fee. I looked at all of them, read their documentation and pricing, and extrapolated what their cost would be and what I might charge my customers. I was worried, again, that my particular use case might be against their terms of use. Ignorance is bliss, I figured, and didn’t look to find out. I figured my volume would be too low to matter anyway.
I found a couple of good candidates and signed up for them, put down my credit card, and deployed my code on my last night of the retreat. I slept nervously that night, wondering if Toofr would still be functioning the next morning.
For the most part, it worked. Toofr was stable and my customers were happy again. I felt better about continuing to charge them. Toofr had new life. The end of December came and went and I decided not to shut it down.
Over the following months, I continued to fret about Toofr being blocked by either or both of the data vendors. I was paying for the data, and everything was above board, but if they looked at the way I was using it and disapproved, I might lose access. It didn’t keep me up at night or distract from Scripted, but the concern was always there.
Toofr continued to grow in 2013 and broke \$50,000 in 2014. The year 2015 was huge as Toofr nearly tripled in revenue. I credit that growth to a lot of power users speaking up and boosting word of mouth referrals. It slowed down the following year, 2016, but still grew a respectable 35 percent.
I was spending several thousand dollars each month on data throughout 2015 and 2016, and as I’d feared, my account eventually did get flagged. My vendors asked to speak to me and I scheduled a call and confessed.
Instead of shutting me down, though, they increased my fees and made me sign annual licenses. Relieved to not face yet another data crisis, I obliged. It’s been nice and steady and stable ever since.
To sum it up, in its first year Toofr made less than \$3,000. When I spent that weekend at the St. Regis working to fix it, that’s all I knew. Toofr made some money, and it might make a lot more, but it also might make nothing. Going into that weekend, Toofr really wasn’t working. I had unhappy customers and a lot of unwanted stress.
If I shut it down that month, I’d save \$800 in tax filing fees the following year. That’s a lot of money, so it was tempting to just kill it.
As it turned out, killing it would have been a very, very costly mistake. Toofr’s lifetime revenue now is over \$550,000. Those two nights at the St. Regis, plus meals and drinks, were about \$1,100. That’s a 5,000% return on investment!
I’ve been taking personal retreats each December ever since and it goes to show that yes, sometimes your side project is a pain in the you-know-what. It’s bound to happen, but you can still deal with it without impacting your day job. | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/01%3A_Theory/1.07%3A_Chapter_6_When_Not_to_Quit.txt |
“Man, I don’t even know how to spell ‘entrepreneur’.” —a friend of mine, Harvard Business School graduate, and self-described “wantrepreneur.”
"The only thing more overrated than natural childbirth is the joy of owning your own business.” —a quote on the wall at the Creekside Cafe in Sonoma, CA
02: Tactics
THERE’S NO SINGLE WAY TO begin building your company. One day, it just starts.
It might have been a conversation over beers, an article you read that sparked an idea, or a lingering notion in the back of your mind that finally manifests itself as a napkin sketch on an airplane.
Whatever that starting point is, at some point, you just start.
The tactics I’ve compiled and am sharing here are the culmination of a decade of starting things. I didn’t form my first company until after college, but I’ve been starting things up since high school. After dozens of conversations with friends trying to “get into startups,” and dozens more with successful entrepreneurs to research this book, I have compiled a very tactical how-to guide for the modern entrepreneur.
The underpinning thesis is that if you’re serious about succeeding and changing your life, then you can and should have at least two irons in the fire. You can and should have two ways to make a living and do what you love.
These tactics show you how to do it with an online subscription-based software business.
2.02: Chapter 7 Reminder- You Only Need 100 Customers
Reminder: You Only Need 100 Customers
YOU DON’T NEED TO TAKE a company or two public in order to be a successful parallel entrepreneur. You only need 100 customers paying you an average of \$100 per month.
That’s it!
And by the way, those 100 customers could be all for the same business, or they could be spread across two or three businesses. Get there by any means necessary and you’ll have reached the promised land.
This is the beauty of software-as-a-service (SaaS) businesses. Jonathan Siegel, the parallel entrepreneur and founder of Xenon Ventures I introduced earlier, loves SaaS business.
“I am bullish on SaaS because of the high customer value and low friction for building and maintaining the customer relationship,” he told me.
Jonathan believes there’s low friction because there is human factor error. Billing someone’s credit card again and again is relatively new. Before this you needed a sales person to close and manage a high value relationship. Now you can do that with a credit card, which doesn’t feel like money to the customer.
This recurring credit card billing phenomenon leads to some great business opportunities.
A hundred customers paying \$100 per month adds up to \$120,000 per year of revenue. Since we’re building software, you’ll have about 85% gross margins, so your gross profit could be at least \$100,000.
Your operating expenses are business-related assets and advertising activities, some of which will neatly cross over into your personal life (tax write-off for your home office, for example). Let’s say those expenses cost another \$30,000 per year, so your “in-the-bank” net profit is \$70,000.
That’s the big picture. That’s what you’re shooting for.
It’s a business that makes enough income for you to pay rent, even if you live in San Francisco or New York. If your home base is anywhere else, then you’re living like self-made royalty.
You may still need dual income to save for a house and take nice vacations, but what you’ve done with your \$120,000 business is bought yourself time and flexibility. You might even keep your day job. Or you’ll start building a second \$120,000 business because your first one pretty much runs itself.
This is when you feel rich, free, independent, and on top of the world. Even if you don’t have a million dollars in the bank, you’ll feel like you do, and your lifestyle won’t be that much different than the millionaire class. Except you’ll probably work a lot less, spend more time with your family, and sleep better.
That’s what it means to be a parallel entrepreneur. You don’t wait until your plate is empty before you start another business. You just spin another one up and see if it grows as nicely as your first one.
It’s “and”—not “or”—when you’re clearing \$10,000 month with a SaaS business that runs itself. You can pretty much do anything you want.
Here are a few points about how to make this work. We’ll dive into these in more detail throughout this part of the book:
• Sell to businesses. Businesses don’t mind spending \$100 per month on a service that delivers value. It’s likely you’ll fly right under the radar during those inevitable months when they barely log into your product. Businesses these days are conditioned to accept monthly software fees. Take advantage of it!
• Pick a problem that’s never really solved. The beautiful thing about sales leads is you never stop needing them. That’s why Toofr is a great little business. When it works (it finds good emails and generates good leads) it makes the users (sales reps and recruiters) want more. So the monthly nature of the billing actually makes sense!
• Automate as much as you can. If you’re going to actually enjoy running a small business yourself or keep your team lean enough so you’re able to keep a ratio of \$100K in profit per employee, then you need to automate. A lot. Often that means signing up for other people’s software products. I love supporting other parallel entrepreneurs.
• Focus on one problem per business. If you try to do too much at one time, you’ll burn cash without increasing your company’s value. Your investors will lose steam and you won’t have the traction you need to be competitive. Instead, focus on doing one thing that adds value. Diane Baxter, a CFO at Kranz & Associates sums it up nicely, “If you want to do parallel entrepreneurship, then have multiple singularly-focused business with different boards and different investors.”
It will take some time to get there on a bootstrapped shoestring budget, but you’ll get those 100 customers eventually. Just stick to the game plan and stay tuned in to your market. | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/02%3A_Tactics/2.01%3A_Prelude_to_Tactics.txt |
Business Structure
You don’t need a partner
DON’T START WITH THE ASSUMPTION that you need a partner. That’s a mistake that I see far too often. Give yourself more credit than that.
You’re an entrepreneur, right? Figure it out yourself!
I interviewed fifteen successful parallel entrepreneurs for this book and focused a lot on their skill sets. There are at least a dozen common tasks that employees at software companies have to do, everything from coding to running marketing campaigns and analyzing finances. You might be surprised that only half of the entrepreneurs I spoke to could write their own software.
If you want to put yourself among the ranks of parallel entrepreneurs living the high life with a skill set that you can deploy anywhere, then you should do as much as possible yourself. Not everyone is going to be an engineer. No problem! You can learn to do everything else and delegate the rest.
Max Altschuler is great at outsourcing. “In most cases, I find it best to leverage my expertise, experience, network, and money to work for me, instead of having to do too much heavy lifting. My time is worth more than it would cost someone more proficient to do it for me.”
Max is the sole founder of Sales Hacker and outsourced all his technical development. This is not unusual. Jonathan Siegel told me of the many managers he’s hired and worked with, he sees no correlation between success and how technical the manager is. This is from a guy with three degrees in computer science!
The most important benefit of not having a partner is the lower bar to profitability and freedom.
I started this section telling you that you only need 100 customers to be successful. Well, that’s only true if you do this yourself. If you have a partner then you need 200 customers. If you have three partners, then you need 300 customers. You see how this math works?
If it takes two years to get 100 customers, then it might take another year to get a second 100 customers. You’ve delayed your freedom by a year. And for what? Nine times out of ten it’s completely unnecessary.
A far better approach is to get those 100 customers on your own. Then you’re free.
And now that you’re free, you can choose to either continue as a solopreneur or bring on a partner. You can start that partner part-time or use some of your savings to go in the red so long as you’re certain that future growth will put you back in the black. Or you can take out a small business loan.
The best news is this: you can still own 100% of your business after you bring on this partner. In fact, this partner is really just your first employee, but you can bestow upon them a “partner” status and grant them equity if it’s warranted.
Or not. You’re the boss. You have the keys. It’s totally up to you.
The standard blueprint for solopreneur success is to be a good product manager and an excellent marketer. Tactically, you should focus on the marketing. No one is in a better position to compel the market to try and buy a new product than the founder.
You can outsource software development. You can even outsource product management so long as you have a clear vision of the final product, sketches or mockups, and a very specific list of features for your MVP.
You should not outsource your marketing. Certainly not all of it. You can hire talented freelancers on websites like Upwork to help with design, paid advertising, and content creation, but whether you like it or not, as the sole founder of the company, you are the chief marketing officer.
If you don’t like it, or if the hat simply doesn’t fit, then you should stop your entrepreneurial journey right here or find a business partner who loves marketing with the same fervor that you love building or managing product.
Let’s look more closely at that option.
If you do have a partner, then product and marketing should be evenly split
Initially, your business structure and your team structure should look like this.
Co-founder A: Runs marketing (and usually is the CEO)
Co-founder B: Builds product (and usually is the CTO)
To make the distinction clearer, here are the two critical pathways to launching a product: marketing and product development.
The allure of having a partner is strong. You may decide, as I have, to partner with people who have a unique ability to succeed at marketing activities. This is why I chose to have a partner for Inlistio and I’ve recently begun another business with a different partner.
In both cases, my partners help on the marketing side so I can focus on product. With many parallel businesses running, I can’t do it all anymore. Having business partners helps me scale.
I’m good enough at building products to produce a “minimum viable product” (MVP) for any idea. As a result, I don’t need engineering help. That part is easy and enjoyable for me. The hard part, and what I don’t like as much, is launching and getting the first customers to use my product. I get what might be called “marketing block” and clam up, look away, and go back into the code.
A good partner for me is someone who loves to promote products and has direct access to a network of potential customers.
Here’s a truth that most entrepreneurs learn the hard way, myself included: Good products don’t sell themselves.
It’s true. You can spend all of your time or somebody else’s time refining every last pixel, squashing every bug, and releasing every possible feature for your ideal customer. Without marketing, though, your project is toast. It doesn’t matter how good or how beautiful it is.
It took me ten years to say this but here it is: marketing is everything.
So I don’t partner for the sake of partnering. I’m very selective about whom I work with now, especially if the partnership involves a separate entity that we share ownership of.
Under no conditions should you have a third co-founder. If you go that route then you are adding 50% more friction to your decision-making process, extending launch times, and ultimately delaying your ability to support yourself by at least a year.
The decisions you make about business structure and who you start your business with are fundamentally critical decisions. You should not take any of them lightly. If it blows up in your face, a bad move here can and will doom your business. Business partners don’t go away easily. When they do, it leaves a permanent scar.
Michael Lovitch, co-founder of the prestigious Babybathwater Institute and a supplements e-commerce company, says, “You always need to build better teams.” I completely agree, and in that quest for perfection you may need to let go of employees.
It’s a lot more difficult to let go of business partners. You can avoid that trap by hiring your top talent instead of partnering with them.
Only have a partner if it’s absolutely necessary and you’re completely sure that there’s no other way to do it.
Structure your business as a LLC
Toofr is a LLC (limited liability corporation). Scripted was a C-corporation. I’ve done it both ways, and I can tell you something with great certainty: LLCs are much better.
C-corporations allow you to create a large operation, grant options to future employees, issue stock to investors, build a board of directors, and take your company public. This is overkill. You don’t need it when you first start your company, but everybody wants to form C-corporations. Don’t follow the hype!
You absolutely should create a separate business entity, though. It’s cleaner for tax purposes, demonstrates legitimacy to your customers, and ultimately protects you from lawsuits that might impact you personally.
Also if you decide to sell your business it’s a clean break from you personally. Your business interests are all tied together under the business structure. The legal documents are easy to understand and the transaction fees will be minimized.
Here’s a breakdown of the differences between each type of business structure.
I prefer LLCs because they give all of the same legal benefits as a C- or S-corporation without the reporting requirements.
When it comes to taxes, your single-member LLC is filed along with your personal income taxes. It’s called a pass-through entity because the profit or loss from your LLC is presented on the IRS Schedule K form with your personal taxes.
You don’t need to file anything separately for your business. This is a huge benefit for solopreneurs. Any tax accountant can do this for you for cheap or, if you want, you can do it yourself using TurboTax.
It’s all documented and been done literally a million times by thousands of entrepreneurs just like you. When I file my Toofr LLC taxes, I just send my tax accountant my annual income statement. She’ll ask me a few clarifying questions about it and that’s it. She only needs one piece of information from me. I pay about \$300 per year to prepare and file my personal and business taxes.
All of my other businesses fall under Toofr LLC. The income and expenses for Inlistio, eNPS, Thinbox, and everything else go under Toofr LLC and are filed together. I don’t have a separate LLC for each internet business because it doesn’t matter. There’s no benefit to doing that.
I’ll explain in the next section how I account for them separately, but for legal and tax purposes, it’s actually just a single business. I can only think of one very good reason to break them into separate entities: an acquisition. Until then, they’re all under a single legal umbrella.
Here’s a quick breakdown of the costs to form and operate a LLC in California. Exact costs will vary from state-to-state but they’ll all be roughly the same.
Formation
• \$20 filing fee. It’s a single form you can fill out yourself or use any number of online services.
• \$800 initial minimum tax. Send a check and simple paperwork to the Secretary of State.
Operation
• \$800/year minimum tax due to the State Franchise Board.
• \$100/year in additional accounting overhead and/or TurboTax fees.
Eventually these costs won’t matter. They’ll be a drop in the bucket. But when you’re starting out, dropping a minimum of \$1,000 per year just on legal and taxes feels excessive. Funnel that frustration into marketing and developing your business. It will sting less the second year, and by the third year you won’t even think about it.
You should create the LLC no earlier than when you start spending money to market and build your business and no later than when your customers start paying you. You can do everything as a sole proprietor without a federal employee ID number (EIN) but for protection and organization, I recommend forming an LLC.
Another important characteristic of the LLC is it doesn’t have shareholders. The owners of a LLC are called “members” and each member has a specific percentage ownership of the LLC. If you’re a single founder, you can file in your state as single-member LLC which of course implies that you’re the owner and have 100% of the membership.
If despite all my warnings and explanations above you decide you need to have a partner, then you and your partner will have to decide how to split up the membership.
It’s easy to split it right down the middle with each partner getting 50% of the LLC. Be wary of that arrangement.
If anything should go astray, you will not have control of your business. If it’s your idea, you got started first, and you’re putting in more of your own time or money to launch the business, then you should get at least 51 percent. Your partner should be okay with that.
It may feel adversarial at first, but if it’s the true, honest depiction of the reality of how your business started, then a good partner will understand. I’m not a small business attorney and won’t go into what that 51% gets you in the case of a conflict, but it will make it far easier to resolve disputes when you have the majority stake. It’s worth the awkwardness upfront to have that assurance.
The other implication is you won’t be able to give your future employees stock or options. I’ve decided that I’m okay with this. Employees shouldn’t count on stock in a small business to be of any value, and you shouldn’t feel pressured to offer employees liquidity. Your goal here is set yourself up for financial freedom. Instead of giving them stock, give employees a great place to work, chances to grow and learn, and a nice paycheck.
But we’re getting ahead of ourselves. By the time you can afford to hire full-time staff, you’ll already have a successful business on your hands. You can do whatever you want, including converting your LLC into a C-corporation and taking your company public.
Cross that bridge when you get there. Two-thirds of the parallel entrepreneurs I interviewed agree: Start your business as a limited liability corporation.
Open a separate business checking account as soon as you start spending money
Another reason to form your legal business entity is you’ll need it to open a business checking account at your local bank.
Until then, since you may incur costs before you officially form your business, I recommend opening a second personal checking account. You or your accountant will be glad you did. It’ll keep your financial data clean and easy to follow. This will pay off down the road, even if you decide not to form your legal entity for a year or more.
I can’t overstate how important it is to keep clean books. Simple hygiene like this pays dividends later on. When you lose track of your finances you lose track of your business. You can’t operate as a solopreneur if you don’t know where your cash is going, how much your marketing and development costs each month, and how deep of a hole you’re digging before paying customers start to bail you out.
A dedicated checking account, whether personal or business, is a must-have when you start your business. By the time you’re earning income, you can make a new business checking account, transfer the balance to it, and close your second checking account. Your accounting software will tie the accounting histories together.
The main difference between personal and business checking is your business account will have your business name, which looks more professional for accepting checks and wires, and typically will include features that allow you to give access to employees and accountants. So while it’s preferred to have a business account, you can get by with a personal one. You just need to keep your business income and expenses separate from your personal life.
When you start running multiple businesses in parallel, I’ve found that you can funnel the income and expenses into the same business checking account so long as it’s easy to separate them in your accounting software. I’ll dive into this tactic more in the next section, but suffice to say for now, you can run multiple businesses on a single checking account. Create a new checking account for your second or third businesses only when the bookkeeping process requires it.
Summary
Simplicity pays. My recommendations here are the simplest way to structure your business. A single founder (you) doing both marketing and product activities provides the lowest hurdle to financial freedom. It also allows you to create the simplest form of a limited liability corporation, the single-member LLC.
Start with the assumption that this is the best route. Challenge yourself every time you think you need a partner. If you absolutely need a partner now and can’t wait a year or even six months when it will be much easier to justify having a majority of the LLC membership, then make every effort keep for yourself at least 51 percent.
Finally, there’s no excuse to mix your business and personal funds. Any bank will grant you a second personal checking account. If you haven’t created your LLC by the time you’re starting to spend money on your business, funnel all expenses (and eventually income) through that second personal account. When the income comes, immediately create the LLC and a business checking account and then transfer the balance to it and close the second personal account. You can tie the histories together with your accounting software.
These steps are critical to laying a foundation of clean ownership, expectations, and financial data.
Do not underestimate the importance of being very diligent at this stage of your business! | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/02%3A_Tactics/2.03%3A_Chapter_8_Business_Structure.txt |
Ideation
WE ALL FACE CHALLENGES IN our daily life. A viable business is one that addresses a challenge that a lot of people face. People pay for things that make their lives or their jobs easier. It’s as simple as that.
Remember, businesses will buy faster and pay more for products than consumers will. It’s a lot easier to get 100 customers (threshold for making a living on a B2B company) than 10 million viewers (threshold for making a living on a B2C app or website).
The average revenue per user (ARPU) of a B2B software customer should be at least \$100 per month. Remember the example earlier? 100 customers paying \$100 per month is \$120,000 of revenue and \$102,000 of profit.
What happens if your ARPU drops to \$10 per month? Now you need 1,000 customers, not 100. That’s a ten-fold increase in your marketing needs, which also means more time for you to struggle, second-guess, and perhaps give up.
It gets worse. Netflix hesitated to ask people to pay \$10 per month and took years to do it, so you’ll probably struggle too.
Let’s say your typical B2C customer pays \$5 per month. Now you need 2,000 customers to get \$100,000 per year in profit. That’s a 20-fold increase in costly customer acquisition, and besides that, we don’t want to deal with 2,000 customers. Think of all the support emails you’ll get!
This is assuming you can get people to pay. Most B2C ideas make referral or advertiser revenue. Then the numbers get even more daunting. I hear from my B2C-oriented friends that having one million monthly active viewers gets you an investor meeting. Having 10 million monthly actives gets you a lifestyle business.
That’s too much work for me. Let’s go the easier route and sell to businesses.
Idea Discovery
You need to address a pain point that people face in their jobs. The possibilities are endless! You just have to listen to your colleagues, conversations on Twitter, or sessions at conferences. If you’re struggling to get ideas, then talk to your friends. Here are some questions you can ask:
• What’s the worst part of your workday?
• What do you like least about your job?
• What could you do a lot faster if you just had the right tool?
• What task do you wish you could hand off to someone else?
People are expensive. At a typical small company, salaries are at least 80% of their operating expenses. There’s a reason why your friend can’t just hand off her least favorite tasks to a new hire. Her boss won’t allow it!
But if you could not only take that pain point but also do it better for only \$100 a month, would her boss care? Doubt it. She’ll just hand you the company credit card.
That’s the kind of problem you need to solve and the kind of customer you need to solve it for. Let me elaborate.
There are many kinds of B2B customers.
First, there are users of the product who want to use it because it makes their jobs easier.
Then there are the managers who may not care about the features of your product, so long as it improves their bottom line by reducing costs or making their direct reports more productive.
Finally, there are the business owners who are looking down the field to anticipate market or competitor moves.
The customers you want are the users of the product. They give you good feedback, they are easy to identify and meet (for most people, they are their peers), and they can usually get a simple verbal approval on a \$100 per month spend. Mostly importantly, there are a lot of them. As in millions.
Why not sell to managers and business owners?
Managers and owners are tricky to sell to. They are hard to get a hold of, and they want to talk the language of value, not features. Early on, you probably won’t know the value of what you’re building. You won’t have case studies with managers saying things like, “Acme Business Software has made my employees 10% more productive each month, saving me \$500,000 per year.” That’s what a manager wants to hear, and they’ll also expect to sign an annual contract and get the customer support that comes with it. You don’t want to deal with this. Perhaps later on it’s okay to explore it, but certainly not when you first start.
Don’t get tempted by large contracts with big numbers. Prove out your concept first with a group of lower-paying monthly customers. The big guys will always be there, and if you want to sell up market, you’ll be able to charge more if you wait and polish off the bugs first.
To reiterate, your idea should address a pain point that a large number of people feel at work. Choose a market that you’re familiar with. For example, if you’ve worked in sales, then think about the most annoying part of a sales rep’s job. That’s what I did when I built Toofr, and it paid off.
Your idea should solve a clear pain that you’ve felt personally or people around you feel.
The other critical characteristic of a great B2B business idea is that it should never fully satisfy the customer. Their cup should never be full. They should always need more of your product.
Example: The SEO market has no finish line
A good example of a business category that will never fully satisfy its customers is the search engine optimization (SEO) market. Marketers who work to improve SEO are never done. They will never arrive at work, fire up their screens, and say, “Huzzah! I made it. My SEO is perfect and I can go home early.”
No, the nature of online marketing is the tides are ever-shifting, the challenges ever-increasing, and the whims of Google ever-changing. Even when you’re well positioned in organic search results, you need software to maintain that position, to watch the moves of your competition, and stay one step ahead.
So if you’re a data or software provider in the SEO market and provide an excellent product, then your customers will never leave you because they think your job is done. It’s not like software development where there’s a clearly defined finish line. In SEO, you need a set of software tools to constantly monitor the data and adjust your strategies.
The cup is never full. There’s no finish line. It’s an ongoing need that will never go away.
This is a great business to be in. But before you put this book down and dash off to build your SEO product, know that we’re not alone with this insight. Markets with needs like this are very competitive. The SEO software and data provision market is saturated.
Fortunately there are others. In markets like this the tendency is for demand to expand. You can still carve out your own little niche within the market and get your 100 customers.
I simply suggest that you ask this question about the problem you’re solving: Is there ever a finish line? If not, that’s a very good thing. All else being equal, I’d choose that idea over any others.
Use this Idea Discovery Template to choose which ideas to test
Before going into the testing phase, I suggest you take a deep dive into five ideas. Talk to people, friends, family, colleagues, and ask these questions below. Write down the answers for all five. Pick the one or two ideas that you’re most excited about and then start testing them in the next section.
To help determine which idea to go with, do this short exercise for five unique business ideas:
Text answers
• Describe the idea:
• Describe who will buy it:
Yes/no answers
• Do you personally need this product?
• Can you visualize how the finished product will look and feel?
• Do you already have a logo or name for the business in mind?
• Do you know where to find these customers?
• Is there a finish line?
Here’s a quick note about this technique. I asked you to write down descriptions of your product and customers first so you subliminally start to feel the business form in your head. Then, I toggle to quick tactical and emotional questions. You need to be motivated, and the best way to gauge excitement is how quickly your creative brain kicks in.
If you can visualize the product already, then that’s a very good sign. There’s enough inherent difficulty in building a business no matter what. Some of it should be fun and easy. It should feel rewarding to build because you’re solving a problem for yourself too. If you know where to find your customers and are confident they’ll never stop needing a solution, you’ll find a faster path to success.
Now add up one point for every “yes” answer. The one or two with the highest scores should move on to testing.
Idea Testing
Much has been written about how to efficiently test your idea. Tim Ferriss, Eric Ries, and many others offer great templates and examples. The basic tactic is simple: test your idea using online ads and landing pages before you start building it.
The risk of diving straight into building the application MVP is that you may have defined your MVP incorrectly. It may have the wrong features, the wrong pricing, or the wrong approach to the pain you’re attempting to solve.
You won’t know that your assumptions are off target until you put it in front of a lot of people. The point of idea testing is you don’t need to actually build your tool in order to test demand. You can build a basic page that describes your solution, your pricing, and your features, and then ask people to submit their email addresses for updates.
Granted, there’s a big leap between a prospect giving you their email address and making a credit card purchase. I am not confusing the two but I am suggesting that your success in attracting email addresses is a good and inexpensive indicator of success in attracting paying customers. It’s much better to get that data upfront than to build the wrong thing and lose a lot of valuable time and money.
You might still be wondering why I suggest you do all of this testing if the whole point is to run multiple companies at once. Fair point!
I still stand by this diligence because you want to pick winners. Parallel entrepreneurship is about spinning up the right businesses so you can accumulate 100 customers across multiple businesses faster.
Including a dud in your online business portfolio will only prolong the process. Good idea testing minimizes that risk.
Landing page testing
A landing page is a single page with a single purpose. At this point in the process, the purpose is to capture email addresses from people interested in your future launch.
Your landing page should have the following three components:
• A brief tagline (“Quickly find anybody’s email address!”)
• A call to action (“Get early access! Join our newsletter!”)
• Three or four key benefits (“Fast, easy, affordable”)
All three items, the tagline, call to action (CTA,) and benefit list should be “above the fold.” This old-fashioned newspaper term means no one should have to scroll down to see them.
Below the fold you can begin to experiment with additional information, like in-depth feature descriptions, testimonials, screenshots or screencasts, or your origin story. You can use tools like CrazyEgg to track scroll depth to see if people are seeing this content.
Finally, it’s important to test multiple variations of a landing page. I recommend just two variants to start, and tools like Unbounce and Instapage make it very easy to do this. You will not need to do any programming or page hosting yourself, and they’ll track the success of each variation (you’ll tell Unbounce or Instapage, for example, that “success” is capturing an email address.)
Also, the landing page software you choose will likely include professional design templates that are easily customized so you don’t need to start from a blank page. Choose the design you like the best and then change the colors, icons, and text, and you’re ready to go!
These are the questions that your landing page experiment needs to answer:
• How should I describe the problem my product solves?
• Which benefit do my customers need most?
• Is this an urgent need or an opportunistic need?
• How much are my customers willing to pay for it?
Let’s go through each question individually with some specific tactics to get to the heart of the question.
How should I describe the problem my product solves?
If you answered “yes” to the question on the Idea Discovery Survey about whether or not you need this tool, then start by writing the description to yourself as the customer. What description would entice you to buy? Write it down using as few words as possible.
If you’re not personally in the ideal customer set, then try your hardest to put yourself there. You may need to do some more research to figure it out. Talk to you friends, find competitors on Google, and rephrase the solution in a way that makes sense to you.
For example, maybe you’ve heard that cannabis suppliers are having a really hard time creating labels for their products. You enjoy product marketing and design and want to build an online labeling software for the cannabis industry. You’re not a cannabis seller so you can’t speak to it directly as a potential customer, but it’s not too difficult to imagine what they might want to hear.
Something like, “Quickly create compliant labeling for cannabis products.” That would be the main description of your product. Short, snappy, nothing left for interpretation or extrapolation. You make labels for cannabis products and you sell to cannabis producers. If I’m one of them and feeling this pain, I would sign up for updates.
For testing, I recommend choosing wildly different taglines on your homepage. Emphasize a different benefit or reason to use your product. Call out the benefits rather than features. Rather than say, “Acme Widgets does X,” say, “Acme Widgets gives you X.”
In the above example, the benefit is that it’s fast and compliant. A poor description would read, “Upload your cannabis products and get labels in return.”
Which benefits do my customers need most?
By testing descriptions that emphasize one specific benefit, you can use the email submission conversion rates to tell how important that benefit is to your potential customers.
Another place to test benefits is below the tagline, where you might have text in a smaller font, usually bulleted, that dives further into the scope of your product.
For example:
• Select from five industry-standard templates.
• Expert legal review included.
• Fits products of all sizes.
Once you’ve identified the best description, you can run more experiments by keeping the description the same and completely changing the benefits bullets or altering the order.
Is this an urgent need or an opportunistic need?
A silent killer of your campaign is a lack of urgency among your prospects. This can be very difficult to see in advance and is demoralizing to a solo founder. You can gauge a sense of urgency by testing the language of your CTA.
For one version of the page, make it loud and clear that there’s scarcity. Either say you’re only going to invite the first 20 signups, or that you have 50 early bird coupons to offer, or you’ll turn off the signup form at the end of the month.
Then run another version of the page that has a typical “Join Now” or “Learn More” CTA. See if there’s a significant difference in conversion. If there’s not, your customers may not have a burning need. You’ll likely see longer and more complex sales cycles. The pain may not be as acute as you’d hoped.
This doesn’t mean it’s a bad business to go into. It just means you will need to reach a larger audience and build up more slowly using organic traffic rather than paid traffic. I’ll describe these differences in the Growing chapter.
No difference between the urgent call to action approach and the standard call to action approach also means this business might be a good candidate for parallel entrepreneurship. But since it will take some time to get traction, put it up, nurture it, and slowly build the product, don’t count on it for income any time soon.
If you do get a significant increase in conversion (the urgent call to action converted more people), then you have a hungry customer market and you should move ahead to pricing and building as quickly as possible.
A quick note about testing button colors: just stop.
Don’t bother experimenting with button colors or dramatically different designs. We’re testing the crux of your business idea here and it will not be made or broken by which font and color pallette you use. You can learn this the hard way, on your own, or you can heed my advice. I hope you choose the latter.
How much are my customers willing to pay for it?
This is the easiest experiment to do. It’s cut and dry logistically and it should be the last experiment you run.
Once you’ve arrived at the best description and set of CTAs, you should keep those constant while you play with pricing.
My favorite approach is to come up with your ideal set of prices. Remember, 100 customers paying \$100 each, right? The average customer needs to pay you \$100, so if you have three plans, that \$100 price should be in the middle.
The experiment you should run is whether or not to have a plan under \$100. If you can get good conversion rates by displaying, say, a \$100 per month and a \$250 per month plan, then that’s very good news. You might still have a \$50 per month plan, but save it for an email newsletter promotion to high risk customers. You don’t need to show it to everybody.
Far too often entrepreneurs underprice their products. The more you charge, the less work you ultimately have to do. And the fact is, most online B2B businesses are price inelastic. This means that demand doesn’t change much with pricing. Business owners usually don’t feel a difference between a \$50 per month product and a \$150 per month product. They won’t churn over pricing.
So if your market allows it, price high. Start high and adjust downward because it’s often easier to lower prices than to raise them.
A quick primer on the statistics of landing page testing
You don’t need to be a math whiz to figure out when a landing page variation is statistically significant. The landing page applications you’ll use to run these will do that calculation for you. However, it’s still important for you to understand what’s going on and how to interpret the results.
The best landing page experiments test only one change. Consider a case where you have two landing pages that are completely identical except for the top tagline. When you run the two variations through your landing page software, you can attribute a significant conversion rate difference to the change in description. That’s cut and dry.
But what if you throw another change in there? What if you included a pricing change along with the description change? Now you have two pages each with two variations, so to fully test this, you’d actually need to run four unique landing pages.
It might be easier to visualize it this way:
There are four variations needed to test, but you’re testing only LP #1 and LP #4! The landing page software will run whatever variations you give it. It doesn’t know that you’ve changed multiple things on both pages. So if you get a better result with Landing Page #4, you won’t know if it’s because of Description B, Pricing B, or both. You need to run LP #1, #2, and #3 too.
If you add a third element, then it gets even harder. Instead of four variations, you’ll have nine, and so on.
You might say, so what? I’ll just run the four or nine variations. If you want to pay for that traffic, then sure, but traffic costs money. People aren’t going to just stumble upon your landing page, and clicks from your Twitter or Facebook pages will have bias. As we’ll read in the next section, you’ll need to pay for ads to drive traffic to your landing pages.
The more variations you have, the more traffic you’ll need, the longer it will take, and the more cash you’ll have to pay to get the results.
It’s better to have fewer variants, ideally one change per experiment. So I suggest you run them sequentially.
Create a landing page with your best guess on each of the above sections. You have to put a stick in the sand somewhere, and a landing page with no pricing at all may lead to buyer confusion. So put your best guess down and then change one thing at a time. Start with the description, move on to the benefits and CTA, and then finally to the price.
CASE STUDY: Inlistio
1 month and 23 days. This is equal to 14.5% of a year.
That’s how long it took to go from idea to first revenue in the bank for Inlistio, a company I launched in my quest for a parallel revenue stream alongside Toofr.
It’s an important reminder of how long it can take to get your SaaS company launched and making revenue.
A friend and entrepreneur I admire, Max Altschuler, sent me an email describing his idea on July 16, 2017. He asked me, “Would you pay for a piece of software that tells you when a user or subscriber leaves the company, what company they go to, and what their new email address is?”
I told him I’d had a similar thought for one of my side projects and investigated it enough to discover some non-obvious ways to grab the data. “Wanna collaborate on that?” I asked.
“Yes. Yes I do,” he replied.
A few days later, on July 21, I had a GitHub repository for my code, a Heroku account for hosting, and very basic Ruby on Rails application live and running. (I’ll explain what each of these are later in the Building section.)
Almost exactly a month later, on August 22, I “launched” Inlistio on social media. It had actually been up and live for a couple of weeks, but this was the first time I said it loud and proud. We both posted about it on LinkedIn and Facebook.
I ultimately changed the pricing three times, and then finally on September 7, nearly two weeks after that announcement, I got our first customer. It took us just under two months to go from idea to first revenue and for the next few months it averaged only one new customer every month. It took five months to get the first \$1,000 of monthly recurring revenue.
The lesson here is this: even if you’re quick to launch, getting customers and traction still takes a while. Here’s what I wrote on social media when we launched:
Today I released https://www.inlistio.com to the world with my friend and fellow sales tech entrepreneur, Max Altschuler.
From idea (when Max sent me an email describing the problem) to launch it took just under 5 weeks! Record time considering we’re both occupied with other businesses.
Inlistio alerts sales reps, business owners, and marketing leaders when their contacts switch jobs.
Why does that matter?
• Job changes cause accounts to cancel or downgrade.
• Job changes also open up new business opportunities.
How do you grow a business? Reduce churn and get new customers.
Inlistio helps with both!
I like this post because it clearly states what Inlistio does (tracks job changes) and why it’s valuable (reduces churn and increases customer acquisition).
Unfortunately, I got a lot of likes and registrations but no customers. Not a single one. I included 20 contacts for free, so anyone could kick the tires. I wanted to give some free data so I wouldn’t have to give demos for everyone.
I launched with this pricing:
Bottom tier: \$199/mo for 200 contacts
Middle tier: \$499/mo for 1,000 contacts
Top tier: \$999/mo for 5,000 contacts
Since I had a business partner on this one and we were going to split profits, I wanted to have higher value customers. At the time I launched Inlistio, Toofr was making over \$18,000 a month of profit. I was anxious to get Inlistio up there as quickly as possible.
Unfortunately, customers don’t work that way. They don’t care about your other businesses and how much money they’re making. I waited a few days and lowered the prices:
Bottom tier: \$99/mo for 200 contacts
Middle tier: \$249/mo for 1,000 contacts
Top tier: \$499/mo for 3,000 contacts
I sent an email out to the 40 people who registered free accounts on Inlistio. Again, crickets. Of the 40 or so who signed up for free, only 25% of them actually used the free credits.
That first week was off to a bad start, but I kept going.
At the end of August, about a week after the last price change, I lowered prices again; this time by a lot.
Bottom tier: \$29/mo for 40 contacts
Middle tier: \$59/mo for 100 contacts
Top tier: \$249/mo for 1,000 contacts
The first customer came in, finally, about a week after that last price change. It was a \$29/mo subscription, but I didn’t mind. I was elated. The seal was broken!
It took another two weeks to get the next \$29/mo customer and then I had my first big break, a \$600/mo customer who had a lot of contacts to track. She paid three months upfront—\$1,800—and I texted Max a picture of the receipt. We were both pumped!
But there was a problem. (And by the way, there’s always a problem.) The data providers I was using were expensive. Really expensive. I ended up spending nearly all of the \$1,800 on servicing her account. That’s no way to run a business.
Two months lapsed before we had another customer. In the meantime, while on a Toofr customer call, I had a major insight. I was doing Inlistio all wrong. I didn’t need these expensive data providers. There was a much cheaper way to get the data I needed.
I hacked it together and ran the numbers. The cost was 90% lower so I lowered pricing again, one last time, and quickly got two more customers.
Bottom tier: \$19/mo for 1,000 contacts
Middle tier: \$149/mo for 10,000 contacts
Top tier: \$249/mo for 20,000 contacts
I lowered the bottom tier and raised the middle tier, but reduced the effective price per contact across the board by as much as 90 percent. Since most marketers have large lists, closer to 10,000 contacts, it makes it a lot easier to attract them. I used to need to charge \$1,000 for a list of that size. Now I can do it for a tenth of that amount.
Be warned, though, that lowering prices is not the best growth tactic. It’s been several months since that last pricing change and I’ve changed my approach again, removing the pricing page altogether and doing custom pricing and demos for interested customers. For those same 10,000 contacts I’m now charging \$249/mo with a three-month upfront commitment. I’m attending conferences and getting great feedback.
Each business is different. The only thing that’s the same is the hustle required to figure out how to get it making money.
Ad campaign testing
Now let’s look at the tactics behind driving traffic to your landing pages.
You’ll drive traffic to your landing page experiment with an ad campaign. I recommend using Google or Facebook ads and at least a budget of \$100 to accumulate 50-100 clicks.
If you have the funds, spend \$100 each on Google and Facebook. I’ve seen and heard enough stories from professional digital marketers to know that failure on one platform doesn’t mean failure on another. Facebook and Google have different technologies, audience parameters, and most importantly, buyer intents.
Google AdWords
Google is the preeminent advertiser on the internet. At some point, no matter what you do as an online entrepreneur, you’ll eventually need to dive into AdWords and run a campaign.
AdWords is a behemoth of an application. A deep dive into this technology is beyond the scope of this book but there are dozens of good tutorials and YouTube videos about it online.
Google users are actively looking for answers. Consider that when you choose your ad headlines. They should read like answers to a question that your ideal customer has in mind.
Some examples are:
• How do I lower my business burn rate?
• What’s the best accounting software?
• How do I pay my contractors?
• Where should I buy my next car?
Whatever the idea is that you’re testing, the ad headline should answer that burning question your customer has. It should pop out among the Google results.
The best way to research your ad headlines is to simply do some googling on your own. Ask Google the question your customers might be asking. Become your own ideal customer and dive into Google and see what’s there. You’ll be surprised how quickly the ad headline ideas will come.
It’s a valuable exercise and will not only bring up interesting competitive intelligence in the organic results (the main area below the search bar) but will also give you ideas for headlines in the advertising results (on the right side and immediately below the search bar.)
Facebook Ad Manager
Unlike Google, most users are not on Facebook to get their questions answered. They’re passively consuming content, usually on a break from professional business. Facebook’s ads are on a column to the right side of the user’s newsfeed.
Also unlike Google, and perhaps because of this passive viewership, Facebook allows and encourages you to use images. They’ll provide a library of free stock images to use above your headline.
So your goal with Facebook ads is to grab attention. Studies have shown that images with people in them perform best. Rather than answering a question, as I suggested in the Google section, you should be provocative with your Facebook ad headline. You need to pique the interest of a passive viewer, and a compelling statistic or a bold claim is your best bet at drawing clicks.
There are several reasons why both B2B and B2C marketers love Facebook. First of all, its reach is at least as broad as Google’s. With billions of users, its potential is limitless. And because of the way it is structured and the user data it has access to, Facebook has much deeper audience targeting than Google. You can be very specific about who you want to reach.
When you combine breadth and depth at massive internet scale, you have an advertiser’s dream platform. Like AdWords, Facebook Ad Manager is overwhelming at first, but you’re only a couple of online tutorials away from figuring it out. Dedicate an hour to reading it and clicking through to create your first ad and you’ll begin to understand. It’s complex but you’ll get used to it.
Some general suggestions about setting up your ads
Follow these rules whether you’re advertising on Facebook or Google or both.
Like your landing page descriptions, choose wildly different headlines. You can copy your landing page descriptions if they fit or edit them down as needed. You’ve already done this work so you might as well reuse it.
Again, the headline should be the only difference between the ads; make sure you use the same audience parameters for both ads and the same image on Facebook.
Keep your audience broad. Audience parameters shouldn’t be in this experiment yet. Since we’re doing a B2B business, a good, broad audience is all adults (21+) in the United States. You’ll be tempted to filter down on industries and job titles on Facebook, but resist it. Stay broad while we’re just doing headline tests.
If you use Google, then you’ll need to choose keywords. Facebook doesn’t require this. Keep your keywords as broad and obvious as possible while maintaining a low cost-per-click (CPC). You should be able to get the CPC around \$1. Broader terms cost more because they get more traffic, so be specific without being too verbose. Use verbs. For me, a good just-broad-enough keyword for Toofr is simply, “find emails” and “email finder.”
Organize your ads by putting them into an “Ad Group.” This is what Google and Facebook call a set of ads that share all the same parameters except the ad’s headline and/or image.
Finally, set a daily budget of \$20 so it’ll take five days for you to use all \$100. This way we can wash out any regular flux in internet traffic (e.g. weekends vs weekdays).
With all of that done, we wait and see what happens. If you’re using Unbounce or Instapage, you’ll see a running total of views and conversions. A day or so after you launch the ads, check back in your landing page analytics to make sure it’s working and conversions are tracking.
Funnel analysis
We now have two layers to our funnel. First, we have the ad. The ad links to the landing page. The landing page has a CTA to collect an email address. That’s the conversion event.
The full experiment funnel looks like this:
• Ad headline experiment: Ad 1 + Ad 2
• CTR
• Landing page experiment: Landing 1 + Landing 2
• CVR
• Email submission
Once your budget is spent, you’ll go into the ad manager on Facebook or Google and see a click-through rate (CTR) for each ad. The CTR measures how many impressions (showings) it takes to get one click. If your headlines are distinct then you should have one ad clearly outperforming the other.
A high CTR is 5-10%. Usually it’s around 1-2%. If you can find a headline that’s above 5%, then that’s a really good indicator of interest in the headline. If you used that ad headline in a landing page description then I’d be surprised if that page didn’t perform well too.
Moving down the funnel, once a visitor lands on your page, the software will register a visit and track how many visitors it takes to get one CTA completion. This ratio is your conversion rate (CVR). Since you’re only driving traffic from ads, a high conversion rate is 10-15%. Normally, on a mature page against all traffic, a good CVR is more like 1-5%.
So let’s do the math. Let’s say \$100 bought you 100 clicks (that would imply a \$1 CPC). Your CPC may be higher or lower, but you should try get around 100 clicks even if it means putting another \$20 or \$40 into this experiment.
Those 100 clicks will probably get you 10 email addresses, so your entry cost per acquisition (CPA—aren’t you loving these acronyms?) is \$10. That’s not a bad CPA to start. You can get it down further by optimizing around the benefits and features that generate the most clicks.
To do this, you should be sure to incorporate the winning ad headlines into your landing page copy and focus the rest of the copy on that particular feature or related set of features. Modify your ads in a similar way, again focusing the ad headlines and copy on those same one or two features and benefits.
Each time you do this you’ll spend another \$100 to \$150 and be even more confident about building your product.
The true, final CPA will not be known until you launch and can actually start getting customers. If it takes you 100 email addresses to get one paid customer, then multiply the entry CPA by 10 to get a final CPA of \$1,000.
I just heard you gasp.
One thousand dollars in ad spend just to get one measly customer? Yes indeed! This is yet another reason why you need to solve a real pain for real business users. If you can get the average customer to pay more than \$100 per month, then you’re probably at breakeven or better in the long run on that \$1,000 ad spend.
Three final considerations
Now that you know how to describe your idea and which benefits to focus on, you need to do a little bit more work before diving into building.
I believe that each of these considerations is merely a gut check. If you believe in your idea and are excited to work on it, then you’re 99% of the way there. This last bit of diligence is meant to make sure you’re in it to win it.
Technical complexity
How difficult do you think it will be to build? Talk to some engineers you know. Describe the application, what it does, and the one or two features you absolutely need to have in order to launch. If you’re not very technical, then being aware at this stage will help you push through the inevitable hurdles that you’ll encounter when actually building.
When you do this diligence, still keep in mind the difference between the finished product and the bare-bones “minimum viable product” version, or MVP. Also, caveat the technical complexity with the reminder that ultimately it will be marketing that dictates success or failure. You just need a product that works, so what you’re really testing here is how long it will take to build that MVP.
Competitive landscape
Who’s already doing this? Don’t let yourself believe you’re the only one. There’s always one or two players dominating and a handful of others playing catch-up.
Don’t let your research dissuade you. It’s simply awareness so that when a customer inevitably asks what makes you different you’ll know how to answer.
If you’re not that different in features, then you should be different in price, at least to start. So in addition to looking at a) who they are and b) what exactly they offer, you’ll need to pay attention to c) how much they cost.
I also like to check out their traffic and see how they’re trending. Alexa and Compete are great tools for this. Flat or increasing are signs that the market is healthy. A declining traffic chart could mean an opportunity for you to enter but could also mean that there’s something rotten about the market.
If someone ahead of you is failing, tread cautiously. Try to find out why. I’d much rather enter into a market where my competitors are doing well than one where everyone is struggling.
Market size
Should you focus on a large market or a niche one? Should you choose a problem that everyone has or a problem that a smaller, more specialized customer has?
If you’re looking to raise money from investors then you need to have your sights on a big market with a lot of customers. It will be difficult to get investors excited about entering a niche market.
However, the nice thing about running a small business yourself, without investors, is you can enter a small market and do very well for yourself.
What do I mean by large versus niche? An example might help.
Let’s say you have a sales background and have always been frustrated with customer relationship management (CRM) software. You think it’s too complex, too expensive, just plain too ugly. After reading this book you decide to build a simple, elegant alternative in this category.
The good news is the CRM market is huge! Salesforce is the dominant player and pulls in about \$1 billion per month (yes, per month) in revenue. Other large companies in this market include Oracle and Microsoft. You can count on every business on the planet needing to purchase this software at some point. This is the epitome of a large market.
If you decided to build a general CRM application then you would be competing against these huge incumbent players. On the one hand, there are millions of potential customers. On the other hand, you have dozens of large and small companies competing with you for those accounts. Large markets are going to be very competitive.
On the other hand, maybe you happen to be a dog trainer on the side and have a great network of other dog trainers in your local community and online. Perhaps you’ve heard from them how hard it is to keep track of clients, the names of their dogs, which training packages they bought, and whether they prefer to be contacted by email or text message.
Hearing this, you might decide to build a CRM for dog trainers. Typically, niche products cost a bit more because they’re specialized and there’s less competition. In this case, your CRM features would be optimized for dog trainers and therefore your product would be completely differentiated from both the huge and smaller CRM players. Rather than having to compete online for SEO and expensive ad units, you could advertise in pet magazines and go to dog training conferences. There’s less competition but you have to look harder for customers.
Like nearly everything in business, there’s no right way to go. I merely suggest you be aware of these pros and cons when deciding whether to go after a large or niche market.
In a nutshell, niche markets will absorb higher prices but the buyers are more difficult to find. Large markets will pay less but the customers are easy to identify.
Whether your product is large or niche simply depends on how many people feel this pain today. Markets will shift. What’s niche now may be large in a couple of years, in which case you’ll be lucky to have entered when there was less competition. If the dog training market were to suddenly expand, you’d get to ride that wave as the #1 CRM for dog trainers.
Whichever market your idea fits into best, know the pros and cons above because they’ll directly impact the speed of traction you get after you launch. | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/02%3A_Tactics/2.04%3A_Chapter_9_Ideation.txt |
Branding and Designing
AS A GENERAL RULE, DON’T dwell on branding and designing. The marketing side of things will ultimately determine your success at attracting customers. That’s the first hurdle.
The worst reason for losing those hard-earned acquisitions, though, is building a product that is difficult to use or simply doesn’t work. And if you’re outsourcing development, you can quickly spiral down a path of never-ending feature creep and redesigns.
It’s best if you can think through the basic set of features, pages, and screens so that you or your development resource knows exactly what needs to be built, where the elements will go, and what the user should experience upon signing up for your product.
That’s what I mean by branding and design. I’m far less concerned about how beautiful your product is than I am about how well it functions. Part of good function is a clear brand and navigation, as well as an obvious purpose for each and every page of your application.
You should consider the cases for both guest users and logged in users. Have a logical process for onboarding, and a clear set of pages for users to manage as much of their accounts as possible without needing to contact you.
These are the steps you’ll need to take in order to quickly spin one or two of your ideas into a lightweight sketch of your minimum viable product.
Start by mocking up your application with outlines of UI elements
A mockup is a colorless sketch of your application. It’s a terrific way to share the vision you had in the Idea Discovery step with your friends, friendly potential customers, and contract developers.
Some popular mockup tools are Balsamiq and Ninjamock, both of which give a “sketchy” look to their mocked up elements. The point is to not get caught up on whether a box should have round or square edges. That doesn’t matter right now so they intentionally make their elements rough.
This exercise will allow you to build pages quickly and help you think through the execution of the most critical features of your application. Doing this now will save you time later as you or your developers begin to actually write the code that brings your idea to life.
At a minimum you should mock up these pages:
• The main dashboard to which your customer is redirected immediately upon signing up. It might be a set of charts, a form to collect more information, or your application’s main feature or tool.
• A second or third feature or tool page that is required for your MVP.
• An account settings page where your customers can configure your application to fit their needs.
• A page to contact you if they need help.
• A page to upgrade, downgrade, or cancel their account.
Don’t spend a lot of time on fancy registration, login, and password reset pages. Most web development frameworks will have out-of-the-box implementations of these pages. You can optimize these pages further after you launch and start driving traffic to them.
As you mock up the main tooling, really look at it through the eyes of your customers. Often you’ll leave out something obvious which will create a stumbling block later on in the development process. Do this mockup in at least two different sittings so you’ll come back to it with a fresh perspective.
Most people are able to knock this out in a couple of days. You don’t need any software or programming experience. The tools I mentioned above, and any others in this category that you might discover, should be very user friendly. Most of them are free to try and you might find that as a solopreneur you’ll never need their paid features, which are meant to upsell teams within larger companies onto paid accounts.
Use templates when you’re ready to start designing
Design aficionados will not agree with me. It may not be the right approach in the long run but you can always go back and do a custom design later.
If you search around, you’ll find that there are dozens, even hundreds, of professional-looking homepage and application templates. There are some good free templates and plenty of good premium templates that cost anywhere from \$20 to \$100 each.
I suggest the paid variety for their higher quality designs and to give your application a different look than the rest. You can easily spend days thumbing through previews and searching every gallery on the internet. Resist that urge and pick one that feels right to you with your “customer” hat on. Don’t spend more than an hour looking around.
You can also copy the look of the landing page templates you used for your idea testing. If it’s already working, don’t reinvent it! You’ll probably still need to buy a template, but can pick a template that looks similar to the landing page you built and then edit it so they’re more alike.
Use these shortcuts for colors and logos
It will also be tempting to spend a lot of time choosing your logos and colors. Don’t spend more than an hour on this either.
I like to get ideas other websites in the same industry. What colors do they use? Are they bold and brash or cool and mellow? Do the logos have text, common symbols, or are they completely custom?
Most of the time you can get by with a free color palette from an online color palette generator. Give it a base color and it will create primary, secondary, and tertiary color options for you. Usually it will present a dozen or so palette combinations. Choose one that’s attractive to you and is not too far afield from the others in the market you’re entering.
You can use a resource like The Noun Project to search for an icon or symbol for your logo. Put it alongside the text of your business name in a nice font and that serve as a perfectly nice logo for your business. It will only cost a few dollars to get the commercial rights for a pre-made icon.
You don’t want to risk appearing too bold and deterring customers, so don’t deviate too far from the norms in your field. You need to attract as broad a range of customers as possible; some buyers will be turned off if they land on your site and see something too far beyond their expectations. Sure, you may stand out, but standing out doesn’t always engender trust and lead to signups.
You can rebrand later when your customers are using your product and you have a word of mouth engine already humming. Companies change their logos and colors all the time. Even Google, with one of the most iconic and widely seen logos on the Internet, has done it and survived. You can too.
Don’t stress about the color and logo. Not yet. If your idea ultimately fails, it will not be because you chose the wrong shade of blue and didn’t hire a professional designer to spend a month consulting on a custom logo.
So do the best you can, pick something that looks good to you, and move on. It’s time to start building. | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/02%3A_Tactics/2.05%3A_Chapter_10_Branding_and_Designing.txt |
IF YOU’RE NOT A SEASONED programmer and are building an idea in order to expand your skills, this may be the longest stage of your journey.
Don’t worry if it takes months before your work starts to pay off. Keep learning, keep researching, keep running into dead-ends and walls of bugs. You will break through them and get faster and faster at application development.
If you want, do it yourself. It may take two years to launch this way, but you’ll gain a priceless skillset. I can’t tell you how valuable it’s been for me to learn to program. I literally can’t price it. I don’t think it’s a stretch to say it’s priceless. The speed by which I’m able to launch and test new ideas, get access to new opportunities, and meet and gain the respect of other entrepreneurs is not quantifiable.
I can say that being able to do it all myself has saved me over a hundred thousand dollars of outsourced development cost in the last several years. I couldn’t afford to buy that kind of time, so I wouldn’t have launched as many products if I couldn’t simply build them myself.
Now I’m going to get a bit technical. It’s not important that you understand everything but it is important for you to be aware of the types of services and terms I’m using. I encourage you to read through it carefully even if you’re not going to develop your application yourself. You’ll manage the developers who do it for you better.
You will eventually need to have an opinion on everything in this section. Some chapters will take you more time than others, and you’ll find the best answers simply by getting out there and building. However, I’ll describe my thinking so you know what to expect and can develop your own informed opinions.
The goal is not to start just one software company. You should start several, so you’re going to choose a set of these services (a “stack”) that you can reuse across all of your future projects.
Since I’ve already used this term, I have a quick note on what it means to be “technical.” Here’s a checklist. If you answer yes to all of these, then congratulations! I, with no real authority to do so, hereby dub you “technical.”
• Do you regularly launch a terminal window to open programs, navigate folders, or check to see why your laptop’s fan keeps turning on?
• Do you know what a SQL join query is? Bonus point if you know the difference between an inner join and outer join?
• Can you clearly state the difference between an instance method and a class method?
• Can you describe why the model, view, and controller files are separated in modern web frameworks?
If those questions are completely foreign to you then you have some reading to do. It will take some time before you can build a web application yourself. You’re not technical now and it will take you months of active learning or a year of passive learning to become technical. But again, the journey will be well worth it. The value will be priceless for you too.
If you’ve read this far and have a pit in your stomach and want to skip this chapter, I understand. That’s okay. You don’t need to be technical in order to succeed as a parallel entrepreneur. This section doesn’t require you to be a computer software geek. Instead, I’ve written this to speak directly to you and catch you up on what you absolutely must know in order to outsource multiple development projects serially or in parallel.
Don’t give up yet. Keep reading!
It took me about five years to become technical, and I’m still probably somewhere between a novice and an intermediate programmer. The thing is, I love the technical stuff. It activates a part of my brain that really enjoys being challenged. So I eat it up. Maybe you will too, but don’t let that be a barrier. Another way to learn while still speeding up development is to outsource it to a friendly expert who doesn’t mind answering questions and can teach you how your application works as they build it.
The following questions are extremely important. You should have an educated opinion on these answers in order to build multiple products successfully. It will only help you as an entrepreneur to have a deeper understanding of this side of things.
Let’s jump right in.
Where will you host your web app?
Hosting today for companies at our scale comes in two flavors: virtual private servers (VPS) and hosting platforms or platforms-as-a-service (PaaS).
Some notable examples of VPS’s are Rackspace, Digital Ocean, and the EC2 product from Amazon Web Services (AWS). They’ll give you the ability to log into a server and install everything you need to run your application.
On the other hand, a PaaS will do all the server creation and code deployments for you. The most popular PaaS is Heroku, which is owned by Salesforce and itself runs on AWS EC2. AWS has its own PaaS as well, Elastic Beanstalk, which has many of the same features as Heroku but is less expensive.
Recommendation: Heroku. It’s free to start and scales at low cost. If you’re not technical then I don’t recommend using a technology that Heroku doesn’t support. Disregard the buzz about the latest, greatest thing. Use a tried and true software that’s already supported by Heroku.
Which language will it be written in?
Your options are many, but the three that you should choose from are Ruby, Python, and JavaScript. If you’re paying any attention to technology then those three names should sound familiar.
Python + Django
Python is about thirty years old. It began in academia and became popular because of its semantic and descriptive language. If you’ve seen code snippets in the past, you probably saw a bunch of parentheses, curly brackets, and semicolons. Python got rid of those and people rejoiced.
It became popular among data scientists and today, for example, the code written to analyze electron collisions at the Large Hadron Collider in Lucerne, Switzerland, is written in Python. Most of the machine learning community still uses Python, and blockchain developers have also embraced it. It has a large community of engineers who write and release free, open-source packages of code, called libraries, which give Python a suite of out-of-the-box tools to use in your programs.
One of those libraries is Django and it has become the de facto way to build modern websites using Python. If you’re going to develop your app in Python, you’re going to use the Django library to do it.
Ruby + Rails
Ruby is a more recent language, developed in Japan as an alternative to Python about 20 years ago. It’s also very easy to read; many would argue more so than Python.
Ruby began as a very niche, almost underground movement to fix some of the things that bothered programmers about Python. Then everything changed when a Danish developer named David Heinemeier Hansson began to write a Ruby library (they’re called gems in Ruby) for web development. He named the gem Rails and the project became known as Ruby on Rails.
Ruby on Rails is the most popular web programming language with millions of websites built on it. Its most recent release, Rails 5, went live in spring 2017 to much fanfare in the Ruby community. It’s a major milestone for the project and speaks to the quality, security, and longevity of this technology.
If you dive into Ruby, you will find that there is a gem for everything. Not to be outdone, even the super nerdy data and statistics libraries from Python have been rewritten in Ruby. It’s a very safe choice.
JavaScript (Node.js) + Angular or React
JavaScript right now is like the Wild Wild West. Only a few years ago it was a purely front-end, client-side (e.g. it only runs in your browser) language. Today there’s much excitement around JavaScript itself emerging as an option to run back-end logic, database queries, and of course the cool front-end tricks it’s known for.
The difference between JavaScript and Ruby and Python is that: JavaScript runs in browsers and Ruby and Python run on servers.
Have you ever noticed that sometimes you click on a button on a website and the page will reload, and other times you’ll briefly see a spinning icon and then content will magically appear without the reload? That asynchronous loading is JavaScript in action. It’s logic that runs in your browser so your server doesn’t need to do the HTML page rendering and cause the reload.
To make this more clear, here are some real examples of both techniques on sites you’ve probably visited:
Pages reload:
• New York Times
• Wikipedia
Pages load asynchronously:
• Facebook
• Gmail
Unlike Ruby and Python, the JavaScript world is in a controlled chaos state and is moving very, very fast. The most popular website development package (that’s a library or gem in JavaScript) is called Node.js. Node is really just a backend package, so on top of Node you’ll need any number of front-end packages. The two most popular are Angular (released by Google) and React (released by Facebook).
There are thousands of posts published online about each of these JavaScript technologies. The important thing for you to know is that they exist. I won’t go into the pros and cons of each here because that ultimately boils down to a personal choice about the behavior of your web app and your desire to use the latest tech.
Recommendation: Unless you’re already technical, use Ruby on Rails and don’t attempt JavaScript yet. You can add a slick JavaScript front-end later. Rails will give you everything you need and your code will be efficient and easy to understand. Plus, if you outsource, you will have many inexpensive Ruby development options.
What kind of database will you use?
Fortunately, we’re back down to two choices, and I’m just going to cut to the chase here and tell you to use Postgres. You still need to know what the other option is, though.
SQL -Postgres
Postgres is a transactional database, which means it uses tables and rows just like an Excel spreadsheet. It’s the most popular kind of database, commonly known as SQL (Structured Query Language). There are competitors to Postgres in the SQL landscape, including MySQL which is now maintained by Oracle, but in recent years Postgres has emerged as the most reliable and fastest of the SQL technologies.
NoSQL -MongoDB
The alternative to SQL is a document-based approach, commonly called NoSQL. The leader in this space is MongoDB. Rather than having rows on tables, you can think of each row being a document with arbitrarily structured data. The documents can still relate to each other but if you want to add a new kind of data, you can just add it. That’s the main benefit—no declaring new columns and having to migrate your tables. The new columns can simply just appear.
Recommendation: Use Postgres SQL. It’s a much older, safer, and more popular technology. The migration process may seem complex at first but if you think through your application structure well in advance, you won’t need to change your tables too much. Your migrations will usually be adding new fields, which is easy to do. Document-based storage simply isn’t necessary in 99% of cases.
Where will you store your code?
Heads up! This is critical.
You need to use a code repository and you must be the owner of the repository account. If you work with third-party developers, then you need to invite them to your repository, not the other way around. You must be the owner of the repository.
Even if you develop everything yourself, using a code repository is good hygiene. You don’t want all of your undeployed source code stored locally on your laptop. If it gets lost or stolen then you might lose weeks or months of work. Code repositories are remote and work in conjunction with a versioning system like Git. They’ll track your code changes (called “pushes”) and help you collaborate with others you will want to bring onto your project in the future.
Because it’s inexpensive, easy to use, and just the right thing to do, I’ll simply say that a code repository is a must-have.
Recommendation: Use GitHub. There are alternatives like BitBucket, and Heroku has a built-in code-repository, but GitHub has a beautiful, intuitive design and issue-tracking features that are worth exploring.
Which design framework will you use?
A design framework is a file in cascading stylesheet (CSS) format that you include in your website markup to streamline the look and feel of your website.
If none of that made sense, I’ll explain briefly how a web page works. First, you have HTML, which is the structure of your page and looks like <div>content</div> or <h1>content</h1>. Those brackets (which you don’t see when the page loads) surrounding the content (which you do see) forms the foundation of your web page design. A CSS file tells your web browser how those <div> and <h1> structures should look when the page loads.
Bootstrap is a wonderful CSS file released by Twitter in 2011 and web design has never been the same. For solopreneurs it makes your website look decent without doing any extra designing yourself. The design frameworks give you styling for:
• Navigation bars
• Forms
• Buttons
• Alerts
• Modals (JavaScript popups)
• Banners
• And more…
Most importantly, it makes your website responsive to the device viewing it. Have you noticed that some websites look good on your smartphone, with text and buttons that scale with your screen, while others look like a version of a desktop website and require you to zoom in to navigate?
That automated resizing to the screen size is called “responsiveness.” Without a framework it would be an insane amount of work to do, and most of us aren’t knowledgeable of CSS beyond the basics. Bootstrap takes care of all the heavy lifting for you and it’s free.
The two most popular options are Bootstrap and Foundation, with new entrants like Tailwind and others coming up all the time.
Twitter Bootstrap
These days you can’t visit a new company’s homepage without seeing some of the tell-tale signs of Bootstrap. This is good and bad. Bootstrap is stable and well-documented with a huge community of other developers asking and answering questions about Bootstrap on sites like Stack Overflow. No matter what problem you run into, someone else has also encountered it and posted the answer online. It’s amazing how much support there is online for major open-source technologies like this.
The downside is it’s very difficult to make your site not look like it’s on Bootstrap. You can buy templates that use Bootstrap on the backend and include modifications to the core Bootstrap defaults so your site won’t feel like everyone else’s site, but it’s just about impossible to completely eradicate the Bootstrap vibe from your site.
Zurb Foundation
Foundation, because it’s less popular, doesn’t suffer from the all-too-familiar design rut that Bootstrap has thrust websites into. However, this also means less community support and fewer design themes to choose from.
Zurb is a design agency, and like Bootstrap their Foundation project began as an internal tool which they later open-sourced and continue to update frequently. It is easier to customize than Bootstrap, so Foundation sites are not as easy to identify visually.
Technically, Foundation and Bootstrap are very similar. They both launched in 2011 and have a 12-column grid system along with the standard set of UI elements.
Tailwind
Tailwind is a distinct alternative to Bootstrap and Foundation. Rather than forcing a set of prescribed defaults, Tailwind gives a comprehensive set of utilities that you can combine to customize your UI elements. The result is more class syntax in your views, giving it a more unique feel to your site and an easier way to change it without digging into the CSS source code.
Recommendation: Use Bootstrap. Go with the majority because it will ultimately save you time and give you more options for template purchases. If you’re really motivated to give your site a unique look, then use Tailwind.
Should you use a test suite?
All of the major web development frameworks include what’s called a testing suite that developers can run to make sure there aren’t any glaring bugs before they deploy their code into production.
Testing suites have a unique syntax and present another learning curve to slow down your development. However, they are very effective in eliminating downtime and user complaints from obvious bugs.
The real benefit of writing tests and requiring they pass before deployments comes when you have a team of developers and a complex application. It’s difficult, if not impossible, for a single developer to keep all the linkages across application functions running in their head. They may delete or rename a function, figuring it wasn’t used anywhere, and accidentally cause the app to crash or stop working. Really good developers make these mistakes all the time.
So test suites were developed to mimic actual application behavior and ensure that the app behaves as predicted in the test.
You can test things like:
• Making sure a page loads with a certain amount of text or a particular form.
• Ensuring that when the form submits, the data is saved and a user is redirected.
• Validating that when a form is not fully completed it won’t save and will alert the user.
Test suites are extremely thorough. Developers can test anything: any button, page load, or backend process. They’re especially useful to cover the cases where a user’s action is not what you intended them to do. You need to make sure your application can handle an unusual action appropriately. This is where most bugs are introduced and the tests do a great job of catching them.
There’s even a movement among developers to write the tests before writing the code. It’s called test-driven development and has a legion of followers. I commend them for doing it, because I personally hate writing tests. However, I’ve forced myself to do it; and, while on the verge of deploying and thinking I might as well run the tests and make sure nothing had broken, I’ve caught many bugs.
So tests are effective, but they may not be necessary in the early days of your product launch. Here’s a quick chart to summarize the pros and cons of requiring tests.
Recommendation: Write tests for the core functionality of the app. You don’t need 100% test coverage. Settle for 50% or less, so long as the tools that your users will use every time they log in are well covered.
How will you collect payments?
Collecting money, of course, is a critical feature in your application. There are two popular options today, and you should be prepared to make a choice between them.
Don’t be persuaded by small differences in fees. Unfortunately, credit card processing is expensive at scale. I wish the fees were flat, but they’re not. Whether you’re charging \$5 or \$5,000, you should expect to pay 3% for payment processing. When you hit that \$10,000 per month revenue goal, you’ll be spending about \$300 off the top on merchant fees.
Stripe
Stripe is the younger of the two options and is favored by most entrepreneurs I know. Started by two brilliant young developers from Ireland, Stripe was designed with software engineers in mind.
If you’re not a developer then there’s no reason for you to know about Stripe, but you’ve probably used Stripe without knowing it. From huge ride-sharing applications like Lyft to tiny startups, Stripe has a customer list in the hundreds of thousands.
The main benefit to using Stripe is its ease of integration. They continue to be extremely thoughtful about the developer experience. Setting up your business account is fast and automated, and they have a testing environment that exactly mimics production, which is another huge attraction.
Stripe facilitates ACH transfers alongside credit cards, and allows payments with Apple Pay. Another great feature automates the transfer of payments between buyers and sellers in marketplace applications. It’s a huge time saver if you’re building a marketplace.
Braintree
Braintree is older than Stripe and was purchased by PayPal in 2013. It too began as a developer-friendly payment processor but was soon eclipsed by Stripe on a number of fronts. After the PayPal acquisition, it has caught up in some key areas like drop-in payment forms. Overall it has benefited from its proximity to PayPal.
If you want an easy integration with PayPal and Venmo, Braintree is the obvious choice. There are other idiosyncrasies around proration of upgrades and downgrades of subscriptions and the logging of webhooks, but none of those differences make an obvious winner.
Recommendation: Use Stripe. It has superior documentation and an active community of online entrepreneurs like you who share stories, tips, and techniques. I respect Stripe for not selling to a larger payment company and continuing to focus on making collecting payments a trivial part of the web development stack.
How will you send emails?
A final consideration is which service you’ll use to send transactional emails.
Amazon SES
I signed up for Amazon’s Simple Email Service (SES) when it first launched in 2011. The emails were blazing fast and incredibly inexpensive at \$0.10 per 1,000 emails sent. No other competitors get anywhere close to that price.
Sendgrid
Sendgrid came onto the scene in 2009 and I remember the fanfare around this company at the annual South By Southwest conference in Austin. They followed a similar path as Stripe, building a critical infrastructure piece of web architecture and making it a breeze for developers to work with. The nerds loved them. Sendgrid became a public company in November 2017.
Mailgun
Mailgun is now owned by Rackspace, a large hosting provider that competes with Amazon Web Services on multiple fronts. Due to its simple user interface and emphasis on making developer-friendly tooling, Mailgun is more similar to Sendgrid than it is to SES.
Recommendation: Use Mailgun. I currently run all of my products with Mailgun. With all of these services, the differences really are in the minutiae. Look at all three, discuss with your developer if you hire one, and make an educated choice. The reason I suggest Mailgun is its position in the Rackspace ecosystem and free Heroku integration.
Conclusion: Choose your stack wisely
I went through this technology stack section in perhaps overwhelming detail for one specific reason: if you’re going to run multiple internet businesses simultaneously, they need to use the same stack, so choose it wisely.
Having multiple businesses humming at once is enough complexity. Having them all using different technologies is a fool’s errand. Don’t do it. You should only have to gain familiarity with one service in each of the categories above. Once you’re familiar with its eccentricities and pitfalls, you’ll be able to more rapidly spin up other businesses that leverage the same stack.
This is the secret to the technical side of becoming a parallel entrepreneur. Each company may look different, but when you peel back the wrapping it’s the same technology. I use Heroku, Stripe, Mailgun, Postgres, Ruby on Rails, and Bootstrap for all of my businesses.
I don’t deviate because that would slow me down. | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/02%3A_Tactics/2.06%3A_Chapter_11_Building.txt |
Growing
GROWTH IS A LONG GAME. You’ll be best positioned to grow if you do a little bit every day, both for your personal brand and your websites’ brands.
It’s far easier said than done. Everything you’ve done up to this point has immediate cause and effect. You post an ad and get clicks. You develop a feature and release it. The turnaround times are fast and feel good.
Growth tactics aren’t like that. The results come weeks or even months later, and it’s usually not one activity that creates the impact. Growth happens when you consistently cultivate it. It’s the accumulation of dozens or hundreds of discrete activities.
That’s what makes growth so powerful and yet also so frustrating. When you’re committed to growth, you’re not susceptible to any single points of failure because there aren’t any single points of failure. Your growth is the cumulation of months and years of work.
Conversely, you also can’t count on an any single activity to move the needle. Silver bullet thinking will only leave you frustrated and confused. Don’t fall into that trap.
Here are three broad tactics you can do every day to maintain slow and steady growth of your web application.
Cultivate a following
Bryan Harris, the founder of VideoFruit, tweeted, “It constantly amazes me how big of a cheat code having an engaged email newsletter is.”
I’ve experienced this myself but I had to earn it slowly with Toofr. Having cultivated the list over four years of registrations, I now have over 24,000 engaged readers of my Toofr newsletter. I could have grown faster if I already had an email list of my own personal followers. I could have used that list to test landing pages, get early customers, and intros to potential partners.
I now use my Toofr list to foster adoption of my other businesses. My first two Inlistio customers came directly from promoting to my Toofr audience. That’s how tactically your businesses can play off each other when you have a following to use as leverage.
A few pointers on using Twitter
It all starts with whom you follow. If you follow everybody on Twitter, then your feed is bound to be a big bumbling mess. If you want to get good at Twitter, then you should probably start over, unfollow everybody, and start following again, very strategically.
Pick a couple of topics that are professionally relevant to you. Going back to the cannabis business example, you might use Google to find the thought leaders in the cannabis ecommerce space. Who are the CEOs and founders of the most innovative companies in that market? Look them up on Twitter and follow them.
Search Twitter for relevant topics and see who’s asking the most interesting questions and giving the most thoughtful replies. Follow them. Before you can start engaging, you need to get a higher signal to noise ratio in your feed.
Once you’re following between 50 and 100 carefully chosen people, you can begin to participate. Like tweets, reply to the ones where you can add to the conversation. It will take time but people will notice.
Do this for a year and you will start your ascent. Do this consistently for two years and you’ll be someone whom others will follow for tips and insights.
LinkedIn is great for business
The news feed on LinkedIn has recently evolved into another must-use platform for thought leadership. Like Twitter, it takes weekly if not daily attention. Anyone can publish long-form articles that will get automatically promoted as notifications to your network. You can also publish shorter-form posts with public comments and likes.
LinkedIn’s feed is automatically curated by the people to whom you’re connected and the content that they liked. It’s a great way to get industry news, updates from professional contacts, and distribute content.
LinkedIn is a major source of referral traffic to all of my companies. I post a regular report on Toofr’s growth and finances and try to keep my connections updated regularly about my other businesses as well.
People respond well to it and I can tell it has a cumulative impact. Many people have commented or messaged me privately saying that my posts continually pique their interest in what I’m doing. It’s as though each piece of content adds another pixel to an increasingly focused picture.
It’s not the rule of 7, it’s the rule of 700
With so much competition for attention, not just within platforms but between them as well (Twitter and LinkedIn, for example), Ogilvy’s idea that you need to reach a consumer seven times before they’ll remember you feels a bit antiquated. Today it might as well be The Rule of 700.
That’s the attitude you should have when it comes to building your personal and business brands. Seven hundred LinkedIn posts, seven hundred Twitter posts, seven hundred blog posts. In other words, it doesn’t stop. It’s not a week-long or month-long activity. It will take you several years to write those 700 blog posts.
Might as well start now!
Start search engine optimization (SEO) from Day 1
Even before you launch publicly, before you actually want to attract customers, and before you have your second page ready:
Launch the homepage.
Pick two or three obvious keywords for your site. Assuming you’re not alone in your market, the keywords you optimize for right now should be the ones that show your biggest competitor in the #1 result slot. With any luck, within a year you’ll be right up next to them at #2. That’s a fine place to be and you’ll get your 100 customers in no time.
I cannot understate how important it is to start your SEO campaign as early as possible. I mean this literally. As soon as you can put up a homepage, do it and be smart about the words on that page. You should have those keywords in <h1> tags, in the <title> tags and in your <meta> descriptions.
The thing to remember is the earlier you start, the faster you’ll see results and benefit from the free traffic Google will send to you. It’s just like what the financial planners say about saving for retirement. The difference between saving in your twenties and saving in your thirties is night and day. The same goes for SEO. Don’t wait until your product is developed to get your landing page up. Start building SEO right away.
As bootstrapping entrepreneurs, there’s no better price for high quality traffic than free. You can tap into this fountain by thinking about SEO from Day 1.
Get familiar with SEMRush and Moz
SEO, like online advertising, merges data science, website development, and writing. The two leaders in the SEO analysis category are SEMRush and Moz. Moz has a huge following and hosts the leading conference in this market but many people prefer SEMRush. Here’s why you need to subscribe to one of these services:
• Ongoing SEO audit of your pages. They will constantly scan your pages to make sure you’re doing all the best SEO practices.
• Track your positions over time. Instead getting your search page position manually, let Moz or SEMRush do it for you. They’ll dive deep into the results pages, tracking the top 100 results for each keyword.
• Survey the SEO battlefield. SEMRush tracks the organic search positions of your competitors too. It produces a report that shows which keywords your competitors have that you don’t. This data forms the basis of any SEO strategy.
Start a blog on your website
At some point you will run out of landing pages to produce. You can only have so much static content on your site. Once you’ve produced them, optimized them for keywords, and linked to them from elsewhere on your site, you’ll need to create more content.
Where do you put it? On your blog, of course. Write one piece a week and syndicate it on Twitter and LinkedIn. Choose your blog post topics using your SEO reports. Do it regularly, and over time (months not weeks, remember?) you will see the results.
If writing isn’t your thing, you can easily hire a writer to do it for you. You can work with one directly if you’re willing to go through the hiring process on a site like Remoteok.io or you can use a service like Scripted and have the process managed for you. There’s no right or wrong way to do it. Just get it done.
Contact new prospects via email
Organic traffic is the best traffic, but a close second is email marketing. Cold email marketing has believers in every industry and at every stage of business.
If you’re new to the idea of marketing to people you don’t know by email, it’s not as difficult or as sketchy as you might initially think.
In the early days of each of my businesses, I reach out to people, directly and one-on-one, without the use of software. I pick people on LinkedIn who match my ideal customer profile and use Toofr to get their email addresses.
I then craft a message that directly speaks to their business. I do a fair amount of research on both them and their company. This process doesn’t scale but it does help me develop a template that I can use at scale. When I first start, though, I begin with a blank slate.
Every business that uses email marketing will ultimately need fresh content written from the ground up. You can google for top performing email templates and pick out some patterns you might incorporate, but there’s no one-size-fits-all here. If you want to maximize the opportunity in this channel, do the legwork and build a template one email at a time.
When you do decide to scale it, there are a bunch of services that will help. Companies like Gmass, PersistIQ, Sendbloom, and YesWare plug right into your Google Mail account and will send your templates at regular intervals, allowing you to follow up automatically with your prospects if they don’t reply. When they do reply, because these services are tapped into your inbox, your prospects will get pulled out of the sequence automatically.
It’s a wonderful way to grow your business and get some early momentum. I stand by the technique and you won’t have problems so long as you follow these rules:
• Don’t misrepresent yourself or your product.
• Include a functioning unsubscribe link.
• Be targeted, concise, and respectful.
If you follow these rules, when a prospect declines your offer, they’ll do so politely and thank you for reaching out. The positive replies will be elated. They’ll say they just walked out of a meeting about this problem and then your message came down from the heavens and landed in their inbox.
Like SEO, email marketing has a cumulative effect. You’ll want to continually refine your sequences (commonly called “drip campaigns”) and subject lines to maximize open and response rates.
You should start email marketing as soon as you have a functioning registration form. If you send a dozen messages a day then you should see results within a week or two. | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/02%3A_Tactics/2.07%3A_Chapter_12_Growing.txt |
Maintenance
BUILDING, IRONICALLY, IS EASIER THAN maintaining. When you build, you build for the average user, the one who passes all the tests you wrote. But if your app hits any kind of scale, there will be cases you never considered. Your app will break, and you need to have a plan for how to fix it.
Let the maintenance games begin!
Maintaining Toofr is my single most time-intensive activity. The application can break from user inputs, bad code pushes, and hardware outages. When that happens, I have to drop everything I’m doing and fix it. Those days are distracting at best and completely wasted at worst.
As you add more websites to your portfolio, the maintenance needs expand as well, and there can be serious consequences. What if you have two apps crashing at once?
Record feature requests and low-impact bugs to stay organized
Use Trello, an online organizing tool that uses cards and lists, to maintain your roadmap, record bugs, and save new SEO ideas. It helps to have it all in one place.
Whatever tool you use, return to it consistently. It’s very easy to lose track of priorities, especially when you add the complexity of multiple companies at once.
The issues you find in one project foreshadow issues you’ll have on other projects. It’s a best practice to make the same improvement on all of your applications even if only one is having problems.
The same goes for SEO strategies. It’s easy to forget, and it’s not any more mental work to make the same edit on the same file in another project. Do it and the payoffs multiply.
Use a customer relationship management (CRM) app to keep track of prospects and customers
Using CRM is also good data hygiene. If you ever bring a sales rep or marketer onto your team, giving them access to a database of every customer conversation you’ve had will help them get up to speed quickly and help you coach them.
The critical feature of modern CRMs is you can give them access to your inbox. The CRM will record your customer conversations for the rest of your team to see. If you’re not comfortable with that level of access, you can also BCC an email address and have the conversations recorded. This way the CRM will only see what you want it to see.
When you’re dealing with longer sales cycles and managing multiple conversations, a CRM is the only way to make sure you don’t drop the ball. If you tell someone you’ll get back to them in a week, you need to do that. Your CRM can remind you, show the conversation history, and track your progress to closing your next big deal.
Schedule time each week for your projects and stick to the calendar
Don’t let any one project fall into disrepair. You need to maintain a Trello board, spreadsheet, or some other note-taking system for each one of your projects. Focus on each one at some point every week, even when they don’t seem to need it.
This tactic will refresh your memory on the status of the project and helps you to draw connections to that project and ideas you might read on Twitter or LinkedIn. The best way to continually innovate is to find ways to apply the insights of others to your own businesses.
Put critical processes into a background processor and use a crash reporting system
A background processor is a service common to web applications. You can design your application so that it throws certain processes into a queue. If the process fails due to a bug in your code or an outage from a data provider to which you’re connecting, or any other reason, the background processor will keep retrying it.
If your background processor has a lot of retries in its queue, you can look at the logs, find the problem or bug, and fix it; and when the processor tries again, it will go through. Customers are happy because their requests aren’t lost, they’re just delayed. You don’t need to tell them to go back to a page and try again. Often they won’t know there was a problem.
Similarly, a crash reporting system will listen to your logs for major problems and report them to you. My favorite in this category is a service called Sentry.io. It tracks application crashes, gives helpful bug reports including what line of code caused the error, and shows which users were impacted.
Sentry covers the problems that aren’t collected in the background processor. Instead of telling every user, including unaffected users, about the problem, you can email only those who were impacted. Customers usually appreciate the proactive outreach.
Respond to all customer support inquiries within 12 hours
Finally, a related tactic and one that I think every solopreneur should commit to, is responding to support inquiries within 12 hours.
Your customers are critical. Every single customer matters and responding to them promptly demonstrates that level of importance.
It’s not hard to respond to customers immediately. I put my phone number on every email. I have a chat feature on my site that pings me directly. It can sometimes be distracting but earning a new customer or preventing a churned customer is worth it.
To grow a business, find financial and personal freedom, and one day sell it for a huge profit, then treat every customer with respect. | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/02%3A_Tactics/2.08%3A_Chapter_13_Maintenance.txt |
How and When to Sell a Business
HERE’S AN UNCONVENTIONAL SUGGESTION: YOU should always have a number in mind.
The goal of the parallel entrepreneur is not to take a company public. It’s probably not even to raise money. Your goal is to grow and then graduate your business into someone else’s hands. After you sell your business, you keep building more.
To make your exit as smooth and fast as possible, you need to do the following from Day 1:
• Make everyone who works with you sign a PIIA. Failing to do this can kill a deal.
• Track your expenses carefully and diligently. Clean books make a clean sale.
• Keep your files organized. Everything you sign needs to be saved! Every contract, employment or contractor agreement, and partnership deal.
• Comment your code as much as possible while you’re writing it, and also have as much test coverage as is reasonably possible.
• Keep your CRM updated. An acquirer will want your CRM too and may pay a premium for a well-kept archive of all your customers, prospects, and related conversations.
While you may not be motivated to build your business to sell it, you’re going to need an exit strategy if you want to continue on your path as a parallel entrepreneur. An exit strategy will give you a framework for deciding when to let go of a business to make room for a new one.
There’s a strong market for profitable B2B software businesses. Exactly the kind of business I described in this book. There’s a growing number of investors, entrepreneurs, and private equity firms seeking to buyout sub-million-dollar-revenue businesses. I’ve spoken to a lot of them, and turned down offers to buy Toofr in a few cases. In the process I’ve learned there are a few things they all look for.
Keep your margins steady and as high as possible
High margins indicate a healthy business. The people who buy small profitable B2B software businesses expect to see margins in the 85% range. Fight your way there if you’re not there already. Negotiate lower variable costs. Be creative if you can and be brutal if you have to. The financial benefits will be well worth it.
If you can’t keep your monthly growth steady, be sure to keep your quarterly growth consistent. Acquirers love to see “up and to the right” charts in your income statement. When you have high margins and growing revenue, you can expect to get 3-4X multiples on your revenue. So For example, if you’re making \$30,000 per month, \$360,000 per year, and your margins are 85% and you have consistent growth, you can sell for over \$1 million in cash.
That’s the reward for running a tight little business. It’s important to keep this in mind as you build and grow. It’s also why SEO is so important. An easy way to grow your business is to grow traffic, and the way to grow traffic is to rank on a larger set of keywords.
Have a number in mind
“I’ve never met a founder who regretted selling his business, but I’ve met plenty who regretted not selling.”
— A friend who works in private equity
Pick a number that would be a meaningful exit. It might be what you have left on your mortgage, or your parent’s mortgage, or the cost of your childrens’ college expenses. Whatever that number is, that’s your number. As soon as you can sell your business for that number, sell it.
Don’t get greedy and hold out for a higher offer. You can and should try to fetch as high a price as possible, but if you land at or above your number, then you need to take it.
Don’t worry about seller’s remorse. You’re a parallel entrepreneur. You can and will spin up another business. Or two, or three. You’re going to do this again, so don’t think about what might have been. Be elated that you took a business from the ground and built it up, extracted a living out of it for a while, and then sold it for a profit, allowing you to start a new business.
Parallel entrepreneurs love to build. That’s why you’re doing this. In order to keep building, you have to let some businesses go. Some will never make it, and you’ll shut them down. Others will do really well, and you’ll sell them. After you sell them, you may have the resources to buy businesses with product market fit so you don’t need to start them from scratch.
Nathan Latka, an entrepreneur, author, and host of popular business podcast TheTop, says, “It’s way smarter to buy a company than it is to start one.” For most of us, though, we need to start and sell a business before we can afford to buy one.
That’s the beautiful cycle of building, running, and selling businesses on the internet.
2.10: Chapter 15 Conclusion
Conclusion
THE TOOLS AVAILABLE TO INTERNET builders today make it easier than ever to take a portfolio approach to entrepreneurship.
The “side hustle” is nothing new, but the idea that you can have multiple side hustles is new. Internet businesses and automation tools make it possible and enjoyable to start and run multiple companies.
The path to 100 customers each paying you \$100 every month is littered with obstacles. Reaching and surpassing this goal may require launching more than one business. Increase your odds of success by being a parallel entrepreneur.
This too is not a new revelation. Investors make multiple investments per fund. They diversify across industries and stages of growth. Entrepreneurs can do that too.
There are a few high-profile examples and countless other lower-level ones. While each founder paved his own path, there are some common patterns.
A typical approach is to start a company while you’re at your day job. There are some risks but you can mitigate them by choosing a business that doesn’t compete with your employer. Never use your employer’s resources for your side business. And read the legal documents you signed when you joined the company. Legal awareness is key.
A riskier approach is to quit your job and then start businesses. It’s probably not necessary, but if you must do it, remember that it takes at least 18 months to make a livable income.
Regardless of the outcome, you’ll benefit by acquiring new skills that will transfer to your day job. You can explore a new career or make a transition to it, ultimately shutting down your venture and seeking employment at a company similar to it.
The time you put into parallel entrepreneurship will boost your confidence, improve your skills, and ultimately increase your salary, whether it’s at your current company, your next job, or by gaining some extra income on the side.
Luck is always a factor, too.
“Sometimes you can do everything wrong and still succeed,” Diane Baxter, my CFO when I sold Scripted, told me. “My first startup did over 100 acquisitions. We learned as we went. I’ve seen other companies that had great teams, great approaches, and it just took too long and the investors wore out and new money was not available.”
Some companies, despite having everything going for them, ultimately fail.
It takes a lot of time and hard work, and likely more than one company, to get lucky. | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/02%3A_Tactics/2.09%3A_Chapter_14_How_and_When_to_Sell_a_Business.txt |
PARALLEL ENTREPRENEURS NEED TO FIND every ounce of efficiency available. Software tools are critical, and the best ones are those that let you manage multiple businesses with a single account.
Here’s a list of tools that are built for parallel entrepreneurship.
Upwork
The best way to stay lean is to pay only for the help you need. Upwork makes that possible. I have used Upwork (and its previous iterations, Elance and Odesk) at each of my previous companies. I also hired my editor and designer for this book through Upwork. It is built for the modern freelancer and entrepreneur and to be successful with your own parallel entrepreneurship I highly recommend you use it too.
Mixpanel
Mixpanel is best for business intelligence and people tracking. It makes dashboards for critical activities, registration and conversion funnels, and even sends email messages to users. It’s the best \$150 you can spend each month, especially because you can share the same paid account across all of your businesses.
Heroku
In addition to being my preferred hosting platform for its reliability and ease of use, it’s also perfect for parallel entrepreneurs. Not only can you host multiple businesses on a single account, the free hosting accounts are quite generous. You can spin up a website and let it build SEO for months or years—for free.
GitHub
GitHub is an online code repository that has become a cornerstone of the internet development community. It is well-documented, reliable, and inexpensive to safely store the code for all of your websites. Since you’ll need a repository for each business, and GitHub was always designed to have multiple repositories per account, it’s literally built for parallel entrepreneurship.
Stripe
Stripe is best for payment processing and also lets you view multiple business dashboards without having to log in and out of different accounts. It’s built for the modern parallel entrepreneur.
Scripted
Scripted released a product for a single entity to manage multiple Scripted accounts and this makes it a great tool for agencies as well as parallel entrepreneurs. I’m a co-founder of this company, so of course I stand behind both the quality of the writing and its tooling to manage multiple businesses at once.
Trello
Trello also makes it easy to create multiple boards. You can create a board for each of your businesses and easily toggle between them. You’ll probably keep Trello open in your browser all day.
Facebook for Business
The agency features in Facebook are perfect for parallel entrepreneurs. You’ll create a single business account and then assign multiple pages and ad accounts to that business account. This makes it easy to manage the ad campaigns in a single place for all of your businesses.
G Suite: Gmail, Google Analytics, Google AdWords
G Suite is built for multiple businesses, and because most entrepreneurs have a personal Gmail account and a business account on Google Apps, they’ve also made it easy to toggle between accounts without needing to log out of anything.
Segment
Segment is useful for managing all of your on-page JavaScript libraries from companies like Mixpanel and Google. Their interface is intuitive and easy to manage multiple businesses at once.
Quickbooks
By making it easy to toggle in between separate business accounts or run a single set of books with classes for each business, QuickBooks belongs on your toolbelt.
Unbounce
Unbounce is a great landing page generator. You can add multiple domains to your account, allowing you to host landing pages for all of your businesses on one account.
Apple Mail & Apple Calendar for MacOS
Instead of G Suite, you might also consider Apple Mail and Apple Calendar. Because email is such an ongoing need, constantly toggling between four Gmail tabs for your email may not work well. Apple Mail aggregates the messages from multiple G Suite accounts into a single inbox and associates the correct sending email on replies.
Similarly, Apple Calendar aggregates all of your business calendars into a single view. It’s another big time saver.
HubSpot CRM
There aren’t any CRMs that allow you to aggregate data from multiple accounts, unfortunately. HubSpot will allow you to create a CRM for each of your businesses for free. You’ll need to log in and out of each one, though.
There isn’t currently a CRM for parallel entrepreneurs. A business opportunity, perhaps? Go for it! | textbooks/biz/Business/Entrepreneurship/Book%3A_The_Parallel_Entrepreneur_(Buckley)/03%3A_The_Parallel_Entrepreneur_Toolkit.txt |
Edward Chamberlin published the foundations of monopolistic competition in his 1933 book entitled The Theory of Monopolistic Competition. It is considered by some economists to have the same stature as John Maynard Keynes’s General Theory in revolutionizing economic thought in the 20th century.Brakman and Heijdra (2004). The idea behind monopolistic competition is simple in form and powerful in practice.
Monopolistic competition involves many buyers, many sellers, and easy exit and entry, with slightly differentiated products. The sellers in these markets sell products that are closely related, but not identical. They have features that differentiate them from the competition. Usually, the buyers and sellers also have good information on the attributes of the products and the prices of the products in the marketplace. Indeed, most products and services are sold in markets characterized by monopolistic competition. The list includes jewelry, movie production, food, entertainment, many electronic gadgets and components, some durable goods, books, crafts, soda, houses, cars, consulting businesses, software, game consoles, restaurants, bars, and so forth.
A monopolist is a price setter and a business competing in a perfectly competitive market is a price taker. Most businesses strive to be price setters within a certain range of prices by offering a product that is closely related, but not exactly identical to other products in the market. The key strategy for competing in markets characterized by monopolistic competition is to offer products that are differentiated. The products are sort of quasi-substitutes, but they still resemble the original product or service. For example, Apple developed the iPod to compete with existing MP3 players.
According to standard economic theory, a purely competitive market has many buyers and sellers and each individual firm is a price taker. In essence, consumers and producers determine the market price for a product or service. In perfectly competitive markets, there are many sellers and buyers, and entry into and out of the market is easy. In a perfectly competitive market, companies sell their products at prevailing market prices where marginal revenue equals marginal cost. In actuality, every business would like to control the market, set the price, and be a monopolist. All businesses should strive to compete as a monopolist, even if it is in the short term. The goal is to rake in lots of money in the short term because your company is the only seller of a slightly differentiated product or service.An oligopoly is a special case of a monopoly. There are a small number of firms (e.g., 2–8) and they control more than 50% of the market. An oligopolistic market is characterized by low levels of product differentiation and very high fixed costs of entry, where competition is often based on price with elements of both price taking and price leadership. Sample sectors include steel, copper, autos, breakfast cereals, tires, some appliances, and home-care equipment. See McConnell, Brue, and Campbell (2004). This will be short term (unless you have an exclusive patent on a product, own a large oil field, or have exclusive rights to providing cable or utility services) because successful products will always attract the competition. The only way to compete in contemporary markets is to become a serial entrepreneur, to constantly refine and reposition your products, and to function as a near-monopolist in the short term.
1.02: The Importance of Being Entrepreneurial and Being a Short-Term Monopolist
The notion of the entrepreneurial enterprise as a monopolist is not new. Indeed, it has a long tradition and history. KirznerKirzner (1973). noted in 1973 that entrepreneurship may be a step to monopoly power. It is possible to acquire market power by adding unique features or services that are not offered by the competition. When the unique features of a product are combined with a well-thought-out production and distribution process and an understanding of the competitive environment, the results are usually positive. This knowledge and the unique knowledge resources are of course transitory, but in the short run they can provide for near-monopoly power.
Entrepreneurship is currently being viewed as a set of skills that are part of a rational and logical process for identifying and creating opportunities.Sarasvathy and Venkataraman (2008). The process and the skills have been likened to learning how to read, write, calculate, and conduct scientific reasoning. Being a successful entrepreneur requires insight and knowledge of problem solving, strategic planning, new product development, project management, and portfolio management among others. An important reason for participating in the entrepreneurial process is that it involves a significant amount of making and building things. This, in turn, leads to learning-by-doing and the creation of new unforeseen opportunities because you have been participating in the entrepreneurial process. Participation in entrepreneurial activity leads to the creation of opportunities in the form of products and services that were not even conceptualized or anticipated in the beginning. The entrepreneurial process actually creates new markets via innovation and product differentiation. Our definition of entrepreneurship focuses on a continuous process for creating new and enhanced products and services.
Entrepreneurship is a risky endeavor involving the continuous creation and re-creation of a new enterprise, a new product, or a new idea.
The origin of the word entrepreneur can be traced to Old French. Entrepreneurs were individuals who undertook risky endeavors such as theatrical productions. Risk is an inherent part of entrepreneurship. If there is no risk involved and there is still money to be made, then the endeavor is probably a gift. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/01%3A__Concepts_in_the_Context_of_Monopolistic_Competition/1.01%3A__Monopolistic_Competition.txt |
Developments in economics, marketing, operations management, and information technology have now brought the vision of customization and personalization to reality.Arora et al. (2008). Consumers want products and services tailored to their personal needs, but they also want products that are standardized, mass produced, and inexpensive. It is possible to assemble products and services using standardized processes and standardized modular components and still achieve product differentiation. Autos, global positioning systems (GPSs), tax software, operating systems, refrigerators, and so forth are all designed so that features and performance can be easily added and subtracted. The key principle in designing products and services is to design for flexibility and to continuously improve those products and services. This is the essence of a product differentiation strategy and the only way to survive under monopolistic competition.
1.04: Entrepreneurship Can Be Found in Large and Small Companies
Large companies can be entrepreneurial, but as a company scales up it is difficult to maintain entrepreneurial momentum. For example, several promising employees left Google for the relatively entrepreneurial environment of Facebook.Miller (2010, November 28). This is a natural phenomenon in high-tech enclaves such as Silicon Valley, but there was reason for concern because Google had grown to 23,000+ employees. Google was being viewed as slow and lumbering, too bureaucratic, and too slow to respond to the innovative possibilities of emerging technologies. Google has taken several steps to retain entrepreneurial talent by permitting them to work independently and letting them recruit individuals with relevant skills.
It does not matter if a firm is a gigantic monolithic multinational or a small start-up company manufacturing kazoos or even a mom and pop organization designing and launching Web services. The objective is the same: design products and services that are new and unique, easily differentiable, and adaptable to the needs of consumers. Entrepreneurial guru, blogger, and author Guy Kawasaki describes the situation perfectly:
A great company anticipates what a customer needs—even before she knows she wants it … the key to driving the competition crazy is outinnovating, outservicing, and outpricing … Create a great product or service, put it out there, see who falls in love with it …Kawasaki (2008).
1.05: The Kingpins of Product Differentiation and Entrepreneurial Innovation Activity
Jeff Bezos, founder and CEO of Amazon.com, and Steve Jobs, the former CEO of Apple, are excellent models of serial entrepreneurship and the differentiation strategy. Many businesses give lip service to the notion of satisfying customers’ wants. Bezos means it. He is a maker of markets, a veritable doer and inventor. Amazon did not have skills in developing electronic books or selling cloud computing, so Bezos embarked on a mission to develop competencies in electronic books and cloud computing. His goal was to satisfy customer needs for books anywhere and computing anywhere at any time at an attractive low price. Bezos even enlisted a Harvard MBA to craft a business plan for the cloud computing initiative. Here is the essence of the Bezos approach for developing new businesses:
• The business should be capable of generating significant returns.
• The business should be able to scale substantially.
• The business should address an underserved market.
• The market should be highly differentiated.
• The opportunity should be in an area where a company is well-positioned to provide a new service.
Steve Jobs was always an experimenter and a doer. Although some of Apple’s products, such as the Newton, the Lisa, and Apple TV, might be considered failures, he bounced back numerous times and introduced dazzlingly exceptional products that have and still are dominating the market. He is a superb example of an experimenter who sometimes failed in the marketplace, but learned from his mistakes and achieved subsequent success. This is the hallmark of the serial entrepreneur.
Our view of innovation does not require an expensive research lab, but it can. It does not demand a large team of physicists, chemists, engineers, and software developers, but it can. It does not need lots of money, even though it helps. Innovation, as always, just demands hard work and constant attention to searching for new ideas and building things, and is often accompanied by failure. Success is the result of a never-ending process of trial and error and being entrepreneurial.
1.06: Radical and Incremental Innovation
The two primary categories of innovation are radical and incremental. Radical innovation tends to replace existing ideas, products, services, or processes. They are innovations that are very different or even revolutionary and they replace existing ideas, products, services, or processes and perhaps lead to markets that were previously nonexistent. Radical innovation can lead to massive changes in an industry and to what is referred to as creative destruction in the marketplace. The internet, the horseless carriage, GPSs, and digital encoding of music and video technology were radical innovations resulting in the development of new markets.
Incremental innovations involve smaller improvements in ideas, products, services, and processes. They are like adding unique features to a product or service. But even incremental improvements can have a radical effect on the marketplace. For example, consider the incremental improvements in wireless phones that eventually lead to the development of Apple’s iPhone and to the numerous smartphone offerings. | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/01%3A__Concepts_in_the_Context_of_Monopolistic_Competition/1.03%3A_The_Entrepreneur_Should_Design_Products_and_Services_for_Continuous_Product_Differentiation_a.txt |
There are a number of factors that influence the diffusion of products and technology. These factors include whether the technology solves an important problem, how well the public or target market understands the technology, the value versus cost calculation made by consumers, how well the product or technology has been marketed, the effectiveness of the social network in communicating the benefits of the technology, the effectiveness of the supply chain in delivering quality products in a timely manner, and finally, how well the technology performs. Performance is the most important factor influencing diffusion, but it can be trumped by any of these factors. There were nearly a quarter of a million patents granted by the U.S. Patent Office in 2010. There have been nearly 5.2 million patents granted since 1963.Patent Technology Monitoring Team (n.d.). The point is that technology development never stops.
The diffusion and subsequent awareness of a product usually lags increases in product performance (see Figure 1.3 "Diffusion Lags Performance"). This is in part related to Moore’s law. The essence of Moore’s law is that the performance of products increases over time, whereas the cost of the product stays the same or decreases. This increase in performance is a function of technological developments and, of course, the learning curve. The idea behind the learning curve is that a company or an individual gets better at doing something the more they do it. Moore originally stated the idea in the context of computer-processing power (see Figure 1.3 "Diffusion Lags Performance").
Figure 1.3 Diffusion Lags Performance
Moore is widely known for “Moore’s Law,” in which he predicted that the number of components the industry would be able to place on a computer chip would double every year. In 1975, he updated his prediction to once every 2 years. It has become the guiding principle for the semiconductor industry to deliver ever-more-powerful chips while decreasing the cost of electronics.Moore (n.d.).
Over time, individual firms and the industry become more efficient and the products have better features. The net result is that product performance increases, production capabilities increase, and the cost of production decreases. Increases in product performance are coupled with improvements in manufacturing efficiency and attract more customers. Research and development (R&D) and learning curve effects drive all this.Spence (1981). One of the most important outcomes of the learning curve is that it provides short-term cost advantages to those firms that achieve large market share and additionally creates barriers to market entry. The essence of Moore’s law is that organizations learn by doing. They begin to break down tasks, tasks become specialized, and some tasks are automated. These organizations also begin to develop complementary competencies that are the foundation for new innovations and products.
1.08: Discontinuities Chasms and Hype in the Diffusion Process
Some technologies and products fail very quickly because they are simply not effective. Others do not fail initially because of the hype surrounding the product. But they eventually flop because existing customers become disillusioned and communicate their dissatisfaction in a variety of informal and formal communication networks. There are also instances where a product is very useful, yet fails because of inadequate marketing and a problematic supply chain. In all of these instances, the traditional S-curve is not suitable for understanding and illustrating discontinuities in the diffusion and awareness of a new product or emerging technology.
Figure 1.4 Transistor Count and Moore's Law
A very popular approach to understanding growth and diffusion of technologies and products is Gartner’s Hype Cycle.Gartner (n.d.). It is an adaptation of the technology life cycle and attempts to deal with discontinuities in adoption. One of the more interesting features of Gartner’s Hype Cycle is that it takes into account the unbridled and almost euphoric optimism that accompanies the introduction of some technologies and, of course, the inevitable precipitous decline of the next-best thing (see Figure 1.5 "Gartner Hype Cycle"). The Hype Cycle consists of five phases: (1) the Technology Trigger, (2) the Peak of Inflated Expectations, (3) the Trough of Disillusionment, (4) the Slope of Enlightenment, and (5) the Plateau of Productivity.
Another approach to handling the very difficult cross-over between awareness of the technology and massive adoption was developed by Geoffrey Moore.Moore (1999). He uses a bell curve to model technology and adds a couple of cracks or discontinuities in the curve to illustrate the difficult diffusion issues that need to be dealt with when selling high-technology products. He notes that there is a large chasm that has to be crossed when a technology transitions from emerging and glitchy technology to productive, easy-to-use, and readily applicable to solving problems. The early adopters of an emerging technology are usually more willing to put up with the glitches than the masses. Technologies and products that are not capable of making the transition fade into the chasm.
Figure 1.5 Gartner Hype Cycle
1.09: Product and Technology Life Cycles
Life cycles are a very useful way to understand how products and technology evolve over time. They are very useful in tracking product and process differentiation. They can be used to understand the evolution, growth, and decline of ideas and phenomena in the physical world, the plant and animal kingdom, and technology. The most commonly used life cycles in business are the technology life cycles and the product life cycles. They are used to track the diffusion of technologies and products.
Diffusion is the acceptance, adoption, and awareness of a technology or a product by individuals. The technology and product life cycles are essentially the same, except the product life cycle is focused on selling products while the technology life cycle is focused on innovation. The technology and product life cycles consists of four phases that follow the classic S-curve and they consist of awareness of the technology, technological growth, technological maturity, and a decline of interest in the technology (see Figure 1.1 "Technology Life Cycle"). Figure 1.2 "Technology Life Cycle Profile in 2011" illustrates a snapshot of where we believe several technologies belong in the life cycle in 2011.
1.10: The Bridge Model of Technology Life Cycle
We have adapted the Hype Cycle model and the chasm approaches and integrated them into the traditional S-curve that is used to model the technological life cycle. As illustrated in Figure 1.6 "Crossing the Bridge of Hope and Climbing the Bridge of Adversity", there is often a crisis of adoption as a technology begins to transition from awareness to expansion. There is a major bridge to be crossed where attention to design and marketing and performance are critical. It is the Bridge of Hope. If the performance of the technology is inadequate or the technology falls off of the public’s radar, then there is a diffusion crisis, and the technology can fall into the chasm and become irrelevant. It is possible to crawl out of the chasm with better product design, an influx of resources, and better marketing, but it is a difficult climb out of the abyss. The climb out of the abyss is over the Bridge of Adversity. Companies that have invested in emerging technologies are forever hopeful that they can cross the abyss from relative obscurity to expansion and reap the monetary rewards derived from the expansion of the marketplace.
Figure 1.6 Crossing the Bridge of Hope and Climbing the Bridge of Adversity | textbooks/biz/Business/Entrepreneurship/Developing_New_Products_and_Services/01%3A__Concepts_in_the_Context_of_Monopolistic_Competition/1.07%3A_Diffusion_of_a_Technology_Usually_Lags_Performance.txt |
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