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Look past the gimmicks and exercise resource parsimony, strategy experts warns startups


Startups that fail to exercise resource parsimony or understand the job their customers want to get done will not survive against larger companies and risk falling afoul of investors, a prominent strategy expert has warned.

In Sydney last month to participate in the World Business Forum (25 to 26 May), Rita McGrath, a professor at Columbia Business School, set aside time to speak with Dynamic Business about startups and other small businesses.

Ahead of her presentation on the increasing irrelevance of sustainable competitive advantage (you can read about that here), she identified some key challenges for small businesses as well as tips for not only surviving but also thriving in a turbulent business environment:

Forget foosball teams

“What we are going to see happen in Silicon Valley is that firms with massively high burn rates will suffer once venture capitalists become less willing to throw money at them. When venture capitalists back trucks up to your company’s front doors and unload money, you can be fooled into thinking it’s great to have foosball teams, on-site masseuses and whatever else. You forget that the minute someone puts money into your company, the clock is ticking until they want it back. If you don’t have a scalable business, it’s going to be very difficult to accomplish that.

Exercise resource parsimony

“In the last few years a lot of people have forgotten entrepreneurship 101, which advocates resource parsimony.  That means being as creative as you can about how to get resources, rather than digging further into your pockets. In other words, you should spend your imagination before you spend your money. Also, don’t over-invest in fixed costs and don’t limit yourself to a particular configuration of technology or assets because it’s likely to change. Think to yourself: can you leverage the resources of others; can you pay for things on a variable basis rather than taking on fixed costs; can you manage your cash flows very precisely so you know how many units you have to sell to cover your fixed costs.”

Find your niche

“Small businesses need to look for the early warning signs of big changes in their industry. I interviewed someone at Sony around ten year ago, and he said the company used to supply 55,000 businesses, all of which were mom and pop electronic stores. Well, the world changed and there was a complete inversion of the supply chain so that only a handful of companies mattered to Sony – Best Buy, Walmart, Radio Shack and a few others. Consider the small bookstores which have closed due to Barnes and Noble, and the fact that Toys “R” Us is closing down local toy shops. Consider also Amazon – they’re affecting everybody. Small businesses can win in these kinds of situations by finding niches that really appreciate what they do and are willing to pay for it, and by overserving their customers in a way that a larger, less personal entity is unable to.”

Know your customers

“For a competitive advantage, small businesses really need to understand the jobs their customers are trying to get done. Let’s take the case of a hardware store. There are two basic market segments you’re selling to and they want completely different things. One is the DIY home renovators who need need advice and guidance. Then you have the professional contractors who just want to buy supplies, load their truck and drive off. In this situation, you should probably consider which customer you really want to serve. Alternatively, if you want to serve both, you really have to have a different service delivery function. It’s important not to confuse what the customer wants to get done and what you can offer them.”

Budget for change

“Small business operators need to budget for necessary updates and upgrades. When a small business is founded, things tend to be a bit rushed, a bit makeshift. However, if the business is going to be sustainable, the operator need to consider the funding necessary to bring it up to a certain standard. Entrepreneurs can be caught by surprise if they need to update their systems or physical plant but realise they didn’t budget for it.

Access to assets 

“Small businesses have more opportunities to break into areas that previously required massive amounts of scale and asset intensity. Two guys in a garage can have global reach whereas 40 to 50 years ago that would have been unthinkable. The advantage that small firms have today is that the focus has shifted from ownership of assets to access to assets.”