Why do some new ideas succeed where others repeatedly fail? Unfortunately, despite years of research, the answer is “it depends.” It depends upon the economy of the area in which the business operates. It depends upon obtaining favorable financing. It depends upon a creative management team who can navigate the business through those first tough years. It depends upon that one great customer/supplier/financier/employee to come along just when the firm needs them most. At its core it depends upon some luck in some combination with a lot of knowledge and effort. Having worked in a variety of capacities with businesses over the past 30 years, I am a firm believer in the old adage that luck exists where perspiration and preparation meet. Recognizing that critical piece of luck often takes years of experience and lots of research.
Combination of Opportunity and Action
Such a stroke of luck appeared in an industry that had been established for decades. A major shift in the Plumbing Master Distribution Industry occurred when the leading company in the industry (YOW – Your Other Warehouse) was purchased by Home Depot. Many of the large plumbing supply companies that had traditionally purchased from YOW were reluctant to support Home Depot (a direct competitor). A group of high-end plumbing wholesalers met in March 2002 to discuss the possible creation of an independent Master Distribution operation. Ranson Roussel, director of branch services for Morrison Supply Company of Fort Worth, Texas, took the lead developing the proposal. He presented his findings to the Embassy Group at their biannual meeting in August 2002. With their encouragement and promise of support both financially and as customers, he felt there was an opportunity in the market. The group endorsed his recommendation, and he was chosen to take the lead in forming an LLC and private equity offering.
Armed with his plan, he went on the road to meet with the owners of the 62 high-end plumbing wholesalers who made up the Embassy Group. In just 10 weeks, he raised $4.55 million. In the meantime, he had decided to locate the business in neutral territory near an importer who had been particularly helpful during the design phase. The location chosen (Moody, Ala.) had the workforce, access, shipper availability and buildings needed for the business. Funding closed on Friday, Jan. 17, 2003, and Ranson was in a shell building by himself in Moody, Ala., on Monday, Jan. 20, 2003. THE DISTRIBUTIONPOINT (TDP) opened for business with an established warehouse, call center and shipping operation two and a half months later on April 14, 2003. Three months after starting operations, the business broke even and in April 2004, the Supply House Times ranked TDP as one of the top three Master Distributors in the country! Not only was the opportunity recognized, but action was taken by those with the best knowledge of the industry dynamics.
Art vs. Science
Running a business is part “science” and part “art.” As an individual, you either have the “art” or you don’t. You can improve your ability to recognize opportunities, but “art” in this sense is downright impossible to teach. On the other hand, there is indeed an important element in starting a new business operation that is “science.” Through research, decades of work by consulting operations, and the thousands upon thousands of experiences in the area of new business development, we know quite a bit about what works and what doesn’t in starting up and running new ventures whether they are independent or part of an established corporation. This “science” is what is taught in entrepreneurship programs across the country and is the catalyst for the boom in interest by students from undergraduate to graduate to Ph.D.
Entrepreneurship from this perspective is valuable not only to those who wish to start a new business, but even more importantly to established large businesses. Those students who master the “science” of entrepreneurship are putting those skills to work for the corporate world in a way that gives them great pride of accomplishment and yet doesn’t mean risking the family fortune. Corporations are setting up business analysis units to generate new business ideas. In much the same manner as dealing with a venture capitalist, these groups develop a business plan and pitch their ideas to senior management in a bid to be funded. These internal corporate ventures (ICVs) are a means for corporations to investigate promising new ideas without taking their eye (literally and figuratively) off the main business of the organization.
The “science” of growing a business with new ideas starts with the understanding that all good ideas are best exposed to the harsh reality of the written word. There are thousands of great ideas out there. Although I believe that I have heard every argument available for why taking the time to do this wastes the effort and energy of the business people, experience suggests that this method kills bad ideas before they are born, helps refine good ideas into great ideas and is the catalyst for evaluating an opportunity in a manner that might truly lead to success. The “science” of entrepreneurship suggests that some industry knowledge goes a long way toward recognizing opportunities. The “science” of entrepreneurship suggests that the whole financial game is cash flow. The “science” shows us that a deep understanding of the strategy/positioning/mission of the business and/or the new venture within the corporation will help maintain the needed focus early in the life of the operation — a time when it is so easy to drift away and simply fail to establish a position in the market.
Out of the Ordinary
The “science” of good strategy is fundamentally founded on the separation within the business between what is orthodox (ordinary) versus what is unorthodox (extraordinary). Many (if not most) of the resources and capabilities possessed by any business are ordinary resources, those that the firm must possess in order to be a credible contender in the industry. If you operate a sit-down restaurant, then you must have refrigerators, food preparation equipment, food preparers, serving staff, utensils, plates, napkins, condiments, a cash register, a credit card transmitter, telephones, a building to operate within, computers, some office furniture, lighting, a payroll system, a business license, and so on. These constitute the absolute minimum resources that must be in place for the business to be considered a restaurant; however, they provide no distinctive competitive advantage to the firm.
To create a sustainable competitive advantage with the associated opportunity to earn substantial returns, some of the resources that the business possesses must be extraordinary resources. There must be a reason why customers would consider giving their business to a different company. For most people it is far more convenient to continue in their established patterns of behavior than it is to change those patterns. Customers are often not willing to switch unless there is a compelling reason to do so. A company’s extraordinary resources can create exceptional value and become the source of that motivation to change.
