What Causes Small Businesses to Prosper?

by Moya K. Mason

Short Answer: Many researchers say it is having a comprehensive business plan.

Survival is also closely associated with age and size of the firm. The longer a firm has been in business the more likely that it will continue in business. The same is true of size. A study of firms found that 85% were still in business after three years, if they had developed a business plan at the outset.

Planning Plays an Integral Part in Success

HBS professor Nitin Nohria along with William Joyce and Bruce Roberson studied 160 companies to look for common management practices that succeed.

The dot-com boom of the 1990s had changed the rules of business forever, it seemed; all you needed was a sexy IPO, cold nerve, and the magic carpet of momentum trading. But even as entrepreneurs and venture capitalists were dismissing traditional business models as antiquated and conventional business wisdom as old school, we found ourselves wondering if they were right. For years we had watched new management ideas come and go, passionately embraced one year, abruptly abandoned the next. "What really works?" we wondered. Our curiosity prompted us to undertake a major, multiyear research effort in which we carefully examined more than 200 well-established management practices as they were employed over a ten-year period by 160 companies.

Our findings took us quite by surprise. Most of the management tools and techniques we studied had no direct causal relationship to superior business performance. What does matter, it turns out, is having a strong grasp of the business basics. Without exception, companies that outperformed their industry peers excelled at what we call the four primary management practices-strategy, execution, culture, and structure. And they supplemented their great skill in those areas with a mastery of any two out of four secondary management practices-talent, innovation, leadership, and mergers and partnerships.

We learned, for example, that it doesn't really matter if you implement ERP software or a CRM system; it matters very much, though, that whatever technology you choose to implement you execute it flawlessly. Similarly, it matters little whether you centralize or decentralize your business as long as you pay attention to simplifying the way your organization is structured. We call the winning combination the 4+2 formula for business success. A company that consistently follows this formula has better than a 90 percent chance of sustaining superior business performance.

The 160 companies in our study, which we call the Evergreen Project, were divided into forty quads, each comprising four companies in a narrowly defined industry. The companies in each quad began the study period (1986 to 1996) in approximately the same fiscal condition. Yet their fortunes differed dramatically over the decade. One company in each foursome emerged as a winner-it consistently outperformed its peers in the industry throughout our study period; one a loser-it consistently underperformed against its competitors; one a climber-it started off poorly but dramatically improved its performance once it applied the 4+2 formula; and one a tumbler-it began the decade in good shape then fell far behind. Over the ten-year period, investors in the winning companies saw their money multiply nearly tenfold, with total returns to shareholders of 945 percent. By contrast, the average loser produced only 62 percent in total returns to shareholders over the decade.

Winners, losers, climbers, and tumblers-with startling consistency, their fortunes marched in lockstep with how well they performed on the 4+2 practices. Consider how Tennessee-based retailer Dollar General, a winner in our study, fared during our research period compared to Kmart. (The other companies in their quad were Target and the Limited.) Both companies were in roughly the same financial shape in 1986, but Dollar General grew steadily, showing healthy profits year after year. Meanwhile, Kmart floundered, its market share plummeting from 30 percent to 17 percent between 1990 and 2000. (We confirmed our findings in the five years following the study period.) Both companies' performance was directly linked to whether or not they adhered to the 4+2 formula. In the strategy practice, for example, Dollar General never wavered from its focus, which was to provide quality products at a low price to low- and fixed-income consumers. Kmart, by contrast, couldn't seem to decide whether it was focusing on low- or middle-income consumers. What's more, it got distracted by a major foray into specialty retailing, moving even further from its core customers. At the same time, Kmart was trying to compete with Wal-Mart on price-a losing battle and in direct conflict with the organization's effort to go upmarket.

The eight essential management practices we cite are not new, nor is their importance particularly surprising or counterintuitive. But implementing our formula for success is not as simple as it sounds. Companies can all too easily forget or ignore the basics, as we saw in the waning years of the last century. And succeeding at the eight business practices can be hard work. Maintaining a laserlike focus on strategy alone, year in and year out, can be grueling. Yet the winning companies in our study were running full tilt on six tracks at once-impressive when you consider that a single misstep on any of the six can be fatal. Indeed, some of the companies that were deemed winners during our ten-year research period have since stumbled in one dimension or another-for instance, Dollar General lost its focus on the values in its culture and, as a result, recently had to restate its earnings. It's much easier to be a tumbler than it is to remain a winner. Our research found that less than 5 percent of all publicly traded companies maintain a total return to shareholders greater than their industry peers for more than ten years. And so, it seems, there is value in being reminded from time to time what really works.

Excel at four primary practices

The primary management practices-strategy, execution, culture, and structure-represent the fundamentals of business. But what does it mean to excel in these areas? There are myriad tools and techniques available to help executives master these practices. To improve execution, for example, leaders can employ TQM, Kaizen, or Six Sigma, among others. The conventional wisdom about what works best shifts with the times. Our research shows that while such tools and techniques are helpful and even necessary in streamlining execution, for instance, or developing strategy, there is no single, obvious choice that will bring a company success. There are, however, hallmarks of effective strategy, execution, culture, and structure-which virtually all of our forty winners demonstrated for ten solid years. That's no small accomplishment, especially given the limited resources companies have and the unpredictable pressures they face.

Making 4+2 work for you

Besides identifying the management practices that can significantly affect a company's performance, we've developed a list of behaviors that support excellence in each practice. The practices and accompanying mandates are outlined below.

Primary management practices

Strategy
Whatever your strategy, whether it is low prices or innovative products, it will work if it is sharply defined, clearly communicated, and well understood by employees, customers, partners, and investors.

Execution
Develop and maintain flawless operational execution. You might not always delight your customers, but make sure never to disappoint them.

Culture
Corporate culture advocates sometimes argue that if you can make the work fun, all else will follow. Our results suggest that holding high expectations about performance matters a lot more.

Structure
Managers spend hours agonizing over how to structure their organizations (by product, geography, customer, and so on). Winners show that what really counts is whether structure reduces bureaucracy and simplifies work.

Secondary management practices

Talent
Winners hold on to talented employees and develop more.

Innovation
An agile company turns out innovative products and services and anticipates disruptive events in an industry rather than reacting when it may already be too late.

Leadership
Choosing great chief executives can raise performance significantly.

Mergers and Partnerships
Internally generated growth is essential, but companies that can master mergers and acquisitions can also be winners.

In Brand New, Nancy F. Koehn offers interrelated "business biographies" of six visionary entrepreneurs through more than 250 years of history.

All six built strong, meaningful brands and launched companies, often literally from scratch, which have endured to this day. The six include Josiah Wedgwood, the eighteenth-century British pottery and china manufacturer; H.J. Heinz, of the famous food company; Marshall Field, the Chicago retailer; Estée Lauder, who created one of the largest cosmetics companies in the world; Howard Schultz, of Starbucks Coffee Company; and Michael Dell, of Dell Computer Corporation.

Their genius, she points out, emerged through their ability to plumb the demand side of business rather than just the supply side. All six were able to understand how rapid, widespread socioeconomic change affected consumers' preferences and then not only satisfy, but also anticipate buyers' evolving wants and needs. And they did so profitably.

Nevertheless, each, she writes, instinctively grasped the fundamentals of earning long-term customer trust and loyalty.

Even though they didn't all use the word 'branding,' these three entrepreneurs knew that 'If we build it, they may not necessarily come.' This is a lesson that we could all learn better in the wake of the recent 'dotcom implosion.' Wedgwood, Heinz, and Field needed to make a market [for a product and/or service] and show consumers why their respective offering improved their lives. This meant appealing to them. Engaging them. And then, once consumers had initially tried their product or service, earning their repeat business and their loyalty by creating trust between the product, the company, and the consumer.

To me, that is the strategic essence of a great brand: For a company it creates distinction, sustainable, defensible, and value-added differentiation. And clearly, that is what Wedgwood, and Heinz, and Marshall Field used it for.

When you are making a market, who you choose as your initial customers and whom you decide not to market to is critically important in defining what the brand and company will become.

And he did it by listening to consumers. Wedgwood, Heinz, and Field all understood that they needed consumer feedback. Success wasn't based on just what they offered as it came out of their factories or-in the case of Field-onto their sales floor. Wedgwood conducted some of the first focus groups on record with aristocrats and gentry about new vases. Henry Heinz went door to door, or grocery store to grocery store, saying, 'What do you think about these pickles?' Field walked the floors of his Chicago department store observing customer reactions to merchandise, displays, and, of course, salesclerks. As each of these entrepreneurs gathered consumer feedback, they adjusted their product and services accordingly.

Effective brand creation and management have a vital interactive component, and this two-way communication served Wedgwood remarkably well.

The ability to translate individual creativity into sustained organizational capabilities is a key success factor for entrepreneurs, says HBS professor Nancy F. Koehn.

First, each had a huge amount of determination and commitment.

Second, they also had the commitment to bring their offerings to large numbers of people, to make a market.

A third important factor in understanding how these entrepreneurs created such successful products, brands, and organizations is their individual knowledge of the products. Successful entrepreneurs all know an extraordinary amount about the goods and services they are offering.

A fourth factor has to do with recognizing talent. Somewhere along the way-and there is no single defining, easily discernible, moment-each of the six entrepreneurs in Brand New also developed the ability to identify ability in others: organizational and strategic talent, as well as commercial imagination. Lauder, Schultz, and Dell-like the three entrepreneurs in the past-shared a willingness to delegate responsibility to talented people, to learn from these people, to institutionalize the capabilities they were helping to develop, and create a company from them.

So in making the transition from the garage to company headquarters, one very important issue is dedication: the wish to see a start-up become an institution. There is also the talent for choosing other great institution builders, and the inclination and willingness to give them the power to do this.

You must learn, as Howard Schultz once said, that successful businesses cannot sustain themselves on exhilarating ideas alone. They require a healthy balance between the forces of vision and motivating passion and those of process, structure, and efficient systems.
http://hbswk.hbs.edu/item.jhtml?id=2174&t=entrepreneurship
http://hbswk.hbs.edu/item.jhtml?id=2175&t=entrepreneurship&sid=2177&pid=2207&cache=t

The Right Team and Talent

"When launching a start-up, the most critical task, without question, is finding and assembling a compatible team that possesses the appropriate expertise," advises Rosin, echoing the words of Paul Maeder. "Ignoring this can put even the best business concept at serious risk."
http://hbswk.hbs.edu/item.jhtml?id=2027&t=entrepreneurship

In an article in the Harvard Business Review, HBS Professor William Sahlman suggests that a great business plan is one that focuses on a series of questions.

These questions relate to the four factors critical to the success of every new venture: the people, the opportunity, the context, and the possibilities for both risk and reward.

The questions about people revolve around three issues: What do they know? Whom do they know? and How well are they known? As for opportunity, the plan should focus on two questions: Is the market for the venture's product or service large or rapidly growing (or preferably both)? and Is the industry structurally attractive?

Then, in addition to demonstrating an understanding of the context in which their venture will operate, entrepreneurs should make clear how they will respond when that context inevitably changes. Finally, the plan should look unflinchingly at the risks the new venture faces, giving would-be backers a realistic idea of what magnitude of reward they can expect and when they can expect it.

A great business plan is not easy to compose, Sahlman acknowledges, largely because most entrepreneurs are wild-eyed optimists. But one that asks the right questions is a powerful tool. A better deal, not to mention a better shot at success, awaits entrepreneurs who use it.
http://hbswk.hbs.edu/item.jhtml?id=565&t=entrepreneurship

Dan Bricklin Suggests a Few Lessons That Have Made All the Difference to His Success:

First, understand your true talent and what value you bring to an endeavor. Too often, entrepreneurs don't value the work others do, and they tend to overestimate their own contributions.

Second, don't wait to get started. Or at least understand that if you wait, you may have less flexibility in making trade­offs between the business and your standard of living.

No matter what, however, you must always be a careful spender. In every business I've started-whether backed by venture capital funds, family investors, or my own bank account-I've arranged my affairs so that on short notice I can afford to live without a salary for a year.

The final and most important lesson every entrepreneur must learn is this: You are not your business. On those darkest days when things aren't going so well-and trust me, you will have them-try to remember that your company's failures don't make you an awful person. Likewise, your company's successes don't make you a genius or superhuman. To avoid this ego trap, first you should consider the difference between pushing a tidal wave and riding one, and second, you should accept that every business faces challenges beyond its control. Obviously, these are difficult points to remember when you're heading for a rough patch, but I tell you from experience, business failure is not the end of the world.
http://hbswk.hbs.edu/item.jhtml?id=2569&t=entrepreneurship

There are Four Basics of Success in Small Business:

  1. Sound management practices.
  2. Industry experience.
  3. Technical support.
  4. Planning ability.

Few people start a business with all of these bases covered. Honestly assess your own experience and skills; then look for partners or key employees to compensate for your deficiencies.

Additionally, you need a business plan.

A business plan precisely defines your business, identifies your goals and serves as your firm's resume. Its basic components include a current and performance balance sheet, an income statement and a cash flow analysis. It helps you allocate resources properly, handle unforeseen complications, and make the right decisions. Because it provides specific and organized information about your company and how you will repay borrowed money, a good business plan is a crucial part of any loan package. Additionally, it can tell your sales personnel, suppliers and others about your operations and goals.
http://www.sba.gov/starting/faqs/busquest.html

The Three Criteria for a Successful New Business: a 100-year-old concept, an antiquated industry, and a niche.

1. Number one, I want a concept that's been around for 100 years or more. OK, maybe less than 100 years. The important thing is that it's an established concept, one that everybody understands. It's not something new and revolutionary. Why? Because there is nothing more expensive than educating a market. I found that out the hard way when I took my delivery business to Atlanta in the early 1980s. At the time, companies there handled deliveries by putting a secretary in a cab and sending her off with a package. The secretaries didn't want our service -- they liked having time out of the office -- and the companies didn't know they needed it.

2. Of course, if you're going to compete, you have to be able to differentiate yourself with customers. Which brings me to the second criterion: I want an industry that is antiquated. I don't necessarily mean "old-fashioned." I'm talking about a business in which most companies are out of step with the customer. Maybe the customer's needs have changed and the suppliers haven't paid attention. Maybe they're not up-to-date on the latest technology. In any case, there has been a change, and the industry hasn't followed it.

3. That gave me my third criterion for a successful new business: a niche. In fact, having a niche is critical to every start-up, but not for the reason most people think. It has to do with those high gross margins you must have to make sure your start-up capital lasts long enough for your business to achieve viability. If you're the new kid in town, you can't compete on price, because you'll go out of business. On the other hand, you do have to get customers. That means offering them more value at the going rate.

I don't mean to discourage the visionary geniuses out there. I'm all for advances in technology and the creation of new industries. If you're another Thomas Edison, Fred Smith, or Bill Gates, forget my criteria. Go right ahead. Change the world.

But most of us go into business with more modest goals. We're happy to wind up with a company that survives and grows. If you're one of us, take my advice: Don't try to turn that revolutionary new concept into a business. Find a great old concept instead.
http://www.inc.com/magazine/19960401/1616.html

Culture is vital, in spite of the feelings of some managers that it's "soft" and hardly worthy of the sort of attention devoted to manufacturing or IT.

Winning companies... design and support a culture that encourages outstanding individual and team contributions, one that holds employees-not just managers-responsible for success. Winners don't limit themselves to besting their immediate competitors. Once a company has overmatched its rivals in, say, the effectiveness of its logistics, it looks outside the industry. Employees may ask, for instance, "Why can't we do it better than FedEx?" If the goal is unreachable, it still represents an opportunity for high-performing employees and managers: "If we can't be the best at logistics, why not outsource it to a partner that can?" http://www.internettime.com/blog/archives/000557.html

Is Entrepreneurship For You?

In business, there are no guarantees. There is simply no way to eliminate all the risks associated with starting a small business - but you can improve your chances of success with good planning, preparation, and insight. Start by evaluating your strengths and weaknesses as a potential owner and manager of a small business. Carefully consider each of the following questions:

Are you a self-starter? It will be entirely up to you to develop projects, organize your time, and follow through on details.

How well do you get along with different personalities? Business owners need to develop working relationships with a variety of people including customers, vendors, staff, bankers, and professionals such as lawyers, accountants, or consultants. Can you deal with a demanding client, an unreliable vendor, or a cranky receptionist if your business interests demand it?

How good are you at making decisions? Small business owners are required to make decisions constantly - often quickly, independently, and under pressure.

Do you have the physical and emotional stamina to run a business? Business ownership can be exciting, but it's also a lot of work. Can you face six or seven 12-­hour workdays every week?

How well do you plan and organize? Research indicates that poor planning is responsible for most business failures. Good organization ­ of financials, inventory, schedules, and production ­can help you avoid many pitfalls.

Is your drive strong enough? Running a business can wear you down emotionally. Some business owners burn out quickly from having to carry all the responsibility for the success of their business on their own shoulders. Strong motivation will help you survive slowdowns and periods of burnout.

How will the business affect your family? The first few years of business start­up can be hard on family life. It's important for family members to know what to expect and for you to be able to trust that they will support you during this time. There also may be financial difficulties until the business becomes profitable, which could take months or years. You may have to adjust to a lower standard of living or put family assets at risk in the short-term.

There is not a single management skill more critical to your personal and professional success as an entrepreneur than learning to delegate.

There is much more to delegating than meets the eye. It does not mean to simply hand out assignments. It is a science and an exercise in understanding one's self. Read more at: http://www.sba.gov/managing/growth/delegate.html

Top 10 Small Business Tips

Launching your own business is tough and the line between success and failure can be fine; smallbusiness.co.uk's Top Ten small business Tips help you make the right decisions from the outset.

1. Involve your family
If you have a husband or wife or children, involving them in the decision to go it alone is important. Your home atmosphere should be very supportive, particularly in the early stages. Your family could also be useful as a sounding board, helping out with the odd task or providing feedback or finance.

2. Analyse your personality
You need to ask yourself if you are the right person to start a business. Compile a checklist with the help of the following questions: Can you work long hours? Can you take criticism? Will you be able to cope with financial insecurity? If your business struggled in the early stages, would you continue? Write down the reasons why you are starting a business.

3. Make sure your product is a must-have not a nice-have
Once you've got an idea you need to know that people will need it enough to want to buy it. Many people opt to begin a business by using a skill that they have acquired in their spare time as a hobby, such as jewellery-making.

4. Your idea doesn't have to be new
Trying to sell a product that is new can be an uphill struggle. Being first is not always best, as you have to educate a market and convince them of the need for your product. So don't be put off if your idea has been done before - think about how you can do it differently, by including an additional feature or benefit.

5. Know your market better than your competitors
Carry out as much market research as possible. Find out about your market place, concentrating on areas such as the demand, your competitors and the size of the market. Talk to potential customers, suppliers, competitors, distributors and ex-employees of competitors.

6. Toe-dip
Everyone has different motivations for starting a business, and toe-dipping means you can test your idea out without risking everything. You can carry on earning money from your job while you are starting up. Use your spare time to carry out your market research.

7. Be honest about your weaknesses
Identify what you do well and what you do badly, dividing it into areas such as financial, marketing, operational and general management. Be honest with yourself, but also be realistic. Try and get someone else to evaluate your answers - another person's perspective can be very valuable. Identifying your weakness will help you to recognise what you are good at, and which areas you will need to find someone who can do a better job than you.

8. Get a good mentor on board
Remember - two heads are better than one. Seek out the advice of a family friend who has the experience of being in business, or someone who is recommended to you, or someone you are close to. Consider giving them a share of the profits or equity in your company in return for advice.

9. Justify every assumption in your business plan
But remember that whatever you write down is not set in stone. Your business plan should have longer-term objectives, estimates and forecasts - try to make as many of your goals as possible measurable. The two most important reasons for having a plan are to show to outsiders if you need to raise money, and to help you keep your business on a planned course, so you can spot when things are not going to plan.

10. Keep your business plan succinct
An ideal format for your plan, if you intend it to be for outside use, is to have between three and ten pages of text that draw out the important points, plus a series of financial figures. Excessive detail should be confined to appendices.

Nine Lessons Learned for Start-up Success

The following are "nine steps to success" that are based on many "real-life" lessons of successes and failures.

1: GET SMART
You may know a lot about your product or service, but not be knowledgeable about the practical aspects of starting and operating a business. Take advantage of available information as well as the various support organizations such as your local Small Business Development Center, the Small Business Administration, and the Service Corp of Retired Executives.

2: GET ADVICE
You cannot be an expert on everything. Get assistance from as many sources as possible. Talk to your attorney, accountant, banker, friends, family and the competition.

3: PLAN
A major reason for business failure is lack of planning. Failing to plan is a plan for failing. Prepare a strategic plan for your business that clearly defines your mission, your present situation, your strategies, and where you want to be in the next three to five years. For more information on strategic planning, visit: www.tsbj.com/editorial/03050503.htm.

4: PROTECT YOURSELF
Before you start operations, make certain you are insured and protected legally. Select a business legal structure (talk to your attorney, if necessary) and develop an insurance program (talk with an independent insurance agent).

5: HIRE LATER
Delay hiring employees as long a possible. The legal complexities of hiring and maintaining employees (even one!) can be daunting and take up a lot of time. A better option may be to "outsource". Outsourcing is becoming more affordable as the business-to-business industry on the internet continues to become more popular.

6: USE A COMPUTER
Operating without a computer will put you at an immediate disadvantage, financially and competitively. It is simply too valuable as a time-saving tool. Don't be overwhelmed at the apparent complexity of a computer. Once you begin, it is quite easy to use. You will want a computer to take advantage of the Internet to send e-mail messages and search the world wide web for information. It is also an invaluable marketing tool.

7: PERSIST
There will be good times and bad times. Be persistent and stubborn-view any failure as a learning experience and an opportunity for additional success.

8: VISUALIZE SUCCESS
Keep your goals in mind and expect that you will achieve them. Don't lose sight of your goal(s)-keep striving.

9: ACT ON A GOOD IDEA

Characteristics of Successful Entrepreneurs Studies show that the personalities and individual characteristics of the entrepreneurs who start new businesses may be the most important factors of success.

An individual's management skills have become so important that venture capitalists have begun to revise the way they look at potential new venture deals. Rather than betting on the "horse" (i.e., the business idea and the business plan), they are now much more likely to bet on the "jockey" and look for someone who has a history of successful past entrepreneurial efforts. These investors have come to realize that a good business plan does not necessarily make a good business, but a good entrepreneur can, whether the business plan is optimal or not.

The 12 Steps (Advice) to Entrepreneurial Success

The lesson? To greatly increase your chance of success, find out as much as you can BEFORE you open your doors.

Talk to people who run their own businesses, especially businesses similar to yours, and get a realistic understanding of the time, financial, and emotional resources necessary. Keep your eyes open - not to the possibility of failure, but to the very real demands of running your own business. -- http://www.usatoday.com/money/smallbusiness/columnist/abrams/2004-05-06-success_x.htm


Related Papers

Research on Small Businesses
Worldwide Business Startups
What Causes Small Businesses to Fail?
Truth About Franchising


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