Ten keys to success in todays rough and tumble environment Establishing and managing small and medium-sized, technology-based companies is a formidable challenge at the best of times. For budding founders and managers of entrepreneurial firms, the challenges are numerous and complex. The cards are stacked against them. The competitive experiences and strategies of 29 small technology-based companies were critically examined to determine which characteristics distinguish those entrepreneurial surfers who have succeeded to sail alongside multinationals from those that have disappeared in the undertow of global competition. The 29 companies were first surveyed in 1969-1970, with detailed follow-up surveys conducted in 1979-1980 and in 1990. By 1992, 10 of the companies, some of which had become successful, were still in operation. Another 10 were acquired in the 1980s by larger companies -- the majority by U.S. multinationals -- and the remaining nine had exited the corporate landscape. The companies taken over included a number of successful ventures. The technology-based industry and marketplace is characterized by long lead times from basic research to industrial application, short lead times in commercialization, and accelerated obsolescence under the global competitive pressure of new product and process introductions. Market opportunities are often short-lived, and technological breakthroughs can quickly wipe out the success achieved by a pioneering firm. How best to compete in such an industry was an overriding concern for the 29 companies studied, since none was sufficiently large to enjoy the advantages of scale and risk averaging. Although the successful survivors lacked the formalized strategic planning systems of their larger multinational competitors, a series of solid decisions made in the areas of marketing, R and D, production and finance enabled some of the firms to develop from small, entrepreneurial ventures with uncertain futures to medium-sized, technology-based companies with international reputations. The survivors corporate strategies show some striking similarities and provide an excellent basis for a set of guidelines for small entrepreneurial companies. Guidelines for Small Entrepreneurial Companies 1. Pursue a global marketing niche strategy. Geographic rather than product diversification should be the underlying emphasis. 2. Concentrate corporate efforts and resources on products for which competitive advantages can be sustained and enhanced. Avoid diversifying into non-related businesses. Concentration of marketing efforts on products in which a competitive edge can be sustained was a key characteristic of the survivors. Product-market specialization allowed the survivors to compete with larger multinational firms. By maintaining highly specialized and limited product lines, the survivors utilized the strategy of nichemanship -- targeting specific products at specific market segments. The decision to limit the diversity of product line was due to the entrepreneurs reluctance to enter new product-markets, especially in view of competition from large firms and the substantial R and D, manufacturing, sales and distribution costs associated with building up new product lines. Internationalization was critical to the success of the survivors. The development of highly specialized products, for which there was no adequate domestic demand, immediately triggered off a global orientation. The importance of international sales was reflected in the fact that in 1991 the survivors reported revenues from foreign sales ranging from 35% to 80% of total sales. Since inception, internationalization formed an integral element of the competitive strategies pursued by the 29 companies. Not surprisingly the major international thrusts were aimed at the adjacent U.S. market, 10 times larger than the Canadian, where differences in language, culture, customer preferences, distribution networks and business practice was minimal. Market success in the U.S. quickly produced an interesting phenomenon: U.S. sales exceeded Canadian sales, and the successful companies became binational (North American) or even U.S. market-driven. Unican Securities Systems Limited is a good example. Incorporated in 1964, Unican began its public life in 1968 with a vision of producing a mechanical access control system. Between 1968 and 1991, the companys annual sales grew from about $180,000 to $118 million. Unicans sales for 1991 were 74% in the U.S., 17% in Canada and 9% elsewhere. Assets in 1991 were 59% in the U.S., 30% in Canada and 11% elsewhere. • 3. Improve production flexibility and cost efficiency through subcontracting arrangements and increased investment in advanced manufacturing systems. This is central for small companies competing against large multinationals that benefit from economies of scale in production and distribution. • 4. Incorporate product and process technology plans into company strategic plans. In technology-based industries where the product life cycle is short and products are threatened with early obsolescence, companies should market new products and utilize new processes as quickly as the state of the art permits. At the root of the success of the emerging technology-based company is the ability to tie together the companys R and D and marketing strategies, and the ability to manage the transition from a research orientation, that is, product innovation, to a development/manufacturing orientation, which is concerned with process innovation and profit maximization. In most instances the start-up of the 29 technology-based ventures was prompted by a new concept or invention developed by one of the participating founders. The more successful ventures were distinguished by their ability to manage the transition from innovation to product and process development. As these companies progressed towards greater product development, a marketing orientation replaced the experimental emphasis as the dominant feature of the R and D process. At this point of their evolution, R and D projects became more oriented towards the production of results with significant commercial value. The high cost of establishing or expanding manufacturing facilities convinced many of the 29 companies to subcontract some of their requirements when feasible. These companies typically assembled products from numerous parts, components and materials that were either produced through subcontracting arrangements to their design specifications or sourced from other manufacturers as standard parts. Thus, in many of the companies, emphasis was placed on the importance of in-line inspection and production audit techniques to provide quality control as products were assembled. A number of the survivors, particularly those dependent on large export contracts, regularly faced two or three year delays between orders, unexpected slumps when markets tightened and long dry spells. One such company, Canadian Foremost, which specializes in high-mobility, all-terrain vehicles, subcontracted much of the work involved in the manufacture of its vehicles, allowing it to have relatively low fixed overhead costs. This strategy helped keep the labor force down to a fairly stable level and allowed Canadian Foremost to move rapidly into full production when the larger orders came in. Although the adoption of advanced manufacturing technology had been more of a ripple than a wave among the 29 companies, some had invested substantial amounts in computerized manufacturing. One survivor invested over $2 million on computer aided design systems along with other advanced technology machines. To have done otherwise would have resulted in a loss of significant sales, particularly to large customers including government. Demand for higher quality, lower cost parts and just-in-time delivery required the introduction of more automated equipment. Small companies that successfully adopt advanced manufacturing technology tend to have a greater awareness of technological developments, and their CEOs are quicker to seek outside advice and support, including technical support from government. 5. Develop the ability to obtain government R and D grants and to generate government business. Government grants were vital to the R and D programs of all 29 companies and an important source of cash during the companies start-up, development and growth phases. A significant number of company founders used government money in tight periods as bridging funds to survive, even if it meant postponing some targeted R and D activity in the short term. Government grants also enhanced the attractiveness of the technology-based enterprises to prospective suppliers of capital such as friends, suppliers, customers, venture capital firms and other government agencies. In addition to the grants, government R and D procurement contracts provided an important source of cash flow. As one would expect, the companies most pleased with government grants and contracts were those whose products were both funded and purchased by government. 6. File for patents in OECD countries to strengthen international marketing niche strategies and to enhance the companys credibility as an innovative organization. The more R and D a company does the more likely it is to obtain patents. Patents were obtained to protect the companies abilities to market their own product and process developments and to facilitate the licensing and cross-licensing of others. Since most of the 29 companies pursued the development of a narrow group of technology-based products for international markets, competitive technological strength was paramount. The patent strategy employed by the companies was driven by three key motives. First, the companies took out patents to establish a quasi-monopoly in a market niche. Some thought that such a move helped to shut out potential competitors, giving them time to build a competitive manufacturing capability. Second, having patents made the companies more bankable. Given their limited asset base, patents were regarded by the companies as a current asset possessing a future income stream, making them more attractive candidates for loans, capital infusion from venture capital firms and government grants, and for going public. And third, patents were also a source of revenue. Lack of capital to undertake their own manufacturing and marketing operations abroad for certain products, prompted some companies to employ an international licensing strategy. Patents were principally held in Canada, the U.S. and other OECD countries because the public authorities in these countries enforced the monopoly rights on the sale of goods and services embodying knowledge. The high rate of filings in the U.S. was understandable because of the strategic importance of the American market, the high degree of integration and interdependence between the Canadian and U.S. economies and markets, and the operating presence of many of the companies in the U.S. It was not uncommon for the companies to file concurrently in Canada and the U.S.; in fact, some applied first in the U.S. Patents also generated an aura of credibility for companies wanting to be viewed as innovative by demonstrating an ability to develop patentable innovative products or processes. The Japanese appeared to be impressed by patent numbers, for example. A solid R and D image was one of the byproducts. Patents were also useful bargaining chips for negotiating cross licensing and joint venture arrangements. Some companies were quick to patent to enhance their bargaining position when considering strategic partnerships or alliances. 7. Promote corporate growth through strategic alliances involving vertical or horizontal related businesses. The net result will help to secure and enhance access to new markets and additional R and D, production and marketing capabilities. All 29 companies participated in strategic alliances. The most successful alliances had one characteristic in common - strategy complementarity between the partners. In all such cases, the alliance was designed to help realize the companys strategic plan, rather than solve a short-term operating problem. • 8. Raise capital by giving up some equity ownership. • 9. Provide equity participation to key employees as a means of rewarding their contribution and retaining their loyalty to the founders and company. Management and technical personnel stability and commitment during the formative and growth stages of a companys life cycle are especially critical. The 29 companies utilized a variety of financing techniques, including loans and equity financing from sources such as corporate lending institutions, Canadian and U.S. venture capital firms and equity markets, and grants from government bodies and agencies. The majority of the companies were established by founders with minimal sums of money and limited access to capital sources. Initially, most of the companies financed their operations largely with the help of increased bank borrowings. Second-round financing involved other financial institutions, largely venture capital firms, and to a lesser extent, going public. The possibility of losing control was of concern to the founders during the second round of financing, that is, the expansionary phase of the business. The founders were quick to point out that there were problems associated with venture capital investment. First, the objective of many venture capitalists was to realize capital gains on investments within five to seven years, while the entrepreneurs interest was in long term growth. And second, unlike most public investors, a venture capitalists role does not end with the investment of funds in the firm. In many instances, in minority equity positions a continuing role of counselling developed, and an active role in majority equity positions. The decision to go public was made primarily as a means of acquiring funds to fuel the growth of a company without incurring the additional risks of heavy debt financing. Going public offered a variety of attractive advantages. First, the stock market provided a ready and usually orderly market for those who wished to buy or sell the shares of a public company. As a result of this liquidity factor, the valuation based on publicly-traded stock was frequently higher than that placed on privately or closely held shares. Second, the entrepreneurs usually had most of their personal financial resources invested in their companies. Going public allowed them the opportunity to solicit growth funds from outside investors rather than committing additional personal resources. Third, for some of the companies, a public market for stock in their ventures facilitated growth through acquisition. Managers of smaller, private companies were encouraged to accept takeover bids, which involved an exchange of shares with a publicly traded company whose shares were relatively marketable and carried an ascertainable value. Fourth, ownership participation served to reward those instrumental in the success of the firm and tied senior executives more closely to the company. The equity incentive also served as a sweetener in attracting new executive talent. Fifth, in the event of disposition of shares, stock in the company had a definite price. Finally, public ownership often marked the success of the company, raising the status of the entrepreneur and the visibility of the company. 10. Although formal strategic planning is not always necessary, strategic creative thinking is. Formulate a mission or vision for the company that captures the owners strategic intent, involving the participation of key employees. Few of the 29 companies practiced formal, detailed strategic planning. The entrepreneurs indicated that they were too busy managing their companies, handling unscheduled crises and responding to competitors incursions to devote much time or resources to producing futuristic documents. They saw little merit in having a wish list of goals to be realized three to five years down the road. In addition, because of their general concern with secrecy and the ever-present threat of a key employee becoming a competitor, the entrepreneurs were unwilling to disclose the necessary financial and marketing data to make formal strategic planning a purposeful management activity. These attitudes, concerns and constraints did not mean that the 29 companies did not develop business plans or engage in strategic planning. Most did; but the planning process was typically fluid and episodic in response to external demands. For example, companies that went public found it necessary to produce a long range plan, parts of which appeared in their prospectuses. Similar documents were demanded when banks and venture capital firms were contacted for financing. Equally detailed documentation was necessary when government was approached for R and D support, financial assistance, international marketing help or as a prospective customer. Many of the entrepreneurs, however, did promote strategic creative thinking as distinct from strategic planning. A few even admitted they were addicted to this activity, and often involved other members of management and the board. The development and articulation of a vision or mission occasionally served as a catalyst for promoting strategic planning, especially among some of the more successful survivors. Unican Securities Systems Limited, one of the successful survivors, managed to exploit the benefits of strategic planning for some years because of the founders commitment to the process. The companys strategic planning approach was grounded in the business philosophy of Aaron M. Fish, its founder, president and chairman. He viewed playing chess as excellent training for strategic planning. He commented, Chess is conducive to the kind of mental gymnastics with which a business person must be equipped in this day and age. It makes you look all around the problem. It makes you consider all the possibilities before you move. One must never lose sight of the ultimate goal, the strategic focus on winning the game... strategic focus includes the necessary elements to make the successful transition from a small venture to an established, major growth corporation while retaining the dynamism characteristic of the entrepreneur. Small Technology-Based Companies Can Survive Many of the 29 companies studied succumbed to the marketing, technological and financial tidal waves produced by giant North American, Japanese and European multinationals. There are survivors, however, and a number are successful global players. They survived because they concentrated corporate efforts in areas of comparative advantage, pursued a global niche strategy, emphasized the applied and marketing side of the technology chain and possessed the ability to adapt to and take advantage of the business/government climate in which they operated. GUIDELINES FOR SUCCESS 1. Pursue a global marketing niche strategy. 2. Concentrate on products for which competitive advantages can be sustained and enhanced. 3. Gain production flexibility and efficiency through subcontracting and investment in advanced manufacturing systems. 4. Incorporate product and process technology into strategic plans. 5. Develop the ability to obtain government R and D grants and to generate government business. 6. File for patents in OECD countries. 7. Promote corporate growth through strategic alliances. 8. Raise capital by giving up some equity ownership. 9. Provide equity participation to keep employees. 10. Develop a mission statement that captures the owners intent. The formulation of such a statement should involve the participation of key employees. PHOTO (BLACK & WHITE): Isaiah A. Litvak ~~~~~~~~ Isaiah A. Litvak, Professor York University Isaiah A. Litvak is a professor of International Business, Faculty of Administrative Studies, at York University. He received his B. Comm. from McGill University and his M.S. and Ph.D. from Columbia University. The author of more than 10 books and 50 articles, Dr. Litvak is a member of various government committees and corporate boards, and is a frequent contributor to Business Quarterly. He won the Touche Ross Award (now the Deloitte & Touche Award) in 1981 for the best article published in Business Quarterly that year.
Posted on: Mon, 25 Nov 2013 23:32:05 +0000
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