Tag Archives: family business

Bootstrapping: “The art of learning to do more with less.”

Bootstrapping, the Purest form of Entrepreneurship

Bootstrapping… bootstrapping… bootstrapping, it can be said that the purest form of entrepreneurship is bootstrapping.  During the prelaunch phase of a company and at times when access to business capital is difficult, bootstrapping is the way to go. To compete with existing businesses entrepreneurial firms face two major disadvantages: the burden of smallness and the disadvantage of newness. The reality means that the majority of start-up businesses and small businesses lack available resources to effectively compete (Winborg, 2009). Access to capital is a major issue for entrepreneurs. InexperienceBootstrapping, The Purest form of Entrepreneurship of many entrepreneurs has made it extremely difficult to obtain debt and equity when lack of a track record, reputation, or collateral for loans exists.  Starting with personal savings, followed by funding through family and friends, have been the main sources of finance for the vast majority of entrepreneurs. Engaging in “bootstrapping activities” is the way to go in operating the business.

Do not be discouraged with the thought of bootstrapping. There exist many great American bootstrapping success stories. A snippet include (Sherman, 2005):

Apple Computer. In 1976, Steve Jobs and Steve Wozniak sold a Hewlett-Packard programmable calculator and a Volkswagen van to raise $1,350. Through bootstrapping, the partners built the first Apple I personal computer in Job’s garage.

Hewlett-Packard Co.  Starting with $538 in 1938, Hewlett-Packards first client was fellow bootstrapper Walt Disney, who required sound equipment for the production of Fantasia in 1940.

Microsoft Company. With is high school sidekick (Paul Allan) and dropping out of Harvard University, Bill Gates moved into an Albuquerque hotel room in 1975 to start the company and write the programming language for the first commercially available microcomputer.

Nike Inc. William Bowerman and Philip Knight in the early 1960s sold imported Japanese sneakers from the trunk of a station wagon with startup costs of $1,000.

Lillian Vernon Corp. With her brainstorming idea of selling monogrammed purses and belts through the mail, Lillian Vernon established a mail-order company in 1951.  As a recent bride and four months pregnant, Lillian needed to earn extra money to support her new family. Society in the 1950s dictated that she stay at home for the duration of the pregnancy. A home-based business was her answer.  Lillian took $2,000 that her husband and she received as wedding gifts and designed a bag and belt set targeted at high school girls.  She manufactured the set through her father’s leather goods company. Than placing a $495, one-six-of-a-page ad in the September 1951 issue of magazine Seventeen the company generated $32,000 in orders by the end of the year.

The use of bootstrapping requires imaginative and parsimonious strategies for marshaling and controlling necessary resources. Think of bootstrapping from two perspectives:

1.    Raising money without the use of banks or investors.
2.    Gaining access to resources without the need for money.

First, entrepreneurs can raise money through the use of personal credit cards, cross-subsidizing from other businesses owned or through employment, reducing the time for invoicing seeking advanced payments and loans from friends and family. Entrepreneurs can hire temporary employees, share premises and/or employees with other entities, share or borrow the use of equipment, and obtain emotional support, skills, and knowledge from friends and family.

A key question that should be asked, “Do I need it or want it?”  In the event the entrepreneur needs a resource, try to use a bootstrapping technique to get it. If the entrepreneur wants a resource, defer the purchase. Preservation of cash is important.  This means controlling cost too.

Based on the writing of Oswald Jones and Dilani Jayawarna (2010) some bootstrapping techniques include:

•    Customer related

  • Receive payments in advance
  • Obtain advance payments
  • Increase invoicing
  • Select customers that pay on time

•    Delay payment

  • Negotiate payment conditions
  • Barter for goods and services
  • Lease rather than purchase

•    Owner related

  • Change salary payment period from weekly to bi-monthly
  • Use personal credit cards
  • Cross-subsidize with other businesses or employment
  • Fund through friends and family

•    Joint use

  • Borrow equipment from other companies
  • Use temperate employees or contractors
  • Share equipment, premises and employees

Simply put, bootstrapping is “entrepreneurship in its purest form” (Salimath & Jone, 2011). Overcoming resource constraints enables business operations to continue with the aid of external financial resources. Bootstrapping transforms human capital into financial capital also known as sweat equity that converts into bankable equity. It is about creating value that includes the idea of “meeting the need for resources without depending on long-term financing (debt or equity).  Bootstrapping is the strategy of necessity for entrepreneurs and not of choice.

For entrepreneurs that want to learn how to raising money for their business, push to following button:

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Sources:

Jones, O., & Jayanwarna, D. (2010). Resourcing new businesses: social networks, bootstrapping and firm performance. Venture Capital , 12 (2), 127-157.
Salimath, M. S., & Jone, R. J. (2011). Scientific entrepreneurial management: bricolage, bootstrapping, and the quest for efficiencies (Vol. 17). Orange, CA: Journal of Business & Management.
Sherman, A. J. (2005). Raising Capital (Vol. 2). New York, NY: AMCOM, 2. 30-33.
Winborg, J. (2009). Use of financial bootstrapping in new businesses: A question of last resort? Venture Capital, 11 (1), 71-83.

 

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Strategy: Is War Strategy and Business Strategy Similar?

In business as in war, a company can be small and win or can be large but lose. The rules of success or failure depends on key variables:

  • Understand to read the business landscape and act strategically
  • Understand time to attack or defend
  • Understand time to enter the field of battle or withdraw
  • Understand in what ways to isolate, outflank or even encircle the competition
The War Strategists

A pictorial of war strategists (military and business) including Winston Churchill, Carl von Clausewitz, George Patton, Sun Tzu, Peter Drucker, Napoleon, Steve Jobs, Michael Porter, and Norman Schwarzkopf.

The Debate—Similar or Dissimilar

A debate exists as to whether business strategy and war strategy are equivalent. The attraction of applying strategic, operational and tactical strategies of war to business is similar. Many principles and tools of war strategies can be applied to assist those in the business world. Some view business and war strategies differently and come up with a new view of how they can be applied.

One dissimilarity with business is that, within the context of past military planning and doctrine, there tended to be, generally, only one enemy and the purpose of the planning activity is to fashion the conditions for a specific, decisive act to bring defeat to the enemy. However, the nature of current warfare has transformed vastly from the days of state-to-state positional warfare and two well-defined enemies fighting within distinct geographic theaters of conflict.

For more than seventy years, war planners have been dealing with asymmetric warfare, fourth generation warfare, low intensity conflict, nonstate actors participating in various wars and skirmishes. As in business, rarely do we deal with a single enemy or a single decisive battle to end a conflict and bring about the defeat or surrender of the single enemy. The Iraq and Afghan wars of conflict are examples of this assessment.

Current Warfare Strategy

In Iraq, the US military and its allies were fighting Iraq’s the Sunni Arab community upon their toppling of Saddam Hussein’s brutal Baathist regime and subsequently these same Iraqi Arab Sunnis allied themselves with US forces to extract from communities the menace and plague of Al Qaeda. Both in Afghanistan and Pakistan, US military forces were fighting alongside of, and supporting, the national security forces of these two nations while the next minute they are combating them directly and indirectly while fighting the Taliban, fragments of Al-Qaeda and different Jihadist combatants.

Accordingly, current warfare strategy, as we know it today, and business strategy have begun to converge with more remarkable similarities than differences. In business, the competitive landscape is generally complex and dynamic. Strategy and tactical interplay are vital in business. Similarly in warfare, the multitude of different stakeholders must be considered. In Afghanistan, the US military must, at the same time, plan and manage relationships encompassing Pakistanis, the Iranians, the Russians and several Afghan clans. Some times they are treated as friends and sometimes as foes. This complex relationship is also trues in business. Look at Apple Computer and Samsung. Both are fighting in the battlefield of the courts over intellectual property rights and at the same time cooperating and collaborating on other projects.

The competition is more vague and often operates over an ill-defined territory. Consequently, modern warfare is more about politics and community action than purely military engagement and its goal is to wear down the various forces working against your army and render them ineffective and unwilling to continue fighting rather than totally eliminating them. An example is Coca Cola versus Pepsi. Both companies have waged a very expensive conflict, however none have the intention of totally destroy the opponent.

Types of Warfare

In large part, warfare strategy, at a tactical level, fosters “kill, capture, destroy” asuch of the military opponent’s capabilities as fast as possible while protecting current forces. In business strategy, parallel tactics are called upon. Types of warfare include:

Limited War—a military example is the US versus the Nicaragua Sandinistas whereas the US used overwhelming superiority to defeat. A business example is Microsoft versus smaller software producers in the 1980s and 1990s. Microsoft used patent trolling techniques and it market dominance to block competition.

Counter-Insurgency (COIN)—a military example is the US versus the Taliban. Although decisive victory probably cannot be achieved within the normal mode of warfare, a COIN strategy use the divide and rule tactic that bifurcates the existing power structure and prevent smaller power groups from linking up. The strategy is designed to fracture the connections between insurgency and the population thus weakening the enemy. A business example is the US versus Microsoft for violating the Sherman Antitrust Act. Microsoft used its WINTEL dominance to crush its competition during the browser wars with Netscape’s Navigator and Opera Software’s Opera browsers. By bundling its Internet Explore web browser into its operating systems (O/S), making it difficult to download competing browsers into the Window O/S, and forming restrictive licensing agreements with its original equipment manufacturers, Microsoft prevented smaller companies effectively from competing or gaining any traction.

Total War—a military example is the Soviet Union versus Nazi Germany. Typically a high intensity conflict of balanced opponents, such wars tend to be a victory at any price, even if truce would be advantageous for both parties during a stage of the war. An example is two of Germany’s most well known brands Volkswagen and Porsche and reclusive industrial families, the Porsches and the Piechs; both belong to the same family line. This resulted in the 2008 majority takeover by Porsche of Volkswagen. The typical strategy is total exhausting of the opponent similar to war.

Conclusion

Correspondingly, purpose of much of the best of current business strategy is to transform the rules of the game in favor of the business. Creating unique market niches based on the first move advantage, and discovering a unique technology as well as product, and process innovation can grab an unquestionable market share based on a combination of these factors that competitors simply cannot weaken. Accordingly, warfare, whether business or military, becomes a series of battles whereby the cleverest “wins”, but where victory is more about the superiority at what you do rather than total dominance leading to a wholesale decimation of the company’s competition.

Strategic Business Warfare Tactics Series:

This it is first of a blog series on business warfare strategies. The series will discuss various war tactics that can be used as competitive strategies for family businesses, entrepreneurs, small businesses, and business executive to thrive in both good and tough market conditions. Sign up at http://garyrushin.com to follow the series.

 

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8 Challenges of Small Family-Owned Business Turnarounds

After surviving the Great Recession of 2009, family held businesses still have an uphill battle to survive slow economic growth, possibly stagnation, tight credit, and problematic expectations of the future. The challenge for family owned businesses to survive is critical in this current economic atmosphere. For the U.S. economy, family held businesses represent 64 percent of the Gross Domestic Product (GDP), approximately 62 percent of the nations workforce, and, most noticeably, 80-90 percent of U.S. businesses. However, among second-generation owners, 70 percent of the businesses fail and for third-generation owners, 88 percent of the businesses collapse into bankruptcy according to Family Business Review. The impact on the global recovery will depend on turnaround strategies of family held businesses.  The challenge of family owned businesses to survive is critical in this current economic atmosphere.

Small family firms have unique characteristics that affect their ability to initiate turnaround strategies when encountering an organizational crisis. In many cases, employing standard turnaround strategies such as top-management changes, infusion of external management expertise, and retrenchment are normally followed practices, however eight characteristics moderate these practices. In a study by John Cater and Andreas Schwab (2008), the researchers identified unique eight propositions or challenges in dealing with small-established family owned businesses. These include:

Challenge 1: The strong ties of family top managers to the business reduce an established family firm’s ability to initiate and implement necessary management changes in response to an organizational crisis.

Challenge 2: The limited pool of replacement candidates constrains a family firm’s ability to initiate and implement top-management changes in response to an organizational crisis.

Challenge 3: The family ties among top managers increase consensus orientation and conflict avoidance, which reduces the firm’s ability to initiate and

Challenge 4: The more informal management systems at established family firms reduce their ability to implement top-management changes in response to an organizational crisis.

Challenge 5: The internal orientation of established family firms constrains their ability to find adequate external support from services providers (e.g., consulting companies) to address temporary expertise needs in response to an organizational crisis.

Challenge 6: The internal orientation of established family firms constrains their ability to find and integrate external personnel to address permanent expertise needs in response to an organizational crisis.

Challenge 7: Strong altruistic behavioral tendencies of organizational members increase an established family firm’s ability to implement retrenchment strategies in response to an organizational crisis.

Challenge 8: Long-term goal orientations of organizational members increase an established family firm’s ability to implement retrenchment strategies in response to an organizational crisis.

As you can tell, turning around today’s distressed family business requires dealing with unique set of challenges. Unfortunately the greatest difficulty is not taking action early enough to void a crisis, but realizing that we have intergenerational issues possibly with limited financing options at hand. Too often the owners of the business are so busy working the business that they do not have the time to properly plan to manage the growing risks or to capitalize on possibly new opportunities.

Personally, I think that the significant role played by family owned businesses is critical. Identifying the risks of failure, recognizing strategies of company renewal, and implementing the necessary turnaround tactics that covers these enterprises that have unique characteristics. This will maintain family wealth, protect jobs, and strengthen the economy.

Reference

Cater, J. & Schwab, A. (2008). Turnaround Strategies in Established Small Family Firms. Family Business Review 21.1. Pg. 31-50.

Downes, J.J. (2012). Preventing Family Business Failure. Association of Insolvency & Restructuring Advisors Journal. Pg. 1 & 3.

 

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