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An online monthly research publication by the Ivey Business School
Volume 13, Number 12: Supplement
December 2007
Survival and Growth
of New Ventures
Click here to download audio/visual
presentation.
Click here
to listen to the Q&A.
It takes more than
good idea and a little bit of luck to start up a
successful new venture. Entrepreneurs need to
focus on a reasonable pace of growth – and keep
an eye on the infrastructure of their business
as they expand.
Stewart Thornhill, professor of Strategic
Management and Entrepreneurship at the Richard
Ivey School of Business, outlines some pitfalls
for new ventures and offers advice for young
companies.
Ashleigh Murphy started by asking him if there
is there one trap that many new ventures fall
into…
A. One issue for a lot of ventures is
trying to take on too much growth too fast. So
if a company
has a good product or service, and the customers
are coming to them and they like it, often if
they try to grow too quickly. They outgrow their
own financial resources, [and] their own ability
to meet their customer needs and then customers
end up being disappointed, they start missing
orders, or they simply can’t keep up with their
financial obligations because they stretch too
thin too fast. It’s often a real tragedy that a
business that has a great idea, and there is
demand for it, just gets ahead of itself. And we
see some great companies that just fail because
they were too impatient, couldn’t get the
financing in time, and just got out ahead of
themselves.
Q. How can new ventures overcome this
challenge?
A. Well, one way is to spend as much time
working on the business side – and by that I
mean the financial, the backend, the people and
the infrastructure –as they do on the product
and customer side. It’s very easy to really
spend a lot of time and effort on satisfying
customers, which is critical; but, unless you’ve
got the business behind the scenes that are able
to deliver the product and keep those customers
happy, then there is going to be a failure. It’s
finding that balance between managing the
business and managing the customer-product
relationship. And a big piece of that is getting
financing. If companies try to really launch a
strong growth initiative without having the
money and the financial backing to support that,
again, they’re looking at a lot of trouble and a
lot of stress.
Q. What are some other tactics that new
ventures can employ to increase the likelihood
of success in the market?
A. Probably the single biggest piece is
making sure you actually have something that
people want. And we talk a lot in the classroom
about a value proposition, which is simply a way
of saying, how are people’s lives better after
using your product or service than they were
before they used your product or service. And if
you haven’t created value for them, done
something that makes their life, their job,
their way of doing things better or easier or
faster or simpler, then you haven’t brought a
solid value proposition to the table. So long as
you know what that is, you know why your
customers are coming to you, you understand what
it is you’re doing to satisfy them, you’ve got a
much better chance than businesses that only
have sort of half an idea. Or that it’s a
technology, for example, that doesn’t really
have a need in the marketplace that somebody’s
trying to push onto it. Focus on the value
proposition, understand the customer need, and
just dedicate time, effort and resources to
that.
Q. What are some of the pitfalls that
young companies fall into?
A. One of the big problems that a lot of
young companies see is not asking for help soon
enough or widely enough. Entrepreneurs often get
caught in the “ego trap,” that they can do it
all themselves, that it’s their company, often
their baby—you hear them talk about it in those
kind of terms. [What happens then is] they’re
unwilling to share decision making
responsibility, they’re unwilling to take advice
from others –whether that be accounting, legal,
marketing advice, operations advice –[because
of] this real desire to keep control and to
manage all aspects of the business. And the
bigger a business gets the harder that becomes.
So, being willing to share risk, share
responsibility, delegate decision making, and
just sometimes let go of some aspects of the
business, can really help a business grow.
Trying to do everything yourself is really going
to put you behind the eight ball.
Q. How does the number of new ventures in
the market affect success rates?
A. Well anytime you talk about number of
competitors or market saturation it’s really
relative to the number of customers. There are
some markets that are out there that are very
small, but growing, and can accommodate a huge
number of new entrants and that’s typically what
you see when a new technology comes along, such
as when mp3 players hit the market. Prior to the
introduction of the iPod that market was fairly
small and there were a limited number of
players. Once the popularity of the medium, the
technology became much more popular, and the
price points came down, a lot more new entrants
came in. But they all still made money because
the market was growing so fast. The question of
how many competitors is the right number really
is one of those supply-demand things. [If]
you’ve got lots of customers you can support a
lot of ventures. [If] customers start to dry up,
or the demand for the product falls off and you
can get squeezed pretty quickly in that
shrinking market.
Q. Is there a different outcome for new
ventures that employ pure strategies vs. hybrid
strategies? Maybe you explain the difference
between these two…
A. When we talk about pure and hybrid
strategies…an example of a pure strategy would
be Wal-Mart, where everything is dedicated
towards reducing costs. So their whole business
mandate is low cost, low cost, low cost and they
make their profits by having a better
cost-structure. Another pure strategy is having
an average cost-structure but adding more value
to their products. So a car manufacturer that
produced high end products, like a Rolls Royce
or a Ferrari. They are a premium product,
premium value at high quality, and that’s a
different pure strategy.
The hybrid is when you try to do a little bit of
operating efficiency and cost cutting and a
little bit of value add and so sometimes you
don’t have a product or service that’s really
clearly differentiated in terms of how it
creates value.
Q. Do you have an example of a Hybrid
Strategy?
A. An example of a company that started
as a pure play was WestJet. WestJet entered the
market, they used the Southwest Airlines
business model. [They used] one kind of jet,
only flew into secondary airports, no
multi-classes of service, no meals –you know,
everything was cost cutting, cost cutting, cost
cutting –and that was the Southwest discount
model. And it’s been replicated in easyJet and
Europe and several other carriers. Over the past
several years they’ve [WestJet] really evolved
that strategy and tried to create more value.
They’ve got the leather seats, they’ve got the
TV, they’ve got the longer haul routes, and
they’re flying into primary airports like
Pearson. So they’ve really moved into that
middle space. Air Canada meanwhile, has started
as the premium airline, originally, and now has
tried to cut costs, and cut costs, and cut
costs, so they’ve moved into the middle space.
So what you see are both airlines, which
originally had very different strategies, have
kind of converged on the middle where they look
pretty similar now, when you look at the
pricing, the quality, the root structure,
there’s not a whole lot to distinguish between
Air Canada and WestJet. Air Canada of course is
a much larger international presence. But
they’ve both kind of evolved towards this middle
strategy, and neither of them is as pure as they
were, say, five years ago.
Now, what we’ve found is, we’ve done research
that’s looked at thousands of companies over
about a six year period, and the prediction and
theory was, and this goes back a guy named
Michael Porter, that pure strategies should
outperform hybrid strategies because you’re
dedicated to what you’re doing, you’ve got a
clear value proposition and everybody in the
organization is organized in the right way. When
you start running a hybrid strategy you’re not
quite as good on some dimensions, and people are
sometimes confused about where their priorities
should be. You know, should we be spending more
time at cost cutting or more on value adding,
and it gets a little blurry. What we’ve found is
that the pure strategies do make higher profits,
they’ve got better operating margins [and] they
tend to be more profitable. But they also tend
to be riskier because you’re dedicating all your
resources to one specific set of activities and
if the market shifts a little bit or the
competitive landscape changes a little bit,
you’re more exposed. If you think about a hybrid
strategy as you maintain a little bit of
expertise in one area and a little bit of
expertise in the other, if the market shifts,
you can shift with it a little more easily but
by maintaining all those different capabilities
or skills. It’s like having an option. You’re
kind of buying insurance against what the market
might do in the future. And the cost of that is
reduced profitability today.
The trade off, you see, is hybrids kind of
combine strategies, tend to be safer in the long
run, grow to a larger size because they stick
around longer and they can often service more
customers –though not as profitably. The pure
companies [see] higher profit rates, but it’s
riskier. There is risk in return as in most
things in life. And that’s a choice an
individual entrepreneur has to make.
That was Stewart Thornhill, Professor of
Strategic Management and Entrepreneurship at the Richard Ivey School of
Business.
Professor
Stewart Thornhill
is the ERA Fellow in Entrepreneurship.
Professor
Thornhill's Homepage
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