"Companies that grow for the sake of growth or that expand into areas outside their core business strategy often stumble. On the other hand, companies that build scale for the benefit of their customers and shareholders more often succeed over time."
---Jamie Dimon (Chairman, JPMorgan Chase)
If you Google "biggest problems facing entrepreneurs today," you'll find 100's of different answers on the subject. There are dozens of laundry lists to choose from and most offer some very good suggestions on the pitfalls you should avoid. That said, you'll find little commentary regarding the impact or importance of each problem in these articles. Therefore, I thought we would add our opinions on the matter into the discussion. We'll start with what we believe the top challenge every entrepreneur will face at one point in their journey is, if they hope to gain traction. As you'll soon learn, it's a challenge that entrepreneurs have faced in free market economies for eons.
If We Knew Then What We Know Now
There's a good chance that you're a foundling entrepreneur or that you work for a startup if you're reading this. If that's the case, I'm sure you have big dreams for your products or services. At least, that was the case with me when I founded my first business back in 2008. It was a real-time valuation service catering to antiques / collectibles merchants and avid hobbyists. My vision was that CollectCentric would quickly become an invaluable resource within the industry. I dreamed we'd one day be the 800 lb. gorilla within the category.
We built a working prototype and began searching for suitable investors so we could bring our concept to market. To make a long story short, CollectCentric was beaten out by another Atlanta-based startup: WorthPoint. Their business plan was more agile than ours and they also had deeper pockets. It turned out that they were also better negotiators too. They locked the principal data supplier (eBay) into a long-term, exclusive agreement. Needless to say, we were no longer able to compete in the category once the deal was announced.
The truth of the matter was that we were blind to factors that our team hadn't ever worked through before. In retrospect, we should have taken time during our development cycle to brief analysts and industry press. They could've been used as eyes and ears to let us know how the competitive landscape was shaping up. If we had done this, we might have altered our strategy and avoided the mistake of launching an also-ran product.
The Universal Challenge: How To Scale?
CollectCentic's tale mirrors similar stories dating back through the centuries (e.g. Nicola Tesla). Like Tesla and countless others, our principal challenge was scalability. A scalable company is one that can maintain or improve profit margins while sales volume increases. In other words, a startup cannot afford to lose revenue traction in order to produce more goods or services unless it has a well thought out strategy to secure a second round of funding (or your first round if you're bootstrapping).
Our revenue forecast was a different matter entirely. We didn't have deep supplier relationships, so we anticipated a rather lengthy ramp up time. This was a barrier for some potential investors and it put us in a difficult negotiating position with others. You have to understand that angel investors take a huge risk when they invest in a startup. Consequently, they generally seek a return of 10x or more on every investment they make. They also generally want to recoup their investment in a relatively short time period. To receive serious consideration from angel Investors your ROI should be 30-40% minimum. Additionally, the payback and dividend period should be no more than five to seven years out. As we found out, it's difficult to come to quick agreement on terms if your revenue streams don't meet these requirements.
What We Learned Along The Way
In hindsight, we made the mistake of underestimating the competition in an emerging market. WorthPoint had the more sustainable business strategy. They went after the suppliers aggressively while we concentrated on both branding and the development of our end user interface. We never saw Worthpoint's agreement with Terapeak (eBay's data aggregator) coming. Naturally, it was a hard pill for all of us to swallow when we learned of the agreement.
beaten into oblivion by experienced entrepreneurs and wiser businessmen just like we were. As an old adage goes, your only two choices as an entrepreneur are "get better or get beaten." In other words, you need to solve your company's scalability equation early or you'll probably be outflanked by your competition.
Author: Erik Gagnon - Managing Partner, Chi Rho Consulting
"All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved."
Effective strategic planning is essential for any entrepreneur who envisions profit and growth for their company. It’s the key to looking toward the future and forging a deliberate path for your organization. In today's competitive marketplaces, effective strategic plans helps executives build their companies based on the values that matter most of them while maintaining their focus and sanity. The alternative is to simply react to the market whenever the wind shifts. In other words, effective strategic planning distinguishes the leaders from the followers.
Traditionally, strategic planning meant going offsite for a few days once a year. Businesses would conduct team building exercises and map out their company's direction and goals for the next 12 to 18 months. Most businesses, particularly large enterprises, felt obliged to engage in this exercise to get their management teams on the same page.
While this traditional goal setting method still holds some value, most companies really aren’t satisfied with the outcome. This is particularly true for startups and other companies with agile business models. A recent survey by The Alternative Board, shows that many entrepreneurs are dissatisfied with the end results of their strategic planning efforts. Indeed, more than 27% of entrepreneurs said that they wished that they had invested more time and effort into strategic planning! Besides more time, 15% of the respondents indicated that they should have spent more money on the their strategic planning processes. "Operations, technology investments and product development were all ranked lower" on the wish list, and only 1% of the entrepreneurs surveyed indicated that would have spent more time seeking venture capital and pursuing investors.
The Consequences of Poor Strategic Planning
It's clear that most of the leaders who were surveyed think strategic planning is essential. The consensus from the respondents who expressed regret is that they did not realize a return on investment for the time and effort spent. Ineffective strategic planning sessions often produce lofty objectives. However, they rarely produce quantifiable long-term results. Unfortunately, we've found that ineffective strategic planning often produces negative outcomes and breeds cynicism throughout the organization.
Startups should pay serious attention to the pitfalls of poor strategic planning. It’s a given that investors are going to expect you to deliver on your mission and end goals. Consequently, you can expect a great deal of scrutiny from qualified investors on exactly how you intend to deliver. You’ll also likely be asked about your backup plan if market forces change or you face unforeseen adversity. Therefore, be certain to avoid these five mistakes when you pull together your team for strategic planning sessions:
1. Lack of Focus
During early-stage strategic planning sessions, companies often get lost in the semantics of defining their mission, vision, and values. They spend a lot of time and effort trying to understand what these terms mean and how they fit together. It becomes mentally exhausting and unproductive. As a result, there’s little creative energy left once they get on to strategic opportunities, implementation and execution.
Tip: Concentrate on activities that are likely to produce long-term results during your initial strategic planning efforts. Ideation sessions and and contingency planning discussions are more likely to produce meaningful results for your company vs consensus building on value and mission statements. These types of activities will also help to create organizational culture where outside-the-box thinking is encouraged and rewarded.
2. Little or No Accountability
In some cases, a company’s strategic planning process becomes a political battle. When innovative strategies threaten established managerial duties, turf wars can ensue. Also, people will point fingers and the blame game will start if things don’t go according to plan, When, divisiveness occurs, key processes are likely to break down and the strategy is likely doomed to failure.
Tips: Set realistic and quantifiable benchmarks for each and every strategic objective. Identify process owners within your executive ranks and tie their compensation to to the benchmark goals. Filter the goals down throughout the organization to key management stakeholders. Produce benchmark metric reports and communicate performance throughout organization on a regular basis.
3. Lack of Flexibility
Many strategic plans become obsolete if market conditions fluctuate or when the competitive landscape changes dramatically. If regular status updates and strategic review sessions aren’t incorporated into your process, the results could be catastrophic to your company.
Tip: In the information age, the ability to adapt quickly to changing conditions is necessary for survival. Goals need to be revisited regularly if you're to stay on point and meet your financial objectives. It's best to adopt strategic best practices that allow you to change direction quickly. Consider incorporating agile planning processes, scenario planning approaches and Baysesian methods into your strategic planning toolkit.
Tip: By definition, a strategy is an action plan designed to achieve a major or end objective. Like a winning sports coach, a good business leader must understand that tactical goals shift while the game is being played. As a result, strategic plans need to be evaluated routinely. Additionally, your tactical goals often need to be reformulated to achieve desired results.
5. Insufficient Resources
To achieve your desired end goals, you must balance delivery time with the implementation / execution costs. For example, our firm worked with one company that had previously formulated an aggressive strategic marketing plan for a new product. Half way through the launch cycle, they had to abandon their plan completely. When asked why they replied that they had blown through their advertising budget because of the short time frame they were given to generate pre-orders.
Tip: When it comes to time, cost and quality: you can only pick two, Consider incorporating quality management tools into your strategic planning processes. A basic understanding of Lean Planning and Six Sigma methods is extremely beneficial for entrepreneurs, startups and other businesses with tight budget constraints.
Author: Erik Gagnon - Managing Partner, Chi Rho Consulting