How Start-Ups Beat Corporations

Decades of research reveal how disruptive entrepreneurs beat billion-rand corporations.

At first the thought seems absurd. Two guys in a garage with a few hundred bucks, an idea, and a dream beat a billion rand corporation. How is it possible that a start up can even think of competing with a major corporation? Corporations have more money, more resources and far more experienced and talented employees; they have massive marketing departments and real business savvy.

Just look at Google’s talent pool, Pick n’ Pay’s vast retail network work and Standard Banks brand awareness. Surely they can’t be beat. For me, an appropriate metaphor would be an U14C rugby side playing the Springboks and hoping to win. This truly is the impossible dream. But time and time again history has shown that start-ups not only compete with leading corporations, but they often beat them into bankruptcy.

Start-ups that won

DEC computer the second largest computer company with over 100,000 employees was beaten by Apple Computers a company founded by two kids in their 20s with a student budget. Yahoo, which, at its peak was ranked the number 1 search engine in the world was beaten by a Stanford University PhD project, Google.

Yahoo now holds 6% of the search engine market while Google holds 78%. Harley Davidson and BMW where once undisputed leaders in the motorcycle market, that was until an unknown Japanese Company sent 3 employees to California to sell a new type of small engine motorcycle in the US. The company’s name was Honda.

Professor Clayton Christensen of the Harvard Business School has spent a large part of his career and preformed countless studies to try and answer one question: how do these start-ups do it?

His answer is disruptive technologies.

Disruptive technologies

Disruptive technologies are new technologies that are generally “cheaper, simpler, smaller, and, frequently, more convenient to use”, the problem for leading corporations is they are often sold to small, less-profitable customers, and, why would a billion dollar corporation waste its time on small, less-profitable customers?

Any corporate manager would rather sell to a customer that will make them R50 million than customer that make them R50 thousand.

The dilemma for leading corporations and the opportunity for entrepreneurs, is that low-profit, small-markets eventually become high-profit, big-markets. This happened with when Western Union turned down Alexander Bell’s offer for the telephone patent, or when Microsoft waited until Google was a billion rand company before focusing on search.

The same story seems to repeat itself again and again through business history. Major company ignores disruptive innovation until it becomes a billion rand industry, only then does it enter the market, but often it is too late.

History shows us that beating the finest corporations is not only possible, but the odds are actually stacked in the entrepreneurs favour. Start-ups are happy to target small, less profitable customers and work their way up to the bigger sales, but corporations are not. So, the question is not: Can entrepreneurs launch disruptive innovations? But which entrepreneurs will launch disruptive innovations? And will you be one of them? That of course is a question only you can answer.

How to launch a disruptive innovation

  • Become a technology entrepreneur: Disruptive innovations are usually technology innovations; new technology replacing old technology. For example, Cars replaced Horse carts; PCs replaced Typewriters; Cell Phones replaced landlines.
  • Get in early: At one time, the horse cart was better than the car, the typewriter was better than the PC, and landline were better than the cell phone. This changes when the new technology becomes better than the old. So, look for a technology less advanced that the established technology, but one that is improving.
  • The new technology should offer real benefits: The new technology should eventually improve enough to offer real benefits to the customer, such as, a lower-price (internet retail vs. storefront retail), better performance (GPS vs. maps), greater convenience (digital books vs. paper books) and greater reliability (cars vs. horses).



How Vision Leads to Failure

How dogged determination to achieve your company vision may lead to failure.

Google ‘the importance of having a clear vision for your business’ and the search engine will return over 4 million results. Consult a management guru and the importance of company vision is almost unquestioned. Jim Collins talks of the importance of creating an “envisioned future” and making it more specific and concrete with a “vivid description”; Steven Covey recommends “beginning with the end in mind”; and John Demartini is adamant a “clear vision” is the important first step to business success. This is sound advice if your vision is correct, but what happens if it is wrong?

A cautionary tale

In the late 1990s, Webvan.com had a vision to reinvent the grocery store. The company was oozing talent. The founding team had managed to attract some of the world’s smartest investors, assembled a management team to envy and had developed state-of-the-art facilities that would deliver groceries to customers in under 30-minutes. Unfortunately, the vision was wrong.

Fewer customers signed up than planned; costs were higher than expected; and efficiencies never paralleled with the original vision. Undeterred the founders marched on implementing the original plan. But then, reality kicked in. The result was R6,4 billion in losses and one of the most spectacular flame outs from the dot.com era.

Getting your vision right

Webvan, however, is not alone. In a recent study, “Premature scaling”, Max Marmer and a team of researchers from the Start up Genome project set out to test how many start ups failed due building a business before they had aligned their visions with reality. The study looked at 3,200 internet start ups and found that 70% of the start ups failed due “premature scaling”.

Premature scaling is when the founder grows the business with a vision that doesn’t make sense, just as Webvan did. It may be the value proposition doesn’t attract enough customers, or the cost structure is wrong or the marketing isn’t attracting attention it should. In short, if you vision doesn’t fit with reality your dream will stay just that, a dream.

The truth is that great entrepreneur’s visions seldom come from “ah-ha” moments; rather they are moulded as they learn more about their industry, products and customers. Each time obstacles or opportunities are encountered they change and adapt their vision to fit. They will switch products, features, costs, industry or any other part of the business until they find what works.

When Evan Williams launched Odeo a podcast service he had no idea the final outcome would be twitter, the world largest micro-blogging service, or when Richard Branson started Student magazine he didn’t know it would lead to mail order record business that would be the inspiration for his first major success, Virgin Records. So, great entrepreneurs don’t have crystal clear, unchanging visions. No.

They have broad flexible changing visions that have been moulded by interactions with the real world. So, the key to your business success may not be sticking doggedly vision, but rather changing it repeatedly on your path to success.

Tips on finding your company’s vision

  • Change and adapt your vision until you have a reliable and repeatable way to acquire customers.
  • Change and adapt your product or service until customers are beating down your door.
  • Change and adapt your cost structure/pricing until there is enough profit to fund growth.
  • Don’t start any heavy investment in your business until you have proven that all of the assumptions of vision fit with reality.


Messing with Fate: The Real Magic of Steve Jobs

New biography reveals what made Steve Jobs the business icon he is today.

Shortly after launching the Apple I, in 1976, Steve Jobs had the “ah-ha” moment that would change the world. Jobs had decided that computers should come as a complete package. Jobs and his co-founder Steve Wozniak had sold a couple hundred of their first computer, the Apple I, but the Apple I could hardly be called a finished product. It comprised of a circuit board with no power supply, no keyboard, no monitor and no case. As a result, the market ended at computer hobbyists.

Jobs’ big insight was that the Apple II need to be a fully “integrated consumer product” that could be sold to the average consumer. It needed to be ready to go out of the box with a keyboard, monitor, power supply, all beautifully wrapped up in a moulded plastic case. But, to achieve this he needed cash. After approaching a number of venture capitalists, he connected with Mike Markkula an ex-Intel executive who was enamoured by the Apple II prototype, and hence, invested $250,000. This enabled the two founders to turn their hobby into a business. Unfortunately, the brilliant co-founder and engineering genius Steve Wozniak wasn’t interested. He refused to quit his full-time job at HP. While Markkula shrugged and said okay, Jobs refused to take no for an answer. Walter Isaacson explains Jobs’ reaction in his new biography, Steve Jobs:

He cajoled Wozniak; he got friends to try to convince him; he cried, yelled, and threw a couple of fits. He even went to Wozniak’s parents’ house, burst into tears, and asked Jerry for help. “I started getting phone calls at work and home from my dad, my mom, my brother, and various friends, “ Wozniak recalled. “Every one of them told me I’d made the wrong decision.” None of that worked. Then Allen Baum, their Buck Fry Club mate at Homesead High, called. “You really ought to go ahead and do it,” he said. He argued that if he joined Apple full-time, he would not have to go into management or give up being an engineer. “That is exactly what I needed to hear,” Wozniak later said. “I could stay at the bottom of the organization chart, as an engineer.” He called Jobs and declared that he was now ready to come on board.”

Born entrepreneurs 

In the early 1980s, Robert Brockhaus began to explore personal traits that separated entrepreneurs from the general population. Brockhaus discovered that ‘internal locus of control’ was a powerful predictor of both a person intention to start a business and the success of that business. This finding has been replicated in many studies since.

A person with an internal locus of control believes that effort, skill and ability are what lead to success. They minimise the importance of fate, luck and chance in achievement. The problem with people who have an extreme, internal locus of control, is their beliefs often don’t fit with reality, they believe too much in their ability to shape their destiny. Steve Jobs is one such example. So extreme was his belief that he could shape the events in his life that colleagues described it as his “reality distortion field”.

Tribble, a former college, explained, “In his presence, reality is malleable. He can convince anyone of practically anything. It wears off when he’s not around, but it makes it hard to have schedules.”

It enabled him to convince co-founder Steve Wozniak to write a programme that should have taken months in just four days. Similarly, when Jobs decided he wanted one of the world’s top designers, Paul Rand, to work with him, IBM had already contracted him. Jobs was so persistent with phone calls that, after two days, the Vice Chairman of IBM Paul Rizzo concluded, “it was futile to resist Jobs” and gave the go ahead.

When he was launching iTunes, and many believed it would be impossible to get all the artists and record label’s to sign up. Roger Ames the head of Warner music describes the Apple founder’s behaviour, “He would call me at home, relentless at ten at night, to say he still needed to get to Led Zeppelin or Madonna. He was determined, and nobody else could have convinced some of these artists.”

Isaacson’s biography is peppered with incidents of Jobs acting on his belief that he can, and would, shape the world around him. Again and again Jobs indomitable will, charisma and belief that he would prevail, helped him reimage seven industries. As a former team member commented on his reality distortion field, “It enabled Jobs to inspire his team to change the course of computer history with a fraction of the resources of Xerox or IBM.” In short, Jobs was a living example of “people who are crazy enough to think they can change the world are the ones that do.”

Developing your internal locus of control

A large volume of research has shown that you can develop a deep belief in your ability to influence the world through four mechanisms:

  • Doing it: The best way to change your belief in your ability to control your destiny is by actually doing it. Setting and achieving goals has been shown to raise a person internal locus of control.
  • Learning from others: Studying and meeting entrepreneurs who have a deep belief in their ability to control their lives, you realise, so can you.
  • Persuasion: If you don’t believe the you are totally in control of your company’s destiny read Great by Choice it gives a convincing argument why luck and chance play little role in business success.
  • Manage your moods: Emotions have been shown to alter your belief your own ability. Being happy raises perceived beliefs, while being sad lowers them.


Should you Write a Business Plan?

Is writing a business plan a vital ingredient to start-up success or a waste of time? New research gives new insight into the business plan debate.

What did the founders of Dell, Twitter and Facebook all do before starting their companies?

The answer: they didn’t write a business plan.

Yup, according to a number of research studies the large majority of very successful entrepreneurs skip writing a business plan and are even less likely to do market research. But are they wrong? Could they have improved their chances of success if they had taken the time to layout their businesses ideas on paper?
According to many local MBA programmes, business experts, and popular ‘how to’ entrepreneurship books, the answer is yes. They preach that business plans are vital for raising money, thinking through future business problems and creating a clear vision for your business.
A few dissenters, however, disagree.

They believe that business plans are a waste of time and those hours are better spent working on the business.
To settle the debate, researchers have explored whether start ups that write business plans do better than those that don’t.
A group of researchers at Babson College in the United States followed 116 start-up businesses for eight years. They found that start ups who spent time writing a business plan did not out perform those that skipped the process altogether. A recent study sheds some light on why this might be.

Planning and business success

A team of researchers led by John Dencker from the University of Illinois did a study on 436 new businesses. He found that if an entrepreneur had a good general business knowledge and the industry in which they were setting up their business, than spending time on planning proved beneficial.

However, if the entrepreneur had limited knowledge of business and a limited knowledge of the industry in which they were planning to set up a business then planning increased the probability of failure.

Intuitively this makes sense. Having a good knowledge of how a business will operate will help the planning process and the assumptions you base your plans on will most likely be correct. However, if you have limited knowledge of an industry, if the business model is unclear with unproven planning and the market is dynamic and fast changing, then planning is more likely to be a waste of time. So should you write a business plan? 

Situations where planning is more likely to be beneficial
  • The final business model is clear and proven.
  • You have a good understanding of the market.
  • You have a good understanding of the industry sector.
  • You have a good understanding of how to set up the business.
  • The market is stable and slow changing.
Situations when planning is more likely to be harmful
  • The final business model is unclear and unproven.
  • You have a limited understanding of the market.
  • You have a limited understanding of the industry.
  • You have a limited understand of how to set up the business.
  • The market is dynamic and fast changing.


How Great Entrepreneurs Think Differently

New research reveals how great entrepreneurs use pessimism to compete in uncertain markets.

A few years ago, Saras Sarasvathy, now a Professor at Darden College, set out on the audacious task of getting inside the minds of the world’s greatest entrepreneurs. Using a research technique developed by her supervisor, Nobel Prize winner Herbert Simon, she had 27 of America’s best entrepreneurs think out loud while they wrestled with some of the toughest business problems that most entrepreneurs face.

Different mindsets

The most important finding of her research is that great entrepreneurs make decisions differently to corporate managers, novice entrepreneurs and investors. One of the key ways that great entrepreneurs think differently is how they evaluate business opportunities. Great entrepreneurs don’t think in terms of returns, but rather, evaluate business opportunities in terms of what they can lose if the business fails.

Corporate managers tend to put a lot of effort in predicting the sales and profits of new products and new divisions. MBA programmes teach tools for students to predict which new products will be successful and which products won’t. Great entrepreneurs don’t do this, they rather decide how much they are willing to lose up front and spend time thinking about how they could lower the downside if it all goes pear -shaped.

Saras Sarasarvathy describes this principle as the affordable loss principle: “committing in advance what one is willing to lose rather than investing in calculations about expected returns to the project.” In the messy, unpredictable and often hazardous world of entrepreneurship and innovation this approach makes sense. It is hard enough to predict whether a business will succeed or fail, let alone predict how well a business will do.

Yet predicting sales is how many entrepreneurs spend their time. Even though research shows that most entrepreneurs’ projections are kilometres off actual sales figures. A recent study  undertaken by the Start up Genome project  conducted on 650 internet start ups showed that unfunded start ups on average over-estimate their market size by about 100 times.

So when planning out your next big business idea it might be worthwhile to skip the feel good exercise of projecting sales figures and rather consider what would happen if it all went horribly wrong.

Putting affordable loss to use

Decide up front how much time, effort and money you are willing to put in the business.  Less is often better. Great entrepreneurs in extreme cases are able to set up business with almost no personal investment, getting customers, investors or partners to fund the business.