Main The Business Book

The Business Book

Packed with innovative graphics and simple explanations of business concepts, from managing risk and alternative business models to effective leadership and thinking outside the box, The Business Book covers every facet of business management.

Big ideas make great business thinkers and leaders. From Adam Smith and Andrew Carnegie to Bill Gates and Warren Buffett, The Business Book is perfect for college students, would-be entrepreneurs, or anyone interested in how business works.

The Business Book is the perfect primer to key theories of business and management, covering inspirational business ideas, business strategy and alternative business models. One hundred key quotations introduce you to the work of great commercial thinkers, leaders, and gurus from Henry Ford to Steve Jobs, and to topics spanning from start-ups to ethics.

Categories: Economy
Year: 2014
Edition: 1
Publisher: DK Publishing
Language: english
Pages: 352 / 354
ISBN 10: 1465415858
ISBN 13: 9781465415851
Series: Big Ideas Simply Explained
File: PDF, 39.76 MB
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THE

BUSINESS
BOOK

THE

BUSINESS
BOOK

London, new York, MeLbourne,
Munich, and deLhi

DK
senior editor
sam Atkinson
project Art editor
Amy child
editors
scarlett o’Hara, Alison sturgeon
Us editors
Margaret parrish, jane perlmutter

jAcKet designer
Laura Brim
jAcKet editor
Manisha Majithia
jAcKet design
deveLopMent MAnAger
sophia tampakopoulos

iLLUstrAtions
james graham

pictUre reseArcHer
sumedha chopra
MAnAging editor
esther ripley

prodUcer, pre-prodUction
rebecca Fallowfield

MAnAging Art editor
Karen self

prodUcer
gemma sharpe

pUBLisHer
sarah Larter

original styling by

Art director
phil ormerod
AssociAte
pUBLisHing director
Liz Wheeler
pUBLisHing director
jonathan Metcalf

First American edition, 2014
published in the United states by
dK publishing
375 Hudson street
new York, new York 10014
11 12 13 14 15 10 9 8 7 6 5 4 3 2 1
001 - 192364 - Feb/2014
copyright © 2014
dorling Kindersley Limited
All rights reserved
Without limiting the rights under
copyright reserved above, no part of
this publication may be reproduced,
stored in or introduced into a retrieval
system, or transmitted, in any form,
or by any means (electronic,
mechanical, photocopying, recording,
or otherwise), without the prior written
permission of both the copyright owner
and the above publisher of this book.

stuDio8 Design

published in great Britain by
dorling Kindersley Limited.

produced for dK by

A catalog record for this book is
available from the Library of congress.

cobalt iD
Art editors
darren Bland, paul reid
editors
richard gilbert, diana Loxley,
sarah tomley, Marek Walisiewicz

isBn: 978-1-4654-1585-1
printed and bound in china by
Leo paper products Ltd
discover more at
www.dk.com

contributors
ian marcouse, consultant editor

denry machin

Ian Marcousé lectures in business and economics education at
the Institute of Education in London. He has written a host of
business text books for A-level and BTEC students, including
the popular A–Z Business Studies handbooks, and is the founder
and director of A–Z Business Training Ltd.

Denry Machin is an associate tutor at Keele University, UK,
and is working at doctoral research on the application of business
thinking within education. He also works for Harrow International
Management Services as projects manager, assisting in the
development of Harrow School’s presence in Asia. He is the author
of several business books, journals, and magazine articles.

PhiliPPa anderson
Philippa Anderson is a communications consultant and business
writer who has authored articles, magazine features, and books on
numerous aspects of business, from market research to leadership.
She also provides communications consultancy for multinational
firms, including 3M, Anglo American, and Coca-Cola.

alexandra black
Alexandra Black studied business communications before
embarking on a writing career that led her to Japan and stints
with financial newspaper group Nikkei Inc. and investment bank
J. P. Morgan. She later worked for a direct marketing publisher in
Sydney, Australia, before moving to Cambridge, UK. She writes
on a range of subjects, from business to history and fashion.

nigel watson
Nigel Watson has taught business and economics for A-Level and
International Baccalaureate students for 25 years. He has authored
and co-authored books and magazine articles in both subjects.

CONTENTS
10 INTRODUCTION

START SMALL,
THINK BIG
STARTING AND GROWING
THE BUSINESS
20

22

24

28

32

Be first or be better
Gaining an edge

40

Put all your eggs in one
basket, and then watch
that basket
Managing risk

If you can dream it,
you can do it
Beating the odds at
start-up

The secret of business is
to know something that
nobody else knows
Stand out in the market

Without continuous
growth and progress,
success has no meaning
The Greiner curve

62

If you believe in
something, work nights
and weekends—it won’t
feel like work
The weightless start-up

LIGHTING THE FIRE
LEADERSHIP AND HUMAN
RESOURCES

42

Luck is a dividend of
sweat. The more you
sweat, the luckier you get
Luck (and how to get lucky)

68
43

Broaden your vision, and
maintain stability while
advancing forward
Take the second step

Managers do things right,
leaders do the right thing
Leading well

70

Nothing great is
created suddenly
How fast to grow

None of us is as smart
as all of us
The value of teams

72

Innovation must be
invasive and perpetual:
everyone, everywhere,
all of the time
Creativity and invention

74

Dissent adds spice,
spirit, and an
invigorating quality
Beware the yes-men

76

No great manager or
leader ever fell from
heaven
Gods of management

There’s a gap in the
market, but is there
a market in the gap?
Finding a profitable niche
You can learn all you
need to know about the
competition’s operation
by looking in his
garbage cans
Study the competition

58

44

46

The role of the CEO is to
enable people to excel
From entrepreneur to leader

48

Chains of habit are too
light to be felt until
they are too heavy to
be broken
Keep evolving business
practice

52

A corporation is a living
organism; it has to
continue to shed its skin
Reinventing and adapting

78

80

A leader is one who
knows the way, goes the
way, and shows the way
Effective leadership
Teamwork is the fuel
that allows common
people to attain
uncommon results
Organizing teams and talent

112 Management is a practice

where art, science, and
craft meet
Mintzberg’s management
roles
114 A camel is a horse

designed by committee
Avoid groupthink
132 Make the best quality
115 The art of thinking

independently, together
The value of diversity

of goods at the lowest
cost, paying the highest
wages possible
Your workers are your
customers

86

Leaders allow great
people to do the work
they were born to do
Make the most of your talent

88

The way forward may
not be to go forward
Thinking outside the box

MAKING MONEY
WORK

138 Utilize OPM—Other

The more a person
can do, the more you
can motivate them
Is money the motivator?

MANAGING FINANCES

146 Swim upstream. Go the

90

92

Be an enzyme—a catalyst
for change
Changing the game

100 The worst disease that

afflicts executives is
egotism Hubris and nemesis
104 Culture is the way in

which a group of people
solves problems
Organizational culture

120 Do not let yourself be

involved in a fraudulent
business Play by the rules

other way. Ignore the
conventional wisdom
Ignoring the herd
150 Debt is the worst poverty

Leverage and excess risk
124 Executive officers must

be free from avarice
Profit before perks
126 If wealth is placed where

it bears interest, it comes
back to you redoubled
Investment and dividends
128 Borrow short, lend long

Making money from money
110 Emotional intelligence

is the intersection of
heart and head
Develop emotional
intelligence

People’s Money
Who bears the risk?

130 The interests of the

shareholders are our own
Accountability and
governance

152 Cash is king

Profit versus cash flow
154 Only when the tide goes

out do you discover who’s
been swimming naked
Off-balance-sheet risk
155 Return on equity is a

financial goal that can
become an own goal
Maximize return on equity
156 As the role of private

equity has grown, so have
the risks it poses
The private equity model
158 Assign costs according to

the resources consumed
Activity-based costing

186 Synergy and other lies

Why takeovers disappoint
188 The Chinese word “crisis”

is composed of two
characters: “danger”
and “opportunity”
Crisis management
190 You can’t grow long-term

if you can’t eat short-term
Balancing long- versus
short-termism
192 Market Attractiveness,

WORKING WITH
A VISION
STRATEGY AND
OPERATIONS

Business Attractiveness
The MABA matrix

an opportunity
Learning from failure
166 If I had asked people what

they wanted, they would
have said faster horses
Leading the market
170 The main thing to

remember is, the main
thing is the main thing
Protect the core business
172 You don’t need a huge

company, just a computer
and a part-time person
Small is beautiful
178 Don’t get caught in

the middle
Porter’s generic strategies

where you are, a map
won’t help
The capability maturity
model
220 Chaos brings uneasiness,

but it also allows for
creativity and growth
Coping with chaos
222 Always do what is right.

It will gratify half of
mankind and astonish
the other
Morality in business
223 There is no such thing as

194 Only the paranoid survive

Avoiding complacency
202 To excel, tap into people’s

164 Turn every disaster into

218 If you don’t know

capacity to learn
The learning organization
208 The future of business is

a minor lapse in integrity
Collusion
224 Make it easier to do

the right thing and
much harder to do the
wrong thing
Creating an ethical culture

selling less of more
The long tail
210 To be an optimist ...

have a contingency
plan for when all hell
breaks loose
Contingency planning

SUCCESSFUL
SELLING
MARKETING MANAGEMENT

211 Plans are useless, but

planning is indispensable
Scenario planning
212 The strongest

competitive forces
determine the profitability
of an industry
Porter’s five forces

232 Marketing is far too

important to leave to the
marketing department
The marketing model
234 Know the customer so

well that the product fits
them and sells itself
Understanding the market

216 If you don’t have a
184 The essence of strategy

is choosing what not to do
Good and bad strategy

competitive advantage,
don’t compete
The value chain

242 Attention, Interest,

Desire, Action
The AIDA model

244 Marketing myopia

Focus on the future market
250 The cash cow is the

beating heart of the
organization
Product portfolio

278 Trying to predict the

future is like driving
with no lights looking
out of the back window
Forecasting
280 Product, Place, Price,

Promotion Marketing mix
256 Expanding away from

your core has risks;
diversification doubles
them Ansoff’s matrix
258 If you’re different, you

will stand out
Creating a brand

268 Whitewashing, but with

a green brush
Greenwash
270 People want companies

to believe in something
beyond maximizing
profits The appeal of ethics
271 Everybody likes

something extra for
nothing
Promotions and incentives

customers are your
greatest source of
learning
Feedback and innovation
314 Technology is the great

growling engine of change
The right technology
316 Without big data, you are

DELIVERING THE
GOODS
PRODUCTION AND
POSTPRODUCTION

264 There is only one boss:

the customer
Make your customers
love you

312 Your most unhappy

blind and deaf and in the
middle of a highway
Benefitting from “big data”
318 Put the product into

the customer’s hands—
it will speak for itself
Quality sells

288 See how much, not how

little, you can give for
a dollar
Maximize customer benefits
290 Costs do not exist to be

calculated. Costs exist to
be reduced
Lean production
294 If the pie’s not big enough,

make a bigger pie
Fulfilling demand

324 The desire to own

something a little better,
a little sooner than
necessary
Planned obsolescence
326 Time is money

Time-based management
328 A project without a

critical path is like a ship
without a rudder
Critical path analysis

296 Eliminate unnecessary

steps Simplify processes

330 Taking the best from

the best Benchmarking
272 In good times people

want to advertise; in bad
times they have to
Why advertise?
274 Make your thinking as

funny as possible
Generating buzz

300 Every gain through the

elimination of waste is
gold in the mine
Juran’s production ideal
302 Machines, facilities,

and people should work
together to add value
Kaizen

276 E-commerce is becoming

mobile commerce
M-commerce

332 DIRECTORY

310 Learning and innovation

go hand in hand
Applying and testing ideas

340 GLOSSARY
344 INDEX
351 ACKNOWLEDGMENTS

INTRODU

CTION

12 INTRODUCTION

F

rom the time that goods
and services began to be
traded in early civilizations,
people have been thinking about
business. The emergence of
specialized producers and the use
of money as a means of exchange
were methods by which individuals
and societies could, in modern
terms, gain a “business edge.” The
ancient Egyptians, the Mayans, the
Greeks, and the Romans all knew
that wealth creation through the
mechanism of commerce was
fundamental to the acquisition of
power, and formed the base on
which civilization could prosper.
The lessons of the early traders
resonate even today. Specialism
revealed the benefits of economies

The art of administration
is as old as the
human race.
Edward D. Jones
US investment banker
(1893–1982)

of scale—that production costs fall
as more items are produced. Money
gave rise to the concept of “value
added”—selling an item for more
than it cost to produce. Even when
barter was the norm, producers still
knew it was advantageous to lower
costs and raise the value of goods.
Today’s companies may use different
technologies and trade on a global
scale, but the essence of business
has changed little in millennia.

An era of change
However, the study of business as
an activity in its own right emerged
relatively recently. The terms
“manager” and “management” did
not appear in the English language
until the late 16th century. In his
1977 text The Visible Hand, Dr.
Alfred Chandler divided business
history into two periods: pre-1850
and post-1850. Before 1850 local,
family-owned firms dominated the
business environment. With
commerce operating on a relatively
small scale, little thought was given
to the wider disciplines of business.
The growth of the railroads in
the mid-1800s, followed by the
Industrial Revolution, enabled
businesses to grow beyond the
immediate gaze of friends or family,
and outside the immediate locale.
To prosper in this new—and

increasingly international—
environment businesses needed
different, and more rigorous,
processes and structures. The
geographic scope and ever-growing
size of these evolving businesses
required new levels of coordination
and communication—in short,
businesses needed management.

Managing production
The initial focus of the new breed
of manager was on production.
As manufacturing moved from
individual craftsmen to machinery,
and as ever-greater scale was
required, theorists such as Henri
Fayol examined ever-more-efficient
ways of operating. The theories
of Scientific Management, chiefly
formulated by Frederick Taylor,
suggested that there was “one best
way” to perform a task. Businesses
were organized by precise routines,
and the role of the worker was simply
to supervise and “feed” machinery,
as though they were part of it. With
the advent of production lines
in the early 1900s, business was
characterized by standardization
and mass production.
While Henry Ford’s Model T car
is seen as a major accomplishment
of industrialization, Ford also
remarked “why is it every time I ask
for a pair of hands, they come with

INTRODUCTION 13

a brain attached?” Output may have
increased, but so too did conflict
between management and staff.
Working conditions were poor and
businesses ignored the sociological
context of work—productivity
mattered more than people.

Studying people
In the 1920s a new influence on
business thinking emerged—the
Human Relations Movement of
behavioral studies. Through the
work of psychologists Elton Mayo
and Abraham Maslow, businesses
began to recognize the value of
human relations. Workers were no
longer seen as simply “cogs in the
machine,” but as individuals with
unique needs. Managers still
focused on efficiency, but realized
that workers were more productive
when their social and emotional
needs were taken care of. For the
first time, job design, workplace
environments, teamwork,
remuneration, and nonfinancial
benefits were all considered
important to staff motivation.
In the period following World
War II, business practice shifted
again. Wartime innovation had
yielded significant technological
advances that could be applied
to commerce. Managers began to
utilize quantitative analysis, and

were able to make use of computers
to help solve operational problems.
Human relations were not forgotten,
but in management thinking,
measurability returned to the fore.

Global brands
The postwar period saw the
growth of multinationals and
conglomerates—businesses with
multiple and diverse interests
across the globe. The war had made
the world seem smaller, and had
paved the way for the global brand.
These newly emerging global
brands grew as a result of a media
revolution—television, magazines,
and newspapers gave businesses

Entrepreneurship is about
survival, which nurtures
creative thinking. Business
is not financial science, it’s
about trading—buying
and selling.
Anita Roddick
UK entrepreneur (1942–2007)

the means to reach a mass
audience. Businesses had always
used advertising to inform
customers about products and to
persuade them to buy, but mass
media provided the platform for
a new, and much broader, field—
marketing. In the 1940s US
advertising executive Rosser Reeves
promoted the value of a Unique
Selling Proposition. By the 1960s,
marketing methods had shifted
from simply telling customers about
products to listening to what
customers wanted, and adapting
products and services to suit that.
Initially, marketing had its critics.
In the early 1960s hype about the
product became more important
than quality, and customers grew
dissatisfied with empty claims.
This, and competition from
Japanese manufacturers, had
Western companies embracing a
new form of business thinking:
Total Quality Management (TQM)
and Zero Defects management.
Guided by management theorists,
such as W. Edwards Demming and
Philip B. Crosby, quality was seen
as the responsibility of the entire
company, not just those on the
production line. Combining Human
Relations thinking and the
customer-focused approach of
marketing, many companies ❯❯

14 INTRODUCTION

adopted the Japanese philosophy of
kaizen: “continuous improvement of
everything, by everyone.” Staff at
all levels was tasked with improving
processes and products through
“quality circles.” While TQM is no
longer the buzzword it once was,
quality remains important. The
modern iteration of TQM is Six
Sigma, an approach to process
improvement that was developed
by Motorola in 1986 and adapted by
Jack Welch during his time as CEO
of General Electric.

Gurus and thinkers
Business history itself emerged
as a topic of study in the 1970s.
Dr. Alfred Chandler progressed
the study of business history from
the purely descriptive to the
analytical—his course at Harvard
Business School stressed the
importance of organizational
capabilities, technological
innovation, and continuous
learning. Taking their cue from
Chandler, in the 1980s and 1990s
management experts—such as
Michael Porter, Igor Ansoff,
Rosabeth Moss Kanter, Henry
Mintzberg, and Peter Drucker—
encouraged businesses to consider
their environments, to consider
the needs of people, and to remain
adaptable to change. Maintaining

the conditions for business growth,
and the correct positioning of
products within their market, were
considered key to business strategy.
Moreover, what distinguished these
gurus from their predecessors—who
had tended to focus on operational
issues—was a focus on leadership
itself. For example, Charles Handy’s
The Empty Raincoat revealed the
paradoxes of leadership, and
acknowledged the vulnerabilities
and fragilities of the managers
themselves. Leadership in the
context of business, these writers
recognized, is no easy undertaking.

Digital pioneering
Just as television and mass media
had done before, the growth of the
Internet in the 1990s and early

Business can be a source
of progressive change.
Jerry Greenfield
US businessman, co-founder of Ben
and Jerry’s ice cream (1951–)

2000s heralded a new era for
business. While early hype led to
the failure of many online start-ups
in the dot-com bubble of 1997 to
2000, the successful e-commerce
pioneers laid the foundations for a
business landscape that would be
dominated by innovation. From
high-tech garage start-ups—such
as Hewlett-Packard and Apple—
to the websites, mobile apps, and
social-media forums of the modern
business environment, technology
is increasingly vital for business.
The explosion of new
businesses thanks to technology
also helped to expand the
availability of finance. During the
1980s and 1990s finance had grown
into a distinct discipline. Corporate
mergers and high-profile takeovers
became a way for businesses to
grow beyond their operational
limits; leverage joined marketing
and strategy as part of the
management lexicon. In the late
1990s this expanded to venture
capital: the funding of small
companies by profit-seeking
investors. The risk of starting and
running a business remains, but
the opportunities afforded by
technology and easier access to
finance have made taking the first
step a little easier. With microfinance, and the support of online

INTRODUCTION 15

networks and communities of likeminded people dispensing
business advice, enterprise has
never been more entrepreneurial.
Recent business thinking has
brought diversity and social
responsibility to the fore. Businesses
are encouraged, and increasingly
required by law, to employ people
from diverse backgrounds and to
act in an ethical manner, wherever
they operate in the world.
Businesses such Nike and Adidas
require suppliers to prove that labor
conditions in their factories meet
required standards. Sustainability,
recycling, diversity, and
environmentalism have entered
business thinking alongside
strategic management and risk.

New horizons
If business thinking has shifted,
so too has the nature of business
itself. Where once a company was
constrained by its locality, today
the opportunities are truly global.
Globalization does, however, mean
that business is more competitive
than ever. Emerging markets are
creating new opportunities and
new threats. They may be able to
outsource production to low-cost
countries, but as their economies
grow, these emerging nations are
breeding new competition. China,

for example, may be “the world’s
factory,” but its home-grown
companies are also starting to
represent a threat to Western
businesses. As the global recession
of 2007–08 and ongoing economic
uncertainty have proven, business
in the 21st century is increasingly
more interdependent and more
challenging than ever before.
Starting a business might be easier,
but to survive entrepreneurs need
the tenacity to take an idea to
market, the business acumen to
turn a good plan into a profitable
enterprise, and the financial skill to
maintain success.

Business is a fascinating subject.
It surrounds us and affects us daily.
A walk down the street, a wander
around a supermarket, an Internet
search on almost any topic will
reveal commerce in its many and
varied forms. At its core business
is, and always has been, about
survival and surplus—about the
advancement of self and of society.
As the world continues to open
up, and as opportunities for
enterprise multiply, an interest
in business has never been more
relevant, or more exciting. Moreover,
for those with entrepreneurial
spirit, business has never been
more rewarding. ■

Continual change
For centuries social, political, and
technological factors have forced
companies and individuals to
create new ways of generating
profits. Whether bartering goods
with a neighboring village or
seeking ways to make profits from
social networking, business
thinking has changed, shifted, and
evolved to mirror the wants and
needs of the societies whose wealth
it creates. Sometimes, as in the
2008 financial crisis, business failed
in its efforts. In other examples—the
legacy of Apple’s game-changing
products, for example—companies
have been spectacularly successful.

Business, more than any other
occupation, is a continual
dealing with the future; it
is a continual calculation,
an instinctive exercise
in foresight.
Henry R. Luce
US magazine publisher (1898–1967)

START S
THINK B
STARTING AND
GROWING THE
BUSINESS

MALL,
IG

18 INTRODUCTION

A

ll businesses start from the
same point: an idea. It is
what happens to that idea
that determines business success.
According to Entrepreneur
magazine, nearly half of all new
start-ups fail within the first three
years. Beating the odds at start-up
is tough. First and foremost an idea,
no matter how good, must be
combined with entrepreneurial
spirit, defined as the willingness
to take risk. Without entrepreneurial
spirit a great idea might never be
pursued. Not all ideas are good
ones though; it would be a foolish
entrepreneur who rushed a product
to market without careful thought,
research, and detailed planning.
Risk might be inherent in business
enterprise, but successful
entrepreneurs are those who are
not only willing to take risks, but
are also able to manage risk.

Realistic propositions
Having an idea is the first step—
the next hurdle is finance. Some
start-ups require very little capital,
and a few require none at all.
However, many require significant
backing, and most will need to seek
funding at some stage in the
growth process. An entrepreneur
must be able to convince financial
backers that the concept is valid

and that they have the skills and
knowledge to turn the original
concept into a successful business.
It follows that the idea must
be profitable. Sometimes, an idea
may look great on paper, but turn
out to be uncommercial when put
into practice. Determining whether
an idea has potential requires a
study of the competition and the
relevant market. Who is competing
for customers’ time and money?
Are these competitors selling
directly competitive products or
possible substitutes? How are
competitors perceived in the
market? How big is the market?
Most markets are increasingly
global, crowded, and competitive.
Few companies are lucky enough to

The only thing worse
than starting something
and failing … is not
starting something.
Seth Godin
US entrepreneur (1960–)

find a profitable niche—to succeed,
companies need to do something
different in order to stand out in
the market. The strategy for most
companies is to differentiate; this
means demonstrating to customers
that they offer something that is not
available from competitors—a
Unique or Emotional Selling
Proposition (USP or ESP).
Such attempts to stand out are
everywhere. Every business, and
at every stage of production, from
raw-material extraction to aftersales service, tries to distinguish
its products or services from all
others. Walk into any bookstore,
for example, and you will see
countless examples of books, often
on the same topic, using design,
style, and even size (large or small)
to stand out from the competition.
Gaining an edge often depends
on one of two things: being first
into a new market niche, or being
different from the competition. For
example, in 1995 eBay was first
into the online auction market,
and has dominated it ever since.
Similarly, Volvo was first to identify
the opportunity for luxury bus sales
in India, and has enjoyed healthy
sales. In contrast, Facebook was by
no means the first social network,
but it is the most successful; its
edge was having a better product.

START SMALL, THINK BIG 19

Once a company is established,
the challenge shifts: the objective
now is to maintain sales and grow
in the short- and long-term.

Adapting to survive
Long-term business survival
depends upon the company
constantly reinventing and
adapting itself in order to remain
ahead of the competition. In
dynamic markets, which are
growing and evolving all the time,
the idea on which the company
was founded may become irrelevant
over time, and rivals will almost
certainly copy it. The ecosystem
in which a business operates is
rarely, if ever, static. Corporations
exist in these ecosystems as living
organisms that must adapt to
survive. In their 2013 book,
Reinventing Giants, Bill Fischer,
Umberto Lago, and Fang Liu noted
that the Chinese home appliances
company Haier had reinvented
itself at least three times in the
past 30 years. In contrast, Kodak,
a US giant of the 20th century, was
slow to react to the rise of digital
photography, and went bankrupt.
Moreover, just as the enterprise
must adapt, so too must the owner.
Most businesses start small, and
remain small. Few entrepreneurs
are willing or know how to take

the second step of employing
people who are neither family nor
previously known friends. This is
the start of a move from entrepreneur
to leader, and it requires a new set
of skills, as new demands are placed
on the business founders. Where
once energy, ideas, and passion
were enough, evolving businesses
require the development of formal
systems, procedures, and processes.
In short, they require management.
Founders must develop delegation,
communication, and coordination
skills, or they must employ people
who have them.
As Larry Greiner described in
his 1972 paper, “Evolution and
Revolution as Organizations Grow”,
as a business grows, the demands
on it change. The Greiner Curve is
a graphic that shows how the initial
stages of growth rely on individual
initiative, and that evolving ad-hoc
business practice into sustainable
and successful growth can only be
achieved by experienced people
and rigorous systems. Professional
management, as opposed to
entrepreneurial spirit, becomes
essential to business evolution.
Some leaders, such as Bill Gates
and Steve Jobs, for example, are
able to make the transition from
entrepreneurial founder to corporate
leader. Many others, however,

struggle to make the necessary
changes; some try and fail, while
others decide to remain small.

Finding a balance
Determining how fast to grow is,
therefore, a balance of the founder’s
skills and desires. But in order to
survive, the idea must be unique
enough to define its own niche, and
the individual or group behind it
must demonstrate entrepreneurial
spirit. They need the flexibility to
adapt the idea—and themselves—
as business and market pressures
demand. Luck will play a part, but
it is the balance of these factors
that determines whether a small
start-up becomes a giant. ■

When you have to prove
the value of your ideas by
persuading other people to
pay for them, it clears out an
awful lot of woolly thinking.
Tim O’Reilly
Irish entrepreneur (1954–)

20

IF YOU CAN
DREAM IT,
YOU CAN DO IT
BEATING THE ODDS AT START-UP

IN CONTEXT
FOCUS
Business start-ups

...a good idea allied to
a great business plan.

KEY DATES
18th century The term
“entrepreneur” is used to
describe someone who is
willing to risk buying at
certain prices and selling
at uncertain prices.

...an entrepreneurial spirit:
a willingness to take risks.

Beating the odds at
start-up requires...

1946 Professor Arthur Cole
writes An Approach to
Entrepreneurship, sparking
interest in the phenomenon.
2005 The micro-finance,
nonprofit site Kiva.com
launches to make small loans
to very small businesses.
2009 Crowdfunding websites,
such as Kickstarter.com, allow
individuals to provide funding
for businesses.
2013 A study by Ross Levine
and Yona Rubinstein finds that
as teenagers, many successful
entrepreneurs exhibited
aggressive behavior, broke the
rules, and got into trouble.

...business acumen to
put the plan into action.

T

he reasons for starting a
business are many. Some
people dream of being their
own boss—of turning their hobby
into a profitable enterprise, of
expressing their creativity, or of
being richly rewarded for their hard
work. Although Walt Disney’s maxim
“if you can dream it, you can do it”

...determination to
deal with setbacks.

holds true for some, pursuing the
dream is risky. Those who attempt
it must have the entrepreneurial
spirit to fearlessly quit a well-paid
job, go it alone, and face a future
filled with uncertainty. Others
might need a push; often being laid
off (and its associated lump-sum
payment) can be a springboard.

START SMALL, THINK BIG 21
See also: Finding a profitable niche 22–23 ■ Managing risk 40–41 ■ Luck (and how to get lucky) 42 ■ Take the second
step 43 ■ From entrepreneur to leader 46–47 ■ Learning from failure 164–65 ■ Small is beautiful 172–77

Younger entrepreneurs are
increasingly a part of the start-up
scenario. They may have gained
the necessary skills for business by
their early twenties, and enjoy the
excitement and freedom of running
their own venture.

Keeping the faith
While the reasons for start-up may
vary, what all entrepreneurs have in
common is the willingness to take
risks. Few entrepreneurs get it right
first time—it takes resilience and
tenacity to keep going in the face
of failure, and it takes perseverance
to remain positive when customers,
banks, and financial backers
repeatedly say “no.” Faith in the
idea is essential. While some startups require very little capital, most
require funding during their early
growth phases. A business owner
must be able to convince banks,
or other financial backers, that their
concept is valid and that they have
the skills to turn the idea into a
profitable venture, even though
this may take some time. It took
Amazon six years to make a profit.

“Tony” Fernandes

In recent years, securing finance
for start-ups has become a little
easier. Many governments offer
loan plans or grants. Entrepreneurs
with big ideas can access large
funds of money and managerial
support from venture capitalists,
whose sole purpose is to incubate
start-ups. For smaller start-ups, and
for people with very little of their
own capital, micro-loans and
crowdfunding finance—such as
that offered by Kickstarter.com—
are increasingly popular.

Sustaining a business is
a hell of a lot of hard work,
and staying hungry is half
the battle.
Wendy Tan White
UK business executive (1970–)

The business plan
The key to securing financing is
a business plan. A good plan will
outline the idea itself, detail any
supporting market research,
describe operational and marketing
activities, and give financial
predictions. The plan should also
outline a strategy for long-term
growth and identify contingencies
(alternative ideas or markets) if
things do not go as planned.
Most importantly, a good
business plan will acknowledge
that the biggest reason for business

failure is a lack of cash. While
loan capital can help for a while,
eventually a business must fund
its operations from revenue. A good
business plan will analyze future
cash flows and identify any
potential shortfalls.
Beating the odds at start-up is
defined by the tenacity to take an
idea to market, the ability to secure
sufficient finance, and the business
acumen to turn a good plan into a
long-term, profitable enterprise. ■

Tan Sri Anthony “Tony” Fernandes
was born in Kuala Lumpur in 1964
to an Indian father and Malaysian
mother. He went to school in
England and graduated from
the London School of Economics
(LSE) in 1987. He worked briefly
for Richard Branson at Virgin
Records as a financial controller
before becoming Southeast Asia
Vice President for Warner Music
Group in 1992. In 2001, Fernandes
left Warner to go it alone. He
mortgaged his home to raise
the finance needed to buy the
struggling young airline, AirAsia.
His low-cost strategy was clear

in the company’s tagline: “Now
everyone can fly.” One year after
his takeover, the airline had
cleared its debts of $11 million
and had broken even. Fernandes
estimates that around 50
percent of its travelers are
first-time flyers. The company
is now widely regarded as the
world’s best low-cost airline.
In 2007 Fernandes founded
Tune Hotels, a low-cost hotel
chain that promises “Five-star
beds at one-star prices.” He
advises potential entrepreneurs
to “dream the impossible. Never
take no for an answer.”

22

THERE’S A GAP IN
THE MARKET, BUT
IS THERE A MARKET
IN
THE
GAP?
FINDING A PROFITABLE NICHE
IN CONTEXT
FOCUS
Positioning strategy

Many markets are crowded,
with multiple sellers chasing
the same customers.

KEY DATES
1950s and 60s Markets are
dominated by large companies
offering mass-produced items,
such as Coca-Cola. Choice is
limited, but the scope for
products targeted at new
sectors of the market is high.

For these sellers, competition
lowers profitability.

1970s and 80s Markets
become more segmented as
companys generate new
products and market them
toward narrower groups.

Market gaps—a new product or
sector of the market—offer the
enticing prospect of healthy
profitability.

1990s and 2000s Companies
and brands position themselves
ever-more aggressively and
distinctively in the
overcrowded marketplace.
2010s Finding and sustaining
market niches is assisted by
the promotional capabilities
of the Internet, which allow
“one-to-one” marketing and
customization of products.

But does the gap contain
enough business
to generate a profit?

There’s a gap in the
market, but is there a
market in the gap?

F

inding a space in the
market that is unchallenged
by competition is the Holy
Grail of positioning strategy.
Unfortunately these spaces—
known as market gaps—are often
illusive, and the benefits of finding
one are often equally illusory.
Although competition is a fact of
life, it makes business difficult,
contributing to an ever-downward
pressure on prices, ever-rising costs
(such as the funding of new product
development and marketing), and an
incessant need to outmaneuver and
outsmart rivals. In contrast, the
benefits of finding a market gap—a
small niche segment of a market that
is unfettered by competition—are
obvious: greater control over prices,
lower costs, and improved profits.
The identification of a market
gap, combined with a dose of
entrepreneurial spirit, is often all
that is needed to launch a new
business. In 2006, Twitter founder
Jack Dorsey combined short-form
communication with social media,
providing a service that no one else
had spotted. Free to most users,
revenue comes from companies who
pay for promotional tweets and
profiles: Twitter earned advertising
revenues of $582 million in 2013.

START SMALL, THINK BIG 23
See also: Stand out in the market 28–31 ■ Gaining an edge 32–39 ■ Reinventing and adapting 52–57
strategies 178–83 ■ Good and bad strategy 184–85 ■ The value chain 216–17 ■ Marketing mix 280–83

Not all gaps are lucrative, however.
The Amphicar, for instance, was an
amphibious car produced in the
1960s for US consumers who wanted
to drive on roads and rivers. It was a
quirky novelty, but the market was
too small to be profitable. This was
also true for bottled water for pets—
launched in the US in 1994, Thirsty
Cat! and Thirsty Dog! failed to
entice pet owners.

Snapple’s positioning in the
crowded US beverage marketplace
was the key to its success. By
focusing on a niche healthy product
and marketing itself as a quirky
company, Snapple was able to
wrestle a large market share
(indicated here by circle size)
from its rivals.

Snapple

Arizona

UNHEALTHY

OceanSpray

HEALTHY

Lipton

Nestea

MAINSTREAM

natural ingredients. Its founders ran
a health store in Manhattan, and the
company used the slogan: “100%
Natural.” Snapple targeted students,
commuters, and lunch-time office
workers with a new healthy “snack”
drink, combining its Unique Selling
Proposition (USP) with irreverent
marketing and small bottles that
were designed to be consumed in

Snapple
A contraction of the words
“snappy” and “apple,” Snapple
was launched in 1978 by
Unadulterated Food Products
Inc. The company was founded
in 1972 by Arnold Greenberg,
Leonard Marsh, and Hyman
Golden in New York, US.
Such was the popularity of
Snapple that the company has
been subject to numerous
buyouts. Unadulterated was
purchased by Quaker Oats for
$1.7 billion in 1994 but,
following differences in strategic

Porter’s generic

UNIQUE

A sustainable niche
Snapple, the manufacturer of healthy
tea and juice drinks, is a company
that has successfully found a
sustainable and profitable niche. A
glance at the beverage counter of
any supermarket reveals that dozens
of brands compete for sales. Many
companies have failed in this ultracompetitive market: for example,
Pepsi tried to capture a nonexistent
market for morning cola with its
short-lived, high-caffeine drink, AM.
Success for Snapple came from
positioning the product as a unique
brand—Snapple was one of the first
companies to manufacture juices
and drinks made completely from

■

vision that led to falling sales,
was sold to Triarc in 1997 for
$300 million. Triarc then sold
the Snapple brand to Cadbury
Schweppes for $1.45 billion in
September 2000, with a further
deal in May 2008 seeing Snapple
become part of what is now the
Dr Pepper Snapple Group.
Marketed as “Made From the
Best Stuff on Earth,” Snapple’s
unusual blends of ready-to-drink
teas, juice drinks, and waters
are sold in more than 80
countries around the world.

one sitting. Distribution was through
small, inner-city stores where
customers could “grab-and-go.”
These tactics helped to secure a
profitable and sustainable niche,
distinguishing Snapple from its
rivals in the 1980s and 1990s. In 1994
sales peaked at $674 million.
Unoccupied market territory can
present major opportunities for
companies, but the challenge lies in
identifying which gaps are profitable
and which are traps. During the
1990s, many companies became
excited about the potential of the
“green” market, across a whole range
of goods. But this market has failed
to materialize in any profitable way.
This marks one of the potential
pitfalls in identifying market gaps
based on market research:
sometimes consumers have strong
attitudes or opinions on trends or
issues—such as ecology—that they
are disinclined to consider when
purchasing products, especially if
they affect cost. Many market gaps,
it seems, are tempting, but illusory. ■

24
IN CONTEXT

YOU CAN LEARN ALL
YOU NEED TO KNOW
ABOUT THE COMPETITION’S
OPERATION BY LOOKING
IN HIS GARBAGE CANS
STUDY THE COMPETITION

FOCUS
Analytical tools
KEY DATES
1950s Harvard academics
George Smith and C. Roland
Christensen develop tools to
analyze companies and
competition.
1960s US management
consultant Albert Humphrey
leads a research project that
yields SOFT analysis, the
forerunner to his later
SWOT analysis.
1982 US professor Heinz
Weihrich develops the TOWS
matrix which uses the threats
to a company as the starting
point for formulating strategy.
2006 Japanese academics
Shinno, Yoshioka, Marpaung,
and Hachiga develop computer
software that combines SWOT
analysis with AHP (Analytic
Hierarchy Process).

W

hether a company is
long established or in its
start-up phase, a key
strategic issue is its competitive
advantage—the factor that gives it
an edge over its competitors. The
only way to establish, understand,
and protect competitive advantage
is to study the competition. Who is
competing with the company for its
customers’ time and money? Do
they sell competitive products or
potential substitutes? What are their
strengths and weaknesses? How
are they perceived in the market?
For Ray Kroc, the US entrepreneur
behind the success of fast-food
chain McDonalds, this reportedly
involved inspecting competitors’

START SMALL, THINK BIG 25
See also: Stand out in the market 28–31 ■ Gaining an edge 32–39 ■ Thinking outside the box 88–89
166–69 ■ Porter’s generic strategies 178–83 ■ The MABA matrix 192–93 ■ Porter’s five forces 212–15

■

Leading the market

Strengths (S).
...key internal factors,
such as:
Weaknesses (W).
SWOT analysis helps
a company analyze
its position by
focusing on...
Opportunities (O).
...key external factors,
such as:
Threats (T).

trash. But there is a range of more
conventional tools to help companies
to understand themselves, their
markets, and their competition.

courses. It is a creative tool that
allows managers to assess a
company’s current position, and to
imagine possible future positions.

SWOT analysis

A practical tool

The most popular such tool is
SWOT analysis. Created by US
management consultant Albert
Humphrey in 1966, it is used to
identify internal strengths (S) and
weaknesses (W), and to analyze
external opportunities (O) and
threats (T). Internal factors that can
be considered as either strengths or
weaknesses include: the experience
and expertise of management; the
skill of a work force; product quality;
the company’s financial health; and
the strength of its brand. External
factors that might be opportunities
or threats include market growth;
new technologies; barriers to
entering markets; overseas sales
potential; and changing customer
demographics and preferences.
SWOT analysis is widely used
by businesses of all types, and it is
a staple of business management

When well-executed, a SWOT
analysis should inform strategic
planning and decision-making. It
allows a company to identify what
it does better than rivals (or vice
versa), what changes it may need to
make to minimize threats, and what
opportunities may give the company
competitive advantage. The key to
strategic fit is to make sure that the
company’s internal and external
environments match: its internal
strengths must be aligned with the
external opportunities. Any internal
weaknesses should be addressed
so as to minimize the extent of
external threat.
When undertaking a SWOT
analysis, the views of staff and
even customers can be included—
it should provide an opportunity to
solicit views from all stakeholders.
The greater the number of views

included, the deeper the analysis
and the more useful the findings.
However, there are limitations. While
a company may be able to judge its
internal weaknesses and strengths
accurately, projections about future
events and trends (which will affect
opportunities and threats) are
always subject to error. Different
stakeholders will also be privy to
different levels of information about
a company’s activities, and therefore
its current position. Balance is key; ❯❯

If you go exactly where
your competitors are,
you’re dead.
Thorsten Heins
German-Canadian former CEO
of Blackberry (1957–)

26 STUDY THE COMPETITION
senior managers may have a full
view of the company, but their
perspective needs to be informed
by alternative views from all levels
of the organization.
As with all business tools, the
factor that governs the success of
SWOT analysis is whether or not
it leads to action. Even the most
comprehensive analysis is useless
unless its findings are translated
into well-conceived plans, new
processes, and better performance.

Market mapping
A slightly narrower but more
sophisticated tool for analyzing a
company’s position and competition

is “market mapping” (also known as
“perceptual mapping”). Market maps
are diagrams that represent a market
and the placement of products within
that market, providing a visual
means of studying the competition.
The process is useful both internally
(to help an organization understand
its own products) and externally (to
chart how consumers perceive the
brand in relation to the competition).
To draw up a market map, a
company identifies several consumer
purchase-decision factors that
stand in opposition to one another.
In the fashion market, an example
might include “technology” vs.
“fashion,” and “performance” vs.

Market mapping plots opposing qualities of products
along two axes. By identifying the two main oppositional
factors for any product, it is easy to see gaps in the market.
PERFORMANCE

“leisure.” Additional factors could
include the item’s price (high vs.
low), quality of production (high
vs. low), stylish vs. conservative,
or durable vs. disposable. Two of
these dimensions, or opposing
pairs, are then plotted onto a
horizontal or vertical axis.
Based on market research or the
knowledge of managers, all of the
products within a particular market
can be plotted onto the map. The
market share of each product can
be represented by the size of its
corresponding image on the map,
but more often, analysts choose to
simply make a rough sketch of the
market, ignoring market size.
A company may choose to
compile several market maps, each
of which depicts a different set of
variables, and then analyze them—
individually and in combination—
to gain an overall view of the
company’s position in the market.

Speedo

Finding the gap

TYR

ZXU

Market gap?
Adidas
Nike

O’Neill

Puma
Quicksilver
Slazenger

TECHNOLOGY

Ripcurl

Billabong

FASHION

Market gap?
Gottex
H&M
Bravissimo
Tommy Hilfiger

LEISURE

The goal of market mapping is
to identify opportunities where a
company can differentiate itself
from its competitors. These are
areas where the company offers
unique value, and they can be used
to inform marketing messages. The
map will also reveal overcrowded
segments, which signify
heightened competitive threat.
For a new start-up, a market
map can be used to identify a
viable gap in the market—a good
place to position a company when
it is struggling to establish itself.
Established businesses can use
market mapping combined with
SWOT analysis to discover
opportunities and decide whether
the company has the strengths to
exploit one of those opportunities.
The market map helps to inform
the strategy (the need to reposition
a product away from competitors’

START SMALL, THINK BIG 27
The apparel market is a competitive
sector with a host of finely delineated
fashion brands. Speedo’s market
positioning is built around producing
high-performance, technical products.

offerings, for example) and the
tactics (moving from conservative
to sporty, for example) that will
help the company to achieve
that strategic goal.
Market analysis such as this may,
for example, have helped luxury
Singaporean tea shop TWG Tea
to identify an opportunity in the
market. Launched in 2008, TWG
targets a slightly older, wealthier
customer base than coffee shops
and other “lifestyle” cafés. TWG
has opened new locations across
the world, based on studying the
competition, identifying a market
gap, and designing its products
and services to fill that gap.

Internal focus
As a company grows it might
choose to draw up a map including
just its own products. Analysis of
the results can help identify any
overlap between different products
(informing decisions about which
products to drop, and which to
concentrate research and
development and marketing spend,
for example). It can also be used
to ensure that the company’s
marketing message stays on track,
helping to avoid strategic drift.

Perceived as a technical
performance product, Speedo,
for example, needs to ensure that
its marketing reflects that view;
a campaign that promotes Speedo
as a fashionable label would risk
confusing customers and could
damage the brand.
The key to successful market
mapping is market research. While
it can be useful to compare internal
and external perceptions of a
product, and the products of the
competition, it is the customers’
views that matter most. When

Albert Humphrey
Born in 1926, Albert Humphrey
was educated at the University
of Illinois, US, and at the
Massachusetts Institute of
Technology (MIT), where he
gained a master’s degree in
Chemical Engineering. He later
went on to earn an MBA
from Harvard University. While
working with the Stanford
Research Institute (now SRI
International) between 1960 and
1970, Humphrey came up with
the Stakeholder Concept, which
has since been used by business

based on such data, even though
managers may disagree, the market
map cannot be “wrong”—it simply
represents, for better or worse,
how the brand is perceived. The
challenge for management is to use
the map, and knowledge of internal
strengths and weaknesses, to plan
the appropriate strategic response.
Both SWOT analysis and market
mapping allow a company to better
understand itself, its market, and,
most importantly, the competition.
Equally, being aware of weaknesses
can help avoid costly strategic
mistakes, such as producing overly
ambitious products or making an
entry into a crowded market
position. An appreciation of the
opportunities and threats of the
market, and the relative and
shifting positions of competing
products, is essential to long-term
successful strategic planning. To
plan where you are going, it helps
to know where you are—and where
your competitors are too. ■
leaders and politicians. He also
undertook research to identify
why corporate planning failed,
by holding interviews with more
than 5,000 executives at over
1,100 companies. As a result of
the findings, he invented SOFT
analysis: “what is good in the
present is Satisfactory, good in
the future is an Opportunity; bad
in the present is a Fault, and bad
in the future is a Threat.” Fault
was later softened to the more
acceptable Weaknesses, and
Satisfactory became Strengths.
The now-ubiquitous acronym
SWOT was born.

28
IN CONTEXT

THE SECRET OF
BUSINESS IS TO
KNOW SOMETHING
THAT NOBODY
ELSE
KNOWS
STAND OUT IN THE MARKET

FOCUS
Differentiation
KEY DATES
1933 US economist Edward
Chamberlin’s Theory of
Monopolistic Competition
describes differentiation as
a means for a company to
charge more for its products or
services by distinguishing
them from the competition.
1940s The concept of the
Unique Selling Proposition
(USP) is put forward by Rosser
Reeves, advertising executive
at New York advertising
agency Ted Bates, Inc.
2003 US marketing professor
Philip Kotler outlines the need
for USPs to be superseded by
Emotional Selling Propositions
(ESPs) in his book Marketing
Insights from A to Z.

F

ew businesses enjoy the
privileges of monopoly
power in their chosen
fields of operation. Most markets
are increasingly global, increasingly
crowded and, therefore, increasingly
competitive. In order to achieve
commercial success companies
need to do something different—as
Greek shipping magnate Aristotle
Onassis recommended, they need
to “know something that nobody
else knows” in order to stand out
from the competition.

Unique Selling Propositions
Faced with competition, the
strategy for most companies is to
differentiate. This involves offering

START SMALL, THINK BIG 29
See also: Finding a profitable niche 22–23 ■ Gaining an edge 32–39 ■ Reinventing and adapting 52–57
strategies 178–83 ■ Good and bad strategy 184–85 ■ The value chain 216–17

■

Porter’s generic

Few companies enjoy the
monopoly privileges
afforded by market gaps.

To achieve success,
especially in its early
stages of growth, a
company must stand out...

...which requires
differentiation in product,
service, process, or
marketing.

Only then will companies
truly stand out in
the market.

Enduring difference
can only be maintained
through a Unique
Selling Proposition.

But difference can
be easily copied
by competitors.

customers something that the
competition cannot or does not
offer—a Unique Selling Proposition
(USP). The concept was developed
by US advertising executive Rosser
Reeves in the 1940s to represent
the key point of dramatic difference
that makes a product salable at a
price higher than rival products.
Tangible USPs are hard to acquire
and hard to copy, which is what
makes them unique.
Companies must distinguish
their product or service from the
competition at every stage of
production—from raw material
extraction to after-sales service.
Products such as Nespresso coffeemakers and Crocs footwear, and
service providers such as majority
Asian-owned hotel group Tune
Hotels, are all heavily differentiated,
each having a strong USP.
The primary benefit of
uniqueness, however it is achieved,
is greater customer loyalty and
increased flexibility in pricing.
Differentiation guards products
and services from low-priced
competition; it justifies higher

prices and protects profitability;
and it can give businesses the
competitive advantage needed
to stand out in the market.

The challenge of difference
By definition, not all products can
be unique. Differentiation is costly,
time consuming, and difficult to
achieve, and functional differences
are quickly copied—“me-too”
strategies are commonplace.
Touchscreen technology was
introduced to the cell-phone market
as a point of differentiation for
Apple’s iPhone, but is now a feature
of most smartphones.
Differentiation often does not
remain a point of difference for long.
With functional uniqueness
being so elusive, marketing guru
Philip Kotler suggested that
companies focus instead on an
Emotional Selling Proposition (ESP).
In other words, that the task of
marketing is to generate an
emotional connection to the brand
that is so strong that customers
perceive difference from the
competition. For example, while

the design and functionality of Nike
and Adidas sneakers are distinct,
the differences are so small that
they amount to only a marginal
difference in performance. The
products’ differences are, however,
magnified in the perception of the
consumer through marketing and
the power of branding—uniqueness
is achieved through brand imagery,
promotion, and sponsorship.
Apple achieved differentiation in
the fledgling digital-music market by
combining easy-to-use software ❯❯

There is no such thing
as a commodity.
All goods and services
are differentiable.
Theodore Levitt
US economist (1925–2006)

30 STAND OUT IN THE MARKET
with well-designed hardware and a
user interface that integrated the
two. The product itself—the iPod
portable music device—was
functionally little different than
existing MP3 players, but combined
with the iTunes software to create a
unique customer experience. This
experience is Apple’s ESP, which the
company promoted with its “Think
Different” advertising campaign.

Standing out
One company that has achieved
uniqueness is the British fashion
label Superdry, which has grown to
include more than 300 stores in
Europe, Asia, North and South
America, and South Africa. Drawing
a novel, international influence from
Japanese graphics and vintage
Americana, combined with the
values of British tailoring, Superdry
quickly established a strong position
in the hypercompetitive clothing
market from its launch in 2004. The
business started life in university
towns across the UK, a positioning
that gave the brand a youthful
appeal. Despite limited advertising
and abstaining from celebrity
endorsements, Superdry’s popularity
rapidly grew. The company’s
distinctive look quickly caught the

eye of celebrities (a jacket worn
by soccer player David Beckham
became one of its best-selling
products, and Beckham himself
became an unoffical talisman of the
brand), providing free publicity.
Superdry focused on offering
clothing with a fashionably tailored
fit and attention to detail (even down
to garment stitching). Worn by offduty office workers, students, sports
stars, and celebrities alike, the
brand was able to appeal to a broad
customer base. Most differentiation
strategies involve targeting one
segment of the market; Superdry
chose to target them all. The brand’s
unique blend of fashion with ease of
wear, comfort with style, and the
presence of mysterious but
meaningless Japanese writing,
has proved a difficult mix for
competitors to replicate.

Maintaining uniqueness
As many companies discover,
popularity can be the enemy of
difference. While Superdry clothing
has become increasingly
ubiquitous around the world, its
uniqueness and difference have
declined. The challenge for
Superdry, like all companies, is to
protect its uniqueness while also

expanding its reach—to stand out
from the crowd, while welcoming
those crowds into its stores.
Differentiation can occur at any
point in the value chain. Standing
out is not limited to products or
services—it can occur in any
number of internal processes
that translate into an improved
customer experience. Swedish
furniture retailer IKEA, for
example, differentiates itself not
only through contemporary design
and low prices, but through the
entire customer retail experience.
The company’s low prices are
achieved, in part, through its selfpicking and self-assembly retail
model—the customer experience
involves picking products from the
company’s vast showrooms and
warehouses and then, once they
have transported the goods home,
assembling the furniture.
Even the way IKEA “guides”
shoppers on a one-way, defined
route through its showrooms is
unique. While this tactic encourages
spontaneous purchases, it also
helps to reinforce IKEA’s points of
difference—customers are exposed
to predesigned rooms and
furniture layouts that emphasize
the brand’s contemporary style.
Price is kept low since fewer store
assistants are required to direct
customers around the store.

Different but the same
Paradoxically, familiarity can also
be a source of differentiation. The
entire McDonald’s organization
revolves around providing almost
identical fast-food products, with
the same service, in identical
Fashion label Superdry is a young
company that has successfully carved
out market share. Rapid growth since its
founding in 2004 is thanks in part to a
highly differentiated, faux-vintage look.

START SMALL, THINK BIG 31
Differentiation is not so important
when a company’s products match
the desires of the customer
and do not overlap with the
competition. Although the
risks might be high,
differentiation is most
What your company
effective when your
does well
products are popular,
but overlap with those
of the competition.

What the
consumer
wants

restaurants the world over. This
familiarity differentiates
McDonald’s from unknown local
offerings, and from other global
competitors who cannot maintain
the same degree of consistency
across their operating territories.
In a market in which rival
companies promote the uniqueness
of their products in ever-louder and
more complex ways, consumers
have become increasingly savvy
when it comes to distinguishing
reality from rhetoric. While
differences do not have to be
tangible—the evidence shows that
an Emotional Selling Proposition
(ESP) is often enough—the
challenge for businesses is that
points of differentiation do have to
be genuine and believable.
Developing an emotional connection
with the customer requires that the
differentiation is understood and
consistently delivered throughout
the organization. Well-defined core
principles that celebrate a
company’s uniqueness should
inform the customer experience at

High sales
Low sales
High scope for
differentiation

What your
competitors
do well

every point of contact—difference
has to be believable, and it is only
believable if it is dependable.

Sustaining differentiation
Once established, uniqueness—
whether functional or emotional—
requires nurturing and protecting.
Standing out from the crowd is a
constant battle that is fought in the
hearts and minds of the company’s
staff, as well as customers. As legal
clashes between rivals—such as
Apple and Samsung—demonstrate,
uniqueness might also have to be
contested in the courtroom.
Every industry has leaders and
followers—what separates them is
that the leaders are usually those
with the most defensible points of
differentiation. Whether in features
and functionality, brand image,
service, process, speed, or
convenience, uniqueness must be
established and communicated for
a company and its offerings to stand
out in the market. The key to longlasting success is making that
differentiation sustainable. ■

Rosser Reeves
US advertising executive
Rosser Reeves (1910–84)
held the maxim that an
advertisement should show off
the value of a product, not the
cleverness of the copywriter.
After a brief spell at the
University of Virginia, from
where he was expelled for
drunken misconduct, Reeves
worked as a journalist and
then copywriter before joining
advertising agency Ted Bates,
Inc. in New York in 1940. His
exceptional talent saw him rise
to become Chairman of the
company in 1955. He is credited
with redefining television
advertising and, among many
others, for formulating slogans
such as “It melts in your
mouth, not in your hand” for
chocolate confectionary brand
M&Ms. Reeves’s Unique
Selling Proposition, first
outlined in the 1940s, was
described in his 1961 book
Reality of Advertising. Such
was his impact on the
advertising industry that his
legacy lives on long after his
death—his pioneering style of
leadership was the inspiration
for the lead character in US
television series Mad Men.

In order to be irreplaceable one
must always be different.
Coco Chanel
French fashion designer (1881–1971)

32

BE FIRST OR BE

BETTER
GAINING AN EDGE

33

34 GAINING AN EDGE
IN CONTEXT
FOCUS
Competitive advantage
KEY DATES
1988 US scholars David
Montgomery and Marvin
Lieberman write “First-Mover
Advantage,” outlining the
competitive advantages
of being first to market.

First-movers have no competition and have the potential
to become market leaders...

...but unless the market is static, and technological
innovation is limited, the risk of failure is high.

1995 Amazon.com launches,
the first of a new breed of
online retailers.
1997–2000 Adopting the
“be first” mantra, dot-com
companies race to market;
many fail when the promised
advantages do not materialize.
1998 Montgomery and
Lieberman question their
original findings in their paper,
“First-Mover (Dis)Advantages.”
2001 Amazon.com returns
its first profit. The company’s
first-mover advantages were
significant, but a good business
model mattered more.

I

f you need to buy a book
online, which website do
you visit first? If you want to
research the author of the book,
which search engine do you use?
The answers, most probably, are
Amazon and Google, respectively.
Such is the dominance of these two
Internet giants that their names
define their respective markets.
Both organizations have a
significant edge in the markets
they lead, but they achieved that
dominance by different means.
Amazon, launched in 1995, gained
its advantage by being the first

Later entrants enter a recognized market and
know what mistakes to avoid.

They stand to benefit most in a rapidly changing market,
in which technological innovation is advanced.

In order to gain an edge,
either be first, or be better.

business to enter the online retail
market, establishing its brand
name, and building a loyal
customer base. Google, by contrast,
was by no means first. When
Google launched in 1998, the
market was already dominated by
several large players; Google’s edge
came from offering a superior
product—not only was it faster, but
it produced more accurate search
results than any of its competitors.
Getting into a market first has
significant advantages, but there
are also benefits to being second.
The key is that in order to gain a

competitive edge in the market,
a business needs either to be first,
or it needs to be better.

Market pioneers
The benefits of being first into a
market are known as “first-mover
advantage,” a term popularized in
1988 by Stanford Business School
professor David Montgomery and
his co-author, Marvin Lieberman.
Although introduced a decade
previously, Montgomery and
Lieberman’s idea took particular
hold during the dot-com bubble
between 1997 and 2000. Spurred

START SMALL, THINK BIG 35
See also: Beating the odds at start-up 20–21
curve 58–61 ■ Creativity and invention 72–73

■
■

Stand out in the market 28–31 ■ How fast to grow 44–45 ■ The Greiner
Changing the game 92–99 ■ Balancing long- versus short-termism 190–91

Amazon.com was a first-mover
in the online retail market. It has
dominated the industry since its
launch in 1995, creating strong brand
recognition and a loyal customer base.

on by the example of Amazon,
businesses spent millions pitching
themselves headlong into new
online markets. Conventional
wisdom was that being first
ensured that the company’s brand
name became synonymous with
that segment, and that early market
dominance would create barriers to
entry for subsequent competition.
In the end, however,
overspending, overhype, and
overreaching into markets where
little demand existed was the
downfall of many fledgling dot-coms.
With notable exceptions, businesses
found that promised returns were
not being realized and funds quickly
ran short—and for many of these
first-movers, failure followed.

First-mover advantage
Being first out of the block
undoubtedly has its advantages,
and in the case of the dot-coms,
those advantages were exaggerated
to the extreme. First-movers often
enjoy premium prices, capture
significant market share, and have

a brand name strongly linked to
the market itself. First-movers also
have more time than later entrants
to perfect processes and systems,
and to accumulate market
knowledge. They can also secure
advantageous physical locations
(a prime location on a main street
of a city, for example), secure the
employment of talented staff, or

First-mover advantages
accrue when a company
gains a first-mover opportunity
(through proficiency or luck)
and is able to maintain an
edge despite subsequent entry.
David Montgomery and
Marvin Lieberman

access beneficial terms with key
suppliers (who may also be eager to
enter the new market). Additionally,
first-movers may be able to build
switching costs into their product,
making it expensive or inconvenient
for customers to switch to a rival
offering once an initial purchase
has been made. Gillette, for example,
having invented the safety razor in
1901, has consistently leveraged its
first-mover advantage to create new
products, such as a “shaving system”
that combines cheap handles with
expensive razor blades.

Market strategies
In the case of Amazon.com, firstmover advantage consisted of a
combination of factors. In the newly
emerging e-commerce market,
customers were eager to try online
purchasing, and Amazon was well
placed to exploit this growing
curiosity. Books represented a small
and safe initial purchase, and
Amazon’s simple web design made
buying easy and enjoyable. Early
sales enabled the organization to
adapt and perfect its systems,
and to adjust its website to match
customer needs—adding, for
example, its OneClick ordering
system to enable purchases
without entering payment details.
Amazon was also able to build
distribution systems that ensured
quick and reliable delivery of its
products. Although competitors
could replicate these systems,
customers already trusted
Amazon, and the brand loyalty ❯❯

36 GAINING AN EDGE

Gillette invented the safety razor
in 1901 and later consolidated its
first-mover advantage by developing a
“shaving system” that made it difficult
for customers to switch brands.

the organization enjoyed created
significant emotional switching
costs; even today, Amazon enjoys
the benefits of this trust and loyalty,
and almost a third of all US book
sales are made via Amazon.com.
A recent example of how
important first-mover advantage
remains are the “patent wars”
contested between most of the
leading smartphone makers
(including Apple, Samsung, and
HTC). Patents help a company to
defend technological advantage. In
the hypercompetitive smartphone
industry, being first to market with
a new technological feature offers
critical, albeit short-term, advantage.
In an industry in which consumers’
switching costs are high, even
short-term advantages can have
a significant impact on revenue.
Since the publication of
Montgomery and Lieberman’s
original paper in 1988, academic

research has indicated that
significant advantages accrue
to market pioneers, which can be
directly attributable to the timing
of entry. The irony is that in a
retrospective paper that appeared
in 1998, “First-Mover (Dis)
Advantages,” Montgomery and
Lieberman themselves backed off
their original claims concerning
the benefits of being the first to
enter a market.
Building on the work of, among
others, US academics Peter Golder
and Gerard Tellis in 1993,
Montgomery and Lieberman’s 1998
paper questioned the entire notion
of first-mover advantage. In their
research, Golder and Tellis had
found that almost half the firstmovers in their sample of 500
brands, in 50 product categories,
failed. Moreover, they found that
there were few cases where later
entrants had not become profitable
or even dominant players—in fact,
their research identified that the
failure rate for first-movers was
47 percent, compared to only
8 percent for fast followers.

Learning from mistakes
The challenge for first-movers is
that the market is often unproven;
industry pioneers leap into the
dark without fully understanding
customer needs or market
dynamics. First-movers often
launch untried products onto
unsuspecting customers; and it is
rare that they get it right first time.
Large companies may be able to
take the losses of such early-market
entry mistakes; small companies,
on the other hand, may soon find
that their cash is running out and
their tenuous business models
are collapsing.
Later entrants have the
advantage of learning from the
mistakes of the first-movers, and

from entering a proven market.
They are also able to avoid costly
investment in risky and potentially
flawed processes or technologies;
first-movers, by contrast, may have
accrued significant “sunk costs”
(past investment) in old, lessefficient technologies, and may be
less able to adapt as the industry
matures. Followers can enter at
the point at which technology
and processes are relatively well
established, with both cost and
risks being lower.
Followers may have to fight
to overcome the first-movers’
brand loyalty, but simply offering
a superior product that better
addresses customer needs is
often sufficient to secure a market.
Brand recognition is one thing,
but technical and product superiority
can give that all-important
competitive edge. Moreover, with
investment costs being much
lower, followers often have surplus
cash to use on marketing, thereby
offsetting the branding advantages
of the first-mover.
When Google, for example,
entered the Internet search
business in 1998, the market was
dominated by the likes of Yahoo,
Lycos, and AltaVista, all of whom
had established customer bases
and brand recognition. However,
Google was able to learn from the

Good artists copy;
great artists steal.
Steve Jobs
US former CEO of Apple (1955–2011)

START SMALL, THINK BIG 37

If later entrants can leapfrog
pioneers, companies could be
better off entering late.
Peter Golder and
Gerard Tellis

mistakes of these earlier entrants
and, quite simply, build a better
product. The organization realized
that with so much information on
the Internet people wanted search
results that were comprehensive
and relevant; the various market
incumbents offered a variety of
systems for filtering search results,
but Google was able to take the
best of these systems and build
its own unique algorithm that led
to market dominance.

Us.) The online clothing retailer
boo.com is an example of a firstmover that had technological
superiority, but was ahead of its
time—the site was too resourceheavy for most consumers’ slow
Internet connections. Launched in
1999, boo.com went into receivership
the following year—being first is
not a guarantee of success if the
basic business model is flawed.
Despite the evidence presented
by Golder and Tellis, and examples
such as Google, it remains the case
that first-mover advantage has
captured corporate imagination.
Mirroring the earlier dot-com gold
rush, the recent boom in the market
for web-based smartphone- and
tablet-accessed applications (the
“app” market) is fueled by a desire
to be first. Thousands of apps have
launched in the hope of staking
their claims on lucrative segments

Timing is everything
The reason a first-mover does
not always yield its promised
advantages is that much depends
on timing, and therefore luck. In
their 2005 paper, “The Half-Truth
of First-Mover Advantage,” US
business scholars Fernando Suarez
and Gianvito Lanzolla identified
technological innovation and the
speed at which the market is
developing as crucial in
determining whether or not being
a first-mover is advantageous.
Their findings suggest that
when a market is slow-moving and
technological evolution is limited,
first-mover advantage can be ❯❯

80
73

SHAREHOLDER RETURN (%)

First-mover failures
There are numerous examples in
corporate history of first-movers
that were unable to achieve or
maintain a competitive advantage.
Famous failures in the online
sphere include Friends Reunited
and MySpace. Although both
companies still exist, their firstmover advantage was not sufficient
to offset the might (and product
superiority) of Facebook. Similarly,
eToys.com, launched in 1999, was
one of a new breed of online retailers,
but first-mover advantage was not
enough to sustain the business and
the company declared bankruptcy
in 2001—by coincidence, the same
year that Amazon started to sell
toys. (Resurrected some years later,
etoys.com is now owned by Toys R

of this new market. But success
is not guaranteed—a 2012 study
revealed that on average, 65
percent of users delete apps within
90 days of installing them.

Launched just
two years later,
Commodore’s
“fast-follower” GUI
computer yielded a
shareholder return
of 80 percent.

36

Apple Lisa (1983)
Apple’s pioneering
GUI computer was a
commercial failure,
with a shareholder
return of -61 percent.

Commodore Amiga (1985)
IBM Personal System/2 (1987)
HP (1989)

-61
Being the first-mover in a new, untried market
does not always result in success. Apple’s Lisa was
the first computer with a Graphical User Interface
(GUI)—a version of which now forms the user
interface of every computer, smartphone, and
digital device—yet sales were far exceeded by
later offerings from Commodore, IBM, and HP.

38 GAINING AN EDGE
significant. They give the example
of the market for vacuum cleaners,
and, in particular, of the long-term
market leader, Hoover. Until the
relatively recent introduction of
Dyson cleaners, the market was
benign and technological
advancement slow. Having been
first to market in 1908, Hoover
enjoyed several decades of
advantage—an advantage that
was (and, in some places, still is)
reflected in the widespread use of
the company’s brand name as the
verb “to hoover.”
In other industries, however,
where technological change or
market evolution is rapid, firstmovers are often at a disadvantage.
The first search engines are
examples of businesses that had
too much invested in early
iterations of a technology to keep
up with the rapid pace of change.
Early advantage quickly
becomes obsolete in changeable
markets. As the market evolves,
later entrants are those that seem
to be cutting edge, offering
innovative features that build on
the market-knowledge as well as
learning from the mistakes of the
first-mover. The first-mover may

have enjoyed short-lived advantage
but in dynamic markets such an
advantage is rarely durable. Even
Apple, who enjoyed significant
early-entrant advantage in the
smartphone market with the
iPhone, is not immune from firstmover disadvantage. Competitors,
Samsung in particular, were able
to listen to customer complaints
about iPhones, analyze customer
needs, and produce products with
features and functionality welcomed
by the market. Apple, locked into
previous technology iterations, took
time to react and iPhone sales
suffered as a result.

Customer needs
To gain an edge, therefore, you do
not always need to be first. Indeed,
US multinational Procter & Gamble,
for example, prefers only to enter
those markets in which it can
establish a strong number one or
number two position over the longterm—rarely is this achieved in a
blind rush to be first.
Procter & Gamble seeks
markets that are demographically
and structurally attractive, with
lower capital requirements, and
higher margins. But most

If you do things well,
do them better.
Anita Roddick
UK entrepreneur (1942–2007)

importantly, the organization
insists on a deep understanding of
customer needs in any market they
enter. In other words, they would
rather enter mature markets than
be first into new ones.
The company values long-term
relationships with its customers
and suppliers; its view of innovation
is different from small companies
who, in attempting to capture
market share, strive to gain an
edge through the introduction of
disruptive technology—innovative
technology that seeks to destabilize
the existing market. Procter &
Gamble, perhaps heeding the
research, considers such strategies
to be short-lived. They realize that
overly rapid innovation runs the risk
of cannibalizing their own sales
and reducing the returns on new
product investment. In the market
for disposable baby diapers, for
example, Procter & Gamble was
more than ten years behind the first
mover. The company’s now famous
Pampers brand was launched in
1961, following some way behind
Johnson & Johnson’s Chux brand,
The PalmPilot, launched in 1997, was
a successful fast-follower product. It
followed Apple’s unsuccessful Newton,
which was the first personal digital
assistant (PDA) to enter the market.

START SMALL, THINK BIG 39
which was launched in 1949. At
the time, disposable diapers were
a new innovation, and customers
were wary of their use. Procter &
Gamble waited until customers had
come to accept the product before
entering the market. Moreover, they
spent nearly five years researching
and addressing each of the major
problems with Chux and developed
a product that was more absorbent,
had lower leakage, was more
comfortable for the baby, offered
two sizes, and could be produced
at a significantly lower cost. Today,
Forbes magazine lists Pampers as
one of the world’s most powerful
brands, valued at over $8.5 billion,
with the diapers being purchased
by 25 million consumers in over 100
countries. By contrast, Chux was
phased out by Johnson & Johnson
in the 1970s due to shrinking sales.

Securing a foothold
In reality, then, while it is readily
assumed that speed is good when
entering a market, gaining an edge
might depend less on timing than it
does on appropriateness. Whether a
company is first, second, or last to
market is important; but it is less
important than the suitability of a

Jeff Bezos

company’s products or services to
that market, and its ability to
deliver on brand promises. Both
these factors can have a profound
impact on long-term viability and
business success.
Amazon may have enjoyed
lasting first-mover advantage, but
that alone is insufficient to account
for its phenomenal success. Amazon
leverages its first-mover advantage
into a sustainable competitive edge;
its website is continually made
easier to use, it offers a range of
complimentary products, and it
continues to drive down costs,
enabling it to offer market-beating
prices. Most notably, Amazon did
not return a profit until 2001—the
company spent its earlier years
building a better product. The
foundations of success may have
been laid by first-mover advantage,
but Amazon’s edge has been built on
long-term good business practice.
First-movers undoubtedly have a
natural competitive edge. Whether
it is a lasting impression on
customers, strong brand recognition,
high switching costs, control of
scarce resources, or the advantages
of experience, that edge can help
to secure a strong, and long-term,

foothold in the market. But as
research shows, second-movers,
and their followers, may sometimes
be in an advantageous position.
Learning from the mistakes of early
entrants, they frequently offer
superior products at lower prices.
With the aid of skillful marketing,
these benefits can be leveraged to
offset the advantages enjoyed by
first-movers. To become a market
leader, a business needs either to
be first, and impressive, or it needs
to be better. The companies we
remember, the Amazons and the
Googles, are those that were either
first or better—the ones we forget
are those that had no edge at all. ■

Born on January 12, 1964 in
Albuquerque, New Mexico, US,
Jeff Bezos had an early love of
science and computers. He
studied computer science and
electrical engineering at Princeton
University, and graduated summa
cum laude in 1986.
Bezos started his career on
Wall Street, and by 1990 had
become the youngest senior
vice-president at the investment
company D. E. Shaw. Four years
later, in 1994, he quit his lucrative
job to open Amazon.com, the
online book retailer—he was
barely 30 years old at the time.

As with many Internet startups, Bezos, with just a handful
of employees, created the new
business in his garage; but as
operations grew, they moved
into a small house. The Amazon.
com site was launched officially
on July 16, 1995. Amazon
became a public limited
company in 1997; the company’s
first year of profit was 2001.
Today, Bezos is listed by Forbes
magazine as one of the wealthiest
people in the US; and Amazon
stands as one of the biggest
global success stories in the
history of the Internet.

To suffer the penalty of
too much haste, which is
too little speed.
Plato
Greek philosopher (429–347 BCE)

40

PUT ALL YOUR EGGS
IN ONE BASKET,
AND THEN WATCH
THAT
BASKET
MANAGING RISK
IN CONTEXT
FOCUS
Risk management
KEY DATES
1932 The American Risk
and Insurance Association
is established.
1963 Robert Mehr and Bob
Hedges publish Risk
Management in the Business
Enterprise, claiming that the
objective of risk management
is to maximize a company’s
productive efficiency.
1970s Inflation and changes
to the international monetary
system (the ending of the
Bretton Woods agreement)
increase commercial risks.
1987 Merrill Lynch becomes
the first bank to open a
risk-management department.
2011 The US Financial Crisis
Inquiry Commission says that
the 2008 financial crisis was
caused partly by financial
companies “taking on too
much risk.”

E

ntrepreneurs are defined
by their willingness to bear
risk—particularly the risk of
business failure. This is especially
true for those starting new
companies, because more than half
of start-ups fail within the first five
years. Lesser risks in established
businesses include the possible

failure of new products, or damage
to the brand or a manager’s
reputation. Whatever the level or
type, however, risk is something
that all businesses need to be
aware of and manage carefully.
US businessman Andrew Carnegie
was pondering these issues when
he suggested that in terms of

Risk is an inevitable part
of business.

But it can be quantified
and action taken...

Part of this process involves
deciding what level of risk
is “acceptable”...

...through oversight and
good management.

...and where to place the
risk—on all the “eggs in the
basket,” or just one?

Managing risk is a
strategic process, balancing
cost against reward.

START SMALL, THINK BIG 41
See also: How fast to grow 44–45 ■ Hubris and nemesis 100–103 ■ Who bears the risk? 138–45 ■ Leverage and excess risk
150–51 ■ Off-balance-sheet risk 154 ■ Avoiding complacency 194–201 ■ Contingency planning 210 ■ Scenario planning 211

managing risk, it might be best
to put all your eggs in one basket,
then watch that basket.
From the collapse of Lehman
Brothers (2008), to BP’s Deepwater
Horizon disaster (2010), events of
the early 21st century fundamentally
changed how organizations
perceive risk. Companies now think
in terms of two factors: oversight
and management. “Risk oversight”
is how a company’s owners govern
the processes for identifying,
prioritizing, and managing critical
risks, and for ensuring that these
processes are continually reviewed.
“Risk management” refers to the
detailed procedures and policies
for avoiding or reducing risks.

Inherent risks
Risk is inherent in all business
activity. Start-ups, for example, face
the risk of too few customers, and
therefore insufficient revenue to
cover costs. There is also the risk
that a competitor will copy the
company’s idea, and perhaps offer a
better alternative. When a company
has borrowed money from a bank

there is a risk that interest rates will
rise, and repayments will become
too burdensome to afford. Start-ups
that rely on overseas trade are also
exposed to exchange-rate risk.
Moreover, new businesses in
particular may be exposed to the
risk of operating in only one market.
Whereas large companies often
diversify their operations to spread
risk, the success of small companies
is often linked to the success of one
idea (the original genesis for the
start-up) or one geographic region,
such as the local area. A decline
in that market or area can lead
to failure. It is essential that new
businesses are mindful of market
changes, and position themselves
to adapt to those changes.
The Instagram image-sharing
social-media application, for example,
started life as a location-based
service called Burbn. Faced with
competition, the business changed
track into image-sharing. Had
Instagram not reacted to the risks,
and been savvy enough to diversify
its offering (regularly adding new
features), it may not have survived.

It’s impossible that
the improbable will
never happen.
Emil Gumbel
German statistician (1891–1966)

At its heart, risk is a strategic
issue. Business owners must
carefully weigh the operational risk
of start-up, or the risks of a new
product or new project, against
potential profits or losses—in other
words, the strategic consequences
of action vs. inaction. Risk must be
quantified and managed; and it
poses a constant strategic challenge.
Fortune favors the brave, but with
people’s lives and the success of the
business at stake, caution cannot
simply be thrown to the wind. ■

In deep water

BP’s Deepwater Horizon incident
led to huge fines and US government
monitoring of its safety practices and
ethics for four years.

Even large and diverse
organizations can find it hard to
successfully balance risk against
potential financial reward. On
April 20, 2010, Deepwater Horizon,
an offshore oil rig chartered by
British Petroleum (BP), exploded,
killing 11 workers and spilling
tens of thousands of barrels of
crude oil into the Gulf of Mexico.
The incident was blamed on
management failure to adequately
quantify and manage risk; the
official hearing cited a culture
of “every dollar counts.” Analysts

who examined the disaster
claimed that BP had prioritized
financial return over operational
risk. Chief executive Tony
Hayward, who took the post
in 2007, had suggested that the
organization’s poor performance
at the time was due to excessive
caution. Coupled with
increasing pressure from
shareholders for better returns,
the bullish approach that
followed led to significant cost
cutting and, eventually, riskmanagement failures.

42

LUCK IS A DIVIDEND
OF SWEAT. THE MORE
YOU SWEAT, THE
LUCKIER
YOU
GET
LUCK (AND HOW TO GET LUCKY)
IN CONTEXT
FOCUS
Maximizing opportunity
KEY DATES
1974 3M employee Art Fry
uses the adhesive developed—
and rejected as defective—by
a colleague six years earlier
to attach a bookmark in his
hymnbook. This chance usage
leads to the Post-it Note.
2009 A Harvard Business
Review article “Are ‘Great’
Companies Just Lucky?”
reports that in only half of the
287 high-performing companies
surveyed could success be
attributed to distinguishable
practices or features of the
organizations themselves.
2013 Five years’ hard work
yields music group Daft Punk’s
aptly titled song “Get Lucky”. A
result of industry collaboration,
market research, and strong
marketing and publicity, the
song’s commercial success
demonstrates the value of
business planning.

L

uck is usually regarded
as something over which
businesses have no control.
Yet, as McDonald’s CEO Ray Kroc
said, “the more you sweat, the
luckier you get,” suggesting that luck
can be created. The reality is that
both are true. As global markets
become more volatile and less
predictable, luck plays an inevitable
part in business success. Launch a
start-up at the same time as a rival
and it may be luck that determines
who succeeds, and who fails.

The first rule of luck in
business is that you should
persevere in doing the right
thing. Opportunities will
come your way if you do.
Ronald Cohen
UK venture capitalist (1945–)

Making your own luck
A well-considered business plan is
designed to dispense with reliance
on luck. A good idea, underpinned
by detailed market research and
solid financial planning, may help
a start-up to ride the whims of the
market. A good plan charts a course
of action in turbulent markets,
protects against the unknown,
and prepares the company
for contingencies.
In addition, a well-conceived plan
can ensure that a company is in a
position to benefit from favorable

market conditions. In other words,
what might seem like luck is often
the result of planning. Take the
famous example of 3M Post-it Notes.
The invention of a reusable glue was
accidental, but it was business
insight that turned the lucky
discovery into a commercial success.
With so many variables, luck is
likely to play a part in the survival of
a start-up. But a good plan reduces
how much luck a company needs. ■

See also: Beating the odds at start-up 20–21 ■ Gaining an edge 32–39
Understanding the market 234–41 ■ Forecasting 278–79

■

START SMALL, THINK BIG 43

BROADEN YOUR VISION,
AND MAINTAIN
STABILITY WHILE
ADVANCING FORWARD
TAKE THE SECOND STEP

IN CONTEXT
FOCUS
Expanding the business
KEY DATES
1800 French cotton
manufacturer Jean-Baptiste
Say popularizes the term
“entrepreneur,” which is taken
from the French for the verb
“to undertake.”
1999 Chinese business
magnate Li Ka-shing
underlines the importance of
vision for business growth,
stating “Broaden your vision,
and maintain stability whilst
advancing forward.”
2011 The Lean Startup by
US technology entrepreneur
Eric Ries encourages new
businesses to utilize resources
as efficiently as possible to
encourage growth.
2011 The number of active
entrepreneurs in mature
countries grows by about 20
percent, reflecting job losses
due to the economic downturn.

T

he business landscape may
appear to be dominated by
corporate goliaths, but the
reality is that small businesses
outnumber large companies by a
significant margin. In fact, most
businesses never grow beyond the
scope of the owner—they start small
and stay small. In the US, more than
99 percent of companies employ
fewer than 500 people. In 2012,
there were almost 5 million small
businesses (with fewer than 49
employees), but only 6,000 companies
employing more than 250 people.
Aspiration, or its lack, is a key
factor for small-scale companies.
Many small-business owners are
content with the lifestyle the
business allows them, and have
no desire for growth. But he biggest
reason for a lack of growth is finance.
Growth requires access to capital,
which is difficult and expensive
to access for small companies.
Moreover, unlimited liability means
that an owner’s personal assets
(such as the family home) are at
risk if the business fails—a risk
that many are unwilling to take.

Entrepreneurial spirit is defined
as the willingness to take risks.
Business owners who do aspire to
growth must be willing to take the
risky but important second step.
For most small-business owners,
this means employing the first
nonfamily member and beginning
to acquire the necessary leadership
and management skills to scale the
business and manage the people,
systems, and processes. ■

Large businesses might appear to be
towering oaks, but most have acornlike
beginnings. A common difference
between them and companies that stay
small is the willingness to take risks.

See also: Beating the odds at start-up 20–21 ■ Managing risk 40–41 ■ The
Greiner curve 58–61 ■ Who bears the risk? 138–45 ■ Small is beautiful 172–77

44

NOTHING GREAT
IS CREATED
SUDDENLY
HOW FAST TO GROW

IN CONTEXT
FOCUS
Business growth
KEY DATES
1970s McKinsey & Company
consultants develop the MABA
matrix to help conglomerates
decide which divisions to
grow, and how quickly.
2001 Neil Churchill—professor
at INSEAD business school,
France and John Mullins—
professor at London Business
School, UK—write How Fast
Can Your Company Afford to
Grow, introducing the selffinanceable growth rate (SFG).
2002 Toyota announces plans
to be the world’s largest car
producer. Eight years later, after
recalling more than 8 million
cars due to quality issues, it
admits to growing too fast.
2012 Edward Hess writes
Grow to Greatness: Smart
Growth for Entrepreneurial
Businesses, describing growth
as recurring change.

“Grow or die”
thinking can lead
to overtrading and
business failure.

When the market
is growing, a company
must grow too...

Nothing great is
created suddenly.

...but that growth
must be balanced
and controlled.

O

ne reason many new
businesses fail is, perhaps
surprisingly, because they
grow too fast. Excessively rapid
growth can cause companies to
overreach their ability to fund
growth: they simply run out of cash
to pay for day-to-day operations.
A major challenge for any manager

is to balance income with
expenditure, ensuring that there
is sufficient cash to meet the rising
costs of the business.
In 2001, business professors Neil
Churchill and John Mullins created
a formula for calculating the pace at
which a company can expand from
internal financing alone. Known

START SMALL, THINK BIG 45
See also: Managing risk 40–41
Profit versus cash flow 152–53

■

■
■

Luck (and how to get lucky) 42 ■ The Greiner curve 58–61
Small is beautiful 172–77 ■ The MABA matrix 192–93

as the self-financeable growth
rate (SFG), it helps managers to
strike the right balance between
consuming and generating cash.
It does this by measuring three
things: the amount of time a
company’s money is tied up in
inventory before the company has
paid for its goods or services; the
amount of money needed to finance
each dollar of sales; and the amount
of cash that is generated by each
dollar of sales.

Sustainable growth
When accurately applied, the
SFG formula determines the rate
at which a company can sustain
growth through only the revenues
it generates—without needing to
approach external funding agencies
for more cash. Essentially, it
predicts a sustainable growth rate
and helps to avoid overtrading.
When a market is growing faster
than a company’s SFG, Churchill
and Mullins identified three ways
for managers to exploit the growth
opportunity: speed up cash flow;
reduce costs; or raise prices.

Each of these “levers” helps to
generate the cash needed to fuel
faster growth.
As a young start-up business,
the fashion brand Superdry enjoyed
phenomenal growth. From its
inception in the UK in 2004, the
company rapidly added new stores
throughout the world. In 2012,
however, after several profit
warnings, it became clear that
Superdry had become a victim of
its own success. Critics suggested
that the brand was so focused on
growth that it had forgotten its
fashion roots, failing to update
products on a seasonal basis. Other
reasons for the decline included
supply issues, accounting mistakes,
and an inability to react quickly
enough to fierce competition. In
a tacit acknowledgement that
excessive growth was to blame, the
company announced plans to
review its new store openings.
Business-growth expert Edward
Hess suggests that growth can add
value to a company, but if it is not
properly managed, it can “stress a
business’s culture, controls,

Edward Hess

A profitable company
that tries to grow too
fast can run out of cash—
even if its products are
great successes.
Neil Churchill and
John Mullins

A graduate of the universities of
Florida, Virginia, and New York,
Edward Hess has been teaching
and working in the world of
business for more than 30 years.
He began his career at the oil
company Atlantic Richfield
Company, and later became
a senior executive at several
other leading US organizations,
including Arthur Andersen.
Hess specializes in business
growth, and especially in
debunking the “myths” that
growth is always good and

■

Hubris and nemesis 100–03

The fate of the exploding Helix
Nebula resembles the decline of a
company that has expanded too rapidly:
after using up all its energy resources,
the star collapses on itself and dies.

processes and people, eventually
destroying its value and even
leading the company to grow
and die.” Growth is not a strategy,
he claims, but a complex change
process, which requires the right
mindset, the right procedures,
experimentation, and an enabling
environment. ■
always linear. Contrary to the
dictum that companies must
“grow or die,” he suggests that
they are likely to “grow and die.”
Hess is the author of ten
books and more than 100
practitioner articles and case
studies. He is currently professor
of business administration at
the University of Virginia, US.
Key works
2006 The Search for Organic
Growth
2010 Smart Growth
2012 Grow to Greatness

46

THE ROLE OF THE
CEO IS TO ENABLE
PEOPLE
TO
EXCEL
FROM ENTREPRENEUR TO LEADER
IN CONTEXT
As a business grows,
its demands change.

Entrepreneurship is
needed to spark a
business into life, but...

...and leadership skills
are required to maintain
long-term growth.

...management discipline
is required to support
that growth...

Founders must adjust
from being the sole decisionmaker to delegating...

...and make the
transition from
entrepreneur to leader.

FOCUS
Business growth
KEY DATES
1972 Professor Larry Greiner
suggests the various stages of
business growth are preceded
by crisis, the first being a
crisis of leadership.
2001 Leadership and change
expert John Kotter writes the
paper “What Leaders Really
Do.” Published in Harvard
Business Review, it draws a
distinction between the roles
of manager and leader.
2008 Indian business scholar
Bala Chakravarthy and
Norwegian