Importance of Market Focus

Reprinted with permission from The Hindu Business Line.

The story of Starbucks is one that best illustrates the importance of market focus.

Right from its inception, Starbucks was based on rapid growth. Howard Schultz, its founder, believed that no one living in a city in the United States should have to walk more than five minutes for a cup of Starbucks coffee. This is the reason that the number of Starbucks outlets grew more than two and a half times between 2003 and 2007. This period also saw a great growth in sales. By 2008 however, sales revenue as well as profitability collapsed sharply. Not only had the rapidly growing number of outlets begun to cannibalize each other but they had also begun to attract a segment of customers that was not their original target segment: the ‘take away’ segment. This segment consisted of customers who were on their way to work or back, or those who took a short break to quickly grab a steaming cup of coffee. Starbucks, whose original segment consisted of people who wished to sit down and enjoy a premium coffee experience, began to now focus on the take away segment. In keeping with this, they began to automate their coffee delivery service, stopped grinding fresh coffee beans and introduced flavor locked packaging which diluted the rich coffee aroma that was always in the air in any Starbucks outlet. In an attempt to grow the top line, new products and services were also introduced. This included wi-fi, music production as well as the sale of merchandise like teddy bears.

As long as Starbucks served their core customers, they obtained handsome revenue growth, profitability and market capitalization. However, once they began to pay attention to incompatible segments, their service delivery to their core customers weakened. In 2007, in an internal memo to top management, Howard Schultz admitted that the problem was most likely the ‘commodization of the Starbucks brand’. Many refer to this as the ‘McDonald-isation of Starbucks’

This serves as an important learning for all businesses. Whether you are a company that deals in millions of dollars or just a start up, it is critical to focus on your core market and serve your target segment. If you drift away from the core customers who have supported and patronized you, you are likely to be punished by the markets. For a startup, this is equivalent to creating a company that is not attractive to investors. This in turn proves problematic in attracting good talent. Retaining customers poses a significant challenge in the absence of good investors and good employees. Businesses must also resist the temptation of exploring other areas without a clear understanding of, and a thorough research into, the same. Focus on core customer is the mantra for growth.

In 2008, the Board invited Howard Schultz back as the CEO. Among the first things Schultz did was cut the expenses of the company by $600 million. Store expansion was next on his list. Schultz even closed down 1000 stores around the world. He then refocused the attention of employees on identifying and serving core customers. Music production and sale of merchandise was also stopped. The store went back to grinding fresh coffee beans. When serving their take-away segment, the coffee grinding machines were so big that customers couldn’t see the faces of the barista and had difficulty striking up a conversation. In 2008 however, in an effort to personalize the customers coffee experience, the machines were designed and developed specifically to allow for interaction between the barista and the customer. This too is an important lesson for businesses. As companies grow, they are likely to lose touch with their customers. However, unless the company is able to reconnect with its principal customer and re-establish intimacy, competitors are sure to come in and woo the customers away.

Thanks to the steps taken by Schultz to go back to the basics, the profits of Starbucks jumped back by 2010. In fact, profit before tax to sales and profit after tax to sales have been the best ever in the country. Share prices too rose, even when the NASDAQ remained essentially flat.

As an entrepreneur, it is important that you look at new sources of growth. Equally important however, is knowing when to pull back. As Howard Schultz said, ‘Growth is not a strategy, it is a tactic. And if growth becomes a strategy, it is not an enduring one’

How and when to Scale your business?

Reprinted with permission from The Hindu Business Line.

Scaling a business from zero to millions is not easy, but it can be done and my company Rentwise is the perfect example of this. Our core business is in helping companies implement a consistent and up-to-date IT infrastructure across the organization, under a rental or operating lease structure. By doing so, we help our customers conserve capital to invest in their core business. Thanks to key scaling strategies used by us we have managed to grow the company from zero customers to more than 300 and from 10 employees to more than 70 today – all in the short span of six years.

Attracting and retaining key employees is an important scaling strategy. As an entrepreneur or a CEO, there is only so much you know and only so much you can do. It is possible that you’ve exhausted all your ideas in the process of starting up and building up a company. This is where your team steps in, bringing with them a fresh perspective and new ideas. In an effort to attract and retain good talent, a conscious effort was made by us to share the company’s successes with employees and contribute to their personal growth. ESOS or a form of Employee Equity Participation played an important role in sharing successes with key people. Clearly defined goals and KPIs were also implemented to motivate them and keep them focused. Incentive based compensation or a bonus system that rewards hard working and loyal employees also goes a long way. It is important to remember that good people will want to be with a growing business that is rewarding them and unless you reward them, they can’t be blamed for following a better opportunity elsewhere. Retaining key people and allowing them to participate in their own personal growth plays a big part in growing a small business.

The next thing we did was identify adjacent products and services or adjacent markets. Since going into new segments would mean starting from a low base and going through a business start-up phase again, we chose to look into services and products which were connected to what we were already working on. By doing this we managed to leverage on our existing expertise and grow without incurring the costs that would go into supporting a new business. A thorough customer analysis plan was then set in motion and we spend a lot of visiting and talking to our customers to better understand them. We discovered that all our customers had one thing in common – a very diverse IT infrastructure that was the result of a traditional IT procurement practice based on restrictive budgets and the best IT deals available at the time of purchase. This legacy of inconsistent technology throughout the organization leads to issues of poor security, non-maximization of software and incompatibility problems. We also discovered that all customers aspired to achieve a standard IT operating environment which will help them overcome the problems of a diverse IT infrastructure. Having determined the problems faced by our customers and their desired solutions, we embarked on identifying the products and services we could offer them to satisfy their needs. Thanks to this exercise we also discovered a whole range of services that we could monetize through our existing customer base. For example, we offered our national and international customers asset tracking, something we were doing for ourselves, as a billable service. We also offered installation and de-installation as a chargeable service and also moved into data mining, among other things.

A golden rule in scaling is ‘Don’t scale unless you can differentiate’, and having identified our adjacencies, we went on to identify our differentiation factors. We discovered what we were good at and what we did better than our competitors and came up with eight additional services that our competitors did not offer in totality. This was then included in the entire Rentwise package, giving us a big edge in the market.

The next step is to ensure that the right systems and processes are in place. Documenting systems allow both internal and external people to know what to do. Most businesses scale by having replicable systems that everyone in the organization understands. Having replicable systems is made easier if a business understands the niche they serve since areas of commonalty or similar situations are more likely to be the same for a majority of your customers. Dominating your micro niche means ease of replicating systems which in turn allow your business to scale.

Organic growth or mergers and acquisitions are the next step in scaling. Both involve healthy risk taking appetite and reinvestment of money. Merging one business with another also involves the risk of transfer of equity, integration of systems and processes as well as co habilitation and cooperation of two cultures. These issues need to be worked out before you determine which the right path is, for your company as well as yourself since, as CEO, you are the key driver.

Leadership 1.1

Reprinted with permission from The Hindu Business Line.

At a time when decisions are being taken at unit and department levels and when leaderless social movements seem all the rage, many may question the need for leaders. The truth however is that there is a leader in every crowd who takes the team forward in a certain direction. Leaders are present in all fields, but it is important to have the right form of leadership in the right field as style and content of leadership differs from field to field.

People are not born leaders. Circumstances, learnings and a strong desire to lead make people leaders. The best example of this is Mr Ratan Tata, CEO of the Tata Group. When he started as the Head of Tata, he was known to be an extremely shy and private person. With time though, the qualities of a leader bloomed within him and the difference between Ratan Tata, the Executive and Ratan Tata, the Leader were quiet apparent. He was not born to be the CEO of the Tata Group, nor did he become a leader overnight, he simply trained himself to be one.

Leadership Qualities

The first and foremost quality of a leader is his ability to form and hold a team. The ability to hold a team together and direct them towards a goal, even when the formulation of the team is beyond the control of the leader, is the true mark of a great leader. The ability to hold a team together does not come from the authority given to the leader by the company but by the trust that the group he leads places in him. Unless they are able to buy into him based on his emotional intelligence and his ability to handle different people differently, the leader will not be able to hold the team together or direct their focus on the wellbeing of the company.

The ability to keep the focus of the team on the goal is also the quality of a good leader. It is essential that the goal be made known to every member of the team in a language that he/she understands. For instance, top management understands the language of money while lower management talks in terms of number of units to be produced.

It is important that the leader ensures the safety of his team by keeping external and internal threats in check. A leader must also ensure that teams are deployed in proportion to the threats being faced as this keeps other areas of the business from weakening or being left unattended.

Becoming a good leader

The success of a leader is determined by the success of his team. One of the first steps to becoming a good leader is ensuring you have a good team. Having team members who are on the same wavelength and frequency as the leader ensures harmony and greater cooperation within the team.

The second step to becoming a good leader is setting clearly defined, time-bound goals that are made known to all the members of the team

Delegation forms the third step to becoming a good leader. Delegation is essential since it not only frees the leader from day to day operations, but also makes his time available for other, more important duties. Delegation also helps the leader keep checks and balances in place, review overall operations and help in identifying and training potential leaders.

Sharing the spoils on reaching the goal is the last step. Even the smallest of victories must be celebrated as these give you a chance to reward your team and create a positive work atmosphere which will push the team members work harder. It is important to remember however, that sharing the spoils goes beyond just monetary rewards. It is sharing the recognition and appreciation, and acknowledging that each member has contributed immensely in reaching the goal.

Leadership Styles

Leaders display different styles of leadership depending on the field and the team they are dealing with.

A leader who leads from the front is called a Captain. This style of leadership is seen mostly in small scale industries or in the field of sports, where the leader is expected to demonstrate his ability to solve a problem or overcome a situation. A Captain needs to display strong leadership and have a reliable, strong and well-knit team. He must also know the nuances of all the roles that his team members play and must be able to demonstrate them as well.

A Coach is a leader who has a thorough understanding of not just the processes, but the people as well. This type of leadership works very well in IT, R&D and Finance where training, re-training and development of skills of employees is critical.

The leader of leaders is known as the Guru. This style of leadership is apt for a large team with numerous goals. A Guru not only sets the tenets, but leads by example and follows them religiously.

A Cheerleader is the kind of leader found in most MNCs. He appreciates and celebrates all the victories of the team and pushes and motivates the team through their losses.

Dictators come into play when the company is faced with a dire situation which cannot be made known to the employees to ensure the wellbeing of the company. Dictators give orders which are to be followed completely and without opposition.

Although there are many leadership styles, it is not advisable to stick to just one. Instead, the leader must adopt different styles keeping in mind the field, the team and, most important of all, the situation.

Making family business work into the next generation

Reprinted with permission from The Hindu Business Line.

Evidence suggests that over 70% of family businesses do not make it to the third generation and fewer still make it to the fourth. Understanding how the 30% managed to survive successfully goes a long way in helping family businesses to preempt failure and transfer a positive legacy to the next generation.

One mantra to live by when dealing with a family business is: The family business must grow faster than the number of family members who aspire to be part of it. Stagnation kills any business and the same holds true for family businesses. Continuous growth coupled with profits and a good cash flow are essential for maintaining the peace in business families and ensure that the business grows faster than the number of members who aspire to be a part of it. Developing a strong, successful brand and scaling to national or global expectations also acts as a motivator for the highly educated younger generations who have a multitude of career options to choose from.

A good thumb rule to follow is to formalize processes when the number of family members already in business and the number of potential entrants to the business increases beyond those visible at a ‘breakfast table meeting’. Family businesses also need to align their purpose, objectives and plans in keeping with the aspirations of both, the incoming younger generation as well as existing members in order to successfully cope with the increasing complexities of running a family business.

An important tool in ensuring a smooth succession is a strong retirement policy. It is often seen that due to the lack of a retirement policy, members of the older generation are unwilling to pass on the business to younger members, leading to frustration and resentment among the younger generation. The older generation also resists ‘letting go’ as they fear losing their monthly income and other employment related benefits that support the lifestyle they are used to. Therefore, a retirement policy that addresses the insecurities of the older generation as well as the aspirations of the younger generation must be put in place. A formalized management structure that clearly defines the roles, functional responsibilities, authority as well as accountability of the family members active in business also helps in a smooth succession, leaving no room for miscommunication.

A solution package with external assistance if necessary, in the form of a ‘partnership pact’ or a ‘government code’ lends process integrity to the family business, helping unite the older and the younger generations.

Succession as a process must not be translated into an over-simplified exercise in which a single family member over-rides other equally capable family members. Almost every member of the younger generation these days is capable of leading a business on his own and it is important to have a succession plan that reflects this. A good succession plan will re-structure the enterprise to harness the leadership skills and potential of competent members of the family and help create new growth opportunities that will further enhance opportunities for progress of other family members as well as the family enterprise as a whole.

How expert Entrepreneurs go about doing things

Reprinted with permission from The Hindu Business Line.

Most people believe that entrepreneurship is not meant for them since entrepreneurs seem to be very different and even hero-like, as with entrepreneurs like Steve Jobs. The truth however, is that it is their business decisions that set entrepreneurs apart from the rest. And with the right guidance, anyone can be a successful entrepreneur.

Professor Saras Sarasvathy accurately sums up entrepreneurs with her definition: ‘Expert entrepreneurs do not necessarily begin with an opportunity or market research. Instead, they start with who they are, what they know and whom they know. These are their primary means. What they have, that is, capital assets, is a function of their identity, knowledge and networks’

What sets an entrepreneur apart from a professional manager is his way of thinking. Managers display causal thinking by first looking at the effect they wish to create and then determining how to create it. When a manager is given a goal, he typically looks at the different means of production available and chooses one which allows him to reach his goal in the most optimum manner. A manager plays by the rules and keeps his eye on the goal. On the other hand, an entrepreneur displays effectuation based thinking by taking into account who he is, what he knows and who he knows in order to come up with a new way to create value. An entrepreneur does not base his decisions on a pre-planned goal, and chooses instead to look at the several outcomes and ends made available to him with the means he possesses. He does not play by the rules, he changes the game because, like Professor Sarasvathy says ‘Building a business is more about using what you know than finding the perfect market niche or opportunity’.

A typical example of managerial thinking is the process used when creating a new enterprise. A large company looking at entering a new business will first look into market data, population growth, spending power of buyers, etc. Based on the research done, they will then determine the most viable business to enter (say, for instance, the restaurant business). Segmentation, based on geographical, social and economic terms is then done and the target segment determined. The business is then positioned keeping in mind the target segment. For instance, the restaurant may be positioned as offering healthy food for office goers. The various aspects of the business are then designed and developed in accordance with the positioning of the new business. For the restaurant, this would include recipes, menu, layout, ambience, etc.

While a manager displays a typical textbook MBA approach in creating a new business, an entrepreneur uses an approach that allows him to fully utilize the resources available to him. For instance, a chef in a hotel who wants to get into business but does not have the finances required to do so may choose to look at the other options available to him. Knowing that he is a good cook and deciding to work with what he has, he decides to look at who he knows. This may lead him to a friend in an administrative post in a software company who may get him an order to supply lunch to the employees there, leading to the creation of his catering business. During his interactions, a new customer may ask him to share his recipes which could give the entrepreneur the idea to publish a recipe book or even open a class to teach people how to cook healthy. This may lead to an invitation to speak at a seminar and open the door for the entrepreneur to enter public-speaking. Once the entrepreneur determines what works best for him, he can standardize processes so he can start scaling those activities. So an entrepreneur starts with who he is, what he knows and who he knows. As the entrepreneur goes about interacting with people and getting commitment from different stake holders, his identity, knowledge and network continue to evolve leading to the development of new means and ends which lead to more new means and ends, and the cycle continues. This, essentially, is the effectuation process.

Many share Dr Mathew Manimala’s view that ‘entrepreneurship can be called the science of muddling through’ since entrepreneurs take decisions and risks which others may not understand. The concept of risk is very different for entrepreneurs since no one has as much information about the business as they do, neither can anyone else fully understand the position they are in. Just as a tightrope walker knows that he has taken the necessary precautions to be safe despite onlookers believing that what he is doing is reckless, so too an entrepreneur knows that the risks or business decisions taken by him are backed by logic and reasoning.

For entrepreneurs who are just starting their journey, it is important to first get a better understanding of yourself. The best way to do this is to introspect and discover your strengths, your values and your beliefs to ensure that you’re doing something you love and value. Knowledge comes next. While it is important to know what you’re good at and the skills and expertise that you possess, it is equally important to keep picking up knowledge and expertise in different areas since these may come in handy at a later stage. Constantly building and cultivating your network is also important as you never know when it may come handy. An equality of these three things not only help build an enterprise, but also determine its success.