Why are Large Firms so Slow to Change?

Large firms can be notoriously slow to change. For example, Polaroid Corporation's refusal to move into digital imaging when the photography industry was clearly becoming more digital, adversely affected the company, ultimately leading to bankruptcy.

Reasons large firms can be slow to change include:

Communication challenges: Communication can often become inefficient in large organizations due to the greater number of communication channels that develop with large size. One-on-one communication becomes impractical with large organizations leading to different groups within an organization communicating with each other but not necessarily with other groups.

Slow response time: In a large company an employee’s actions are often far removed from the results of those actions. For example, in a large manufacturing corporation, mistakes of inefficiencies in operations are often not identified until managerial cost reports are generated and analyzed weeks or months after the actions that produced the negative results. After such a time gap it is often too late to avoid the losses incurred from such inefficiencies or mistakes.

In a much smaller firm employees often know immediately if consumer preferences change, for example. Not only will the smaller firm employee be more likely to recognize a potential problem or opportunity they will often be in a better position to respond quickly to the situation. Employees in a smaller organization are also able to understand the relationship between the various operations of the firm and the results these operations produce. A large company would need to do research, create an assembly line, determine which distribution chains to use, plan an advertising campaign, etc., before any change could be made. By this time smaller competitors may well have grabbed that market niche.

Unwillingness to change: Large, older companies are often characterized by an attitude of, “we’ve always done it that way, so there's no need to ever change". Refusal to consider change, even when indicated, is toxic to a company, because changes in the industry and market conditions will inevitably require changes in the company, in order to remain competitive.

Mature market stagnation: Large firms also tend to be older and in mature markets. Both of these have negative implications for propensity to change as well as future growth potential. Additionally, firms that have been around for awhile tend to have a large retiree base, with high associated pension and health costs. Add to these costs the tendency for large corporations to be unionized and the propensity to change is further suppressed.

Burdened by bureaucracy: The larger a company becomes the more dependencies there are between decisions, which makes it natural for decision-making committees to grow in number. In addition, processes are added in layers over time, often complicating operations and requiring more employees to accomplish tasks. This result is in companies burdened by bureaucracy where 20 people are “required” to complete a task that is accomplished at a smaller, leaner competitor by 3 or 4 employees, often with better results. Over time, administrators forget that it’s possible to make things happen without talking to a committee, filling out forms, or doing extensive market research. The challenge is that it’s typically easier to add processes than it is to remove them.

Protection of Status quo / Follower mentality: For anyone interested in progress, risk taking, change or growth potential, a large corporation can be an incredibly frustrating place to work, because the dominant culture is one of playing it safe and political correctness. 

Differences in incentive systems: Medoff and Abraham (1980), who examined the pay of managerial and professional employees in two large manufacturing firms and found little differences in earnings resulting from superior performance. In addition, Lawler (1971) reviewed cites six separate studies of the relationship between pay and performance in large companies, and found that the studies generally concluded that pay is not very closely related to performance in many organizations that claim to have merit increase salary systems. The studies suggest that many business organizations do not do a very good job of tying pay to performance. While many companies claim their incentive systems are based on performance most organizations do a poor job in this regard. What is often found, however, are horizontal equity systems which are concerned with maintaining equal treatment to everyone at the same level in an organization with the objective of “fairness”. While fairness may be achieved an unintended side effect can be complacency and a perpetuation of status quo.       

By contrast, small firms are better able to lure top talent than large firms due to their comparative advantage in offering aggressive incentive packages. Such packages are more likely to reward individual contributions and therefore, are more attractive to innovators as compared to traditional, merit-based systems. In addition, at small firms, senior managers are more likely to be involved in employee recruitment and are better able to judge the quality of job applicants. Also, small size helps these firms avoid information overload while sustaining cooperation. As a result, small firms are better able to generate unique insights from their own experience to support change as compared to large firms.

Although many large corporations can be characterized by the reluctance to change as described in this blog post, it doesn’t have to be that way. Large organizations can be dynamic agents of change. Take, for example,  Apple’s incursion into the sluggish music business with the introduction of the iPod in 2001 and then the iTunes music store in 2003. At the time, Apple was faced with slow growth in the high-end computer industry. Even though industry conditions were not promising, Apple had all the resources of an established, well-run corporation: highly skilled employees, brand appeal, and access to capital. And the company was hungry for growth. Since Apple entered the music business, the company’s profit has increased more than 3,000 percent, from $57 million in 2003 to nearly $2 billion in 2006.

Useful Links

http://canback.com//archive/jmanec.pdf

http://www.scribd.com/doc/51465240/2/II-Promotion-Based-Incentive-Systems

http://en.wikipedia.org/wiki/Peter_Principle

Buying a Business

Building a business from the ground floor tests every aspect of one’s entrepreneurial ability. The challenge and potential to create a business unlike any other is part of the entrepreneurial drive and is the only option for many independent-minded entrepreneurs. However, in many circumstances starting from nothing, bootstrapping, building a customer base, and slowly building a business is the only option due to funding considerations.

Other entrepreneurs choose to purchase an existing business. When starting a business, every aspect of the business is unknown. You don't know who your customers will be; you don't know how many employees you will need; you don't even know if the business will succeed! When you buy an established business, all of those “unknown” details have been worked out by the previous owner.

In order to buy the right business or franchise, you need to do a thorough investigation of its historical performance, its operations, current status, the staff and management, competition, the industry and its future potential. Once all this analysis has been completed, you will then have to determine how it measures up with your skill, expertise and leadership. All of which is so much easier to do with an existing business. There are a number of reasons to consider the purchase of an existing business rather that starting one:

Advantages

• Risk. Buying an established business, and therefore proven concept, is less risky – as a buyer you already know the process or concept works. Consequently, financing a purchase is often easier than securing funding for a start-up business for that very reason—the business has a track record. A bank will be able to look at the historical results for the business, not just rely on projections (which they assume will be wrong anyway).
• Proven business concept and processes. Proof of concept is invaluable to an entrepreneur. With a proven model the business has immediate credibility and perception of success. There are also proven products, services, marketing and, sales strategies in place.
• Brand. When you purchase an existing business you’re buying a brand. The on-going benefits of any marketing or networking the prior owner has done will transfer to you. When you have an established name it’s easier to place cold calls and attract new business than with an unproven start-up. A brand is an intangible asset that’s difficult to put a price on.
• Relationships/Goodwill. With the purchase of an existing business, you will also be buying an existing customer base and established suppliers that may have taken years to develop. Seller support during the transition can help the buyer to establish good relations with suppliers and customers thus helping the buyer to capitalize on the goodwill that may have taken the seller years to establish.
• Growth. When you buy a business, you can start working immediately and focus on improving and growing the business immediately. The seller has already laid the foundation and taken care of the time-consuming, tedious start-up work. Starting a new business means spending a lot of time and money on basic items like computers, telephones, furniture and policies that don’t directly generate cash flow.
• Trained Employees. In an acquisition, one of the most valuable and important assets you’re buying is the people. It took the seller time to find those employees, train them and assimilate them into the company culture. With the right team in place, you will have an easier time implementing growth strategies. In addition, with seasoned employees in place it will be possible for the entrepreneur to take vacations, spend time with family, or work on other business ventures. Start-up owners are often unable to take time away from their business for years.
• Cash flow. An existing business can generate positive cash flow from day one. The sale can be structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level. On the other hand, some experts say start-ups aren’t expected to make money for the first three years.

Disadvantages

• Substantial Investment. The investment necessary to buy an existing business can be substantial. In addition to acquiring the business assets there may also be substantial professional fees incurred in the transaction, including attorneys, accountants, surveyors, etc. It is important to seek the advice and guidance of business finance experts, lawyer and certified accountant before you begin your search for an acquisition target. A good “team” is necessary to put the best total package together to ensure a successful acquisition and success long term.

• Additional Investment. If the business requires a turnaround you may need to invest quite a bit more in addition to the purchase price to give it the best chance of success.

• Legal/Contractual. You may be bound by any existing contracts or other legal obligations or liabilities the previous owner leaves in place. In addition, certain contracts or licenses necessary to the success of the business may not be transferable to another owner or may take time to be transferred.
• Poor Reputation. You also need to consider why the current owner is selling up and how this might impact the business going forward. While goodwill is a desirable advantage of buying a business, if the seller has a poor reputation considerable time, effort, and money may be required to establish good relations with customers and suppliers. Good due diligence can uncover problems in this area, as well as with the other disadvantages.
• Goodness of Fit. The previous corporate culture and employees may not be a good fit for the management style of the new owner. The larger the discrepancy between the new owner’s style and the established culture, the greater the possibility of conflict. In order to buy the right business or franchise, you need to do a thorough investigation of its historical performance, its operations, current situation, the staff and management, competition, the industry and its future prospects. Once all this analysis has been completed, you will then have to determine how it measures up with your skill, expertise and leadership.

Two Ways to Buy a Business

A buyer purchasing a business has two options for structuring the deal (assuming the transaction is not a merger). The first option is an asset acquisition, in which you purchase only those assets you want. The advantage of an asset acquisition is protection from legal liabilities since instead of buying the corporation (and all its legal risks), you are buying only its assets.

The purchase of assets both tangible and intangible is a tax advantage for the buyer. Not only can you choose to purchase only the assets that you feel are necessary for the successful operation of the business, you may also reduce your company taxes through the mark up and depreciation of tangible assets. While this method is not nearly as appealing for the seller it is a clear advantage for the buyer.

The other option is a stock acquisition, in which you purchase stock. Among other things, this means you must be willing to purchase all the business assets--and assume all its liabilities.

The final purchase contract should be structured with the help of your acquisition team to reflect very precisely your understanding and intentions regarding the purchase from a financial, tax and legal standpoint. The contract must be all-inclusive and should allow you to rescind the deal if you find at any time that the owner intentionally misrepresented the company or failed to report essential information. It's also a good idea to include a no compete clause in the contract to ensure the seller doesn't open a competing operation in your area. This option is preferred if the expectation is for the business to continue operating in a relatively seamless manner which could preserve much of the customer base.

Useful Links:

http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1074410852&type=RESOURCES

http://www.entrepreneur.com/startingabusiness/startupbasics/article79638.html

Considering a Franchise?

What is the difference between a franchisee and a company owned store within a franchise chain? Why might one prefer to be the franchisee or the manager of a company owned store?

A company owned store within a franchise chain is owned and operated by the corporation. A manager, employed by the corporation, runs the store. As an employee of the corporation, the manager is only as independent as the employer allows. This arrangement is most often seen in larger corporations which use retained earnings to open company-owned stores and to purchase existing stores from franchisees.

Owning a franchise gives the entrepreneur an opportunity to experience the rewards of business ownership. The rewards of ownership include self-direction (although somewhat limited by the franchisor) and the potential for high returns. Franchise owners usually have responsibilities which extend beyond managing their location. In fact, many franchisees own and oversee multiple locations.

By contrast, a store manager is employed at the discretion of the employer. Management can be a rewarding career and may provide the ideal career for the right individual. In addition, managing a chain does not put personal capital at risk. Not everyone has the skill set, the desire, or the financial resources to own their own business. Given the differences in individual makeup, it is impossible to say, in general terms, whether management or business ownership is better.

What is typically provided by a franchisor to its franchisees? Why would these be valuable to a nascent entrepreneur? Why is the failure rate lower for franchisees than it is for independent businesses?

The appeal of starting a franchised business comes from ability of an owner to start a business that is ready to go versus the uncertainty and risk of an independent startup.

Franchises offer a number of advantages including a proven business model, support systems, shortened learning curve and recognizable brand. For example, franchisors can help franchisees with financing, advertising and promotion, finding locations, negotiating leases, and managing numerous other day-to-day operational and administrative tasks. There is certainly value to buying a proven business model. Franchisors hold all locations to a consistent standard which is key to promoting consumer confidence. To assure standardization, franchisors offer and often require training and ongoing marketing for its franchise owners in order to maintain consistency and quality and to protect the overall reputation of the corporation. Providing experience and expertise is essential for the success of a nascent entrepreneur who, more often than not, requires the operational and administrative scaffolding that a franchisor can offer. While these franchisor functions are attractive, they need to be weighed against the often substantial price and fine print that comes with the franchise. Franchisees must adhere to a strict agreement detailing how they will operate their franchise as well as the franchise fee schedule which outlines the percentage of their profits, or flat fee, they must pay to the franchisor.

The failure rate is typically lower for franchises than startups due to the established name or brand of the franchise. When opening a franchise, the owner has instant credibility; customers know what to expect which leads to greater confidence in choosing the business. However, franchises still come with some risk – if you open a franchise in the wrong location, or open a store with a new or unknown franchise you could have just as much trouble as any other nonfranchise start-up. In most cases however, the franchisor does not want to see their franchisee fail because it reflects poorly on the overall brand and can be a red flag for potential owners so they will provide training upon initialization and oversight throughout operations as needed. The franchisors really don’t want their franchisees to fail. The old franchise adage holds: “You’re in business for yourself; not by yourself.”

The down side of franchises is that you’re not really an entrepreneur; it may be the next best thing, but you do have a hierarchy that you must answer to and restrictions which can be very confining. Don’t believe me? Ask some of the owners of Cold Stone Creamery franchises. A June 2008 Wall Street Journal article discussed the unusually high number of Cold Stone Creamery franchises that had been closed or put up for sale by their owners. Many of these owners suffered substantial financial losses along with severe emotional distress. The problems facing Cold Stone franchisees are not limited to that organization; they are an all too common experience for franchisees from an array of corporations.

At Cold Stone, the franchisees found that their costs were too high relative to their revenues. Some of the specific problems facing Cold Stone franchisees include: high overhead, a saturated market, and franchisor control. Franchisees complained about the way they were required to operate their businesses. For an example, the franchisor requires franchisees to buy Pepsi products from approved distributors who can be substantially more expensive than alternatives. Cold Stone does not allow franchisees to do their own advertising, and even force franchisees to honor discount coupons mailed out by the corporate office.

While examples like Cold Stone are cause for caution, it would seem to make sense that starting a business through franchising would be the safest track in many instances. It is just important for the owner to do due diligence. Make sure that the franchise you are inspecting is a good fit. Remember that just because a business is a franchise does not mean that you will automatically be successful. If a franchisee does not seek out a business opportunity that matches their interests, skills, budget constraints, and risk tolerance the probability of success diminishes. However, with all other factors being equal, the franchise will lead to quicker results and returns.

Helpful Links about Franchising

http://online.wsj.com/article/SB121321718319265569-search.html

http://franchises.about.com/od/franchisebasics/a/history.htm

http://www.entrepreneur.com/magazine/entrepreneursstartupsmagazine/2009/october/203504.html

http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sbp_isfforme.pdf

http://www.entrepreneur.com/franchises/index.html

Entrepreneurial Characteristics

What are the most important characteristics of an entrepreneur? It is important for anyone considering starting a business for the first time to reflect on their personal characteristics and compare these characteristics to ones proven to be important for success as an entrepreneur.

There is no shortage of research on the characteristics of successful entrepreneurs.The approaches taken by researchers are quite varied and the conclusions drawn from studies are sometimes contradictory but investigating the findings can yield useful insights to the entrepreneur. According to Zhao & Seibert (2006) the personality construct with the strongest relationship to being an entrepreneur seems to be Conscientiousness. Conscientiousness indicates an individual’s degree of organization, persistence, hard work, and motivation to accomplish goals. Conscientious individuals are achievement oriented and dependable. This personality type is the most consistent predictor of job performance across a wide variety of work and occupations including entrepreneurship.

I agree with the findings of this research due to the traits that comprise the conscientiousness construct. I would add that I believe that passion coupled with a conscientious personality greatly increases the likelihood of entrepreneurial success. Successful entrepreneurs do what they are passionate about. Passion typically stems from the entrepreneur’s belief that their business will positively impact people’s lives. Conversely, lack of passion can kill a business. Entrepreneurs with a lack of passion find it more difficult to make the personal sacrifices necessary for new venture success. Passion can make a seventy-eighty hour work seem tolerable. A lack of passion results in the entrepreneur asking themselves, “Is this what I what to be doing?”

Passion can fuel motivation which can result in focused, goal oriented behavior, and can be a wellspring of energy fueling the often grueling hours of entrepreneurship. If I have a student who is an aspiring entrepreneur, but has no idea the type of business they want to start, I ask them, “What are you are passionate about?” The answer to this question should be the foundation of an investigation of business opportunities. For instance, I often see individuals start a business based on their favorite hobby or a cause they are involved in. These are logical considerations because people are usually passionate about their hobbies and causes. For example, I had a student who was passionate about bees, as a hobby, so when he was laid off from his job he started a business constructing bee hives and educating his customers about beekeeping. In addition, my sister, a mother of three school-age children, became passionately involved in fund-raising efforts for her children’s schools. She was dissatisfied with available fund-raising options so she started her own fund-raising business.

In addition to asking students what they are passionate about I commonly attempt to help students ascertain the likelihood of their success as an entrepreneur. I sometimes direct them to one of a number of profiles that attempt to assess an individual’s entrepreneurial aptitude, using various personality and behavioral constructs. I believe that passion is more difficult to measure because it is so situational. Passion can also be a function of intensity which is also difficult to measure.

While I believe that there is an optimum personality profile for entrepreneurial success, weighted heavily towards conscientiousness, I tell my students that they should not be discouraged if their personality or personal characteristics do not match the ideal profile touted by a survey. While personality tends to remain relatively stable throughout one’s life, behaviors associated with these personality types can be acquired through practice and persistent effort. For example, if an entrepreneur recognizes that they are not as organized as they need to be, the skills and strategies to become organized can be learned.

Obviously entrepreneurship is not for everyone. The factors influencing entrepreneurial success are many and complex. In addition, there is a certain amount of luck and timing involved. All the complexities notwithstanding, I believe the key to success is the ability to persist in an endeavor that one is passionate about.

References:

Zhao, H. & Seibert, S.E. 2006. The big five personality dimensions and entrepreneurial status: A meta-analytical review. Journal of Applied Psychology, 259-271.

http://www.managementpsychology.com/article.php?id=28

http://www.forbes.com/2005/11/15/entrepreneur-personality-quiz_cx_bn_1116quiz.html

How might the following characteristics impact success in small business: Life experiences; parental influences; career displacement; and education?

The following characteristics can have a profound impact on success in a small business:

Life Experiences: Although there are a multitude of life experiences which could impact the success of an entrepreneur, I am most interested in the growing trend o older entrepreneurs. According to Census Bureau predictions, the number of Americans age 50 and up will soar by 31 million by 2020, to 118 million. A report this year by the  Kauffman Foundation found that older entrepreneurs were a growing trend. An aging population and increasing rate of entrepreneurship among older adults has led to a rising share of new entrepreneurs in the fifty-five to sixty-four age range. This age group represented 14.5 percent of new entrepreneurs in 1996, whereas it represented 22.9 percent of new entrepreneurs in 2010. 

 The older entrepreneur has several distinct advantages over their younger counterparts.   An older entrepreneur has likely spent years in a company or in a trade learning the ins and outs of that industry.  In addition to the years of experience that a younger entrepreneur does not have, they are likely starting with more of their own seed money. In addition to having more access to money through savings, retirement funds and other investments, an older entrepreneur may also have fewer ongoing expenses if his or her mortgage is already paid off.

I believe that another, less obvious, advantage of older entrepreneurs is that there are just not as many other job opportunities for someone in the over 50 age range. The reason that this can be an advantage is that the lack of employment opportunities effectively eliminates a source of distractions which potential job offers can be if the start-up is experiencing difficulties.

Career Displacement: For the last eight years I have worked on the “front lines” with students who have returned to school as a consequence of career displacement. Many return to school years after completing high school. These individuals typically went to work after graduation in local mills or factories and settled in to what they anticipated as a life-long career. Most of these individuals were understandably distressed when their company shut down. Most also initially were reluctant as well as apprehensive concerning a return to school. I have seen many students grow in substantial ways during their tenure in college. Some pursued long dormant passions; others found new areas of interest.

Recently, with the addition of our Entrepreneurship degree, students have been able to choose a different kind of path. After experiencing displacement, some are deciding that they wish to take more control over their own destiny. In the next few years, I hope to see these students not only develop successful businesses of their own but become providers of stable, rewarding employment for others.    

Occupational background: Occupational background plays a very significant role in entrepreneurial development. The person engaged in some occupation gains an in-depth knowledge of their field. A common path to entrepreneurship is laid out when an individual gains extensive knowledge working in a particular industry and then strikes out on their own, applying their knowledge and experience to their new endeavor.

Educational background:  The need for higher education to cope with technological advances, business competition, and the changing global economy has never been greater. Higher education develops skills and leadership abilities important to business success. Other school related activities can also be helpful in entrepreneurial development. Many businesses are started every year by recent college graduates who developed their business through business plan competitions. Also, college clubs and organizations can be an excellent avenue to develop leadership abilities.

The schools that are attended are not as important as may be the case in occupational careers. While attending a top school can help graduates network to sources of capital other personal characteristics are more important to success.

Parental background: Parental background can be important to entrepreneurial success. For example, many children develop entrepreneurial skills by working an apprenticeship in a family business. Consequently, children of business owners are two to three times more likely to own a business than children with parents who did not own a business.

Links

http://www.activefilings.com/business-trends/older-entrepreneurs-have-advantages-when-starting-a-company/

http://www.american.com/archive/2009/may-2009/the-importance-of-family-for-entrepreneurial-success

http://www.kauffman.org/Details.aspx?id=1434

http://www.usatoday.com/money/smallbusiness/2005-01-17-older-entrepreneurs_x.htm