Chapter 3: Life Stages (Part 2)

Growth:

If the business can pass through first stage it will slowly and gradually move to next stage which is growth. At this stage a business has to move from break even to making profits. Size of the business grows. Number of employees and production level increases. Now since the production level is higher,business gets cost benefit. It is able to produce the product or provide service at lower cost as compared to the cost at introduction phase.

At this stage things are very exciting. Revenue is moving only in upward direction, there are lot of new talented resources in the organization who have so many ideas to further improve things. At this stage an entrepreneur has to be very careful, because it’s not necessary that the speed with which things are moving will only take you upwards. At this stage an entrepreneur comes across following four types of entities.

1. New Investors
2. New Employees
3. New Consultants
4. New Partners

New Investors

This is a mutual need. Business needs funds to operate and there are people out there who are always looking for some investment opportunity to multiply their money. An entrepreneur must be very careful while accepting new investors. If the founder wants to run the business the way he/she wants and on the ideology on which the business was found then the founder must have control of business. There are several stories where the founding member got thrown out of the company by other investors. So most important thing to keep in mind is to keep the control with yourself.

New Employees

As the business grows different type of expertise is required to cater to increasing needs of business. So hiring of new resources starts. Most of the times management prefers to hire the people with whom they have worked in the past. Management does this because of three reasons, first one is they know competencies of these people. Second one is they feel comfortable working with them and third one is management likes these people, for any reason other than their competencies, and want to promote them.

Hiring any employee for first reason is totally justified, because if a person is competent enough for the role in organization and the organization can benefit from it then he must be hired. However hiring a person for any or both of the next two reason is totally wrong. Just because management is comfortable working with a person does not make him/her competent for the job. I don’t think explanation for third reason is required.

Unnecessary hiring leads to increasing manpower cost which increases pressure on margins of the business. There are many companies out there which has accumulated too much of manpower, who are giving enough output and are consuming organizations resources.

Hiring of employees should be strictly based on requirement of the business and the person's competence and potential who is being hired.

New Consultants

A well-dressed person in a suit will come to your doorstep and tell you that whatever you have been doing all this time was wrong and he can tell the right way to do it, and when you let him in he will take all the information from you put it in a fancy powerpoint presentation and present it to you. He will tell you that this is the way you are supposed to do the business which you have found and for this fancy presentation you will give him a big fat cheque. This person is a consultant. When think carefully about it you will realize…”dammit….I’ve been doing the same thing all the time and I paid him for nothing.”

An organization needs to hire a consultant because it has hired employees for two wrong reasons as mentioned in topic of “New Employees”.

New Partners

Sometimes an entrepreneur comes across an opportunity where he can get a good business deal but does not have necessary competence in his organization to work on it and if it’s a short term project then it doesn’t make a sense to hire a new employee with required competence to work on such short term project. In such case we need to find that competence outside the organization. These outside assistance which an organization hires are known as partners. While hiring a new partner as organization must take into account below two primary factors.

• Economic feasibility: the cost at which an organization is hiring a consultant must be less than the revenue which the organization is getting from such work, because then only it can make profits.
• Partner’s competence and ability to deliver: As you can see in fig 3.3: “Use of Partner” as organization is always as the front end facing the customer and not the partner, so if the customer does not get what he wants then the organization's reputation is at stake. Hence before choosing any partner the organization must look into the competence and ability of partner. 

Chapter 3: Life Stages (Part 1)

Every human passes through certain stages of life viz. Childhood, teenager hood, Adulthood similarly a business also passes through stages.

As you can see in Fig 3.1 primarily there are four stages of any business. This cycle applies to all businesses, be it a road side food stall or any sophisticate IT startup. There might be a chance that a business skips middle two stages, but the first and last stage is always there. In this part we will discuss about first stage.

Introduction:

"The owner is the business, performs all the important tasks, and is the major supplier of energy, direction and capital"

      The Five Stages of Small Business Growth, by Neil C. Churchill and Virginia L. Lewis. Harvard Business Review.

At this stage the entrepreneur has to ensure the existence and survival of business. Focus is primarily on creating strong customer base. The very fresh example for this, Reliance Jio. They are distributing free sim card to everyone with least document verification and offering free data and voice calls for few months. At this stage business focuses on promotion. At this stage business may have to operate at very low profits or even loss. Business spends more money on marketing and promotion of business at this stage.

Sometimes between introduction and Growth stage there could be a struggle period when the entrepreneur might feel that his business won’t be able to survive any more. Primarily there could be following two problems causing this issue

1. Lack of resources
2. Not able to get customers

An entrepreneur needs to analyze these problems. Lack of resources could be due to two reasons. In the introduction stage an entrepreneur invests his/her own funds and these funds might be very limited. If this is the reason then the entrepreneur needs to seek outside assistance which could be in the form of loan from relatives, financial institution, investors or partner.

Business also generates funds by selling its product or service to customers. However if the business is not able get customers then it would impact cash flows which in turn would impact further operations of business. I’d like to call it “The Spiral Effect” (Fig 3.2), your product or service is sold to customers which will generate funds and these funds are utilized to acquire resources for further production. If the business is not able to get customers it could be due to product/service not getting promoted properly, in such case one will have to invest more in marketing. Another reason for not getting customers could be that there is something missing in the product/service. In such case an entrepreneur needs to understand what his/her product lacks.

• Is there similar product in market which is better in terms of features? – in this case include all the features which the competitor is providing and also include some additional features
• Customer is not willing to pay the price at which the product is being sold – Since the business is at the introduction stage it might not be able to produce its product or provide its services at a price which is at par or lower than its competitors. However at this stage business might have to bear losses by selling its product / service at a price lower than its competitors to attract new customers.

Chapter 2: The Seed

A tiny seed is required to grow a tree. In the same way to build a business all you need is an idea, but an idea is not something which can buy online or in a store. You need to keep your eyes and ears open, you don’t know when you will get an idea. Whether or not you turn an idea into a successful business is different thing, but the first step is to find an idea.

An idea to turn into business should be

•  Of something which people need or
• You have to create a need for it.

Google is the perfect example of first type. Internet is a very big world, what if I need to find something on internet. I cannot go and check on each website I can imagine and look for the stuff that I want. So I need something which will go on the internet and find it for me that too in least possible time. That something is “Google”. It’s the most brilliant and most simple idea. The way google works is very complex but the idea is very simple. Even the google webpage must be the simplest web page.

Facebook is a good example of second type of idea. Remember those good old days when kids used to go to school, parks and camps to make new friends, grownups used to go to parties, clubs, social gathering to meet new people. We never needed a website to make new friend and meet people or to know about our existing friends. But facebook created that need and now it’s most popular “social networking site”. Number of people who use facebook is equal to a country’s population.

However just any of the above two characteristics cannot turn an idea into a business. It needs to be presentable, reusable and adaptable. Facebook and orkut both were based on same ideas, but one is now most valuable name and the other one has completely disappeared. Facebook won over orkut because of presentation. Facebook looks more professional and sophisticated on the other hand orkut looked more amateur. Facebook continuously keeps you updated about your friends. Anyways, I don’t want to turn this into facebook vs orkut.

A product or service should be reusable. Your customers should come back to you again and again for your product or service, then only it can be a sustainable business. Also an idea should be adaptable to changing environment. The product or service should be able to cater to changing needs of consumers. Nokia lacked this quality and they paid very heavy price for that.

Need, presentation, adaptable and reusable these are the basic qualities an idea must have to grow into a big tree.

Chapter 1: The Tree

Every organization has three groups of employees. In business language they are known as top management, middle management and junior management. However here I won’t be using those terms. An organization is like a tree and a tree can be divided into three parts. Roots, stem and leaves.

Roots refer to those employees who actually produce the product or provide the services which generates revenue for the organization. In manufacturing industry they are known as workers and in service industry they are known as billable resources. An organizations existence depends on these roots, because they are the source of revenue on which entire organization survives, still the amount of money an organization spends on each resource at this level is much lower than the people at top. We will discuss reason for this in coming chapters.

Stem, these are support staff. Their job is to take data from roots and present it to leaves in the way leaves want it to be presented. This section does not produce any product or give any services which will generate revenue for organization, still they are in the middle and not bottom because this category is the only link between Roots and Leaves. People in leaf category come up with various requirements every day. They need various data in multiple format, for “Decision making”. To what extent leaves are making really useful decisions based on this data is a matter of question, but that’s the different topic to discuss. So employees in stem category are not that important for existence of organization, but they are critical for smooth functioning of various operations of an organization.

leaves are at the top of the organization. They are known as leaders, decision makers and so on, there are so many fancy names for them. These are the people who make strategy. They would control the way an organization operates. There are several organizations producing same product and delivering same service, but still the quality of product and service is different. It’s not because of the resources an organization uses to deliver its product and service, it’s because of the way leaves operate a company. Leaves neither produce nor provide any service still they are the most important section of an organization. Their job is to manage people, both inside and outside the organization. Although people at this level do not directly get in touch with all the employees in an organization, still any decision made by them impact all or most of the employees in an organization. Leaves represents entire organization to the world. They deal with investors, government authority, competitors and all the stakeholders outside the organization. Leaves are held to be responsible for success or failure of the organization.

Roots, Stem and Leaves are all important and necessary for existence and survival of an organization, however how healthy and big a tree is dependent on it’s Leaves i.e.  The way leaves manage and run an organization, decides the fate of the organization.