Small Business Success Factors
Recently, a reporter asked me: "What is the most important elements a new small business needs to be successful?" I said the short answer is capitalization - having sufficient working capital.Being a good reporter, she asked for the long answer. I told her the long answer was, understanding the basic success factors.
My friend, Doug Wilson, teaches a university level entrepreneurial course in which he has developed what I think is the best list of success factors. Doug is Vice President of Marketing at Palo Alto Software. I like his list, and I used it as the reporter and I continued our interview on how to be successful in small business. Here are Doug's success factors followed by my thoughts.
Success Factor 1 - Choice Of Business
Why have you chosen this business? Are you passionate about this particular business, or just about being in business?
You've heard me say this before: Whether fixing fenders, baking bagels, or sewing suits, you MUST love the business you're in. Merely being passionate about being in business won't get you through the days when the details of business turn against you.
But loving a certain business isn't enough if the business you love is on the way out. One very important success factor is choosing a business that is going to be vital for as long as you can reasonably foresee. (More on this in Success Factor 5.)
You have to be passionate about your business to be successful, but take care not to fall in love with the wrong business.
Success Factor 2 - Education and Experience
The reporter also asked me this question: "Which is more important: Education or experience?"
I told her that I knew plenty of highly educated business failures, as well as many highly successful business owners who are not very well educated. Of course, I've also seen the other side of that coin. The best candidates for success are those who have adequate education AND experience.
I then came back to her question, and I think my answer surprised her. I said, experience trumps education. When it comes to running a small business, I'll take 25 years of industry experience over an industry Ph.D. any day.
Education and experience are both important success factors. Identify where you are deficient and acquire what you don't have.
Success Factor 3 - People
Doug puts people in the third slot, and he breaks this factor into three groups:
• Internal Team: These are the founders and the key employees who make the company work.
A well capitalized company with a weak and poorly functioning team may be valuable on paper, but in terms of the marketplace, it's not as valuable as an undercapitalized company with outstanding people. Capital is just money, and therefore, a commodity. People are not fungible like money. Good people are actually considered rare, even precious.
Many winning strategies have been built around one person or team. Capital is critical to success, but there is nothing particularly strategic about it. Success is often a result of the intangibles: desire, spirit, courage, pride, honor, loyalty. There is no place for intangibles on the balance sheet.
• External team: These are the paid professionals. Every business has them, but in small businesses they become de facto vice presidents. Choosing this team is a critical element in success.
• Connections: I like to use the term, network: your community of marketplace friends. Networking has long been on my list of success factors, and it's never been truer than today. Leveraging your network give you access to more intangibles.
Success Factor 4 - Creativity In Management
Every small business needs the creative influence of an entrepreneur, PLUS the steady hand of a manager. But here are two cold, hard truths:
• Some entrepreneurs are not good managers.
• Some excellent managers don't have a creative bone in their bodies.
Honesty is definitely the best policy here. Be honest with yourself. If you're an entrepreneur through-and-through, sell what you create quickly, like when an inventor licenses an invention, or hire a good manager to run what you have created.
If you're a hide-bound manager, congratulations: You probably run a nice, tidy ship. But will need to find someone who can deliver the creative juices your organization will require to maintain a competitive advantage in the marketplace.
I think this factor is the most misunderstood, and consequently, the most overlooked of all of the success factors.
Success Factor 5 - The Industry
This factor ties in closely with Success Factor 1 - Choice Of Business. Doug encourages you to find out if the industry you are considering has high potential or low potential. You're probably asking, "Why would anyone pick a low potential industry?" Well, believe it or not, it happens everyday. But only to those who don't do their industry homework.
The definitions of high and low potential might seem intuitive, but not always.
High Potential
Intuitive - Obviously, a high potential industry is one that's emerging, or at least hasn't spent too much time on the maturity continuum. Much of the technology industry would fit this profile. Doug says a high potential industry is also one that affords a low capital investment, and/or one where you can operate with a small number of employees.
Counter-intuitive - VCR players are pretty technologically advanced these days, but with advances in digital technology, I wouldn't invest in a business that makes or sells VCRs today, would you?
Low Potential
Intuitive - A low potential industry is one that has already seen it's best days, like buggy whips at the turn of the 20th century, or 56K modems at the turn of the 21st century. Doug says industries that are capital and people intensive, and/or highly specialized, are also examples of those with low potential.
Counter-intuitive - You might be the problem; low potential could be associated with the business owner. If you start a business that has high potential, but you lack adequate capital, experience, or other key elements of success, you have created low potential for your entry into that industry.
Success Factor 6 - Records
I think this factor ties closely with Success Factor 2 - Education/Experience. This is one area where education usually trumps experience. A business owner long on experience but short on education will typically be more likely to rely on instinct than documentation. The more educated business owner, on the other hand, will be more comfortable creating data and managing with it.
Successful businesses must manage the information they collect: financial statements, customer records, sales performance, service levels, plus dozens of other categories. Furthermore, there are an infinite number of ways to cross-reference any data category with another to identify trends and other indicators.
The more educated business owner will usually begin with data collection fundamentals, but must learn how to apply those rules effectively in the marketplace. Business owners with significant marketplace experience must acquire an understanding and appreciation for how sophisticated data collection and processing can leverage their experience.
Either way, the educated and the experienced both must make a journey of understanding, and each one must decide which lane they have to travel to make this journey.
Success Factor 7 - The Corridor Principle
This factor is closely related to Success Factor 5 - Choice Of Industry. Doug defines the Corridor Principle as "the concept where an entrepreneurial venture may significantly change focus from the venture's initial concept through a continuous response to the market and the desire to optimize profitability."
As you've heard me say before, marketplace velocity today is breathtaking. In past eras, a product could be expected to have a multi-year life and a market strategy at least 12 months. Today, things are measured in terms of the Internet, and an Internet year is about 90 days. Whew!
I think Doug puts the Corridor Principle last because the best way to adhere to it is to have the other six factors adequately covered. No matter what business you're in, you need to be operating with what I call the Three-Strategy Principle:
1. The current strategy - the one you're in the marketplace with right now.
2. The next strategy - the R&D is done and it's on the shelf ready to deploy when the current strategy plays out.
3. The quantum leap strategy - the one you're investing in today so it's ready to follow #2.
Back To The Press
The reporter asked, "Do small business owners really have to know all of this to be successful?" I said, yes - and much more.
Write this on a rock... Small business success is made up of experience, education, hard assets, and human assets, all deployed in our wonderfully pure and extremely demanding marketplace. Identify how you measure up with each of the success factors. Lead with your strengths, overcome deficiencies, and keep one eye on the road ahead and one on the horizon.
