what are my goals}Do I have the right strategy^

Can I execute the strategy I

> • ,

The Questions Every Entrepreneurby Amar Bhide

Of the hundreds of thousands of husiness ven-tures that entrepreneurs launch every year, manynever get off the ground. Others fizzle after spectac-ular rocket starts.

A six-year-old condiment company has attractedloyal custoiners but has achieved less than$500,000 in sales. The company's gross margitiscan't cover its overhead or provide adequate in-comes for the founder and the family members whoparticipate in the business. Additional growth willrequire a huge capital infusion, but investors andpotential buyers aren't keen on srnall, rnarginallyprofitable ventures, and the family has exhaustedits resources.

Another young company, profitable and grow-ing rapidly, imports novelty products from the Far

growth has forced him to reinvest most of his prof-its to finance the business's growing inventoriesand receivables. Furthermore, the company's prof-itability has attracted competitors and temptedcustomers to deal directly with the Asian suppli-ers. If the founder doesn't do something soon, thehusiness will evaporate.

Like most entrepreneurs, the condiment rnakcrand the novelty itnportcr get plenty of confusitigcounsel: Diversify your product line. Stick to yourknitting. Raise capital by selling equity. Don't risklosing control just because things arc bad. Delegate.Act decisively. Hire a professional manager. Watchyour fixed costs.

Why all the conflicting advice? Because the rangeof options-and problems-that founders of young

businesses confront is vast. The, , , tnanager of a mature company might

1 he problems entrepreneurs ^^k, what business are we in? orp^ 1 1 1 How can we exploit our core compe-

COnirOnt every day would ^cndcs? Entrepreneurs must contin-overwhelm most managers.East and sells thetn to large U.S. chain stores. Thefounder, who has a paper net worth of several mil-lion dollars, has been nominated for entrepreneur-of-the-year awards. But tbe company's spectacular

ually ask tbemselves what businessthey want to be in and what capabili-ties they would like to develop. Sitii-ilarly, the organizational weaknesses

and imperfections that entrepreneurs confrontevery day would cause the managers of a maturecompany to panic. Many young enterprises simul-taneously lack coherent strategies, competitive

120 HARVARD BUSINESS REVIEW November-December iy96

nswer

to

strengths, talented employees, adequate controls,and clear reporting relationships.

The entrepreneur can tackle only one or two op-portunities and prohlems at a time. Therefore, justas a parent should focus more on atoddler's motor skills than on his orher social skills, the entrepreneurtnust distinguish critical issues frotiinormal growing pains.

Entrepreneurs cannot expect thesort of guidance and cotnfort that anauthoritative child-rearing hook canoffer parents. Human beings passthrough physiological and psychological stages ina more or less predetermined order, but companiesdo not sbare a developmental path. Microsoft, Lo-tus, WordPerfect, and Itituit, although cotnpeting inthe satne industry, did not evolve in the same way.Each of those companies has its own story to tellabout tbe development of strategy and organiza-tional structures atid about tbe evolution of thefounder's role in the enterprise.

The options that are appropriate for one entrepre-neurial venture may he cotnplctely inappropriatefor another. Entrepreneurs rnust make a hewilder-ing number of decisions, and they tiiust make thedecisions that are right for thctn. The framework Ipresent here and the accompanying rules of thumbwill help entrepreneurs analyze the situations in

which they find themselves, establish prioritiesamotig the opportunities and problems they face,and make rational decisions about the future. Thisframework, which is based on my observation of

its owntell about the development

of systems and strategy.several hundred start-up ventures over eight years,doesn't prescribe answers. Instead, it helps entre-preneurs pose useful questions, identify itnportantissues, and evaluate solutions. The framework ap-plies whether the enterprise is a stnall printing shoptrying to stay in husiness or a catalog retailer seek-ing hundreds of milliotis of dollars in sales. And itworks at almost any point in a venture's evolution.Entrepreneurs should use the framework to evalu-

Amai Bhide is an associate professor at the HarvardBusiness School in Boston, Massachusetts, where heleaches entiepreneurship. He has published two otherHBR articles on entrepreneurship: "Bootstrap Finance:The Art of Start-ups" (Novemher-Deeemher 1992} and"How Entrepreneurs Craft Strategies That Work"(March-April 1994).

HARVARD BUSINESS REVIEW November-Deeember 1996 121

QUESTIONS FOR ENTREPRENEURS

ate their companies' position and trajectory often -not just when problems appear.

The framework consists of a three-step sequenceof questions. The first step clarifies entrepreneurs'current goals, the second evaluates their strategiesfor attaining those goals, and the third helps themassess their capacity to execute their strategies.The hierarchical organization of the questions re-quires entrepreneurs to confront the basic, big-pic-ture issues hefore they think about refinements anddetails. (See the exhibit "An Entrepreneur's Guideto the Big Issues.") This approach does not assumethat all companies-or all entrepreneurs - developin the same way, so it does not prescrihe a one-size-fits-all methodology for success.

Clarifying Goals:Where Do I Want to Go?

An entrepreneur's personal and husiness goalsare inextricahly linked. Whereas the manager of apuhlic company has a fiduciary responsibility tomaximize value for shareholders, entrepreneursbuild their businesses to fulfill personal goals and,if necessary, seek investors with similar goals.

Before they can set goals for a business, entrepre-neurs must he explicit ahout their personal goals.And they must periodically ask themselves if thosegoals have changed. Many entrepreneurs say thatthey are launching their businesses to achieve inde-pendence and control their destiny, but those goalsare too vague. If they stop and think about it, tnost

entrepreneurs can identify goals that are mure spe-cific. For example, they may want an outlet forartistic talent, a chance to experiment with newtechnoh)gy, a flexible lifestyle, tbe rush that comesfrom rapid growth, or the itiimortality of buildingan institution that embodies their deeply held val-ues. Financially, some entrepreneurs are looking forquick profits, some want to generate a satisfactorycash flow, and others seek capital gains from build-ing and selling a company. Some entrepreneurswho want to build sustainable institutions do notconsider personal financial returns a high priority.They may refuse acquisition proposals regardless ofthe price or sell equity cheaply to employees to se-cure their loyalty to the institution.

Only when entrepreneurs can say what theywant personally from their businesses does it makesense for thetn to ask tbe following tbree questions:

What kind of enterprise do I need to build? Long-term sustainability does not concern entrepreneurslooking for quick profits from in-and-out deals.Similarly, so-called lifestyle entrepreneurs, wbo areinterested only in generating enough of a cash flowto tnaintain a certain way of life, do not need tobuild businesses that could survive without them.But sustainabihty-or the perception thereof-mat-ters greatly to entrepreneurs who hope to sell theirbusinesses eventually. Sustainability is even moreimportant for entrepreneurs who want to buildan institution that is capable of renewing itselfthrough changing generations of technology, em-ployees, and customers.

An Entrepreneur's Guide to the Big Issues

Are my goals well defined?

Personal aspirationsBusiness suslainability and sizeTolerance for risk

If the answer is yes.

Do 1 hove rile right strategy?

Clear definitionProfifabilify and potential for growthDurabilityRate of growth

If fhe onswer is no...

Can t execute the strategy?

ResourcesOrganizational infrastructureThe founder's role

122 HARVARt:) BUSINESS REVIEW November-December 1996

Entrepreneurs' personal goals shouid also dutcr-mine the target size of the businesses they launch.A lifestyle entrepreneur's venture needn't growvery large. In fact, a business that becomes too bigmight prevent the founder from enjoying life orremaining personally involved in all aspects of thework. In contrast, entrepreneurs seeking capitalgains must build companies largeenough to support an infrastructurethat will not require their day-to-dayintervention.

What risks and sacrifices doessuch an enterprise demand? Build-ing a sustainable business - tbat is,one whose principal productive as-set is not just the founder's skills,contacts, and efforts-often entailsmaking risky long-term bets. Unlikea solo consulting practice-whicb generates eashfrom the start - durable ventures, such as companiest hat produce branded consumer goods, need contin-ued investment to build sustainable advantages. Forinstance, entrepreneurs may have to advertise tobuild a brand name. To pay for ad campaigns, theymay bave to reinvest profits, accept equity part-ners, or personally guarantee debt. To build depthin their organizations, entrepreneurs may have totrust inexperienced employees to make crucial de-cisions. Furthermore, many years may pass beforeany payoff materializes-if it tnaterializcs at all.Sustained risk taking can be stressful. As one entre-preneur observes, "When you start, you just do it,like the Nike ad says. You are naive because youhaven't made your mistakes yet. Then you learnabout all the things tbat can go wrong. And becauseyour equity now has value, you feel you have a h)tmore to lose."

Entrepreneurs who operate small-scale, or life-style, ventures face different risks and stresses. Tal-ented people usually avoid companies that offer nostock options and only limited opportunities forpersonal growth, so the entrepreneur's long hoursmay never end. Because personal franchises are dif-ficult to sell and often require the owner's dailypresence, founders may become locked into theirbusinesses. They may face financial distress if theybecome sick or just burn out. "I'm always running,running, running," complains one entrepreneur,whose business earns him half a million dollars peryear. "I work 14-hour days, and I can't remembertbe last time I took a vacation. I would like to selltbe business, but wbo wants to buy a eompany withno infrastructure or employees?"

Can I accept those risks and sacrifices? Entrepre-neurs must reconcile what they want with what

they are willing to risk. Consider Joseph Alsop, co-founder and president of Progress Software Corpo-ration. Wben Alsop launched the cotnpany in 1981,he was in his mid-thirties, with a wife and threechildren. With that responsibility, he says, he didn'twant to take the risks necessary to build a multi-billion-dollar corporation like Microsoft, but he and

To set meaningful goals,entrepreneurs must reconcilewhat they want with what they

are willing to risk.

his partners were willing to assume the risks re-quired to build something more than a personal ser-viee business. Consequently, they pieked a marketniche that was large enough to let them build a sus-tainable company but not so large that it would at-tract the industry's giants. They worked for twoyears without salaries and invested their personalsavings. In ten years, they bad built Progress intoa $200 million publicly beld company.

Entrepreneurs would do well to follow Alsop'sexample by thinking explicitly about what tbey areand are not willing to risk. If entrepreneurs findthat their businesses-even if very successful-won't satisfy tbem personally, or if they discoverthat achieving their personal goals requires them totake more risks and make more sacrifices than theyare willing to, they need to reset their goals. Whenentrepreneurs have aligned their personal and theirbusiness goals, they must then make sure that theyhave the right strategy.

Setting Strategy:How Will I Get There?

Many entrepreneurs start husinesses to seiztfshort-term opportunities without thinking aboutlong-term strategy. Successful entrepreneurs, bow-ever, soon make the transition from a tactical to astrategic orientation so that they can hegin to buildcrucial eapabilities and resourees.

Formulating a sound strategy is more basic toa young company than resolving hiring issues, de-signing control systems, setting reporting relation-ships, or defining the founder's role. Ventures hasedon a good strategy can survive confusion and poorleadership, but sopbisticated control systems andorganizational structures cannot compensate for

HARVARD BUSINESS REVIEW Ncivcmhcr December 1996 123

an unsound strategy. Entrepreneursshould periodically put their strate-gies to the following four tests:

Is the strategy well defined? Acompany's strategy will fail all other.gtests if it doesn't provide a clear di-rection for the enterprise. Even soloentrepreneurs can benefit from a de-fined strategy. For example, dealmakers who specialize in particularindustries or types of transactionsoften have better access to potentialdeals than generalists do. Similarly,independent consultants can chargehigher fees if they have a reputationfor expertise in a particular area.

An entrepreneur who wants tobuild a sustainable company mustformulate a bolder and more explicitstrategy. The strategy should inte-grate the entrepreneur's aspirationswith specific long-term policies HKabout the needs the company willserve, its geographic reach, its tech-nological capabilities, and other strategic consider-ations. To help attract people and resources, thestrategy must embody the entrepreneur's vision ofwhere the company is going instead of where it is.The strategy must also provide a framew^ork formaking the decisions and setting the policies thatwill take the company there.

The strategy articulated hy the founders of SunMicrosystems, for instance, helped them makestnart decisions as they developed the company.From the outset, they decided that Sun would forgothe niche-market strategy commonly used by Sili-con Valley start-ups. Instead, they elected to com-pete with industry leaders IBM and Digital bybuilding and marketing a general-purpose worksta-tion. That strategy, recalls cofounder and fortiierpresident Vinod Khosla, made Sun's product-devel-opment choices obvious. "We wouldn't developany applications software," be explains. This strat-egy also dictated that Sun assume the risk of build-ing a direct sales force and providing its own fieldsupport-just like its much larger competitors."The Moon or Bust was our motto," Khosla says.The founders' bold vision helped attract premierventure-capital firms and gave Sun extraordinaryvisibility within its industry.

To he useful, strategy statements should he con-cise and easily understood by key constituents suchas employees, investors, and customers. They mustalso preclude activities and investments that, al-though they seem attractive, would deplete the

A newompany's

strategy mustembody the

founder'svision of

where thecompany isgoing, notwhere it is.

company's resources. A strategy thatis so broadly stated that it permits acompany to do anything is tanta-mount to no strategy at all. For in-stance, claiming to be in the leisureand entertainment business doesnot preclude a tent manufacturerfrotn operating casinos or makingfilms. Defining the venture as ahigh-performance outdoor-gearcompany provides a much more use-ful focus.

Can the strategy generate suffi-cient profits and growth? Once en-trepreneurs have formulated clearstrategies, they must determinewhether those strategies will allowthe ventures to be profitable and togrow to a desirable size. The failureto earn satisfactory returns shouldprompt entrepreneurs to ask tough

'̂ questions: What's the source, if any,of our competitive edge? Are our of-ferings really better than our com-

petitors'? If they are, does the premium we cancharge justify the additional costs we incur, and canwe move enough volume at higher prices to coverour fixed costs? If we are in a commodity business,are our costs lower than our competitors'? Disap-pointing growth should also raise concerns: Is themarket large enough? Do diseconomies of scalemake profitable growth impossible?

No amount of hard work can turn a kitten intoa lion. When a new venture is falteritig, entrepre-neurs must address basic economic issues. Forinstance, many people arc attracted to personal ser-vice businesses, such as laundries and tax-prepara-tion services, because they can start and operatethose businesses just by working hard. Thoy dtin'thave to worry about confronting large competitors,raising a lot of capital, or developing proprietarytechnology. But the factors that make it easy forentrepreneurs to launch such businesses often pre-vent them from attaining their long-term goals.Businesses based on an entrepreneur's willingnessto work hard usually confront other equally deter-mined competitors. Furthermore, it is difficult tomake such companies large enough to support em-ployees and infrastructure. Besides, if employeescan do what the founder does, they have little in-centive to stay with the venture. Founders of suchcompanies often cannot have the lifestyle theywant, no matter how talented they arc. With noway to leverage their skills, they can eat only whatthey kill.

124 HARVARD BUSINESS REVIEW Ni)vi:iTiber-Deccmber 1996

QUESTIONS FOR ENTREPRENEURS

Entrepreneurs who arc stuck in ventures that arcunprofitahle and cannot grow satisfactorily musttake radieal action. They must find a new industryor develop innovative economies of scale or scopein their existing fields. Rebecca Matthias, for exam-ple, started Mothers Work in 1982 to sell maternityclothing to professional women by mail order. Mail-order businesses are easy to start, but with tens ofthousands of catalogs vying for consumers' atten-tion, low response rates usually lead to low profit-ability-a reality that Matthias confronted afterthree years in the business. In 198S, she horrowed$IS0,000 to open the first retail store specializingin maternity elothcs for working women. By 1994,Mothers Work was operating 175 stores generat-ing about $59 million in revenues.

One alternative to radical action is to stick withthe failing venture and hope for the big order that'sjust around the corner or the greater fool who willbuy the business. Both hopes arc usually futile. It'sbest to walkaway.

Is the strategy sustainable? The next issue entre-preneurs must confront is whether their strategicscan serve the enterprise over the long term. Theissue of sustainahility is especially significant forentrepreneurs who have heen riding the wave of anew teehnology, a regulatory change, or any otherchange-exogenous to the business-that createssituations in which supply cannot keep up with de-mand, Entrepreneurs who catch a wave can prosperat the outset just because the trend is on their side;they are competing not with one another hut withoutmoded players. But what happens when thewave crests? As market imbalancesdisappear, so do many of the erst-while high fliers wbo had never de-veloped distinctive capahilities orestablished defensible competitivepositions. Wave riders must antici-pate market saturation, intensifyingcompetition, and the next wave.They have to abandon the me-tooapproaeh in favor of a new, moredurable business model. Or theymay he ahle to sell their high-growth businessesfor handsome prices in spite of the duhious long-term prospects.

Consider Edward Rosen, who cofounded Vydeein 1972. The company developed one of the firststand-alone word processors, and as the market forthe macbines exploded, Vydec rocketed to $90 mil-lion in revenues in its sixth year, with nearly 1,000employees in the United States and Europe. ButRosen and his partner could see that the days ofstand-alone word processors were numbered. They

happily accepted an offer from Exxon to buy ibecompany for more than $100 million.

Such forward thinking is an exception. Entrepre-neurs in rapidly growing companies often don'tconsider exit strategies seriously. Encouraged hyshort-term success, they continue to reinvest prof-its in unsustainable businesses until all tbey haveleft is memories of better days.

Entrepreneurs who start ventures not by catchinga wave but by creating their own wave face a differ-ent set of challenges in crafting a sustainable strat-egy. They must build on their initial strength hydeveloping multiple strengths. Brand-new venturesusually cannot afford to innovate on every front.Few start-ups, for example, can expect to attract theresources needed to market a revolutionary productthat requires radical advances in teehnology, a newmanufacturing process, and new distrihution chan-nels. Cash-strapped entrepreneurs usually focusfirst on building and exploiting a few sources ofuniqueness and use standard, readily available ele-ments in the rest of the business. Michael Dell, thefounder of Dell Computer, for example, made lowprice an option for personal computer buyers byassembling standard components in a college dor-mitory room and selling by mail order without frillsor much sales support.

Strategies for taking the hill, however, won't nec-essarily hold it. A model based on one or two

, strengths becomes obsolete as success begets imita-' tion. For instance, competitors can easily knock off

an entrepreneur's innovative product. But they willfind it much more difficult to replicate systems

Vy^ It's easy to knock off^^ innovative product., but anp ,innovative business system is

much harder to replicate.that incorporate many distinct and complementarycapabilities. A business with an attractive productline, well-integrated manufacturing and logistics,close relationsbips with distributors, a culture ofresponsiveness to customers, and the capability toproduce a continuing stream of product innova-tions is not easy to copy.

Entrepreneurs who huild desirable franchisesmust quickly find ways to broaden their competi-tive capahilities. For example, software start-upIntuit's first product. Quicken, had more attractive

HARVARD BUSINESS REVIEW November-Deccmbtr 1996 125

features and was easier to use than other personal-finance software programs. Intuit realized, howev-er, that competitors eould also make their productseasy to use, so the company took advantage of itsearly lead to invest in a variety of strengths. Intuitenhanced its position with distributors by intro-ducing a family of products for small husinesses, in-cluding QuickBooks, an accounting program. Itbrought sophisticated marketing techniques to anindustry that "viewed customer calls as interrup-tions to the sacred art of programming," accordingto the company's founder and chairman, ScottCook. It established a superior product-designprocess with multifunctional teams that includedmarketing and technical support. And Intuit in-vested heavily to provide customers with outstand-ing technical support for free.

Are my goals for growth too conservative or tooaggressive? After defining or redefining the busi-ness and verifying its basic soundness, an entre-preneur should determine whether plans for itsgrowth are appropriate. Different enterprises canand should grow at different rates. Setting the rightpace is as important to a young business as it isto a novice bicyclist. For either one, too fast ortoo slow can lead to a fall. The optimal growthrate for a fledgling enterprise is a function of manyinterdependent factors. (See the insert "Findingthe Right Growth Rate.")

Executing the Strategy: Can I Do It?The third question entrepreneurs must ask them-

selves may he the hardest to answer hecause it re-quires the most candid self-examination; Can I exe-cute the strategy? Great ideas don't guarantee great

Entrepreneurs who hope tounderqualified employeesstar performers are a]always disappointed.

performance. Many young companies fail hecausethe entrepreneur can't execute the strategy; forinstance, the venture may run out of cash, or theentrepreneur may be unable to generate sales or fillorders. Entrepreneurs must examine three areas-resources, organizational capabilities, and theirpersonal roles - to evaluate their ability to carry outtheir strategies.

Finding the Right Grovs^h Rate

Finding the optimal growth rate for a new enterpriseis a difficult and critical task. To set the right pace,entrepreneurs must consider many factors, includingthe following:

Economies nf scaU', ^icope, or customer network.The greater the returns to a company's scale, seope, orthe size of its customer network, the stronger the casefor pursuing rapid growth. When scale causes prof-itability to increase considerably, growth soon pays foritself. And in industries in which economies of scaleor scope limit the numher of viable competitors, es-tablishing a favorable economic position first can helpdeter rivals.

The ability to lock in customers or scarce resources.Rapid growth also makes sense if consumers are in-clined to stick with the companies with which theyinitially do business, either because of an aversion tochange or hecause of the expense of switching to an-other company. Similarly, in retail, growing rapidlycan allow a company to secure the most favorable lo-cations or dominate a geographic area that can support

Do I have the right resources and relationships?The lack of talented employees is often the first ob-stacle to the successful implementation of a strate-gy. During the start-up phase, many ventures can-not attract top-notch employees, so the foundersperform most of the crucial tasks themselves andrecruit whomever they can to help out. After thatinitial period, entrepreneurs can and should be am-bitious in seeking new talent, especially if they

^ want their businesses to grow quick-ly. Entrepreneurs who hope that theycan turn underqualified and inexpe-rienced employees into star perform-ers eventually reach the conclusion,along with Intuit founder Cook, that"you can't coach height." Moreover,after a venture establishes even ashort track record, it can attracta much higher caliber of employee.

In determining how to upgrade theworkforce, entrepreneurs must address many com-plex and sensitive issues: Should I recruit individu-als for specific slots or, as is commonly the case intalent-starved organizations, should I create posi-tions for promising candidates? Are the recruits go-ing to manage or replace existing employees? Howextensive should the replacements he? Should thereplacement process be gradual or quick? Should

turnto

126 HARVARD BUSINESS REVIEW November-December 1996

only one large store, even if national economies ofscale arc limited.

Competitors' growth. If rivals are expanding quick-ly, a company may be forced to do the same. Inmarkets in which one company generally sets the in-dustry's standard, such as the market for personal-computer operating-system software, growing quicklyenough to stay ahead of the pack may be a yoting com-pany's only hope.

Resource constraints. A new venture will not beable to grow rapidly if there is a shortage of skilled em-ployees or if investors and lenders are unwilling tofund an expansion that they consider reckless. A ven-ture that is growing quickiy, however, will be able toattract capital as well as the employees and customerswho want to go with a winner.

Internal financing capability. When a new ventureis not able to attract investors or borrow at reasonableterms, its internal financing capability will determinethe pace at which it can grow. Businesses that havehigh profit margins and low assets-to-sales ratios can

fund high growth rates. A self-funded business, ac-cording to the well-known sustainable growth for-mula, cannot expand its revenues at a rate faster thanits return on equity.

Tolerant customers. When a company is young andgrowing rapidly, its products and services often con-tain some flaws. In some markets, such as certain seg-ments of the high-tech industry, customers are accus-tomed to imperfect offerings and may even derivesome pleasure from complaining about them. Compa-nies in such markets can expand quickly. But in mar-kets in which buyers will not stand for breakdownsand hugs, such as the market for luxury goods and mis-sion-critical process-control systems, growth shouldbe much more cautious.

Personal temperament and goals. Some entrepre-neurs thrive on rapid growth,- others are uncomfort-able with the crises and fire fighting that usually ac-company it. One of the limits on a new venture'sgrowth should be the entrepreneur's tolerance forstress and discomfort.

I, with my personal attachment to the business,makf termination decisions myself or should Ibring in outsiders?

A young venture needs more than internal re-sources. Entrepreneurs must also consider theircustomers and sources of capital. Ventures oftenstart with the customers they can attract the mostquickly, which may not be the customers the com-pany eventually needs. Similarly, entrepreneurswho begin by bootstrapping, using money fromfriends and family or loans from local banks, mustoften find richer sources of capital to build sustain-able husinesses.

For a new venture to survive, some resources thatinitially are external may have to become internal.Many start-ups operate at first as virtual enterprisesbecause the founders cannot afford to produce in-house and hire employees, and hecause they valueflexibility. But the flexibility that comes from own-ing few resources is a double-edged sword. Just asa young company is free to stop placing orders, sup-pliers can stop filling them. Furthermore, a com-pany with no assets signals to customers and po-tential investors that the entrepreneur may not becommitted for the long haul. A business with noemployees and hard assets may also be difficult tosell, because potential buyers will probably worrythat the company will vanish when the founder de-

parts. To build a durable company, an entrepreneurmay have to consider integrating vertically or re-placing subcontractors with full-time employees.

How strong is the organization? An organiza-tion's capacity to execute its strategy depends on its"hard" infrastructure-its organizational structureand systems-and on its "soft" infrastructure-itsculture and norms.

The hard infrastructure an entrepreneurial com-pany needs depends on its goals and strategies. [Seethe insert "Investing in Organizational Infrastruc-ture.") Some entrepreneurs want to huild geograph-ically dispersed businesses, realize synergies bysharing resources across business units, establishfirst-mover advantages through rapid growth, andeventually go public. They must invest more in or-ganizational infrastructure than their counterpartswho want to build simple, single-location busi-nesses at a cautious pace.

A venture's growth rate provides an importantclue to whether the entrepreneur has invested toomuch or too little in the company's structure andsystems. If performance is sluggish-if, for exam-ple, growth lags hehind expectations and new prod-ucts are late-excessive rules and controls may bestifling employees. If, in contrast, the business isgrowing rapidly and gaining share, inadequate re-porting mechanisms and controls are a more likely

HARVARD BUSINESS REVIEW November-December 1996 127

QUESTIONS FOR ENTREPRENEURS

concern. When a new venture is growing at a fastpace, entrepreneurs must simultaneously give newemployees considerable responsibility and monitortheir finances very closely. Companies like Block-buster Video cope by giving frontline employees allthe operating autonomy they can handle whilemaintaining tight, centralized financial controls.

An evolving organization's culture also has a pro-found influence on how well it can execute itsstrategy. Culture determines the personalities andtemperaments of the workforee; lone wolves areunlikely to want to work in a consensual organiza-tion, whereas shy introverts may avoid rowdy out-

fits. Culture fills in the gaps that an organization'swritten rules do not anticipate. Culture determinesthe degree to which individual employees and orga-nizational units compete and cooperate, and howthey treat customers. More than any other factor,culture determines whether an organization eancope with the crises and discontinuities of growth.

Unlike organizational structures and systems,whieh entrepreneurs often copy from other compa-nies, eulture must he custom built. As many soft-ware makers have found, for instance, a laid-backorganization ean't compete well against Microsoft.The ramhunctiousness of a start-up trading opera-

Investing in Organizational Infrastructure

Few entrepreneurs start out with both a well-defined strategy and a plan for developing an orga-nization that can achieve that strategy. In fact, manystart-ups, which don't have formal control systems,decision-making processes, or clear roles for employ-ees, can hardly be called organizations. The foundersof such ventures improvise. They perform most of theimportant functions themselves and make decisionsas they go along.

Informality is fine as long as entrepreneurs aren't in-terested in building a large, sustainable business.Once that becomes their goal, bowever, they muststart developing formal systems and processes.Such organizational inirastructure allows aventure to grow, but at the same time, it in-creases overhead and may slow down deci-sion making. How much infrastructure isenougb and how mucb is too mucb? Tomatch investments in infrastructure to tbe icquirements of a venture's strategy, entrepre-neurs must consider the degree to wbich tbeir strate-gy depends on tbe following:

Delegating tasks. As a young venture grows, itsfounders will probably need to delegate many of tbetasks that they used to perform. To get employees toperform those tasks competently and diligently, thefounders may need to establish mechanisms to moni-tor employees and standard operating procedures andpolicies. Consider an extreme example. Randy andDebbi Fields pass along tbeir skills and knowledgethrougb software that tells employees in every Mrs.Fields Cookies shop exactly how to make cookies andoperate the business. The software analyzes data sucbas local weather conditions and the day of the week togenerate hourly instructions about sucb matters aswbicb cookies to bake, wben to offer free samples, andwben to reorder chocolate cbips.

Telling employees bow to do their iobs, bowever,can stifle initiative. Companies that require frontlineemployees to act quickly and resourcefully migbt de-cide to focus more on outcomes tban on bebavior, us-ing control systems that set performance targets foremployees, compare results against objectives, andprovide appropriate incentives.

Specializing tasks. In a small-scale start-up, every-one does a little bit of everything, but as a businessgrows and tries to acbieve economies of scale andscope, employees must be assigned clearly defined

roles and grouped into appropriate organizationalunits. An all-purpose worksbop employee, for

example, migbt become a machine tool opera-lor, wbo is part of a manufacturing unit. Spe-cialized activities need to be integrated by,for example, creating the position of a gen-eral manager, wbo coordinates tbe manufac-

turing and marketing functions, or througbsystems tbat are designed to measure and re-

ward employees for cross-functional cooperation.Poor integrative mechanisms are wby geographic ex-pansion, vertical integration, broadening of productlines, and otber strategies to achieve economies ofscale and scope often fail.

Mobilizing funds for growth. Cash-strapped busi-nesses that are trying to grow need good systems toforecast and monitor tbe availability of funds. Outsidesources of capital sucb as banks often refuse to ad-vance funds to companies witb weak controls and or-ganizational infrastructure.

Creating a track record. If entrepreneurs bope tobuild a company tbat tbey can sell, tbey must startpreparing early. Public markets and potential acquir-ers like to see an extended bistory of well-kept finan-cial records and controls to reassure them of thesoundness of the business.

128 HARVARD BUSINESS REVIEW November-December

tion may scare away the conserva-tive clients the venture wants to at-tract. A culture that fits a company'sstrategy, however, can lead to spec-tacular performance. Physician Sales& Service |PSS), a medical-productsdistribution company, has grownfrom $13 million in sales in 1987 tonearly S500 million in 1995, from 5branches in Florida to 56 branchescovering every state in the continen-tal United States^ and from 120 em-ployees to 1,800. Like other rapidlygrowing companies, PSS has tight fi-nancial controls. But, venture capi-talist Thomas Dickerson says, "PSSwould be just another efficientlymanaged distribution company if itdidn't have a corporate culture thatis obsessed with meeting customers'needs and maintaining a meritoc-racy. PSS employees are motivatedhy the culture to provide unmatchedeustomer service."

When entrepreneurs neglect to articulate organi-zational norms and instead hire employees mainlyfor their technical skills and credentials, their orga-nizations develop a culture by chance rather thanhy design. The personalities and values of the firstwave of employees shape a culture that may notserve the founders' goals and strategies. Once a cul-ture is estahlished, it is difficult to change.

Can I play my role? Entrepreneurs who aspireto operate small enterprises in which they performall crucial tasks never have to change their roles.In personal service companies, for instance, thefounding partners often perform client work fromthe time they start the company until they retire.Transforming a fledgling enterprise into an entitycapable of an independent existence, however, re-quires founders to undertake new roles.

Founders cannot huild self-sustaining organiza-tions simply hy "letting go." Before entrepreneurshave the option of doing less, they first must domuch more. If the husiness model is not sustain-able, they must create a new one. To secure the re-sourees demanded by an ambitious strategy, theymust manage the perceptions of the resource pro-viders: potential customers, employees, and inves-tors. To build an enterprise that will be able tofunction without them, entrepreneurs must designthe organization's structure and systems and moldits culture and character.

While they are sketching out an expansive viewof the future, entrepreneurs also have to manage

entrepreneursdon't stop tothink about

culture, theircompanies

develop oneby chancerather thanby design.

as if the eompany were on theverge of going under, keeping a firmgrip on expenses and monitoringperformance. They have to inspireand coach employees while dealingwith the unpleasantness of firingthose who will not be ahle to growwith the company. Bill Nussey,cofounder of the software makerDa Vinci Systems Corporation, re-calls that firing employees who had"struggled and cried and sacrificedwith the company" was the hardestthing he ever had to do.

Few successful entrepreneurs evercome to piay a purely visionary rolein their organizations. They remaindeeply engaged in what AbrahamZaleznik, the Konosuke MatsushitaProfessor of Leadership Emeritus atthe Harvard Business School, callsthe "real work" of their enterprises.Marvin Bower, the founding partnerof MeKinsey & Company, contin-

ued to negotiate and direct studies for elients whileleading the firm through a considerable expansionof its size and geographic reach. Bill Gates, co-founder and CEO of muItibillion-doUar softwarepowerhouse Microsoft, reportedly still reviews thecode that programmers write.

But founders' roles must change. Gates no longerwrites programs. Miehael Roberts, an expert on en-trepreneurship, suggests that an entrepreneur's roleshould evolve from doing the work, to teaching oth-ers how to do it, to prescribing desired results, andeventually to managing the overall context inwhieh the work is done. One entrepreneur speaksof changing from quarterback to eoaeh. Whateverthe metaphor, the idea is that leaders seek ever in-creasing impact from what they do. They achievethis by, for example, focusing more on formulatingmarketing strategies than on selling; negotiatingand reviewing budgets rather than directly super-vising work; designing incentive plans rather thansetting the compensation of individual employees;negotiating the acquisitions of companies insteadof the eost of office supplies; and developing a com-mon purpose and organizational norms rather thanmoving a product out the door.

In evaluating their personal roles, therefore, en-trepreneurs should ask themselves whether theycontinually experiment with new iobs and respon-sibilities. Founders who simply spend more hoursperforming the same tasks and making the samedecisions as the business grows end up hindering

HARVARD BUSINESS REVIEW November-December 1996 129

QUESTIONS FOR ENTREPRENEURS

growth. They should ask themselves whether theyhave acquired any new skills recently. An entrepre-neur who is an engineer, for example, might masterfinancial analysis. If founders can't point to newskills, they are probably in a rut and their rolesaren't evolving.

Entrepreneurs must ask themselves whetherthey actually want to change and learn. People whoenjoy taking on new challenges and acquiring newskills-Bill Gates, again-can lead a venture fromthe start-up stage to market dominance. But somepeople, such as H. Wayne Huizenga, the movingspirit behind Waste Management and BlockbusterVideo, are much happier moving on to get other ven-tures off the ground. Entrepreneurs have a responsi-bility to themselves and to the people who dependon them to understand what fulfills and frustratesthem personally.

Many great enterprises spring from modest, im-provised beginnings. William Hewlett and DavidPackard tried to craft a bowling alley foot-fault indi-cator and a harmonica tuner before developing their

first successful product, an audio oscillator. Wal-Mart Stores' founder, Sam Walton, started by buy-ing what he called a "real dog" of a franchised vari-ety store in Newport, Arkansas, beeause his wifewanted to live in a small town. Speedy response andtrial and error were more important to those eom-panies at the start-up stage than foresight and plan-ning. But pure improvisation - or luck-rare lyyields long-term success. Hewlett-Packard mightStiU be an obscure outfit if its founders had noteventually made conscious decisions ahout productlines, technological eapahilities, debt policies, andorganizational norms.

Entrepreneurs, with their powerful bias for ac-tion, often avoid thinking about the big issues ofgoals, strategies, and capabilities. They must, soon-er or later, consciously structure sueh inquiry intotheir companies and their lives. Lasting success re-quires entrepreneurs to keep asking tough ques-tions about where they want to go and whether thetrack they are on will take them there. ^

Reprint 96603 To order reprints, see the last page of this issue.

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'The 401(k} retiiement savings of the people downstairs are what we up herelike to think of as petty cash."

130 CARTOON BY JACK ZIEGIER