Startup: Managing Transformation

July 19, 2011 in Entrepreneurship, Starting up by Nicolas Rouhana

Managing the transformation of a viable startup requires understanding internal and external dynamics of the business entity, and subsequently charting a course of action – “Strategy” that will result in business continuity.

1.    Overview of Startup Phase

Startups are typically launched with no capital, no history, no clients, no products, no brand name, limited if any accounting or other formal management tools, no market analysis or strategy etc. The main asset was determination and hard work; and the main objective was survival.

Startups may be likened to rafts drifting at the mercy of the seas; with no specific orientation (in any case due to Operational Deficiencies limited capability exists to influence events). Most will go under before reaching safe harbor; some will succeed and manage to find a safe haven. Assuredly external and more importantly internal factors contributed to this success; suggesting strong potential for further success. To capitalize on the success in survival during the transient startup phase allowing transformation into a stable business, internal and external issues need to be addresses:

  1. Awareness of ongoing internal changes, and the need for transformation of the organization to accommodate these transformations.
  2. Transformation from a “Client Driven” business to a “Market Driven” business

2.    Internally Driven Transformation

The startup phase is characterized by an internal culture shaped by the struggle for survival; as the operation becomes a self sustainable profitable business, internal culture changes accordingly, and management needs to be aware of these changes, adapt to them and transform accordingly. Lack of awareness of this change, is a common pitfall which results in eventual failure of the operation after having been a successful or even remarkable startup.  These changes relate primarily to human resource management and management system in the company.

3.    Market Driven Transformation

Having established viability of the particular business, “reaching safe harbor” in our analogy above, the company is faced with another pitfall, adopting a “business as usual” attitude, based on the assumption, that:

What worked before successfully will continue working successfully

Above attitude is a recipe for failure. Having struggled to “reach a safe harbor” the need exists to question:

Where have we arrived, and where do we go from here?

Whereas during the “drifting phase” the operation had limited capability for maneuvering, it presently has some margin for maneuvering and accordingly must use this opportunity to plan for the future and adjust accordingly. Specifically certain activities, product lines and policies that were feasible during the startup phase are no longer possible. Thus the operation needs to study its present activities and performance, analyze future market potential, identify where its best opportunities exist, and develop a strategy to realize these opportunities.

An example that may help illustrate the above is the case of Apple Computers vs. Microsoft.

Apple was by far better positioned than Microsoft in the early stages of the PC era; by 1982 Apple had 50% of PC market with annual sales exceeding $1 Billion at which time Microsoft sales were around $ 50 Million. Furthermore Apple activities included both hardware and software production, whereas Microsoft had only software activities. As such it is fair to say that in 1982 Microsoft was a small subset of Apple, and technological and financial capabilities of Apple exceeded those of Microsoft in every aspect.

The issue here is not to address why Microsoft was able to eclipse Apple, but rather to illustrate the importance of vision and strategy; and specifically that it may sometimes necessary to drop specific activities and focus on company activities that are most compatible with market evolution and company profile.

Product Lineup:  Client Driven vs. Market Driven

In the startup phase a business typically has negligible funds for sales and marketing expenditures, and in any case is no position to compete from a marketing stand point with its established competitors. This results in a very limited client base. Consequently the startup rather than developing markets for its existing products and developing these products to better meet market requirements, it tends to develop new products to its existing clients. It is not uncommon for a startup to have more products than clients. Thus by the end of the startup phase the business typically has a range of products of related content (reflecting capabilities of the startup), but which differ significantly in application (purpose), profitability, and future market potential.  The startup phase is thus commonly “Client Driven”, this term has a positive ring to it, and is quite helpful during the startup phase, promoting quality, product development, and ability to survive with negligible marketing expenditures. It must be realized however, that each client will have their own unique profile, and as such a group of very few clients will generally not be truly representative of the global market. If this fact is not realized, the business will be molded to adapt to this very limited client sample, rather than developing into a “Market Driven” business, capable of meeting requirements of the market at large, where much greater opportunities exist, which are necessary for long term survival and growth of the business.

Thus, whereas client driven business is commonly the only option during startup, management needs to be aware that this involves significant risks and instabilities, and that a need exists to transform the business into a market driven entity capable of meeting wider market requirements, and reaching to these markets.

Need to transform from a “Client Driven” to a “Market Driven” business

–                                        Study market, including competitors and market  trends

–                                        Identify product and operational weaknesses

–                                        Identify opportunities

–                                        Develop program for addressing weaknesses & capitalizing on opportunities

Client driven businesses require minimal sales and marketing expenditures, allowing them to offer competitive pricing, and yet have revenue margins that appear to compare favorably with leading competitors. Unfortunately dependence of “Client Driven” businesses on a very limited client base carries in it the seeds of failure, and is not a viable option for long term growth and stability of the company.  Reaching the wider market necessitates committing significant sales and marketing expenditures hitherto not accounted for in company operations. As a result revenue margins will be significantly affected, transforming some of the company activities/products from profitable to losing activities. Therefore it is necessary to critically review and analyze each business activity, incorporating in the analysis, sales and marketing expenditure ratios inline with those of competitors.