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Thinking Like An Entrepreneur

Thinking Like An Entrepreneur
Table of Contents

Chapter 3
Men Are Cheaper Than Guns

Chapter 4
Intellectual Capital And Bootstrapping

Thinking Like An Entrepreneur


Business Lessons From
"The Entrepreneurial Mindset"

  New entrepreneurs can learn much from habitual entrepreneurs. That's the premise of Rita Gunther McGrath and Ian MacMillan, authors of The Entrepreneurial Mindset: Strategies for Continuously Creating Opportunity in an Age of Uncertainty.

  McGrath and MacMillan define "habitual entrepreneurs" as those who have made a career out of starting new businesses and launching new products. Habitual entrepreneurs find opportunities while others fail to act during times of uncertainty.

  "In a world of uncertainty, our guiding philosophy is: Take Charge. If nobody knows what the future will hold, your vision of how to navigate it is as good as anyone's. The future may as well belong to you," write McGrath and MacMillan.

  Successful habitual entrepreneurs experiment intelligently. They don't view every business move as a do-or-die endeavor for their company. Habitual entrepreneurs focus ruthlessly upon priorities and ruthlessly weed out unprofitable endeavors. They balance current, profitable, business operations with an eye to future opportunities.

  Because the endeavors of start-ups are fraught with uncertainly and, thus, are not well-suited to Net Present Value Calculations (where estimates of future cash flows are made and these estimated cash flows are discounted back to the present to determine the worth of the venture), McGrath and MacMillan suggest entrepreneurs view their endeavors as a portfolio of options. Entrepreneurs create "opportunity portfolios." Each option is pursued or abandoned as conditions warrant.

  The goal is to learn as you go and effectively convert assumptions to knowledge at a low cost. For example, via Stepping-Stone Options, McGrath and MacMillan say, "You start with small, exploratory forays into less challenging market niches and use the experiences gained there as steppingstones to build competencies in increasingly challenging and attractive market arenas that you discover as you go."

  The Entrepreneurial Mindset gives the example of The Kyocera Company, which entered the industrial ceramics business by focusing upon lower-end, niche-based, ceramic products, such as ceramic scissor blades. Using the knowledge of ceramics acquired making scissor blades, the company successfully moved into more profitable ceramic markets, such as semiconductor-chip substrates.

  McGrath and MacMillan point out that many companies have difficulty managing their opportunity portfolios. In particular, many companies try to undertake too many product launches and pursue too many forays into test markets at the same time.

  A company must effectively allocate both physical assets and personnel resources. As the authors note, a software engineer, working on a six-month project, who is given three more, similar projects, takes two years to complete all four projects. And, in businesses where speed to market is a key success factor, there is a world of difference between completing a project in six months versus two years. In two years, you probably will have missed the market entirely, and all work on all projects might well have been in vain.

  McGrath and MacMillan suggest that you map out all of your company's projects and the monthly, people-hours demanded by each project so that you don't take on too much.

  Similarly, companies aren't always effective in deciding when the commitment to a business foray should be increased or abandoned. In fact, sometimes, abandoning an activity that has been the central, historical focus of a business is required if it appears that the future profitability of the endeavor will be low. Making such an entrepreneurial, organizational change is demanding.

  To ruthlessly focus upon performance, entrepreneurs need benchmarks and guides to help them evaluate how they are doing. Ratios are one key tool used by entrepreneurs to benchmark performance.

  McGrath and MacMillan write: "The reason key ratios are such a powerful device for directing entrepreneurial thinking is that they help align the efforts of everyone in the company around a common set of measures. Describing and consistently using these ratios makes abstract statements about strategy more concrete for people and helps focus their energies. Kept simple and meaningful, key ratios can be crucial."

  Superiority to the competition will be reflected in a key ratio. If it isn't, how does the superiority convey any real value to the company? McGrath and MacMillan suggest that entrepreneurs identify seven to ten benchmark ratios specific to their industry. And, don't just look at the more obvious and common financial ratios.

  The Entrepreneurial Mindset discusses General Electric Financial Services, which is especially effective in collecting delinquent accounts. At one time, GEFS' bad-debts-to-book ratio was nearly 30 percent below industry norms, meaning GEFS was collecting far more delinquent accounts.

  Favorable operational ratios don't just materialize of their own accord. Something must happen to improve the ratio. McGrath and MacMillan define this "something" as "entrepreneurial insight." Entrepreneurial insight is the crucial ingredient behind entrepreneurial success. Entrepreneurial insight is seeing something about an industry or a market that others miss or fail to understand.

  With GEFS, the key insight was acquired by studying the behavior of people whose accounts might default. GEFS found that after a period of about ten days, the probability of collecting a delinquent account dropped significantly as people's feelings of guilt over not paying the debt wore off.

  Using this, and other insight into potential defaults, GEFS specially trained people to follow-up on delinquent accounts. GEFS developed an automated system to ring the delinquent account holder's phone at regular intervals. Then, when the phone was answered, an automated system put the call into the hands of a person trained to handle the situation.

  McGrath and MacMillan write: "Keeping your entrepreneurial insights to yourself is key here. Most reasonably competent competitors can match whatever you do in terms of benchmark processes or technologies, but without the entrepreneurial insight behind the competence and without the deep familiarity that comes from experience, competitors can only grope their way toward your competitive position."

  The authors astutely observe that while it is relatively easy to reverse-engineer a product, products bundled with services are much more difficult for competitors to replicate.

  While you can expect your competitors to mimic your product's best features, McGrath and MacMillan strongly emphasize that you must carefully examine the features of your own products and services.

  Using all meaningful sources of input, McGrath and MacMillan describe the process of "attribute mapping," which divides a product's features into the customer's perception of the desirability of the feature. Attributes could range from "nonnegotiables" (features expected by the customers) through "differentiators" (features that positively differentiate your product from the competition) and "exciters" (features customers find positively delightful) to "tolerables" (features not really liked, but not hated either) and "enragers" (features customers absolutely hate, fear, or despise).

  Enragers must be eliminated, while exciters to drive customer purchasing should be sought. McGrath and MacMillan point out that there is no definite correlation between the expense of creating a feature and the customer's perception of its value. McGrath and MacMillan write, "Exciters are often technically simple, relatively low-cost advances that greatly add to the offering's convenience or ease of use." And, many features that are quite costly often go unappreciated by the customer. Nixing such features might offer big cost savings.

  McGrath and MacMillan profoundly observe: "Trying to achieve perfection is a mistake because the translation from what your business has to offer to what the customer wants or needs can never be perfect."

  Developing a product is often like a blindfolded archer shooting arrows downrange at a target. Trying intensely to hold the bow steady makes little sense when you can't see the target! Your point of aim might be wrong. Plus, it's tiring! Better to just point in the general direction and let the arrow fly. Then, fire again in a relaxed manner. You can peek through the blindfold via attribute mapping.

  Learning how consumers contemplate, select, use, and dispose of a company's products is another major focus of The Entrepreneurial Mindset. Via such "consumption chain analysis," entrepreneurs can find ways to positively differentiate their products from the competition.

  If you want to understand how other entrepreneurs think and how companies achieve market superiority, you will definitely want to read The Entrepreneurial Mindset: Strategies for Continuously Creating Opportunity in an Age of Uncertainty.

Peter Hupalo