E-M8 Entrepreneurial Management for Eternal Mission

UNDERSTAND MARKETS

The market is the cornerstone of commerce. Commerce in turn is at the heart of every business. Commerce helps define value through the exchange of goods and services. A business can hardly be successful if it fails to meet a need of the market. A company that has done their homework should be able to easily tell apart potential customers and non-customers. But before we can understand our ideal customer it does not hurt to be aware of the general trends in the overall marketplace. This is precisely what we can learn by becoming familiar with economic principles in the next few pages. We will discuss perception and value, business cycles, relationship of supply and demand and local specializations.

MARKET SEGMENTS
Market is not a single point of exchange; rather it is a patchwork of many various points of exchange. Tremendous opportunity exists in arbitraging[1] goods and services. It is very important to be able to delineate these markets so that we can decide where and at what prices we should make our goods and services available.

MARKET TYPES
There are four key market types: Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly. Each of these markets operates completely differently, so it is the starting point for any understanding.
Without outside factors, such as government regulations, Perfect Competition happens at the birth of an industry. No company has figured out how to differentiate itself, so the competition is strictly on price. The market determines the price, since there is no single buyer or seller who can really control this market. Barriers of entry are low, so if there is a profit to be made, expect a flood of new competitors. Laws of supply and demand are paramount to this market.
            Monopolistic Competition tends to be the common in rapidly growing markets, where each player tries to differentiate themselves and thus they compete on features, branding or other factors that are not related to price. In this market a low price can actually be misinterpreted to mean that the product is of inferior quality.
            Oligopoly is the norm for the mature markets. A few major players survive and learn how to keep others out of the game. The key feature of this market is that they tend to either stagnate or develop price wars that can devastate all the players. This is because downward change in price has to be replicated by all the other players, but not the upward.
            Finally, a natural Monopoly tends to only occur in declining industries where the market is no longer big enough to support multiple players, or in the early stages of new market development, where one company comes up with a unique offering and everyone else, for the time being, fails to replicate their success. Monopolies tend to be least capable of dealing with change and are highly vulnerable to any innovation that renders them obsolete. Otherwise monopolies are highly effective  at resisting any direct attacks by the new players trying to penetrate the market.
MARKET STYLES
There are three key market styles that require completely different approaches. Typically, organizations succeed by becoming an expert at one of the three, or having separate divisions dealing with each, since the very skills that make someone good at one of these markets make them not so good at the others.

The three styles are low cost / high volume, high cost / low volume and low cost / low volume.  The low cost / high volume is most successful with lots of publicity and broadcast marketing. High cost / low volume is most successful with targeted promotions and a targeted direct sales force. Low cost / low volume can only be successful in niche markets that do can primarily rely on the word of mouth advertising.

PERCEPTION & VALUE

People and Organizations value all that they perceive as enhancing their survival, freedoms and opportunity to pursue their mission. At different times and under different circumstances they value things differently, and therein lay one of the key reasons why in depth hands on market review is paramount to the success of almost any venture.

The rare ones that pursue their Mission are always looking for most effective solutions through partnering relationships, research, etc. They know that price is important, but also consider factors other than pricing. Value for them is defined by alignment with their organizational goals and can be fairly easily quantified. These are the few who have a better chance of a long term survival.

Most have allowed themselves to become complacent, they still do enough to get by and even continue growing, but having lost focus are more concerned with creature comforts than with accomplishing goals.

 But a number of people, corporations, non-profits and governmental agencies are too busy “surviving” to consider anything other than price. Since they have no clear goal, they struggle to recognize the best solution for the organization. In turn, they tend to operate for the benefit of the individuals, or departments, rather than organization as a whole. A myriad of value propositions for these “survivors” can be created without changing the underlying product. Selling to these organizations can be a very profitable venture, and with some, such as government entities, there often comes the feeling of invincibility. But catering to these customers teaches the business to focus on things that are of little importance, become inefficient, and be more concerned with splitting the pie rather than making it larger. Most importantly, these lucrative contracts can be lost overnight, simply due to a change in a political environment or a key decision-maker.

Where mission focused organizations just want the product that fits their needs, the underlying product is often of less importance to the non-mission driven market. The perception created by the skillful work of the marketing team takes over as the key to creating value for those markets.

MARKETS ARE DYNAMIC
 Markets are flexible, they can and do change all the time. Yet, most change is not instantaneous. Rather, there is a drag in the system. There is a great benefit to understanding the dynamics of change in the particular markets. This understanding can only be achieved through constant engagement in the particular markets and learning the underlying dynamics that are driving them.

BUSINESS CYCLES
As you are probably aware, many things in life tend to operate on a cycle. Even if they did not, we would perceive a cycle as we connected the dots of the random events. It seems that the economy needs these cycles to purge out inefficiencies in the system and even when in recent times recessions have been delayed or avoided through fiscal[2] policy, the growth of the recoveries has also been delayed or avoided. No matter what, the economy will be slower at times and more buoyant at others. So we need to structure the business in such a way that would gain benefits during both the up and the down swings of the economy.

During the up tick, we need to manage our growth to capture the most opportunities possible. The trick in the up market is to discriminate among customers to ensure that we keep only the ones that fit our objectives. Building up inventories to support the growth needs to be managed very carefully to avoid cash-flow problems. Once the cash flow stabilized, in the later portion of the up swing, it is the time to expand product lines and invest in means of production.

On the downturn we can focus on getting the best Manpower (employees, contractors and suppliers) that fit our objectives by hiring those that other companies are laying off. Downturn is also the time to perfect the Method of operations, so as to position the company for the upswing.

The result should be an improved bottom line through growth in the upswing and an improved bottom line through improved operational efficiency in downturn. The problem is that we do not know if we are in an up tick or down turn unless we look at it in hindsight. We need to continually engage in all the areas of improvement and only shift the emphasis a little as different opportunities arise.

This is only possible in companies where key management has established a high level of trust and is actively engaged in continual fellowship, which allows to quickly moving in on the opportunities as they become available. This is also only possible in companies that have the wisdom to separate the noise from true opportunities. While fellowship is a prerequisite, wisdom in this regard can be arrived at through regular growth that results from engaging in the task of fellowship.

Other options that we may consider in light of cycles are diversifying[3] in to other markets, establishing financial hedging[4] strategies, investing only in readily sellable tooling and cross training key personnel. However, this is all something that we will come back to once we are well established. The key to the success during the initial phases of establishment of a business is through the single minded focus. While at this stage in the game worrying about diversifying only drains the much needed resources.

A business, a department or project that is just starting out should not worry about sustainability until long after the time it established viability. Instead, a sound exit plan, with exit criteria, needs to be identified before we even start. There is a great degree of attachment to our business ideas. That is why, before starting up a business, the most critical document is a failure exit plan. Everyone is convinced that their business is the one out of ten that will not fail to launch. Yet, it will save many a sleepless night to know exactly when to quit, rather than having to agonize over that decision with the ticker running. Survival is optional.  Fortunes can be made shutting businesses down and lost trying to keep them open.

SUPPLY AND DEMAND
Nothing affects the market as much as supply and demand. If the demand is not satisfied the pricing is highly controlled by the seller. If the demand and supply are at equilibrium, pricing is determined by the market. If the supply is overabundant, the supplier liquidity will determine what happens. If this is a market that is easy to abandon, the supply will reign itself in rather quickly. Unless the governments step in, if this is not an easy market to abandon the prices will drop and the supplier base will become completely devastated.

It makes the most sense to enter markets where demand is not satisfied. But preferably so, in an acute, not very obvious way, so that others (with deeper pockets) do not pick up on the same perceived need and move in.

The other factor that is very important is elasticity of demand, which is the responsiveness of demand to pricing. Interestingly enough, many consulting and service type products have tiered elasticity, where in a given price range there is some elasticity, but if the offering is above or below that particular price range, it receives no consideration at all, no matter how much of a value proposition it creates. This is mainly due to pricing too cheaply being interpreted as not worthwhile. Even with goods, if something is priced too cheaply, it tends to raise suspicions.

Traditional economists claim that supply begets demand and demand creates supply. Since the underlying assumption is that money is primarily means of exchange, increasingly that principle does not work. In an industrial economy money is primarily a means to store wealth. But the new economy makes even that concept obsolete since it created a world where wealth is created rather than just exchanged or stored. Which is really nothing new, except that the ability to generate wealth has always been limited to the few and with the change in the environment, potentially many can participate in that process. In this bold new world, it is the idea that creates demand, and it is the owner of the idea that determines the market.

Understanding the elasticity of demand and other supply and demand dynamics in a particular market should have direct impact on the market strategy for entry into that market.

INTERNATIONAL DEALINGS
It is the home market that gives us the greatest advantage starting out, at least in part, because we know it better. This is also a place where previous relationships can turn into powerful alliances. But long term strategy and, with the advance of the Internet, the ease of International trade require us to also be aware of the global marketplace and its effects on our area of interest.

In dealing internationally there are many more opportunities, but also more things to consider. The obvious ones are the exchange rates and differences in economic regulations. Exchange rate is nothing more than a difference between the values that the market asserts to the currencies. Economic regulations on the other hand can be quite complicated and vastly different. However, people’s values are different and so, what is priced highly in one country can often be found quite inexpensively in another. More importantly, goods and services that are common place in one country may be completely new to a different location.

With the reductions in time and cost requirements for international communication and transportation, this is a market where new opportunities will abound for years to come. Since the outside world is only a few mouse clicks away, consider making it part of a long term strategy. There is a lot of wisdom to be gained in dealing with people who have been conditioned to live in a world that is different from our own.

More importantly, it is imperative to be aware of the competition from abroad. There are entrepreneurs half way around the world that are considering how to penetrate our market.  If we can look at the problem from their perspective, we may gain insights that are hidden from our direct competition.

MARKET FAILURES AND ROLE OF GOVERNMENT
The market is not always a good judge of value. It can be manipulated. Markets tend to be reactive, and slow to respond. One of the key roles of a just government is to compensate for market failures. There are a few vehicles that governments use to accomplish this. It comes in forms of regulations, taxation, grants and aid. The problem is that generally only businesses that have been engaged in the particular line of business have experience dealing with the particular government regulations – which can also be an opportunity, since ignorance of this facet will keep other newcomers out.

The basic pattern is that the government gets involved when the market does not behave according to the principles of self-balancing of supply and demand. These exceptions are monopolies and companies that are benefiting from unpaid use of common resources (externalities), or companies that work to benefit the community at large without a way to be compensated properly.

Both of these cases are classic examples of market failures and are an opportunity for positive government involvement.

A monopoly’s hardest struggle is to keep the entrepreneurial spirit alive and to self regulate so as to avoid catching the government’s eye. It is better to be a responsible business than to be forced by the government to be that way.

Similar situations occur with common resources. Most societies will cut some slack to a startup that is just trying to make it. But an established business that wastes common resources, such as the environment, infrastructure capacity, or government funding will cause resentment in the community. While some resentment is par for the course for just being in business, too much resentment will often translate into government regulations. Lobbying may be a viable option to alleviate regulation.

Just as the government regulates, it also subsidizes. Any business, non-profit or otherwise, has an opportunity to bid on grants that are provided by the government and non-governmental agencies. Is there value that is created to the community at large? Then chances are there is a grant or a government program to aid with the task. If not, there is no reason that it cannot be created. Affluent individuals, corporations and government have interests in increasing stability, improving infrastructure and dealing with social problems. The trick is to show them how they benefit. There is money available for such goals as educating the workforce and land improvements that go unclaimed every year. For a startup business that is likely to need all the funding it can get, these are very worthwhile areas to look into.

Grant availability may well decide our preferred base of operation and target market. Different incentives exist around the globe and there are very different things that are encouraged by different governments. The skill set they desire may well be what we have to offer. A small business can experience tremendous growth by exploiting favorable regulations and good relationship with the officials.

Sometimes governments try to implement agenda that makes no economic sense. At those times a lot of money can be made betting against the government.  

SOCIETY
It is not enough to be keenly aware of the government. Societal forces, in the long term, can change the government and, in the short term, completely circumvent government’s role. Many societal factors are more pervasive and relevant to business than governments, whose agenda can change readily. Some of the societal factors are a perception of this type of business, work ethic, skill sets, behavior expectations, labor practices and market idiosyncrasies. At some level, many of these stem from and/or drive some form of the government regulations.

The key points of contact with society are the market and the manpower. Since both of these are crucial for our business success, it is imperative that we either find a society that shares our perceptions about company behavior (flow with the stream), or find opportunities to instill internal culture that is different from societal, and yet accepted by the society (swim in the direction needed). Since the opportunities often lie in doing things differently, it becomes very important to be aware of what differences are embraced, which are tolerated, and which will not be tolerated at all.

More importantly, we can look for different segments in the society that are more open to a given difference than the society on the whole. An example of this is the Japanese automotive companies placing their plants in the South, where labor rates are lower, but in more rural areas where work ethic is better. A strategic decision to locate plants far away from the US Automotives has worked wonders, because it has slowed the impact of the transfer of Detroit’s way of doing business. It has allowed for the transplanting of the highly effective Japanese means and methods of production without being polluted by the American automotive industry.

Awareness of market idiosyncrasies is even more important. While it does not always make sense to follow them, a simple realization that markets do not always value the most practical solution, is crucial to developing a successful business strategy. The economic theory that humans are well informed rational risk-averse beings is highly suspect. And knowing how to tap into irrational risk-taking behavior can be just as much of a market opportunity as opportunities that we arrive at with traditional theory of economics. Irrational behavior, such as fads and other market idiosyncrasies, can lose steam quickly, but in a quick time they can completely redefine the market and that which the market considers valuable. Stampedes, viral marketing, self-fulfilling prophecies, the “cool” factor are just a few examples of how the power of society can be released to either make or break a business.

SUMMARY
Being aware of the overall market dynamics should help us better find our place in the marketplace. Having gained the bird’s eye view of the markets by looking at the dynamics we should be ready to help define our market goals and conduct specific research.

——————————————————————————–

[1] Arbitrage is buying low and selling high concurrently in two different markets.

[2] Fiscal policy is the financial policy that along with monetary policy can influence economics of the country.

[3] Diversifying is spreading the effort among various areas.

[4] Hedging is making opposite bets to offset some of the risk of loss.