 (Eighth article of a series on Natural Enterprise, and eighth chapter of a book-in-progress on the same subject)
A few months ago I was taking
our dog, Chelsea, for a walk in the local park. The park has a sizeable
playground, and as we entered, Chelsea, who loves kids, trotted over
and licked the leg of a little boy who was standing near the sandbox.
The boy immediately smiled, turned around, put down his toy bulldozer
and dump truck, and petted Chelsea enthusiastically. As we went on our
way, I noticed the boy was watching three bigger kids in the sandbox.
Given that he obviously wasn't shy (at least with animals) I wondered
why he looked reticent about joining the others, since his toys were
clearly intended for the sand. When we returned back the way we came,
we saw the boy playing by himself in a large park garden that had been
excavated and filled with topsoil, but not yet planted. He had clearly
decided that the sandbox was too crowded, and, although it was
unconventional, the much larger, unoccupied garden was the perfect
place to play. He smiled and waved to us. That, I said to myself, is the very picture of an entrepreneur.
Not to strain the analogy too far, the kids in the sandbox had three
competitive advantages over the enterprising boy: They were bigger than
him, they were there first, and they appeared to know each other and be playing together.
The economy that has emerged in the last generation looks very much
like this sandbox. Size counts, being first into a market counts, and
oligopoly (a few large 'players' cornering the market for some product
or commodity) creates a nearly impossibly high entrance barrier for new
players. I often feel sad for new immigrants to the West who invest
their money in franchises that are cookie-cutter imitations of each
other, in saturated markets, because they don't understand the rules of
the new economy. It's capitalism, and you still can beat the odds and
succeed, but it's a closed system, heavily biased in favour of those
with great wealth and influence. The best, simplest road to success for
the entrepreneur is to make your own sandbox.
In a previous chapter, I pointed out the critical differences between
what I call Natural Enterprise and the traditional business:
- Where the traditional business develops its product, mass
produces it, and then advertises to create demand for the product,
Natural Enterprises start by identifying unmet customer needs,
developing customized solutions, then delivering to the pre-qualified
customers, and marketing virally.
- Where the traditional business has a hierarchical
organization structure and common shares, with control of the business
often wielded by corporations or people other than those who run it,
Natural Enterprises are flat and unincorporated, controlled equally by
their members.
The economy is always changing, always evolving, and the New Economy, the one that was supposed
to be powered by information, 'intellectual capital' instead of
physical and financial capital, is still a work in process. Two
overarching economic trends of recent years have largely stalled its
evolution: Globalization, which accelerates the concentration of power
in the hands of the oligopolies which control most industries in the
economy, and privatization, which views the dismantling of government
as a positive step towards efficiency, free markets and individual
enterprise, but which is in fact a sell-out of essential public assets
to large oligopolies, an abandonment of the responsibility of
government to regulate irresponsible corporate behaviour, and a huge
disincentive for innovation. As Adam Smith said, "the real purpose of
government is to protect those who run the economy from the outrage of
injured citizens". This has become discouragingly true over the past
half-decade, at least in North America.
So here are the grim facts facing entrepreneurs at this mid-point in the evolution towards a new economy:
- Oligopolies rule. No matter what industry you're in (or trying to enter) it's probably dominated by a small, ruthless oligopoly with very deep pockets, armies of lawyers, and governments in their back pockets.
- It's already patented. Governments (greased by campaign funding) are allowing large corporations to patent not only products, but very broad processes and concepts
as well. Established businesses are attempting to preclude any
innovation that could disrupt their control of the market. No matter
what you try to do, no matter how novel or imaginative, it's probably already patented or copyrighted by a large corporation. With an army of lawyers.
- Big guys buy cheap.
Large corporations are able to bully governments to lower standards and
taxes and provide them with subsidies, and bully suppliers, usually in
third world countries, to sell to them at rock-bottom prices, and lower
these prices every year. This gives them a substantial cost advantage
over the entrepreneur.
- Prepare for impact.
The economy is currently in serious trouble, thanks to reckless levels
of debt incurred by the Bush government, horrendous trade imbalances,
excessive debt loads of many large corporations, artificially
suppressed interest rates, and absurdly overpriced stock markets and
real estate markets. Personal debt levels are already at record levels,
and when the economy goes into deep recession consumer buying power is
going to disappear.
That's the bad news. Here's the good news:
- You can be (nearly) recession-proof.
If you establish a Natural Enterprise, with the two critical
differences summarized above, you will be selling something you know
meets a need, so you are much less likely to be affected by an economic
downturn than a company producing something frivolous, fashionable,
cyclical or otherwise non-essential. And because you're not relying on
outside investors like most businesses, your business won't collapse
when those investors suddenly decide or need to cash in their holdings
to cover other losses in an economic downturn.
- Four industries still have lots of room in the sandbox.
The information economy has still barely begun. Of the four industries
that are poised for the most explosive growth in the next decade, as
baby boomers move into their retirement years, three of them -- health
care, education, and the 'connections' industry (personal networking
and communications) -- are driven more than anything else by
information and innovation. [The fourth is recreation, largely an 'old
economy' industry, at least for baby boomers.] These industries are
going to face such enormous growth, such extraordinary new needs, and
such breathtaking change that they will probably be unrecognizable in a
generation. There is huge opportunity in these industries for
entrepreneurs, and these 'sandboxes' will be just too immense for even
the most vicous and reactionary oligopolies, with all their lawyers, to
control or dominate.
- You're agile, they're not.
Consumers are becoming more demanding, and starting to flex some of
their economic muscle. The Internet is providing a place for them to
convey their needs and obtain and share information, and for agile
suppliers to meet those needs. Large corporations are inflexible and
depend on volume and 'economies of scale' to be profitable. As hard as
they may try to 'mass customize' their products and services, they will
be at a disadvantage relative to the millions of entrepreneurial
businesses that can produce one-off solutions with almost no lead time.
As consumers learn that entrepreneurs can give them exactly what they
want, and large corporations can only give them standard off-the-shelf
brand names, consumer preference will inevitably shift in favour of
entrepreneurs.
- You can offer better value.
There is a growing consumer backlash against globalization and its
consequences -- outsourcing, offshoring, shoddy quality, lost jobs,
poorer jobs, ruined communities and environmental carnage. Consumers
are beginning to favour small, local businesses that can (and must, to
survice) provide quality and service that has become too 'expensive'
for large multinational corporations to offer. And although Wal-Mart
may sell something cheaper, the three inherent inefficiencies of large
corporations (bureaucracy, exorbitant management salaries, and massive
profit margins demanded by shareholders) mean that Wal-Mart's price
isn't that much cheaper, and is actually poorer value-for-money than what the small, local business can provide.
So what are the rules for entrepreneurs to succeed in this new, still not-fully-formed economy? Here are some of them:
- Don't try to play in the big guys' sandbox.
You may have a great idea for a new pre-moistened window-cleaning,
eyeglass-cleaning wipe, but do you really think Proctor & Gamble
will let you make any money at it? You have to find a need that the big
guys, for whatever reason, can't fill. Take advantage of their lack of
agility, their focus, their disinterest in niches and specialization,
their inability to customize, their physical distance, to find needs
that they wouldn't even think of trying to satisfy.
- Don't borrow money or give up equity.
When the economic recession hits, or interest rates spike, those in
debt, or with expensive equity, will fall like flies. Of course
organically financed businesses are harder to get started, and they
grow more slowly. But financial leverage is a double-edged sword. In
bad times, it can kill you.
- Avoid lawyers, and the need for lawyers.
If you get into a legal fight to defend your intellectual property from
a bigger guy, or because a bigger guy has sued you over your alleged
infringement, you're going to lose. It may not be fair, but in court
the most expensive team of lawyers almost always wins.
- Be careful lying down with elephants.
Many entrepreneurs find that the Business-to-Business niche is more
lucrative, easier, or better suited to their competencies than a
Business-to-Consumer business. Often that means your customers are much
bigger than you. If you're careful, attentive, provide something unique
and make a healthy margin with these customers, that can be a formula
for great entrepreneurial success. But watch out if the elephant rolls
over -- if it gets sold, or decides to change suppliers, or decides to squeeze suppliers, you could be squashed.
- Do what you know.
And know what you're doing. When times get tough, or new, disruptive
innovations start creating waves in an industry, experts survice and
dilettantes flounder. You must always be the best at what you're doing.
If the idea of being in a particular business intrigues you but it's
not in your area of competency, go work for someone else who is competent in it first. Then when you're an expert, go on your own.
- Follow the money.
The four big-opportunity industries noted above are going to explode
because they are aligned with the needs of baby-boomers, who (by sheer
numbers) have much of the disposable income in our society. Read books
like Boom, Bust & Echo to find out who has the money, and then follow it -- find out what they're spending it on and why, and what they'll need next. This is especially true in a fragile economy, because the rich are the last to stop buying and the first to re-start.
- Know your customer.
Next to running out of cash, and making bad management decisions, not
knowing your customer -- what they need and why they buy -- and not
investing social capital in relationships with customers, is the
biggest cause of entrepreneurial failure. The reasons why customers buy
what they do, and don't buy what they don't, aren't always logical or
even informed. You can't understand this from a distance -- surveys and
studies of buying patterns won't tell you. You have to spend time with
customers (real and prospective) and get inside their hearts and minds.
These relationships also help recession-proof you, and, if you use them
properly, they will provide most of the fodder you need for continuous
innovation (rule #9 below).
- Network with other entrepreneurs.
The big guys network constantly with their suppliers, other corporate
executives and even competitors. They leverage their contacts and,
without the need for a LinkedIn or a Ryze, they know who to call for
information and advice on anything that can happen that affects their
business. They don't need to have all their expertise on staff or on
retainer. Entrepreneurs, for some reason, seem to do this less
(probably they're too busy trying to do everything themselves). Most
entrepreneurs need to do it more, especially one-on-one.
- Innovate. The big guys don't want to innovate (they think it's expensive and risky), they don't have
to innovate (in today's economy it's easier for them to litigate,
pre-emptively patent and buy out innovators than to develop anything
radically new themselves), and they're no good
at innovating (they're too big, too inflexible, and too risk-averse and
cost-conscious). That's your competitive advantage as an entrepreneur.
And innovation isn't just about products and services, and about
pre-start-up activity, it's about every aspect of the business --
products, services, processes, distribution channels, technologies,
organization, structure, strategy, everything -- and it must be continuous. There's a simple, intuitive process for doing it:
Economies can change quickly, and if this one can get past its current
difficulties we might get back on the very healthy track we were on in
the 1990s, when investment in innovation and information was on the
upswing. At that point, some of these rules may change again, as new
economic developments and changing demographics and buying preferences
present new opportunities.
It's important that the entrepreneur understand the economy -- how it
works in theory, how it works in practice, and what are the trends
right now. The business press is generally focused on the needs of the
investor, rather than those of the entrepreneur, and when they actually
talk about what's happening in business, it's almost always about large
corporations -- information and advice that's often not translatable,
and sometimes even dangerous, in the entrepreneurial world. There are
some excellent entrpreneurial magazines, the best in my opinion being Fast Company (which also has an excellent blog), Business 2.0, and Wired. There are some good blogs by economists too, like Globalize This and MaxSpeak.
What every entrepreneur needs, though, is someone to help them think through what these changes in the economy mean
to their business, and to their customers' needs and buying habits.
Intelligent, informed conversations on this subject -- with customers,
with network colleagues, and with advisors, paid and unpaid -- can
provide this context and this insight, and help entrepreneurs
understand and navigate the economy -- the old one, the new one, and
whatever is coming next.
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MADE IN CANADA
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