nat enterprise(Eighth article of a series on Natural Enterprise, and eighth chapter of a book-in-progress on the same subject)

A few months ago I was taking our dog, Chelsea, for a walk in the local park. The park has a sizeable playground, and as we entered, Chelsea, who loves kids, trotted over and licked the leg of a little boy who was standing near the sandbox. The boy immediately smiled, turned around, put down his toy bulldozer and dump truck, and petted Chelsea enthusiastically. As we went on our way, I noticed the boy was watching three bigger kids in the sandbox. Given that he obviously wasn’t shy (at least with animals) I wondered why he looked reticent about joining the others, since his toys were clearly intended for the sand. When we returned back the way we came, we saw the boy playing by himself in a large park garden that had been excavated and filled with topsoil, but not yet planted. He had clearly decided that the sandbox was too crowded, and, although it was unconventional, the much larger, unoccupied garden was the perfect place to play. He smiled and waved to us. That, I said to myself, is the very picture of an entrepreneur.

Not to strain the analogy too far, the kids in the sandbox had three competitive advantages over the enterprising boy: They were bigger than him, they were there first, and they appeared to know each other and be playing together. The economy that has emerged in the last generation looks very much like this sandbox. Size counts, being first into a market counts, and oligopoly (a few large ‘players’ cornering the market for some product or commodity) creates a nearly impossibly high entrance barrier for new players. I often feel sad for new immigrants to the West who invest their money in franchises that are cookie-cutter imitations of each other, in saturated markets, because they don’t understand the rules of the new economy. It’s capitalism, and you still can beat the odds and succeed, but it’s a closed system, heavily biased in favour of those with great wealth and influence. The best, simplest road to success for the entrepreneur is to make your own sandbox.

In a previous chapter, I pointed out the critical differences between what I call Natural Enterprise and the traditional business:

  • Where the traditional business develops its product, mass produces it, and then advertises to create demand for the product, Natural Enterprises start by identifying unmet customer needs, developing customized solutions, then delivering to the pre-qualified customers, and marketing virally.
  • Where the traditional business has a hierarchical organization structure and common shares, with control of the business often wielded by corporations or people other than those who run it, Natural Enterprises are flat and unincorporated, controlled equally by their members.

The economy is always changing, always evolving, and the New Economy, the one that was supposed to be powered by information, ‘intellectual capital’ instead of physical and financial capital, is still a work in process. Two overarching economic trends of recent years have largely stalled its evolution: Globalization, which accelerates the concentration of power in the hands of the oligopolies which control most industries in the economy, and privatization, which views the dismantling of government as a positive step towards efficiency, free markets and individual enterprise, but which is in fact a sell-out of essential public assets to large oligopolies, an abandonment of the responsibility of government to regulate irresponsible corporate behaviour, and a huge disincentive for innovation. As Adam Smith said, “the real purpose of government is to protect those who run the economy from the outrage of injured citizens”. This has become discouragingly true over the past half-decade, at least in North America.

So here are the grim facts facing entrepreneurs at this mid-point in the evolution towards a new economy:

  • Oligopolies rule. No matter what industry you’re in (or trying to enter) it’s probably dominated by a small, ruthless oligopoly with very deep pockets, armies of lawyers, and governments in their back pockets.
  • It’s already patented. Governments (greased by campaign funding) are allowing large corporations to patent not only products, but very broad processes and concepts as well. Established businesses are attempting to preclude any innovation that could disrupt their control of the market. No matter what you try to do, no matter how novel or imaginative, it’s probably already patented or copyrighted by a large corporation. With an army of lawyers.
  • Big guys buy cheap. Large corporations are able to bully governments to lower standards and taxes and provide them with subsidies, and bully suppliers, usually in third world countries, to sell to them at rock-bottom prices, and lower these prices every year. This gives them a substantial cost advantage over the entrepreneur.
  • Prepare for impact. The economy is currently in serious trouble, thanks to reckless levels of debt incurred by the Bush government, horrendous trade imbalances, excessive debt loads of many large corporations, artificially suppressed interest rates, and absurdly overpriced stock markets and real estate markets. Personal debt levels are already at record levels, and when the economy goes into deep recession consumer buying power is going to disappear.

That’s the bad news. Here’s the good news:

  • You can be (nearly) recession-proof. If you establish a Natural Enterprise, with the two critical differences summarized above, you will be selling something you know meets a need, so you are much less likely to be affected by an economic downturn than a company producing something frivolous, fashionable, cyclical or otherwise non-essential. And because you’re not relying on outside investors like most businesses, your business won’t collapse when those investors suddenly decide or need to cash in their holdings to cover other losses in an economic downturn.
  • Four industries still have lots of room in the sandbox. The information economy has still barely begun. Of the four industries that are poised for the most explosive growth in the next decade, as baby boomers move into their retirement years, three of them — health care, education, and the ‘connections’ industry (personal networking and communications) — are driven more than anything else by information and innovation. [The fourth is recreation, largely an ‘old economy’ industry, at least for baby boomers.] These industries are going to face such enormous growth, such extraordinary new needs, and such breathtaking change that they will probably be unrecognizable in a generation. There is huge opportunity in these industries for entrepreneurs, and these ‘sandboxes’ will be just too immense for even the most vicous and reactionary oligopolies, with all their lawyers, to control or dominate.
  • You’re agile, they’re not. Consumers are becoming more demanding, and starting to flex some of their economic muscle. The Internet is providing a place for them to convey their needs and obtain and share information, and for agile suppliers to meet those needs. Large corporations are inflexible and depend on volume and ‘economies of scale’ to be profitable. As hard as they may try to ‘mass customize’ their products and services, they will be at a disadvantage relative to the millions of entrepreneurial businesses that can produce one-off solutions with almost no lead time. As consumers learn that entrepreneurs can give them exactly what they want, and large corporations can only give them standard off-the-shelf brand names, consumer preference will inevitably shift in favour of entrepreneurs.
  • You can offer better value. There is a growing consumer backlash against globalization and its consequences — outsourcing, offshoring, shoddy quality, lost jobs, poorer jobs, ruined communities and environmental carnage. Consumers are beginning to favour small, local businesses that can (and must, to survice) provide quality and service that has become too ‘expensive’ for large multinational corporations to offer.  And although Wal-Mart may sell something cheaper, the three inherent inefficiencies of large corporations (bureaucracy, exorbitant management salaries, and massive profit margins demanded by shareholders) mean that Wal-Mart’s price isn’t that much cheaper, and is actually poorer value-for-money than what the small, local business can provide.

So what are the rules for entrepreneurs to succeed in this new, still not-fully-formed economy? Here are some of them:

  1. Don’t try to play in the big guys’ sandbox. You may have a great idea for a new pre-moistened window-cleaning, eyeglass-cleaning wipe, but do you really think Proctor & Gamble will let you make any money at it? You have to find a need that the big guys, for whatever reason, can’t fill. Take advantage of their lack of agility, their focus, their disinterest in niches and specialization, their inability to customize, their physical distance, to find needs that they wouldn’t even think of trying to satisfy.
  2. Don’t borrow money or give up equity. When the economic recession hits, or interest rates spike, those in debt, or with expensive equity, will fall like flies. Of course organically financed businesses are harder to get started, and they grow more slowly. But financial leverage is a double-edged sword. In bad times, it can kill you.
  3. Avoid lawyers, and the need for lawyers. If you get into a legal fight to defend your intellectual property from a bigger guy, or because a bigger guy has sued you over your alleged infringement, you’re going to lose. It may not be fair, but in court the most expensive team of lawyers almost always wins.
  4. Be careful lying down with elephants. Many entrepreneurs find that the Business-to-Business niche is more lucrative, easier, or better suited to their competencies than a Business-to-Consumer business. Often that means your customers are much bigger than you. If you’re careful, attentive, provide something unique and make a healthy margin with these customers, that can be a formula for great entrepreneurial success. But watch out if the elephant rolls over — if it gets sold, or decides to change suppliers, or decides to squeeze suppliers, you could be squashed.
  5. Do what you know. And know what you’re doing. When times get tough, or new, disruptive innovations start creating waves in an industry, experts survice and dilettantes flounder. You must always be the best at what you’re doing. If the idea of being in a particular business intrigues you but it’s not in your area of competency, go work for someone else who is competent in it first. Then when you’re an expert, go on your own.
  6. Follow the money. The four big-opportunity industries noted above are going to explode because they are aligned with the needs of baby-boomers, who (by sheer numbers) have much of the disposable income in our society. Read books like Boom, Bust & Echo to find out who has the money, and then follow it — find out what they’re spending it on and why, and what they’ll need next. This is especially true in a fragile economy, because the rich are the last to stop buying and the first to re-start.
  7. Know your customer. Next to running out of cash, and making bad management decisions, not knowing your customer — what they need and why they buy — and not investing social capital in relationships with customers, is the biggest cause of entrepreneurial failure. The reasons why customers buy what they do, and don’t buy what they don’t, aren’t always logical or even informed. You can’t understand this from a distance — surveys and studies of buying patterns won’t tell you. You have to spend time with customers (real and prospective) and get inside their hearts and minds. These relationships also help recession-proof you, and, if you use them properly, they will provide most of the fodder you need for continuous innovation (rule #9 below).
  8. Network with other entrepreneurs. The big guys network constantly with their suppliers, other corporate executives and even competitors. They leverage their contacts and, without the need for a LinkedIn or a Ryze, they know who to call for information and advice on anything that can happen that affects their business. They don’t need to have all their expertise on staff or on retainer. Entrepreneurs, for some reason, seem to do this less (probably they’re too busy trying to do everything themselves). Most entrepreneurs need to do it more, especially one-on-one.
  9. Innovate. The big guys don’t want to innovate (they think it’s expensive and risky), they don’t have to innovate (in today’s economy it’s easier for them to litigate, pre-emptively patent and buy out innovators than to develop anything radically new themselves), and they’re no good at innovating (they’re too big, too inflexible, and too risk-averse and cost-conscious). That’s your competitive advantage as an entrepreneur. And innovation isn’t just about products and services, and about pre-start-up activity, it’s about every aspect of the business — products, services, processes, distribution channels, technologies, organization, structure, strategy, everything — and it must be continuous. There’s a simple, intuitive process for doing it:

innov process
Economies can change quickly, and if this one can get past its current difficulties we might get back on the very healthy track we were on in the 1990s, when investment in innovation and information was on the upswing. At that point, some of these rules may change again, as new economic developments and changing demographics and buying preferences present new opportunities.

It’s important that the entrepreneur understand the economy — how it works in theory, how it works in practice, and what are the trends right now. The business press is generally focused on the needs of the investor, rather than those of the entrepreneur, and when they actually talk about what’s happening in business, it’s almost always about large corporations — information and advice that’s often not translatable, and sometimes even dangerous, in the entrepreneurial world. There are some excellent entrpreneurial magazines, the best in my opinion being Fast Company (which also has an excellent blog), Business 2.0, and Wired. There are some good blogs by economists too, like Globalize This and MaxSpeak.

What every entrepreneur needs, though, is someone to help them think through what these changes in the economy mean to their business, and to their customers’ needs and buying habits. Intelligent, informed conversations on this subject — with customers, with network colleagues, and with advisors, paid and unpaid — can provide this context and this insight, and help entrepreneurs understand and navigate the economy — the old one, the new one, and whatever is coming next.

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  1. Ben koot says:

    Hi Dave, A great chapter. I look forward to the finished book. To me it makes perfect sense, as I believe I think like you. As a matter of fact I am modeling my business concept around this philosophy. In the mean time, us simple folks that use our brains still have to communicate with the old world, living in the MBA age. Many official procedures still only work by abbiding to outdated rules and regulations. Any thoughts on how to bridge that gap. To some extend you can’t blame the folks with less creativty, although they can be the cause of lack of progress.CheersBen

  2. Dave Pollard says:

    Thanks, Ben. The chapter on Day to Day Operations will have something on bridging the gap, and working with ‘old economy’ businesses and thinking.

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