How Entrepreneurs CraftStrategies That Work

by Amar Bhide

Reprint 94202

Harvard Business Review

HarvardBusinessReviewMARCH-APRIL 1994

Reprint Number

JAMES P. WOMACK FROM LEAN PRODUCTION TO THE LEAN ENTERPRISE 94211AND DANIEL T. JONES

LYNN SHARP PAINE MANAGING FOR ORGANIZATIONAL INTEGRITY 94207

THOMAS H. DAVENPORT SAVING IT’S SOUL: HUMAN-CENTERED 94203INFORMATION MANAGEMENT

REGINA FAZIO MARUCA THE RIGHT WAY TO GO GLOBAL: 94210AN INTERVIEW WITH WHIRLPOOL CEO DAVID WHITWAM

AMAR BHIDE HOW ENTREPRENEURS CRAFT STRATEGIES THAT WORK 94202

J.L. HESKETT, PUTTING THE SERVICE-PROFIT CHAIN TO WORK 94204L.A. SCHLESINGER, ET AL.

HBR CASE STUDYANDREW D. BARTMESS THE PLANT LOCATION PUZZLE 94201

PERSPECTIVESEDUCATING THE WORKFORCE OF THE FUTURE 94208

IN QUESTIONMARTHA NICHOLS DOES NEW AGE BUSINESS HAVE A MESSAGE FOR MANAGERS? 94206

WORLD VIEWVLADIMIR KVINT DON’T GIVE UP ON RUSSIA 94205

FIRST PERSONBILL SELLS WHAT ASBESTOS TAUGHT ME ABOUT MANAGING RISK 94209

How Entrepreneurs Craft

Copyright © 1994 by the President and Fellows of Harvard College. All rights reserved. HARVARD BUSINESS REVIEW March-April 1994

However popular it may be in the corporateworld, a comprehensive analytical approach toplanning doesn’t suit most start-ups. Entrepreneurstypically lack the time and money to interview arepresentative cross section of potential customers,let alone analyze substitutes, reconstruct competi-tors’ cost structures, or project alternative technol-ogy scenarios. In fact, too much analysis can be

harmful; by the time an opportunity is investigatedfully, it may no longer exist. A city map and restau-rant guide on a CD may be a winner in January butworthless if delayed until December.

Interviews with the founders of 100 companieson the 1989 Inc. “500” list of the fastest growingprivate companies in the United States and recentresearch on more than 100 other thriving venturesby my MBA students suggest that many successfulentrepreneurs spend little time researching and an-alyzing. (See the insert, “Does Planning Pay?”) Andthose who do often have to scrap their strategiesand start over. Furthermore, a 1990 National Feder-ation of Independent Business study of 2,994 start-

ups showed that founders who spent a long time instudy, reflection, and planning were no more likelyto survive their first three years than people whoseized opportunities without planning. In fact,many corporations that revere comprehensive anal-ysis develop a refined incapacity for seizing oppor-tunities. Analysis can delay entry until it’s too lateor kill ideas by identifying numerous problems.

Yet all ventures merit some analy-sis and planning. Appearances to thecontrary, successful entrepreneursdon’t take risks blindly. Rather, theyuse a quick, cheap approach that rep-resents a middle ground betweenplanning paralysis and no planningat all. They don’t expect perfection –even the most astute entrepreneurs

have their share of false starts. Compared to typicalcorporate practice, however, the entrepreneurialapproach is more economical and timely.

What are the critical elements of winning en-trepreneurial approaches? Our evidence suggeststhree general guidelines for aspiring founders:

1. Screen opportunities quickly to weed out un-promising ventures.

2. Analyze ideas parsimoniously. Focus on a fewimportant issues.

3. Integrate action and analysis. Don’t wait for allthe answers, and be ready to change course.

Screening Out LosersIndividuals who seek entrepreneurial opportuni-

ties usually generate lots of ideas. Quickly discard-ing those that have low potential frees aspirants to

Entrepreneurs adopt the approaches that work – and they’re quick,

How Entrepreneurs Craft

by Amar Bhide

Amar Bhide teaches entrepreneurship at the HarvardBusiness School, where he is associate professor. His lastHBR article was “Bootstrap Finance: The Art of Start-ups” (November-December 1992).

By the time an opportunity isinvestigated fully, it may nolonger exist.

Strategies That Work

cheap, and timely.

Strategies That Work

HARVARD BUSINESS REVIEW March-April 1994 151

concentrate on the few ideas that merit refinementand study.

Screening out unpromising ventures requiresjudgment and reflection, not new data. The en-trepreneur should already be familiar with the factsneeded to determine whether an idea has prima fa-cie merit. Our evidence suggests that new venturesare usually started to solve problems the foundershave grappled with personally ascustomers or employees. (See thediagram “Where Do Entrepre-neurs Get Their Ideas?”) Compa-nies like Federal Express, whichgrew out of a paper its founderwrote in college, are rare.

Profitable survival requires anedge derived from some combi-nation of a creative idea and a superior capacity for execution.(See the diagram “Tipping theCompetitive Balance.”) The en-trepreneur’s creativity may in-volve an innovative product or aprocess that changes the existingorder. Or the entrepreneur mayhave a unique insight about thecourse or consequence of an ex-ternal change: the California goldrush, for example, made paupersof the thousands caught in thefrenzy, but Levi Strauss started acompany – and a legend – by rec-ognizing the opportunity to sup-ply rugged canvas and later denimtrousers to prospectors.

But entrepreneurs cannot rely on just inventingnew products or anticipating a trend. They must al-so execute well, especially if their concepts can becopied easily. For example, if an innovation cannotbe patented or kept secret, entrepreneurs must ac-quire and manage the resources needed to build abrand name or other barrier that will deter imita-tors. Superior execution can also compensate for a

Where Do Entrepreneurs Get Their Ideas?

20%

71%

5%4%

Replicated or modified an idea encountered through previous employment

Swept into the PC revolution

Discovered through systematic research for opportunities

Discovered serendipitously:

Built temporary or casual job into a business (7%)

Wanted as an individual consumer (6%)

Happened to read about the industry (4%)

Developed family member’s idea (2%)

Thought up during honeymoon in Italy (1%)

Source: 100 founders of the 1989 Inc. "500" fastest growing private companies.

152 HARVARD BUSINESS REVIEW March-April 1994

me-too concept in emerging or rapidly growing in-dustries where doing it quickly and doing it rightare more important than brilliant strategy.

Ventures that obviously lack a creative conceptor any special capacity to execute – the ex-consul-tant’s scheme to exploit grandmother’s cookierecipe, for instance – can be discarded withoutmuch thought. In other cases, entrepreneurs mustreflect on the adequacy of their ideas and their ca-pacities to execute them.

Successful start-ups don’t need an edge on everyfront. The creativity of successful entrepreneursvaries considerably. Some implement a radical idea,some modify, and some show no originality. Ca-pacity for execution also varies among entrepre-neurs. Selling an industrial niche product doesn’tcall for the charisma that’s required to pitch trin-kets through infomercials. Our evidence suggeststhat there is no ideal entrepreneurial profile either:successful founders can be gregarious or taciturn,

Does Planning Pay?Interviews with the founders of 100 companies on

the 1989 Inc. “500” list of the fastest growing compa-nies in the United States revealed that entrepreneursspent little effort on their initial business plan:

41% had no business plan at all.26% had just a rudimentary, back-of-the-envelope

type of plan.5% worked up financial projections for investors.28% wrote up a full-blown plan.Many entrepreneurs, the interviews suggested,

don’t bother with well-formulatedplans for good reasons. They thrivein rapidly changing industries andniches that tend to deter estab-lished companies. And under thesefluid conditions, an ability to rollwith the punches is much more important than careful planning.

The experiences of two Inc.“500” companies, Attronica Com-puters and Bohdan Associates, il-lustrate the limitations of planningin entrepreneurial ventures. Carol Sosdian and Atul Tucker, who hadworked together in a large corpora-tion, started Attronica in 1983 to retail personal computers in Washington, D.C. Carol recalls that Atul “wrote a one-paragraph business planand brought it to me, and I turned it into a real busi-ness plan. It took about one month, and then we ban-tered back and forth over the next three months. Wegot to where we thought it might work, and then weshowed it to some friends. It passed the ‘friends test.’”

Heartened, Carol and Atul conducted almost twoyears of market research, which led them to purchasea Byte franchise for $150,000. Soon after they openedtheir first store, however, Byte folded. They thensigned on as a franchisee of World of Computers,which also folded; and in 1985, Attronica began to op-erate as an independent, direct dealer for AT&T’s com-puters. This partnership clicked, and Attronica soonbecame one of AT&T’s best dealers. Attronica also

changed its customer focus from people off the streetto corporate and government clients. They found largeclients much more profitable because they valued At-tronica’s technical expertise and service.

Peter Zacharkiw founded Bohdan Associates in aWashington, D.C., suburb in the same year that Atuland Carol launched Attronica. Peter did not conductany research, however. He was employed by Bechteland invested in tax shelters on the side. He bought acomputer for his tax shelter calculations, expecting to

deduct the cost of the machine fromhis income. When Peter discoveredthat he was overdeducted for theyear, he placed an ad in the Wash-ington Post to sell his computer. Hegot over 50 responses and sold hismachine for a profit. Peter figuredthat if he had had 50 machines, hecould have sold them all and decid-ed to begin selling computers fromhis home. “At first, I just wanted toearn a little extra Christmas mon-ey,” he recalls. “My wife put sys-tems together during the day, and Idelivered them at night. We grew to$300,000 per month, and I was still

working full-time. I made more then than I wouldhave made the entire year at Bechtel.”

Like Attronica, Bohdan evolved into serving corpo-rate clients. “First, we sold to individuals respondingto ads. But these people were working for companies,and they would tell their purchasing agents, ‘Hey, Iknow where you can get these.’ It was an all-referralbusiness. I gave better service than anyone else. Iknew the machines technically better than anyoneelse. I would deliver them, install them, and spendtime teaching buyers how to use them.” In 1985, aftercustomers started asking for Compaq machines, Bohdan became a Compaq dealer, and the business really took off. “We’re very reactive, not proactive,”Peter observes. “Business comes to us, and we react.I’ve never had a business plan.”

41%26%

28%

5%

Only 28% of the entrepreneurswrote up a full-blown plan.

HARVARD BUSINESS REVIEW March-April 1994 153

ENTREPRENEURIAL STRATEGIES

analytical or intuitive, good or terrible with de-tails, risk averse or thrill seeking. They can be dele-gators or control freaks, pillars of the community or outsiders. In assessing the viability of a poten-tial venture, therefore, each aspiring entrepreneurshould consider three interacting factors:

1. Objectives of the Venture. Is the entrepre-neur’s goal to build a large, enduring enterprise,carve out a niche, or merely turn a quick profit?Ambitious goals require great creativity. Building a large enterprise quickly, either byseizing a significant share of an exist-ing market or by creating a large newmarket, usually calls for a revolu-tionary idea. Launching Home De-pot, for example, called for a new retailing concept of immense propor-tions; opening a traditional hardwarestore does not. Revolutionary enter-prises usually require new processesor manufacturing techniques; com-petitive markets rarely fail to provide valuableproducts or services unless providing them in-volves serious technological problems.

Requirements for execution are also stiff. Bigideas often necessitate big money and strong orga-nizations. Successful entrepreneurs, therefore, re-quire an evangelical ability to attract, retain, andbalance the interests of investors, customers, em-ployees, and suppliers for a seemingly outlandishvision, as well as the organizational and leadershipskills to build a large, complex company quickly. Inaddition, the entrepreneur may require consider-able technical know-how in deal making, strategic

planning, managing overhead, and other businessskills. The revolutionary entrepreneur, in otherwords, would appear to require almost superhumanqualities: ordinary mortals need not apply.

Consider Federal Express founder Fred Smith.His creativity lay in recognizing that customerswould pay a significant premium for reliable over-night delivery and in figuring out a way to providethe service for them. Smith ruled out using ex-isting commercial flights, whose schedules were

designed to serve passenger traffic. Instead, he hadthe audacious idea of acquiring a dedicated fleet ofjets and shipping all packages through a central hubthat was located in Memphis.

As with most big ideas, the concept was difficultto execute. Smith, 28 years old at the time, had toraise $91 million in venture funding. The jets, thehub, operations in 25 states, and several hundredtrained employees had to be in place before thecompany could open for business. And Smith need-ed great fortitude and skill to prevent the fledglingenterprise from going under: Federal Express lostover $40 million in its first three years. Some in-

Tipping the Competitive Balance

Doing the right thing: an innovative or farsighted concept

Doing things right: exceptional ability for execution

Potential competition:direct rivals, new entrants, substitutes, buyers, suppliers, or other sources

Capacity for

execution

Competition

Creativity

There is no ideal profile.Entrepreneurs can be gregarious

or taciturn, analytical orintuitive, cautious or daring.

154 PHOTO BY TONY RINALDO

vestors tried to remove Smith,and creditors tried to seize as-sets. Yet Smith somehow pre-served morale and mollified in-vestors and lenders while thecompany expanded its opera-tions and launched national ad-vertising and direct-mail cam-paigns to build market share.

In contrast, ventures that seekto capture a market niche, nottransform or create an industry,don’t need extraordinary ideas.Some ingenuity is necessary todesign a product that will drawcustomers away from main-stream offerings and overcomethe cost penalty of serving asmall market. But features thatare too novel can be a hindrance;a niche market will rarely justi-fy the investment required to educate customers and distribu-tors about the benefits of a radi-cally new product. Similarly, aniche venture cannot support toomuch production or distributioninnovation; unlike Federal Ex-press, the Cape Cod Potato ChipCompany, for example, mustwork within the limits of its dis-tributors and truckers.

And since niche markets can-not support much investment oroverhead, entrepreneurs do notneed the revolutionary’s ability to raise capital andbuild large organizations. Rather, the entrepreneurmust be able to secure others’ resources on favor-able terms and make do with less, building brandawareness through guerrilla marketing and word ofmouth instead of national advertising, for example.

Jay Boberg and Miles Copeland, who launched International Record Syndicate (IRS) in 1979, used a niche strategy, my students Elisabeth Bentel andVictoria Hackett found, to create one of the mostsuccessful new music labels in North America.Lacking the funds or a great innovation to competeagainst the major labels, Boberg and Miles pro-moted “alternative” music – undiscovered Britishgroups like the Buzzcocks and Skafish – which themajor labels were ignoring because their potentialsales were too small. And IRS used low-cost, alter-native marketing methods to promote their alter-native music. At the time, the major record labelshad not yet realized that music videos on televi-

sion could be used effectively topromote their products. Boberg,however, jumped at the opportu-nity to produce a rock show,“The Cutting Edge,” for MTV.The show proved to be a hit withfans and an effective promotion-al tool for IRS. Before “The Cut-ting Edge,” Boberg had to pleadwith radio stations to play hissongs. Afterward, the MTV audi-ence demanded that disc jockeysplay the songs they had heard on the show.

2. Leverage Provided by Exter-nal Change. Exploiting opportu-nities in a new or changing in-dustry is generally easier thanmaking waves in a mature indus-try. Enormous creativity, experi-ence, and contacts are needed totake business away from com-petitors in a mature industry,where market forces have longshaken out weak technologies,strategies, and organizations.

But new markets are different.There start-ups often face rough-around-the-edges rivals, cus-tomers who tolerate inexperi-enced vendors and imperfectproducts, and opportunities toprofit from shortages. Small in-sights and marginal innovations,a little skill or expertise (in the

land of the blind, the one-eyed person is king), andthe willingness to act quickly can go a long way. Infact, with great external uncertainty, customersand investors may be hesitant to back a radicalproduct and technology until the environment set-tles down. Strategic choices in a new industry areoften very limited; entrepreneurs have to adhere tothe emerging standards for product features, com-ponents, or distribution channels.

The leverage provided by external change is illus-trated by the success of numerous start-ups in hard-ware, software, training, retailing, and systems in-tegration that emerged from the personal computerrevolution of the 1980s. Installing or fixing a com-puter system is probably easier than repairing a car;but because people with the initiative or foresightto acquire the skill were scarce, entrepreneurs likeBohdan’s Peter Zacharkiw built successful dealer-ships by providing what customers saw as excep-tional service (see the insert). As one Midwestern

Entrepreneurs atInternationalRecord Syndicatebuilt customerawarenessthrough guerrillamarketing on MTV MusicTelevision.

HARVARD BUSINESS REVIEW March-April 1994 155

ENTREPRENEURIAL STRATEGIES

dealer told me, “We have a joke slogan around here:We aren’t as incompetent as our competitors!”

Bill Gates turned Microsoft into a multibillion-dollar company without a breakthrough product byshowing up in the industry early and capitalizingon the opportunities that came his way. Gates, then19, and his partner Paul Allen, 21, launched Mi-crosoft in 1975 to sell software they had created. By1979, Microsoft had grown to 25 employees and$2.5 million in sales. Then in November 1980, IBM

chose Microsoft to provide an operating system forits personal computer. Microsoft thereupon boughtan operating system from Seattle Computer Prod-ucts, which it modified into the now ubiquitousMS-DOS. The IBM name and the huge success ofthe 1-2-3 spreadsheet, which only ran on DOS com-puters, soon helped make Microsoft the dominantsupplier of operating systems.

Microsoft won the operating system battle with-out clockwork execution and amidst considerableorganizational turmoil. According to author ScottLewis, during the early 1980s, “The firm was dou-bling in size every year and had not yet adapted tobeing a large company. Gates, whose volatile tem-perament was well-known in the computer indus-try, had exacerbated Microsoft’s chaos by abruptlychanging product specifications andmoving developers around.”1

External changes, such as col-lapses in the price of real estate or en-ergy, also create opportunities for entrepreneurs who speculate in out-of-favor assets. Sam Zell, the self-described “grave dancer,” and hisnow deceased partner, Robert Lurie,built a multibillion-dollar real estateand industrial empire through suchopportunities. Their first big success followed thecollapse of the real estate investment trusts in the early 1970s. Later they picked up millions of square feet of office space and shopping centers andtens of thousands of apartments and trailer-parkspaces for mobile homes. During the early 1980s,the partners sold a number of buildings in the boom-ing Southwest and invested in Rust Belt cities like Buffalo and Chicago.

His approach, Zell concedes, doesn’t call for thesort of creativity that’s involved in building a busi-ness.2 Contrarian speculators don’t innovate much;the entrepreneur merely anticipates that the confu-sion or panic that has depressed prices will pass.Nor does successful execution require much man-agerial capacity. Organizational development, en-gineering, or marketing abilities add little valuewhen an entrepreneur buys assets at a low price, ex-pecting to sell them at a high price. Rather, good ex-

ecution requires the ability to movequickly, negotiate astutely, and raisefunds under favorable terms.

3. Basis of Competition: Propri-etary Assets Versus Hustle. In someindustries, such as pharmaceuticals,luxury hotels, and consumer goods, acompany’s profitability depends sig-nificantly on the assets it owns or

controls – patents, location, or brands, for example.Good management practices like listening to cus-tomers, maintaining quality, and paying attentionto costs, which can improve the profits of a goingbusiness, cannot propel a start-up over such struc-tural barriers. Here a creative new technology,product, or strategy is a must.

Companies in fragmented service industries,such as investment management, investmentbanking, head hunting, or consulting cannot estab-lish proprietary advantages easily but can nonethe-less enjoy high profits by providing exceptional ser-vice tailored to client demands. Start-ups in thosefields rely mainly on their hustle.3 Successful en-trepreneurs depend on personal selling skills, con-tacts, their reputations for expertise, and their abili-

ty to convince clients of the value of the servicesrendered. They also have the capacity for institu-tion building – skills such as recruiting and moti-vating stellar professionals and articulating and re-inforcing company values. Where there are fewnatural economies of scale, an entrepreneur cannotcreate a going concern out of a one-man-band or adhoc ensemble without a lot of expertise in organiza-tional development.

Microsoft’s Bill Gates built amultibillion-dollar business

without a breakthrough product.

External changes can providegreat leverage for creative andnimble entrepreneurs.

ENTREPRENEURIAL STRATEGIES

156 PHOTO BY PETER FISHER/FPG

Marvin Bower, who cofounded McKinsey &Company in 1939, created a premier managementconsulting firm through the relentless execution ofa simple idea: providing high-quality business ad-vice to the top managers of large companies. Bowerwas very skilled in developing andserving his clients and was dogged inbuilding organizational capabilities.He preached constantly the virtuesof putting clients’ interests first. Un-der his leadership, McKinsey startedrecruiting from top business schools,adopted an up-or-out policy to elimi-nate employees who didn’t make themark, declined studies that didn’t fit the firm’s mis-sion of serving top management, and opened inter-national offices to better serve chosen clientele.Bower didn’t dictate policy, however, and had thepatience to work on bringing partners around to hispoint of view. Also, he was willing to sell his stockat book value so that the equity of the firm wasshared widely.4

Gauging Attractiveness Entrepreneurs should also screen potential ven-

tures for their attractiveness – their risks and re-wards – compared to other opportunities. Several

less likely to face a cash crunch because of factorssuch as technical delays, cost overruns, and slowbuildup of sales.

Other criteria reflect the typical entrepreneur’sinability to undertake multiple projects: an attrac-

tive venture should provide a substantial enoughreward to compensate the entrepreneur’s exclusivecommitment to it. Shut-down costs should be low:the payback should be quick, or failure soon recog-nized so that the venture can be terminated with-out a significant loss of time, money, or reputation.And the entrepreneur should have the option tocash in, for example, by selling all or part of the eq-uity. An entrepreneur locked into an illiquid busi-ness cannot easily pursue other opportunities andrisks fatigue and burnout.

These criteria cannot be applied mechanicallylike, say, a textbook rule of backing all projectswith positive net present value (NPV). Ventures

that shine by one measure are of-ten questionable by another. Forexample, a successful biotechventure whose patents providesustainable advantages can betaken public more easily than anadvertising agency. But biotechentrepreneurs need to raise sig-nificant capital and may belocked into a venture whose suc-cess can’t be ascertained formany years.

Ventures must also fit whatthe individual entrepreneur val-ues and wants to do. Surviving

the inevitable disappointments and near disastersone encounters on the rough road to success re-quires a passion for the chosen business. En-trepreneurs should evaluate a potential new ven-ture against what they’re looking for and thesacrifices they’re willing to make. Do they want tomake a fortune, or will a small profit be sufficient?Do they seek public recognition? Is the stimulationof working with exciting technologies, customers,or colleagues important to them? Are they preparedto devote their lives to a business, or do they wantto cash out quickly? Can they tolerate working in

factors should be considered. Capital requirements,for example, matter to the entrepreneur who lackseasy access to financial markets. An unexpectedneed for cash because, say, one large customer isunable to make a timely payment may shut down aventure or force a fire sale of the founder’s equity.Therefore, entrepreneurs should favor venturesthat aren’t capital intensive and have the profitmargins to sustain rapid growth with internallygenerated funds. In a similar fashion, entrepreneursshould look for a high margin for error, ventureswith simple operations and low fixed costs that are

An attractive ventureshould provide asubstantial enoughreward to compensatethe entrepreneur’sexclusive commitment toit.

McKinsey & Company grew outof a simple idea: high-quality

advice for top managers.

HARVARD BUSINESS REVIEW March-April 1994 157

an industry that has questionable ethical stan-dards? Or an industry where there is high uncer-tainty? What financial and career risks are they pre-pared to take and for how long?

These deeply personal preferences determine thetypes of ventures that will enthuse and fortify anentrepreneur. For example, ambitious undertakingslike Federal Express fit people who are ready to winor lose on a grand scale. Success can create dynasticfortunes and turn the entrepreneur into a near-cultfigure. But the risks also are substantial. Visionaryschemes may fail for any number of reasons: theproduct is flawed, cannot be made or distributedcost-effectively, serves no compelling need, or re-quires customers to incur unacceptable switchingcosts. Worse, the failure may not be apparent forseveral years, locking the entrepreneur into an ex-tended period of frustrating endeavor. Even busi-nesses that succeed may not be financially reward-ing for their founders, especially if they encounterdelays en route. Investors may dump the visionaryfounders or demand a high share of the equity foradditional financing. The entrepreneur must there-fore anticipate recurring disappointments and ahigh probability that years of toil may come tonaught. Unless entrepreneurs have a burning desireto change the world, they should not undertake rev-olutionary ventures.

Surprisingly, small endeavors often hold more fi-nancial promise than large ones. Often the founderscan keep a larger share of the profits because theydon’t dilute their equity interest through multiplerounds of financings. But entrepreneurs must bewilling to prosper in a backwater; dominating a ne-glected market segment is sometimes more prof-itable than intellectually stimulating or glamorous.Niche enterprises can also enter the“land of the living dead” becausetheir market is too small for the busi-ness to thrive but the entrepreneurhas invested too much effort to bewilling to quit.

Speculators like Zell, who don’tbuild a company or introduce an in-novation to the world, can take plea-sure from showing up the crowd.Their financial risks and returns de-pend on the terms of the deal, the capital at risk, the conditions and amount of borrowing, and, ofcourse, the price of the asset acquired. Risks aregenerally not staged; the entrepreneur is fully ex-posed when the asset is acquired. Liquidity or exitoptions often turn on the success of the specula-tion: if, as hoped, prices rise, the speculator can ex-pect many buyers for the asset owned, but if prices

decline or stay depressed, market liquidity for theasset will be generally poor. All things considered,such ventures appeal most to entrepreneurs whoenjoy making deals and rolling the dice.

A new company that is based on hustle in, say,consulting or advertising can provide the satisfac-tion of working with talented colleagues in a dy-namic and competitive market. Capital require-ments are low, and investments can be staged as the business grows. Entrepreneurs can thereforeavoid significant personal risk and meddling by out-side investors. But although such businesses canprovide attractive current income, great wealth in those situations is elusive: hustle businesses,which lack a sustainable franchise, cannot be easilysold or taken public at a high multiple of earnings.The entrepreneur must therefore savor the ventureenough to make a long-term career of it rather thanenjoy the fruits of a quick harvest.

Parsimonious Planning and AnalysisTo conserve time and money, successful entre-

preneurs minimize the resources they devote to re-searching their ideas. Unlike the corporate world,where foil mastery and completed staff work canmake a career, the entrepreneur only does as muchplanning and analysis as seems useful and makessubjective judgment calls when necessary.

As Harvard’s Michael Porter has pointed out, astart-up faces competition not only from rivals of-fering the same goods but also potentially from sub-stitutes, suppliers, buyers, and other new entrants.A start-up even competes with companies outsideits industry for employees and capital. A completeanalysis, therefore, would cover many industry par-

ticipants and probe internal core competencies andweaknesses. But the astute entrepreneur isn’t inter-ested in completeness. He or she understands thatreturns from additional analysis diminish rapidlyand avoids using spreadsheet software to churn outdetailed but not particularly insightful analyses of aproject’s break-even point, capital requirements,payback period, or NPV.

Surviving the inevitabledisappointments on the rough

road to success requires passionfor the chosen business.

ENTREPRENEURIAL STRATEGIES

158 HARVARD BUSINESS REVIEW March-April 1994

In setting their analytical priorities, entrepre-neurs must recognize that some critical uncertain-ties cannot be resolved through more research. Forexample, focus groups and surveys often have littlevalue in predicting demand for products that aretruly novel. At first, consumers had dismissed theneed for copiers, for instance, and told research-ers they were satisfied with using carbon paper.With issues like this, entrepreneurs have to resist

the temptation of endless investigation and trusttheir judgment.

The parsimonious analyst should also avoid re-search that he or she can’t act on. For example, un-derstanding broad market trends and the strategiesof the industry leaders is unlikely to affect what astart-up in a hustle business like advertising doesand therefore isn’t worth bothering with. Entre-preneurs should concentrate instead on issues thatthey can reasonably expect to resolve through analy-sis and that determine whether and how they willproceed. Resolving a few big questions – under-standing what things must go right and anticipat-ing the venture-destroying pitfalls, for instance – ismore important than investigating many nice-to-know matters.

Standard checklists or one-size-fits-all approachesdon’t work for entrepreneurs. The appropriate ana-lytical budget and the issues that are most worthyof research and analysis depend on the character-istics of each venture.

Ambitious endeavors like Federal Express, for ex-ample, require significant capital and must be bet-ter researched and documented than ventures thatcan be self-financed. Professional investors usuallyask for a written business plan because it providesclues about the entrepreneur’s seriousness of pur-pose, concern for investors, and competence. So en-trepreneurs must write a detailed plan even if theyare skeptical about its relationship to the subse-quent outcomes.

Revenues are notoriously difficult to predict. Atbest, entrepreneurs may satisfy themselves thattheir novel product or service delivers considerablygreater value than current offerings do; how quick-

ly the product catches on is a blind guess. Leveragemay be obtained, however, from analyzing howcustomers might buy and use the product or ser-vice. Understanding the purchase process can helpidentify the right decision makers for the new offer-ing. With Federal Express, for instance, it was im-portant to go beyond the mailroom managers whotraditionally bought delivery services. Understand-ing how products are used can also help by reveal-

ing obstacles that must be overcomebefore consumers can benefit from a new offering.

Visionary entrepreneurs mustguard against making competitorsrich from their work. Many conceptsare difficult to prove but, onceproven, easy to imitate. Unless thepioneer is protected by sustainablebarriers to entry, the benefits of ahard-fought revolution can become

a public good rather than a boon to the innovator.Sun Microsystems and Apple, for example, won bigfrom pathbreaking innovations that had been de-veloped at Xerox’s Palo Alto Research Center.

Entrepreneurs who hope to secure a niche facedifferent problems: they often fail because the costsof serving a specialized segment exceed the benefitsto customers. Entrepreneurs should therefore ana-lyze carefully the incremental costs of serving aniche and take into account their lack of scale andthe difficulty of marketing to a small, diffused seg-ment. And especially if the cost disadvantage is significant, entrepreneurs should determine whethertheir offering provides a significant performancebenefit. Whereas established companies can vie forshare through line extensions or marginal tailor-ing of their products and services, the start-up mustreally wow its target customers. A marginally tasti-er cereal won’t knock Kellogg’s Cornflakes off super-market shelves.

Inadequate payoffs also pose a risk for venturesthat address small markets. For example, a nicheventure that can’t support a direct sales force maynot generate enough commissions to attract an in-dependent broker or manufacturers’ rep. Entre-preneurs will eventually lose interest too if the rewards aren’t commensurate with their efforts.Therefore, the entrepreneur should make sure thateveryone who contributes can expect a high, quick,or sustainable return even if the venture’s totalprofits are small.

Entrepreneurs who seek to leverage factors likechanging technologies, customer preferences, orregulations should avoid extensive analysis. Re-search conducted under conditions of such turbu-

Standard checklists or one-size-fits-all approaches don’t work.The appropriate analyticalpriorities vary for each venture.

PHOTO BY TONY RINALDO 159

lence isn’t reliable, and the importance of a quickresponse precludes spending the time to make sureevery detail is covered.

The entrepreneur has to live with critical uncer-tainties, such as the relative competence of rivals orthe preferences of strategic customers, which arenot easy to analyze. Who could have forecast, forexample, that Sun Microsystems’s four 27-year-oldfounders, who had virtually no business or industryexperience, would beat more than a dozen start-ups, including Apollo, a textbook venture launchedby industry superstars? Or that IBM would turn toMicrosoft for an operating system, gain dominancefor its hardware, and go on to dethrone Digital Re-search’s entrenched CP/M operating system? En-tering a race requires faith in one’s ability to finishahead of whoever else might happen to play.

Analyzing whether or not the rewards for win-ning are commensurate with the risks, however,can be a more feasible and worthwhile exercise. Insome technology races, success is predictablyshort-lived. In the disk-drive industry, for example,companies that succeed with one generation ofproducts are often leap-frogged when the next gen-eration arrives. In engineering workstations, how-ever, Sun enjoyed long-term gains from its earlysuccess because it established a durable architec-tural standard. If success is unlikely to be sus-tained, entrepreneurs should have a plan for mak-ing a good return while it lasts.

Ventures in fast-changingmarkets are more likely to foldbecause they can’t design, pro-duce, or sell a timely, cost-effective product that worksthan because they pursued apoor strategy. Successful en-trepreneurs, therefore, usuallydevote more attention to oper-ational analysis and planningthan strategic planning. Sun’sbusiness plan, one founder re-calls, was mainly an operatingplan, containing specific time-tables for product development, opening sales andservice offices, and hiring engineers.

For speculators like Zell who seek to purchase as-sets at depressed prices, two sets of analysis are cru-cial. One relates to the market dynamics for the as-set being acquired or, more specifically, why theprices of the asset may be expected to rise. En-trepreneurs should try to determine whether pricesare temporarily low (due to, say, an irrational panicor a temporary surge in supply), in secular declinebecause of permanent changes in supply or de-

mand, or merely correcting after an irrational priorsurge. Also important to analyze is the entrepre-neur’s ability to hold or carry the asset until it canbe sold at a profit because it is difficult to predictwhen temporarily depressed prices will return tonormal. Carrying capacity depends on the extent ofborrowing used to purchase the asset, the condi-tions under which financing may be revoked, andthe income produced by the asset. Rental propertiesor a producing well that provides ongoing income,for example, can be carried more easily than rawland or drilling rights. For certain kinds of assets,mines and urban rental properties, for example, theentrepreneur should also consider the risks of ex-propriation (through, for example, rent control) andwindfall taxation.

In ventures based on hustle rather than propri-etary advantages, a detailed analysis of competitorsand industry structure is rarely of much value. Theability to seize short-lived opportunities and exe-cute them brilliantly is of far more importance thana long-term competitive strategy. Analysis of spe-cific clients and relationships dominates generalmarket surveys. Partnership agreements, terms foroffering equity to later employees, performancemeasurement criteria, and bonus plans are impor-tant determinants of company success and are bestthought through before launch rather than hastilyimprovised later on. And although projections of

long-term cash flows are not meaningful, back-of-the-envelope, short-term cash forecasts and analy-ses of breakevens can keep the entrepreneur out oftrouble. Overall, though, the analytical preparationrequired for such ventures is modest.

Integrating Action and AnalysisStandard operating procedure in large corpora-

tions usually makes a clear distinction betweenanalysis and execution. In contemplating a new

Start-ups withpowerful competitorsmust wow theircustomers. Amarginally tastiercereal won’t knockKellogg’s Cornflakesoff supermarketshelves.

160 PHOTO BY STEPHEN FRINK/FPG

venture, managers in establishedcompanies face issues about itsfit with ongoing activities: Doesthe proposed venture leveragecorporate strengths? Will the re-sources and attention it requiresreduce the company’s ability tobuild customer loyalty and im-prove quality in core markets?These concerns dictate a deliber-ate, “trustee” approach: beforethey can launch a venture, man-agers must investigate an op-portunity extensively, seek thecounsel of people higher up, sub-mit a formal plan, respond tocriticisms by bosses and corpo-rate staff, and secure a headcountand capital allocation.5

Entrepreneurs who start witha clean slate, however, don’thave to know all the answers be-fore they act. In fact, they oftencan’t easily separate action andanalysis. The attractiveness of a new restaurant, for example,may depend on the terms of thelease; low rents can change theventure from a mediocre propo-sition into a money machine.But an entrepreneur’s ability tonegotiate a good lease cannot beeasily determined from a generalprior analysis; he or she must enter into a serious negotiationwith a specific landlord for a specific property.

Acting before an opportunity is fully analyzedhas many benefits. Doing something concretebuilds confidence in oneself and in others. Key em-ployees and investors will often follow the individ-ual who has committed to action, for instance, byquitting a job, incorporating, or signing a lease. Bytaking a personal risk, the entrepreneur convincesother people that the venture will proceed, and theymay believe that if they don’t sign up, they could beleft behind.

Early action can generate more robust, better in-formed strategies too. Extensive surveys and focus-group research about a concept can produce mis-leading evidence: slippage can arise betweenresearch and reality because the potential cus-tomers interviewed are not representative of themarket, their enthusiasm for the concept waneswhen they see the actual product, or they lack theauthority to sign purchase orders. More robust

strategies may be developed byfirst building a working proto-type and asking customers to useit before conducting extensivemarket research.

The ability of individual en-trepreneurs to execute quicklywill naturally vary. Trial and er-ror is less feasible with large-scale, capital-intensive ventureslike Orbital Sciences, which hadto raise over $50 million to buildrockets for NASA, than with aconsulting firm start-up. Never-theless, some characteristics arecommon to an approach that in-tegrates action and analysis:M Handling Analytical Tasks inStages. Rather than resolve all issues at once, the entrepreneurdoes only enough research to jus-tify the next action or invest-ment. For example, an individualwho has developed a new medi-cal technology may first obtaincrude estimates of market de-mand to determine whether it’sworth seeing a patent lawyer. Ifthe estimates and lawyer are en-couraging, the individual may domore analysis to investigate thewisdom of spending money toobtain a patent. Several more it-erations of analysis and actionwill follow before the entrepre-

neur prepares and circulates a formal business planto venture capitalists.M Plugging Holes Quickly. As soon as any problemsor risks show up, the entrepreneur begins lookingfor solutions. For example, suppose that an en-trepreneur sees it will be difficult to raise capital.Rather than kill the idea, he or she thinks creative-ly about solving the problem. Perhaps the invest-ment can be reduced by modifying technology touse more standard equipment that can be rented in-stead of bought. Or under the right terms, a cus-tomer might underwrite the risk by providing alarge initial order. Or expectations and goals forgrowth might be scaled down, and a niche marketcould be tackled first. Except with obviously unvi-able ideas that can be ruled out through elementarylogic, the purpose of analysis is not to find faultwith new ventures or find reasons for abandoningthem. Analysis is an exercise in what to do nextmore than what not to do.

An entrepreneur’swillingness to acton sketchy plansand inconclusive

data is oftensustained by analmost arrogantself-confidence.

HARVARD BUSINESS REVIEW March-April 1994 161

M Evangelical Investigation. Entrepreneurs oftenblur the line between research and selling. As onefounder recalls, “My market research consisted oftaking a prototype to a trade show and seeing if I could write orders.” Software industry “betasites” provide another example of simultaneous re-search and selling; customers actually pay to helpvendors test early versions of their software andwill often place larger orders if they are satisfiedwith the product.

From the beginning, entrepreneurs don’t justseek opinions and information, they also look forcommitment from other people. Entrepreneurstreat everyone whom they talk to as a potential cus-tomer, investor, employee, or supplier, or at least as

a possible source of leads down the road. Even ifthey don’t actually ask for an order, they take thetime to build enough interest and rapport so theycan come back later. This simultaneous listeningand selling approach may not produce truly objec-tive market research and statistically significant re-sults. But the resource-constrained entrepreneurdoesn’t have much choice in the matter. Besides, inthe initial stages, the deep knowledge and supportof a few is often more valuable than broad, imper-sonal data.M Smart Arrogance. An entrepreneur’s willingnessto act on sketchy plans and inconclusive data is often sustained by an almost arrogant self-con-fidence. One successful high-tech entrepreneurlikens his kind to “gamblers in a casino who knowthey are good at craps and are therefore likely towin. They believe: ‘I’m smarter, more creative, andharder working than most people. With my uniqueand rare skills, I’m doing investors a favor by takingtheir money.’” Moreover, the entrepreneur’s arro-gance must stand the test of adversity. Entrepre-neurs must have great confidence in their talentand ideas to persevere as customers stay away indroves, the product doesn’t work, or the businessruns out of cash.

But entrepreneurs who believe they are more ca-pable or venturesome than others must also havethe smarts to recognize their mistakes and tochange their strategies as events unfold. Successfulventures don’t always proceed in the direction on

which they initially set out. A significant propor-tion develop entirely new markets, products, andsources of competitive advantage. Therefore, al-though perseverance and tenacity are valuable en-trepreneurial traits, they must be complementedwith flexibility and a willingness to learn. Ifprospects who were expected to place orders don’t,the entrepreneur should consider reworking theconcept. Similarly, the entrepreneur should also beprepared to exploit opportunities that didn’t figurein the initial plan.

The evolution of Silton-Bookman Systems illus-trates the importance of keeping an open mind. Theventure’s original plan was to sell general-purpose,PC-based software for human resource develop-

ment. But established competitorswho already sold similar software onmainframes were beginning to devel-op products for PCs. So the companyadopted a niche strategy and devel-oped a training registration product.And although the founders had ini-tially targeted small companies thatcouldn’t afford mainframe solutions,

their first customer was someone from IBM whohappened to respond to an ad. Thereafter, Silton-Bookman concentrated its efforts on large compa-nies, where they had considerable success. “Theworld gives you lots and lots of feedback,” co-founder Phil Bookman observes. “The challenge isto take advantage of the feedback you get.”

The apparently sketchy planning and haphazardevolution of many successful ventures like Silton-Bookman doesn’t mean that entrepreneurs shouldfollow a ready-fire-aim approach. Despite appear-ances, astute entrepreneurs do analyze and strate-gize extensively. They realize, however, that busi-nesses cannot be launched like space shuttles, withevery detail of the mission planned in advance. Ini-tial analyses only provide plausible hypotheses,which must be tested and modified. Entrepreneursshould play with and explore ideas, letting theirstrategies evolve through a seamless process ofguesswork, analysis, and action.

References1. Scott Lewis, “Microsoft Corporation,” in International Directory ofCompany Histories, ed. Paula Kepos (Detroit, Michigan: St. James Press,1992), p. 258.

2. Erik Ipsen, “Real Estate: Will Success Spoil Sam Zell?” Institutional In-vestor, April 1989, pp. 90-99.

3. See Amar Bhide, “Hustle as Strategy,” HBR September-October 1986.

4. See “McKinsey & Company (A): 1956,” Harvard Business School CaseNo. 393-066, 1992.

5. See Howard Stevenson and David Gumpert, “The Heart of Entre-preneurship,” HBR March-April 1985.

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