Rev. Confirming Pages
After studying Chapter 6, you will be able to:
Discuss what integration of the global economy means for individual companies and their managers. p. 188
Describe how the world economy is becoming more integrated than ever before. p. 194
Define the strategies organizations use to compete in the global marketplace. p. 200
Compare the various entry modes organizations use to enter overseas markets. p. 206
Explain how companies can approach the task of staffing overseas operations. p. 210
Summarize the skills and knowledge managers need to manage globally. p. 210
Identify ways in which cultural differences across countries influence management. p. 213
Managing in a (Sometimes) Flat World
Implications of a Flat World
The Role of Outsourcing
The Global Environment
Asia: China and India’s Ascent
Africa and the Middle East
Pressures for Global Integration
Pressures for Local Responsiveness
Choosing a Global Strategy
Wholly Owned Subsidiaries
Managing across Borders
Skills of the Global Manager
Understanding Cultural Issues
Ethical Issues in International Management
HOW LENOVO IS BECOMING A GLOBAL BRAND
Sales in China have fueled growth that propelled Lenovo onto the world stage. Today, the electronics company led by chief executive Yang Yuanqing is fighting a close battle with Hewlett-Packard for first place in market share for personal computers, with plans to become a leader in smart phone sales as well. The Wall Street Journal has called Lenovo “the first Chinese global consumer brand.”
Until 2005, Lenovo was a Chinese manufacturer serving Chinese customers. But China is a huge marketplace, and sales there brought in a lot of revenue as the company developed its expertise in the high-tech sector. That cash came in handy when IBM decided to get out of the business of selling laptop computers. Lenovo surprised the Western world by purchasing IBM’s laptop division, including the ThinkPad brand name.
Lenovo assumed it would need Western-style management to compete in the West, so it hired an American executive to run the laptop business. But by 2009, sales had slumped. Businesses, which had been the Think-Pad’s main customers, were cutting back in the Great Recession, and Lenovo lacked strong relationships with retailers. Yang, who rose through the ranks after starting as a Lenovo salesperson, took back the reins with one of Lenovo’s founders, Liu Chuanzhi, who returned as chairman. Together, they crafted Lenovo’s strategy for international expansion—start by targeting fast-growing developing economies and use the revenues to enter additional markets as the brand and company strengthened.
Lenovo focused on expanding its presence through retailers in China, India, Russia, and Brazil. This strategy generated sales growth in computers even while the worldwide market for PCs slumped as consumers in North America switched to tablet computers and European customers struggled with economic stagnation in their region. Lenovo is the top brand in the high-potential market of India, where less than 10 percent of the population owns a personal computer. Brazil, too, has a large population with rising incomes, and Lenovo expects that market to represent one of its biggest in the future.
Lenovo’s strategy for smart phones is similar. In China, Lenovo is among the top brands in the biggest market for the devices. In just one recent quarter, Lenovo sold 9 million smart phones in China. The company has re-cently moved into India, Indonesia, and Russia, where the market for smart phones, like the market for PCs, is potentially huge. While others in the PC industry are struggling in mature markets, Lenovo has recently boasted record profits, even profiting in the highly competitive market for smart phones.1
How well can Lenovo’s commitment to meeting the needs of developing economies appeal to consumers around the world? As you read this chapter, consider what qualities of the international business environment present threats and opportunities for this company.
The direction of Lenovo’s growth resembles that of many successful businesses in recent decades. The company started out by satisfying customers in a local market. As sales increased, the company began serving a larger region. Eventually, it began selling goods to and running operations in other countries. Now it boasts sales and develops managers around the globe.
Today’s corporate giants—and many ambitious, creative small businesses—need employees and sales in oth-er countries to meet their objectives. U.S. multinational corporations now employ almost one-third of their workers outside the United States, and the overseas share is growing. Sales of some product categories also are growing faster outside the United States. That’s why GE, for example, earns 60 percent of its revenues outside the United States (versus 30 percent in 2000) and has over half its workforce outside the United States (54 percent, up from 46 percent in 2000).2 Or consider Walt Disney Company. After years of negotiations, the iconic U.S. company began construction of a theme park and resort in Shanghai. The deal is complex because the Chinese government insisted on Chinese ownership, but for Disney it was worthwhile because it wants to bring its brand of entertainment to China’s vast population and rapidly developing economy.3
Because of such trends, today’s managers need to be able to plan how their company will enter markets around the world. That planning begins with understanding the importance of the global economy and the oppor-tunities and threats of the fast-changing global environment.
The global economy matters precisely because it is global—because your customers, employees, and suppliers could be located anywhere in the world. Several years ago, New York Times columnist Thomas Friedman wrote a best seller about this phenomenon. His book, The World Is Flat, described how such trends as the Internet and trade agreements between more and more nations have made international business the norm today. Whether you are a large or small company looking for financing, supplies, employees, machinery, natural resources, or transportation services, you can readily go online and find the mix of price and quality that is right for you. In that way, according to Friedman, the business environment has become a level playing field—in a word, flat.
But if “flat” is taken to mean everyone has the same advantages or buys the same products, it hardly describes the real world. Internet connectivity doesn’t necessarily make us more aware of every idea or interested in every global trend. Sometimes individuals go online to connect with people they already know and to buy products that are tailored to their own particular tastes. And sometimes a local government still makes it hard for a business to grow, or a community lacks the resources to encourage development. In that sense, the world is not always flat; it is often bumpy.4 For managers, that makes the business environment more complex and exciting than ever: a global economy with threats and opportunities around the world, accompanied by a requirement to know their customers’ specific needs and values, which may vary considerably from place to place.
Later in this chapter, we will describe how managers can select strategies for the world’s bumpiness. But first, let’s see how the ever-greater interconnection, or integration, of the world economy is shaping the way business is done today.
Implications of a Flat World
As you will see later in the chapter, increasing prosperity and the lowering of trade barriers have increased the extent to which the economies of different nations are integrated into one global economy. The increasing integration of the global economy has had many consequences. First, even as the world’s economic output has grown, the volume of exports has increased much faster. The severe global recession of 2009 caused a one-year dip in output and trade, but exports surged the following year and have continued to climb since then.5 Years of emphasis on international commerce by major industrial countries, liberalized trading brought about by free trade agreements, and market reforms in China have resulted in lowering the barriers to the free flow of goods, ser-vices, and capital among nation–states. The impact of these trends is staggering. The dollar value of international trade (merchandise exports and commercial services) is over $17.7 trillion—up from just a few hundred billion dollars in the 1960s and 1970s. For example, Figure 6.1 shows how the international trade of the United States (exports of goods and services) increased relative to the country’s output since the 1990s. Despite some dips during recessions, the percentage of goods and services exported to other countries has risen from 10 percent to 14 percent of U.S. gross domestic product. And for durable goods (manufactured goods such as computers and machinery designed to last for several years), more than 20 percent of these products shipped are now exports. Most experts expect competition to increase as trade is liberalized, and as is often the case, the more efficient players will survive. To succeed in this industrial climate, managers need to study opportunities in existing markets as well as work to enhance the competitiveness of their firms.
A second consequence of increased global integration is that foreign direct investment (FDI) is playing an ev-er-increasing role in the global economy as companies of all sizes invest overseas. In particular, the foreign direct investment flows to less developed countries from firms in developed countries have risen substantially.6 Investment by foreign companies and individuals in U.S. firms is also huge: $2.3 trillion, close to double the 2000 level, with the majority coming from European investors. In recent years, the United States has received more foreign direct investment than any other country.7 To give two examples, Deutsche Boerse, a German provider of securities trading, arranged to buy the parent company of the New York Stock Exchange, and a Chinese company called Geely bought the Volvo business unit from Ford Motor Company.8 In recent years, China’s role as an export powerhouse has allowed the Chinese government to amass about $1 trillion in foreign exchange reserves, of which it is expected to invest hundreds of billions of dollars.9
A third consequence of an increasingly integrated global economy is that imports are penetrating deeper into the world’s largest economies. For example, high percentages of the clothing and textile products, paper, cut diamonds, and electronics consumed in the United States are imported. Until recently, most of the canned peaches sold in the United States were cling peaches grown in California, but China’s share of this market has been skyrocketing and now represents more than 1 out of every 10 cans sold. And in the automobile industry, over half of the new cars sold in the United States in 2010 were from automakers based in other countries, primarily in Asia.10 Figure 6.2 shows how the world trade of manufactured merchandise has grown relative to other product groups. The growth of imports is a natural by-product of the growth of world trade and the trend toward the manufacture of component parts, or even entire products, overseas before shipping them back home for final sale.
Finally, the growth of world trade, FDI, and imports implies that companies around the globe are finding their home markets under attack from foreign competitors. This is true in the United States, where Japanese automak-ers have captured market share from General Motors, Ford, and Chrysler, and in western Europe, where the once-dominant Dutch company Philips N. V. has lost market share in the consumer electronics industry to Ja-pan’s JVC, Matsushita, and Sony.
What does all this mean for today’s managers? Compared with only a few years ago, opportunities are greater because the movement toward free trade has opened up many formerly protected national markets. The potential for export and for making direct investments overseas is greater today than ever before. The environment is more complex because today’s manager often has to deal with the challenges of doing business in countries with radically different cultures and coordinating globally dispersed operations. The environment is more competitive because in addition to domestic competitors, the manager must deal with cost-efficient overseas competitors.
Companies both large and small now view the world, rather than a single country,
as their marketplace. As Figure 6.3 shows, the United States has no monopoly on international business. Of the top 25 corporations in the world, 16 are based in countries outside the United States. Also, companies have dis-persed their manufacturing,
marketing, and research facilities to those locations around the globe where cost and skill conditions are most favorable. This trend is now so pervasive in industries such as automobiles, aerospace, and electronics that it is becoming increasingly irrelevant to talk about “American products” or “Japanese products” or “German products.”
For example, the headquarters of an automaker no longer says much about where a particular car is made. According to the National Highway Traffic Safety Administration, despite the Jeep Patriot’s red-white-and-blue name, only 66 percent of its components are made in the United States. In contrast, although Toyota is a
Japanese-headquartered company, 80 percent of the parts in a Toyota Sequoia are produced in the United States. A U.S. headquarters doesn’t limit a U.S. car company either. General Motors reports that it employs more people, sells more cars, and sees its best growth prospects outside the United States.11
Such internationalization is not limited to the largest corporations. An increasing number of medium-size and small firms also engage in international trade. Some companies have limited their involvement to exporting, whereas others set up production facilities overseas. Jade Corporation, which started out as a tool and die maker, operates three facilities with a few hundred employees. The company found it difficult to compete as U.S. manufacturing operations moved overseas, but creative management continued to find opportunities. As the company moved into making more specialized products, it developed its engineering capabilities and its experience in working with a Singapore manufacturer. Eventually, Jade began working with clients to set up manufacturing facilities in Asia. Jade employees first learn about the customer’s product and the way to make it, and then they use their overseas connections to get the customer’s foreign plant running.12 Responding to the dominance of English on the Internet, an Israeli software start-up developed a program called WhiteSmoke, which uses artificial intelligence to analyze written English, not only checking for spelling and grammar errors but also suggesting ways to make the writing clearer and more natural. The company originally found a customer base among Israeli lawyers and tech workers. Since then, the ease of downloading a program online has expanded the market to computer users in the United States. The company next began negotiating with distributors to sell WhiteSmoke in China and India. The global nature of the Internet has provided both the need and a major means of distributing WhiteSmoke.13
Some of the reasons managers collaborate with their overseas counterparts on trade are obvious. Other coun-tries offer expanded markets for one’s own products. In turn, they might have natural resources, products, or cost structures that managers need but that aren’t available in the home country. But there are other, perhaps less obvious, benefits to collaborating with other countries on trade. Because trade allows each country to obtain more efficiently what it cannot as easily produce on its own, it lowers prices overall and makes more goods more widely available. This in turn raises living standards—and may broaden the market for a manager’s own products, both locally and abroad. Trade also makes new technologies and methods more widely available, again raising the standard of living and improving efficiency. Finally, collaborating with others on trade creates links between people and cultures that, particularly over the long run, can lead to cooperation in other areas.
The Role of Outsourcing
In recent years, the issues of offshoring and outsourcing have become sources of controversy. Outsourcing occurs when an organization contracts with an outside provider to produce one or more of its goods or services. Offshoring occurs when companies move jobs to another country, typically where wages are lower. This practice does not necessarily require using an outside provider. Companies with large workforces can resource globally. However, most of the concerns expressed about offshoring refer to outsourcing because people conclude that high-paying U.S. jobs are being lost to low-cost countries overseas. The concern is prompted by widespread reports of major corporations relocating assembly lines, computer programming, help centers, and other parts of their operations to India or China. One study has estimated that by 2015, more than 3 million U.S. jobs will be sent abroad.14 Economist Alan Blinder raised the possibility that communication technology will lead to the off-shoring of at least 30 million jobs over the longer term. For example, the work of bookkeepers, accounting clerks, computer programmers, data entry keyers, and financial analysts can be performed anywhere and submitted to the customer or employer electronically.15
The decline in manufacturing employment in the United States is evident. During the previous decade, the United States lost 2 million manufacturing jobs as well as 1.6 million office and administrative support jobs. During the recession in 2009, more workers in the United States were laid off than abroad. Some economists blame certain conditions in the United States for making the business climate relatively unfavorable: taxes, declining infrastructure, inadequate education, and barriers to hiring skilled immigrant workers.16 However, considerable evidence suggests that the cause of this job decline is not offshoring but innovation. Because of new technology and processes, managers simply need fewer workers to produce the same quantity of goods. Even as manufacturing employment has declined, manufacturing output in the United States has grown. In addition, technology and trade enable the creation of new jobs. Even as manufacturing jobs have been lost, the United States has gained millions of new jobs, including 3.2 million service jobs, 2.5 million professional jobs, and 1.3 million managerial jobs. Thus the important question may not be how to prevent offshoring from taking jobs but how to prepare the workforce for the types of jobs that will be needed in the United States of the future—jobs requiring personal interaction (such as the work of doctors or counselors), hands-on activity (plumbers, janitors), and tailoring to particular situations (identifying clients’ needs rather than following a routine).17
The statistics on offshoring often overlook that the job transfers from offshoring represent a small fraction of the 135 million jobs in the United States. Most jobs require workers to be close to their markets—people still shop at their local supermarkets and appliance dealers, visit their doctors, and attend a community school. Perhaps most important, as offshoring increases
efficiency, it frees funds for expansion and additional employment. The challenge is primarily one in which in-dividual workers are deeply affected when their jobs are lost. Some organizations determine that they have a social responsibility to participate in retraining programs to help these displaced workers identify and prepare for jobs that are less likely to move overseas. The controversy over offshoring also overlooks the extent to which foreign companies hire workers in the United States—for example, when Germany’s BMW runs a South Carolina assembly plant for its X5 sport utility vehicle.
One less positive effect of offshoring has been wage stagnation in industries where offshoring is common because workers in those areas compete with their lower-wage counterparts abroad. On the other hand, wages, energy costs, and other expenses in some of those other countries have started to rise, reducing the benefits of offshoring.18 Some firms have looked for lower costs outside India and China by heading for Bangladesh, Vietnam, and Indonesia, whereas others are testing the potential of operations in African countries.
In recent years, automation has reduced the percentage of product costs that can be attributed to labor, mak-ing it less necessary to consider moving jobs overseas. Also, managers who offshore to achieve wage savings alone often incur unexpected additional costs in travel, training, quality control, language barriers, and the re-sistance of some customers who prefer to deal with local personnel. However, offshoring is a continuing trend because in some cases it delivers advantages other than cost. For some types of work, companies use offshoring as a way to find talent that is in short supply at home. A survey of software firms found that the main reasons for offshoring were to enable the company to grow and to get products to market faster. The companies either have difficulty finding enough programmers in the United States or determine that they can keep a project moving ahead around the clock as U.S. and overseas teams hand the project back and forth. Similarly, by outsourcing a project to a specialist firm, a company can quickly have hundreds of people devoted to it, dramatically shortening the turnaround time.19
In short, in deciding whether to offshore, managers should not start out with the assumption that it will be cheaper for them to do so. Instead, here are some of the factors they might take into account:
What is the competitive advantage of the products they offer? If, say, rapid delivery, reliability, and customer contact are paramount, then offshoring is a less attractive option. But if the product is widely available and standardized, like a calculator, and the only competitive advantage is price, the lowest possible production cost becomes essential and offshoring becomes something managers will consider.
Is the business in its early stages? If so, offshoring may well be inappropriate because managers need to stay close to the business and its customers to solve problems and make sure everything is going according to plan. When the business is more mature, managers can afford to consider moving some operations overseas.
Can production savings be achieved locally? Automation can often achieve significant labor cost savings and eliminate the advantage of moving production abroad. Where automation savings are not feasible, as with computer call centers, then offshoring becomes a more attractive option.
Can the entire supply chain be improved? As we discussed in Chapter 2, enormous productivity savings are possible when managers develop an efficient supply chain, from suppliers to manufacturing to customers. These improvements permit both lower cost and high customer responsiveness. If the supply chain is not a major consideration, or is already highly efficient or routine, and more savings are needed, then offshoring may be one way for managers to achieve additional efficiencies.20
These considerations lead to a variety of decisions about where to operate. The high costs of transporting heavy appliances are one reason GE decided to move some of its appliance manufacturing back to the United States. Master Lock, based in
Milwaukee, Wisconsin, also found that returning production to the United States from China had become more cost-effective. Fortunately for the company, it still had some production facilities and employees in the United States; companies that previously outsourced all production have found that their options for bringing manufac-turing home are now more limited.21
As we saw in Chapter 2, an organization’s external environment includes its economic, technological, le-gal/regulatory, demographic, social, and natural environments. When today’s managers think about, for example, the economic potential of a market, the laws that both protect their property and restrain their conduct, and the resources they need for making products, they should be thinking about these in terms of where the best oppor-tunities lie anywhere in the world. The simple fact is that technology and an integrated economy are making in-ternational business inescapable. Table 6.1 provides examples of current issues we will consider in each area of this international environment.
The global economy is becoming more integrated than ever before. For example, the World Trade Organiza-tion (WTO), formed in 1995, now has 159 member countries involved in most of the world’s trade. The newest members are Laos, Montenegro, the Russian Federation, Samoa, Tajikistan, and Vanuatu. (The International Monetary Fund, set up by the United Nations in 1945, serves a similar purpose and includes 188 countries.) The WTO provides a forum for nations to negotiate trade agreements and procedures for administering the agree-ments and resolving disputes. Issues that are currently under negotiation because they have been difficult for the parties to resolve include objections to environmental regulations and subsidies to farmers in developed coun-tries, on the grounds that they conflict with free trade. To follow how these issues are playing out, you can explore the “Trade Topics” section of the WTO website, http://www.wto.org.
The global economy is dominated by countries in three regions: North America, western Europe, and Asia. However, other developing countries and regions represent important areas for economic growth as well.
Europe is integrating economically to form the biggest market in the world. Under the Maastricht Treaty, which formally established the European Union (EU), the euro was adopted as a common currency among 13 member countries. Currencies with a long history like the franc and the mark are now relics of the past. The EU allows most goods, services, capital, and human resources to flow freely across its national borders. The EU was originally formed after World War II to foster cooperation through trade in place of military conflict, but the efforts have also created an economic superpower. Its 27 members now boast a population of more than 495 million and a GDP (gross domestic product) exceeding that of the United States.22
The pace of European unification accelerated in 2004 with the addition of former Eastern-bloc countries, in-cluding Poland and Hungary, and in 2007 Bulgaria and Romania joined. Many of these new members offer a par-ticular challenge to full integration because as former communist countries they do not have extensive experience as modern market economies. Other even less wealthy countries—Croatia, Macedonia, and Turkey—have also applied to join the EU.
In addition to the difficulty of integrating widely divergent economies, certain structural issues within Europe need to be corrected for the EU to function effectively. In particular, western Europeans on average work fewer hours, earn more pay, take longer vacations, and enjoy far more social entitlements than do their counterparts in North America and Asia. To be competitive in a global economy, Europeans must increase their level of produc-tivity. Other problems will present even greater challenges, such as Europe’s aging population, low birthrates, and low immigration, all of which are threatening to cause Europe’s population to drop, even as America’s is increasing. Recently, EU relationships were tested by the global financial crisis and recession, which hit some member nations harder than others. For example, Ireland, which had been enjoying impressive growth in the banking and insurance sectors, suffered the near-collapse of those industries. With tax revenues falling even as citizens needed more help, the governments of Portugal, Ireland, and Greece found themselves petitioning other EU nations for financial assistance. The economically stronger nations were reluctant to ask their own citizens to support a bailout of other countries but eventually agreed to provide loans through the EU and International Monetary Fund. That assistance is accompanied by requirements that the less stable governments bring more discipline to their spending habits. That, in the end, may make the EU even more potent than it was before.23
Still, unification is creating a more competitive Europe, one that U.S. managers will increasingly have to take into account. The economic difficulties in the region have brought down the costs of investing and hiring workers there, and the region boasts a highly skilled workforce. Dow Chemical, for example, has taken advantage of the opportunity to build a research center to study water desalination in Spain; in Ireland, Microsoft is building a data center, and Eli Lilly expects to erect a facility for making biopharmaceuticals. Companies such as these are hop-ing Europe will recover from its financial woes, and they will be ready for the next surge in demand.24
The EU also presents a regulatory challenge to the United States and other countries. For example, the EU has supported excluding genetically engineered food products from American firms, over objections from the WTO. It has fined Microsoft for what it says are unreasonable prices Microsoft charges rival software firms to give them the information and documentation they need to develop products compatible with the Windows operating system. The EU required the documentation as a remedy to remove its antitrust charges.25
The EU’s more competitive and regulatory environment clearly presents new challenges to managers and their employees. Managers in U.S. companies that wish to export to that market must become more knowledgeable about the new business environment the EU is creating. Management and labor will have to work cooperatively to achieve high levels of quality to make U.S. goods and services attractive to consumers in Europe and other mar-kets around the world. The United States needs managers who will stay on top of worldwide developments and manage high-quality, efficient organizations as well as a well-educated, well-trained, and continually retrained la-bor force to remain competitive with the Europeans and other formidable competitors.
Asia: China and India’s Ascent
Among the Pacific Rim countries, and particularly in the United States, Japan dominated world attention toward the end of the last century. Today Japan is America’s fourth-largest export market, after Canada, China, and Mexico, as you can see in Figure 6.4. And Japan is in fourth place as a source of U.S. imports. Japanese companies such as Toyota are both a major source of goods and, as competitors, a growing influence in the ways U.S. managers seek quality and efficiency.
Today, however, a bigger force is rising in Asia: China. With the world’s largest population and increasing in-dustrialization, China is on its way to becoming the largest producer and consumer of many of the world’s goods. Its large and growing demand for oil is a cost factor that managers everywhere must consider in their long-range planning. The country has also become the world’s largest consumer of basic raw materials, such as steel and cement, as well as the world’s largest cell phone market. Not only is China the largest source of imports to the United States (see Figure 6.4), but it has surged ahead of Germany to become the world’s largest exporter and is the number two importer after the United States.26
As a consuming nation, China’s appeal to managers lies in its large population of 1.3 billion people and its rapid economic growth. As more and more Chinese people earn engineering and science degrees and as labor demand pushes up wages, Chinese companies are branching out into more complex manufacturing operations, such as auto parts, optical devices, and other advanced electronics. Rising incomes create a paradox for busi-ness expansion: Newly middle-class consumers in China are purchasing more products, both foreign and domestic, and low-cost manufacturers are now looking away from China to set up operations in lower-wage countries, such as Vietnam.27 Other companies are staying in China to serve the huge market there. General Motors, for example, is setting up research and design facilities in China so it can introduce innovations aimed at satisfying the demands of Chinese consumers, starting with battery power.28
Even with its growing consumption, China has had an even greater global impact in its role as an exporting na-tion. The enormous size of its labor force, combined with its low labor costs, has given it a competitive advantage in manufacturing. Just a few years ago, estimates placed labor costs in China at less than $1 an hour, compared with $2.92 for manufacturing workers in Mexico and $24.59 for manufacturing workers in the United States.30 These low wage rates led many managers to relocate operations to China or to import an increasing number and variety of Chinese products instead of continuing to do business with local manufacturers. This trend is one reason the value of U.S. imports from China is more than five times the value of U.S exports to China.
This type of trade imbalance may well have contributed to the loss of manufacturing jobs in the United States and Europe. But it has also led to the continuing availability of comparatively low-priced goods, helping consumers everywhere and leading to overall economic and job growth at home. Yet jobs in certain industries, such as textiles, may have been transferred abroad permanently to lower-cost producers such as China and India. Those affected workers and communities experience real hardships. We will be discussing the effects of outsourcing or offshoring in more detail later in this chapter.
Threats to China’s growing dominance include political instability as the growing prosperity of its cities and in-dustrial enclaves leaves millions of poor rural residents further behind. Also, countries that have experienced job loss may face growing pressure to restrict Chinese imports, particularly in the EU, with its strong labor unions. But for the foreseeable future, China’s growing presence in the world economy, as an importer and exporter, is one that you as a manager will increasingly have to take into account.
Besides China, India has become an important player in the global marketplace. The nation is still developing, and its poverty is often severe, but its 1.2 billion people (the world’s second-largest population), many of them entering the working and professional classes, make India an essential market for more and more companies. For many U.S. companies, India is seen as a provider of online support for computer software, software development, and other services. In fact, so many companies have set up shop there that the demand for Indian workers with strong technical and English language skills is exceeding the supply. Companies such as Wipro and Tata Group are responding with expanded training programs.31 Thanks to India’s fast-growing economy and huge population, more U.S. businesses are beginning to see the country as a source of customers as well as workers. Citigroup, for example, has made plans to open more branches in India and expand service such as microfinance (small loans), as well as to add thousands more staff members there.32
Other rapidly growing countries in the region that have strong trade relationships with the United States include South Korea, Taiwan, and Singapore. These countries are important trading partners not merely because of their wage rates but because many of their companies have developed competitive advantages in areas such as engi-neering and technological know-how. South Korea’s Samsung has the largest share of the world’s markets for flat-screen televisions and flash memory cards, and Taiwan’s Hon Hai is the leader in contract manufacturing of electronics. The reason you may not have heard of Hon Hai is that it specializes in making components for brand-name products of other companies, including Sony (PlayStations), Apple (iPods), and Dell (computers).33
These Asian countries and others have joined with the United States, Australia, and Russia to form the 21-member Asia-Pacific Economic Cooperation (APEC) trade group. Combined, APEC members’ economies account for more than half of world output (GDP) and 44 percent of world trade.34 In recent years, the APEC countries have been working to establish policies that encourage international commerce and reduce trade barriers. APEC members address these objectives through dialogue and nonbinding commitments rather than treaties.
Another international organization, the Association of Southeast Asian Nations (ASEAN), brings together 10 developing nations, including Indonesia, Malaysia, and the Philippines. Along with economic development, ASEAN is aimed at promoting cultural development and political security.
North and South America constitute a mix of industrialized countries, such as
Canada and the United States, as well as countries with growing economies, such as Argentina, Brazil, Chile, and Mexico. The winter fruit you eat may come from Chile, the coffee you drink from Jamaica, and the shirt you wear from Honduras. Increasingly, businesses are looking to establish freer trade among countries in the Western Hemisphere—and with other parts of the world.
The North American Free Trade Agreement (NAFTA) combined the economies of the United States, Canada, and Mexico into the world’s largest trading bloc with nearly 450 million U.S., Canadian, and Mexican consumers and a total output of $17 trillion. By 2008, virtually all U.S. industrial exports into Mexico and Canada were duty-free. Although the United States has had a longer-standing agreement with Canada, Mexico has quickly emerged as the United States’s third largest trading partner as a result of NAFTA. U.S. industries that have benefited in the short run include capital goods suppliers, manufacturers of consumer durables, grain producers and distributors, construction equipment manufacturers, the auto industry, and the financial industry, which now has privileged access into a previously protected market. Besides importing and exporting, companies in the NAFTA countries have invested in facilities across national borders. Mexico-based CEMEX, the world’s third-largest cement company, is actually the largest cement supplier in the United States. Twenty-two percent of CEMEX’s employees and 27 percent of its sales are in the United States, and it conducts management meetings in English because the majority of its employees do not speak Spanish.35
Leading the growth following the Great Recession was Brazil, especially in the agricultural and energy sectors. Bright spots in Brazil have included the production of ethanol and potential leadership in wind power from har-nessing its steady trade winds at wind farms built on land being auctioned by the government. As Brazil’s economy matures, investors looking for fresh growth are turning their attention to other South American markets, including Colombia and Peru, both of which have posted solid economic growth in recent years.36 As in Asia, more South American companies are relying on innovation and technology rather than simply cost to compete in the global marketplace. For example, one reason that Argentina’s Tenaris is the global leader in the market for oil pipes is that management of a predecessor company, Siderca, decided to focus on building a global network of facilities that could research customer needs, develop products, and deliver pipes just as needed by their cus-tomers. This focus gave Siderca, now part of Tenaris, a competitive advantage.37
Other agreements have been proposed to promote trade with Central and South America. In 2005, President George W. Bush signed into law U.S. participation in a Central America–Dominican Republic–United States Free Trade Agreement (CAFTA-DR). Other nations that have agreed to participate include Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. CAFTA-DR creates the second-largest free trade zone with the United States (NAFTA being the largest). As part of the negotiations for CAFTA-DR, Central Amer-ican nations promised to protect workers’ rights in their countries. Complaints that some countries have not deliv-ered on this promise have led the U.S. government to request consultations with Guatemala on “apparent viola-tions of its obligations.”38 Other trade agreements have been negotiated on a country-by-country basis with Chile, Peru, Colombia, and Panama. In addition, the countries of South America formed their own trading bloc, called Mercosur, to promote trade among nations of that continent.
Africa and the Middle East
We can’t begin to discuss fully all the important developments, markets, and competitors shaping the global environment. These trends leave huge and promising areas of the world—the Middle East, parts of South America, and much of Africa—that have not yet participated as much in globalization. These regions account for a major share of the world’s natural resources, and managers are watching the global environment, looking for areas with potential.
The economy of the Middle East is, of course, best known for its export of oil. Although oil exploration and drilling take place in many parts of the world, the oil-rich countries of the Middle East supply by far the most oil to the world’s buyers, most of it going to buyers in Asia. The Middle East is not, however, the largest supplier of oil to the United States. About half of the petroleum consumed in the United States comes from imports, slightly more than half of which comes from the Western Hemisphere, mainly Canada, Venezuela, and Mexico. The main Middle Eastern supplier of U.S. oil imports is Saudi Arabia.39 Nevertheless, U.S. businesses are concerned about the Middle East because activities there can shape the price of oil, which is important not only for transportation but also for the manufacture of many products, including fertilizer and plastic. Recently, for example, many Middle Eastern and North African governments have been shaken by public protests, overthrown leaders, and even civil war; the turmoil has been blamed as one cause of a spike in oil prices.
Africa has long been seen only as a place of dire poverty. Indeed, the continent is still plagued by an epidemic of AIDS and many unstable political situations, including outright wars. Nevertheless, a reduction in severe poverty and growth in the middle class in many countries have provided exciting opportunities for businesses willing to learn the needs of the population and make the effort of navigating a sometimes challenging environment. As part of its Smarter Planet initiative (described in the “Management Connection” for Chapter 5), IBM learns about the continent’s huge potential by sending in teams to help local governments solve problems. As it gets to know the region, IBM has begun selling services, setting up partnerships with local companies, and opening research facilities in Kenya, Senegal, South Africa, and other countries. Although African sales are still a small part of IBM’s total, the company expects them to double over the next few years.40
One of the critical tasks an international manager faces is to identify the best strategy for competing in a global marketplace. To approach this issue, managers can plot a company’s position on an integration–responsiveness grid, such as that shown in Figure 6.5. The vertical axis measures pressures for global integration, and the hori-zontal axis measures pressures for local responsiveness. Borrowing language from early in this chapter, we might say that much of the pressure for global integration comes from today’s business world being flat, whereas the pressure for local responsiveness reflects the world’s bumpiness.
Pressures for Global Integration
Managers may have several reasons to want or need a common global strategy rather than one tailored to indi-vidual markets. These factors include the existence of universal needs, pressures to reduce costs, or the pres-ence of competitors with a global strategy.
Universal needs create strong pressure for a global strategy. Universal needs exist when the tastes and pref-erences of consumers in different countries with regard to a product are similar. Products that serve universal needs require little adaptation across national markets; thus global integration is facilitated. This is the case in many industrial markets. For example, electronic products such as semiconductor chips meet universal needs. Certain basic foodstuffs (such as colas) and appliances (such as can openers) are also increasingly available and regarded in similar ways globally.
Competitive pressures to reduce costs may cause managers to seek to integrate manufacturing globally. Cost can be particularly important in industries in which price is the main competitive weapon and competition is intense (e.g., as with smart phones). It is also important if key international competitors are based in countries where labor and other operating costs are low. In these cases, products are more likely to be standardized and perhaps produced in a few locations to capture economies of scale.
The presence of competitors engaged in global strategic coordination is another factor that creates pressures for global integration. For example, a competitor that centrally coordinates the purchase of raw materials worldwide may achieve significant price reductions compared with firms that allow subsidiaries to handle purchases locally. Global competition can often create pressures to centralize in corporate headquarters certain decisions being made by different national subsidiaries. And once one multinational company adopts global strategic coordination, its competitors may be forced to do the same.
Pressures for Local Responsiveness
In some circumstances, managers need to make sure their companies can adapt to different needs in different locations. Strong pressures for local responsiveness emerge when consumer tastes and preferences differ significantly among countries. In such cases, products and/or marketing messages have to be customized. In the automobile industry, for example, U.S. consumers’ demand for pickup trucks is strong in the South and West, where many families have a pickup truck as a second or third vehicle. In contrast, in Europe pickup trucks are viewed as utility vehicles and are purchased primarily by companies rather than by individuals. As a result, automakers must tailor their marketing messages to these differences in consumer demand.
Pressures for local responsiveness also emerge when there are differences in traditional practices among countries. For example, in Great Britain people drive on the left side of the road, creating a demand for right-hand-drive cars, whereas in neighboring France, people drive on the right side of the road. Obviously, auto-mobiles must be customized to accommodate this difference in traditional practices.
Differences in distribution channels and sales practices among countries also may create pressures for local responsiveness. In India, people are used to buying their groceries at small, local shops, creating challenges for Walmart as it develops plans to open supermarkets and larger stores in that country.42 Cinnabon had to adjust its approach to retailing when it moved into the Middle East and Russia. The company had found customers in the United States by setting up in malls, but Middle Eastern and Russian consumers have less of a culture of enter-taining themselves with a visit to the mall. So in those locations, Cinnabon shops are more likely to be storefronts in shopping districts.43
Finally, economic and political demands that host-country governments impose may necessitate a degree of local responsiveness. Most important, threats of protectionism, economic nationalism, and local content rules (rules requiring that a certain percentage of a product be manufactured locally) dictate that international compa-nies manufacture locally. For example, countries may impose tariffs (taxes on imports) or quotas (restrictions on the number of imports allowed into a country) to protect domestic industries from foreign competition perceived to be unfair or not in the nation’s interests. Recently, the United States began imposing tariffs on paper imported from China. The U.S. government justified the tariffs as a response to complaints that the Chinese companies were selling the paper below the cost of the raw materials, presumably because the Chinese government was subsidizing the industry. Others interpret this and other protectionist actions as being motivated primarily by political objectives.44 Whatever the reasons for them, tariffs and quotas influence managers’ decisions about whether it is economically advantageous, or even possible, to operate locally or rely on exporting.
Choosing a Global Strategy
As Figure 6.5 shows, managers can use four approaches to international competition, depending on their company’s position on the integration–responsiveness grid: the international model, the multinational model, the global model, and
the transnational model. Organizations in each model compete globally, but they differ in the strategy they use and in the structure and systems that drive their operations.
The International Model In the international model, managers use their organization’s existing core capabilities to expand into foreign markets. As the grid suggests, it is most appropriate when there are few pressures for economies of scale or local responsiveness. Pfizer is an example of a company operating in the international model. It is in an industry that doesn’t compete on cost, and its drugs obviously don’t need to be tailored for local tastes. The international model uses subsidiaries in each country in which the company does business, with ultimate control exercised by the parent company. In particular, although subsidiaries may have some latitude to adapt products to local conditions, core functions such as research and development tend to be centralized in the parent company. Consequently, the dependence of subsidiaries on the parent company for new products, processes, and ideas requires a great deal of coordination and control by the parent company.
The advantage of this model is that it facilitates the transfer of skills and know-how from the parent company to subsidiaries around the globe. For example, IBM and Xerox profited from the transfer of their core skills in technology and research and development (R&D) overseas. The overseas successes of Kellogg, Coca-Cola, Heinz, and Procter & Gamble are based more on marketing know-how than on technological expertise. Toyota and Honda successfully penetrated U.S. markets from their base in Japan with their core competencies in manufacturing relative to local competitors. Still other companies have based their competitive advantage on general management skills. These factors explain the growth of international hotel chains such as Hilton International, Intercontinental, and Sheraton.
One disadvantage of the international model is that it does not provide maximum latitude for responding to lo-cal conditions. In addition, it frequently does not provide the opportunity to achieve a low-cost position via scale economies.
The Multinational Model Where global efficiency is not required but adapting to local conditions offers ad-vantages, the multinational model is appropriate. The multinational model, sometimes referred to as multi-domestic, uses subsidiaries in each country in which the company does business and provides a great deal of discretion to those subsidiaries to respond to local conditions. Each local subsidiary is a self-contained unit with all the functions required for operating in the host market. Thus each subsidiary has its own manufacturing, marketing, research, and human resources functions. Because of this autonomy, each multinational subsidiary can customize its products and strategies according to the tastes and preferences of local consumers; the competitive conditions; and political, legal, and social structures.
A good example of a multinational firm is Heineken, a Netherlands-based brewing company. Heineken has three major global brands—Heineken, Amstel, and Murphy’s Stout—but it also offers regional and local brands. The company understands that every country is unique, with its own culture and business practices. So it at-tempts to adapt its products to local attitudes and tastes while maintaining its high quality. As a result, the com-pany produces more than 170 brands around the world, from its international brands to local and specialty brews. The localized portfolio includes such brands as Primus and Star in Africa, Vitamalt and Piton in the Caribbean, and Tiger in Asia. Individual countries have considerable autonomy in the beer that is brewed locally.45
A major disadvantage of the multinational form is higher manufacturing costs and duplication of effort. Although a multinational can transfer core skills among its international operations, it cannot realize scale economies from centralizing manufacturing facilities and offering a standardized product to the global marketplace. Moreover, because a multinational approach tends to decentralize strategy decisions (discussed further in Chapters 8 and 9), launching coordinated global attacks against competitors is difficult. This can be a significant disadvantage when competitors have this ability.
The Global Model The global model is designed to enable a company to market a standardized product in the global marketplace and to manufacture that product in a limited number of locations where the mix of costs and skills is most favorable. The global model has been adopted by companies that view the world as one market and assume that no tangible differences exist among countries with regard to consumer tastes and preferences. Procter & Gamble, for example, has been successful in Europe against Unilever because it has approached the entire continent as a unified whole. As part of its effort to improve efficiency while broadening its appeal, Ford recently launched a line of compact cars under the Ford Focus brand as the company’s first truly global product. The Focus models include hybrid, plug-in hybrid, and electric cars, and promotional plans are built around a uni-fied advertising campaign highlighting technology features.46
Companies that adopt the global model tend to construct global-scale manufacturing facilities in a few selected locations so they can realize scale economies. These scale economies come from spreading the fixed costs of investments in new product development, plants and equipment, and the like over worldwide sales. By using centralized manufacturing facilities and global marketing strategies, Sony was able to push down its unit costs to the point where it became the low-cost player in the global television market. This advantage enabled Sony to take market share away from Philips, RCA, and Zenith, all of which used traditionally based manufacturing operations in each major national market (a characteristic of the multinational approach). Because operations are centralized, subsidiaries usually are limited to marketing and service functions.
On the downside, because a company pursuing a purely global approach tries to standardize its goods and services, it may be less responsive to consumer tastes and demands in different countries. Attempts to lower costs through global product standardization may result in a product that fails to satisfy anyone. For example, although Procter & Gamble has been quite successful using a global approach, the company experienced problems when it tried to market Cheer laundry detergent in Japan. Unfortunately for P&G, the product did not suds up as promoted in Japan because the Japanese use a great deal of fabric softener, which suppresses suds. Moreover, the claim that Cheer worked in all water temperatures was irrelevant in Japan, where most washing is done in cold water. The global model also requires a great deal of coordination, with significant additional management and paperwork costs.
The Transnational Model In today’s global economy, achieving a competitive advantage often requires managers to pursue local responsiveness, transfer of know-how, and cost economies simultaneously.47 The transnational model is designed to help them do just that. It is an approach that enables managers to “think globally but act locally.”
In companies that adopt the transnational model, functions are centralized where it makes sense to do so, but a great deal of decision making also takes place at the local level. In addition, the experiences of local sub-sidiaries are shared worldwide to improve the firm’s overall knowledge and capabilities. For example, research, training, and the overall development of the organization’s strategy and global brand image tend to be centralized at home. Other functions may be centralized as well, but not necessarily in the home country.
To achieve cost economies, companies may base global-scale production plants for labor-intensive products in low-wage countries such as Mexico, Poland, and China and locate production plants that require a skilled workforce in high-skill countries such as Germany and Japan. Increasingly, companies are able to find locations where the workforce includes the optimal balance of needed skills and relatively low costs. Thus, although wages have begun rising in India, the level of technical skill of its workforce has made that country an attractive place to locate many kinds of knowledge-based operations such as loan approvals, legal research, and biotech R&D. These types of skilled occupations are growing faster in India than jobs in call centers, the work that once brought India to prominence as an offshoring location.49
Marketing, service, and final assembly functions tend to be based in the national subsidiaries to facilitate greater local responsiveness. Thus major components may be manufactured in centralized production plants to realize scale economies and then shipped to local plants, where the final product is assembled and customized to fit local needs.
Panasonic’s experience in China has made it more of a transnational company.50 Panasonic, a Japanese company, initially saw China primarily as a low-cost site for manufacturing its home appliances. In the early years, Panasonic conducted extensive consumer research in Japan but none in China; it served the Chinese market by removing features to make low-cost versions of its appliances. But as China’s economy developed, consumers began buying new products from Chinese producers—who were also capturing market share from Panasonic elsewhere. Panasonic’s management realized it needed to see China as more than a source of cheap labor. It set up a business unit called Panasonic Corporation of China to provide research and development and marketing support, as well as back-office services, to the manufacturing facilities in China. It also set up the China Lifestyle Research Center to learn more about the tastes and lifestyles of Chinese consumers.
These new units formalized two-way communication. The Japanese managers shared their knowledge of technology and production efficiency. Their Chinese colleagues helped Panasonic identify and meet the needs of this huge consumer market. Managers brought together engineers from different facilities to work together on understanding how they could meet the identified needs better. As the efforts helped Panasonic develop suc-cessful new products, the company began to spread this collaborative approach to other markets—for example, by opening research centers in Germany and India. To ensure that lessons learned in one location were shared, when appropriate, to improve operations in others, Panasonic also set up a global marketing organization to share knowledge about its best practices. Such efforts are critical for Panasonic, whose performance has suffered from efforts to remain profitable in the highly competitive market for electronics such as televisions.
Perhaps the most important distinguishing characteristic of the transnational organization is the fostering of communications among subsidiaries and the ability to integrate the efforts of subsidiaries when doing so makes sense. Achieving such communications across subsidiaries requires elaborate formal mechanisms, such as transnational committees staffed by people from the various subsidiaries who are responsible for monitoring coordination among subsidiaries. Equally important is to transfer managers among subsidiaries on a regular basis. This enables international managers to establish a global network of personal contacts in different subsidiaries with whom they can share information as the need arises. Finally, achieving coordination among subsidiaries requires the head office to play a proactive role in coordinating their activities.
Now that you have seen examples of the need to balance global integration and local responsiveness, consider how those pressures apply to Lenovo’s situation as described in “Management Connection: Progress Report.”
When considering global expansion, international managers must decide on the best means of entering an over-seas market. The five basic ways to expand overseas are exporting, licensing, franchising, entering into a joint venture with a host-country company, and setting up a wholly owned subsidiary in the host country.52 Table 6.2 compares the entry modes.
Most manufacturing companies begin global expansion as exporters and later switch to one of the other modes for serving an overseas market. The advantages of exporting are that it (1) provides scale economies by avoiding the costs of manufacturing in other countries and (2) is consistent with a pure global strategy. By manufacturing the product in a centralized location and then exporting it to other national markets, the company may be able to realize substantial scale economies from its global sales volume.
However, exporting has a number of drawbacks. First, exporting from the company’s home base may be inap-propriate if other countries offer lower-cost locations for manufacturing the product. An alternative is to manufacture in a location where the mix of factor costs and skills is most favorable and then export from that location to other markets to achieve scale economies. Several U.S. electronics companies have moved some manufacturing operations to parts of Asia where low-cost, high-skill labor is available and export from that location to other countries, including the United States.
A second drawback of exporting is that high transportation costs can make it uneconomical, particularly in the case of bulk products. Chemical companies get around this by manufacturing their products on a regional basis, serving several countries in a region from one facility.
A third drawback is that host countries can impose (or threaten to impose) tariff barriers. Trade arrangements described earlier, including the World Trade Organization, NAFTA, and APEC, work to minimize this risk. Howev-er, tariffs continue to affect trade between particular countries in various industries. Examples include U.S.-imposed tariffs on sugar imported from Mexico and, as mentioned earlier, paper imported from China. The U.S. government recently imposed tariffs of 24 to 36 percent on Chinese-made solar panels after concluding that Chinese companies were dumping them in the U.S. market, or selling them below cost to gain an unfair competi-tive advantage.53 (Chinese companies reportedly were trying to keep ahead of the tumbling prices by building ever larger and more efficient factories. If this seems like an unprofitable strategy, note that one of the largest panel makers, Suntech Power, announced a few months later that its Chinese subsidiary was declaring bankruptcy.)
International licensing is an arrangement by which a licensee in another country buys the rights to manufacture a company’s product in its own country for a negotiated fee (typically royalty payments on the number of units sold). The licensee then puts up most of the capital necessary to get the overseas operation going. The advantage of licensing is that the company need not bear the costs and risks of opening up an overseas market.
However, a problem arises when a company licenses its technological expertise to overseas companies. Technological know-how is the basis of the competitive advantage of many multinational companies. But RCA Corporation lost control over its color TV technology by licensing it to a number of Japanese companies. The Japanese companies quickly assimilated RCA’s technology and then used it to enter the U.S. market, eventually gaining a bigger share of the U.S. market than RCA held.
In many respects, franchising is similar to licensing. However, whereas licensing is a strategy pursued primarily by manufacturing companies, franchising is used primarily by service companies. McDonald’s, Hilton Internation-al, and many other companies have expanded overseas by franchising. Pretzel maker Auntie Anne’s has ex-panded through franchising in the Asia-Pacific region, where its sales are growing at 30 percent a year, far more quickly than in the United States.54
In franchising, the company sells limited rights to use its brand name to franchisees in return for a lump-sum payment and a share of the franchisee’s profits. However, unlike most licensing agreements, the franchisee has to agree to abide by strict rules regarding how it does business. Thus, when McDonald’s enters into a franchising agreement with an overseas company, it expects the franchisee to run its restaurants in a manner identical to that used under the McDonald’s name elsewhere in the world.
The advantages of franchising as an entry mode are similar to those of licensing. The franchisees put up capi-tal and assume most of the business risk. However, local laws can limit this advantage. Until recently, China re-quired franchisors to operate at least two company-owned outlets in that country profitably for at least a year before they would be allowed to offer franchises to Chinese entrepreneurs. Relaxation of that requirement made franchising in China’s high-growth market far more attractive to businesses such as Ruby Tuesday, all of whose restaurants are operated by franchisees with knowledge of their local markets.55
The most significant disadvantage of franchising concerns quality control. The company’s brand name guaran-tees consistency in the company’s product. Thus a business traveler booking into a Hilton International hotel in Hong Kong can reasonably expect the same quality of room, food, and service that he or she would receive in New York. But if overseas franchisees are less concerned about quality than they should be, the impact can go beyond lost sales in the local market to a decline in the company’s reputation worldwide. If a business traveler has an unpleasant experience at the Hilton in Hong Kong, she or he may decide never to go to another Hilton hotel—and urge colleagues to do likewise. To make matters worse, the geographic distance between the franchisor and its overseas franchisees makes poor quality difficult to detect.
Establishing a joint venture (a formal business agreement discussed in more detail in Chapter 17) with a company in another country has long been a popular means of entering a new market. Joint ventures benefit a company through (1) the local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems, and business systems and (2) the sharing of development costs and/or risks with the local partner. Hershey recently announced a joint venture with India’s Godrej Beverages and Foods as a way to achieve growth in an industry that has matured in the United States. Hershey will own a 51 percent share of the joint business, which combines Hershey’s brands and recipes with Godrej’s manufacturing facilities and distribution network. The venture will start by selling Hershey’s Syrup in India and later add other products.56 In addition, many countries’ political considerations make joint ventures the only feasible entry mode. Before China opened its borders to trade, many U.S. companies, including Eastman Kodak, AT&T, Ford, and GM, did business in the country via joint ventures.
But as attractive as they sound, joint ventures have their problems. First, as in the case of licensing, a company runs the risk of losing control over its technology to its venture partner. For example, Japan’s Kawasaki Heavy Industries and Germany’s Siemens entered into joint ventures with Chinese partners to build China’s high-speed rail network, but now those Chinese companies are using some of the technology they learned from the venture to compete with Kawasaki and Siemens for contracts elsewhere.57 Second, companies may find themselves at odds with one another. For example, one joint venture partner may want to move production to a country where demand is growing, but the other would prefer to keep its factories at home running at full capacity. Conflict over who controls what within a joint venture is a primary reason many fail.58 In fact, many of the early joint ventures American and European companies entered into with companies in China lost money or failed precisely because of conflicts over control. To offset these disadvantages, experienced managers strive to iron out technology, control, and other potential conflicts up front, when they first negotiate the joint venture agreement.
Wholly Owned Subsidiaries
Establishing a wholly owned subsidiary—that is, an independent company owned by the parent corporation—is the most costly method of serving an overseas market. Companies that use this approach must bear the full costs and risks associated with setting up overseas operations (as opposed to joint ventures, in which the costs and risks are shared, or licensing, in which the licensee bears most of the costs and risks).
Nevertheless, setting up a wholly owned subsidiary offers two clear advantages. First, when a company’s competitive advantage is based on technology, a wholly owned subsidiary normally is the preferred entry mode because it reduces the risk of losing control over the technology. Wholly owned subsidiaries are thus the pre-ferred mode of entry in the semiconductor, electronics, and pharmaceutical industries. However, this advantage is limited by the extent to which the government of the country where the subsidiary is located will protect intellectual property such as patents and trademarks. Seven years after SI Group, a U.S. chemical company, began making rubber-bonding resins in China for the local tire industry, a competitor hired away SI Group’s plant manager and began making a product that was virtually identical. After aggressive efforts to find relief in the Chinese legal system failed, SI Group took its complaint to the U.S. International Trade Commission (ITC). The ITC could restrict the sale of the Chinese competitor’s products in the United States if it finds the company stole trade secrets.59
Second, a wholly owned subsidiary gives a company tight control over operations in other countries, which is necessary if the company chooses to pursue a global strategy. Establishing a global manufacturing system re-quires world headquarters to have a high degree of control over the operations of national affiliates. Unlike licen-sees or joint venture partners, wholly owned subsidiaries usually accept centrally determined decisions about how to produce, how much to produce, and how to price output for transfer among operations.
When establishing operations overseas, headquarters executives have a choice among sending expatriates (in-dividuals from the parent country), using host-country nationals (natives of the host country), and deploying third-country nationals (natives of a country other than the home country or the host country). Although most corporations use some combination of all three types of employees, there are advantages and disadvantages for each. Colgate-Palmolive and Procter & Gamble, for example, use expatriates to get their products to market abroad more quickly. AT&T and Toyota have used expatriates to transfer their corporate cultures and best prac-tices to other countries—in Toyota’s case, to its U.S. plants.
Because sending employees abroad can cost three to four times as much as employing host-country nationals, other companies, including Texas Instruments, have made more limited use of expatriates. Moreover, in many countries—particularly developing countries in which firms are trying to get an economic foothold—the personal security of expatriates is an issue. As a result, more firms may send their expatriates on shorter assignments and engage in telecommuting, teleconferencing, and other electronic means to facilitate communications between their international divisions. In fact, working internationally can be very stressful, even for experienced globalites. Table 6.3 shows some of the primary stressors for expatriates at different stages of their assignments. It also shows ways for executives to cope with the stress as well as some of the things companies can do to help with the adjustment.
Although developing a valuable pool of expatriates is important, local employees are more available, tend to be familiar with the culture and language, and usually cost less because they do not have to be relocated. In addition, local governments often provide incentives to companies that create good jobs for their citizens, or they may place restrictions on the use of expatriates. Such advantages, coupled with the often-inadequate educational systems of developing nations, combine to create stiff competition for local management talent. The result is that China, India, and Latin America do not have enough qualified talent to fill the demand for local executives. For example, in China, recruiting firm Russell Reynolds finds that local managers offer technical skills but often lack conceptual skills and a strategic perspective. Motorola Mobility meets the challenge in mainland China with a mix of executives—about one-third from mainland China, one-third from other Asian countries, and one-third from the West.60
Skills of the Global Manager
It is estimated that nearly 15 percent of all employee transfers are to an international location. However, the fail-ure rate among expatriates (defined as those who come home early) ranges from an estimated 20 percent to 70 percent, depending on the country of assignment. The cost of each of these failed assignments ranges from tens of thousands to hundreds of thousands of dollars.61 Typically, the causes for failure overseas extend beyond technical capability and include personal and social issues. In a recent survey of human resource managers around the globe, two-thirds said the main reason for the failures is family issues, especially dissatisfaction of the employee’s spouse or partner.62 The problem may be compounded in this era of dual-career couples, in which one spouse may have to give up his or her job to accompany the expatriate manager to the new location. To ensure that an overseas posting will succeed, managers can encourage an employee to talk to her or his spouse about what he or she will do in the foreign country. For both the expatriate and the spouse, adjustment requires flexibility, emotional stability, empathy for the culture, communication skills, resourcefulness, initiative, and diplomatic skills.63 When Kent Millington took the position of vice president of Asia operations for an Internet hosting company, his wife Linda quit her job to move with him to Japan. Especially for Linda Millington, the first three months were difficult because she didn’t speak Japanese, found the transit system confusing, and even struggled to buy food because she couldn’t translate the labels. But she persevered and participated in classes and volunteer activities. Eventually, she and her husband learned to enjoy the experience and appreciated the chance to see just how well they could tackle a challenge.64
Companies such as Levi Strauss, Bechtel, Monsanto, Whirlpool, and Dow Chemical have worked to identify the characteristics of individuals that will predict their success abroad. Table 6.4 shows skills that can be used to identify candidates who are likely to succeed in a global environment. Interestingly, in addition to such char-acteristics as cultural sensitivity, technical expertise, and business knowledge, an individual’s success abroad may depend greatly on his or her ability to learn from experience.65
Companies such as BPAmoco, Global Hyatt, and others with large international staffs have extensive training programs to prepare employees for international assignments. Table 6.5 suggests ways to improve their likeli-hood of success. Other organizations, such as Coca-Cola, Motorola, Chevron, and Mattel, have extended this training to include employees who may be located in the United States but who also deal in international markets. These programs focus on areas such as language, culture, and career development.
Managers who are sent on an overseas assignment usually wonder about the effect such an assignment will have on their careers. Certainly their selection for a post overseas is usually an indication that they are being groomed to become more effective managers in an era of globalization. In addition, they will often have more responsibility, challenge, and operating leeway than they might have at home. Yet they may be concerned that they will soon be out of the loop on key developments back home. Good companies and managers address that issue with effective communication between subsidiaries and headquarters and by a program of visitations to and from the home office. Communication technology now makes it easy for expatriates to keep in touch with colleagues in their home country on a daily or even more frequent basis, through e-mail and phone calls. Alan Paul, an American journalist working in China, says Internet phone service, a webcam, and podcasts of favorite radio programs also enable him to stay in touch with family and friends back home, even to the extent that he has to work hard to have “a fully engaged existence in China.”66
Understanding Cultural Issues
In many ways, cultural issues represent the most elusive aspect of international business. In an era when modern transportation and communication technologies have created a global village, it is easy to forget how deep and enduring the differences among nations can be. The fact that people everywhere drink Coke, wear blue jeans, and drive Toyotas doesn’t mean we are all becoming alike. Each country is unique for reasons rooted in history, culture, language, geography, social conditions, race, and religion. These differences complicate any international activity and represent the fundamental issues that inform and guide how a company should conduct business across borders. For example, while working in Hong Kong, Geoffrey Fowler discovered that his coworkers there choose topics for small talk—people’s weight, salary, and the size of their apartment—that would horrify Americans. At the same time, Chinese workers are put off by the American custom of combining lunch with a business meeting, meaning junior employees are chewing away while a superior in the company is talking.67
Ironically, although most of us would guess that the trick to working abroad is learning about a foreign culture, in reality our problems often stem from our being oblivious to our own cultural conditioning. Most of us pay no attention to how culture influences our everyday behavior, and because of this, we tend to adapt poorly to situations that are unique or foreign to us. Without realizing it, some managers may even act out of ethnocentrism—a tendency to judge foreign people or groups by the standards of one’s own culture or group and to see one’s own standards as superior. Such tendencies may be totally unconscious—for example, the assumption that “in England, they drive on the wrong side of the road” rather than merely on the left. Or they may reflect a lack of awareness of the values underlying a local culture—for example, an assumption that the culture is backward because it does not air American or European television programming, when it is actually focused on maintaining its traditional values and norms.
Assumptions such as these are one reason people traveling abroad frequently experience culture shock—the disorientation and stress associated with being in a foreign environment. Managers are better able to navigate this transition if they are sensitive to their surroundings, including social norms and customs, and readily able to adjust their behavior to such circumstances.68 Employers can help by identifying some of the cultural norms to expect and by establishing performance measures for behaviors that contribute to success in the host country (for example, the types of communication and direction employees will expect from their manager).
A wealth of cross-cultural research has been conducted on the differences and similarities among various countries. Geert Hofstede, for example, has identified four dimensions along which managers in multinational corporations tend to view cultural differences:
Power distance: the extent to which a society accepts the fact that power in organizations is distributed une-qually.
Individualism/collectivism: the extent to which people act on their own or as a part of a group.
Uncertainty avoidance: the extent to which people in a society feel threatened by uncertain and ambiguous situations.
Masculinity/femininity: the extent to which a society values quantity of life (e.g., accomplishment, money) over quality of life (e.g., compassion, beauty).
Figure 6.6 offers a graphic depiction of how 40 nations differ on the dimensions of individualism/collectivism and power distance. Of course, this depiction exaggerates the differences between national traits to some ex-tent. Many Americans prefer to act as part of a group, just as many Taiwanese prefer to act individualistically. And globalization may have already begun to blur some of these distinctions. Still, to suggest no cultural differ-ences exist is equally simplistic. Clearly, cultures such as the United States, which emphasize rugged individu-alism, differ significantly from collectivistic cultures such as those of Pakistan, Taiwan, and Colombia. To be effective in cultures that exhibit a greater power distance, managers often must behave more autocratically, perhaps being less participative in decision making. Conversely, in Scandinavian cultures such as Sweden’s, for instance, where power distance is low, the very idea that management would make decisions on its own may be questioned. Here, managers tend to work more toward creating processes that reflect an industrial democracy.
Cross-cultural management extends beyond U.S. employees going abroad. It also includes effective manage-ment of inpatriates—foreign nationals who are brought in to work at the parent company. These employees pro-vide a valuable service to global companies because they bring extensive knowledge about how to operate effectively in their home countries. They will also be better prepared to communicate their organization’s products and values when they return. But they often have the same types of problems as expatriates and may be even more neglected because parent–company managers either are more focused on their expatriate program or unconsciously see the home country as normal—requiring no period of adjustment. Yet the language, customs, expense, and lack of local community support in the United States are at least as daunting to inpatriates as the experience of American nationals abroad. Culture shock works both ways.
Effective managers are sensitive to these issues and take them into account in dealing with foreign-national employees. In contrast to American-born employees, coworkers or customers from other countries might tend to communicate less directly, place more emphasis on hierarchy and authority, or make decisions more slowly. For example, an American manager working in Japan sent an e-mail to her American supervisor and Japanese colleagues in which she pointed out flaws in the process they were working on. The supervisor appreciated the alert, but her colleagues were embarrassed by behavior they considered rude; she should have inquired indirectly—say, by wondering what might happen if such a problem did exist. In another situation, a manager from Mexico showed respect for authority by phrasing ideas as questions when he was in a meeting with superiors. Instead of seeing him as appropriately humble, his American colleagues concluded that he was indecisive. In general, managers of international groups can manage these types of misunderstandings by acknowledging cultural differences frankly and finding ways to work around them by modifying the group (e.g., assigning tasks to subgroups), by setting rules to correct problems that are upsetting group members, or by removing group members who demonstrate they cannot work effectively within a particular situation.69
In addition, when working in the United States, foreign nationals will encounter a number of work-related dif-ferences. Alert managers help their employees adjust. A few basic categories include the following:
Meetings: Americans tend to have specific views about the purpose of meetings and how much time can be spent. International workers may have different preconceptions about the nature and length of meetings, and managers should make sure foreign nationals are comfortable with the American approach.
Work(aholic) schedules: Workers from other countries can work long hours but, in countries with strong labor organizations, often get many more weeks of vacation than American workers. And Europeans in particular may balk at working on weekends. Obviously, matters such as these are most helpfully raised and addressed at the beginning of the work assignment.
E-mail: Parts of the world have not yet embraced e-mail and voice mail the way U.S. workers have. Often others prefer to communicate face to face. Particularly when potential language difficulties exist, managers will probably want to avoid using e-mail for important matters at the outset.
Fast-trackers: Although U.S. companies may put a young MBA graduate on the fast track to management, most other cultures still see no substitute for the wisdom gained through experience. (This is something U.S. managers working abroad will also want to keep in mind.) More experienced managers are often a better choice for mentoring inpatriates.
Feedback: Everyone likes praise, but the use of excessive positive feedback tends to be less prevalent in other cultures than in the United States—a useful fact for managers when they give foreign nationals their performance reviews.70
Ethical Issues in International Management
If managers are to function effectively in a foreign setting, they must understand how culture influences both how they are perceived and how others behave. One of the most sensitive issues in this regard is how culture plays out in terms of ethical behavior.71 Issues of right and wrong get blurred as we move from one culture to another, and actions that may be normal and customary in one setting may be unethical—even illegal—in another. The use of bribes, for example, is perceived to be an accepted part of commercial transactions in many Asian, African, Latin American, and Middle Eastern cultures; and even in cultures that view bribery as a form of corruption, some companies offer bribes when they think that it is part of the culture.72
In the United States, of course, such behavior is illegal, but what should a U.S. businessperson do when working abroad? Failure to sweeten the deal with bribes can result in lost business. Although the Foreign Corrupt Practices Act of 1977 prohibits U.S. employees from bribing foreign officials, one study published in the United States found that fewer than half of U.S. managers said bribes were unacceptable, and 20 percent actually said they were always acceptable. (Small business gifts or grease payments to lower-level officials are permissible under the act if the dollar amount of the payments would not influence the outcome of the negotiations.) Internationally, countries of the Organization for Economic Cooperation and Development, including the United States, have also prohibited bribes since 1977.74 Companies that conduct business in Britain are also subject to that country’s Bribery Act, which prohibits not only bribes of foreign officials but also bribes between businesspeople.75 That sweeping law took effect in 2011; as of this writing, it is not yet clear how aggressive the British government will be in pursuing cases involving small bribes and companies based outside Britain.
Britain’s law comes at a time when other governments are getting tough on bribery and other forms of corrup-tion. Other European countries have recently strengthened their laws against bribery, and China has begun to prosecute corporations for bribery. In the United States, the Justice Department has been charging more firms with violating the Foreign Corrupt Practices Act (FCPA). In one case, for example, IBM paid $10 million to settle charges by the Securities and Exchange Commission that its people had been engaging in bribery to win con-tracts. (That settlement was actually small; fines in FCPA cases can exceed $100 million.) In this case, IBM nei-ther admitted wrongdoing nor denied it, and the company said it was taking remedial action to ensure that viola-tions didn’t occur in the future.76
Without an understanding of local customs, ethical standards, and applicable laws, an expatriate may be woe-fully unprepared to work internationally. To safeguard against the problems and mitigate the punishment if an organization should be found guilty of bribery, the U.S. Sentencing Commission has deemed it essential for firms to establish effective ethics programs and see that they are enforced. Companies such as Caterpillar, General Dynamics, and United Technologies established official codes of conduct for their employees years ago. In addition, many other companies have hired official ethics officers and increased their efforts to ensure ethical conduct. UPS couples an international code of conduct (available in 12 languages) with tools to ensure compliance: a corporate compliance department headed by a senior vice president, ethics training for all managers and employees, a toll-free line for requesting guidance or reporting problems, and regular audits of compliance with the code. In developing the international code of ethics, the compliance department sought input from employees in many positions and countries to ensure that the policies would be relevant throughout the company. Employees are invited to submit any ideas they have for improving the code’s current language.77
To put teeth into the corporate ethics initiative, companies with global operations should be at least as engaged in establishing and enforcing standards for ethical behavior as domestic corporations. In Chapter 5, we identified a number of steps organizations should take. They include establishing and communicating the company’s values, measuring performance in meeting ethical standards, rewarding employees at all levels for meeting those standards, and taking swift but fair action when violations occur. The primary difference in the international context is that these activities must be carried out with foreign business partners and employees in any subsidiary, franchise, or other company operation.
Interestingly, despite some obvious differences across cultures, research suggests that regardless of nationality or religion, most people embrace a set of five core values: compassion, fairness, honesty, responsibility, and respect for others. These values lie at the heart of human rights issues and seem to transcend more superficial differences among Americans, Europeans, and Asians. Finding shared values such as these allows companies to build more effective partnerships and alliances, especially across cultures. Perhaps as long as people understand that there is a set of core values, they can permit all kinds of differences in strategy and tactics.78
To a large extent, the challenge of managing across borders comes down to the philosophies and systems used to manage people. In moving from domestic to international management, managers need to develop a wide portfolio of behaviors along with the capacity to adjust their behavior for a particular situation. This adjust-ment, however, should not compromise the values, integrity, and strengths of their home country. When manag-ers can transcend national borders and move among different cultures, they can leverage the strategic capabili-ties of their organization and take advantage of the opportunities that our global economy has to offer.
Taking these management principles beyond national borders is an exciting challenge that should be irresisti-ble to today’s and tomorrow’s leaders. As we saw in the early sections of this chapter, the business environment is spreading wider. The implications are evident at Lenovo, as described in “Management Connection: Onward” and the earlier parts of this continuing case. People around the world are seizing the chance to get an education, launch a business, and enjoy a higher standard of living. The opportunities to serve their needs are enormous. Thanks to modern technology, the ability to learn about needs and meet them globally is available even to small, local businesses. Whether you are addressing unique desires in a bumpy world or delivering your product to all continents in a flat one, you must pay attention to what is happening far beyond your neighborhood.
It was once said that the sun never set on the British Empire. Today, the sun does set on the British Empire, but not on the scores of global empires, including those of IBM, Unilever, Volkswagen, and Hitachi.
— LESTER BROWN
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Managing in a (Sometimes) Flat World
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U.S. Exports as a Share of U.S. Output (goods and services)
Source: World Bank, “World Development Indicators,” World DataBank, http://databank.worldbank.org.
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Relative Growth in World Merchandise Exports by Major Product Group, 1950–2011
Source: World Trade Organization, “Appendix: Historical Trends,” International Trade Statistics 2012, Table A1, p. 204, available at http://www.wto.org.
Companies both large and small now view the world as their marketplace.
Top 10 Global Firms
Source: “Global 500,” Fortune, July 23, 2012, http://money.cnn.com/magazines/fortune/global500/2012/full_list.
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An increasing number of American companies are outsourcing and offshoring divisions and departments of their organizations to save money. Many call centers are now located in India, where wages are still much lower than in the United States. Here is a photo of a typical call center in Hyderabad, India.
Contracting with an outside provider to produce one or more of an organization’s goods or services.
Moving work to other countries.
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Key Issues of the Global Environment
Economic environment Foreign investment; growth of developing nations; rising wages in developing nations
Technological environment Internet and wireless technology
Legal/regulatory environment Free trade agreements; anticorruption laws
Demographics Aging population in developed nations; growing population worldwide, especially in the developing world
Social issues Cultural differences; bribery concerns
Natural environment Intensifying demand for resources, including oil, water, and food; growing desire for sustainable products and operations; increasingly endangered species; climate change
The Global Environment
The global economy is becoming more integrated than ever before.
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Globalization requires improvements in all bottom-line practices. Why might innovation be important for a U.S. company in a global market?
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Top U.S. Trading Partners, Based on Total Imports and Exports
SOURCE: U.S. Bureau of the Census, Statistical Abstract of the United States: 2011, Table 1306, http://www.census.gov.
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DISNEY’S ENGLISH SCHOOLS IN SHANGHAI
Several U.S. and European companies have sensed opportunity in the estimated 300 million Chinese people learning English—and presumably many millions more who want to learn, given the chance. British publisher Pearson PLC and Sweden-based school operator English First SV have emphasized adult education, but Walt Disney Company sees a profitable niche market in teaching children.
Disney has opened a chain of Disney English schools in Shanghai and has drawn up plans to operate in Bei-jing. Managers insist that the mission of the schools is simply to teach English to Chinese children, but that mis-sion requires books and worksheets, and they just happen to be populated with Buzz Lightyear, Ariel the Mer-maid, and other characters from Disney’s movies. Young students can earn rewards such as stickers and CDs featuring Disney characters and productions. Rather than being repelled by the marketing angle, Chinese parents see a chance for their children to learn from a company that is familiar and truly international.
For Disney, the schools offer an opportunity to connect with families in an environment that is otherwise politi-cally tricky. Although the Chinese government limits movie and television distribution of Disney productions, Dis-ney English can offer students all the Disney-themed worksheets, backpacks, and toys they need to develop a lasting love for Mickey Mouse.29
• What threats and opportunities did Disney identify in China?
This Chevy Volt electric car is charging in the parking lot in Shanghai at General Motors headquarters.
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North American Free Trade Agreement (NAFTA)
An economic pact that combined the economies of the United States, Canada, and Mexico into one of the world’s largest trading blocs.
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Universal needs create strong pressure for a global strategy.
SOURCES: C. A. Bartlett and S. Ghoshal, Managing across Borders: The Transnational Solution (Boston: Harvard Business School Press, 1991); and A. W. Harzing, “An Empirical Analysis and Extension of the Bartlett and Ghoshal Typology of Multinational Companies,” Journal of International Business Studies 31, no. 1 (2000), pp. 101–20.
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IGNIGHTER.COM GAINS TRACTION IN INDIA
Ignighter.com is an Internet start-up that surprised its founders by appealing to traditional practices far from its home base in New York City. Dan Osit, Kevin Owocki, and Adam Sachs created Ignighter.com as a dating site that would make dating “safer, less awkward, and more fun.” Its distinction was the founders’ assumption that dating would be more comfortable if the individuals met up with others in a group. Thus one customer coordinates a date by inviting a group of people to join him or her for an outing.
After a year, 50,000 people in the United States had registered for the service—not an embarrassing start, but also not enough for a viable business. It turned out that many people in the target group—singles in their twen-ties—were confused by the concept. But Osit studied user data and picked up on an unexpected trend: the site was generating a lot of traffic from Singapore, Malaysia, India, and South Korea. At first the founders brushed off that information as just a quirk.
The trend persisted, however, especially in India, where hundreds of users were signing up for Ignighter every day. After another year, the founders acknowledged that they had accidentally created a website for dating Indi-an-style. In many parts of India, young people are not supposed to be out with someone from the opposite sex; but from their exposure to Western media, the idea of dating appeals to them. Group outings meet their desire in a socially acceptable way. With that realization, Ignighter’s founders laid plans to hire employees in India and let the U.S. website coast.41
• How might Ignighter’s founders have prepared better for local responsiveness?
The need to lower costs is a key globalization driver. What is one way in which a global strategy can help reduce costs?
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In this ad, Toyota counters the perception that foreign auto companies take jobs from Americans. The production line above is actually its Georgetown, KY, manufacturing plant. According to the organizational model in Figure 6.5, what type of company is Toyota?
An organizational model that is composed of a company’s overseas subsidiaries and characterized by greater control by the parent company over the research function and local product and marketing strategies than is the case in the multinational model.
The international model helps spread quality and service standards globally. Give an example of a product for which quality standards would apply globally.
An organizational model that consists of the subsidiaries in each country in which a company does business and provides a great deal of discretion to those subsidiaries to respond to local conditions.
The multinational model helps speed up local response. What kind of product might experience rapid changes in local demand?
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STARBUCKS IMPROVES PERFORMANCE
A few years ago, Starbucks’ sales in the United States began falling. Howard Schultz came out of retirement to resume the role of CEO and turn around the coffee chain. Schultz refocused the stores on the coffee, closed poorly performing outlets, renegotiated to get lower prices on pastries, and searched for ways to improve effi-ciency. Not only did those lessons help Starbucks improve in the United States, but they provided a foundation of knowledge when, more recently, sales in Europe began to slide. The company took its efficiency lessons and renewed focus on coffee brewing across the Atlantic to improve performance there.
At the same time, when it comes to menu and store atmosphere, Starbucks caters to consumers’ tastes in dif-ferent locales. Stores are being redecorated with local flair, which is especially important in countries such as France, where customers want to relax over their drinks, not rush off. Drink recipes are tweaked to local prefer-ences—more choices in France and extra-strong drinks in Britain, for example. In a nod to the German consum-er’s passion for value, Starbucks accelerated its plan to introduce rewards cards in Germany.
In Asia, local adaptations are even more pronounced. Whereas coffee drinking in the United States is often a grab-and-go morning routine, Chinese consumers are more likely to gather in the afternoon with friends or col-leagues for an exotic Western-style experience, so Starbucks is setting up comfortable group seating with couches. But many Chinese people don’t actually care for coffee, so Starbucks is preparing sweet drinks with locally familiar flavors and creating Chinese-style sandwiches.48
• How well does Starbucks fit the definition of a transnational company? Why?
An organizational model consisting of a company’s overseas subsidiaries and characterized by centralized decision making and tight control by the parent company over most aspects of worldwide operations; typically adopted by organizations that base their global competitive strategy on cost considerations.
The global model of standardization lowers costs. Could this model apply to a jewelry company? If so, how? If not, why not?
An organizational model characterized by centralizing certain functions in locations that best achieve cost economies; basing other functions in the company’s national subsidiaries to facilitate greater local responsiveness; and fostering communication among subsidiaries to permit transfer of technological expertise and skills.
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The transnational model tries to deliver on all bottom-line practices. Does that mean the transnational model is always best? Why or why not?
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LENOVO’S GLOBAL STRATEGY
When Lenovo’s chief executive, Yang Yuanqing, crafted the strategy to build outward from China, he had to con-sider how the company would compete in a fast-changing industry selling to developing markets. Selling high-tech products requires constant innovation; selling in communities where people are newly entering the middle class requires high efficiency and low prices.
Yang and Gerry Smith, senior vice president of Lenovo’s supply chain, explored the most efficient and responsive ways to make electronics. They concluded that Lenovo could win on both counts by handling more of its own manufacturing. In contrast to U.S.-based electronics companies, Lenovo does about half of its own manufacturing, outsourcing the other half. Its 4,000-employee facility in Brazil helps Lenovo cut costs, including taxes, related to serving the Latin American market. Lenovo facilities in the United States (North Carolina), Japan, and India keep production close to those regions’ buyers and their needs and tastes.
The company-owned factories were an advantage recently when floods in Thailand interrupted production of computer hard drives. Lenovo and other computer makers competed fiercely for the limited supply. As hard drives became available, Lenovo made prompt adjustments to its production lines, focusing on the most profitable models using the hard drives available. Companies that outsourced were less agile, and Lenovo gained market share at their expense.
Another challenge is the importance of brand image. By prioritizing developing economies such as Brazil, Lenovo has the advantage of arriving early and establishing a reputation before Hewlett-Packard, Apple, and oth-er competitors move in. In countries such as Russia and India, the company established a good reputation for PCs, which now elevates the brand’s reputation in smart phones. The situation is trickier when products are rolled out to developed economies such as the United States, where consumers expect their electronic devices to be exciting. Chief Marketing Officer David Roman has expanded the company’s promotional efforts, and successes at the global level have drawn attention to Lenovo as the sometimes-number-one computer brand. Lenovo hopes its North Carolina factory will further raise the brand’s profile in the United States.51
• Where in this example do you see pressures for global integration? Where do you see pressures for local re-sponsiveness?
• Which global strategy (international, multinational, global, or transnational) do you think is most appropriate for Lenovo? Why?
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TABLE 6.2 COMPARISON OF ENTRY MODES
Exporting Licensing Franchising Joint Venture Wholly Owned Subsidiary
Scale economies Lower development costs Lower development costs Local knowledge Maintains control over technology
strategy Lower political risk Lower political risk Shared costs and risk
May be the only option Maintains control over operations
No low-cost sites
High transportation costs
Tariff barriers Loss of control over technology Loss of control over quality Loss of control over technology
Conflict between partners High cost
Exporting offers scale economies.
Can services be exported? Why or why not?
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Setting up a wholly owned subsidiary offers two clear advantages.
In six years, Cold Stone Creamery has expanded its franchises into 17 countries outside of the United States, including South Korea, shown here.
Franchising is one way to maintain standards globally. Why does quality control pose a risk in franchising?
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It is estimated that nearly 15 percent of all employee transfers are to an international location.
Managing across Borders
Parent-company nationals who are sent to work at a foreign subsidiary.
Natives of the country where an overseas subsidiary is located.
Natives of a country other than the home country or the host country of an overseas subsidiary.
Expatriate hiring increases cost; training raises quality. How might training an expatriate manager differ from training a local manager?
The number of expatriate managers of an overseas operation who come home early.
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TABLE 6.3 STRESSORS AND COPING RESPONSES IN THE DEVELOPMENTAL STAGES OF EXPATRIATE EXECUTIVES
Stage Primary Stressors Executive Coping Response Employer Coping Response
selection Cross-cultural unreadiness. Engage in self-evaluation. Encourage expatriate’s self- and family evaluation. Perform an assessment of potential and interests.
Assignment acceptance Unrealistic evaluation of stressors to come. Hurried time frame. Think of assignment as a growth opportunity rather than an instrument to vertical promotion. Do not make hard-to-keep promises. Clarify expectations.
postarrival Ignorance of cultural differences. Do not make unwarranted assumptions of cultural competence and cultural rules. Provide pre-, during-, and postassignment training. Encourage support-seeking behavior.
Arrival Cultural shock. Stressor reevaluation. Feelings of lack of fit and differential treatment. Do not construe identification with the host and parent cultures as mutually exclusive. Seek social support. Provide postarrival training. Facilitate integration in expatriate network.
Novice Cultural blunders or inadequacy of coping responses. Ambiguity owing to inability to decipher meaning of situations. Observe and study functional value of coping responses among locals. Do not simply replicate responses that worked at home. Provide follow-up training. Seek advice from locals and expatriate network.
Transitional Rejection of host or parent culture. Form and maintain attachments with both cultures. Promote culturally sensitive policies in host country. Provide Internet access to family and friends at home. Maintain constant communication and periodic visits to parent organization.
Mastery Frustration with inability to perform boundary-spanning role. Bothered by living with a cultural paradox. Internalize and enjoy identification with both cultures and walking between two cultures. Reinforce rather than punish dual identification by defining common goals.
Repatriation Disappointment with unfulfilled expectations. Sense of isolation. Loss of autonomy. Realistically reevaluate assignment as a personal and professional growth opportunity. Arrange prerepatriation briefings and interviews. Schedule postrepatriation support meetings.
SOURCE: From Academy of Management Executive, J. Sanchez, P. Spector, and C. Cooper, May 2000, pp. 96–106. Copyright © 2000. Reproduced with permission of Academy of Management via Copyright Clearance Center.
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In this era, when people from all over the globe are collaborating on business issues, it is important to continue learning about and respecting different cultures in order to succeed.
TABLE 6.5 HOW TO PREVENT FAILED GLOBAL ASSIGNMENTS
• Structure assignments clearly: Develop clear reporting relationships and job responsibilities.
• Create clear job objectives.
• Develop performance measurements based on objectives.
• Use effective, validated selection and screening criteria (both personal and technical attributes).
• Prepare expatriates and families for assignments (briefings, training, support).
• Create a vehicle for ongoing communication with expatriates.
• Anticipate repatriation to facilitate reentry when they come back home.
• Consider developing a mentor program that will help monitor and intervene in case of trouble.
TABLE 6.4 IDENTIFYING INTERNATIONAL EXECUTIVES
End-State Dimensions Sample Items
1. Sensitivity to cultural differences
2. Business knowledge.
3. Courage to take a stand.
4. Brings out the best in people.
5. Acts with integrity.
6. Is insightful.
7. Is committed to success.
8. Takes risks. When working with people from other cultures, works hard to understand their perspective.
Has a solid understanding of the company’s products and services.
Is willing to take a stand on issues.
Has a special talent for dealing with people.
Can be depended on to tell the truth regardless of circumstances.
Is good at identifying the most important part of a complex problem.
Clearly demonstrates commitment to seeing the organization succeed.
Takes personal as well as business risks.
Learning-Oriented Dimensions Sample Items
1. Uses feedback.
2. Is culturally adventurous.
3. Seeks opportunities to learn.
4. Is open to criticism.
5. Seeks feedback.
6. Is flexible. Has changed as a result of feedback.
Enjoys the challenge of working in countries other than his or her own.
Takes advantage of opportunities to do new things.
Does not appear brittle—as if criticism might cause him or her to break.
Pursues feedback even when others are reluctant to give it.
Doesn’t get so invested in things that he or she cannot change when something doesn’t work.
SOURCE: Copyright © 1997 by the American Psychological Association. G. M. Spreitzer, M. W. McCall, and J. D. Mahoney, “Early Identification of International Executive Potential,” Journal of Applied Psychology 82, no. 1 (1997), pp. 6–29.
The tendency to judge others by the standards of one’s group or culture, which are seen as superior.
The disorientation and stress associated with being in a foreign environment.
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Positions of 40 Countries on the Power Distance and Individualism Scales
SOURCE: G. Hofstede, “Motivation, Leadership, and Organization: Do American Theories Apply Abroad?” Organizational Dynamics 9, no. 1 (Summer 1980), pp. 42–63. Reprinted by permission.
A foreign national brought in to work at the parent company.
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CELTEL’S START IN AFRICA
Mo Ibrahim had to address the expectation of bribery when he set up Celtel to bring cellular service to under-served countries in Africa. Ibrahim saw enormous untapped demand for mobile communications on a continent with a billion people where many regions lacked fixed telephone lines, but he couldn’t persuade any established companies to operate in African countries. Ibrahim decided he could do what others wouldn’t, and he raised enough funds to start Celtel.
Ibrahim assembled a board of directors experienced in the telecommunications industry. They decided that the company’s long-term success required a sterling reputation. Celtel defined requirements for doing business: Li-censes to operate must be granted in an open bidding process, and the entire board had to approve any expense greater than $30,000. One of the directors, Salim Ahmed Salim, formerly prime minister of Tanzania, even offered a personal touch. Whenever a local official hinted to a Celtel employee that a bribe might be helpful, Salim would contact an appropriate authority and explain that bribery would taint Africa’s reputation. Generally, this diplomacy returned the deal to a transparent course.
Celtel’s ethical approach prevailed. By targeting low-cost markets with low-priced mobile devices, Celtel opened up as much demand as it could meet. The decision to avoid bribery actually helped because Celtel in-stead used its money to invest openly in communities through fair wages, employee training, and construction of schools and health clinics, thereby winning customers’ goodwill. Today Celtel’s operations are part of Bharti Airtel, an Indian company whose corporate vision is to be “the most loved brand, enriching the lives of millions”—a vision requiring an ongoing commitment to ethics.73
• What were the risks and rewards of Ibraham’s insistence on ethical practices at Celtel?
This billboard advertising Celtel’s service is located in Malawi.
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1. Loretta Chao, “As Rivals Outsource, Lenovo Keeps Production In-House,” The Wall Street Journal, July 9, 2012, http://online.wsj.com; Saabira Chaudhuri, “Is the End of the PC Market Closer than We Think?” The Wall Street Journal, January 14, 2013, http://blogs.wsj.com; Bruce Einhorn, “Lenovo’s Persistent PC Strategy in India,” Bloomberg Businessweek, November 6, 2012, http://www.businessweek.com; Joe McDonald, “Lenovo Profit Boosted by Smartphones, Tablets,” Bloomberg Businessweek, January 30, 2013, http://www.businessweek.com; Paul Mozur, “Lenovo Profit Rose in Latest Quarter,” The Wall Street Journal, January 30, 2013, http://online.wsj.com; Loretta Chao, “Chinese Tech Titans Eye Brazil,” The Wall Street Journal, January 8, 2013, http://online.wsj.com; Tom Orlik and Paul Mozur, “Lenovo Says Phones Are in the Black in China,” The Wall Street Journal, January 23, 2013, http://online.wsj.com.
2. D. Wessel, “Big U.S. Firms Shift Hiring Abroad,” The Wall Street Journal, April 19, 2011, http://online.wsj.com.
3. E. Smith and J. T. Areddy, “Disney to Begin Shanghai Park,” The Wall Street Journal, April 4, 2011, http://online.wsj.com.
4. M. S. Malone, “Living in a Bipolar Business World,” ABC News, November 13, 2009, http://abcnews.go.com.
5. World Trade Organization, “World Trade Developments,” International Trade Statistics 2012, p. 14, available at http://www.wto.org; World Trade Organization, “Trade Growth to Slow in 2012 after Strong Deceleration in 2011,” news release, May 10, 2012, http://www.wto.org; Mark Dorns, “Growing Appetite for American-Made Goods Overseas,” Economics and Statistics Administration, March 22, 2011, http://www.esa.doc.gov.
6. See, for example, M. Mandel, “What Spending Slowdown?” BusinessWeek, April 23, 2007, http://www.businessweek.com.
7. Bureau of the Census, Statistical Abstract of the United States: 2011, table 1290, p. 797, http://www.census.gov; UN Conference on Trade and Development (UNCTAD), “Inward and Outward Foreign Direct Investment Flows,” UnctadStat, http://unctadstat.unctad.org.
8. Reuters, “Deutsche Boerse Set for NYSE Deal as Nasdaq Bows Out,” LiveMint.com, May 16, 2011, http://www.livemint.com; and F. Yan and A. Leung, “China’s Geely Completes Volvo Buy,” LiveMint.com, August 2, 2010, http://www.livemint.com.
9. C. Zappone, “China Poised for Global Shopping Spree,” CNNMoney, March 30, 2007, http://money.cnn.com.
10. R. Rodriguez, “Peach Growers in Valley, China Fight for Market Share,” Fresno (Calif.) Bee, January 31, 2011, http://www.fresnobee.com; and “AIADA: Imports Increase Market Share,” Auto Remarketing, December 7, 2010, http://www.autoremarketing.com.
11. Joseph B. White, “What Is an American Car?” The Wall Street Journal, January 26, 2009, http://online.wsj.com.
12. T. Heston, “Fitting into the Global Puzzle,” Fabricating and Metalworking, February 2007, Business & Company Resource Center, http://galenet.galegroup.com.
13. N. Sandler, “Software That Will This Sentence Fix,” BusinessWeek, February 22, 2007, Business & Company Resource Center, http://galenet.galegroup.com.
14. D. W. Drezner, “The Outsourcing Bogeyman,” Foreign Affairs, May/June 2004.
15. D. Wessel and B. Davis, “Pain from Free Trade Spurs Second Thoughts,” The Wall Street Journal, March 28, 2007, http://online.wsj.com.
16. Wessel, “Big U.S. Firms Shift Hiring Abroad.”
17. Wessel and Davis, “Pain from Free Trade”; P. Levy, “Trade Truths for Turbulent Times: A Reply to Vladimir Masch,” BusinessWeek, February 14, 2007, Business & Company Resource Center, http://galenet.galegroup.com; P. Restuccia, “Profs Claim the Threat of Outsourcing Is Overblown,” Boston Herald, February 12, 2007, http://galenet.galegroup.com; and D. Blanchard, “Compete or Retreat,” Industry Week, January 2007, http://galenet.galegroup.com.
18. D. Whitford, “Where in the World Is Cheap Labor?” Fortune, March 22, 2011, http://money.cnn.com.
19. C. Lombardi, “Survey: Software Companies Increasing Offshoring Work,” C/Net News, January 12, 2007, http://news.com.com.
20. “When Staying Put Trumps Offshoring,” McKinsey Quarterly, December 7, 2004, online; and C. Koepfer, “A Look at Total Cost Can Change the View,” Production Machining, January 2011, p. 6.
21. Koepfer, “A Look at Total Cost”; and Whitford, “Where in the World Is Cheap Labor?”
22. European Union, “About the EU,” http://europa.eu; Central Intelligence Agency, “European Union,” The World Factbook, http://www.cia.gov.
23. “Irish Welcome Portuguese to the ‘Debt Club,’” The Wall Street Journal, April 7, 2011, http://blogs.wsj.com; S. Rastello and R. Christie, “IMF Will Work on Portugal Bailout Plan with European Union,” Bloomberg Businessweek, April 8, 2011, http://www.businessweek.com; P. Kowsmann, “Portugal Reaches a Deal on Bailout,” The Wall Street Journal, May 4, 2011, http://online.wsj.com; and M. Elliott, “Global Crises? Don’t Panic,” Fortune, April 21, 2011, http://money.cnn.com.
24. Liz Alderman, “Foreign Investment in Europe Starts Anew,” New York Times, March 4, 2012.
25. R. Casert, “EU Waves New Fines in Face of Microsoft,” Seattle Times, March 2, 2007; and D. Litterick, “Regulation EU Losing Patience with Reluctant Microsoft,” Daily Telegraph (London), March 2, 2007, Business & Company Resource Center, http://galenet.galegroup.com.
26. World Trade Organization, “World Trade Developments,” p. 15.
27. Alex Frangos, “Behind China’s Switch to High-End Exports,” The Wall Street Journal, March 24, 2013, http://online.wsj.com; Yajun Zhang, “China Begins to Lose Edge as World’s Factory Floor,” The Wall Street Journal, January 16, 2013, http://online.wsj.com.
28. “Three Snapshots of Chinese Innovation,” McKinsey Quarterly, February 2012, http://www.mckinseyquarterly.com.
29. J. T. Areddy and P. Sanders, “Chinese Learn English the Disney Way,” The Wall Street Journal, April 20, 2009, http://online.wsj.com.
30. Bureau of Labor Statistics, “International Comparisons of Hourly Compensation Costs in Manufacturing, 2007,” news release, March 26, 2009, http://www.bls.gov/ilc.
31. G. Anand, “India Graduates Millions, but Too Few Are Fit to Hire,” The Wall Street Journal, April 5, 2011, http://online.wsj.com.
32. “Citigroup Plans More Branches in India,” Associated Press, March 26, 2007, http://my.earthlink.net.
33. A. van Agtmael, “Industrial Revolution 2.0,” Foreign Policy, January–February 2007, Business & Company Resource Center, http://galenet.galegroup.com.
34. Asia-Pacific Economic Cooperation, “About Us,” http://www.apec.org.
35. Agtmael, “Industrial Revolution 2.0”; CEMEX website, http://www.cemex.com.
36. C. Simoes and I. Dantas, “Brazil’s Economy: Growth May Have a Downside,” Bloomberg Businessweek, June 10, 2010, http://www.businessweek.com; A. Ragir and D. Kopecki, “Brazil’s Credit Boom Could End in Tears,” Bloomberg Businessweek, January 6, 2011, http://www.businessweek.com; and S. Nielsen, “Wind Power: Brazil’s Second Act,” Bloomberg Businessweek, October 7, 2010, http://www.businessweek.com; Polya Lesova and Michael Molinski, “Latin America’s New Tigers Forge Ahead,” MarketWatch, July 25, 2012, http://www.marketwatch.com.
37. Agtmael, “Industrial Revolution 2.0.”
38. Office of the United States Trade Representative, “Free Trade Agreements,” http://www.ustr.gov.
39. U.S. Energy Information Administration, “How Dependent Are We on Foreign Oil?” Energy in Brief, July 13, 2012, http://www.eia.gov; World Trade Organization, “World and Regional Export Profiles 2011, International Trade Statistics 2012, http://www.wto.org.
40. F. Aquila, “Africa’s Biggest Score: A Thriving Economy,” Bloomberg Businessweek, June 28, 2010, http://www.businessweek.com; Sarah Frier, “For IBM, Africa Is Risky and Rife with Opportunity,” Bloomberg Businessweek, February 21, 2013, http://www.businessweek.com.
41. E. Markowitz, “A Dating Site Thrives in Delhi,” Inc., February 14, 2011, http://www.inc.com; and H. Seligson, “Jilted in the U.S., a Site Finds Love in India,” The New York Times, February 19, 2011, http://www.nytimes.com.
42. See, for example, “India’s Bharti Says to Sign Wal-Mart Deal in April,” Reuters, April 11, 2007, http://news.yahoo.com.
43. Leslie Kwoh, “Cinnabon Finds Sweet Success in Russia, Mideast,” The Wall Street Journal, December 25, 2012, http://online.wsj.com.
44. P. B. Kavilanz, “U.S. Slaps Tariffs on Chinese Imports,” CNNMoney.com, March 30, 2007, http://money.cnn.com.
45. Heineken International website, http://www.henekeninternational.com; and Heineken N.V. profile, Vintners.com, http://www.vintners.com.
46. S. Elliott, “Ford Tries a Global Campaign for Its Global Car,” The New York Times, February 25, 2011, Business & Company Resource Center, http://galenet.galegroup.com.
47. A.-W. Harzing, “An Empirical Analysis and Extension of the Bartlett and Ghoshal Typology of Multinational Companies,” Journal of International Business Studies 31, no. 1 (2000), pp. 101–20; Sucheta Nadkarni, Pol Herrmann, Pedro David Perez, “Domestic Mindsets and Early International Performance: The Moderating Effect of Global Industry Conditions,” Strategic Management Journal 32, no. 5 (May 2011), pp. 510–31; S. M. Morris and S. A. Snell, “Intellectual Capital Configurations and Organizational Capability: An Empirical Examination of Human Resource Subunits in the Multinational Enterprise,” Journal of International Business Studies 42, no. 6 (2011), pp. 805–27; Elaine Ferndale, Jaap Paauwe, Shad S. Morris, Günther K. Stahl, Philip Stiles, Jonathan Trevor, Patrick M. Wright, “Context-Bound Configurations of Corporate HR Functions in Multinational Corporations,” Human Resource Management 49, no. 1 (Jan/Feb 2010), pp. 45–66.
48. Julie Jargon, “Starbucks in Europe Imports U.S. Tactics,” The Wall Street Journal, December 27, 2012, http://online.wsj.com; Laurie Burkitt, “Starbucks Plays to Local Chinese Tastes,” The Wall Street Journal, November 26, 2012, http://online.wsj.com; Liz Alderman, “In Europe, Starbucks Adjusts to a Cafe Culture,” New York Times, March 30, 2012, http://www.nytimes.com.
49. J. Sandberg, “How Long Can India Keep Office Politics out of Outsourcing?” The Wall Street Journal, February 27, 2007, http://online.wsj.com.
50. Toshiro Wakayama, Junjiro Shintaku, and Tomofumi Amano, “What Panasonic Learned in China,” Harvard Business Review, December 2012, pp. 109–113; Daisuke Wakabayashi, “Panasonic to Pare Unprofitable Units,” The Wall Street Journal, March 28, 2013, http://online.wsj.com.
51. Chao, “As Rivals Outsource”; Chao, “Chinese Tech Titans Eye Brazil”; Orlik and Mozur, “Lenovo Says Phones Are in the Black”; Juro Osawa, “Made in the USA by Apple and Lenovo,” The Wall Street Journal, December 6, 2012, http://blogs.wsj.com; Ian Sherr, “Lenovo Aims Higher in U.S.,” The Wall Street Journal, January 10, 2013, http://online.wsj.com.
52. C. H. Moon, “The Choice of Entry Modes and Theories of Foreign Direct Investment,” Journal of Global Marketing 11, no. 2 (1997), pp. 43–64; and I. Maignan and B. A. Lukas, “Entry Mode Decisions: The Role of Managers’ Mental Models,” Journal of Global Marketing 10, no. 4 (1997), pp. 7–22.
53. Diane Cardwell and Keith Bradsher, “U.S. Will Place Tariffs on Chinese Solar Panels,” New York Times, October 10, 2012, http://www.nytimes.com; Charles Riley, “Major Chinese Solar Company Goes Bankrupt,” CNNMoney, March 21, 2013, http://money.cnn.com.
54. P. Jitpleecheep, “Auntie Anne’s Aims to Double Asia Outlets,” Bangkok Post, April 10, 2007, Business & Company Resource Center, http://galenet.galegroup.com.
55. M. Prewitt, “Breaking Down the Great Wall to Franchising in China,” Nation’s Restaurant News, March 12, 2007, Business & Company Resource Center, http://galenet.galegroup.com.
56. “Hershey’s Global Gambit,” BusinessWeek, April 4, 2007, http://www.businessweek.com.
57. S. Oster, N. Shirouzu, and P. Glader, “China Squeezes Foreigners for Share of Global Riches,” The Wall Street Journal, December 28, 2010, http://online.wsj.com.
58. R. C. Beasley, “Reducing the Risk of Failure in the Formation of Commercial Partnerships,” Licensing Journal 24, no. 4 (April 2004), p. 71; Elie Chrysostome, Roli Nigam, Chaire Stephen Jarilowski, “Revisiting Strategic Learning in International Joint Ventures: A Knowledge Creation Perspective,” International Journal of Management 30, no. 1 (March 2013), pp. 88–98.
59. J. T. Areddy, “In China, Tire-Espionage Suit Treads Loudly,” The Wall Street Journal, April 28, 2011, http://online.wsj.com$$$; Bryan Vogel, “ITC Foreign-Based Misappropriation of Trade Secrets Actions,” InsideCounsel, July 31, 2012, http://www.insidecounsel.com$$$. ; Julie Juan Li, Laura Poppo, Kevin Zheng Zhou, “Relational Mechanisms, Formal Contracts, and Local Knowledge Acquisition by International Subsidiaries,” Strategic Management Journal 31, no. 4 (April 2010), pp. 349–70.
60. K. Hille, “Western Faces Are Vital to China,” Financial Times, December 9, 2010, Business & Company Resource Center, http://galenet.galegroup.com; and J. S. Lublin, “Finding Top Talent in China, India, Brazil,” The Wall Street Journal, April 11, 2011, http://online.wsj.com.
61. A. W. Andreason, “Expatriate Adjustment to Foreign Assignments,” International Journal of Commerce and Management 13, no. 1 (Spring 2003), pp. 42–61.
62. P. Capell, “Know before You Go: Expats’ Advice to Couples,” Career Journal Europe, May 2, 2006, htp://www.careerjournaleurope.com; Mila Lazarova, Mina Westman, Margaret A. Shaffer, “Elucidating the Positive Side of the Work-Family Interface on International Assignments: A Model of Expatriate Work and Family Performance,” Academy of Management Review 35, no. 1 (January 2010), pp. 93–117.
63. R. A. Swaak, “Expatriate Failures: Too Many, Too Much Cost, Too Little Planning,” Compensation & Benefits Review, November/December 1995, pp. 50–52.
64. Capell, “Know before You Go.”
65. G. M. Sprietzer, M. W. McCall, and J. D. Mahoney, “Early Identification of International Executive Potential,” Journal of Applied Psychology 82, no. 1 (1997), pp. 6–29; R. Mortensen, “Beyond the Fence Line,” HRMagazine, November 1997, pp. 100–9; “Expatriate Games,” Journal of Business Strategy, July/August 1997, pp. 4–5; and “Building a Global Workforce Starts with Recruitment,” Personnel Journal (special supplement), March 1996, pp. 9–11; Ming Li, William H. Mobley, Aidan Kelly, “When Do Global Leaders Learn Best to Develop Cultural Intelligence? An Investigation of the Moderating Role of Experiential Learning Style,” Academy of Management Learning & Education 12, no. 1 (March 2013), pp. 32–50; Nicola M. Pless, Thomas Maak, Günther K. Stahl, “Developing Responsible Global Leaders through International Service-Learning Programs: The Ulysses Experience,” Academy of Management Learning & Education 10, no. 2 (June 2011), pp. 237–60.
66. A. Paul, “How the Internet Shrinks the Distance between Us,” The Wall Street Journal, March 16, 2007, http://online.wsj.com.
67. G. A. Fowler, “In China’s Offices, Foreign Colleagues Might Get an Earful,” The Wall Street Journal, February 13, 2007, http://online.wsj.com.
68. John Slocum, “Coming to America,” Human Resource Executive, October 2, 2008, http://www.hrexecutive.com.
69. J. Brett, K. Behfar, and M. C. Kern, “Managing Multicultural Teams,” Harvard Business Review, November 2006, pp. 84–91.
70. D. Stamps, “Welcome to America,” Training, November 1996, pp. 23–30.
71. L. K. Trevino and K. A. Nelson, Managing Business Ethics: Straight Talk about How to Do It Right (New York: John Wiley & Sons, 1995).
72. Transparency International, “Leading Exporters Undermine Development with Dirty Business Overseas,” news release, October 4, 2006, http://www.transparency.org.
73. Mo Ibrahim, “Celtel’s Founder on Building a Business on the World’s Poorest Continent,” Harvard Business Review, October 2012, pp. 41–44; Zain, “About Zain: Overview,” http://www.zain.com; Bharti Airtel, “About Bharti Airtel,” http://www.airtel.in.
74. J. G. Longnecker, J. A. McKinney, and C. W. Moore, “The Ethical Issues of International Bribery: A Study of Attitudes among U.S. Business Professionals,” Journal of Business Ethics 7 (1988), pp. 341–46.
75. D. Searcey, “U.K. Law on Bribes Has Firms in a Sweat,” The Wall Street Journal, December 28, 2010, http://online.wsj.com.
76. Ibid.; and J. Holzer and S. Raice, “IBM Settles Bribery Charges,” The Wall Street Journal, March 19, 2011, http://online.wsj.com.
77. UPS, “The UPS Code of Business Conduct: Leading with Integrity,” UPS Pressroom, http://www.pressroom.ups.com; and i-Sight, “International Code of Conduct: United Parcel Service,” Best Practices, June 17, 2010, http://i-sight.com.
78. A. B. Desai and T. Rittenburg, “Global Ethics: An Integrative Framework for MNEs,” Journal of Business Ethics 16 (1997), pp. 791–800; and P. Buller, J. Kohls, and K. Anderson, “A Model for Addressing Cross-Cultural Ethical Conflicts,” Business & Society 36, no. 2 (June 1997), pp. 169–93.
79. Chao, “As Rivals Outsource”; Einhorn, “Lenovo’s Persistent PC Strategy”; Chao, “Chinese Tech Titans Eye Brazil”; Sherr, “Lenovo Aims Higher in U.S.”; Bruce Einhorn, “In China’s Smartphone Market, Lenovo Gets Busy,” Bloomberg Businessweek, January 3, 2013, http://www.businessweek.com.
MANAGING LENOVO ACROSS NATIONAL BOUNDARIES
To implement its strategy of keeping production in-house and expanding to new markets as it builds market share, Lenovo needs managers who understand local markets and can run an efficient manufacturing operation. Examples include host-country nationals such as Amar Babu, the managing director of Lenovo’s business in In-dia, and third-country nationals such as American Dan Stone, whose background in business strategy helps him succeed as the head of Lenovo’s Brazilian business unit. In India, Babu notes that consumers are just beginning to make the move from a basic cell phone to a smart phone, whereas demand for PCs is likely to remain strong because people want a computer with a full screen for educational applications.
Of course, electronics companies also need to dream up, or at least keep up with, the next great ideas. Lenovo’s chief executive, Yang Yuanqing, admits that Lenovo has not exactly been a leader in design, but he has plenty of experience in catching up. In the 1980s, when Yang was a Lenovo salesperson, he used a bicycle to deliver products, and support services such as advertising agencies were unavailable. As he persevered then, he is persevering today in leading innovation. A recent attempt includes the IdeaPad Yoga, whose keyboard can be positioned for using the computer as a tablet or laptop.
China, where the market is huge and the brand is already respected and popular, provides fertile ground for launching new ideas such as the K91 Smart TV, an Internet-connected television. China is an important locale for the move into smart phones. Lenovo, which until recently had just one model, unveiled a line of 19 phones, helping it gain the second-largest share of the world’s biggest smart phone market. From there, Lenovo took its smart phones to India, Russia, and Indonesia, with plans for expansion into Latin America and the Middle East.
Yang is patient in building Lenovo’s brand in the United States. According to Yang, the company intends to use its reputation as the maker of business computers as the basis for selling high-end PCs to consumers. Yang said recent prototypes have been exciting, but the final versions suffered from compromises made to lower costs. Yang intends to shift the focus toward favoring the design. Also, during some recent quarters, Lenovo has ranked as the world’s biggest seller of PCs, which Lenovo hopes will further raise the brand’s profile worldwide.79
• What advantages does Lenovo have from its choice of entry modes?
• What cultural issues should an American-born manager at Lenovo be prepared to handle?
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culture shock, p. 213
ethnocentrism, p. 213
expatriates, p. 210
failure rate, p. 210
global model, p. 203
host-country nationals, p. 210
inpatriate, p. 214
international model, p. 202
multinational model, p. 203
North American Free Trade Agreement (NAFTA), p. 198
offshoring, p. 192
outsourcing, p. 192
third-country nationals, p. 210
transnational model, p. 204
SUMMARY OF LEARNING OBJECTIVES
Now that you have studied Chapter 6, you should be able to:
Discuss what integration of the global economy means for individual companies and their managers.
In recent years, rapid growth has occurred in world trade, foreign direct investment, and imports. One consequence is that companies around the globe are now finding their home markets under attack from international competitors. The global competitive environment is becoming a much tougher place in which to do business. However, companies now have access to markets that previously were denied to them.
Describe how the world economy is becoming more integrated than ever before.
The gradual lowering of barriers to free trade is making the world economy more integrated. This means that the modern manager operates in an environment that offers more opportunities but is also more complex and competitive than that faced by the manager of a generation ago.
Define the strategies organizations use to compete in the global marketplace.
The international corporation builds on its existing core capabilities in R&D, marketing, manufacturing, and so on to penetrate overseas markets. A multinational is a more complex form that usually has fully autonomous units operating in multiple countries. Subsidiaries are given latitude to address local issues such as consumer preferences, political pressures, and economic trends in different regions of the world. The global organization pulls control of overseas operations back into the headquarters and tends to approach the world market as a unified whole by combining activities in each country to maximize efficiency on a global scale. A transnational attempts to achieve both local responsiveness and global integration by using a network structure that coordinates specialized facilities positioned around the world.
Compare the various entry modes organizations use to enter overseas markets.
There are five ways to enter an overseas market: exporting, licensing, franchising, entering into a joint venture, and setting up a wholly owned subsidiary. Each mode has advantages and disadvantages.
Explain how companies can approach the task of staffing overseas operations.
Most executives use a combination of expatriates, host-country nationals, and third-country nationals. Expatriates sometimes are used to establish new country operations quickly, transfer the company’s culture, and bring in a specific technical skill. Host-country nationals have the advantages that they are familiar with local customs and culture, may cost less, and are viewed more favorably by local governments. Third-country nationals often are used as a compromise in politically touchy situations or when home-country expatriates are not available.
Summarize the skills and knowledge managers need to manage globally.
The causes for failure overseas extend beyond technical capability and include personal and social issues as well. Success depends on a manager’s core skills, such as having a multidimensional perspective; having proficiency in line management and decision making; and having resourcefulness, cultural adaptability, sensitivity, team-building skills, and mental maturity. In addition, helpful augmented skills include computer literacy, negotiating skills, strategic vision, and the ability to delegate.
Identify ways in which cultural differences across countries influence management.
Culture influences our actions and perceptions as well as the actions and perceptions of others. Unfortunately, we are often unaware of how culture influences us, and this can cause
problems. Today, managers must be able to change their behavior to match the needs and customs of local cultures. For example, in various cultures, employees expect a manager to be either more or less autocratic or participative. By
recognizing their cultural differences, people can find it easier to work together collaboratively and benefit from the ex-change.
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Part Two Planning: Delivering Strategic Value
1. Why is the world economy becoming more integrated? What are the implications of this integration for international managers?
2. Imagine you were the CEO of a major company. What approach to global competition would you choose for your firm: international, multinational, global, or transnational? Why?
3. Why have franchises been so popular as a method of international expansion in the fast-food industry? Contrast this with high-tech manufacturing, where joint ventures and partnerships have been more popular. What accounts for the differences across industries?
4. What are the pros and cons of using expatriates, host-country nationals, and third-country nationals to run overseas operations? If you were expanding your business, what approach would you use?
5. If you had entered into a joint venture with a foreign company but knew that women were not treated fairly in that culture, would you consider sending a female expatriate to handle the start-up? Why or why not?
6. What are the biggest cultural obstacles that we must overcome if we are to work effectively in Mexico? Are there different obstacles in France? Japan? China?
6.1 UNDERSTANDING MULTINATIONAL CORPORATIONS
To gain a more thorough picture of how a multinational corporation operates.
Perhaps the best way to gain an understanding of multinational corporations is to study a specific organization and how it operates throughout the world. Select a multinational corporation, find several articles on that company, and answer the questions on the Multinational Worksheet.
1. What is the primary business of this organization?
2. To what extent does the company engage in multinational operations? For example, does it market its products and/or services only in other countries, or does it also have overseas manufacturing facilities? What portion of the firm’s oper-ating income comes from overseas operations?
3. What percentage of the managers in international activities are American (or from the country the corporation considers home)? Are these managers given any special training before their international assignment?
4. What characteristics of the organization have contributed to its success or lack of success in the international market-place?
SOURCE: R. R. McGrath Jr., Exercises in Management Fundamentals, p. 177. Copyright 1985. Reproduced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey.
6.2 CROSS-CULTURAL COMMUNICATION SIMULATION
In this simulation, you will play the part of a manager employed by one of three firms—a commercial bank, a construction firm, and a hotel development company—that are planning a joint venture to build a new hotel and retail shopping complex in Perth, Australia. They come from three cultures: Blue, Green, and Red. Each has specific cultural values, traits, customs, and practices.
You are a manager in the company to which you have been assigned. You will attend the kickoff get-together for the three-day meeting during which the three companies will negotiate the details of the partnership. Your management team consists of a vice president and a number of other managers. Consider the types of topics that would be discussed by the various corporations at an initial meeting.
Your instructor will provide you with information pertaining to your culture. You will be given about 15 minutes to meet with your fellow corporate members, during which you
1. Select a leader.
2. Discuss what your objectives and approaches will be at the opening get-together.
3. Use the description of your assigned culture to practice how you will talk and behave until you are reasonably familiar with your cultural orientation. Be sure to practice conversation distance, greeting rituals, and nonverbal behavior.
You will then return to the kick-off meeting, where you will meet with the other firms. As the social proceeds, interact with the managers from the other companies. Maintain the role you have been assigned, but do not discuss it explicitly. Notice how other people react to you and how you react to them. You will discuss the experience after it is over.
Upon completing this activity, answer the following questions:
1. In what ways did your perceptions of others and their differences influence how you interacted with them and your ability to achieve your goals?
2. What did you learn about yourself and others through this activity? Discuss your strengths and weaknesses in cross-cultural interaction.
3. What were things you or others did or said that enabled or hindered you from adjusting to other people and their culture (a) in this activity? (b) in similar real-life situations?
4. What lessons did you learn from this activity? What steps can you take to improve your ability to understand and appre-ciate differences?
SOURCE: D. A. Jameson, “Using a Simulation to Teach Intercultural Communication in Business Communication Courses,” Business Communication Quarterly, Vol. 55, No. 4, March 1993, pp. 1–10. Copyright 1993. Reprinted by permission of Sage Publications, Inc., via Copyright Clearance Center.
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International Management Chapter 6
A GLOBAL LAUNCH FOR NET-WORK DOCS
Nina Jones and Matt Smith have been raising capital for their start-up, Net-Work Docs. The company will help business clients create and manage their documents electronically. Net-Work Docs will help companies create easily searchable electronic versions of their safety manuals, human resource manuals, training guides, operating instructions, and more. For clients who wish, the company will help in embedding video, audio, and pop-up content along with the basic text and will develop apps for companies that want to make the content available through mobile devices. They also will provide consulting services such as helping clients shop for cloud storage of their documents.
As Nina and Matt developed their business plan, they found themselves expanding their idea of the geographic market they could serve. Initially, they intended to start by working
with businesses in their city. But they realized they will be selling a product that can be made anywhere and shipped an-ywhere. Software and electronic documents can be transported over the Internet at essentially no cost, and a web-site gives a company an immediate global presence. With that
in mind, Nina and Matt have concluded that they are
unnecessarily limiting themselves by targeting geographic markets.
Thus, the plan is now to launch Net-Work Docs as a global company, serving clients in any country. After all, reason Nina and Matt, companies everywhere have policies and procedures they need to document. They will describe their services on their website, make initial contacts via e-mail, and set up a PayPal service to handle online payments. They can travel to meet major clients, but routine jobs may not require face-to-face meetings, and cost-conscious clients should appreciate the savings of conducting business online.
One hitch with this plan is that some potential investors have expressed doubts about operating globally before the company has built experience and a reputation serving clients locally. One investor asked Matt and Nina whether they really were prepared to understand the needs of business clients located hundreds or thousands of miles away—and whether they could assess a faraway client’s likelihood to pay for services. He asked, “Can you really serve overseas clients without any overseas employees?” The company’s founders believe they can because they will start with an English-only website, so they will initially have only
1. What are some possible advantages of Net-Work Docs serving a global market?
2. How are the founders balancing pressures for global integration and local responsiveness? Is their global strategy likely to succeed? Why or why not?
3. What skills of a global manager could help Net-Work Docs succeed?
Rev. Confirming Pages
Part Two Planning: Delivering Strategic Value
Rev. Confirming Pages
After studying Chapter 7, you will be able to:
Describe why people become entrepreneurs and what it takes, personally. p. 229
Summarize how to assess opportunities to start new businesses. p. 231
Identify common causes of success and failure. p. 238
Discuss common management challenges. p. 240
Explain how to increase your chances of success, including good business planning. p. 244
Describe how managers of large companies can foster entrepreneurship. p. 249
Why Become an Entrepreneur?
What Does It Take to Succeed?
What Business Should You Start?
What Does It Take, Personally?
Success and Failure
Increasing Your Chances of Success
Building Support for Your Idea
HOW POPCHIPS BECAME KEITH BELLING’S NEXT BIG IDEA
Keith Belling was no stranger to business start-ups when he got an idea for making snacks better. A corporate attorney until age 27, Belling had already built and run the Oh La La chain of coffee stores and the Paragon restaurant group; in addition, his web portal for small companies, Allbusiness.com, earned him and his business partner $225 million when he eventually sold it to NBC Interactive. After the experience of running those enterprises, it might not seem so crazy to take on industry giants such as PepsiCo to sell a new line of snacks, branded Popchips.
Belling had been looking for a healthy-food company to run with his business partner, Pat Turpin. They toured a possible facility, a factory for making rice cakes, located near Los Angeles. Belling was intrigued by the process, cooking rice under high pressure to make it pop the way popcorn does. He investigated the possibility of popping other starchy foods and concluded that making snacks this way preserved flavor in a reduced-fat snack. It sounded like the next great thing for diet-conscious Americans, so he and Turpin had the idea they were looking for.
Belling and Turpin bought the Los Angeles rice cake factory in 2005, and two years later, Popchips, with Belling as CEO, was making popped, seasoned potato chips and selling them at Safeway stores on the West Coast. (Later, the company introduced triangular popped tortilla chips.) By 2008, Popchips was reporting sales of $6.5 million. To expand, Popchips generated publicity. The company sent samples to all the employees at selected companies (for example, Amazon.com and J. Crew) and to influential people at Mercedes-Benz Fashion Week. With the attention earned, Popchips won shelf space in Jamba Juice, Target, and Whole Foods.
Along the way, Belling pursued a creative idea for publicity: Sign agreements with celebrities in which they not only pitch the brand in advertisements but actually become investors. Each celebrity invests in Popchips, gets involved in developing a new flavor, and becomes a spokesperson for the flavor. First was Ashton Kutcher, who also was a party to the company’s first big marketing embarrassment: In one ad, he portrayed an awkward Indian stereotype of a Bollywood producer to promote the snack’s chili-lime flavor. After complaints of racism, the ads were canceled. Meanwhile, however, sales continued rising, and Popchips has signed up other celebrities, including Jillian Michaels, Heidi Klum, Sean “Diddy” Combs, David Ortiz of the Red Sox, and Katy Perry. Sales have continued to soar—to $40.9 million in 2010, $73 million in 2011, and more than $93 million in 2012. By a recent count, Popchips snacks are now available for sale in 25,000 stores in the United States and beyond.1
Keith Belling took an existing method for preparing snacks and built a company by applying that method in tasty new ways. As you read about the qualities of successful entrepreneurs and the challenges they must overcome, think about which of these you see in Belling and his experience with Popchips.
As Keith Belling and countless others have demonstrated, great opportunity is available to talented entrepreneurs who are willing to work hard to achieve their dreams. Entrepreneurship occurs when an enterprising individual pursues a lucrative opportunity.2 To be an entrepreneur is to initiate and build an organization rather than being only a passive part of one.3 The entrepreneurial process involves discovering, evaluating, and capitalizing on opportunities to create new and future goods and services.4
Creating value is a central objective of entrepreneurship, just as it is in strategic management. Wealth may be an en-trepreneur’s ultimate goal, but it won’t come without providing value for other individuals, organizations, and/or society.5
How does entrepreneurship differ from managing a small business?6 A small business is often defined as having fewer than 100 employees, being independently owned and operated, not dominant in its field, and not characterized by many innovative practices. Small-business owners tend not to manage particularly aggressively, and they expect normal, moderate sales, profits, and growth. In contrast, an entrepreneurial venture has growth and high profitability as primary objectives. Entrepreneurs manage aggressively and develop innovative strategies, practices, and products. They and their financial backers usually seek rapid growth, immediate and high profits, and sometimes a quick sellout with large capital gains.
The Excitement of Entrepreneurship Consider these words from Jeffry Timmons, a leading entrepreneurship scholar and author: “During the past 30 years, America has unleashed the most revolutionary generation the nation has experienced since its founding in 1776. This new generation of entrepreneurs has altered permanently the economic and social struc-ture of this nation and the world. . . . It will determine more than any other single impetus how the nation and the world will live, work, learn, and lead in this century and beyond.”7 Timmons had written previously, “We are in the midst of a silent revolution—a triumph of the creative and entrepreneurial spirit of humankind throughout the world. I believe its impact on the 21st century will equal or exceed that of the Industrial Revolution on the 19th and 20th.”8
Overhype? Well, partly, because the rate of new business formation may be slowing down.9 But let’s hope the slow-down is temporary, because entrepreneurship has transformed economies all over the world and the global economy in general.10 In the United States in the quarter century since 1980, more than 95 percent of the wealth was created by en-trepreneurs.11 It’s been estimated that since World War II, small entrepreneurial firms have generated 95 percent of all radical innovation in the United States. The Small Business Administration has found that in states with more small-business start-ups, statewide economies tend to grow faster, and employment levels tend to be higher than in states with less entrepreneurship.12
The self-employed love the entrepreneurial process, and they report the highest levels of pride, satisfaction, and in-come. Importantly, entrepreneurship is not about the privileged descendants of the Rockefellers and the Vanderbilts—it provides opportunity and upward mobility for anyone who performs well.13
Myths about Entrepreneurship Simply put, entrepreneurs generate new ideas and turn them into business ventures.14 But entrepreneurship is not simple, and it is frequently misunderstood. Read Table 7.1 to start thinking about the myths and realities of this important career option.
Here is another myth, not in the table: Being an entrepreneur is great because you can get rich quick and enjoy a lot of leisure time while your employees run the company. But the reality is much more difficult. During the start-up period, you are likely to have a lot of bad days. It’s exhausting. Even if you don’t have employees, you should expect communications breakdowns and other people problems with agents, vendors, distributors, family, subcontractors, lenders, and whomever. Software entrepreneur Dan Bricklin advises that the most important thing to remember is this: “You are not your business. On those darkest days when things aren’t going so well—and trust me, you will have them—try to remember that your company’s failures don’t make you an awful person. Likewise, your company’s successes don’t make you a genius or superhuman.”15
As you read this chapter, you will learn about two primary sources of new venture creation: independent entrepreneur-ship and intrapreneurship. Entrepreneurs are individuals who establish a new organization without the benefit of corpo-rate support. Intrapreneurs are new venture creators working inside big companies; they are corporate entrepreneurs, using their company’s resources to build a profitable line of business based on a fresh new idea.16 Thus, although people tend to think of new, young ventures when they consider entrepreneurship, really it is an activity that should contribute to mature organizations as well. Entrepreneurship is vitally important across the entire life cycle of an organization.17
Table 7.2 lists some extraordinary entrepreneurs. The companies they founded are famously successful—and all of the founders started in their 20s. Two young entrepreneurs who started a highly successful business are Tony Hsieh and Nick Swinmurn. In 1999, Swinmurn had the then-new idea to sell shoes online, but he needed money to get started. Hsieh, who at age 24 had already just sold his first start-up (LinkExchange, sold to Microsoft for $265 million), agreed to take a chance on the new venture. Swinmurn has moved on, but Hsieh remains at the helm of the company as the CEO of Zap-pos.com. In a recent year, Zappos.com enjoyed sales of $1 billion.18 The real, more complete story of entrepreneurship is not about the famous people in Table 7.2—it’s mostly about people you’ve probably never heard of. Often it’s about young people, and definitely it’s about people of all ages and ethnic groups.19
They have built companies, thrived personally, created jobs, and made positive contributions to their communities through their businesses. Or they’re just starting out.
Why Become an Entrepreneur?
Jessica Mah was an entrepreneur before she even finished school. At the age of 13, she went into business using eBay to sell computer parts and templates for websites. While in college at the University of California–Berkeley, she and another student, Andy Su, founded a business they called InternshipIN, which provided information about internship opportunities. When she graduated, Mah was ready to launch another venture. With support from Y Combinator, which provides funds and advice to selected start-ups, Mah again partnered with Su, this time founding inDinero, a company that helps small business owners manage their money. Customers give inDinero their bank and credit card account numbers, and inDinero keeps track of transactions and analyzes where their money is going. The idea for inDinero came from Mah’s own experience that for some people excited about starting a new business, working with customers and products is more exciting and easier to learn than handling money.20
Why do Jessica Mah and other entrepreneurs do what they do? Entrepreneurs start their own firms because of the challenge, the profit potential, and the enormous satisfaction they hope lie ahead. People starting their own businesses are seeking a better quality of life than they might have at big companies. They seek independence and a feeling of being part of the action. They feel tremendous satisfaction in building something from nothing, seeing it succeed, and watching the market embrace their ideas and products.
People also start their own companies when they see their progress or ideas blocked at big corporations. When people are laid off, they often try to start businesses of their own. And when employed people believe they will not receive a promotion or are frustrated by bureaucracy or other features of corporate life, they may quit and become entrepreneurs. Years ago, Philip Catron became disillusioned with his job as a manager at ChemLawn because he concluded that the lawn care company’s reliance on pesticides contributed to illness in its employees, its customers’ pets, and even in the lawns themselves. Catron left the company to start NaturaLawn of America, based on the practice of integrated pest management, which uses natural and nontoxic products as much as possible, reducing pesticide use on lawns by 85 percent. Catron built NaturaLawn into 66 franchises in 23 states—and helped integrated pest management become mainstream, as even his former employer, now part of TruGreen, has changed many of its practices.21
Immigrants also may find conventional paths to economic success closed to them and turn to entrepreneurship.22 For example, the Cuban community in Miami has produced many successful entrepreneurs, as has the Vietnamese community throughout the United States. Sometimes the immigrant’s experience gives him or her useful knowledge about foreign suppliers or markets that present an attractive business opportunity. Rakesh Kamdar immigrated to the United States from India to study computer science, but he saw a way he could meet the huge U.S. demand for nursing talent. He set up DB Healthcare to recruit nurses from India to work in the United States. Unlike U.S. competitors that had failed, Kamdar set up meetings at DB’s Indian offices, and he invited nurses to attend with their husbands, parents, and in-laws. His staff discussed family and individual questions related to the American jobs. With this strategy, DB Healthcare was earning millions of dollars within a few years.23
What Does It Take to Succeed?
What can we learn from the people who start their own companies and succeed? What enables entrepreneurs to succeed? We show this in general terms with
Figure 7.1. Successful entrepreneurs are innovators who also have good knowledge and skills in management, business, and networking.24 In contrast, inventors may be highly creative but often lack the skills to turn their ideas into a successful business. Manager–administrators may be great at ensuring efficient operations but aren’t necessarily in-novators. Promoters have a different set of marketing and selling skills—useful for entrepreneurs, but those skills can be hired, whereas innovativeness and business management skills remain the essential combination for successful entrepreneurs.
What Business Should You Start?
You need a good idea, and you need to find or create the right opportunity. The following discussion offers some general considerations for choosing a type of business.
The Idea Many entrepreneurs and observers say that in contemplating your business, you must start with a great idea. A great product, a viable market, and good timing are essential ingredients in any recipe for success.
Many great organizations have been built on a different kind of idea: the founder’s desire to build a great organization rather than to offer a particular product.25 Examples abound. Bill Hewlett and David Packard decided to start a company and then figured out what to make. J. Willard Marriott knew he wanted to be in business for himself but didn’t have a product in mind until he opened an A&W root beer stand. Masaru Ibuka had no specific product idea when he founded Sony in 1945. Sony’s first product attempt, a rice cooker, didn’t work, and its first product (a tape recorder) didn’t sell. The company stayed alive by making and selling crude heating pads.
Many now-great companies had early failures. But the founders persisted; they believed in themselves and in their dreams of building great organizations. Be prepared to kill or revise an idea, but never give up on your company—this has been a prescription for success for many great entrepreneurs and business leaders. Think about Sony, Disney, Hewlett-Packard, Procter & Gamble, IBM, and Walmart: their founders’ greatest achievements—their greatest ideas—are their organizations.26
The Opportunity Entrepreneurs spot, create, and exploit opportunities in a variety of ways.27 Entrepreneurial companies can explore domains that big companies avoid and introduce goods or services that capture the market because they are simpler, cheaper, more accessible, or more convenient. Limor Fried spotted her opportunity when she got involved with a hobby that flew under the radar of most traditional businesses: building clever do-it-yourself electronic gadgets. When Fried was at MIT, earning a master’s degree in computer science and electrical engineering, she relaxed by ordering parts to build homemade MP3 players, programmable jewelry, and other fun gadgets. As she posted her creations on her personal website, she began attracting requests from people wanting her to sell them kits so they could make the same items themselves. Fried took some personal funds and started Adafruit Industries, now a 50-employee business racking up $10 million in sales annually.28
To spot opportunities, think carefully about events and trends as they unfold. Consider, for example, the following possibilities:29
Technological discoveries. Start-ups in biotechnology, microcomputers, and nanotechnology followed technological advances.
Demographic changes. All kinds of health care organizations have sprung up to serve an aging population, from exercise studios to assisted-living facilities. One business that targets both the aging American population and the growth in single-parent and dual-career households is Errands Done Right. The service assists those who are pressed for time or have difficulty getting around.30
Lifestyle and taste changes. Start-ups have capitalized on new clothing and music trends, desire for fast food, and growing interest in sports. In recent years, more consumers want to help take care of the environment, and more businesses are concerned about showing consumers that they care, too.
Economic dislocations, such as booms or failures. Rising oil prices spurred a variety of developments related to al-ternative energy or energy efficiency.
Calamities such as wars and natural disasters. The terrorist attacks of September 2001 spurred concern about secu-rity, and entrepreneurs today are still pursuing ideas to help government agencies prevent future attacks. The hur-ricanes on the Gulf Coast raised awareness of the importance of preparing for emergencies.
Government initiatives and rule changes. Deregulation spawned new airlines and trucking companies. Whenever the government tightens energy efficiency requirements, opportunities become available for entrepreneurs developing ideas for cutting energy use.
Franchises One important type of opportunity is the franchise. You may know intuitively what franchising is. Or you can at least name some prominent franchises: Chipotle, Jiffy Lube, Dunkin’ Donuts—add your favorites here. Franchising is an entrepreneurial alliance between two organizations: the franchisor and the franchisee.31 The franchisor is the innovator who has created at least one successful store and seeks partners to operate the same concept in other local markets. For the franchisee, the opportunity is wealth creation via a proven (but not failureproof) business concept, with the added advantage of the franchisor’s expertise. For the franchisor, the opportunity is wealth creation through growth. The partnership is manifest in a trademark or brand, and together the partners’ mission is to maintain and build the brand. The Noodles & Company chain of fast casual restaurants first grew by opening 79 company-owned locations. Management concluded that it could grow at a faster pace through franchising. Establishing standard menus and prices took a year, but franchising helped the company almost double its revenues in just two years.32
People often assume that buying a franchise is less risky than starting a business from scratch, but the evidence is mixed. One study that followed businesses for six years found the opposite of the popular assumption: 65 percent of the franchises studied were operating at the end of the period, whereas 72 percent of independent businesses were still operating. One reason may be that the franchises involved mostly a few, possibly riskier, industries. A study that compared only restaurants over a three-year period found that 43 percent of the franchises and 39 percent of independent restaurants remained in business.33
If you are contemplating a franchise, consider its market presence (local, regional, or national), market share and profit margins, national programs for marketing and purchasing, the nature of the business, including required training and de-gree of field support, terms of the license agreement (e.g., 20 years with automatic renewal versus less than 10 years or no renewal), capital required, and franchise fees and royalties.34
Although some people think success with a franchise is a no-brainer, would-be franchisees have a lot to consider. Luckily, plenty of useful sources exist for learning more, including the International Franchise Association (http://www.franchise.org), the Small Business Administration (http://www.sba.gov), Franchise Chat (http://www.franchise-chat.com), and Entrepreneur magazine’s online Franchises page (http://www.entrepreneur.com), which includes rankings as well as articles profiling franchisors and franchisees. In addition, the Federal Trade Commis-sion investigates complaints of deceptive claims by franchisors and publishes information about those cases. Take your time in investigating business opportunities, consulting with an accountant or lawyer who has experience.
The Next Frontiers The next frontiers for entrepreneurship—where do they lie? Throughout history, aspiring entrepre-neurs have asked this question. The editors of Entrepreneur magazine recently identified opportunities arising from new technology and changing consumer tastes.35 The powerful potential of big data to improve decision making is opening up tremendous opportunities for businesses that can help their clients collect, store, manage, and analyze data. Sectors and product categories that have recently enjoyed huge growth are health care, education, and, of course, mobile apps.36
One fascinating opportunity for entrepreneurs is outer space. Historically, the space market was driven by the govern-ment and was dominated by big defense contractors such as Boeing and Lockheed Martin. But now, with demand for satellite launches and potential profits skyrocketing, smaller entrepreneurs are entering the field. SpaceX has been trans-porting cargo to the International Space Station for NASA and is developing the capability to transport astronaut crews. NASA also has granted a cargo-shuttling contract to Orbital Sciences Corporation. More futuristic still is the concept of entrepreneur Robert Bigelow. His company, Bigelow Aerospace, has created a residence module for living in space. The module is made out of a synthetic fiber rather than a metal structure, so it can be compressed for more efficient transportation and then expanded upon its arrival. Bigelow has a contract to test a 13-foot by 10-foot version of the module at the International Space Station.37
Changes have been coming fast in the health care sector in the United States, and where there is change, smart en-trepreneurs spot opportunities. Driven by advances in technology coupled with incentives in the Affordable Care Act, health care providers have been digitizing their data for patient care, medication management, and treatment out-comes—a trend that yields opportunities for hardware and software businesses that understand the needs of these cli-ents. In addition, rising costs for health care and health insurance create opportunities for entrepreneurs with ideas for restraining those costs. For example, mobile-device apps that promote fitness or help patients manage chronic condi-tions can appeal to consumers, insurance companies, and employers. GE’s healthymagination program recently part-nered with an entrepreneurship support group called Startup Health to fund promising start-ups in the health care field. Among the companies the partners funded are itMD, which developed a system for sharing and storing medical images online, and Care at Hand, which analyzes data about elderly patients receiving home care to alert nurses when data signal a possible disease requiring attention.38
The Internet The Internet is a business frontier that continues to expand. With Internet commerce, as with any start-up, entrepreneurs need sound business models and practices. During the heady days of the Internet rush, many entrepre-neurs and investors thought revenues and profits were unimportant and all that mattered was to attract visitors to their websites (capture eyeballs). But you need to watch costs carefully, and you want to break even and achieve profitability as soon as possible.40
At least five successful business models have proven successful in the e-commerce market: transaction fee, advertis-ing support, intermediary, affiliate, and subscription models.41 In the transaction fee model, companies charge a fee for goods or services. Amazon.com and online travel agents are prime examples. In the advertising support model, adver-tisers pay the site operator to gain access to the demographic group that visits the operator’s site.
The intermediary model has eBay as the premier example, bringing buyers and sellers together and charging a com-mission for each sale. With the affiliate model, sites pay commissions to other sites to drive business to their own sites. Zazzle.com, Spreadshirt.com, and CafePress.com are variations on this model. They sell custom-decorated gift items such as mugs and T-shirts. Designers are the affiliates; they choose basic, undecorated products (such as a plain shirt) and add their own designs, creating the customized products offered to consumers.42 Finally, websites using the sub-scription model charge a monthly or annual fee for site visits or access to site content. Newspapers and magazines are good examples.
What about businesses whose primary focus is not e-commerce? Start-ups and established small companies can cre-ate attractive websites that add to their professionalism, give them access to more customers, and bring them closer to suppliers, investors, and service providers. Companies can move much more quickly than in the past and save money on activities including customer service/support, technical support, data retrieval, public relations, investor relations, selling, requests for product literature, and purchasing. Setting up shop online costs less than it ever did.
Social Entrepreneurship Social entrepreneurship has been around for decades, but is surging in popularity and impact and as a focus for academic research.43 Social entrepreneurship has been defined in many ways, but most fundamen-tally it refers to leveraging resources to address social problems.44
It does so by using market-based methods.45 Organizations that do this are social enterprises. Social entrepreneur-ship creates social value by stimulating social change or meeting social needs.46
One of the best-known examples of social entrepreneurship is the Nobel Prize–winning work of Dr. Muhammad Yunus, formerly of Grameen Bank, which began helping women in South Asia obtain microloans.47 Another is Fabio Rosa’s Agroelectric System of Appropriate Technology (STA), which established low-cost electrification and irrigation in rural Brazil.48 Additional examples include Nuru Energy, which uses local entrepreneurs to sell high-efficiency LED lighting in Rwanda;49 the EMR Project, which developed an electronic medical records system to improve patient care in Botswa-na;50 the Cookie Project, which trained women to make high-quality cookies with natural ingredients in distressed areas of South Africa;51 and the Feeds Project, which produces low-cost, high-quality animal feed in Zambia for small-scale chick-en farmers, thereby alleviating unemployment and starvation.52
Social entrepreneurship is not charity, and it is different from corporate social responsibility (CSR),53 which you read about in Chapter 5. CSR is not necessarily practiced with profit as a guiding principle, and corporations often relegate it to a side activity. Social entrepreneurship fully incorporates social as well as economic value into mainstream thinking and decision making. It provides dual, shared value: creating economic value plus social or societal benefit simultaneously.54 See Table 7.3 for examples.
Combining social and commercial goals isn’t new; consider hospitals, universities, and arts organizations.55 And, not all social problems can be solved by entrepreneurial solutions. But pursuing the dual goal of both economic and social value may be developing as the new norm, with positive social outcomes as key to long-term success. States Pierre Omidyar, founder of eBay: “you really can make the world better in any sector—in nonprofits, in business, or in government. It’s not a question of one sector’s struggling against another, or of ‘giving back’ versus ‘taking away.’ That’s old thinking. A true philanthropist will use every tool he can to make an impact. Today business is a key part of the equation, and the sectors are learning to work together.”56
Opportunities exist to make substantial positive impact on virtually every societal need and to make a profit doing so. Profit is likely to make societal value creation more sustainable over the long run.
What Does It Take, Personally?
Many people assume that there is an entrepreneurial personality. No single personality type predicts entrepreneurial suc-cess, but you are more likely to succeed as an entrepreneur if you exhibit certain characteristics:57
1. Commitment and determination: Successful entrepreneurs are decisive, tenacious, disciplined, willing to sacrifice, and able to immerse themselves in their enterprises. Entrepreneurial passion58 can play an important role in all of these things.
2. Leadership: They are self-starters, team builders, superior learners, and teachers. Communicating a vision for the future of the company—an essential component of leadership that you’ll learn more about in Chapter 12—has a direct impact on venture growth.59
3. Opportunity obsession: They have an intimate knowledge of customers’ needs, are market driven, and are obsessed with value creation and enhancement.
4. Tolerance of risk, ambiguity, and uncertainty: They are calculated risk takers and risk managers, tolerant of stress, and able to resolve problems.
5. Creativity, self-reliance, and ability to adapt: They are open-minded, restless with the status quo, able to learn quickly, highly adaptable, creative, skilled at conceptualizing, and attentive to details.
6. Motivation to excel: They have a clear results orientation, set high but realistic goals, have a strong drive to achieve, know their own weaknesses and strengths, and focus on what can be done rather than on the reasons things can’t be done.
Making Good Choices Success is a function not only of personal approaches but also of making good choices about the business you start. Figure 7.2 presents a model for conceptualizing entrepreneurial ventures and making the best possible choices. It depicts ventures along two dimensions: innovation and risk. The new venture may involve high or low levels of innovation or the creation of something new and different. It can also be characterized by low or high risk. Risk refers primarily to the probability of major financial loss. But it also is more than that; it is psychological risk as perceived by the entrepreneur, including risk to reputation and ego.60
The upper-left quadrant, high innovation/low risk, depicts ventures of truly novel ideas with little risk. As examples, the inventors of Lego building blocks and Velcro fasteners could build their products by hand at little expense. A pioneering product idea from Procter & Gamble might fit here if there are no current competitors and because, for a company of that size, the financial risks of new product investments can seem relatively small.
In the upper-right quadrant, high innovation/high risk, novel product ideas are accompanied by high risk because the financial investments are high and the competition is great. A new drug or a new automobile would likely fall into this cat-egory.
Most small business ventures are in the low innovation/high risk cell (lower right). They are fairly conventional entries in well-established fields. New restaurants, retail shops, and commercial outfits involve high investment for the small busi-ness entrepreneur and face direct competition from similar businesses. Finally, the low innovation/low risk category in-cludes ventures that require minimal investment and/or face minimal competition for strong market demand. Examples are some service businesses having low start-up costs and those involving entry into small towns if there is no competitor and demand is adequate.
How is this matrix useful? It helps entrepreneurs think about their ventures and decide whether they suit their particular objectives. It also helps identify effective and ineffective strategies. You might find one cell more appealing than others. The lower-left cell is likely to have relatively low payoffs but to provide more security. The higher risk/return trade-offs are in other cells, especially the upper right. So you might place your new venture idea in the appropriate cell and determine whether that cell is the one in which you would prefer to operate. If it is, the venture is one that perhaps should be pur-sued, pending fuller analysis. If it is not, you can reject the idea or take steps to move it toward a different cell.
The matrix also can help entrepreneurs remember a useful point: successful companies do not always require a cut-ting-edge technology or an exciting new product. Even companies offering the most mundane products—the type that might reside in the lower-left cell—can gain competitive advantage by doing basic things differently from and better than competitors.
Success and Failure
Success or failure lies ahead for entrepreneurs starting their own companies as well as for those starting new businesses within bigger corporations. Entrepreneurs succeed or fail in private, public, and not-for-profit sectors; in nations at all stages of development; and in all nations, regardless of their politics.62
Estimated failure rates for start-ups vary. Most indicate that failure is more the rule than the exception. The failure rate is high for certain businesses such as restaurants and lower for successful franchises. Start-ups have at least two major liabilities: newness and smallness.63 New companies are relatively unknown and need to learn how to be better than es-tablished competitors at something that customers value. Regarding smallness, the odds of surviving improve if the ven-ture reaches a critical mass of at least 10 or 20 people, has revenues of $2 million or $3 million, and is pursuing opportu-nities with growth potential.64
To understand further the factors that influence success and failure, we’ll consider risk, the economic environment, various management-related hazards, and initial public stock offerings (IPOs).
Risk You learned about risk in Chapter 3. It’s a given: starting a new business is risky. Entrepreneurs with plenty of business experience are especially aware of this. When Chris McGill was evaluating his idea for Mixx.com, a news web-site that could be personalized based on recommendations by users, he was USA Today’s vice president of strategy. To make Mixx succeed, McGill knew he would be leaving a well-paying job for an uncertain future in which he had to line up financing and hire talented people in a turbulent business environment. But McGill also concluded that his experience at USA Today and prior management experience with Yahoo News gave him the knowledge and connections for a suc-cessful Internet business.65 He sold Mixx.com in 2011 to UberMedia.
Successful entrepreneurs are realistic about risk. They anticipate difficulties and cushion their business to help it weather setbacks. In downtown Seattle, entrepreneurs Ben and Cindi Raykovich saw a risk when a major construction project began disrupting traffic around their store, Sound Sports. The Raykoviches had built their business around serving running enthusiasts who worked downtown and would stop by on their lunch hour or after work. Concerned that the construction would drive away so much business that the store couldn’t survive, they opened a second location in the nearby community of Poulsbo. If they needed to close the first store, they could continue to build their business in Poulsbo. Ben Raykovich is hardly cavalier about the situation: “My life is invested in this business. We need to spread out the risk.”66
The Role of the Economic Environment Entrepreneurial activity stems from the economic environment as well as the behavior of individuals. For example, money is a critical resource for all new businesses. Increases in the money supply and the supply of bank loans, real economic growth, and improved stock market performance lead to both improved prospects and increased sources of capital. In turn, the prospects and the capital increase the rate of business formation. Under favorable conditions, many aspiring entrepreneurs find early success. But economic cycles can quickly change favorable conditions into downturns. To succeed, entrepreneurs must have the foresight and talent to survive when the environment becomes more hostile.
Although good economic times may make it easier to start a company and to survive, bad times can offer an oppor-tunity to expand. Ken Hendricks of ABC Supply found a business opportunity in a grim economic situation: a serious downturn in the manufacturing economy of the Midwest contributed to the shutdown of his town’s largest employer, the Beloit Corporation. Hendricks purchased the company’s buildings and lured a diverse group of new employers to town despite the economic challenges. In fact, Hendricks turned around struggling suppliers that ABC acquired.67 Another silver lining in difficult economic times is that it’s easier to recruit talent.
Business Incubators The need to provide a nurturing environment for fledgling enterprises led to the creation of business incubators. Business incubators, often located in industrial parks or abandoned factories, are protected environments for new, small businesses. Incubators offer benefits such as low rents and shared costs. Shared staff costs, such as for receptionists and secretaries, avoid the expense of a full-time employee but still provide convenient access to services. The staff manager is usually an experienced businessperson or consultant who advises the new business owners. Incubators often are associated with universities, which provide technical and business services for the new companies.
The heyday of business incubators came in the 1990s, when around 700 of them were financing start-ups, mainly em-phasizing technology. Eight out of 10 shut down following the collapse of the Internet bubble, but the idea of nurturing new businesses persists. Naval Ravikant, for example, is developing a company tentatively named Hit Forge, which resembles the dot-com incubators. Hit Forge hired four engineers with experience in launching successful Internet concepts. The engineers have wide latitude to try ideas, but they work under strict deadlines. They must go from concept to product within 90 days, and any enterprises that aren’t growing after a year will be terminated. Unlike the older-style incubator, Hit Forge lets engineers work from the locations of their choice, and the engineers retain half ownership in the ventures they develop. Also, whereas incubators in the 1990s might have spent $2 million developing an idea, today’s launches might cost just $50,000.68
Business incubators hatch new businesses. Once a young business begins gaining a foothold and establishing itself, business accelerators can provide additional support and advice. These still-young firms are more mature but still in their formative years, and they now face the challenges of sustaining growth and achieving their full market potential.69
Common Management Challenges As an entrepreneur, you are likely to face several common challenges that you should understand before you face them and then manage effectively when the time comes. We next discuss several such challenges.
You Might Not Enjoy It Some managers and employees can specialize in what they love, whether it’s selling or account-ing. But entrepreneurs usually have to do it all, at least in the beginning. If you love product design, you also have to sell what you invent. If you love marketing, get ready to manage the money too. This last challenge was almost a stumbling block for Elizabeth Busch, Anne Frey-Mott, and Beckie Jankiewicz when they launched The Event Studio to run business conferences for their clients. All three women had experience with some aspect of running conferences, but when they started their company, they didn’t fully think out all the accounting decisions they would need for measuring their income and cash flow. With some practical advice, they learned some basic accounting lessons that helped them avoid tax trou-bles later on.70 If they hadn’t been willing to learn new skills, entrepreneurship might not have been the right career path for them.
Survival Is Difficult Companies without much of a track record tend to have more trouble lining up lenders, investors, and customers. When economic conditions cool or competition heats up, a small start-up serving a niche market may have limited options for survival. Failure can be devastating.
Founders of a start-up must make key decisions in so many areas of business that mistakes are a potentially devastating risk. Several months after starting Zipcar, a car-sharing service, founder Robin Chase evaluated the early financial data and discovered that the company had made a mistake in setting prices. The daily rental fees had been set too low to make the company profitable. Chase concluded that the only way she could keep Zipcar in business was to own up to her error, disclose it to her customers, and explain that the rate would be rising by 25 percent. Only two customers complained, and Zipcar grew into a multimillion-dollar business.71
Growth Creates New Challenges Just one in three Inc. 500 companies keeps growing fast enough to make this list of fastest-growing companies two years running. The reason: They are facing bigger challenges, competing with bigger firms, stretching the founders’ capacities, and probably burning cash. Consultant Doug Tatum calls this phase of a com-pany’s growth “no man’s land.”72 It’s a difficult transition.
In the beginning, entrepreneurs keep their business afloat with dogged determination to win customers and keep them happy. They work long hours at low pay, deliver great service, and get good word-of-mouth advertising, and their busi-ness grows. When keeping up with all the work becomes physically impossible, entrepreneurs feel they need to bring in help. Julie Ladd, founder of CopyShark.net, says she got ready to contract for help after she spent six months doing everything alone: “I was working 70-plus hours a week and wasn’t able to get the turnaround time that my clients needed.”73 The challenge, of course, is that you not only have to come up with the money to keep paying people for the long haul but also have to figure out who will bring the necessary skills and a level of motivation that can bring them close to the business owner’s commitment to the company.
Growth seems to be a consuming goal for most entrepreneurs. But some company founders reach the size where they’re happy and don’t want to grow any further. Reaching a golden mean is possible.74 Also, sometimes growth needs to be restrained until the company is ready. Only a year after Gregory Wynn, Komichel Johnson, and Robert A. Jones III set up their homebuilding business, JLW Homes and Communities, they had an opportunity to build a 70-unit condomin-ium project called Heritage Pointe. They determined that getting the job done would require a master builder, two assis-tants, and at least 100 workers. JLW had two master builders, who were already assigned to projects, and too few work-ers, so the partners reluctantly decided not to take the job. Jones recalls, “It was way too early for us to do this type of deal, . . . and I’m glad we did [turn it down] because if we didn’t, we may have lost our shirts.”75 By carefully planning growth at a sustainable pace, JLW has become a successful Atlanta firm.
It’s Hard to Delegate As the business grows, entrepreneurs often hesitate to delegate to other people work that they are used to doing. Leadership deteriorates into micromanagement, in which managers monitor too strictly, to the minutest detail. For example, during the Internet craze, many company founders with great technical knowledge but little experi-ence became instant experts in every phase of business, including branding and advertising.76 Turns out, they didn’t know as much as they thought, and their companies crashed. Fortunately, many entrepreneurs observe the consequences of their behavior and figure out how to manage more effectively. Albert Ko, who founded a coupon website called DealPerk, used to handle employees’ mistakes by yelling at them, but after he realized he was creating a fear-driven workplace, he began discussing problems privately with an emphasis on improvement. And after losing $500 to mistakes made by an employee who didn’t understand directions, Jimmy Tomczak, founder of sandal maker Paper-Feet, has learned to verify that employees understand directions before they get started.77
Misuse of Funds Many unsuccessful entrepreneurs blame their failure on inadequate financial resources. Yet failure due to a lack of financial resources doesn’t necessarily indicate a real lack of money; it could mean a failure to use the available money properly. A lot of start-up capital may be wasted—on expensive locations, great furniture, and fancy stationery. Entrepreneurs who fail to use their resources wisely usually make one of two mistakes: They apply financial resources to the wrong uses, or they maintain inadequate control over their resources.
This problem may be more likely when a lucky entrepreneur gets a big infusion of cash from a venture capital firm or an initial offering of stock. For most start-ups, where the money on the line comes from the entrepreneur’s own assets, he or she has more incentive to be careful. Tripp Micou, founder of Practical Computer Applications, says, “If all the money you spend is based on what you’re bringing in [through sales], you very quickly focus on the right things to spend it on.”78 Micou, an experienced entrepreneur, believes that this financial limitation is actually a management advantage.
Poor Controls Entrepreneurs, in part because they are very busy, often fail to use formal control systems. One common entrepreneurial malady is an aversion to record keeping. Expenses mount, but records do not keep pace. Pricing decisions are based on intuition without adequate reference to costs. As a result, the company earns inadequate margins to support growth.
Sometimes an economic slowdown provides a necessary alarm, warning business owners to pay attention to controls. When Servatii Pastry Shop and Deli’s sales deteriorated even as the prices of ingredients were rising, owner Gary Got-tenbusch set goals and monitored progress. One problem Gottenbusch tackled was the price of baking commodities, such as shortening and flour. He partnered with other local bakeries to form a purchasing association that buys in bulk and passes along the savings. Keeping costs down helped Servatii stay profitable when customers were trimming their budgets for baked goods.79 Blinded by the light of growing sales, many entrepreneurs fail to maintain vigilance over other aspects of the business.
Even in high-growth companies, great numbers can mask brewing problems. In the absence of controls, the business veers out of control. So don’t get overconfident; keep asking critical questions. Is our success based on just one big customer? Is our product just a fad that can fade away? Can other companies easily enter our domain and hurt our business? Are we losing a technology lead? Do we really understand the numbers, know where they come from, and have any hidden causes for concern?
Mortality and Succession One long-term measure of an entrepreneur’s success is the fate of the venture after the founder’s death. Founding entrepreneurs often fail to plan for succession. When death occurs, estate tax problems or the lack of a skilled replacement for the founder can lead to business failure. In the United States and around the world, the large majority of family-owned businesses fail before the founder’s grandchildren have taken charge.80
Management guru Peter Drucker offered the following advice to help family–managed businesses survive and pros-per.81 Family members working in the business must be at least as capable and hard-working as other employees; at least one key position should be filled by a nonfamily member; and someone outside the family and the business should help plan succession. Family members who are mediocre performers are resented by others; outsiders can be more ob-jective and contribute expertise the family might not have. Issues of management succession are often the most difficult of all, causing serious conflict and possible breakup of the firm.
Going Public Sometimes companies reach a point at which the owners want to go public. Initial public stock offerings (IPOs) offer a way to raise capital through federally registered and underwritten sales of shares in the company.82 You need lawyers and accountants who know current regulations. The reasons for going public include raising more capital, reducing debt or improving the balance sheet and enhancing net worth, pursuing otherwise unaffordable opportunities, and improving credibility with customers and other stakeholders—you’re in the big leagues now. Disadvantages include the expense, time, and effort involved; the tendency to become more interested in the stock price and capital gains than in running the company properly; and the creation of a long-term relationship with an investment banking firm that won’t necessarily always be a good one.83
Many entrepreneurs prefer to avoid going public, feeling they’ll lose control if they do. That’s a viewpoint that has per-sisted into the second generation of ownership at Half Price Books, a retail chain that was founded four decades ago by Pat Anderson and Ken Gjemre and remains a family business run by Anderson’s daughter,
Sharon Anderson Wright. Wright sees retaining private ownership as a necessary part of maintaining the company’s commitment to employees, pointing out that “not everyone comes out well” when a business is sold. The company, which has more than 100 stores in 16 states, prides itself on hiring bright people and rewarding them with training, a good bene-fits package, and opportunities for advancement. Concern for employees fits in well with Half Price Books’ general com-mitment to sustainability: 70 percent of the stores’ inventory consists of used books, magazines, and music, a business model that promotes reusing rather than throwing out these items. Wright’s desire to run an ecofriendly business is an-other value she can insist on when she is both owner and CEO of the company.84
Executing IPOs and other approaches to acquiring capital are complex, legalistic, and beyond the scope of this chap-ter. Sources for more information include the National Venture Capital Association (www.nvca.org), the Small Business Administration’s Community page (http://www.sba.gov/community), and the SBA’s Small Business Learning Center (http://www.sba.gov/sba-learning-center).
In the case of Popchips founder Keith Belling, he didn’t opt for an IPO with his earlier venture, Allbusiness.com; in-stead, he exited after selling it to NBC. As you read “Management Connection: Progress Report,” think about whether Popchips would be a good candidate for an IPO.
Increasing Your Chances of Success
Entrepreneurs need to think through their business idea carefully to help ensure its success. We discuss here the im-portance of good planning and a variety of resources.
Planning So you think you have identified a business opportunity. And you have the personal drive to make it a success. Now what? Where should you begin?
The Business Plan Your excitement and intuition may convince you that you are on to something. But they might not convince anyone else. You need more thorough planning and analysis. This effort will help convince other people to get on board and help you avoid costly mistakes.
The first formal planning step is to do an opportunity analysis. An opportunity analysis includes a description of the good or service, an assessment of the opportunity, an assessment of the entrepreneur (you), a specification of activities and resources needed to translate your idea into a viable business, and your source(s) of capital.86 Table 7.4 shows the questions you should answer in an opportunity analysis.
The opportunity analysis, or opportunity assessment plan, focuses on the opportunity, not the entire venture. It provides the basis for making a decision on whether to act. Then the business plan describes all the elements involved in starting the new venture.87 The business plan describes the venture and its market, strategies, and future directions. It often has functional plans for marketing, finance, manufacturing, and human resources.
Table 7.5 shows an outline for a typical business plan. The business plan (1) helps determine the viability of your en-terprise, (2) guides you as you plan and organize, and (3) helps you obtain financing. It is read by potential investors, suppliers, customers, and others. Get help in writing up a sound plan!
Key Planning Elements A successful business needs enough cash to cover start-up expenses and keep the company running during slow periods. The initial budget should cover one-time costs, such as the fee to form a corporation, and ongoing expenses such as supplies and rent for the first few months. The company’s founders may start the business with their own money, or they may seek financing in the form of debt (taking out a loan from family, friends, or a bank) or equity (taking money in exchange for an ownership share in the company). Typically, start-ups get most of their money from the owners, their families, and loans and credit lines from banks. Other kinds of investors, such as venture capital firms, generate a lot of publicity for splashy deals but provide a very small share of start-up funds.88
Under these circumstances, raising money to start a business can be one of the entrepreneur’s greatest challenges. When Eaton Corporation decided to close down the Massillon, Ohio, factory where Tony Lee worked, the ambitious foreman decided he would rather learn to run it than watch it go out of business. Lee studied business books at the library, wrote a detailed plan, and convinced a group of investors that his ideas could work; however, the investors insisted he also raise $25,000 of his own money and become a part-owner. Lee saved every penny he could, sold his motorcycle, and took out a second mortgage on his house. Since then, he has rebuilt the manufacturing company, now called Ring Masters, has earned a tidy return on his investment, and is planning to expand.89
Just as the Internet has transformed every other aspect of business, it is poised to remake the challenge of raising start-up money. This trend started with the use of social-media tools to link would-be entrepreneurs with people who want to make great ideas happen. At crowdfunding websites, such as AngelList, Crowdfunder.com, FundersClub, and Kick-starter, the entrepreneurs post their ideas, and anyone can donate to the cause. Until recently, crowdfunding was mostly limited to small contributions from people who gave in exchange for a company-provided experience, discount, or product sample; the funders don’t receive equity in the business. The main reason is that the Securities and Exchange Commission, which regulates investing, needs to ensure that investors on these sites have the same protections available to traditional investors. In 2012, however, Congress passed the Jumpstart Our Business Startups Act (JOBS Act), which allows crowdfunding sites to begin accepting equity investors after the SEC has prepared rules for this type of financing. As of this writing, the rules were expected to be ready before the end of 2013. If crowdfunding takes off, as some observers expect, entrepreneurs could have access to a huge new source of funds and new ways to convert customers into fans of the company, but they should be careful not to rely on the crowd to the exclusion of seasoned investors who might also provide valuable advice.90
Most business plans devote so much attention to financial projections that they neglect other important infor-mation—information that matters greatly to astute investors. In fact, financial projections tend to be overly optimistic. Investors know this and discount the figures. In addition to the numbers, the best plans convey—and make certain that the entrepreneurs have carefully thought through—five key factors: the people, the opportunity, the competition, the context, and risk and reward.91
The people should be energetic and have skills and expertise directly relevant to the venture. For many astute inves-tors, the people are the most important variable, more important even than the idea. Arthur Rock, a legendary venture capitalist who helped start Intel, Teledyne, and Apple, stated, “I invest in people, not ideas. If you can find good people, if they’re wrong about the product, they’ll make a switch.”92
The opportunity should provide a competitive advantage that can be defended. Customers are the focus here: Who is the customer? How does the customer make decisions? How will the product be priced? How will the venture reach all customer segments? How much does it cost to acquire and support a customer and to produce and deliver the product? How easy or difficult is it to retain a customer?
It is also essential to consider the competition fully. The plan must identify current competitors and their strengths and weaknesses, predict how they will respond to the new venture, indicate how the new venture will respond to the competi-tors’ responses, identify future potential competitors, and consider how to collaborate with or face off against actual or potential competitors. The original plan for Zappos was for its website to compete with other online shoe retailers by of-fering a wider selection than they did. However, most people buy shoes in stores, so Zappos cofounders Nick Swinmurn and Tony Hsieh soon realized that they needed a broader view of the competition. They began focusing more on service and planning a distribution method that would make online shopping as successful as visiting a store.93
The environmental context should be a favorable one from regulatory and economic perspectives. Such factors as tax policies, rules about raising capital, interest rates, inflation, and exchange rates will affect the viability of the new venture. The context can make it easier or harder to get backing and to succeed. Importantly, the plan should make clear that you know that the context inevitably will change, forecast how the changes will affect the business, and describe how you will deal with the changes.
The risk must be understood and addressed as fully as possible. The future is always uncertain, and the elements described in the plan will change over time. Although you cannot predict the future, you must contemplate head-on the possibilities of key people leaving, interest rates changing, a key customer leaving, or a powerful competitor responding ferociously. Then describe what you will do to prevent, avoid, or cope with such possibilities. You should also speak to the end of the process: how to get money out of the business eventually. Will you go public? Will you sell or liquidate? What are the various possibilities for investors to realize their ultimate gains?94
Selling the Plan Your goal is to get investors to support the plan, so the elements of a great plan, as just described, are essential. It’s also important whom you decide to try to convince to back your plan.
Many entrepreneurs want passive investors who will give them money and let them do what they want. Doctors and dentists generally fit this image. Professional venture capitalists do not—they demand more control and more of the re-turns. But when a business goes wrong—and chances are, it will—nonprofessional investors are less helpful and less likely to advance more (needed) money. Sophisticated investors have seen sinking ships before and know how to help. They are more likely to solve problems, provide more money, and navigate financial and legal waters.95
View the plan as a way for you to figure out how to reduce risk, maximize reward, and convince others that you under-stand the entire new venture process. Don’t put together a plan built on naïveté or overconfidence or one that cleverly hides major flaws. You might not fool others, and you certainly would be fooling yourself.
Nonfinancial Resources Also crucial to the success of a new business are nonfinancial resources, including legitimacy in the minds of the public and the various ways in which other people can help.
Legitimacy An important resource for the new venture is legitimacy—people’s judgment of a company’s acceptance, appropriateness, and desirability.96 When the market confers legitimacy, it helps overcome the liability of newness that creates a high percentage of new venture failure.97 Legitimacy helps a firm acquire other resources such as top manag-ers, good employees, financial resources, and government support. In a three-year study tracking business start-ups, the likelihood that a company would succeed at selling products, hiring employees, and attracting investors depended most on how skillfully entrepreneurs demonstrated that their business was legitimate.98
A business is legitimate if its goals and methods are consistent with societal values. You can generate legitimacy by visibly conforming to rules and expectations created by governments, credentialing associations, and professional organizations; by visibly endorsing widely held values; and by visibly practicing widely held beliefs.99
Networks The entrepreneur is aided greatly by having a strong network of people. Social capital—being part of a social network and having a good reputation—helps entrepreneurs gain access to useful information, gain trust and cooperation from others, recruit employees, form successful business alliances, receive funding from venture capitalists, and become more successful.101 Social capital provides a lasting source of competitive advantage.102
Top Management Teams The top management team is another crucial resource. For example, Sudhin Shahani’s start-ups include MyMPO, whose digital media services include Musicane, which lets musicians sell audio and video files and ringtones online at storefronts they create for themselves. The company’s head of marketing was singer Will.i.am.103 Having a musician in that top spot may help Musicane build client relationships with other artists. Also, in companies that have incorporated, a board of directors improves the company’s image, develops longer-term plans for expansion, sup-ports day-to-day activities, and develops a network of information sources.
Advisory Boards Whether or not the company has a formal board of directors, entrepreneurs can assemble a group of people willing to serve as an advisory board. Board members with business experience can help an entrepreneur learn basics such as how to do cash flow analysis; identify needed strategic changes; and build relationships with bankers, accountants, and attorneys.
Partners Often two people go into business together as partners. Partners can help one another access capital, spread the workload, share the risk, and share expertise. One of the strengths of JLW Homes and Communities, the Atlanta con-struction business described earlier, is that the three founding partners bring different areas of expertise to the business. Gregory Wynn was a master homebuilder, Komichel Johnson was a financial expert, and Robert A. Jones III was a suc-cessful salesperson. Johnson explains the advantage this way: “We don’t all agree on the same issues, and we’ve had some heated arguments. . . . But we realize that through communication and laying out the facts, we can overcome any issues that may arise within our organization.”104
Despite the potential advantages of finding a compatible partner, partnerships are not always marriages made in heaven. “Mark” talked three of his friends into joining him in starting his own telecommunications company because he didn’t want to try it alone. He learned quickly that while he wanted to put money into growing the business, his three part-ners wanted the company to pay for their cars and meetings in the Bahamas. The company collapsed. “I never thought a business relationship could overpower friendship, but this one did. Where money’s involved, people change.”
To be successful, partners need to acknowledge one another’s talents, let each other do what they do best, com-municate honestly, and listen to one another. Partners also must learn to trust each other by making and keeping agreements. If they must break an agreement, it is crucial that they give early notice and clean up after their mistakes.
Large corporations are more than passive bystanders in the entrepreneurial explosion. Even established companies try to find and pursue new and profitable ideas—and they need in-house entrepreneurs (sometimes called intrapreneurs) to do so.
Building Support for Your Idea
A manager who has a new idea to capitalize on a market opportunity will need to get others in the organization to buy in or sign on. In other words, you need to build a network of allies who support and will help implement the idea.
If you need to build support for a project idea, the first step involves clearing the investment with your immediate boss or bosses.105 At this stage, you explain the idea and seek approval to look for wider support.
Higher executives often want evidence that the project is backed by your peers before committing to it. This involves making cheerleaders—people who will support the manager before formal approval from higher levels.
Next, horse trading begins. You can offer promises of payoffs from the project in return for support, time, money, and other resources that peers and others contribute.
Finally, you should get the blessing of relevant higher-level officials. This usually involves a formal presentation. You will need to guarantee the project’s technical and political feasibility. Higher management’s endorsement of the project and promises of resources help convert potential supporters into an enthusiastic team. At this point, you can go back to your boss and make specific plans for going ahead with the project. Along the way, expect resistance and frustra-tion—and use passion and persistence, as well as business logic, to persuade others to get on board.
Success in fostering a culture in which intrapreneurs flourish comes from making an intentional decision to foster entre-preneurial thinking and behavior, creating new venture teams, and changing the compensation system so that it encour-ages, supports, and rewards creative and innovative behaviors. In other words, building intrapreneurship derives from careful and deliberate strategy.
Two common approaches used to stimulate intrapreneurial activity are skunkworks and bootlegging. Skunkworks are project teams designated to produce a new product. A team is formed with a specific goal within a specified time frame. A respected person is chosen to be manager of the skunkworks. In this approach to corporate innovation, risk takers are not punished for taking risks and failing—their former jobs are held for them. The risk takers also have the opportunity to earn large rewards.
Bootlegging refers to informal efforts—as opposed to official job assignments—in which employees work to create new products and processes of their own choosing and initiative. Informal can mean secretive, such as when a bootlegger believes the company or the boss will frown on those activities. But companies should tolerate some bootlegging, and some even encourage it. To a limited extent, they allow people freedom to pursue pet projects without asking what they are or monitoring progress, figuring bootlegging will lead to some lost time but also to learning and to some profitable innovations.
Merck, desiring entrepreneurial thinking and behavior in research and development, explicitly rejects budgets for plan-ning and control. New product teams don’t get a budget. They must persuade people to join the team and commit their resources. This creates a survival-of-the-fittest process, mirroring the competition in the real world.106 At Merck, as else-where, intrapreneurship derives from deliberate strategic thinking and execution.
Organizations that encourage intrapreneurship face an obvious risk: the effort can fail. One author noted, “There is con-siderable history of internal venture development by large firms, and it does not encourage optimism.”107 However, this risk can be managed. In fact, failing to foster intrapreneurship may represent a subtler but greater risk than encouraging it. The organization that resists entrepreneurial initiative may lose its ability to adapt when conditions dictate change.
The most dangerous risk in corporate entrepreneurship is the risk of overreliance on a single project. Many companies fail while awaiting the completion of one large, innovative project.108 The successful entrepreneurial organization avoids overcommitment to a single project and relies on its entrepreneurial spirit to produce at least one winner from among sev-eral projects.
Organizations also court failure when they spread their entrepreneurial efforts over too many projects.109 If there are many projects, each effort may be too small in scale. Managers will consider the projects unattractive because of their small size. Or those recruited to manage the projects may have difficulty building power and status within the organiza-tion.
The hazards in intrapreneurship, then, are related to scale. One large project is a threat, as are too many underfunded projects. But a carefully managed approach to this strategically important process will upgrade an organization’s chances for -long-term survival and success.
Earlier in this chapter, we described the characteristics of individual entrepreneurs. To conclude the chapter, we do the same for companies: we describe how companies that are highly entrepreneurial differ from those that are not. CEOs play a crucial role in promoting entrepreneurship within large corporations.110
Entrepreneurial orientation is the tendency of an organization to engage in activities designed to identify and capital-ize successfully on opportunities to launch new ventures by entering new or established markets with new or existing goods or services.111 Entrepreneurial orientation is determined by five tendencies: to allow independent action, innovate, take risks, be proactive, and be competitively aggressive. Entrepreneurial orientation should enhance the likelihood of success and may be particularly important for conducting business internationally.112
To allow independent action is to grant to individuals and teams the freedom to exercise their creativity, champion promising ideas, and carry them through to completion. Innovativeness requires the firm to support new ideas, experi-mentation, and creative processes that can lead to new products or processes; it requires a willingness to depart from existing practices and venture beyond the status quo. Risk taking comes from a willingness to commit significant re-sources, and perhaps borrow heavily, to venture into the unknown. The tendency to take risks can be assessed by con-sidering whether people are bold or cautious, whether they require high levels of certainty before taking or allowing ac-tion, and whether they tend to follow tried-and-true paths.
To be proactive is to act in anticipation of future problems and opportunities. A proactive firm changes the competitive landscape; other firms merely react. Proactive firms are forward thinking and fast to act and are leaders rather than followers. Similarly, some individuals are more likely to be proactive, to shape and create their own environments, than others who more passively cope with the situations in which they find themselves.113 Proactive firms encourage and allow individuals and teams to be proactive.
Finally, competitive aggressiveness is the tendency of the firm to challenge competitors directly and intensely to achieve entry or improve its position. In other words, it is a competitive tendency to outperform one’s rivals in the marketplace. This might take the form of striking fast to beat competitors to the punch, to tackle them head-to-head, and to analyze and target competitors’ weaknesses.
What makes a firm entrepreneurial is its engagement in an effective combination of independent action, innovative-ness, risk taking, proactiveness, and competitive aggressiveness.114 The relationship between these factors and the per-formance of the firm is a complicated one that depends on many things. Still, you can imagine how the opposite pro-file—too many constraints on action, business as usual, extreme caution, passivity, and a lack of competitive fire—will undermine entrepreneurial activities. And without entrepreneurship, how would firms survive and thrive in a constantly changing competitive environment?
Thus management can create environments that foster more entrepreneurship. If your bosses are not doing this, con-sider trying some entrepreneurial experiments on your own.115 Seek out others with an entrepreneurial bent. What can you learn from them, and what can you teach others? Sometimes it takes individuals and teams of experimenters to show the possibilities to those at the top. Ask yourself and ask others: Between the bureaucrats and the entrepreneurs, who is having a more positive impact? And who is having more fun?
Information for Entrepreneurs
If you are interested in starting or managing a small business, you have access to many sources of useful information.
The first step is a complete search of materials in libraries and on the Internet. You can find a huge amount of published information, databases, and other sources about industries, markets, competitors, and personnel. Some of this information will have been uncov-ered when you searched for ideas. Listed here are additional sources that should help get you started.
Guides and Company Information Valuable information is available in special issues and the websites of BusinessWeek, Forbes, Inc., The Economist, Fast Company, and Fortune, as well as online in the following:
• RDS Bizsuite.com
Valuable Sites on the Internet
• Entreworld (http://www.entreworld.org), the website of the Kauffman Center for Entrepreneurial Leadership, Ewing Marion Kauffman Foundation
• Fast Company (http://www.fastcompany.com)
• Ernst & Young (http://www.ey.com)
• Global Access—SEC documents through a subscription-based website (http://www.primark.com)
• Inc. magazine (http://www.inc.com)
• Entrepreneur.com and magazine (http://www.entrepreneur.com).
• EDGAR database (http://www.sec.gov)—subscription sources, such as ThomsonResearch (http://www.thomsonfinancial.com), provide images of other filings as well.
• Venture Economics (http://www.ventureeconomics.com).
Journal Articles via Computerized Indexes
• Factiva with Dow Jones, Reuters, The Wall Street Journal
• Ethnic News Watch
• The New York Times
• InfoTrac from Gale Group
• ABI/Inform and other ProQuest databases
• RDS Business Reference Suite
• The Wall Street Journal
• Stat-USA (http://www.stat-usa.gov)—U.S. government subscription site for economic, trade, and business data and market research
• U.S. Bureau of the Census (http://www.census.gov)—the source of many statistical data, including
• Statistical Abstract of the United States
• American FactFinder—population data
• Economic programs (http://www.census.gov/econ/www/index.html)—data by sector
• County business patterns
• Zip code business patterns
• Knight Ridder . . . CRB Commodity Year Book
• Manufacturing USA, Service Industries USA, and other sector compilations from Gale Group
• Economic Statistics Briefing Room (http://www.whitehouse.gov/fsbr/esbr.html)
• Federal Reserve Bulletin
• Survey of Current Business
• FedStats (http://www.fedstats.gov/)
• Labstat (http://stats.bls.gov/labstat.htm)
• Global Insight, formerly DRI-WEFA
• International Financial Statistics—International Monetary Fund
• World Development Indicators—World Bank
• Bloomberg Database
• New Strategist Publications
Projections and Forecasts
• InfoTech Trends
• Guide to Special Issues and Indexes to Periodicals (Grey House Directory of Special Issues)
• RDS Business Reference Suite
• Value Line Investment Survey
• LifeStyle Market Analyst
• Scarborough Research
• Simmons Market Research Bureau
• New Strategist Publications
• Consumer Expenditure Survey
• Wall Street transcript
• Brokerage house reports from Investext, Multex and so on
• Company annual reports and websites
Everything entrepreneurs need to know will not be found in libraries because this information needs to be highly specific and current. This information is most likely available from people—industry experts, suppliers, and the like. Summarized here are some useful sources of intelligence.
Trade Associations Trade associations, especially the editors of their publications and information officers, are good sources of information. Trade shows and conferences are prime places to discover the latest activities of competitors.
Employees Employees who have left a competitor’s company often can provide information about the competitor, especially if the employee departed on bad terms. Also, a firm can hire people away from a competitor. Although consideration of ethics in this situation is important, the number of experienced people in any industry is limited, and competitors must prove that a company hired a person intentionally to get specific trade secrets to challenge any hiring legally. Students who have worked for competitors are another source of information.
Consulting Firms Consulting firms frequently conduct industry studies and then make this information available. Frequently, in such fields as computers or software, competitors use the same design consultants, and these consultants can be sources of information.
Market Research Firms Firms doing market studies, such as those listed under the previously mentioned published sources, can be sources of intelligence.
Key Customers, Manufacturers, Suppliers, -Distributors, and Buyers These groups are often a prime source of information.
Public Filings Federal, state, and local filings, such as filings with the Securities and Exchange Commission (SEC), Patent and Trademark Office, or Freedom of Information Act filings, can reveal a surprising amount of information. There are companies that process inquiries of this type.
Reverse Engineering Reverse engineering can be used to determine costs of production and sometimes even manufacturing methods. An example of this practice is the experience of Advanced Energy Technology, Inc., of Boulder, Colorado, which learned firsthand about such tactics. No sooner had it announced a new product, which was patented, than it received 50 orders, half of which were from competitors asking for only one or two of the items.
Networks The networks mentioned in this chapter can be sources of new venture ideas and strategies.
Other Classified ads, buyers’ guides, labor unions, real estate agents, courts, local reporters, and so on can all provide clues.
The U.S. government is engaging in new and more extensive outreach efforts so that small business owners will use government resources more and understand them more easily. In 2009, the U.S. Small Business Administration launched a community forum, the first government-sponsored online community built specifically for small business owners, on the Business Gateway site of Business.gov. The forum combines discussion threads, blogs, and resource articles. The goals for the SBA and 21 other federal agencies that cosponsor the site are to engage in dialogue with the public, leverage the expertise that exists in both the public and private sectors, and help government serve entrepreneurs better.
SOURCES: J. A. Timmons and S. Spinelli, New Venture Creation, 7th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), pp. 103–4; K. Klein, “Government Resources for Entre-preneurs,” Business Week, March 3, 2009.
A man is known by the company he organizes.
The pursuit of lucrative opportunities by enterprising individuals.
Entrepreneurship is inherently about innovation—creating a new venture where one didn’t exist before.
How is entrepreneurship different from inventing a new product?
A business having fewer than 100 employees, independently owned and operated, not dominant in its field, and not characterized by many innovative practices.
A new business having growth and high profitability as primary objectives.
TABLE 7.1 SOME MYTHS ABOUT ENTREPRENEURS
Myth 1—Entrepreneurs are born, not made.
Reality—Although entrepreneurs are born with certain native intelligence, a flair for creating, and energy, these talents by themselves are like unmolded clay or an unpainted canvas. The making of an entrepreneur occurs by accumulating the relevant skills, know-how, experiences, and contacts over a period of years and includes large doses of self-development. The creative capacity to envision and then pursue an opportunity is a direct descendant of at least 10 or more years of experience that lead to pattern recognition.
Myth 2—Anyone can start a business.
Reality—Entrepreneurs who recognize the difference between an idea and an opportunity, and who think big enough, start businesses that have a better chance of succeeding. Luck, to the extent it is involved, requires good preparation. And the easiest part is starting. What is hardest is surviving, sustaining, and building a venture so its founders can realize a harvest. Perhaps only one in 10 to 20 new businesses that survive five years or more results in a capital gain for the founders.
Myth 3—Entrepreneurs are gamblers.
Reality—Successful entrepreneurs take very careful, calculated risks. They try to influence the odds, often by getting others to share risk with them and by avoiding or minimizing risks if they have the choice. Often they slice up the risk into smaller, quite digestible pieces; only then do they commit the time or resources to determine whether that piece will work. They do not deliberately seek to take more risk or to take unnecessary risk, nor do they shy away from unavoidable risk.
Myth 4—Entrepreneurs want the whole show to themselves.
Reality—Owning and running the whole show effectively puts a ceiling on growth. Solo entrepreneurs usually make a living. It is extremely difficult to grow a higher-potential venture by working single-handedly. Higher-potential entrepreneurs build a team, an organization, and a company. Besides, 100 percent of nothing is nothing, so rather than taking a large piece of the pie, they work to make the pie bigger.
Myth 5—Entrepreneurs are their own bosses and completely independent.
Reality—Entrepreneurs are far from independent and have to serve many masters and constituencies, including partners, investors, customers, suppliers, creditors, employees, families, and those involved in social and community obligations. Entrepreneurs, however, can make free choices of whether, when, and what they care to respond to. Moreover, it is extremely difficult, and rare, to build a business beyond $1 million to $2 million in sales single-handedly.
Myth 6—Entrepreneurs work longer and harder than managers in big companies.
Reality—There is no evidence that all entrepreneurs work more than their corporate counterparts. Some do, some do not. Some actually report that they work less.
Myth 7—Entrepreneurs experience a great deal of stress and pay a high price.
Reality—Being an entrepreneur is stressful and demanding. But there is no evidence that it is any more stressful than numerous other highly demanding professional roles, and entrepreneurs find their jobs very satisfying. They have a high sense of accomplishment, are healthier, and are much less likely to retire than those who work for others. Three times as many entrepreneurs as corporate managers say they plan never to retire.
Myth 8—Start a business and fail and you’ll never raise money again.
Reality—Talented and experienced entrepreneurs—because they pursue attractive opportunities and are able to attract the right people and necessary financial and other resources to make the venture work—often head successful ventures. Further, businesses fail, but entrepreneurs do not. Failure is often the fire that tempers the steel of an entrepreneur’s learning experience and street savvy.
Myth 9—Money is the most important start-up ingredient.
Reality—If the other pieces and talents are there, the money will follow, but it does not follow that an entrepreneur will succeed if he or she has enough money. Money is one of the least important ingredients in new venture success. Money is to the entrepreneur what the paint and brush are to the artist—an inert tool that in the right hands can create marvels.
Myth 10—Entrepreneurs should be young and energetic.
Reality—Although these qualities may help, age is no barrier. The average age of entrepreneurs starting high-potential businesses is in the mid-30s, and there are numerous examples of entrepreneurs starting businesses in their 60s. What is critical is possessing the relevant know-how, experience, and contacts that greatly facilitate recognizing and pursuing an opportunity.
Myth 11—Entrepreneurs are motivated solely by the quest for the almighty dollar.
Reality—Entrepreneurs seeking high-potential ventures are more driven by building enterprises and realizing long-term capital gains than by instant gratification through high salaries and perks. A sense of personal achievement and accomplishment, feeling in control of their own destinies, and realizing their vision and dreams are also powerful motivators. Money is viewed as a tool and a way of keeping score rather than an end in itself. Entrepreneurs thrive on the thrill of the chase; and, time and again, even after an entrepreneur has made a few million dollars or more, he or she will work on a new vision to build another company.
Myth 12—Entrepreneurs seek power and control over others.
Reality—Successful entrepreneurs are driven by the quest for responsibility, achievement, and results rather than for power for its own sake. They thrive on a sense of accomplishment and of outperforming the competition rather than a personal need for power expressed by dominating and controlling others. By virtue of their accomplishments, they may be powerful and influential, but these are more the by-products of the entrepreneurial process than a driving force behind it.
Myth 13—If an entrepreneur is talented, success will happen in a year or two.
Reality—An old maxim among venture capitalists says it all: The lemons ripen in two and a half years, but the pearls take seven or eight. Rarely is a new business established solidly in less than three or four years.
Myth 14—Any entrepreneur with a good idea can raise venture capital.
Reality—Of the ventures of entrepreneurs with good ideas who seek out venture capital, only 1 to 3 out of 100 are funded.
Myth 15—If an entrepreneur has enough start-up capital, he or she can’t miss.
Reality—The opposite is often true; that is, too much money at the outset often creates euphoria and a spoiled-child syndrome. The accompanying lack of discipline and impulsive spending usually lead to serious problems and failure.
Myth 16—Entrepreneurs are lone wolves and cannot work with others.
Reality—The most successful entrepreneurs are leaders who build great teams and effective relationships working with peers, directors, investors, key customers, key suppliers, and the like.
Myth 17—Unless you attained 600 1 on your SATs or GMATs, you’ll never be a successful entrepreneur.
Reality—Entrepreneurial IQ is a unique combination of creativity, motivation, integrity, leadership, team building, analytical ability, and ability to deal with ambiguity and adversity.
SOURCE: From S. Spinelli, Jr., and R. J. Adams New Venture Creation: Entrepreneurship for the 21st Century, 9th ed, 2012, pp. 46–47. Copyright 2012 The McGraw Hill Companies, Inc. Reprinted with permission.
Individual who establishes a new organization without the benefit of corporate sponsorship.
New venture creators working inside big companies.
Today’s concern for sustainability presents a tremendous variety of opportunities to entrepreneurs who care about the environment.
What are some environmentally friendly start-ups you’ve heard about? Do you think they have great profit potential?
Successful Entrepreneurs Who Started in Their 20s
Steve Jobs and Steve Wozniak
Naveen Selvadurai and Dennis Crowley
Sergey Brin and Larry Page
Bill Gates and Paul Allen
Ben Silbermann and Evan Sharp
Rent the Runway
Jennifer Hyman and Jenny Fleiss
Sources: Brock Blake, “Why 20-Somethings Are the Most Successful Entrepreneurs,” Forbes, November 30, 2012, http://www.forbes.com; Burt Helm, “Inside Spotify’s U.S. Invasion,” Inc., July 2, 2012, http://www.inc.com; “30 under 30 2011: Where Are They Now?” Inc., 2011, http://www.inc.com (slideshow); Lizette Chapman, “‘Pivoting’ Pays Off for Tech Entrepreneurs,” The Wall Street Journal, April 26, 2012, http://online.wsj.com; Christine Lagorio, “Introducing the Two Young Men Who Made Pinterest,” Inc., July 2, 2012, http://www.inc.com.
Shoppers who stay on top of the latest fashion trends can go to www.renttherunway.com to rent apparel and accessories for special occasions. No dry cleaning required. Photos in ensemble can also be uploaded to the website’s runway.
Who Is the Entrepreneur?
SOURCE: J. A. Timmons and S. Spinelli, Jr., New Venture Creation: Entrepreneurship for the 21st Century, 7th ed., 2007, pp. 67–68. Copyright 2007 The McGraw-Hill Companies, Inc. Reprinted with permission.
Limor Fried, Adafruit Industries, combined both her academic knowledge and personal interests to prove her capabilities as an entrepreneur.
An entrepreneurial alliance between a franchisor (an innovator who has created at least one successful store and wants to grow) and a franchisee (a partner who manages a new store of the same type in a new location).
The International Space Station is a habitable artificial satellite. Currently the largest artificial body in orbit, it can be seen at certain times with the naked eye from earth.
SWITCHBLADE: HELPING CUSTOMERS’ CUSTOMERS
The mobile Internet is another important business frontier for companies such as 3Cinteractive. While many entrepreneurs rushed to offer mobile apps for consumers, 3Cinteractive founders John Duffy, Mike FitzGibbon, and Mark Smith saw profit potential in serving business customers. They formed their company to provide software that helps companies connect with their customers on mobile devices.
Basically, 3Cinteractive created a software platform called Switchblade, which resides on the company’s computer servers and is accessed online. Then 3Cinteractive helps business customers identify what kinds of tasks they want to do with this platform—say, sending text messages or collecting payments. For example, Walgreens uses a 3Cinteractive app to analyze customer data and automatically text customers to remind them when it’s time to refill a prescription, and Boca Raton Regional Hospital uses the service to remind patients of their appointments. The hospital app also includes a database patients can use to look up general medical advice associated with particular symptoms. Newer applications aim to monitor social media for company-related posts and prompt an appropriate response—say, a customer service representative phoning after a major customer complains.
Along with Walgreens, other big clients include Best Buy, Disney, and ESPN. In its first seven years, 3Cinteractive has grown to a $28.7 million business by showing its customers how they can retain and engage consumers better via mobile devices. Cofounders Duffy and FitzGibbon both have backgrounds in sales, so they understand that success is about more than jumping on the latest fad; they have to help their customers achieve their goals.39
• What other opportunities might the popularity of mobile devices offer to 3Cinteractive?
transaction fee model
Charging fees for goods and services.
advertising support model
Charging fees to advertise on a site.
Charging fees to bring buyers and sellers together.
Charging fees to direct site visitors to other companies’ sites.
Charging fees for site visits.
Organization that engages in social entrepreneurship.
Leveraging resources to address social problems.
TABLE 7.3 EXAMPLES OF SOCIAL ENTREPRENEURSHIP COMPANIES
Offers software that enables 30 million SMEs in emerging markets to accept, process, and manage mobile money payments (e.g., Safaricom M-Pesa, Airtel Money). Kopo Kopo is the first company to offer this service on a subscription basis and is positioning itself to be a leader in providing merchant services in emerging markets.
Provides financial services technology that facilitates and tracks transactions between mobile money accounts and bank accounts for small and medium-sized businesses that interact with consumers at the base of the pyramid (BoP). Over 15 million people in Kenya use mobile money services such as M-Pesa. Through Lipisha, businesses can also compile and analyze business reports, assess consumer trends, and advertise to customers via SMS.
Offers a secure, prepaid payment platform that makes clean energy solutions affordable and investable for the base of the pyramid. Simpa sells a mobile meter that enables distributed energy on a progressive purchase basis to underserved consumers in emerging markets. Customers make a small initial down payment for a high-quality solar PV system and pre-pay for energy service in affordable, user-defined increments using a mobile phone. Each payment is applied toward the purchase price of a system. Once fully paid, the system unlocks and produces energy on an ongoing basis.
Waste Capital Partners
Cleans urban areas by providing integrated solid waste management services that also meaningfully employ marginalized individuals. Waste Capital Partners provides doorstep waste collection to residential households in small and medium-sized cities and towns in India for a nominal monthly fee. They also compost organic waste to sell to farmers and sell recyclable waste to processers.
Provides fleets of bicycles that can be rented instantly via SMS, voice, or mobile app to build more sustainable communities. They have developed a proprietary system (including hardware and software) to monitor and control access to each bike remotely and seamlessly manage billing and data collection.
Save Energy Systems
Improves the energy efficiency of small to mid-size businesses by controlling their heating, ventilation, and air conditioning (HVAC) systems through proprietary software. Save Energy Systems’ Demand Limiting Controller (DLC) is integrated with building thermostat systems to provide automated demand response, kWh reductions, and peak-rate power shifts, resulting in reduced energy use and cost savings.
Aims to increase natural gas fuel storage and efficiency for natural-gas vehicles through the manufacture and distribution of high-pressure fuel storage systems. CleanNG has developed a proprietary, high-efficiency fuel storage system that carries 30% more fuel than traditional tanks, is 60% lighter, and is created through a sustainable manufacturing process. By making it easier to switch to compressed natural gas, CleanNG is contributing to major reductions in pollution.
Eco Fuels Kenya
Uses Kenya’s indigenous croton nuts to produce environmentally friendly green biofuels and organic fertilizers. EFK contracts with local communities in western Kenya to harvest and deposit the nuts in locally owned and operated collection centers. The liquid biofuel they process can be used as a direct replacement for diesel, and the residue from the oil extraction process is used to produce organic fertilizers for commercial agricultural use.
Provides basic health care, insurance, and legal advisory services to populations at the base of the pyramid through an affordable subscription of $2-3/month. They leverage a network of mobile field officers, a 24/7 call center, and appointments with third-party specialists for advanced needs.
A web-based platform that provides free health care information to Brazilians. Saútil is serving 100,000 Brazilians living below the poverty line per month and has raised $1 million in follow-on capital from commercial investors.
Founded by Teach for America alumna Jen Medbery, enables teachers to use data to improve student performance in high-poverty areas of the United States. It has raised $2 million in investment and is now serving 25,000 students across the United States.
Enables home-based workers, primarily women living in poverty, in the United States and India to earn extra cash performing micro-tasks on a mobile phone. It has processed over 2 million tasks, graduated Y-Combinator, and raised $1.7 million.
Sells affordable household biogas systems, including stoves, water heaters, and power generators. They are delivered and financed as a utility with remote GSM metering. The biogas systems pay for themselves in 2 years and have a lifespan of over 30 years. They have generated $15K in revenue to date.
Source: Courtesy of Village Capital.
Entrepreneurial Strategy Matrix
SOURCE: Reprinted from Business Horizons, May–June 1997, Sonfield and Lussier, “Entrepreneurial Strategy Matrix: A Model of New and Ongoing Ventures,” Copyright © 1997, with permission from Elsevier.
For Max Arndt, the choice of a business idea was a requirement for his entrepreneurship class at the University of Min-nesota. Pondering what problems of modern society have yet to be solved, it occurred to Arndt that many people hate touching the door handle when they leave a public restroom. How else could they make a sanitary exit? Arndt figured you would need to come up with some kind of metal piece that could be bolted to the bottom of the inside of the door, and that way, you could pull the door open with the toe of your shoe.
That thinking gave birth to the Toepener—basically a metal plate with an L-shaped hook for pulling the door open. Arndt’s class loved the idea and voted to make it the one they would back. The school provided a $15,000 loan, and Arndt led his team in setting up the business, with the goal of repaying the loan and earning a profit by the end of the semester. They built a website, set the price at $49.95, and contracted with a manufacturer. Soon they had hundreds of orders and were on track to meet their goals. The editors of Inc. magazine also fell in love with the idea, naming the Toepener one of the coolest college start-ups.61
• Would you rate this business idea as high or low on innovation? As high or low on risk?
Richard Foos (left), Bob Emmer (center), and Garson Foos are successful entrepreneurs due to their creativity, innovation, and knowledge of their target customers’ desires. They are shown here with a circa 1966–1967 Batmobile children’s arcade ride in their Shout! Factory headquarters in Los Angeles. As CEO of the Shout! Factory, Richard Foos runs an emporium filled with nostalgia-type collectibles.
Economic cycles can quickly change favorable conditions into downturns.
Protected environments for new, small businesses.
An organization that assists young firms in achieving faster and sustainable growth as they move into the next phase of their development.
Entrepreneurs can stabilize their companies’ size, but they still have to keep a high-value business model and provide great customer service.
What might be a sign that a small company is growing too fast?
You probably will pay close attention to costs at the beginning, but success sometimes brings neglect. Don’t fall into that trap.
An entrepreneur who loves selling delegates bookkeeping to an accountant. What danger does this pose to the business?
initial public offering (IPO)
Sale to the public, for the first time, of federally registered and underwritten shares of stock in the company.
CAN POPCHIPS STAY HEALTHY?
Although founders Keith Belling and Kara Nielsen can be proud to see Popchips generate $93.7 million in sales after just a few years, their company does face some formidable challenges. For one thing, although $93 million is a lot of money, it represents roughly 0.1 percent of the $90 billion global market for snacks. Among the hundreds of snack makers in the United States alone, Popchips is competing with such giants as PepsiCo’s Frito-Lay products and Mondelez (formerly part of Kraft Foods). In fact, Kellogg’s has introduced Popcorn Chips, and Quaker has introduced its Popped brand of snacks. Consumers who are now snapping up Popchips as a way to enjoy crunchy snacks without the fat could abandon the brand as soon as someone new offers an alternative.
Belling tries to address the challenge by being personally engaged in helping to keep excitement for Popchips high. Five years after the start-up, Belling told a reporter that he personally answers 25 customer e-mails every day. He does it because he wants to learn about what customers are thinking. It also puts him in a position to respond more dramatically than a big-company customer relations agent could ever do. In one case, after an enthusiastic New Yorker wrote in about her love of the product, Belling invited her to meet with a marketing manager—and sent her about 200 bags of Popchips for an event she was hosting.
To get out the message that his chips are not just low-fat but also delicious, Belling experiments with marketing. As is often the case when people get creative, some of the ideas backfire. The most notable flop was Ashton Kutcher’s attempt to portray a Bollywood producer on a dating show, using an obviously fake Indian accent. After an uproar dominated by a blogger named Anil Dash, the company pulled the ad, and Keith Belling apologized on the company’s website. Reflecting on the incident later, Belling noted that the experience had taught him about the powerful impact that social media can make and had prompted the company to consider consumers’ perceptions more carefully.
Popchips has forged ahead with other celebrity-based marketing efforts. It recently lined up singer Katy Perry to launch tortilla chips in four flavors (Nacho, Ranch, Salsa, and Chili Limón) in 2012 and Katy’s Kettle Corn in 2013. Even if consumers haven’t always appreciated the taste of Popchips advertising, the company hopes they will continue to get excited about the taste of its popped snacks.85
• What do you think are the most significant risks affecting Popchips?
• Do you think Popchips would be a good candidate for an initial public offering (IPO)? Why or why not?
A description of the good or service, an assessment of the opportunity, an assessment of the entrepreneur, specification of activities and resources needed to translate your idea into a viable business, and your source(s) of capital.
What market need does my idea fill?
What personal observations have I experienced or recorded with regard to that market need?
What social condition underlies this market need?
What market research data can be marshaled to describe this market need?
What patents might be available to fulfill this need?
What competition exists in this market? How would I describe the behavior of this competition?
What does the international market look like?
What does the international competition look like?
Where is the money to be made in this activity?
SOURCE: R. Hisrich and M. Peters, Entrepreneurship: Starting, Developing, and Managing a New Enterprise, p. 41. Copyright © 1998 by The McGraw-Hill Companies, Inc. Reprinted with permission.
TABLE 7.5 OUTLINE OF A BUSINESS PLAN
I. EXECUTIVE SUMMARY
Description of the Business Concept and the Business
Opportunity and Strategy
Target Market and Projections
II. THE INDUSTRY AND THE COMPANY AND ITS PRODUCT(S) OR SERVICE(S)
The Company and the Concept
The Product(s) or Service(s)
Entry and Growth Strategy
III. MARKET RESEARCH AND ANALYSIS
Market Size and Trends
Competition and Competitive Edges
Estimated Market Share and Sales
Ongoing Market Evaluation
IV. THE ECONOMICS OF THE BUSINESS
Gross and Operating Margins
Profit Potential and Durability
Fixed, Variable, and Semivariable Costs
Months to Breakeven
Months to Reach Positive Cash Flow
V. MARKETING PLAN
Overall Marketing Strategy
Service and Warranty Policies
Advertising and Promotion
VI. DESIGN AND DEVELOPMENT PLANS
Development Status and Tasks
Difficulties and Risks
Product Improvement and New Products
VII. MANUFACTURING AND OPERATIONS PLAN
Facilities and Improvements
Strategy and Plans
Regulatory and Legal Issues
VIII. MANAGEMENT TEAM
Key Management Personnel
Management Compensation and Ownership
Employment and Other Agreements and Stock Option and Bonus Plans
Board of Directors
Other Shareholders, Rights, and Restrictions
Supporting Professional Advisers and Services
IX. OVERALL SCHEDULE
X. CRITICAL RISKS, PROBLEMS,
XI. THE FINANCIAL PLAN
Actual Income Statements and Balance Sheets
Pro Forma Income Statements
Pro Forma Balance Sheets
Pro Forma Cash Flow Analysis
Breakeven Chart and Calculation
XII. PROPOSED COMPANY OFFERING
Use of Funds
SOURCE: J. A. Timmons and S. Spinelli, Jr., New Venture Creation: Entrepreneurship for the 21st Century, 7th ed., 2007, p. 229. Copyright 2007 The McGraw-Hill Companies. Reprinted with permission.
A formal planning step that focuses on the entire venture and describes all the elements involved in starting it.
The opportunity should provide a competitive advantage that can be defended.
Entrepreneurs should carefully consider the five key factors when developing a business plan: the people, the opportunity, the competition, the context, and risk and reward. Typically, financial projections dominate the plan while these other important factors are overlooked or undervalued.
Tumblr, a blogging platform with social-media features, quickly gained legitimacy because it is beautifully designed and easy to use. Founder David Karp was concerned about creating a genuine sense of community among users and a place where people could enjoy being creative. At Tumblr’s dashboard, users can prepare blog posts, follow other blogs, and share one another’s work. Users who want to comment on another blog do so by reblogging it and commenting on their own page; this avoids anonymity and the ugly behavior that has sometimes followed it. With this approach, Tumblr has attracted more than 86 million blogs and almost 170 million visitors.
The challenge, as has so often been the case with online enterprises, is how to make money without losing sight of the original vision that gave Tumblr its legitimacy. Karp initially downplayed the importance of advertising in Tumblr’s business model—it didn’t even run ads for five years. Then, rather than collect user metrics that would help advertisers target humdrum messages, Karp focused on the creativity of Tumblr and its users. He hoped advertisers with a particularly creative message would consider Tumblr’s blogs a desirable medium. But as the company has grown beyond 100 employees, Karp seems to have accepted that advertising must be a greater part of Tumblr’s future, perhaps as a way to build the advertiser’s image more than close a sale. One compromise he is testing is to include especially creative paid messages in its list of the best Tumblr content.100
• How can Tumblr maintain its legitimacy as a creative outlet if it accepts advertising? (Or if it can’t have both ads and legitimacy, how else might Tumblr be profitable?)
People’s judgment of a company’s acceptance, appropriateness, and desirability, generally stemming from company goals and methods that are consistent with societal values.
A competitive advantage in the form of relationships with other people and the image other people have of you.
Partnerships are not always marriages made in heaven.
Recall from Chapter 3 that creativity spawns good new ideas, but innovation requires actually implementing those ideas so they become realities. If you work in an organization and have a good idea, you must convince other people to get on board.
What skills would you need to get people on board with a new idea?
A project team designated to produce a new, innovative product.
Informal work on projects, other than those officially assigned, of employees’ own choosing and initiative.
The tendency of an organization to identify and capitalize successfully on opportunities to launch new ventures by entering new or established markets with new or existing goods or services.
THE PEOPLE AND PASSION OF POPCHIPS
Despite his own track record as a successful entrepreneur, Keith Belling never tried to start Popchips alone. He partnered with Pat Turpin, whose experience included investment banking and management of Costco’s private-label (store brand) products. Before the Popchips venture, she had worked for Belling at the Allbusiness.com portal. As president of Pop-chips, Turpin focuses on manufacturing and finance.
Belling’s experience also gave him time to build a network of valuable relationships. A key contact early on was someone he knew socially, Alex Panos, managing director of an investment firm called TSG Consumer Partners. When Panos heard about Belling’s idea for Popchips, he thought it sounded similar to another product TSG had successfully invested in, Vitaminwater, so he was interested in a financial stake in the start-up. TSG eventually took 30 percent ownership in exchange for a $25 million investment. It helped that Panos knew Belling as an entrepreneur who had successfully started companies in the past.
But networking was hardly just about money. Through TSG, Belling met Rohan Oza, who had been the chief marketing officer at Vitaminwater. Oza, too, loved the idea for Popchips, so he invested, offered advice, and helped the company recruit former Vitaminwater employees to market Popchips.
As Popchips has built its sales, the value of the business has grown. TSG recently sold its ownership share to another investment firm, Verlinvest, based in Brussels. Verlinvest paid $670 million—a handsome return for TSG and a vote of confidence in the future of Popchips.
With experienced advice and consistent access to funds, can Popchips keep growing, or will it be gobbled up by an-other business? So far, Belling has shown no signs of stopping. He told a USA Today reporter that entrepreneurs like him need “a ton of passion” because the job is so hard—“probably twice as hard as you think it’s going to be.” But, he added, “The good news is that it’s probably twice as much fun when it’s going well.”116
• What actions described in this case increase Popchips’ chances of long-term success?
• Why do you think the innovation of popped snacks came from an entrepreneur like Keith Belling instead of from a big snack company? How could a large company increase the odds that it will be the source of the next great snack idea?
advertising support model, p. 234
affiliate model, p. 234
bootlegging, p. 250
business accelerator, p. 240
business incubators, p. 240
business plan, p. 244
entrepreneur, p. 228
entrepreneurial orientation, p. 251
entrepreneurial venture, p. 226
entrepreneurship, p. 226
franchising, p. 232
initial public offering (IPO), p. 242
intermediary model, p. 234
intrapreneur, p. 228
legitimacy, p. 247
opportunity analysis, p. 244
skunkworks, p. 250
small business, p. 226
social capital, p. 248
social enterprise, p. 235
social entrepreneurship, p. 235
subscription model, p. 234
transaction fee model, p. 234
SUMMARY OF LEARNING OBJECTIVES
Now that you have studied Chapter 7, you should be able to:
Describe why people become entrepreneurs and what it takes, personally.
People become entrepreneurs because of the profit potential, the challenge, and the satisfaction they anticipate (and often receive) from participating in the process, and sometimes because they are blocked from more traditional avenues of career advancement. Successful entrepreneurs are innovators, and they have good knowledge and skills in management, business, and networking. Alt-hough there is no single entrepreneurial personality, certain characteristics are helpful: commitment and determination; leadership skills; opportunity obsession; tolerance of risk, ambiguity, and uncertainty; creativity; self-reliance; the ability to adapt; and motivation to excel.
Summarize how to assess opportunities to start new businesses.
You should always be on the lookout for new ideas, monitoring the current business environment and other indicators of opportunity. Franchising offers an interesting opportunity, and the potential of the Internet is being tapped (after entrepreneurs learned some tough lessons from the dot-bomb era). Trial and error and preparation play important roles. Assessing the business concept on the basis of how innovative and risky it is, combined with your personal interests and tendencies, will also help you make good choices. Ideas should be carefully assessed via opportunity analysis and a thorough business plan.
Identify common causes of success and failure.
New ventures are inherently risky. The economic environment plays an important role in the success or failure of the business, and the entrepreneur should anticipate and be prepared to adapt in the face of changing economic conditions. How you handle a variety of common management challenges also can mean the difference between success and failure, as can the effectiveness of your planning and your ability to mobilize nonfinancial resources, including other people who can help.
Discuss common management
When new businesses fail, the causes often can be traced to some common challenges that entrepreneurs face and must manage well. You might not enjoy the entrepreneurial process. Survival—including getting started and fending off competitors—is difficult. Growth creates new challenges, including reluctance to delegate work to others. Funds may be put to improper use, and financial controls may be inadequate. Many entrepreneurs fail to plan well for succession. When needing or wanting new funds, initial public offerings provide an option, but they represent an important and difficult decision that must be considered carefully.
Explain how to increase your chances of success, including good business planning.
The business plan helps you think through your idea thoroughly and determine its viability. It also convinces (or fails to convince) others to participate. The plan describes the venture and its future, provides financial projections, and includes plans for marketing, manufacturing, and other business functions. The plan should describe the people involved in the venture, a full assessment of the opportunity (including customers and competitors), the environmental context (including regulatory and economic issues), and the risk (including future risks and how you intend to deal with them). Successful entrepreneurs also understand how to develop social capital, which enhances legitimacy and helps develop a network of others including customers, talented people, partners, and boards.
Describe how managers of large companies can foster entrepreneurship.
Intrapreneurs work within established companies to develop new goods or services that allow the corporation to reap the benefits of innovation. To facilitate intrapreneurship, organizations use skunkworks—special project teams designated to develop a new prod-uct—and allow bootlegging—informal efforts beyond formal job assignments in which employees pursue their own pet projects. Organizations should select projects carefully, have an ongoing portfolio of projects, and fund them appropriately. Ultimately, a true entrepreneurial orientation in a company comes from encouraging independent action, innovativeness, risk taking, proactive behavior, and competitive aggressiveness.
1. On a 1 to 10 scale, what is your level of personal interest in becoming an entrepreneur? Why did you rate yourself as you did?
2. How would you assess your capability of being a successful entrepreneur? What are your strengths and weaknesses? How would you increase your capability?
3. Most entrepreneurs learn the most important skills they need after age 21. How does this affect your outlook and plans?
4. Identify and discuss new ventures that fit each of the four cells in the entrepreneurial strategy matrix.
5. Brainstorm a list of ideas for new business ventures. Where did you get the ideas? Which ones are most and least viable, and why?
6. Identify some businesses that recently opened in your area. What are their chances of survival, and why? How would you advise the owners or managers of those businesses to ensure their success?
7. Assume you are writing a story about what it’s really like to be an entrepreneur. To whom would you talk, and what questions would you ask?
8. Conduct interviews with two entrepreneurs, asking whatever questions most interest you. Share your findings with the class. How do the interviews differ from one another, and what do they have in common?
9. Read Table 7.1. Which myths did you believe? Do you still? Why or why not? Interview two entrepreneurs by asking each myth as a true-or-false question. Then ask them to elaborate on their answers. What did they say? What do you conclude?
10. With your classmates, form small teams of skunkworks. Your charge is to identify an innovation that you think would benefit your school and to outline an action plan for bringing your idea to reality.
11. Identify a business that recently folded. What were the causes of the failure? What could have been done differently to prevent the failure?
12. Does franchising appeal to you? What franchises would most and least interest you, and why?
13. The chapter specified some of the changes in the external environment that can provide business opportunity (technological discoveries, lifestyle and taste changes, and so on). Identify some important recent changes or current trends in the external environment and the business opportunities they might offer.
14. Choose an Internet company with which you are familiar and brainstorm ideas for how its services or approach to business can be improved. How about starting a new Internet company altogether—what would be some possibilities?
15. Find some inspiring examples of social entrepreneurship and describe them to your class.
16. Brainstorm some new ideas for social enterprise. What challenges do you foresee, and how would you proceed?
7.1 TAKE AN ENTREPRENEUR TO DINNER
1. To get to know what an entrepreneur does, how she or he got started, and what it took to succeed.
2. To interview a particular entrepreneur in depth about his or her career and experiences.
3. To acquire a feeling for whether you might find an entrepreneurial career rewarding.
1. Identify an entrepreneur in your area you would like to interview.
2. Contact the person you have selected and make an appointment. Be sure to explain why you want the appointment and to give a realistic estimate of how much time you will need.
3. Identify specific questions you would like to have answered and the general areas about which you would like information. (See the following suggested interview questions, although there probably won’t be time for all of them.) Using a combination of open-ended questions—such as general questions about how the entrepreneur got started, what happened next, and so forth—and closed-ended questions—such as specific questions about what his or her goals were, if he or she had to find part-ners, and so forth—will help keep the interview focused yet allow for unexpected comments and insights.
4. Conduct the interview. If both you and the person you are interviewing are comfortable, using a small voice recorder during the interview can be of great help to you later. Remember, too, that you most likely will learn more if you are an interested listener.
5. Evaluate what you have learned. Write down the information you have gathered in some form that will be helpful to you later on. Be as specific as you can. Jotting down direct quotes is more effective than statements such as “highly motivated individual.” Also be sure to make a note of what you did not find out.
6. Write a thank-you note. This is more than a courtesy; it will also help the entrepreneur remember you favorably should you want to follow up on the interview.
QUESTIONS FOR GATHERING INFORMATION
• Would you tell me about yourself before you started your first venture?
Were your parents, relatives, or close friends entrepreneurial? How so?
Did you have any other role models?
What was your education/military experience? In hindsight, was it helpful? In what specific ways?
What was your previous work experience? Was it helpful? What particular chunks of experience were especially valuable or rele-vant?
In particular, did you have any sales or marketing experience? How important was this in starting your company?
• How did you start your venture?
How did you spot the opportunity? How did it surface?
What were your goals? What were your lifestyle or other personal requirements? How did you fit these factors together?
How did you evaluate the opportunity in terms of the critical elements for success? The competition? The market?
Did you find or have partners? What kind of planning did you do? What kind of financing did you have?
Did you have a start-up business plan of any kind? Please tell me about it.
How much time did it take from conception to the first day of business? How many hours a day did you spend working on it?
How much capital did it take? How long did it take to reach a positive cash flow and break-even sales volume? If you did not have enough money at the time, what were some ways in which you “bootstrapped” the venture (i.e., bartering, borrowing, and the like)? Tell me about the pressures and crises during that early survival period.
What outside help did you get? Did you have experienced advisers? Lawyers? Accountants? Tax experts? Patent experts? How did you develop these networks and how long did it take?
What was your family situation at the time?
What did you perceive to be your own strengths? Weaknesses?
What did you perceive to be the strengths of your venture? Weaknesses?
What was your most triumphant moment? Your worst moment?
Did you want to have partners or do it solo? Why?
• Once you got going . . .
What were the most difficult gaps to fill and problems to solve as you began to grow rapidly?
When you looked for key people as partners, advisers, or managers, were there any personal attributes or attitudes you were especially seeking because you knew they would fit with you and were important to success? How did you find them?
Are there any attributes among partners and advisers that you would definitely try to avoid?
Have things become more predictable? Or less?
Do you spend more/same/less time with your business now than in the early years?
Do you feel more managerial and less entrepreneurial now?
In terms of the future, do you plan to harvest? To maintain? To expand?
Do you plan ever to retire? Would you explain?
Have your goals changed? Have you met them?
QUESTIONS FOR CONCLUDING
• What do you consider your most valuable asset—the thing that enabled you to make it?
• If you had it to do over again would you do it again in the same way?
• Looking back, what do you feel are the most critical concepts, skills, attitudes, and know-how you needed to get your company started and grown to where it is today? What will be needed for the next five years? To what extent can any of these be learned?
• Some people say there is a lot of stress being an entrepreneur. What have you experienced? How would you say it compares with other hot-seat jobs, such as the head of a big company or a partner in a large law, consulting, or accounting firm?
• What are the things that you find personally rewarding and satisfying as an entrepreneur? What have been the rewards, risks, and trade-offs?
• Who should try to be an entrepreneur? Can you give me any ideas there?
• What advice would you give an aspiring entrepreneur? Could you suggest the three most important lessons you have learned? How can I learn them while minimizing the tuition?
SOURCE: J. A. Timmons, New Venture Creation, 3rd ed. 1994. Copyright © 1994 The McGraw-Hill Companies. Reprinted with permission.
7.2 STARTING A NEW BUSINESS
1. To introduce you to the complexities of going into business for yourself.
2. To provide hands-on experience in making new business decisions.
1. Your instructor will divide the class into teams and assign each team the task of investigating the start-up of one of the following businesses:
a. Submarine sandwich shop
b. Day care service
d. Gasoline service station
2. Each team should research the information necessary to complete the New Business Start-Up Worksheet. The following agen-cies or organizations might be of assistance:
a. Small Business Administration
b. Local county/city administration agencies
c. Local chamber of commerce
d. Local small business development corporation
e. U.S. Department of Commerce
f. Farmer’s Home Administration
g. Local realtors
h. Local businesspeople in the same or a similar business
i. Banks and S&Ls
3. Each team presents its findings to the class.
New Business Start-Up Worksheet
What customer need will we satisfy?
How can our product be unique?
Who are our customers? What are their profiles?
Where do they live/work/play?
What are their buying habits?
What are their needs?
Who/where is the competition?
What are their strengths and weaknesses?
How might they respond to us?
Who/where are our suppliers?
What are their business practices?
What relationships can we expect?
Where are our customers/competitors/suppliers?
What are the location costs?
What are the legal limitations to location?
6. Physical Facilities/Equipment
7. Human Resources
8. Legal/Regulatory Environment
9. Cultural/Social Environment
10. International Environment
ROLLING OUT SCROLLCO
Mandy Toberman had enjoyed her engineering job at Acme Electronics, but she began to grow restless. Most of her work for the past five years had involved designing minor adjustments to existing products. She worried she would lose her edge in a fast-changing industry, and work just didn’t engage her imagination or problem-solving skills the way it once did. In the evenings, she found herself pursuing new ideas, researching some of the latest technology, and testing out some possible inventions. As the weeks passed, Mandy became increasingly interested in one idea: an e-reader made with flexible materials that could be rolled up and stuffed into a satchel, backpack, or purse. At first she doubted it could be made, but with some investigation, Mandy began to develop a design for the device, which she called the Scroll.
The more Mandy considered the Scroll, the more she thought it would be an exciting new product for Acme to offer. It would open up a whole new area of sales for the company, which had not seen much growth for the past few years. It would generate tremendous publicity for Acme and excitement in her division. So Mandy collected a few of the drawings she had created, estimated the manufacturing costs, and prepared a proposal. She invited her supervisor, Tom Ringsack, and two of her colleagues to a meeting, saying only that she had an idea she wanted to bring up.
At the meeting, Mandy started her laptop to show her drawings and describe her idea for the Scroll. The other engineers’ eyes were wide, and Mandy could sense their eagerness to explore the concept. However, Tom sighed and said, “Mandy, you know our situation, right? In the present economy, we can’t get a lot of financing for risky new projects. We have to focus on the product enhancements that will increase our profit margins, and the budget for anything else is tight—well, really, nonexistent.” Mandy could tell the discussion was over, so she shut down her computer with a quiet sigh.
That weekend, Mandy spent hours at her desk at home, beginning to plan her escape from Acme Electronics. She perused the Small Business Administration website, looking for advice on writing a business plan, and explored her LinkedIn network, looking for contacts who might give her advice—and possibly
funding—for her start-up, which she intended to name ScrollCo. By the end of the weekend, feeling more than a little nervous, Mandy had drafted the outline of a business plan.
1. What actions could Acme Electronics take to foster intrapreneurship? What consequences does it suffer from failing to foster it?
2. What information should Mandy include in her business plan?
3. Describe three nonfinancial resources likely to be important for the future of ScrollCo. How can Mandy ensure that her business has those resources?
PART TWO SUPPORTING CASE
Can Foxconn Deliver for Apple?
Apple is famous for its attractive and highly prized electronics, including iPhone and iTouch portable devices, iPod and iTunes for music, and iMac and iPad computers. However, Apple doesn’t actually make any of its products. Rather, it develops ideas, designs devices, and promotes the products and its brand. To put the devices together, Apple relies on a set of contractors.
One of those contractors is an electronics company called Foxconn, based in Taiwan. With factories located in China, Foxconn has combined manufacturing expertise with low-cost labor to win deals to make computers and key components such as motherboards. As consumers have slowed their spending on laptop computers in favor of smaller devices such as the iPad tablet computer and smartphones, Foxconn has benefited. As of this writing, it was the only company making Apple’s iPad and one of just two makers of Apple’s iPhone. Workers at Foxconn facilities also produce the Sony PlayStation 3, the Nintendo Wii, Dell and Hewlett-Packard computers, and Nokia cell phones. In China alone, Foxconn employs almost a million workers, making it one of the largest employers in the world. Many of those workers live in on-site dormitories, eat in company-run dining halls, and relax in bookstores and gyms located right at their workplace.
Recently, Foxconn has been running into some tragic problems. In 2010, the company drew international media attention when it came to light that several workers at Foxconn’s plant in Shenzhen (a city in southern China) had committed suicide. Questions arose about whether working conditions were so horrible as to drive workers to kill themselves. Apple sent executives accompanied by suicide prevention experts to the plant to investigate. Although Apple requires its contract partners to meet specific standards in its code of conduct, and it visits over 100 facilities a year to ensure compliance, it had failed to uncover any problems at Foxconn before the suicides came to light.
In the following year, Foxconn was again in the news about a tragedy when an explosion in its Chengdu, China, plant killed 3 workers and injured 15. Initial investigations suggested that the explosion was the result of a fairly basic manufacturing safety problem: because of improper ventilation, dust collected in the air of a metal-polishing shop, and the dust ignited. If such a problem occurred in the United States, regulators would quickly shut down the facility for violating safety requirements.
Embarrassed by the media and pressured by important customers such as Apple, Foxconn acted to improve working conditions. At the Shenzhen plant, it brought in counselors, improved training of managers and the staff answering calls on the employee hotline, and launched a morale-boosting program called Care–Love, which sponsors employee outings. In the factories in Chengdu and elsewhere, the company took measures to improve ventilation. Along with these changes, Foxconn began giving out raises. In Shenzhen, workers’ wages more than doubled.
Since Foxconn launched the effort to improve morale, employee turnover has fallen, and the suicides seem to have ended. Unfortunately, the payoff for the company is difficult to measure. Higher costs have erased profits, and Foxconn’s stock price has tumbled. So now the company is looking for lower-cost locations. It opened facilities in China’s interior cities, where wage rates are about one-third below those of Shenzhen, and is investigating sites in Slovakia, Turkey, and Brazil. Besides saving money, the additional facilities in China may contribute to morale by allowing workers to live closer to their hometowns and families; many of the workers at the Shenzhen facility had traveled far to work there and were homesick.
1. What threats, opportunities, strengths, and weaknesses can you identify at Foxconn? How is it addressing these with its strategy?
2. If Foxconn’s management hired you to offer advice on improving its ethical decision making and corporate social responsibility, what measures would you suggest? Why?
3. For Foxconn, what management challenges arise from running an exporting business based in China and serving developed nations such as the United States? What management skills does it need under these circumstances?
Sources: T. Culpan, Z. Lifei, and B. Einhorn, “Foxconn: How to Beat the High Cost of Happy Workers,” Bloomberg Businessweek, May 5, 2011, http://www.businessweek.com; D. Nystedt, “Apple: Foxconn ‘Saved Lives’ with Suicide Prevention Efforts,” PC World, February 15, 2011, http://www.pcworld.com; J. Bussey, “Measuring the Human Cost of an iPad Made in China,” The Wall Street Journal, June 3, 2011, http://online.wsj.com; “Apple Report Details Response to Foxconn Suicides,” eWeek, February 15, 2011, Business & Company Resource Center, http://galenet.galegroup.com; and J. Dalrymple, “Apple Reports on Foxconn, Supplier Workplace Standards,” CNET News, February 14, 2011, http://news.cnet.com.