It established a superior product-design process with multifunctional teams that included marketing and technical support.
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And Intuit invested heavily to provide customers with outstanding technical support for free. After defining or redefining the business and verifying its basic soundness, an entrepreneur should determine whether plans for its growth are appropriate. Different enterprises can and should grow at different rates. Setting the right pace is as important to a young business as it is to a novice bicyclist. For either one, too fast or too slow can lead to a fall. The optimal growth rate for a fledgling enterprise is a function of many interdependent factors.
Finding the optimal growth rate for a new enterprise is a difficult and critical task. To set the right pace, entrepreneurs must consider many factors, including the following:. Economies of scale, scope, or customer network. When scale causes profitability to increase considerably, growth soon pays for itself. And in industries in which economies of scale or scope limit the number of viable competitors, establishing a favorable economic position first can help deter rivals.
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The ability to lock in customers or scarce resources. Rapid growth also makes sense if consumers are inclined to stick with the companies with which they initially do business, either because of an aversion to change or because of the expense of switching to another company. Similarly, in retail, growing rapidly can allow a company to secure the most favorable locations or dominate a geographic area that can support only one large store, even if national economies of scale are limited.
If rivals are expanding quickly, a company may be forced to do the same. Resource constraints. A new venture will not be able to grow rapidly if there is a shortage of skilled employees or if investors and lenders are unwilling to fund an expansion that they consider reckless. A venture that is growing quickly, however, will be able to attract capital as well as the employees and customers who want to go with a winner.
Internal financing capability. When a new venture is not able to attract investors or borrow at reasonable terms, its internal financing capability will determine the pace at which it can grow. Businesses that have high profit margins and low assets-to-sales ratios can fund high growth rates. A self-funded business, according to the well-known sustainable growth formula, cannot expand its revenues at a rate faster than its return on equity.
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Tolerant customers. When a company is young and growing rapidly, its products and services often contain some flaws. In some markets, such as certain segments of the high-tech industry, customers are accustomed to imperfect offerings and may even derive some pleasure from complaining about them. Companies in such markets can expand quickly. But in markets in which buyers will not stand for breakdowns and bugs, such as the market for luxury goods and mission-critical process-control systems, growth should be much more cautious.
Personal temperament and goals. Some entrepreneurs thrive on rapid growth; others are uncomfortable with the crises and fire fighting that usually accompany it. The third question entrepreneurs must ask themselves may be the hardest to answer because it requires the most candid self-examination: Can I execute the strategy? Entrepreneurs must examine three areas—resources, organizational capabilities, and their personal roles—to evaluate their ability to carry out their strategies. The lack of talented employees is often the first obstacle to the successful implementation of a strategy.
During the start-up phase, many ventures cannot attract top-notch employees, so the founders perform most of the crucial tasks themselves and recruit whomever they can to help out. After that initial period, entrepreneurs can and should be ambitious in seeking new talent, especially if they want their businesses to grow quickly. Entrepreneurs who hope to turn underqualified employees into star performers are almost always disappointed.
In determining how to upgrade the workforce, entrepreneurs must address many complex and sensitive issues: Should I recruit individuals for specific slots or, as is commonly the case in talent-starved organizations, should I create positions for promising candidates? Are the recruits going to manage or replace existing employees?
How extensive should the replacements be? Should the replacement process be gradual or quick? Should I, with my personal attachment to the business, make termination decisions myself or should I bring in outsiders? A young venture needs more than internal resources. Entrepreneurs must also consider their customers and sources of capital.
Ventures often start with the customers they can attract the most quickly, which may not be the customers the company eventually needs. Similarly, entrepreneurs who begin by bootstrapping, using money from friends and family or loans from local banks, must often find richer sources of capital to build sustainable businesses.
For a new venture to survive, some resources that initially are external may have to become internal. Many start-ups operate at first as virtual enterprises because the founders cannot afford to produce in-house and hire employees, and because they value flexibility. But the flexibility that comes from owning few resources is a double-edged sword.
Just as a young company is free to stop placing orders, suppliers can stop filling them. Furthermore, a company with no assets signals to customers and potential investors that the entrepreneur may not be committed for the long haul. A business with no employees and hard assets may also be difficult to sell, because potential buyers will probably worry that the company will vanish when the founder departs.
To build a durable company, an entrepreneur may have to consider integrating vertically or replacing subcontractors with full-time employees. The hard infrastructure an entrepreneurial company needs depends on its goals and strategies. They must invest more in organizational infrastructure than their counterparts who want to build simple, single-location businesses at a cautious pace.
Few entrepreneurs start out with both a well-defined strategy and a plan for developing an organization that can achieve that strategy. The founders of such ventures improvise. They perform most of the important functions themselves and make decisions as they go along. Once that becomes their goal, however, they must start developing formal systems and processes.
Such organizational infrastructure allows a venture to grow, but at the same time, it increases overhead and may slow down decision making. How much infrastructure is enough and how much is too much?
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Delegating tasks. As a young venture grows, its founders will probably need to delegate many of the tasks that they used to perform. To get employees to perform those tasks competently and diligently, the founders may need to establish mechanisms to monitor employees and standard operating procedures and policies. Consider an extreme example.
Randy and Debbi Fields pass along their skills and knowledge through software that tells employees in every Mrs. Fields Cookies shop exactly how to make cookies and operate the business. The software analyzes data such as local weather conditions and the day of the week to generate hourly instructions about such matters as which cookies to bake, when to offer free samples, and when to reorder chocolate chips.
Telling employees how to do their jobs, however, can stifle initiative. Companies that require frontline employees to act quickly and resourcefully might decide to focus more on outcomes than on behavior, using control systems that set performance targets for employees, compare results against objectives, and provide appropriate incentives.
Specializing tasks. In a small-scale start-up, everyone does a little bit of everything, but as a business grows and tries to achieve economies of scale and scope, employees must be assigned clearly defined roles and grouped into appropriate organizational units. An all-purpose workshop employee, for example, might become a machine tool operator, who is part of a manufacturing unit.
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Specialized activities need to be integrated by, for example, creating the position of a general manager, who coordinates the manufacturing and marketing functions, or through systems that are designed to measure and reward employees for cross-functional cooperation. Poor integrative mechanisms are why geographic expansion, vertical integration, broadening of product lines, and other strategies to achieve economies of scale and scope often fail. Mobilizing funds for growth.