U.S. Foodservice: A Case Study in Fraud and Forensic Accounting

Maria H. Sanchez

Christopher P. Agoglia^[1]

Ahold’s audit committee ordered investigations at the parent company and at 17 Ahold operating and real estate companies to look for accounting errors, irregularities, and other issues as well as assess internal controls and management integrity (Ahold, 2003a).   After a forensic audit, Ahold eventually reported that the overstatement of U.S. Foodservice’s earnings was more than $850 million (Ball, 2003). A large component of the overstatement resulted from improper recognition of promotional allowances. Several U.S. Foodservice employees and vendors either admitted to or were convicted of playing a role in the fraud. In this case, students will gain insights into the proper accounting for and disclosure of promotional allowances and also the risk of over-reliance on third party confirmation as an audit procedure. Students will also distinguish between a financial statement audit and a forensic audit.

Accounting for cash consideration from vendor rebates, also known as “promotional allowances,” was at the center of the U.S. Foodservice’s earnings restatement. Rebates of this type are common in the grocery and foodservice industries and are frequently material in amount, sometimes exceeding 5% of sales. Vendors can offer rebates to customers in exchange for favorable display space in stores, or they may give volume rebates to provide an incentive to a retailer to increase sales of the vendor’s products, with the rebate percentage increasing as the retailer’s sales volume increases. However, these rebates are problematic in several respects. At the time of U.S. Foodservice’s accounting irregularities, there was no standardized accounting treatment of these rebates. Companies have accounted for them differently, and there have been differing levels of disclosure regarding their amounts. The investigation at U.S. Foodservice revealed that determination of rebates receivable can be problematic.

WHAT HAPPENED AT U.S. FOODSERVICE

            U.S. Foodservice was acquired by Ahold in 2000. Prior to this, U.S. Foodservice used KPMG as their auditor. After the acquisition, U.S. Foodservice was audited by Deloitte &

Touche, Ahold’s auditor. During their 2002 audit of Ahold’s financial statements, as part of their confirmation process at U.S. Foodservice, Deloitte discovered that certain accrued vendor allowance receivable balances were overstated. Deloitte uncovered a series of accounting irregularities at U.S. Foodservice and other Ahold subsidiaries and also improper accounting for certain of Ahold’s joint ventures (Parker, 2003). Deloitte immediately withdrew their audit opinions for 2000 and 2001 and suspended work on the 2002 audit.  

            There appeared to be a confluence of economic conditions, managerial “inventiveness,” and failures of internal controls that led to the accounting irregularities at U.S. Foodservice.

Company sales for the year 2002 had been decreasing. In last quarter of 2002, upper management held a conference call with its divisional managers advising them that their annual bonuses were at risk if sales were not boosted. According to testimony provided by those inside the company, in that conference call, the company’s chief operating officer described an

“initiative” that would increase the likelihood of managers receiving their bonuses and help the company achieve its sales target for the year. Quite simply, the strategy was to order large amounts of inventory and immediately recognize the vendor rebates that accompanied them. The rebates were in many cases substantial and, according to some sources, ranged from 8.5% to 46% of the purchase price. Divisional managers stated that they were told by upper management that if they did not place orders for additional inventory, then it would be done for them. These managers reported that it was made clear that if they did not go along with the “initiative,” not only were their bonuses in jeopardy, but perhaps their jobs were as well (Stecklow, Raghavan, & Ball, 2003).

Soon the warehouses at U.S. Foodservice were overflowing with inventory of foodrelated items and paper products. The amount of inventory the company purchased was so large that it had to rent additional space and refrigerator trucks to store it. As purchases increased, the vendor rebates to which U.S. Foodservice were entitled also increased. Supplier rebates increased from approximately $125 million in 2000 to about $700 million in 2003 (Bray, 2006). These rebates were recognized immediately as products were purchased in an attempt to boost earnings. The excess inventory was so immense, however, that even after the announcement of the earnings restatement, it was questionable whether the company would be able to sell it. In an effort to unload the massive amount of product in its warehouses, the company had to reduce its selling price below its original cost in some cases (Stecklow, Raghavan, & Ball, 2003).

During the audit of U.S. Foodservice, third party confirmations of rebates receivable had been provided by the vendors’ salespeople, not their accounting departments. According to complaints filed by the SEC, employees at U.S. Foodservice urged their vendors to complete and return to the auditors false confirmation letters with dollar amounts intentionally overstated, sometimes by as much as millions of dollars. Some vendors were pressured, some were provided with secret “side letters” assuring the vendors that they did not owe the amounts listed on the confirmations (Securities and Exchange Commission, 2006b).

In a span of several months, the “initiative” proposed by the company’s COO unraveled. Rather than helping the company out of its economic doldrums, the scheme instead resulted in earnings restatements, plunging stock price, several high-level managers losing their jobs, regulatory investigation of the company’s accounting practices, and allegations that officials in both the U.S. and Dutch offices had criminal intent to deceive and defraud the investing public

(Stecklow, Raghavan, & Ball, 2003). In July 2003, Dutch officials raided Ahold’s headquarters and began a criminal probe (Sterling, 2003). One year later, in July 2004, U.S. officials announced that two former U.S. Foodservice executives were being formally charged with conspiracy, securities fraud, and making false filings. Prosecutors also announced at the same time that two other U.S. Foodservice managers had admitted to their roles in the same alleged scheme of overstating earnings (McClam, 2004).

           

THE FORENSIC AUDIT

After the irregularities were uncovered by the external auditors, a criminal investigation was launched by the U.S. Department of Justice. In addition, Ahold appointed a team of forensic accountants from PricewaterhouseCoopers to work alongside the SEC. The forensic accountants had to sort through tens of thousands of documents (Datson, 2003). A U.S. federal grand jury issued subpoenas for Ahold documents for as far back as January 1, 1999 (Buckley and Chaffin, 2003).  

The forensic audit revealed fraud at U.S. Foodservice totaling over $850 million, with over $100 relating to 2000, over $200 million relating to 2001 and the rest relating to 2002. The fraud related to fictitious and/or overstated vendor allowance receivables and improper or premature recognition of vendor allowances and an understatement of cost of goods sold (Ahold, 2003a). Numerous U.S. Foodservice employees were involved in the fraud, and it was discovered that the fraud went back as far as 2000. U.S. Foodservice employees were found to have been using inflated recognition rates for vendor allowances and intentionally misapplying both Dutch and U.S. GAAP. Deloitte’s audit testing using third party confirmations failed to detect management’s misrepresentation of the reduction in cost of sales resulting from these manufacturer rebates (Bryan-Low, 2003).

The probe of U.S. Foodservice expanded to investigate several of the company’s suppliers, including Sara Lee and ConAgra Foods, to determine if they might have been complicit in U.S. Foodservice’s intent to misrepresent certain financial statement assertions. The investigation revealed that U.S. Foodservice employees asked salespeople at their vendors to sign false documentation for Deloitte and that some vendors cooperated with this fraudulent scheme. Three salespeople at Sara Lee admitted that they had signed off on, and forwarded to

U.S. Foodservice’s external auditors, erroneous documents that reflected inflated amounts owed to the company by Sara Lee (Callahan, 2003b). Similarly, at ConAgra Foods two salespeople also admitted to signing off on inflated amounts for manufacturer rebates due to U.S. Foodservice. ConAgra Foods claimed, however, that the erroneous confirmation amounts were discovered and that U.S. Foodservice’s external auditor was notified before news of the accounting scandal broke (Callahan, 2003a). The forensic examination at U.S. Foodservice also revealed numerous weaknesses in internal controls, including failure to properly record and track vendor allowances, inadequate accounting and financial reporting systems for vendor allowances, and failure to follow GAAP (Ahold, 2003a).

The investigation revealed fraud at not only U.S. Foodservice, but also at several other Ahold subsidiaries and the parent company. It was discovered at one subsidiary that fictitious invoices were used to conceal payments, and in some cases, payments were improperly capitalized rather than expensed. It was also discovered that the consolidation of certain joint ventures into Ahold’s financial statements was in error and that secret side letters had been concealed from Ahold’s audit committee and external auditors. Further, accounting irregularities and earnings management were uncovered at other subsidiaries and at the parent company.

Overall, more than 750 separate items related to internal control weaknesses and accounting issues were identified at Ahold and its subsidiaries (Ahold, 2003a). This extensive forensic examination led to a lengthy delay in the announcement of 2002 audited earnings numbers. Ahold’s 2002 annual report was released October of 2003, which included restatements for the years 2000 and 2001.

The total fraud at Ahold was revealed to be over $1 billion. Of this, approximately $856 million related to U.S. Foodservice. Upon conclusion of the forensic investigation, Ahold announced the creation of a task force reporting to the audit committee to address the internal control weaknesses and improper accounting practices uncovered during the investigation. (Ahold, 2003b). Ahold announced in their 2002 annual report that the internal audit department would now report directly to the CEO and the audit committee, rather than solely to the CEO, as was the case previously (Ahold, 2002a).

According to press releases from Ahold, after the accounting scandal, U.S. Foodservice made “substantial improvements in the company’s financial systems and controls, as well as its financial organization, to strengthen financial monitoring and reporting” (Ahold, 2004). They also established a new office of governance, ethics and compliance.

LESSONS LEARNED: AUDIT CONFIRMATIONS

            In designing the tests to be performed during an audit, an auditor must obtain adequate assurance to address audit risk. The greater the risk of a particular financial statement assertion (e.g., the existence and amount of vendor rebates), the more evidence an auditor should gather to support the assertion. Statement on Auditing Standards (SAS) No. 67 states that, “confirmation is the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions” (AICPA, 1992, SAS 67.06, AU 330). According to SAS No. 67, confirmation from an independent source is generally viewed as having greater reliability than evidence obtained solely from client personnel. Confirmation with a third party helps the auditor assess the financial statement assertions with respect to all five of management’s assertions: existence or occurrence, completeness, rights and obligations, valuation or allocation, and presentation and disclosure. The auditor may design a third party confirmation to address any one or more of these assertions (AICPA, 1992). However, existence is usually the primary assertion addressed by confirmation of receivables.

Even though evidence obtained by a third party confirmation is generally viewed as being more reliable than evidence provided by the entity being audited, SAS No. 67 cautions that an auditor should maintain a healthy level of professional skepticism. The auditor should consider information from prior years’ audits and audits of similar entities. Further, an auditor has an obligation to understand the arrangements and transactions between the audit client and the third party so that the appropriate confirmation request can be designed. SAS No. 67 states that “[i]f information about the respondent’s competence, knowledge, motivation, ability, or willingness to respond, or about the respondent’s objectivity and freedom from bias with respect to the audited entity comes to the auditor’s attention, the auditor should consider the effects of such

information on designing the confirmation request and evaluating the results, including determining whether other procedures are necessary” (AICPA, 2002, SAS 67.27). The statement allows for the possibility that the party responding to the confirmation may not be completely objective or free from bias and requires the auditor to use other evidence to confirm financial statement assertions in such cases (AICPA, 1992).

Confirming accounts receivable is a generally accepted auditing procedure and is required unless the amount involved is immaterial, a confirmation would be ineffective, or if the auditor can substantially reduce the level of audit risk of the financial statement assertion through the use of other substantive and analytical tests. Accounts receivable, for the purpose of SAS No. 67 (AU 330), represent claims against customers that have arisen in the normal course of business and loans held by financial institutions (AICPA, 1992). The Statement does not specifically address confirming a receivable that arises when a vendor owes a rebate to a reseller, a situation that differs substantially from the typical trade accounts receivable from a customer. Confirming vendor rebate receivables give rise to different risks that likely were not envisioned when the Statement was adopted in 1992.

In adopting SAS No. 67, two (of the seventeen) Board members, while assenting to the Statement, expressed a reservation that the language used in the Statement usurped the freedom of the auditor in exercising professional judgment in how best to confirm accounts receivable and that the language might also lead auditors to place undue reliance on third party confirmation when circumstances might suggest that the auditor choose a more effective test (AICPA, 1992). With the benefit of hindsight it is clear that the auditors of U.S. Foodservice could have, and should have, designed a more “effective test,” one that would have helped overcome the inherent weakness that existed in this situation where parties providing the confirmation may have either been uninformed about the existence and/or amount owed to the retailer or may have had a vested interest to overstate the amount that was owed to U.S. Foodservice. While some practitioner literature has made reference to biases of confirmation respondents (e.g., Simunic 1996), scant attention has been given to this particular concern regarding responses to auditor confirmations by vendors’ sales personnel.

THE AFTERMATH

In 2004, Timothy J. Lee and William F. Carter, both former purchasing executives for U.S. Foodservice, pleaded guilty to participating in the scheme and to conspiring with suppliers to mislead the company’s auditors. They later agreed to pay approximately $300,000 in civil penalties (Reuters, 2005).

More than a dozen U.S. Foodservice vendors pleaded guilty from 2003 to 2006 to criminal charges related to the fraud, admitting that they submitted false confirmations to the auditors (Bloomberg, 2006). Many other U.S. Foodservice employees and vendors have faced civil charges from the SEC, and most have agreed to pay fines without admitting guilt (Sterling, 2007).

In 2009, the SEC dropped the charges against the two former KPMG auditors charged with having engaged in improper conduct during the 1999 audit of U.S. Foodservice (SEC, 2009).

The auditors had been charged by the SEC in 2006 (SEC, 2006b).

read the above REAL WORLD AUDITING case study and provide an overview of the facts of the case (in your own words);  discuss the theoretical principles applicable to the case.

David’s Story

“Life is difficult.” I once read these three trivial words in a book, but never knew how true to life and impactful they would be until one fateful fall evening. Before I begin, let me back up and tell you more about who I am and how I got here. I am a Caucasian male raised in a small conservative town in Maine by hard-working middle-class parents. My compassionate mother juggled raising three rambunctious children, me being the eldest, and has worked the same secretarial job since high school. As a young child, I observed my mother selflessly dedicating her free time and energy to those in need. My mother would often bring food to the elderly, volunteer at church, and have children from the children’s home stay with us during holidays. I absorbed my mother’s compassionate nature toward the disadvantaged. My uncompromising father has devoted over half his life laboring for the shipping industry. Even after working all day, he would come home to work in the yard or repair the house. Growing up I spent many of my weekends toiling over a project my dad refused to pay someone else to do. I still remember the words of my dad pushing me to better myself as I helped with his undertakings, “Son, if you’re going to do it half way, then don’t do it at all!” As a child with too much energy for my size, I incorporated my father’s hard work ethic to my life and found my outlet in sports. All of my dreams and aspirations were encapsulated in being the best athlete possible. Nothing else mattered except for excelling in sports; my drug was sports. I got a rush from the dirt, sweat and blood produced by two rival opponents clashing. I found my niche in hockey because it combined my love of contact sports with a prosperous future I aimed to achieve. My dream was to be a professional player. Of course, life does not always follow along with dreams. Here is where my story takes a turn of unforeseeable events leading me to never forget that life is difficult. The most significant event impacting my life and cultural identity happened on September 21, 1982. At that time, I was the strong, confident, fearless captain of my freshman high school hockey team. I did not have a care other than playing hockey. I had an adolescent belief I was invincible and that nothing could hurt me. As a 15-year-old that thought he knew everything, my world was turned upside down when I was tragically injured in a hockey accident that left me paralyzed from the neck down. The accident took place when I was flipped head first after trying to steal the puck. In that split second, my life was changed forever! I had broken my neck shattering my fourth and fifth vertebrae while severing my spinal cord. I fell limp like a sack of potatoes face first on the ice unable to move a muscle with my body feeling as if it were on fire. I was awake for every excruciating moment and terrified for my life. I had no idea what was wrong with me. It took 45 minutes, which seemed like an eternity, for the ambulance to arrive and paramedics to reach me on the ice. As I lie listless on the ice, the paramedics cut off my dirty sweat stained hockey pads. They put an oversized neck brace on me and strapped my body to a loading board to get in the ambulance. I remember crying while telling my mother I loved her not knowing if I would ever get the chance again. When I arrived at the hospital, I was immediately rushed into the emergency room and put into traction which consisted of metal rods being screwed in my skull. While I struggled in and out of consciousness, the doctor was informing my traumatized parents that if I made it through the night I would never walk or be able to do ANYTHING again. After making it through the first and next few nights in the hospital, I was in total shock. Unfamiliar words like “spinal cord injury,” “paralyzed,” “quadriplegic” and “handicap” kept being used in my presence but never connected with me. It was as if I was watching from afar and emotionally detached. After the shock began to dissipate, the gravity of my situation set in. I had a disability! Even though I had an unbelievable amount of love and support in the beginning from family, friends, and well wishers, I still felt alone. I thought that no one knew what I was going through. During that solitary time, I had many dark days and restless nights to reflect on who I was and who I would become. I started questioning my worth. I wondered what, if any, contribution I could ever have to society as an individual in a wheelchair unable to walk. I had no real knowledge of individuals with disabilities. I used to feel sorry for and pity people that were different and had disabilities. Now I was one of those people. During those daunting days of coming to terms with my disability, my faith was my bedrock. For a child raised Baptist and taught that God is an angry God looking for an opportunity to punish sinners, I never questioned why I got hurt or got angry with God. I guess I never believed that I was being condemned or punished for some heinous sin that required God to paralyze me. I also had so many people from different Christian denominations and religions coming to visit and pray for me that the angry God image dissolved. The love and support I felt from these multireligious beings assisted in my initial strengthening of a secure positive outlook as a future disabled person, even though I have had significant life events that challenged my faith and relationship with people that I thought empathized with my situation. I once had a close respected neighbor that I looked up to tell me that if my faith in God was strong enough I would not need to use a wheelchair. After he told me that, I thought that maybe there was more I should or could be doing spiritually to help regain my ability to walk. At that time, I had no idea how to respond or rebut my neighbor’s judgment on my faith. I was still young and believed my elders were always wiser. It took a long time to mentally grasp that there was nothing I was doing wrong that kept me paralyzed Having a disability, I have come to realize that I am perceived as different and not always in a good way. I came to this epiphany one day while attending a social work class in pursuit of my bachelor’s degree. My professor wrote five labels on the board and asked everyone to stand beside the label they believed would have best chance of getting a job. I was taken aback when the students parted and I could see everyone standing by all the labels except one. The label read “Quadriplegic with Master’s degree.” I was shocked to discover that everyone in the class viewed people with disabilities as a lesser group. Until that time, I did not see my disability separating me from other people. After leaving class, I felt as if I were not equal to others because I had to use a wheelchair to get around. A harsh reality opened my eyes to the fact that I was no longer looked at as a Caucasian male or majority of the population. I was seen strictly for my disability. Therefore, after spending over half my life with a spinal cord injury and using a wheelchair, I have come to identify most with my disability not my race or gender. I identify with my disability because, unfortunately, it is most noticeable to other people. It is difficult to hide a three-hundred-pound power wheelchair. I am not ashamed of who I am because of my spinal cord injury, but I do realize that because I use a wheelchair to get around and do not quite fit the status quo I draw peculiar, sometimes pitiful and many inquisitive looks from others. I have had many occasions when people I do not know come up to me and inquire about my disability. Before even asking, “How are you?” or “What’s your name?” I’ve been asked, “What’s wrong with you?” “Why can’t you walk?” or “Car wreck, huh?” I am often amazed at other people’s reaction to my disability. Though, children’s uninhibited curiosity humors me the most. I remember one young boy asking his mother, “Why is he riding in a big baby stroller?” as we passed by each other in the doctor’s waiting room. Another child once yelled to his mom in amazement in the middle of a restaurant, “Mom, look! It moves!” when he saw my wheelchair rolling. I do not have a problem with curiosity about my disability, but I do have a problem with people judging me and telling me they know exactly how I feel and what I am going through. Another reason I identify most with my disability is because of how much it consumes my life. From the time I wake in the morning having someone dress me, put me in my wheelchair and prepare my breakfast, until the time I am transferred back into bed at night, I am constantly aware of my disability. It was a surreal and shocking feeling to lose total independence and the ability to walk at 15. I had many psychological battles to overcome in order to rise above my physical losses. Twenty-seven years later and many battles won I still occasionally fight to not let my physical disability turn into a mental disability/crutch. At times, my disability has been a challenge and made life difficult. Due to my spinal cord injury, I require many unbelievably priced adaptations for daily living. My $16,000 wheelchair has taken the place of my legs because I am unable to walk. I look at my wheelchair with ambivalence. As much as I hate having to use a wheelchair, I have no other means of moving. My wheelchair has turned into my best friend because of how much I depend on and trust it to work for me. Besides a wheelchair, I need accessible transportation to get around. I cannot go and jump in any vehicle because my wheelchair will only fit in a modified van. It cost near $20,000, not including the cost of the vehicle, just to adapt a van for me. I also necessitate a bathroom specially equipped with wide doorways and roll-in-shower. Since I need so much and am dependent on others, it has been a financial, emotional and psychological hurdle to not feel like a burden. When I first got hurt, I was unable to move anything but my neck. I had to depend on others for the simplest things like scratching my nose or feeding me. Having my independence snatched away from me so quickly was surreal and by far the most difficult part of adapting to my disability. It was the little things I lost that were taken for granted and so devastating to my ego and recovery. Before I got hurt, if I wanted to shave or brush my teeth I just got up on my own free will and went in the bathroom and did it. It was so humiliating and humbling to ask someone to brush my teeth and watch them do it as I stared in the mirror and remembered the young independent man I once was. The loss of my physical independence left me with two options, give up on life or keep on fighting. Fortunately, I strive for a challenge and chose to keep fighting. I vividly remember when I decided to not let my disability get the best of me. After 4 weeks in the hospital, I was immediately taken to inpatient physical rehab in another state. I had no expectations of what was in store for me or how soon I would have to make a life altering decision. Upon reaching the three-story monolithic rehab that specialized in spinal cord injuries, I was wheeled in on a gurney and taken directly to the room I would call home for the next four months. Before I even reached my room, I was startled by a low painful moan that came from a gentleman I was to know as my roommate. As the nurse’s aides wheeled me into the room, I was shocked to hear that my older rugged looking roommate was repeatedly moaning to his family, “Just let me die, just let me die!” I soon found out that my roommate had a recent spinal cord injury and was coming for rehab just like me. As my roommate continued to moan to his family, my mom had to leave the room to fight back tears. I remained stoic for the sake of my family, but inside of me I was an emotional volcano ready to erupt. I felt so unbelievably hopeless, sad, and confused. I began to wonder, “Is this what I had to look forward to as an individual with a disability? Was I going to eventually follow the path of my roommate and wish for nothing more, but to lie there and die?” After my family and his had all left for the night and all was quiet, I lay in bed and forced myself to make a decision. It was at that moment that I chose to get busy living and make the most of my life no matter the circumstances. When I initially got hurt, I viewed societal barriers to the disabled as just the way things were. I accepted that I would be limited as to where I could go and what I could do. After a few years, I began to get frustrated and fed up with the injustices I saw and experienced. Such as the time my sister and I tried to get in a popular barbecue restaurant in my hometown. Excited and hungry for the mouth-watering burgers the restaurant was known for I quickly lost my appetite after 5 minutes of being there due to their inaccessibility. After struggling to get up a wheelchair ramp that was too narrow and steep for my wheelchair, I had to have my sister pick up on my three-hundred-pound chair and turn it just to get me in the narrow double doors of the restaurant. I should have known what to expect next from the hassle it was to get in the restaurant. As I got my first glance into the restaurant, I saw nothing but a sea of people and counter tops that rose way above my head denying me access to order my meal. While my sister ordered my meal, an older Caucasian female with a food-stained apron came to seat us. From this incident and many similar experiences, I felt compelled to fight for the rights of the disabled. I have contacted restaurant proprietors, written letters to newspapers and been on local television news addressing the injustices endured by the disabled. I try to let everyone know that our “Separate, but Equal” society is not as equal as it seems if you look hard enough. Though great strides for the disabled have been accomplished with the inception of the Americans with Disabilities Act, there is more work to be done. I realized long ago that change does not take place without breaking the status quo. Even though I miss walking and the independence I once had, I would not take back the journey that led to my spinal cord injury or time thereafter. I never imagined the way my disability would shape my life and others’. I have been able to touch and inspire other people in a way that I could not have able-bodied. Though it is a physical and psychological climb over the struggles of living with a disability, I have become stronger because of it. In the end, I want to look back at my life and be able to say, “I may have broken my neck, but I did not let it break me.”

QUESTIONS 1. What was it like for you to read this case study? What feelings emerged for you?

2. Imagine that David was a Black football player dreaming of getting a college scholarship when he was paralyzed. What additional themes might have you seen in this narrative?

3. Imagine that David's accident took place when he was 45 years old, not 15. What could be some differences in terms of his identity issues and development?

4. What do you see as the role of a social worker in this scenario? What interventions may be helpful?

There had been several rough quarters at the Engstrom Auto Mirror plant in Richmond, Indiana, a privately owned business that manufactured mirrors for trucks and automobiles and employed 209 people. For more than a year, plant manager Ron Bent and his assistant, Joe Haley, had focused their Friday meetings on the troubling numbers, but the tenor of their May 14, 2007, meeting was different. Both men sensed that they now faced a crisis at the plant. Bent was talking animatedly to Haley: “This is the third productivity problem in, what, two weeks? We can’t climb out of this downturn with performance like that.” He scowled as he signed the authorization to air-freight a large order to the Toyota plant where Sam Martinez managed the assembly line. The difference in cost was astronomical, and it had been necessitated by the slow pace of productivity at Engstrom, which meant in this case that a job due for completion on Monday wasn’t completed until Thursday. But Bent couldn’t afford to make a late delivery to Martinez; he was a prized but demanding customer who had designated Engstrom as a certified supplier one year earlier. Only one other supplier for Martinez’s plant had achieved certified supplier status—a recognition of both extraordinary reliability and quality. The worry lines on Bent’s face deepened. Certified status meant that Martinez had personally authorized Engstrom products to be used on the auto lines without a quality inspection. Along with productivity problems, product-quality issues had also been creeping into the work done at Engstrom. Bent hoped that he was not paying to air-expedite defective mirrors to Martinez. Haley said, “Ron, we both know the employees have been complaining for months, but yesterday and today the talk has been pretty hostile. I’m not saying there’s a definite connection between nearly late delivery and the grumbling I heard, but you’ve got to wonder.” Bent knew that Haley, in just four months at the plant, had developed good relationships with several workers and could pick up useful information about the mood. Haley said, “They’ve had it with the Scanlon Plan. You hear the griping everywhere: ‘What’s the point of having a bonus plan if no bonus is paid for months?’ And it’s not just the people who’ve always been active in UAW. [United Auto Workers], although the union could start taking a more belligerent position at their next meeting.” Bent held up the expedite authorization. “It’s a vicious cycle. We’re paying a stiff price for slips in productivity—and that’s money I would far rather be paying to workers as a reward for high performance.” After Haley left, Bent sat for a moment staring out the window in his office. Back in 1998 he had faced a similar crisis, marked by low employee morale. At the time, he had rated the average worker productivity at a dismal 40% of expectation. After studying the turnaround of two other plants in Indiana, Bent had painstakingly built the support needed from both employees and the Engstrom family to institute a Scanlon Plan at the plant. The choice proved propitious: the Scanlon Plan, which paid bonuses to workers for increased productivity, had been the primary catalyst of Engstrom’s own turnaround. Business had been good; over a seven-year period: sales had quadrupled. In 2005, however, a downturn hit the industry. In June 2006, Bent had been forced to lay off 46 of his 255 employees. Those who remained had not received a Scanlon bonus in seven months. Bent wondered: Had the plan outlived its usefulness? Was it a victim of its own success? The workers had become accustomed to the plan’s substantial bonuses, perceiving the additional hundreds of dollars as part of their regular compensation. Therefore, when the bonuses stopped, the workers responded with anger and suspicion, as if something that rightfully belonged to them had been taken away. Now, Bent had to determine whether to scrap Scanlon, change it, or look elsewhere for solutions to sustaining productivity and ensuring quality until the downturn ended. Understanding Scanlon Plans The Scanlon Plan is the oldest organization-wide incentive plan still in use in the United States. Many employee incentive plans (for example, the typical bonus paid to sales representatives) are keyed to an individual’s performance. Other plans base incentives on the performance of the functional work group to which an employee belongs. Organization-wide plans such as Scanlon reinforce teamwork and cooperation across work groups while they focus attention on cost savings and motivating employees to “work smarter, not harder.” The first Scanlon Plan was developed in the 1930s by Joseph Scanlon, a cost accountant by training and a steelworkers’ union official at a steel mill facing bankruptcy. Scanlon worked with the mill owner to enlist the plant workers in identifying ideas for increasing productivity. Ultimately, the plant was saved. Although Scanlon was oriented to helping small, distressed companies, variants of his “gainsharing” plan have been adopted by a diversity of organizations. The heart of these plans is the concept of participative management. Scanlon believed that individuals will work hard to help achieve their organization’s goals so long as they have an opportunity to take responsibility for their actions and apply their skills. A key tactic is to communicate financial and other business data through all levels of the organization. While this is a symbolic motivator for many workers, the tactic also has a practical basis: everyone is encouraged to suggest ways to improve the plant’s productivity. The three plan components—the submission of suggestions for improvement by employees at all levels, the structure of the company committees that evaluate the suggestions, and then the sharing of the fruits of increased productivity through monthly bonuses—ideally work together to drive big changes in behavior and attitudes. When things are working properly, teamwork and knowledge- sharing typically improve in Scanlon organizations: collaboration fosters innovation and creativity, (Human Behavior in Organizations 537) which in turn drive improvements in productivity, thereby ensuring the payment of bonuses. The culture in a Scanlon plant also typically becomes more change-friendly, as workers have the opportunity to make more money by changing the status quo for the better. While all Scanlon plans share these characteristics, the plans can be tailored to support an organization’s specific strategy. Plants like Engstrom were focused on cost savings, which means producing more per hour of labor spent. The bonus for everyone at Engstrom was therefore based on that ratio—production per labor hour. Organizations with different strategies base their Scanlon bonuses on different factors, but at Engstrom, pursuing higher productivity that drove labor savings was the linchpin. Exhibit 1 shows the basic financial and structural components of the plan at Engstrom. The Path to Plan Adoption at Engstrom Engstrom Auto Mirror, which had operated since 1948 and enjoyed considerable success for much of its lifetime, had become mired in unprofitability by the late 1990s. The plant at that time was redesigning its production lines to incorporate new technology. The transition was not smooth, and increasingly long production delays irritated and eventually alienated customers. The plant manager lacked the sophistication with technology necessary to find solutions quickly and was inept at working with an increasingly militant union (he claimed that the union was “laying in wait” for him to make mistakes and “wanted to hurt management financially on grievances”). Embittered and tired of conflict, the manager resigned in 1998. Ron Bent, a successful manager in his mid-40s, was hired away from a camshaft production plant to attempt a turnaround. Bent believed strongly in the power of worker incentive programs and wanted to establish one at Engstrom. Owing to his experience with different types of programs and further study he subsequently undertook, he held strong opinions about which type of plan might work best at Engstrom. At the camshaft plant, he had experienced an incentive plan that rewarded individuals— not groups or the employees as a whole—for performance. He didn’t care for the results: “Individual incentive plans require a lot of manpower. You’re often arguing with the union. In my experience, any time you set a rate on an operator, he will figure out a way to beat that rate.” The cumulative effect of numerous small changes in tools and methods could result in incentive standards that had little relationship to workers’ tasks. In support of his position, Bent claimed that the plan at the camshaft plant had “gotten so out of line” that the average worker earned 150% of the day rate. Bent has similarly strong feelings about group incentive plans: “If you are going to change your operations or institute a new technology, product, or manufacturing line, the process to get that installed and operational is much longer under an individual or a group incentive plan.” A Scanlon Plan, Bent thought, was the best for Engstrom, given the challenges that the plant faced: “With Scanlon, workers are receptive to new methods and new machinery because they feel they are a part of the company-wide program. When you’ve established a Scanlon plan properly, you’ve also built a good communications network throughout your organization.” Though Bent had worked at and visited plants with multiple incentive plans in place, he felt that Engstrom was too small to accommodate the complexity of multiple plans. By early 1999, he and his management team began talking about the Scanlon concept around the plant, focusing on the potential benefits for workers. They also posted information about Scanlon on bulletin boards, and Bent spent many hours jawboning workers whom he had heard were opinion leaders. In addition, Bent organized a trip for a group of workers to visit another plant that had implemented Scanlon. As Bent explained:Our bargaining committee mingled casually with the other plant’s bargaining committee, and some of our people attended the Scanlon meeting there. My management team kept in the background and let the workers develop their own sense of the situation. The workers came back enthused, and they set the stage for acceptance of Scanlon by their fellows at Engstrom. Throughout these months of campaigning, Bent included a single consistent message in every communication he had with any employee at Engstrom: the Scanlon Plan would be adopted at the plant only if a substantial majority of workers wanted it. In December 1999, a formal statement of the plan was prepared to be presented to all plant employees for discussion and, ultimately, a vote. The bar was high: management had insisted that, because strong employee buy-in was critical, a 75% “yea” vote was necessary. On December 10, 81% of the workers voted for the plan. Every employee then signed a Scanlon Bonus Plan Agreement. Following are its key provisions: • The labor savings would be split 75% to employees and 25% to the company. • A reserve would be established to cover months when productivity fell below the base ratio. Before the monthly payment of 75% to employees and 25% to the company, 25% of all bonus (both the employees’ and the company’s share) would be set aside as a reserve in case of a deficit month – that is, a month when total payroll costs exceeded allowed payroll. • The structure of the Scanlon Production and Screening Committees—set up to stimulate and then evaluate employees’ suggestions—was presented in detail, and methods for appointing or electing members were established. • Conditions under which management could adjust the base ratio were made explicit. Changes in wages, sales volume, pricing, product mix, subcontracting, or technology were identified as potentially leading to increases or decreases in selling prices or standard costs and therefore as factors that might cause the base ratio to be changed. The trickiest part of the plan adoption was the calculation of the plant’s base Scanlon ratio. A benchmark was needed. Plant management selected a ratio of payroll cost to sales volume of production. Their strategy was to start with the total sales revenues generated during a specified period and then establish a percentage of that total as a standard or normative cost of labor, including managerial support. A ratio of 0.50 to 1, for example, would mean that the normative payroll cost was 50% of total sales revenue—and that employees would be paid a bonus for any month in which the payroll cost was less than 50% of total sales revenue (with the size of the bonus based on the percentage of savings achieved). Bent remembered two of the reasons why establishing the ratio raised protracted arguments among the management team, a Scanlon consultant hired by Bent, and worker representatives: The idea was to examine the historical ratio over a representative period of the plant’s business cycle, including all ups and downs that are likely to occur. But we found it hard to identify a recent period we felt was representative, given the troubles at the plant. And we needed to consider that employees had been performing at unacceptable levels. We wanted to motivate them to excel, not just to perform less poorly. The best reconstruction of actual performance showed that the ratio had varied between 30.5% and 68.2% over the previous fiscal year. The average for the 12 months was 43.7%. Though the Scanlon consultant suggested a target of 44%, the ratio was eventually set at 38.0%. The institution of the plan led quickly to an increase in productivity, as measured by the bonus ratio (payroll cost to sales value of production). While few of the early suggestions that employees made increased productivity in any meaningful way; the committees accepted as many as possible (276 out of 305 in the first year). Bent said, “We really wanted to support the submission of these suggestions.” Bent also immediately instituted monthly communication meetings open to all employees. We covered the results of the prior month in detail, praising the workers for improvements they suggested. We also shared our perception of business conditions, identified new customers we were working with, described new equipment that was coming into the plant— anything that we felt would be of interest to workers. They had never been exposed to this kind of communication before. Then we opened the floor for questions, and it was no-holds- barred. I set only two restrictions: no talking about anyone else’s personality and no discussion of any individual’s pay rate. If I couldn’t answer a question, I‘d ask one of my staff to answer it. I wanted the workers to see we weren’t trying to conceal anything. Tension and conflict in the plant eased, as most plant employees seemed to accept the serious intent of the plan. At the same time as the plant was achieving growth, higher profits, and consistent quality standards, the employees were also receiving good financial rewards. Scanlon bonuses were paid every month of every year following plan adoption, in addition to normal wage increases. (Exhibit 1 includes an example of a worker’s paycheck showing the bonus). “It’s not just the money—though don’t get me wrong, the money is great,” said Jim Lutz, a worker on one of the plant’s lines. “I’m getting rewarded for thinking, not just for performing the same tasks every day. To me, that means the plant values the knowledge I have about how my line runs.” Some of the most important cultural changes, according to Bent, were not apparent in the quantitative measures: If, say, a polisher’s machine went down, he called the maintenance man, who came over to examine the machine and then went back to his area to get a tool – one tool. If that was the wrong tool, he’d go back for a different one. Sometimes he’d go back and forth three or four times. Why? Because it didn’t affect his pay, or matter in any other aspect of his work, whether the machine was running or not. Now the maintenance man brings his whole tool cart over. And the machine operator helps out, almost like a surgical nurse, instead of standing around with his hands in his pockets. At Scanlon meetings, workers regularly expressed satisfaction with these changes in their working conditions. Dori Andrews, a veteran of 10 years at the plant, said, “People see themselves as a more cooperative workforce—Engstrom is now a better place to work than it was before we brought in Scanlon. And this is the first place I’ve ever worked where management does not automatically say ‘no’ to workers. They listen.” Over time, however, enthusiasm waned and dissatisfaction grew with certain aspects of Scanlon. Suggestion rates dropped precipitously, down from hundreds to 50 a year. And two consistent themes were heard in worker complaints: • Distrust of bonus calculations: Although all employees received a detailed explanation of the process and could easily access the bonus calculations, some employees thought that the company might be “playing with” the numbers. The complex nature of the calculation itself, which some felt was “full of bean-counter jargon,” also caused distrust. Before the plan was adopted, production achievement was measured by total units produced. However, the Scanlon bonus was influenced by many other factors, including the length of the month, sales mix, overtime, and product returns. Conceivably, a low Scanlon bonus could be paid following a month in which a record number of units were produced. Another point of distrust shared by some employees was suspicion whenever the management team changed the ratio, which occurred four times between 2000 and 2005 (the final reduction was to 32.6%). Some workers accused management of creating a “moving carrot,” despite their explanations for the reductions. • Question of fairness: Some employees felt that supervisors should have received a reduced bonus because they were ”not working as hard as we are.” These reactions did not surprise Bent: “A Scanlon program won’t perpetuate itself. You have to give it a shot in the arm every so often—whenever the work force needs it.” Before Bent could decide how to provide that “shot in the arm,” the industry downturn that began in 2005 gradually dragged down the workforce’s morale along with the sales figures. The atmosphere in Bent’s monthly meetings with employees grew increasingly charged, as he talked about possible layoffs and the causes for declines in productivity. It was clear that every month without a bonus further chilled labor-management relations (see Exhibit 2 for a description of how the plan handled so-called deficit months). Bent’s exhortations—about preserving the culture of the plant and the danger the Engstrom family might close that plant unless profitability trends were reversed— increasingly fell on deaf ears. The layoffs, when they finally occurred in mid-2006, shook the confidence of even the most fervent Scanlon proponents among the workforce. The event served as an emotional lightning rod in the plant and as a temporal dividing line between good and bad times in the plant. By the time Joe Haley joined the management team in January 2007, there was increasing evidence of worker disaffectation. For example, Haley’s review of inventory reports led him to suspect pilfering, and his conversations with workers only deepened his suspicions. Now, in May 2007, Bent felt he urgently needed to make changes before conditions deteriorated further. But he wondered what kind of change might work. In all the reading and listening he’d done he hadn’t heard of any alternative incentive plan that motivated superior employee performance in both good times and bad – so he saw no reason to replace Scanlon with another plan. Could he revise Scanlon in some way that worked better during a downturn? Could he try to identify and change organizational factors that might be undermining Scanlon at the plant? As Bent’s uncertainty about these issues deepened, personal doubts arose about his own performance. He felt a heightened recognition of Scanlon as more a process of organizational development than a plan prescribing specific steps to follow. Had he and his top managers done everything they could to make Scanlon a sustainable success? Had they thought of it too narrowly as a bonus plan instead of a broader opportunity to build a different workplace culture? Or was there something else he was missed.

Milestone Four of your final project is now based on a workplace analysis. You should use your previous milestone submissions regarding the case study to inform your workplace analysis. This milestone considers actual work experience and asks you to conduct a detailed and in-depth version of a root cause analysis applied to your own workplace experience.

This milestone will cover Section IV, Parts A, B, and C of the final project and should include the following critical elements:

1. Explain actual workplace organizational issues drawing from your own experience.

2. Analyze root causes from a human behavior perspective and validate the analysis with supportive research evidence.

3. Examine the impact of poorly aligned and administrated human behavior theories and concepts

This case deals with one of the pioneers in the electric scooter industry: Bird. Please read the articles provided and answer the following questions:

1) Where is the demand for electric scooters coming from? How fast it is expected to grow? Why are investors buying into this industry? Elaborate. [It might be helpful to provide the target segment and its size to justify your answer].

2) What are the possible concerns impacting the demand of electric scooters? How attractive is this industry? [Use Porter’s five forces model to analyze the industry attractiveness]

3) The industry is at a nascent stage and there are already several competitors such as Lime and Skip (Uber and Lyft have also entered this arena). How should Bird position itself to differentiate from the competitors?

Article:

Bird’s electric scooters are getting more rugged to handle heavy use

A year ago, dockless electric scooters first appeared on the streets San Francisco and Santa Monica. The initial reaction was bewilderment, eventually giving over to annoyance and dismissal. The companies that were scattering these scooters everywhere, like Bird and Lime, seemed to epitomize tech-bro arrogance. Surely the fad would fade and the scooters would be shipped back overseas from whence they came, destined for some landfill in China.

Twelve months later, the scooters are in over 100 cities across the globe, and by most accounts, immensely popular. Bird and Lime have each reported over 10 million rides since their launch. Lime is valued at $1 billion; Bird at $2 billion. Ride-hailing giants Uber and Lyft are now getting in on the action, acquiring bike-share companies and applying for permits to operate their own e-scooters. Early complaints about vandalism, blocked sidewalks, and scofflaw riders — while still valid — have since given way to a realization that, hey, these things are kind of fun! And more than that, they could be a crucial link in helping cities solve crucial transportation challenges.

Against that backdrop, Bird CEO Travis VanderZanden spoke with The Verge about phase two in his plan to conquer the micro-mobility sector. Before founding Bird, VanderZanden was a ride-hail executive. He served as Lyft’s chief operating office until August 2014, when he left to join Uber. The move landed in him in hot water with his former employers, who filed a lawsuit claiming VanderZanden stole confidential material. The parties later settled for an undisclosed amount.

Now VanderZanden is out to steal Uber and Lyft’s customers, or at least the ones who use ride-sharing to take short trips across town. He spoke about Bird’s growth in ridership, building a more rugged scooter, and competition with his former employers in the ride-hailing sector.

The Verge: Congratulations on your one year anniversary.

Travis VanderZanden: Yeah. We’re super excited to announce the one year anniversary and take a minute to reflect on the last year. We’re now seeing that we’re doing 10 million rides, 100 cities with two million riders. The reason we get excited to get the numbers out is for us the first year was really... when we started the company it was suggested, can we use electric scooters to really get people out of cars? And we think the data from the first year it’s been kind of a big data point that people are willing to get out of cars and use electric scooters, so, excited to have the announcement.

What is the next stage, would you say, of the business?

Year two is all about, for us, doubling down on our efforts to work with cities and build out government technologies, call it our “GovTech” platform, where we’re spending a lot of our engineering resources building tools that the cities can use to have the insight into Bird’s data and also control Bird in their cities. So an example is that we just rolled out a geo-speed limiting feature where the Bird is already capped at 15 miles per hour, but when you enter a zone like the beach bike path in Santa Monica, the Bird will slow down to 8 miles per hour automatically. So we’re doing a bunch of cool things like that that help the cities. Year two is gonna be about doubling down on those efforts.

That also includes some geo-fencing, too, I understand, right?

Yeah, because there’s geo-fencing, the geo-speed limit’s going to work with geo-fencing on slowing you down. There’s also ‘no ride’ zones, there’s ‘no park’ zones... a bunch of cool things like that that we’re doing, and so we’re going to be continuing that in the second year.

I mean, it’s not that cool, right? For the first year it was ‘anything goes,’ ‘no rules,’ and now it’s like ‘okay, lots of rules that we have to contend with.’

Well, when we first launched the business, you know, we didn’t know if electric scooters were gonna work, we didn’t know if people would ride them. You know, companies have been trying to get Americans off cars for a long time and so it actually started as a small bet and what we found is people really enjoy riding the electric scooters, which we’re excited about. And we’ve been working with cities in year one as well, but we think year two is about doubling down on those efforts.

How are you adapting to cities introducing these pilot programs and wanting to have more control over the deployment and usage of the scooters?

Yeah, so you know, Ridesharing 1.0... we’re calling Bird Ridesharing 2.0 and two of the biggest changes from 1.0 are that we’re using environmentally friendly vehicles to help reduce carbon emissions and traffic. But the second big difference is really collaborating with cities and sharing data with them through the real-time API access, through the dashboards. And then building technology to control and manage Bird in their market.

What about the scooter itself? Are you guys sticking with the one you’ve got? Are you hoping to make any hardware upgrades?

Yeah, so we’ve been investing heavily over the last year. We built out a really big vehicle engineering team. We have the biggest vehicle engineering team in the industry. We’re working on future vehicles now. We’ve already started testing a new vehicle recently, which is a lot more ruggedized than our original vehicles and built specifically for the speedier sharing model

Can you give me any more details in terms of what that means?

The battery is 55 percent bigger. The shaft is built so it’s very durable. The brake cables aren’t exposed. The tires are solid core tires. We spent a lot of time trying to test tires that didn’t have air in them but still had a good rider experience, which was very important to us. We finally found we think the best tires in the world. So, big things like that, so we’re super excited to be testing these new vehicles.

How are you guys approaching the issue of safety? There have been recent reportsabout a rise in scooter related injuries. How are you hoping to deal with that problem, and how are you talking to the cities about that?“

Early on, Bird has prioritized safety over everything else, including growth. It’s easy to say that, but if you look at our actions, there’s a bunch of ways we’ve prioritized... So, three examples of us prioritizing safety over growth are we capped the vehicle speed at 15 miles per hour, even if the city doesn’t require us to do that. We require a driver’s license and the rider to be 18, even if the city doesn’t require us to do that. And we pick the Birds up at 9PM every night, even if the city doesn’t require it. And we also ship free helmets, even if the city doesn’t require it. It helps us sleep better at night, to really prioritize safety over growth.

Do you have any concern about personal injury attorneys filing class-action claims?

We think cars are dangerous. Our society is kind of built around cars, and cars can be dangerous. I’m sure you know the stat that 40,000 Americans died in car accidents last year. A stat you might not know is that another 6,000 people, pedestrians, died by getting run over by cars. It turns out any time you’re operating... or walking, or biking, or Birding around cars, it can be dangerous, and that’s why we try to educate the riders to wear a helmet. We’re working with cities and encouraging them to build more protected bike lanes. And really aligning with some of the bike advocates who’ve been wanting protected bike lanes for a long time.

In year two, obviously you’re gonna start to see competition from some of your former employers: Uber and Lyft are getting into the game. Are you concerned at all, sort of going up against them, considering obviously the amount of capital that they’re going to be bringing to the market?

No. I welcome Uber and Lyft into Ridesharing 2.0. We think Ridesharing 2.0 will make the world a better place, and we welcome them into that world. I think they’re kind of operating where we were a year ago, and so we think we’re much further ahead on vehicle engineering, on the government technology stuff. We share data with cities, which is something maybe they’re not used to in Ridesharing 1.0. We definitely welcome them.

So why do you think a user would choose a Bird over, say, a Lyft scooter at this point?

One, Bird’s in a hundred cities, and we have a lot more vehicles deployed, a lot more vehicles being manufactured and sent to us. There’s that. So the vehicles will be closer to users because we have more of them. In addition, we have built more ruggedized vehicles, while they’re still working on the vehicles we had a year ago, and haven’t figured out how to ruggedize them yet.

So you’re not worried that they might buy your supply chain out from underneath you?

No, we’re not concerned about it. We have great relationships that we’ve been building over the last year. In fact, we just signed an exclusive deal with the original manufacturer of the ruggedized scooter sharing company. It was the manufacturer that built the original Lime scooters. We have an exclusive deal with them. We continue to work with Ninebot and others. We think we’re far ahead on that, and I think we have access to the most supply right now. I understand a lot of others are having a hard time finding supply.

What’s the latest on bringing the scooters to New York? Obviously that would be a huge market for you guys.

I get excited about any market when there’s massive traffic and car problems, and certainly New York City’s high on that list. For us, we always wanna make sure that we’re legal before we go in. There are folks working with city and state officials to try to figure out how do we best fit in to the existing legal framework. I’m certainly excited about figuring it out. I think New York City would be way easier to get around on Bird than in a car, obviously.

Bird got shut out of San Francisco’s pilot program. Do you think there’s still a chance that you’ll be able to bring the scooters back to San Francisco at some point?

I haven’t spent much time digging into it. I think San Francisco’s just one city. We’re in a hundred cities now. It’s the only city we haven’t been able to stay operating in so far and get a permit. It doesn’t mean we don’t wanna be in San Francisco. We just haven’t spent a lot of time thinking about it right now, because there’s so many other cities that have been embracing the electric scooters. At some point, obviously, we would love to be in San Francisco. We’re just not spending a lot of time... we’re not protesting it or anything like that in the short term.

Yeah, but you did protest in Santa Monica before getting permits there.

Yeah. In Santa Monica, it’s our home state. We felt that’s where scooter sharing, where we originally invented and created scooter sharing. We felt maybe a little more sentimental about Santa Monica. Overall, we’re finding cities are really embracing these scooters. I think that the press tends to over focus on San Francisco. But we’re in a hundred cities now. When we talk to cities about our mission of reducing car trips and traffic and carbon emissions, it 100 percent aligns with the cities’ goals. They have the same goals. So it’s just a matter of figuring out how do we best fit in. Being in a hundred cities and doing 10 million rides in the first year is exciting and we have a lot of cities that are excited about electric scooters.

Bird has promised to provide funding for bike lanes. Are you doing that in every city that you’re operating in, or only just the cities that ask for that kind of thing?

We offer it in all cities and try to figure out who to pay, what initiative makes the most sense. For us, what’s important is investing in improving the bike infrastructure and scooter infrastructure in a city. The cities that have... a lot of cities have permits with their own permitting fees and then they use the permitting fees to go towards the bike infrastructure. An example is, you wanna use the money, you’re happy to help pay for dedicated bike lanes, to get dedicated parking spaces. There are dozens of parking spaces on the street per block, instead of taking that one space away from a car, you could probably fit 10-15 Birds in that same space... And we just think it’s a much more efficient use of space, but that said, we’re not asking for the city to pay us, and we’re not asking [for] a handout. We’re asking them to pay for that space. It’s just a matter of figuring out how do we make that happen. So we’ve certainly been trying.

Bird is in Paris and in Tel Aviv. Are you eyeing any other international cities?

Yeah. We just launched Brussels. We’re gonna be expanding throughout Europe and then next week we’ll have some more exciting announcements about some other international markets.

Did you ever expect this year to be as busy as it has been in terms of this business? Did you expect this to be as popular and as polarizing as it’s turned out to be?

I certainly didn’t expect it to be as polarizing. I think when I first thought about doing the business, I really felt like we could get people out of cars and using electric scooters. I didn’t think we would be able to do 10 million rides. By comparison, if you go back and look at... I think Lyft released an infographic and blog post about on their 15-month anniversary, and they did a million rides in that first 15 months. And to do 10 million rides in 100 cities has been very exciting to see. It doesn’t mean we don’t have a lot of work ahead, and we wanna continue to work with cities to see how do we make it less polarizing, how do we fit in, how do we get dedicated parking so that people don’t complain about the Birds being parked where they shouldn’t be. I think we’re... we’d like the team to work on that so we’ve gotten less polarizing... I know when the car was first introduced and everybody got around on horses, the car had a similar reaction as commuters now to scooters. I think if we can break this car addiction we have, I think it’s ultimately that we will make a road there.

C++ Bank Account Error Fix, full code. I am using Dev-C++ to Compile and Execute.

The project is below, I have supplied the code and I'm getting an error in SavingsAccount.h file.

17   5   C:\Users\adam.brunell\Documents\Classes\C++\Week4\SavingsAccount.h   [Error] 'SavingsAccount::SavingsAccount(std::string, double, double)' is protected

A.Assume

i.SavingsAccount: Assume an Interest Rate of 0.03

ii.HighInterestSavings: Assume an Interest Rate of 0.05, Minimum Balance = $2500

iii.NoServiceChargeChecking: Assume an Interest Rate = 0.02, Minimum of Balance = $1000

iv.ServiceChargeChecking – Assume account service charge = $10, Maximum number of checks = 5, Service Charge if customer exceeds the maximum number of checks = $5.

v.NoServicechargeChecking: Assume an interest rate = 0.02, Minimum Balance = $1000

vi.HighInterestChecking: Assume an interest rate = 0.05, Minimum Balance = $5000

vii.CertificateOfDepsit: Assume an interest rate = 0.05, Initial Number of Maturity Months = 6

    

B.Capitalize the first letter of the derived class names.

C.Use the following driver to validate your program:

#include

#include

#include

#include "bankAccount.h"

#include "SavingsAccount.h"

#include "HighInterestSavings.h"

#include "NoServiceChargeChecking.h"

#include "ServiceChargeChecking.h"

#include "HighInterestChecking.h"

#include "CertificateOfDeposit.h"

#include "checkingAccount.h"

using namespace std;

int main()

{

    vector accountsList;

       //SavingsAccount( Name, Account number, Balance ) - Assume an interest rate = 0.03

    accountsList.push_back(new SavingsAccount("Bill", 10200, 2500));

       //HighInterestSavings(Name, Account Number, Balance) -- Assume an interest rate = 0.05, Minimum balance = $2500

    accountsList.push_back(new HighInterestSavings("Susan", 10210, 2000));

       //NoServiceChargeChecking(Name, Account Number, Balance) -- Assume an interest rate = 0.02, Minimum balance = $1000

    accountsList.push_back(new NoServiceChargeChecking("John", 20100,

                                                    3500));

       //ServiceChargeChecking(Name, Account Number, Balance) -- Assume account service charge = $10, Maximum number of checks = 5, Service Charee Excess Number of Checks = $5

    accountsList.push_back(new ServiceChargeChecking("Ravi", 30100, 1800));

       //HighIntererestChecking(Name, Account Number, Balance) - Assume an inerest rate = 0.05, Minimum balance = $5000

    accountsList.push_back(new HighInterestChecking("Sheila", 20200, 6000));

       //Certificate(name, Account Number, Balance, Interest Rate, Number of Months) - Assume an initial interest rate = 0.05, Initial Number of Maturity Months = 6

    accountsList.push_back(new CertificateOfDeposit("Hamid", 51001, 18000,

                                                0.075, 18));

    cout << "January:\n-------------" << endl;

    for (int i = 0; i < accountsList.size(); i++)

    {

        accountsList[i]->createMonthlyStatement();

        accountsList[i]->print();

        cout << endl;

    }

    cout << "\nFebruary:\n-------------" << endl;

    for (int i = 0; i < accountsList.size(); i++)

    {

        accountsList[i]->createMonthlyStatement();

        accountsList[i]->print();

        cout << endl;

    }

    for (int i = 0; i < accountsList.size(); i++)

    {

         accountsList[i]->withdraw(500);

    }

    cout << "\nMarch:\n-------------" << endl;

    for (int i = 0; i < accountsList.size(); i++)

    {

        accountsList[i]->createMonthlyStatement();

        accountsList[i]->print();

        cout << endl;

    }

    System(“pause”);

    return 0;

}

The Expected Output is:

January:

-------------

Savings account: Bill    ACCT# 10200    Balance: $2575.00

High Interest Savings: Susan     ACCT# 10210    Balance: $2100.00

No Service Charge Check. John    ACCT# 20100    Balance: $3500.00

Service Charge Checking: Ravi    ACCT# 30100    Balance: $1790.00

Higher Interest Checking: Sheila         ACCT# 20200    Balance: $6300.00

Certificate of Deposit: Hamid    ACCT# 51001    Balance: $19350.00

February:

-------------

Savings account: Bill    ACCT# 10200    Balance: $2652.25

High Interest Savings: Susan     ACCT# 10210    Balance: $2205.00

No Service Charge Check. John    ACCT# 20100    Balance: $3500.00

Service Charge Checking: Ravi    ACCT# 30100    Balance: $1780.00

Higher Interest Checking: Sheila         ACCT# 20200    Balance: $6615.00

Certificate of Deposit: Hamid    ACCT# 51001    Balance: $20801.25

March:

-------------

Savings account: Bill    ACCT# 10200    Balance: $2216.82

High Interest Savings: Susan     ACCT# 10210    Balance: $2315.25

No Service Charge Check. John    ACCT# 20100    Balance: $3000.00

Service Charge Checking: Ravi    ACCT# 30100    Balance: $1270.00

Higher Interest Checking: Sheila         ACCT# 20200    Balance: $6420.75

Certificate of Deposit: Hamid    ACCT# 51001    Balance: $22361.34

Press any key to continue . . .

//testdriver.cpp

#include
#include
#include

#include "bankAccount.h"
#include "SavingsAccount.h"
#include "HighInterestSavings.h"
#include "NoServiceChargeChecking.h"
#include "ServiceChargeChecking.h"
#include "HighInterestChecking.h"
#include "CertificateOfDeposit.h"
#include "checkingAccount.h"

using namespace std;
  
int main()
{
vector accountsList;

   //SavingsAccount( Name, Account number, Balance ) - Assume an interest rate = 0.03
accountsList.push_back(new SavingsAccount("Bill", 10200, 2500));

   //HighInterestSavings(Name, Account Number, Balance) -- Assume an interest rate = 0.05, Minimum balance = $2500
accountsList.push_back(new HighInterestSavings("Susan", 10210, 2000));

   //NoServiceChargeChecking(Name, Account Number, Balance) -- Assume an interest rate = 0.02, Minimum balance = $1000
accountsList.push_back(new NoServiceChargeChecking("John", 20100,
3500));

   //ServiceChargeChecking(Name, Account Number, Balance) -- Assume account service charge = $10, Maximum number of checks = 5, Service Charee Excess Number of Checks = $5
accountsList.push_back(new ServiceChargeChecking("Ravi", 30100, 1800));

   //HighIntererestChecking(Name, Account Number, Balance) - Assume an inerest rate = 0.05, Minimum balance = $5000
accountsList.push_back(new HighInterestChecking("Sheila", 20200, 6000));

   //Certificate(name, Account Number, Balance, Interest Rate, Number of Months) - Assume an initial interest rate = 0.05, Initial Number of Maturity Months = 6
accountsList.push_back(new CertificateOfDeposit("Hamid", 51001, 18000,
0.075, 18));

cout << "January:\n-------------" << endl;
for (int i = 0; i < accountsList.size(); i++)
{
accountsList[i]->createMonthlyStatement();
accountsList[i]->print();
cout << endl;
}

cout << "\nFebruary:\n-------------" << endl;
for (int i = 0; i < accountsList.size(); i++)
{
accountsList[i]->createMonthlyStatement();
accountsList[i]->print();
cout << endl;
}

for (int i = 0; i < accountsList.size(); i++)
{
accountsList[i]->withdraw(500);
}

cout << "\nMarch:\n-------------" << endl;
for (int i = 0; i < accountsList.size(); i++)
{
accountsList[i]->createMonthlyStatement();
accountsList[i]->print();
cout << endl;
}
System("pause");
return 0;
}

bankAccount.h

#ifndef BANKACCOUNT_H
#define BANKACCOUNT_H

#include

using namespace std;

class bankAccount {
public:
bankAccount(string name, double initialBalance);
string getName();
unsigned int getAccountNumber();
double getBalance();
double getInterestRate();
string getStatementString();
void deposit(double amount);
void deposit(double amount, string statement);
void withdraw(double amount);
void withdraw(double amount, string statement);
virtual void printStatement() = 0;
protected:
void addStatementLine(string statement, double amount);
private:
string name;
unsigned int accountNumber;
double balance;
static unsigned int nextAccountNumber;
string statementString;
};

#endif /* BANKACCOUNT_H */

//bankAccount.cpp

#include "bankAccount.h"
#include
#include
#include

using namespace std;

unsigned int BankAccount::nextAccountNumber = 1;

BankAccount::BankAccount(string name, double initialBalance)
{
stringstream output;

this->name = name;
balance = initialBalance;
accountNumber = nextAccountNumber++;
output << setw(60) << left << "Transaction" << setw(10) << "Amount" << " " << "Balance" << endl;
statementString = output.str();
addStatementLine("Initial Deposit", initialBalance);
}

string BankAccount::getName()
{
return name;
}

unsigned int BankAccount::getAccountNumber()
{
return accountNumber;
}

double BankAccount::getBalance()
{
return balance;
}

void BankAccount::addStatementLine(string statement, double amount)
{
stringstream output;
  
output << setw(60) << left << statement << setw(10) << amount << " " << getBalance() << endl;
//.append(statement);
statementString.append(output.str());
}

void BankAccount::deposit(double amount)
{
deposit(amount, "Deposit");
}

void BankAccount::deposit(double amount, string statement)
{
balance += amount;
addStatementLine(statement, amount);
}

void BankAccount::withdraw(double amount)
{
withdraw(amount, "Withdrawal");
}

void BankAccount::withdraw(double amount, string statement)
{
if (balance >= amount)
{
balance -= amount;
addStatementLine(statement, amount);
}
else
{
addStatementLine(statement.append(" Overdraft"), amount);
}
}

string BankAccount::getStatementString()
{
return statementString;
}

//CertificateOfDeposit.h

#ifndef CERTIFICATEOFDEPOSIT_H
#define CERTIFICATEOFDEPOSIT_H

#include "bankAccount.h"
#include

using namespace std;

class CertificateOfDeposit : public bankAccount{
public:
CertificateOfDeposit(string name, double initialBalance, int maturityMonths);
CertificateOfDeposit(string name, double initialBalance);
int getMaturityMonths();
double getInterestRate();
int getCurrentCDMonth();
int getWithdrawalPenaltyMonths();
void withdraw();
void incrementMonth();
void printStatement();
private:
int maturityMonths;
double interestRate;
int currentCDMonth;
int withdrawalPenaltyMonths;
void withdraw(double amount);
void withdraw(double amount, string statement);
void deposit(double amount);
};

#endif /* CERTIFICATEOFDEPOSIT_H */

//CertificateOfDeposit.cpp

#include "CertificateOfDeposit.h"

CertificateOfDeposit::CertificateOfDeposit(string name, double initialBalance, int maturityMonths) : bankAccount(name, initialBalance)
{
this->maturityMonths = maturityMonths;
interestRate = 0.05;
currentCDMonth = 0;
withdrawalPenaltyMonths = 3;
}

CertificateOfDeposit::CertificateOfDeposit(string name, double initialBalance) : bankAccount(name, initialBalance)
{
maturityMonths = 6;
interestRate = 0.05;
currentCDMonth = 0;
withdrawalPenaltyMonths = 3;
}

int CertificateOfDeposit::getCurrentCDMonth()
{
return currentCDMonth;
}

double CertificateOfDeposit::getInterestRate()
{
return interestRate;
}

int CertificateOfDeposit::getWithdrawalPenaltyMonths()
{
return withdrawalPenaltyMonths;
}

int CertificateOfDeposit::getMaturityMonths()
{
return maturityMonths;
}

void CertificateOfDeposit::withdraw()
{
if (getCurrentCDMonth() < getMaturityMonths())
bankAccount::withdraw(getBalance()*getInterestRate()*getWithdrawalPenaltyMonths(), "Early Withdrawal Penalty");
bankAccount::withdraw(getBalance(), "Close Account");
}

void CertificateOfDeposit::incrementMonth()
{
bankAccount::deposit(getBalance()*getInterestRate(), "Monthly Interest");
if (getCurrentCDMonth() < getMaturityMonths())
{
currentCDMonth++;
}
else
withdraw();
}

void CertificateOfDeposit::printStatement()
{
cout << "Certificate of Deposit Statement" << endl;
cout << "Name: " << getName() << endl;
cout << "Account Number: " << getAccountNumber() << endl;
cout << "Interest Rate: " << getInterestRate() * 100 << "%" << endl;
cout << "Maturity Month: " << getMaturityMonths() << ", Current Month: " << getCurrentCDMonth() << endl;
cout << "Early Withdrawal Penalty: " << getWithdrawalPenaltyMonths() << " (months)" << endl << endl;
cout << getStatementString() << endl;
cout << "Final Balance: " << getBalance() << endl << endl;
}

//HighInterestChecking.h

#ifndef HIGHINTERESTCHECKING_H
#define HIGHINTERESTCHECKING_H

#include "NoServiceChargeChecking.h"

#include

using namespace std;

class HighInterestChecking : public NoServiceChargeChecking {
public:
HighInterestChecking(string name, double initialBalance);
void printStatement();
private:
};

#endif /* HIGHINTERESTCHECKING_H */

//HighInterestChecking.cpp

#include "HighInterestChecking.h"

HighInterestChecking::HighInterestChecking(string name, double initialBalance) : NoServiceChargeChecking(name, initialBalance, 5000, 0.05)
{

}

void HighInterestChecking::printStatement()
{
bankAccount::deposit(getBalance() * getInterestRate(), "Interest");
cout << "High Interest Checking Statement" << endl;
cout << "Name: " << getName() << endl;
cout << "Account Number: " << getAccountNumber() << endl;
cout << "Interest Rate: " << getInterestRate() * 100 << "%" << endl;
cout << "Minimum Balance: " << getMinimumBalance() << endl << endl;
cout << getStatementString() << endl;
cout << "Final Balance: " << getBalance() << endl << endl;
}

//HighInterestSavings.h

#ifndef HIGHINTERESTSAVINGS_H
#define HIGHINTERESTSAVINGS_H

#include "SavingsAccount.h"
#include

using namespace std;

class HighInterestSavings : public SavingsAccount{
public:
HighInterestSavings(string name, double initialBalance);
int getMinimumBalance();
void printStatement();
void withdraw(double amount, string statement);
void withdraw(double amount);
private:
int minimumBalance;
};

#endif /* HIGHINTERESTSAVINGS_H */

//HighInterestSavings.cpp

#include "HighInterestSavings.h"

HighInterestSavings::HighInterestSavings(string name, double initialBalance) : SavingsAccount(name, initialBalance, 0.05)
{
minimumBalance = 2500;
}

int HighInterestSavings::getMinimumBalance()
{
return minimumBalance;
}

void HighInterestSavings::withdraw(double amount, string statement)
{
if (amount + getMinimumBalance() <= getBalance())
{
bankAccount::withdraw(amount, statement);
}
else
{
addStatementLine(statement.append(" Overdraft. Below Minimum Balance."), amount);
}
}

void HighInterestSavings::withdraw(double amount)
{
withdraw(amount, "Withdrawal");
}

void HighInterestSavings::printStatement()
{
bankAccount::deposit(getBalance() * getInterestRate(), "Interest");
cout << "High Interest Savings Account Statement" << endl;
cout << "Name: " << getName() << endl;
cout << "Account Number: " << getAccountNumber() << endl;
cout << "Minimum Balance: " << getMinimumBalance() << endl;
cout << "Interest Rate: " << getInterestRate() * 100 << "%" << endl << endl;
cout << getStatementString() << endl;
cout << "Final Balance: " << getBalance() << endl << endl;
}

//NoServiceChargeChecking.h

#ifndef NOSERVICECHARGECHECKING_H
#define NOSERVICECHARGECHECKING_H

#include "checkingAccount.h"

#include

using namespace std;

class NoServiceChargeChecking : public CheckingAccount {
public:
NoServiceChargeChecking(string name, double initialBalance);
void writeCheck(double amount, int checkNumber);
void printStatement();
void withdraw(double amount, string statement);
void withdraw(double amount);
double getInterestRate();
int getMinimumBalance();
protected:
NoServiceChargeChecking(string name, double initialBalance, int minBalance, double interestRate);
private:
double interestRate;
int minimumBalance;
};

#endif /* NOSERVICECHARGECHECKING_H */

//NoServiceChargeChecking.cpp

#include "NoServiceChargeChecking.h"
#include
#include

NoServiceChargeChecking::NoServiceChargeChecking(string name, double initialBalance) : checkingAccount(name, initialBalance)
{
minimumBalance = 1000;
this->interestRate = 0.02;
}

NoServiceChargeChecking::NoServiceChargeChecking(string name, double initialBalance, int minBalance, double interestRate) : checkingAccount(name, initialBalance)
{
minimumBalance = minBalance;
this->interestRate = interestRate;
}

void NoServiceChargeChecking::writeCheck(double amount, int checkNumber)
{
stringstream output;
output << "Check #" << checkNumber;
withdraw(amount, output.str());
}

void NoServiceChargeChecking::withdraw(double amount, string statement)
{
if (amount + getMinimumBalance() <= getBalance())
{
bankAccount::withdraw(amount, statement);
}
else
{
addStatementLine(statement.append(" Overdraft. Below Minimum Balance."), amount);
}
}

void NoServiceChargeChecking::withdraw(double amount)
{
withdraw(amount, "Withdrawal");
}

void NoServiceChargeChecking::printStatement()
{
bankAccount::deposit(getBalance() * getInterestRate(), "Interest");
cout << "No Service Charge Checking Statement" << endl;
cout << "Name: " << getName() << endl;
cout << "Account Number: " << getAccountNumber() << endl;
cout << "Interest Rate: " << getInterestRate() * 100 << "%" << endl;
cout << "Minimum Balance: " << getMinimumBalance() << endl << endl;
cout << getStatementString() << endl;
cout << "Final Balance: " << getBalance() << endl << endl;
}

int NoServiceChargeChecking::getMinimumBalance()
{
return minimumBalance;
}

double NoServiceChargeChecking::getInterestRate()
{
return interestRate;
}

//checkingAccount.h

#ifndef CHECKINGACCOUNT_H
#define CHECKINGACCOUNT_H

#include "bankAccount.h"

class CheckingAccount : public bankAccount {
public:
CheckingAccount(string name, double initialBalance);
virtual void writeCheck(double amount, int checkNumber) = 0;
private:

};

#endif /* CHECKINGACCOUNT_H */

//checkingAccount.cpp

#include "checkingAccount.h"

CheckingAccount::CheckingAccount(string name, double initialBalance) : bankAccount(name, initialBalance)
{

}

//SavingsAccount.h

#ifndef SAVINGSACCOUNT_H
#define SAVINGSACCOUNT_H

#include "bankAccount.h"
#include
#include

using namespace std;

class SavingsAccount : public bankAccount
{
public:
SavingsAccount(string name, double initialBalance);
double getInterestRate();
void printStatement();
protected:
SavingsAccount(string name, double initialBalance, double interestRate);
private:
double interestRate;
};

#endif /* SAVINGSACCOUNT_H */

//SavingsAccount.cpp

#include "SavingsAccount.h"

SavingsAccount::SavingsAccount(string name, double initialBalance) : bankAccount(name, initialBalance)
{
interestRate = 0.03;
}

SavingsAccount::SavingsAccount(string name, double initialBalance, double interestRate) : bankAccount(name, initialBalance)
{
this->interestRate = interestRate;
}

double SavingsAccount::getInterestRate()
{
return interestRate;
}

void SavingsAccount::printStatement()
{
bankAccount::deposit(getBalance() * getInterestRate(), "Interest");
cout << "Savings Account Statement" << endl;
cout << "Name: " << getName() << endl;
cout << "Account Number: " << getAccountNumber() << endl;
cout << "Interest Rate: " << getInterestRate() * 100 << "%" << endl << endl;
cout << getStatementString() << endl;
cout << "Final Balance: " << getBalance() << endl << endl;
}

//ServiceChargeChecking.h

#ifndef SERVICECHARGECHECKING_H
#define SERVICECHARGECHECKING_H

#include "checkingAccount.h"
#include

using namespace std;

class ServiceChargeChecking : public CheckingAccount {
public:
ServiceChargeChecking(string name, double initialBalance);
void writeCheck(double amount, int checkNumber);
void printStatement();
private:
int checksWritten;
static const int CHECK_LIMIT = 5;
static const int SERVICE_CHARGE = 10;
};

#endif /* SERVICECHARGECHECKING_H */

//ServiceChargeChecking.cpp

#include "ServiceChargeChecking.h"
#include
#include

using namespace std;

ServiceChargeChecking::ServiceChargeChecking(string name, double initialBalance) : CheckingAccount(name, initialBalance)
{
bankAccount::withdraw(SERVICE_CHARGE, "Service Charge");
checksWritten = 0;
}

void ServiceChargeChecking::writeCheck(double amount, int checkNumber)
{
stringstream output;
if (++checksWritten <= CHECK_LIMIT)
{
output << "Check #" << checkNumber;
bankAccount::withdraw(amount, output.str());

}
else
{
output << "Maximum Limit of Checks Reached. Check # " << checkNumber << " bounced";
addStatementLine(output.str(), amount);
}
}

void ServiceChargeChecking::printStatement()
{
cout << "Service Charge Checking Statement" << endl;
cout << "Name: " << getName() << endl;
cout << "Account Number: " << getAccountNumber() << endl << endl;
cout << getStatementString() << endl;
cout << "Final Balance: " << getBalance() << endl << endl;
}

Receiving Error in SavingsAccount.h

17   5   C:\Users\adam.brunell\Documents\Classes\C++\Week4\SavingsAccount.h   [Error] 'SavingsAccount::SavingsAccount(std::string, double, double)' is protected

A Positive Revolution in Change: Appreciative Inquiry
David L. Cooperrider Case Western Reserve University and Diana Whitney The Taos Institute

After reading the journal article assigned for the week, write and post a 1-pg review (350 words) include a link that was of interest

Appreciative Inquiry (AI) begins an adventure. The urge and call to adventure has been sounded by many people and many organizations, and it will take many more to fully explore the vast vistas that are now appearing on the horizon. But even in the first steps, what is being sensed is an exciting direction in our language and theories of change—an invitation, as some have declared, to “a positive revolution”.
The words just quoted are strong and, unfortunately, they are not ours. But the more we replay, for example, the high-wire moments of our several years of work at GTE, the more we find ourselves asking the very same kinds of questions the people of GTE asked their senior executives: “Are you really ready for the momentum that is being generated? This is igniting a grassroots movement…it is creating an organization in full voice, a center stage for the positive revolutionaries!”
Tom White, President of what was then called GTE Telops (making up 80% of GTE’s 67,000 employees) replies back, with no hesitation: “Yes, and what I see in this meeting are zealots, people with a mission and passion for creating the new GTE. Count me in, I’m your number one recruit, number one zealot”. People cheer.
Enthusiasms continue, and they echo over subsequent months as lots of hard work pays off. Fourteen months later --based on significant and measurable changes in stock prices, morale survey measures, quality/customer relations, union-management relations, etc.-- GTE’s whole system change initiative is given professional recognition by the American Society for Training and Development. It wins the 1997 ASTD award for best organization change program in the country. Appreciative inquiry is cited as the “backbone”.
How Did They Do It?
This paper provides a broad update and overview of AI. The GTE story mentioned at the outset is, in many ways, just beginning but it is scarcely alone. In the ten years since the
1with its emphasis on metaphor and narrative, relational ways of knowing, on language, and on its potential as a source of generative theory (Gergen, 1994); as the most important advance in action research in the past decade (Bushe, 1995); as offspring and “heir” to Maslow’s vision of a positive social science (Chin, 1998; Curran, 1991); as a powerful second generation OD practice (French and Bell, 1995; Porras, 1991; Mirvis, 1988/89); as model of a much needed participatory science, a “new yoga of inquiry” (Harman, 1990); as a radically affirmative approach to change which completely lets go of problem-based management and in so doing vitally transforms strategic planning, survey methods, culture change, merger integration methods, approaches to TQM, measurement systems, sociotechnical systems, etc. (White, 1996); and lastly, as OD’s philosopher’s stone (Head & Sorenson, et. al 1996). Indeed it is difficult to sum up the whole of AI—as a philosophy of knowing, a normative stance, a methodology for managing change, and as an approach to leadership and human development. However, for purposes here, it might be most useful to begin with a practice-oriented definition of AI, one that is more descriptive than theoretical and one that provides a compass for the examples to follow:
Appreciative Inquiry is about the co-evolutionary search for the best in people, their organizations, and the relevant world around them. In its broadest focus, it involves systematic discovery of what gives “life” to a living system when it is most alive, most effective, and most constructively capable in economic, ecological, and human terms. AI involves, in a central way, the art and practice of asking questions that strengthen a system’s capacity to apprehend, anticipate, and heighten positive potential. It centrally involves the mobilization of inquiry through the crafting of the “unconditional positive question” often-involving hundreds or sometimes thousands of people. In AI, the arduous task of intervention gives way to the speed of imagination and innovation; instead of negation, criticism, and spiraling diagnosis, there is discovery, dream, and design. AI seeks, fundamentally, to build a constructive union between a whole people and the massive entirety of what people talk about as past and present capacities: achievements, assets, unexplored potentials, innovations, strengths, elevated thoughts, opportunities, benchmarks, high point moments, lived values, traditions, strategic competencies, stories, expressions of wisdom, insights into the deeper corporate spirit or soul, and visions of valued and possible futures. Taking all of these together as a gestalt, AI deliberately, in everything it does, seeks to work from accounts of this “positive change core”—and it assumes that every living system has many untapped and rich and inspiring accounts of the positive. Link the energy of this core directly to any change agenda and changes never thought possible are suddenly and democratically mobilized.
The positive core of organizational life, we submit, is one of the greatest and largely unrecognized resources in the field of change management today. As said earlier, we are clearly in our infancy when it comes to tools for working with it, talking about it, and designing our systems in synergistic alignment with it. But one thing is evident and clear as we reflect on the most important things we have learned with AI: human systems grow in the direction of what they persistently ask questions about and this propensity is strongest and most sustainable when the means and ends of inquiry are positively
3correlated. The single most prolific thing a group can do if its aims are to liberate the human spirit and consciously construct a better future is to make the positive change core the common and explicit property of all.
Let’s Illustrate:
The Appreciative Inquiry “4-D” Cycle
(insert 4-D cycle here—see page 28)
You have just received the following unsettling phone call:
My name is Rita Simmel; I am President of a New York consulting partnership. Our firm specializes in dealing with difficult conflict in organizations: labor-management issues, gender conflict, issues of diversity. We have been retained by a fortune 500 corporation for the past several years. The contract is around sexual harassment, an issue that is deeper and more severe than virtually any corporation realizes. The issues are about power, the glass ceiling, and many things. As you know, millions of dollars are being expended on the issues. Our firm has specialized in this area for some years and now I’m beginning to ask myself the Hippocratic oath. Are we really helping? Here is the bottom line with our client. We have been working on the issues for two years, and by every measure-- numbers of complaints, lawsuits, evaluations from sexual harassment training programs, word of mouth—the problem continues in its growth. Furthermore people are now voting with their feet. They are not coming to the workshops. Those that do seem to leave with doubts: our post-workshop interviews show people feel less able to communicate with those of the opposite gender, they report feeling more distance and less trust, and the glass ceiling remains. So here is my question. How would you take an appreciative inquiry approach to sexual harassment?
This was a tough one. We requested time to think about it, asking if we could talk again in a day or two. We can do the same for you right now (give you a bit of time) as we invite you to think about things you might seriously propose in the callback.
So before going further with the story lets pause and look at a typical flow for AI, a cycle that can be as rapid and informal as in a conversation with a friend or colleague, or as formal as an organization-wide analysis involving every stakeholder, including customers, suppliers, partners, and the like.
4Figure one shows (page 28), on the outside, four key stages in AI: Discovery—mobilizing a whole system inquiry into the positive change core; Dream—creating a clear results-oriented vision in relation to discovered potential and in relation to questions of higher purpose, i.e., “What is the world calling us to become?” Design—creating possibility propositions of the ideal organization, an organization design which people feel is capable of magnifying or eclipsing the positive core and realizing the articulated new dream; and Destiny—strengthening the affirmative capability of the whole system enabling it to build hope and momentum around a deep purpose and creating processes for learning, adjustment, and improvisation, like a jazz group over time (see the excellent article by Barrett, 1998).
At the core of the cycle, is Affirmative Topic Choice. It is the most important part of any AI. If, in fact, knowledge and organizational destiny are as intricately interwoven as we think, then isn’t it possible that the seeds of change are implicit in the very first questions we ask? AI theory says yes and takes the idea quite seriously: it says that the way we know people, groups, and organizations is fateful. It further asserts the time is overdue to recognize that symbols and conversations, emerging from all our analytic modes, are among the world’s paramount resources.
Topic Choice
So back to our phone call. If inquiry and change are a simultaneous moment; if the questions we ask set the stage for what we “find”; and if what we “discover” (the data) creates the material out of which the future is conceived, conversed about, and constructed—then how shall we proceed with an appreciative approach to sexual harassment? Here is an excerpt from the response:
D.C.: Hello Rita. Before we get into our proposal we have an important question. What is it that you want to learn about and achieve with this whole intervention, and by when?
Rita: We want to dramatically cut the incidence of sexual harassment. We want to solve this huge problem, or at least make a significant dent in it.
D.C.: O.K. Rita… But is that all?
Rita: You mean what do I really want to see? (Long pauses…then she blurts out). What we really want to see is the development of the new century organization—a model of high quality cross-gender relationships in the workplace!
DC: Great topic. What would happen if we put an invitation out in the company newsletter, asking people in pairs to step forward to nominate themselves as candidates to study and share their stories of what it means to create and sustain high quality cross-gender relationships in the workplace? It might be interesting to do a large conference, and really put a magnifying lens to the stages of development, contextual factors, toughquestions of adult attraction, breakthroughs in terms of power relations, and so on. What do you think?
To move fastforward, a relatively small pilot project was created which surpassed everyone’s expectations. Hundreds, not dozens, of pairs nominated themselves. That was surprise number one. Then other organizations got word of the pilot and a truly major effort, moving through the 4-D framework, was conceptualized by another consulting firm, Marge Schiller and Associates. The pioneering organization she worked with, which now can happily be named, was the Avon Corporation in Mexico. Again there were similar issues—including the glass ceiling at senior management levels—but again there was interest in framing the whole thing in terms of an inquiry.
To begin, a hundred people were trained in the basics of AI interviewing. They in turn went out into every part of the organization and over the next several weeks completed many more interviews, about 300 in all. At the end of each interview, the interviewers asked the person interviewed if they too could help do some interviewing. A waterfall was experienced. Stories poured in—stories of achievement, trust building, authentic joint leadership, practices of effective conflict management, ways of dealing with sex stereotypes, stages of development and methods of career advancement.
The second two “Ds”-- articulating the new century dream and creating designs for an organization that maximally supported the development of high quality cross-gender relationships-- came next. These were combined in a large group format much like a future search. Using stories from the interviews as a basis for imagining the future, expansive and practical propositions were created, for example, “Every task force or committee at Avon, whenever possible, is co-chaired by a cross-gender pairing”. The significance of even this simple proposal proved to be big. Likewise, propositions in other areas of organization design were also carefully crafted. Soon, literally everything in the organization was opened to discussion: corporate structures, systems, work processes, communications, career opportunities, governance, compensation practices, leadership patterns, learning opportunities, customer connections, and more.
In the end, some 30 visionary propositions were created. Subsequent changes in system structures and behaviors were reported to be dramatic (Schiller, 1998). As it turns out, the story, like GTE’s, gets even better. Avon Mexico was just recently singled out, several years later, by the Catalyst organization. They were given the 1997 Catalyst Award for best place in the country for women to work.
It is a classic example of the power of topic choice. Affirmative topics, always homegrown, can be on anything the people of an organization feel gives life to the system. As a rule of thumb most projects have between 3-5 topics. Words like empowerment, innovation, sense of ownership, commitment, integrity, ecological consciousness, and pride are often articulated as worthy of study. Topics can be on anything an organization feels to be strategically and humanly important. AI topics can be on technical processes, financial efficiencies, human issues, market opportunities, social responsibilities, or anything else. In each case of topic choice, the same premise isfirmly posited: human systems grow in the direction of their deepest and most frequent inquiries.
The Phase of Discovery
The inquiry we are talking about is anything but wishful. If we were to underline one of the two words-- appreciative or inquiry—our pen would immediately move to the latter. In Vital Speeches of the Day (1996), Tom White, President of what was then called GTE Telephone Operations, puts his interpretation of AI in executive language, months before GTE’s change effort was recognized by ASTD:
Appreciative Inquiry can get you much better results than seeking out and solving problems. That’s an interesting concept for me—and I imagine most of you—because telephone companies are among the best problem solvers in the world. We troubleshoot everything. We concentrate enormous resources on correcting problems that have relatively minor impact on our overall service and performance (and which)…when used continually and over a long period of time, this approach can lead to a negative culture. If you combine a negative culture with all the challenges we face today, it could be easy to convince ourselves that we have too many problem to overcome—to slip into a paralyzing sense of hopelessness….Don’t get me wrong. I’m not advocating mindless happy talk. Appreciative Inquiry is a complex science designed to make things better. We can’t ignore problems—we just need to approach them from the other side”.
What Tom White calls “the other side”, we are describing as the positive change core. AI, most simply, is a tool for connecting to the transformational power of this core. Willis Harman (1990) talks about AI as a participatory science, a yoga of inquiry, where the term yoga comes from the Sanskrit root yug which means link or bond. In that sense if we remember something or someone, it can be said that there is a form of yoga happening. AI helps make the memory link by concentrating systematic inquiry into all aspects of the appreciable world, into an organization’s infinite and surplus capacity—past, present and future. By concentrating on the atom, human beings have unleashed its power. AI says we can do the same in every living system once we open this ever emergent positive core—every strength, innovation, achievement, resource, living value, imaginative story, benchmark, hope, positive tradition, passion, high point experience, internal genius, dream-- to systematic inquiry.
The core task of the discovery phase is to discover and disclose positive capacity, at least until an organization’s understanding of this “surplus” is exhausted (which has never happened once in our experience). AI provides a practical way to ignite this “spirit of inquiry” on an organization-wide basis. Consider this example:
At Leadshare in Canada, AI was used to help this big eight accounting firm make the tough transition in the executive succession of a “legendary” managing partner. The managing partner seized the moment as an incredible leadership development opportunity for all 400 partners. Everyone was interviewed with AI. An extensive interview protocol was designed (it ended up taking about 2 hours per interview)focusing on affirmative topics like innovation, equality, partnership, speed to market, and valuing diversity (in Canada between francophone and anglophone). And not one outside consultant did the interviews. All were done internally, by 30 junior partners as part of a leadership development program. A powerful and instant intergenerational connection was made, and organizational history came alive in face-to-face stories. Instead of amnesia, or a problem-to-be-solved, people began to relate to their history in a whole new way. Like a good piece of poetry filled with endless interpretive meaning, people at Leadshare ascended into their history as a reservoir of positive possibility. At the next annual partners meeting, with over 400 people in the conference hall, the material was showcased and coupled to the future, as the strategic planning became one of the “best” the partners could ever remember (Rainey, 1996)
Perhaps it is obvious, but the process of doing the interviews is as important as the data collected. When managers ask us how many people should be interviewed or, who should do the interviews, we increasingly find ourselves saying “everyone”. It is not uncommon in AI work to talk about doing thousands of interviews. A hospital in Seattle recently did three thousand interviews in preparation for an organization-wide Appreciative Inquiry Summit (Whitney and Cooperrider, 1998). People themselves, not consultants, generate the system-wide organization analysis using questions like this: “ Obviously you have had ups and downs in your career here at XYZ. But for the moment I would like you to focus on a high point, a time in your work experience here where you felt most alive, most engaged, or most successful. Can you tell me the story? How did it unfold? What was it organizationally that made it stand out? What was it about you that made it a high point? What key insights do you have for all of us at XYZ?”
In Chicago, in one of the most exciting AI’s we have seen, there is talk of over a million interviews. And guess whose interviews have produced the best data—the most inspiring, vision-generating stories? It is the children. It is happening through inter-generational inquiry where the elders are valued and share hopes in settings with the young. One of our favorite papers is about the Imagine Chicago story and the leadership of Bliss Browne. It is titled “The Child as the Agent of Inquiry” (Cooperrider, 1996). It argues that the spirit of inquiry is something all of us in change work need to reclaim and aspire to: openness, availability, epistemological humility, the ability to admire, to be surprised, to be inspired, to inquire into our valued and possible worlds.
What distinguishes AI, especially in this phase of work, is that every carefully crafted question is positive. Knowing and changing are a simultaneous moment. The thrill of discovery becomes the thrill of creating. As people throughout a system connect in serious study into qualities, examples, and analysis of the positive core --each appreciating and everyone being appreciated-- hope grows and community expands.
From Discovery to Dream
When an artist sits in front of a landscape the imagination is kindled not by searching for “what is wrong with this landscape”, but by a special ability to be inspired by those things of value worth valuing. Appreciation, it appears, draws our eye toward life, but stirs our feelings, sets in motion our curiosity, and provides inspiration to the envisioning
8mind. In his analysis of esthetics and the origins of creative images, Nietzsche once asked of the power of appreciation: “ Does it not praise? Does it not glorify? Does it not select? Does it not bring {that which is appreciated} to prominence?” (In Rader, 1973, p. 12). Then in the same passage he takes a next step, linking valuing (discovery) and imagination (dream). He elaborates: “ valuing is creating: hear it, ye creating ones! Valuation is itself the treasure and jewel of valued things”.
During the dream phase, the interview stories and insights get put to constructive use. As people are brought together to listen carefully to the innovations and moments of organizational “life”, sometimes in storytelling modes, sometimes in interpretive and analytic modes, a convergence zone is created where the future begins to be discerned in the form of visible patterns interwoven into the texture of the actual. The amplified interaction among innovators and innovations makes something important happen: very rapidly we start seeing outlines of the New World. Some organizations turn the data into a special commemorative report celebrating the successes and exceptional moment in the life of the organization (Liebler, 1997). Others have created a thematic analysis—careful to document rich stories and not succumb to “narrative thin” one line quotes (Ludema, 1996). In all cases the data onto the positive change core serves as an essential resource for the visioning stages of the appreciative inquiry 4-D model.
Before their strategic planning session in 1997, Nutrimental Foods of Brazil closed down the plant for a full day to bring all 700 employees together for a day of Discovery into the factors and forces that have given life to the system when it had been most effective, most alive, and most successful as a producer of high quality health foods. With cheers and good wishes a “smaller” group of 150 stakeholders—employees from all levels, suppliers, distributors, community leaders, financiers, and customers—then went into a four day strategy session to articulate a new and bold corporate dream. The stories from the day before were used just as an artist uses a palette of colors—before painting a picture the artist assembles the red paints, blue, green, yellow and so on. With these “materials” in hand people were asked to dream: “What is the world calling us to become? What are those things about us that no matter how much we change, we want to continue into our new and different future? Lets assume that tonight while we were all asleep a miracle occurred where Nutrimental became exactly as we would like it to be—all of its best qualities are magnified, extended, multiplied the way we would like to see…in fact we wake up and it is now 2005…as you come into Nutrimental today what do you see that is different, and how do you know?”After four days of appreciative analysis, planning, and articulation of three new strategic business directions, the organization launches into the future with focus, solidarity, and confidence. Six months later, record bottom line figures of millions of dollars are recorded—profits are up 300%. The co-CEOs Rodrigo Loures and Arthur Lemme Netto attribute the dramatic results to two things: bringing the whole system into the planning process, and realizing that organizations are in fact “centers of human relatedness”(Loures and Lemme Netto, 1998) which thrive when there is an appreciative eye—when people see the best in one another, when they can dialogue their dreams and ultimate concerns in affirming ways, and when they are connected in full voice to create not just new worlds but better worlds.
9Design
Once the strategic focus or dream is articulated (usually consisting of three things in our model-- a vision of a better world, a powerful purpose, and a compelling statement of strategic intent) attention turns to the creation of the ideal organization, the social architecture or actual design of the system in relation to the world of which it is part. What we have found is that the sequencing is crucial, moving first through in-depth work on Dream before Design, followed with back and forth iterations. In Zimbabwe we recently worked with a partner organization of Save the Children. It was fascinating to observe how easy it was to re-design the organization in terms of structures and systems once broad agreement was reached on a powerful Dream. The articulation of the image of the future was simple: “Every person in Zimbabwe shall have access to clean water within five years”. The critical design shift, demanded by the large dream, was to a new form of organization based on a network of alliances or partnerships, not bureaucracy’s self-sufficient hierarchy.
One aspect that differentiates Appreciative Inquiry from other visioning or planning methodologies is that images of the future emerge out of grounded examples from an organization’s positive past. Sometimes this “data” is complimented with benchmark studies of other organizations creating a “generative metaphor” for circumventing common resistances to change (Barrett and Cooperrider, 1990). In both cases, the good news stories are used to craft possibility propositions that bridge the best of “what is” with collective speculation or aspiration of “what might be”. In the working of the material people are invited to challenge the status quo as well as common assumptions underlying the design of the organization. People are encouraged to “wander beyond” the data with the essential question being: “What would our organization look like if it were designed in every way possible to maximize the qualities of the positive core and enable the accelerated realization of our dreams?”
When inspired by a great dream we have yet to find an organization that did not feel compelled to design something very new and very necessary. Here is an example of a possibility proposition, one of about twenty organization design visions that were created at DIA Corporation, a rapidly growing distributor of consumer products. Today this proposition is modus operandi at the corporation:
DIA has become a learning organization that fosters the cross fertilization of ideas, minimizes the building of empires, harnesses the synergy of group cooperation, and cultivates the pride of being a valued member of one outstanding corporation. DIA accelerates its learning through an annual strategic planning conference that involves all five hundred people in the firm as well as key partners and stakeholders. As a setting for “strategic learning”, teams present their benchmarking studies of the best five other organizations, deemed leaders in their class. Other teams present an annual appreciative analysis of DIA, and together these data-bases of success stories (internal and external) help set the stage for DIA’s strategic, future search planning.
Recently we have had the opportunity to team up with Dee Hock, one of the greatest visionary CEOs we have ever worked with. Dee was the founder of VISA, abreakthrough organization that has over 20,000 offices, and since 1970 has grown something like 10,000%; this year annual sales expected to pass $1 trillion. The whole Visa system, from Calcutta to Chicago, in over 200 countries is completely unmanageable from the perspective of using centralized, command-and-control design principles.
If General Motors once defined the shape of the old model, perhaps Dee’s “chaordic organization” –combining chaos and order in ways which interweave (like nature’s designs) infinite variety and self-organizing order—is a foreshadowing of an emerging prototype. What we have learned by working with Dee is how to move pragmatically and substantively from appreciative Discovery and Dream to truly post-bureaucratic Design that distributes power and liberates human energy in a way we have never seen. Most recently we have collaborated on a re-constitution of the United Way of America as well as an initiative to design something akin to a United Nations among the world’s great religions and spiritual traditions (it is called United Religions). In each case helping people agree on a set of design principles is crucial. That is “principles” as in “We hold these truths to be self evident: that all people are created equal…” Again, this is not a set of platitudes but a manifesto, what people believe in and care about in their gut.
Destiny
Of all the creatures of earth, said William James in 1902, only human beings can change their pattern. “Man alone is the architect of his destiny”.
In our early years of AI work we called the 4th “D” Delivery. We emphasized planning for continuous learning, adjustment, and improvisation in the service of shared ideals. It was a time for action planning, developing implementation strategies, and dealing with conventional challenges of sustainability. But the word delivery simply did not go far enough. It did not convey the sense of liberation we were seeing, like the well documented hotel case, where the system tranformed itself from a one-star to four-star hotel by using AI and literally putting a moratorium on all the traditional problem solving efforts that it had going (Barret and Cooperrider, 1990).
Executives like Jane Watkins (former Chair of the Board at NTL) and Jane Pratt (executive at the World Bank and now CEO of the Mountain Institute) argued that AI engenders a repatterning of our relationships not only with each other but also our relationship to reality itself. Reminiscent of Paulo Friere’s concept of pedagogy of the oppressed—where people move in their relationship to reality from “submergence” to “reflexive awareness” to “co-participation”—these leaders insisted that AI’s gift is at the paradigmatic level. AI is not so much about new knowledge but new knowing. Indeed people frequently talk, as they move through the pedagogy of life-giving Discovery, Dream, and Design, that something suddenly hits home: that interpretation matters—that the manner in which they/we read the world filters to the level of our imaginations, our relationships, and ultimately to the direction and meaning of our action. We create the organizational worlds in which we live.

What we discovered quite honestly was that momentum for change and long-term sustainability increased the more we abandoned “delivery” ideas of action planning, monitoring progress, and building implementation strategies. What was done instead, in several of the most exciting cases, was to focus only on giving AI away, to everyone, and then stepping back. The GTE story, still unfolding but already attracting national recognition, is suggestive. It is a story that says organizational change needs to look a lot more like an inspired movement than a neatly packaged or engineered product. Dan Young, the head of OD at GTE, and his colleagues Maureen Garrison and Jean Moore, call it “organizing for change from the grassroots to the frontline”. Call it the path of positive protest, or a strategy for positive subversion—whatever it is called it is virtually unstoppable once “it” is up and running. Its structure is called the Positive Change Network (PCN). One especially dramatic moment gives the sense:
The headline article in GTE Together described what was spreading as a grassroots movement to build the new GTE. Initiated as a pilot training to see what would happen if the tools and theories of appreciative inquiry were made available to frontline employees, things started taking off. All of a sudden, without any permission, frontline employees are launching interview studies into positive topics like innovation, inspired leadership, revolutionary customer responsiveness, labor-management partnerships, and “fun”. Fresh out of a training session on AI, one employee, for example, did 200 interviews into the positive core of a major call center. Who is going say “no” to a complementary request like—“would you help me out…I’m really trying to find out more about the best innovations developing in your area and I see you as someone who could really give me new insight into creating settings where innovation can happen… It is part of my leadership development. Do you have time for an interview…I would be glad to share my learning’s with you later!” Soon the topics are finding their way into meetings, corridor conversations, and senior planning sessions—in other words the questions, enthusiastically received, are changing corporate attention, language, agendas, and learnings. Many start brainstorming applications for AI. Lists are endless. Have we ever done focus groups with the 100% satisfied customer? How about changing call center measures? What would happen if we replaced the entire deficit measures with equally powerful measures of the positive? How can we revitalize the TQM groups, demoralized by one fishbone analysis after another? What would happen if we augmented variance analysis with depth studies that help people to dream and define the very visions of quality standards? How about a star stories program to generate a narrative rich environment—where customers are asked to share stories of encounters with exceptional employees? How about a gathering with senior executives so we can celebrate our learning’s with them, share with them how seeing the positive has changed our work and family lives, and even recruit them to join the PCN?
The pilot now had a momentum all its own. The immediate response—an avalanche of requests for participation—confirmed that there were large numbers at GTE ready to be called to the task of positive change. To grow the network by the 100s, even thousands, it was decided to do a ten region training session, all linked and downloaded by satellite conferencing. A successful pilot of three sites—Seattle, Indianapolis, and Dallas—confirmed the same kind of energy and response could happen through distancetechnologies. Quite suddenly the power of a 1000 person network caught people’s attention. Just imagine the 1000 “students” of organization life coming together in a year at an AI Summit to share learning from 10,000 innovations discovered at GTE. Very rapidly, by connecting and consistently noticing breakthroughs, new patterns of organizing would become commonplace knowledge. Changes would happen not by organized confrontation, diagnosis, burning platforms, or piecemeal reform but through irresistibly vibrant and real visions. And when everyone’s awareness grows at the same time—that basic change is taking place in this area and that area, it is easier to coalesce a new consensus that fundamental change is possible. PCN was becoming a lightning rod for energy and enthusiasm we all greatly underestimated. Then the unions raised questions. There were serious concerns, including the fact that they were not consulted in the early stages. We were told the initiative was over. There was to be a meeting of the unions and GTE at the Federal Mediation Offices in Washington D.C. to put the whole thing to rest.
But at the meeting with the IBEW and the CWA, leaders from both groups said they saw something fresh and unique about AI. They agreed to bring 200 union leaders together for a 2-day introduction. Their purpose: “to evaluate AI…to see if it should have any place in the future at GTE”. A month later, the session takes place. It looks like it is going pretty well and then the moment of decision. Tables of eight were instructed to evaluate the ideas and cast a vote as a group: “yes, we endorse moving forward with AI” or “No, we withhold endorsement”. For thirty minutes the 30 groups deliberated. Dan Young calls the vote. Tensions are felt. “Table one, how do you vote?” The response was ready: “we vote 100% for moving forward with AI and feel this is an historic opportunity for the whole system”. Then the next table: “We vote 100% with a caveat—that every person at GTE have the opportunity to get the AI training, and that all projects going forward be done in partnership, the unions and the company”. On and on the vote goes. 30 tables speak. 30 tables vote. Every single one votes to move forward. It was stunning. Eight months later AI is combined with the “conflictive partnership” model of John Calhoun Wells of the Federal Mediation Services at the kickoff session and announcement of a new era of partnership. The historic statement of Partnership states: “The company and the Unions realize that traditional adversarial labor-management relations must change in order to adapt to the new global telecommunications marketplace. It is difficult to move to cooperation in one quantum leap. However the company and the Unions have agreed to move in a new direction. This new direction emphasizes partnership…”
AI accelerates the nonlinear interaction of organization breakthroughs, putting them together with historic, positive traditions and strengths to create a “convergence zone” facilitating the collective repatterning of human systems. At some point, apparently minor positive discoveries connect in accelerating manner and quantum change, a jump from one state to the next that cannot be achieved through incremental change alone, becomes possible. What is needed, as the Destiny Phase of AI suggests, are the network-like structures that liberate not only the daily search into qualities and elements of an organization’s positive core but the establishment of a convergence zone for people to empower one another—to connect, cooperate, and co-create. Changes never thoughtpossible are suddenly and democratically mobilized when people constructively appropriate the power of the positive core and simply… let go of accounts of the negative.
But then the question is always voiced: “What do we do with the real problems?”
Basic Principles of Appreciative Inquiry
To address this question in anything other than Pollyannaish terms we need to at least comment on the generative-theoretical work that has inspired and given strength too much of AI in practice. Here are five principles and scholarly streams we consider as central to AI’s theory-base of change.
The Constructionist Principle: Simply stated— human knowledge and organizational destiny are interwoven. To be effective as executives, leaders, change agents, etc., we must be adept in the art of understanding, reading, and analyzing organizations as living, human constructions. Knowing (organizations) stands at the center of any and virtually every attempt at change. Thus, the way we know is fateful.
At first blush this statement appears simple and obvious enough. We are, as leaders and change agents, constantly involved in knowing/inquiring/reading the people and world around us—doing strategic planning analysis, environmental scans, needs analysis, assessments and audits, surveys, focus groups, performance appraisals, and so on. Certainly success hinges on such modes of knowing. And this is precisely where things get more interesting because throughout the academy a revolution is afoot, alive with tremendous ferment and implication, in regards to modernist views of knowledge. In particular, what is confronted is the Western conception of objective, individualistic, historic knowledge—“a conception that has insinuated itself into virtually all aspects of modern institutional life” (Gergen, 1985, P. 272). At stake are questions that pertain to the deepest dimensions of our being and humanity: how we know what we know, whose voices and interpretations matter, whether the world is governed by external laws independent of human choices and consciousness, and where is knowledge to be located (in the individual “mind”, or out there “externally” in nature or impersonal structures)? At stake are issues that are profoundly fundamental, not just for the future of social science but for the trajectory of all our lives.
In our view, the finest work in this area, indeed a huge extension of the most radical ideas in Lewinian thought, can be found in Ken Gergen’s Toward Transformation in Social Knowledge (1982) and Realities and Relationships: Soundings In Social Construction (1994). What Gergen does, in both of these, is synthesize the essential whole of the post modern ferment and crucially takes it beyond disenchantment with the old and offers alternative conceptions of knowledge, fresh discourses on human functioning, new vistas for human science, and exciting directions for approaching change. Constuctionism is an approach to human science and practice which replaces the individual with the relationship as the locus of knowledge, and thus is built around a keen appreciation of thepower of language and discourse of all types (from words to metaphors to narrative forms, etc.) to create our sense of reality—our sense of the true, the good, the possible.
Philosophically it involves a decisive shift in western intellectual tradition from cogito ergo sum, to communicamus ergo sum and in practice constructionism replaces absolutist claims or the final word with the never ending collaborative quest to understand and construct options for better living. The purpose of inquiry, which is talked about as totally inseparable and intertwined with action, is the creation of “generative theory”, not so much mappings or explanations of yesterday’s world but anticipatory articulations of tomorrow’s possibilities. Constructionism, because of its emphasis on the communal basis of knowledge and its radical questioning of everything that is taken-for-granted as “objective” or seemingly immutable, invites us to find ways to increase the generative capacity of knowledge. However there are warnings: “Few are prepared”, says Gergen (1985, p. 271) “for such a wrenching, conceptual dislocation. However, for the innovative, adventurous and resilient, the horizons are exciting indeed.” This is precisely the call AI has responded to. Principle number two takes it deeper.
The Principle of Simultaneity: Here it is recognized that inquiry and change are not truly separate moments, but are simultaneous. Inquiry is intervention. The seeds of change—that is, the things people think and talk about, the things people discover and learn, and the things that inform dialogue and inspire images of the future—are implicit in the very first questions we ask. The questions we ask set the stage for what we “find”, and what we “discover” (the data) becomes the linguistic material, the stories, out of which the future is conceived, conversed about, and constructed.
One of the most impactful things a change agent or practitioner does is to articulate questions. Instinctively, intuitively and tacitly we all know that research of any kind can, in a flash, profoundly alters the way we see ourselves, view reality, and conduct our lives. Consider the economic poll, or the questions that led to the discovery of the atom bomb, or the surveys that, once leaked, created a riot at a unionized automobile plant in London (see Cooperrider and Srivastva, 1987). If we accept the proposition that patterns of social-organizational action are not fixed by nature in any direct biological or physical way, that human systems are made and imagined in relational settings by human beings (socially constructed), then attention turns to the source of our ideas, our discourses, our researches—that is our questions. Alterations in linguistic practices—including the linguistic practice of crafting questions—hold profound implications for changes in social practice.
One great myth that continues to dampen the potential here is the understanding that first we do an analysis, and then we decide on change. Not so says the constructionist view. Even the most innocent question evokes change—even if reactions are simply changes in awareness, dialogue, feelings of boredom, or even laughter. When we consider the possibilities in these terms, that inquiry and change are a simultaneous moment, we begin reflecting anew. It is not so much “Is my question leading to right or wrong answers?” but rather “What impact is my question having on our lives together…is it helping togenerate conversations about the good, the better, the possible… is it strengthening our relationships?”
The Poetic Principle: A metaphor here is that human organizations are a lot more like an open book than, say, a machine. An organization’s story is constantly being co-authored. Moreover, pasts, presents, or futures are endless sources of learning, inspiration, or interpretation—precisely like, for example, the endless interpretive possibilities in a good piece of poetry or a biblical text. The important implication is that we can study virtually any topic related to human experience in any human system or organization. We can inquire into the nature of alienation or joy, enthusiasm or low morale, efficiency or excess, in any human organization. There is not a single topic related to organizational life that we could not study in any organization.
What constuctionism does is remind us that it is not the “world out there” dictating or driving our topics of inquiry but again the topics are themselves social artifacts, products of social processes (cultural habits, typifying discourses, rhetoric, professional ways, power relations). It is in this vein that AI says let us make sure we are not just reproducing the same worlds over and over again because of the simple and boring repetition of our questions (not “one more” morale survey which everybody can predict the results ahead of time). AI also says, with a sense of excitement and potential, that there can be great gains made in a better linking of the means and ends of inquiry. Options now begin to multiply. For example, informally, in many talks with great leaders in the NGO world (Save the Children, World Vision), we have begun to appreciate the profound joy that CEO’s feel as “servant leaders”-- and the role this positive affect potentially plays in creating healthy organizations. But then one questions: is there a book on the Harvard Business book-list, or anywhere for that matter, on Executive Joy ? And even if there isn’t… does this mean that joy has nothing to do with good leadership, or healthy human systems? Why aren’t we including this topic in our change efforts? What might happen if we did?
What the poetic principle invites is re-consideration of aims and focus of any inquiry in the domain of change management. For it is becoming clearer that our topics, like windsocks, continue to blow steadily onward in the direction of our conventional gaze. As we shall soon explore, seeing the world as a problem has become “very much a way of organizational life”.
The Anticipatory Principle: The infinite human resource we have for generating constructive organizational change is our collective imagination and discourse about the future. One of the basic theorems of the anticipatory view of organizational life is that it is the image of the future, which in fact guides what might be called the current behavior of any organism or organization. Much like a movie projector on a screen, human systems are forever projecting ahead of themselves a horizon of expectation (in their talk in the hallways, in the metaphors and language they use) that brings the future powerfully into the present as a mobilizing agent. To inquire in ways that serves to refashion anticipatory reality—especially the artful creation of positive imagery on acollective basis--may be the most prolific thing any inquiry can do.Our positive images of the future lead our positive actions—this is the increasingly energizing basis and presupposition of Appreciative Inquiry.
Whether we are talking about placebo studies in medicine (Ornstein and Sobel, 1987); reviews of a myriad of studies of the Pygmalion dynamic in the classroom (Jussim, 1986); studies of the rise and fall of cultures (Boulding,1966; Polak, 1973); research into the relationships between optimism and health (Seligman, 1990 ); studies of positive self-monitoring and ways for accelerating learning (Kirschenbaum, 1984 ); analysis of the importance of imbalanced, positive inner dialogue to personal and relational well-being (Schwartz, 1986 ); research on positive mood states and effective decision making (Isen, 1983); studies from the domain of “conscious evolution" (Hubbard, 1998 ); or theories on how positive noticing of even “small wins” can reverberate throughout a system and change the world (Weick, 1984 )—the conclusions are converging on something Aristotle said many years ago. “A vivid imagination”, he said “ compels the whole body to obey it”. In the context of more popular writing, Dan Goleman (1987), in a well-written New York Times headline-article declares “Research Affirms the Power of Positive Thinking”.
The Positive Principle. This last principle is not so abstract. It grows out of years of experience with appreciative inquiry. Put most simply, it has been our experience that building and sustaining momentum for change requires large amounts of positive affect and social bonding—things like hope, excitement, inspiration, caring, camaraderie, sense of urgent purpose, and sheer joy in creating something meaningful together. What we have found is that the more positive the question we ask in our work the more long lasting and successful the change effort. It does not help, we have found, to begin our inquiries from the standpoint of the world as a problem to be solved. We are more effective the longer we can retain the spirit of inquiry of the everlasting beginner. The major thing we do that makes the difference is to craft and seed, in better and more catalytic ways, the unconditional positive question.
Although the positive has not been paraded as a central concept in most approaches to organization analysis and change, it is clear we need no longer be shy about bringing this language more carefully and prominently into our work. And personally speaking, it is so much healthier. We love letting go of “fixing” the world. We love doing interviews, hundreds of them, into moments of organizational “life”. And we are, quite frankly, more effective the more we are able to learn, to admire, to be surprised, to be inspired alongside the people with whom we are working. Perhaps it is not just organizations—we too become what we study. So suggested, over and over again, is the life-promoting impact of inquiry into the good, the better, and the possible. A theory of affirmative basis of human action and organizing is emerging from many quarters—social contructionism, image theory, conscious evolution and the like. And the whole thing is beginning, we believe, to make a number of our change-management traditions look obsolete.

Appreciative Inquiry and Power in Organizations
We could have easily called this section “Eulogy for Problem Solving”. In our view, the problem solving paradigm, while once perhaps quite effective, is simply out of sync with the realities of today’s virtual worlds (Cooperrider, 1996). Problem solving approaches to change are painfully slow (always asking people to look backward to yesterday’s causes); they rarely result in new vision (by definition we can describe something as a problem because we already, perhaps implicitly, assume an ideal, so we are not searching to expansive new knowledge of better ideals but searching how to close “gaps”); and in human terms problem approaches are notorious for generating defensiveness (it is not my problem but yours). But our real concern, from a social constructionist perspective, has to do with relations of power and control. It is the most speculative part of this chapter; and hopefully, it better illuminates the potentials advocated by AI. In particular is the more conscious linking of language, including the language of our own profession, to change. Words do create worlds—even in unintended ways.
It was an unforgettable moment in a conference on AI for inner city change agents, mostly community mobilizers from the Saul Alinsky school of thought (Rules for Radicals), in Chicago. After two days a participant challenges: “This is naïve…have you ever worked in the depths of the inner city, like the Cabrini Green public housing projects? You’re asking me to go in and ‘appreciate’ it…just yesterday I’m there and the impoverished children are playing soccer, not with a ball, no money for that, but with a dead rat. Tell me about appreciative inquiry in the housing projects!”
It was a powerful question. It was one that made us go deeper theoretically. At one level we were arguing typical approaches to problem diagnosis, including the Alinsky confrontation methods, would work, but at about half the speed of AI. But then as we explored the subject of the cultural consequences of deficit discourse we began seeing a disconcerting relationship between the society-wide escalation of deficit-based change methods and the erosion of people power. The analysis, from here, could proceed from virtually any “professional” discipline—the diagnostic vocabularies of social work, medicine, organization development, management, law, accounting, community development, editing—but lets begin with psychology and the social sciences (ample linkage will be made to our own field). Ken Gergen’s (1994) work, again, is at the forefront for anyone wanting something more than a suggestive summary.
Consider the following characterizations of the self: impulsive personality, narcissism, anti-social personality, reactive depressive, codependent, self-alienated, type-A, paranoid, stressed, repressed, authoritarian, midlife crisis. These are all terms commonly used by the mental-health professions and are now common among people in the culture itself. But importantly, these terms, and several thousand others (Gergen 1994), have come into conventional usage only within the present century, many in only the last decade. But something else is noteworthy: the terminology’s discredit, draw attention to problems, shortcomings, and incapacity’s. Interestingly, the trajectory of the “professional” development of vocabularies of human deficit is rising at geometric rates, correlated as might be expected with the sheer growth in numbers of the profession. In1892 when the American Psychological association was founded there were 31 members. By 1906 there were 181. The next thirty-one years witnessed an expansion of almost a hundredfold, to over 3000. In the next twenty-two years the figure grew again by twenty times, over 63,000. Add to this similar growth figures in social work, psychiatry, community development, and organization development and one realizes that the spiraling production of languages of deficit have become quite a growth industry. By 1980 mental illness was the third most expensive category of health disorder in the United States at more than $20 billion annually. By 1983, the costs for mental illness, exclusive of alcoholism and drug abuse, were estimated to be almost $73 billion. We have no figures for the consulting industry, but we can guess. While intentions are good, argues Gergen, some of the unintended consequences may not be.
From a constructionist perspective one realizes that words do not so much innocently “mirror” a world out there as they become vehicles for coordinating our actions with one another. Words in any profession function a bit like tools of the trade. When I used to give my son Matt a hammer, inevitably everything in the house soon became a nail. What happens when the “scientifically” legitimated vocabularies of human deficit become the common and explicit tool kit of all? Gergen suggests not everything about it is healthy. Such deficit discourse, when chronically used, “generates a network of increasing entanglements for the culture at large. Such entanglements are not only self serving for the professions, they also add exponentially to the sense of human misery” (1994 p. 142).
In particular, deficit based change approaches have an unfortunate propensity to reinforce hierarchy, wherein “less than ideal” individuals, who learn to accept what sometimes becomes a lifelong label, are encouraged to enter “treatment programs” under expert supervision; to erode community, wherein the mental health professions appropriate the process of interpersonal realignment that might otherwise (in other eras) have happened in a nonprofessional contexts like the family or community; to instill a sense of self-enfeeblement,wherein deficit terms essentialize the person and like a birthmark or fingerprint, the deficit is expected to inevitably manifest itself into many aspects of their lives (it is a “thing”); to stimulate endless vocabulary expansion wherein people increasingly construct their problems in the professional languages (diagnosing each other) and seek more help which in turn increased the numbers in the profession who are rewarded when they expand the vocabulary—“to explore a new disorder within the mental health sciences is not unlike discovering a new star in astronomy (Gergen p.159)”. Gergen sums up: “As I am proposing, when the culture is furnished with a professionally rationalized language of mental deficit and people are increasingly understood according to this language, the population of “patients” expands. This population, in turn, forces the profession to extend its vocabulary, and thus the array of mental deficit terms available for cultural use (Gergen p.161). Is there no exit from such progressive infirmity?
After talking this over with the people in the inner city Chicago conference—and tracing the vocabularies of human deficit not only to the rise of the professions but also to the rise of bureaucracy, skeptical science, original sin theological accounts, the cynical media—the Alinsky trained activist sat down in a gasp. He said: “in the name of entertainment my people are being fed negative views of human violence—and they aresurrounded by endless description of their negative “needs” their “problem lives”. Even in my methods, the same. And what do I see? I see people asleep in front of their TVs. Unable to move, like sleeping dogs. Yes they have voice in the housing project assessments. But it is a certain kind of voice…it is visionless voice. They get to confirm the deficit analysis; all the reports are the same. “Yes” they say, “The reports are true”. What is hitting me right now is how radical the AI message might be. Marx could have said it better: perhaps the vocabularies of human deficit are the opiates of the masses. People have voice in the analyses—this involvement is what we fought for. But people are not mobilized by it anymore. No, they are asleep. Visionless voice is probably worse than no voice.
Elsewhere we have cautioned, in our own discipline, that it is not so much the problem solving methodologies per se that are of central concern, but the growing sense that we all, throughout the culture, have taken the tools a step further. It is not so much that organizations have problems, they are problems (see figure two on page 28). Somewhere a shift of this kind has taken place. Once accepted as fundamental truth about organizations, virtually everything in change-management becomes infused with a deficit consciousness. For example, as French and Bell (1995) define it, “Action-research is both an approach to problem solving—a model or paradigm, and a problem solving process—a series of activities and events” (p. 88). Levinson, in the classic on Organizational Diagnosis (1972) likens it to therapy—“like a therapeutic or teaching relationship it should be an alliance of both parties to discover and resolve these problems…looking for experiences which appear stressful to people. What kinds of occurrences disrupt or disorganize people? (p. 37). Chris Argyris, again in another classic, asserts: One condition that seems so basic as to be defined as axiomatic is the generation of valid information…Valid information is that which describes the factors, plus their interrelationships, that create the problem (1970, pp.16-17).
Tough questions remain about power and deficit discourse. And of course there are an array of new innovations in the field, many in this volume, that are signaling significant departures. So at this point all we want to do is make a call for reflection and caution, taking a lesson from the wisdom of anthropology—beware of the solid truths of one’s own culture.
Conclusion
To be sure, Appreciative Inquiry (AI) begins an adventure. The urge and call to adventure has been sounded by many people and many organizations, and it will take many more to fully explore the vast vistas that are now appearing on the horizon.
As said at the outset, we believe we are infants when it comes to our understanding of appreciative processes of knowing and social construction. Yet we are increasingly clear the world is ready to leap beyond methodologies of deficit based changes and enter a domain that is life-centric. Organizations, says AI theory, are centers of human relatedness, first and foremost, and relationships thrive where there is an appreciative eye—when people see the best in one another, when they share their dreams and ultimateconcerns in affirming ways, and when they are connected in full voice to create not just new worlds but better worlds. The velocity and largely informal spread of the appreciative learnings suggests, we believe, a growing sense of disenchantment with exhausted theories of change, especially those wedded to vocabularies of human deficit, and a corresponding urge to work with people, groups, and organizations in more constructive, positive, life-affirming, even spiritual ways. AI, we hope it is being said, is more than a simple 4-D cycle of discovery, dream, design, and destiny; what is being introduced is something deeper at the core.Perhaps our inquiry must become the positive revolution we want to see in the world. Albert Einstein’s words clearly compel: “There are only two ways to live your life. One is as though nothing is a miracle. The other is as though everything is a miracle”.
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The Five Paths to Business Ownership

There may be “50 ways to leave your lover,”2 as the song states, but there are only five ways to get into small business management:

?          You may start a new business. ? You may buy an existing business. ?        You may franchise a business. ?    You may inherit a business. ?            You may be hired to be the professional manager of a small business.

Although everyone gets into business by one of these five paths, the specific details of going into business are unique to each person.3 Start-ups may be deliberate, well planned, and financed. On the other hand, many start-up businesses “just happen.” Often a compelling hobby slowly morphs into a profitable business, or a chance occurrence leads to a new busi- ness venture. Purchases of existing businesses may occur in any number of ways, from cash purchases to “earn-outs” in which the business is bought over a period of time with money earned from the business. Franchises may range from “turnkey,” in which every part of setting up the business is handled by professionals, to those in which the only thing that is franchised is the right to use the business name. Some business managers work their way to the top from a beginning part-time employee position. Other professional managers are recruited to become the chief executive. It is common for hired management to use leveraged buyouts or employee stock option plans to purchase the firms for which they work. This chapter examines the details of these paths of entry into small business: start-ups, purchasing, franchising, inheritance, and professional management.

Starting a New Business

Starting a new business is at once the most risky path into business and the path that promises the greatest rewards for success. The success rate of start-up businesses is a matter of some controversy. As we note in Chapter 1, while the Small Business Administration (SBA) reports that 66% of new employers survive two years or more, 50% survive at least four years, and 40% survive more than six years,4 those businesses that get help last much longer. Eighty-seven percent of start-ups that begin in business incubators are still in operation five years later,5 and the survival rates for students from entrepreneurship programs and entrepreneurs seeking help from Small Business Development Centers are about twice that of businesses in general.6 Even for those who get help in starting their business, one must admire the courage and optimism of a person who chooses to start a new business (see Figure 6.1). Despite the rather high failure rate, creating a start-up is not, as some maintain, a triumph of hope over reality. Many businesses that end do so not because they failed, but because the owner took advantage of a better opportunity.7 The rewards, both financial and personal, of starting a successful new business can be most impressive.

Advantages of Start-Ups

There are many reasons that people choose to start a new business rather than purchasing an existing business, franchising, or being an employee:

start-up

A new business that is started from scratch.

buyout

The purchase of substantially all of an existing business.

LO2

Compare the rewards with the pitfalls of starting a new business.

?

A start-up begins with a “clean slate.” There are no existing employee problems, debts, law- suits, contracts, or other legal commitments that must be satisfied.

?          A start-up provides the owner with the opportunity to use the most up-to-date technologies. There are no “legacy” locations, buildings, equipment, or software that can hamper productivity. ?    A start-up can provide new, unique products or services that are not available from existing businesses or franchises. Existing businesses and franchises exist because of their success in

providing proven products and services. ? A start-up can be kept small deliberately to limit the magnitude of possible losses. A

purchased business or franchise requires immediate and constant cash flows to meet ongoing obligations.

Disadvantages of Start-Ups

Offsetting the advantages of starting a new business are several disadvantages:

?          A start-up business has no initial name recognition. An existing business or franchise has in- vested in developing its market. The brand rights can guarantee immediate acceptance of the business.

? A start-up will require significant time to become established and provide positive cash flows. An established business or franchise has built-in customers to provide immediate cash inflows.

?          A start-up can be very difficult to finance. Established businesses and franchises provide im- mediate assets, sales, and cash inflows that can be used to obtain financing for the business. ? A start-up usually cannot easily gain revolving credit from suppliers and financial institu- tions. An existing business or franchise often has lines of credit that transfer with the business. ?        A start-up may not have experienced managers and workers. Established businesses and fran-

chises provide experienced workforces, training, and management support.

Creating a New Business

The vast majority of start-up businesses are “me-too” enterprises. The business idea is simply to create another occurrence of a common business: a beauty shop, a restaurant, a bar or lounge, a rock band, a sign company, plumbing service, yard care, and so on. Starting a copycat business provides some protection from business failure. It is not necessary to define the business to the market be- cause everyone knows what a beauty shop, restaurant, or lounge provides.

On the other hand, this type of start-up can be very difficult to differentiate from other similar businesses. Often, the only competitive advantage may be the location of the start-up. This is why owners of common businesses go to so much effort to try to make a difference between their busi- ness and other, essentially identical, firms. An example is how Morton’s of Chicago and the Ruth’s Chris steak houses operate. Careful sampling of each firm’s steaks reveals no significant difference in price, quality, tenderness, size, or taste. The restaurants have similar menus and wine lists. Each, however, has distinctive interior decorating and presentation of their meals. Morton’s brings a selec- tion of huge uncooked steaks to each table for patrons to make their choices. The cooked steaks are served on oversized china plates. Ruth’s Chris provides equally large steaks, selected from a printed menu, served on plates that are heated to a high temperature to create the trademark “sizzle.”

Amy Conti, of San Antonio, provides an example of an accidental business start-up. She initially did babysitting for a few friends. When demand for her services exceeded her available time, she began having some of her friends, whom she knew to be competent, sub contract for her. She re- quired her “subs” to have advanced Red Cross first-aid certification and she closely supervised their sitting engagements. Her strict standards and ability to pay for standby sitters has made her service unique. The high reliability of her service and the confidence that parents have in the abilities of her sitters have made a business that is usually considered to be a part-time thing for the girl next door into a professional and profitable business for its founder.

The specific concept that leads to a start-up business usually comes from the experience of the person starting the business. Two-thirds of all start-ups are based on ideas from prior work experience, hobbies, and family businesses.12 These businesses are generally more likely to succeed than are businesses based on ideas from other sources. Research into the indicators of successful start-ups shows that one of the best predictors of success is the level of experience of the founders. Random events, suggestions from friends and associates, and specific education courses are the sources of only a relatively few start-up ideas.

Increasing the Odds of Start-Up Success

The probability of creating a successful start-up is increased greatly when the founder has certain attributes and when the founder takes certain actions. Doing the following things has been shown to be the most effective route to success (see Exhibit 6.1).

?          Start the business in a business incubator: A business incubator is an organization that pro- vides financial, technical, and managerial help to start-up businesses. Most incubators are asso- ciated with economic development agencies and are integrated into the community. Incubators provide access to angel investors, public grants for seed money, and technology support.

Business incubators are created to strengthen the local economy by helping create jobs through the establishment of successful small businesses. But incubators do much more than just create new jobs. They aid in the commercialization of new technologies, the revitaliza- tion of distressed neighborhoods, and the creation of wealth. The best incubators provide inexpensive office space with full-time on-site managers who can assist the entrepreneur in many ways. Incubator participants share common office services, such as telephone answer- ing, and production and copying of documents. Perhaps most important, incubators pro- vide legitimacy by furnishing the business with a location and with established business processes.

?          Take part in a mentoring program: Successful business owners and corporate executives do well by doing good. They can, by helping others, in a way repay the many people who helped them achieve success. Executive volunteers contribute their time and energy to assist- ing start-up and struggling small businesses as a public service. Because of their experience, mentors can help you avoid mistakes and make good business decisions.

?          Have a detailed start-up budget: The start-up phase is usually the most difficult time you will have in business. You are required to make myriad decisions concerning location, prod- uct, target market, promotion, sales, and all the facets of starting and operating a business. And you must juggle all these demands while simultaneously seeing that you have enough cash. A detailed start-up budget provides a road map for necessary spending during the start- up phase, when cash inflows are likely to be small or nonexistent. Companies that carefully plan their start-up activities and avoid any unnecessary spending are much more likely to succeed.

?          Produce a product or service for which there is a proven demand: It is an unfortunate fact that most new products and services fail to gain acceptance. NewProductWorks of Ann Arbor, Michigan, maintains a “failed product museum” that contains samples of over 73,000 items, all of which were commercial failures. During the dot-com bubble of 1998–2001, many busi- nesses started with novel and completely untested products and services. Examples are Beenz .com, which was started to facilitate Internet transactions; webvan.com and yourgrocer.com, both of which sold groceries online for home delivery; and estamp.com, which offered online purchasing of U.S. postage, to be printed on the user’s printer. All four of these businesses failed to gain success with their products. None of these businesses survived the “dot-com” bust of 2001, although the domain and patents of e-stamp.com were purchased by the cur- rently operating company, stamps.com.

Large corporations, such as Procter & Gamble or Sony, spend millions of dollars annu- ally testing the market acceptance of new products. Despite their huge resources and years of experience, they regularly introduce products that fail. (Are you old enough to remember “New Coke”?) Your start-up business will not have either the experience or the resources to absorb the loss from product failure. By producing a product or service for which there is a proven demand, the risk of product failure can be reduced or eliminated.

?          Secure outside investment: Securing outside investment accomplishes two things: First, the process of obtaining investment funds means that your business will be critically examined by outsiders who have no vested interest in your idea, product, or service. Second, the fact that you were able to convince outsiders to invest in your business indicates a level of belief in the business and you that provides legitimacy.

? Start with more than one founder: Starting with more than one founder provides the business with more experience, skills, and resources than can be furnished by a single indi- vidual. Having more founders in the business also provides an opportunity for synergy, in which the business results are greater than the sum of the input. Multiple founders can also provide a forum for examining ideas, evaluating information, and making good business decisions.

?          Have experience managing small firms: Managing a small business requires attention very much like that displayed by a person spinning plates on sticks. As a performer must move quickly from plate to plate, many demands of small business management require that you have the ability to quickly move from task to task, without allowing any task to ultimately go uncompleted.

The process can be overwhelming for inexperienced managers. Those entrepreneurs who have experience in small business management are more likely to be able to meet the many simultaneous demands of guiding a successful start-up than would a person new to small business.

?          Have industry experience: Each industry has its own peculiarities. Only through experience can you learn the methods, sources, and markets for any specific one. Even simple tasks, such as buying necessary material, can be nearly impossible without industry knowledge.

For example, suppose that you plan to start a quality steak house, similar to Ruth’s Chris or Morton’s of Chicago. Where do you buy prime beef of the required cut and quality? How do you cook the meat? Or, consider making high-tech, lightweight bicycles. Where can you buy titanium tubing? What does it cost? What do you need to cut, shape, and weld it? How will you sell the bikes? Are bicycles sold through wholesalers? Are they sold directly to bicycle shops? Or maybe you want to start a sign company to make sand-blasted signs. Where will you buy the resist material to protect the wood you don’t want blasted away?

The less you know about something, the easier it appears to be. A true expert makes a task seem effortless. Watching Tiger Woods play golf might lead you to believe that it is an incredibly easy game. Just stand up, hit the ball, and watch it fly to the green. Sure it’s easy: So why do fewer than 2 percent of golfers ever make a course par? The same is true of busi- ness. Businesspeople, such as Michael Dell, Scott McNealy, and Warren Buffet, make the process of succeeding in business seem effortless. But if you have been in the business, you know better. Being experienced won’t make your start-up easy, but at least you have firsthand knowledge of how your industry works that will make your task easier.

? Have previous experience in creating a start-up business: “Nothing succeeds like suc- cess.” In the 150 years since Dumas made this famous statement, it has come to be an un- questioned part of our language. It is just succinct enough, just truthful enough, to seem like a universal truth. For entrepreneurs, it is fortunate that the statement is also not completely true. Although one may learn from successes, most learners acquire expertise through a process of repetition, which only occasionally results in successes. One study of entrepreneurs who had successfully created a start-up business found that on average an entrepreneur suffered three start-up failures before achieving success. Thus it is more nearly correct to state that no entrepreneur succeeds without having prior experience in failing.

? Choose a business that produces high margins: High margins, the amount by which sales prices exceed product costs, provide a buffer for lots of mistakes. The single greatest hurdle to a successful start-up is obtaining and maintaining sufficient cash to support both operations and growth. When margins are low, loss of any one sale or customer has an

immediate effect. However, the problem of replacing the lost margin is much easier if you have to make only one or two sales or get one or two new customers to make up for the lost business.

?          Start the business with established customers: When you start with established customers, you know that you will immediately have cash inflows. There are basically three ways that you can go about obtaining committed customers prior to start-up: (1) You can start your new business as a spin-off from your current employer’s business. (2) You can start a business to specifically go into competition with your employer. (3) Or, you can start a business to sub- contract services to your employer or to other established businesses.

(1) Creating a spin-off is a regular business practice that is done by businesses of all sizes and at all stages of development. Some spin-offs are created to get rid of “noncore” activities. By disposing of the noncore activity, the parent firm reduces capital requirements and pro- vides a tighter focus for management on the remaining businesses. Other spin-offs are created when the parent lacks either the interest or the resources to pursue the opportunity. By being spun off, the start-up can gain access to resources other than those of the parent.

(2) Going into competition with your current employer is also a common practice. Of course, this almost always results in resentments and often ends in lawsuits over issues of trade secrets, rights to intellectual property, and abridgment of contractual provisions. You will have to make difficult ethical decisions. From a legal point of view, the contract be- tween employer and employee is satisfied when all wages and other benefits have been paid in return for you accomplishing the tasks for which you were hired. Absent a specific con- tract providing otherwise, neither party, employer nor employee, is obligated beyond this exchange. However, not so easily answered are the questions: (1) Is it ethical to use your employment to build relationships with customers that subsequently can be used to start a new business? and (2) Is it ethical for you to use knowledge and skill received through training and education furnished by your employer to go into business competing with your employer?

(3) Subcontracting services to an existing business is somewhere between doing a spin-off and starting a competing business. Services that are often contracted include sales, janitorial services, accounting, research, and product development. It is a common, accepted practice for the contractual relationship to be created prior to starting a business.

? Build trust in your “story”: Building trust is essential to the success of all start-ups. You must be able to convince suppliers, employees, and, most importantly, customers that the business is now successful and will be in the future. Not only is there an understandable reluctance for people to be associated with a potential “loser,” but customers, vendors, and employees all take risks by doing business with an unknown and unproven start-up.

Suppliers are often reluctant to deal with start-ups, even if you make your purchases in cash. Most new businesses are small compared to established businesses in the same industry. There is a good reason why you, as the owner of a new business, would prefer to make numer- ous orders of small quantities of the goods and services you need. Doing so reduces cash flow requirements and reduces the risk of your being stuck with old or obsolete inventory. For the vendor, however, accepting your frequent small orders greatly increases the cost of providing goods and services to you. Most vendors, especially wholesalers, work on very small margins. The cost of accepting and filling numerous orders for a new customer may well make such business unprofitable. It is, therefore, essential that the vendor believes in your eventual suc- cess and that you will become a valuable customer in the future.

Employees take on significant risks when they go to work for a start-up business. Not only may the start-up fail, but frequently the cash flow problems of start-ups cause payments for wages to be late or missed entirely. This is one reason why so many start-ups offer stock options and stock bonuses to employees. The start-up doesn’t have enough cash to pay high wages right now, but if it’s successful, employees will share the rewards in the future.

Customers can similarly be at risk when purchasing from a start-up business. In the event that the start-up fails, there is no recourse for warranty problems, for maintenance, or for up- grades to the product. This risk is especially acute when the product or service of the start-up affects the core business of its customers. For example, the San Antonio Bed & Breakfast

immediate effect. However, the problem of replacing the lost margin is much easier if you have to make only one or two sales or get one or two new customers to make up for the lost business.

?          Start the business with established customers: When you start with established customers, you know that you will immediately have cash inflows. There are basically three ways that you can go about obtaining committed customers prior to start-up: (1) You can start your new business as a spin-off from your current employer’s business. (2) You can start a business to specifically go into competition with your employer. (3) Or, you can start a business to sub- contract services to your employer or to other established businesses.

(1) Creating a spin-off is a regular business practice that is done by businesses of all sizes and at all stages of development. Some spin-offs are created to get rid of “noncore” activities. By disposing of the noncore activity, the parent firm reduces capital requirements and pro- vides a tighter focus for management on the remaining businesses. Other spin-offs are created when the parent lacks either the interest or the resources to pursue the opportunity. By being spun off, the start-up can gain access to resources other than those of the parent.

(2) Going into competition with your current employer is also a common practice. Of course, this almost always results in resentments and often ends in lawsuits over issues of trade secrets, rights to intellectual property, and abridgment of contractual provisions. You will have to make difficult ethical decisions. From a legal point of view, the contract be- tween employer and employee is satisfied when all wages and other benefits have been paid in return for you accomplishing the tasks for which you were hired. Absent a specific con- tract providing otherwise, neither party, employer nor employee, is obligated beyond this exchange. However, not so easily answered are the questions: (1) Is it ethical to use your employment to build relationships with customers that subsequently can be used to start a new business? and (2) Is it ethical for you to use knowledge and skill received through training and education furnished by your employer to go into business competing with your employer?

(3) Subcontracting services to an existing business is somewhere between doing a spin-off and starting a competing business. Services that are often contracted include sales, janitorial services, accounting, research, and product development. It is a common, accepted practice for the contractual relationship to be created prior to starting a business.

? Build trust in your “story”: Building trust is essential to the success of all start-ups. You must be able to convince suppliers, employees, and, most importantly, customers that the business is now successful and will be in the future. Not only is there an understandable reluctance for people to be associated with a potential “loser,” but customers, vendors, and employees all take risks by doing business with an unknown and unproven start-up.

Suppliers are often reluctant to deal with start-ups, even if you make your purchases in cash. Most new businesses are small compared to established businesses in the same industry. There is a good reason why you, as the owner of a new business, would prefer to make numer- ous orders of small quantities of the goods and services you need. Doing so reduces cash flow requirements and reduces the risk of your being stuck with old or obsolete inventory. For the vendor, however, accepting your frequent small orders greatly increases the cost of providing goods and services to you. Most vendors, especially wholesalers, work on very small margins. The cost of accepting and filling numerous orders for a new customer may well make such business unprofitable. It is, therefore, essential that the vendor believes in your eventual suc- cess and that you will become a valuable customer in the future.

Employees take on significant risks when they go to work for a start-up business. Not only may the start-up fail, but frequently the cash flow problems of start-ups cause payments for wages to be late or missed entirely. This is one reason why so many start-ups offer stock options and stock bonuses to employees. The start-up doesn’t have enough cash to pay high wages right now, but if it’s successful, employees will share the rewards in the future.

Customers can similarly be at risk when purchasing from a start-up business. In the event that the start-up fails, there is no recourse for warranty problems, for maintenance, or for up- grades to the product. This risk is especially acute when the product or service of the start-up affects the core business of its customers. For example, the San Antonio Bed & Breakfast Association contracted with a start-up business to develop and maintain a web-based avail- ability and reservation service for the association’s members. The start-up failed during the dot-com bust of 2001. When problems with the system subsequently developed, there was no one to fix them. The system was complex and the source code incomprehensible. As a result, the association lost a core service that provided value to its members.

The issue of building trust in your story is a catch-22. If customers, vendors, and employees do not have trust in the entrepreneur and in the business, quite simply, there is no business. How- ever, there must be a business, or you don’t need customers, vendors, and employees. There are several ways for a start-up business to build trust and legitimacy, and these are detailed in Chap- ter 2. Specific examples for the kinds of businesses discussed in this chapter include obtaining a performance bond that will pay vendors and customers if your business fails. Restaurants, lodging establishments, barbers, beauty shops, and other businesses that deal with issues of cleanliness as a business requirement can obtain licenses and join industry groups that perform inspections. Displaying licenses and certificates of inspection provides assurance that you are at least meeting minimum standards. Manufacturing businesses and construction businesses may hire engineers to certify design and construction details. Warranty service can be contracted to an independent company that specializes in providing such services. Rigorously maintaining business procedures that ensure on-time delivery of products and services and on-time payment of bills, wages, and loan payments will, in time, result in the start-up being trusted.

Many businesses have been successfully created which lacked one or more of these indicators. It is also true that many start-up businesses have failed, despite having all these characteristics. No one knows what makes the difference between such successes and failures. Some have speculated that the one indispensable trait of people who create successful businesses is determination to make the business work.

“LEAN” Entrepreneurial Methods

You may have read or heard about the currently popular idea of the “lean start-up.” “Lean” is the lat- est name for a set of tried-and-true methods that can lessen the capital requirements and, as a result, reduce the financial risk of a start-up. We discussed the similar concept of bootstrapping in Chapter 5. You remember that bootstrapping includes methods for “finding ways to achieve desired business goals and objectives when start-up capital is limited.” Both lean operations and bootstrapping are based on and share three underlying ideas:

1.         Waste not, want not. That this thought appears in a 1576 book when Shakespeare was a mere 12-years-old tells you how old this latest fashion is. Avoiding waste is one obvious way to achieve this, but so is borrowing something rather than renting it, and renting rather than buy- ing. Making do with an older but free laptop would be another example, as would saving every penny you can.

2.         Create, standardize, repeat. About the same time as Shakespeare, shipbuilders in Venice created a ship made of standard parts. It made creating subsequent ships much faster and easier. You do this when you make a form letter to solicit customers, when you create a cell phone app that thousands of people can download, or when you buy in bulk to save money. Some firms standardize their most important characteristics so customers get the same result wher- ever they buy, for example, in franchise restaurants. If your most important characteristics are built uniquely, you can still benefit from standardizing by applying it to the supporting, repeti- tive aspects of your business.

3.         Keep in touch. Central to the lean start-up is being close to your customer. It helps you know if your product or service is doing its job. It alerts you to problems earlier so you can correct them, and it is just a good business practice in general. Customers and their needs change, and to keep up, you need to keep in touch. As you learn what is needed, adjust your product or service to op- timally fit needs. Most cell phone apps get updated every few weeks. This is because as the app makers find out about bugs or glitches, they can fix them and get the fixed version out to users.13

Today’s lean start-up and bootstrapping stress the need for creativity and innovation in all aspects of business start-ups and operations. Eric Reis, the modern father of the lean start-up writes that

start-ups should attempt to produce the “minimum viable product,” ship it to paying customers, measure its success, apply what is learned to improving the product. There is an older quality control model that checks for problems before the product leaves the firm, and where safety is an issue, that is the best way to go. But for many other types of products or services, the minimum viable product approach is a better one.

Thomas Caldbeck, whose story introduces this chapter, exemplifies many aspects of the lean approach. He did not start into business until after he had mastered the basic management skills needed for success. His garage, van truck, and a spare bedroom in his home became his business location. He expanded into additional areas of business only after a customer had been obtained for that service. This way Tom relied on revenues to provide funds for growth. He maintained close contact with customers to ensure that they were satisfied with the work he was doing. He used his own funds for the start-up and leveraged their value by using bank financing for his truck and equip- ment. Part-timers and subcontractors who are paid only for work actually completed, met the need for employees.

Your current employer may provide assistance if your new venture is not going to be a direct competitor. Often, a new product or service idea arises from the work being done in the current employment of the start-up founder, as in the case of UltimateKeychains.com. The employer may, however, have no interest in pursuing the opportunity. In such cases, the start-up may well proceed with the employer’s active support.

Buying an Existing Business

The second most common way to enter small business management is to purchase an existing busi- LO3 ness. Buying an existing business has important advantages over creating a start-up. However, pur- chasing a business has its own, unique set of risks.

Advantages of Purchasing an Existing Business

There are some advantages to buying an existing business:

? Established customers provide immediate sales and cash inflows. Because the business is already successful, it has proven that there is sufficient demand for its products and services to operate profitably.

?          Business processes are already in place in an existing, operating business. This eliminates the need to hire employees, find vendors, set up accounting systems, and establish production processes.

?          Purchasing a business often requires less cash outlay than does creating a start-up. The seller will often provide financing that makes it possible for you to buy the business.

Disadvantages of Purchasing an Existing Business

Disadvantages to buying an existing business include:

?          Finding a successful business for sale that is appropriate for your experience, skills, and edu- cation is difficult and time-consuming.

?          It is very difficult to determine what a small business is worth. The value of a small business can never be known with certainty. You must rely on analyses, comparisons, and estimates.

? Existing managers and employees may resist change. It can be very difficult to convince employees to adapt to new business methods, procedures, and processes that can provide increased profits.

?          The reputation of the business may be a hindrance to future success. Sellers are usually reluc- tant to tell you about problems that the business has. Business owners are especially sensitive about discussing past disputes and lawsuits with vendors and customers.

?          The business may be declining because of changes in technology. ?           The facilities and equipment may be obsolete or in need of major repair.

You will greatly increase your chances of finding the right business by using multiple sources. Make some calls: Contact business brokers and ply your own network. You should be actively read- ing advertising of businesses for sale in newspapers and magazines and on the Internet. You might consider asking your employer if his or her business is for sale. Keep in mind that every business is for sale at a high enough price. If you hear of a business that is interesting, contact the owners and ask what it would take to buy it.

Brokers advertise and facilitate the sale of businesses for a fee, most usually a percentage of the ultimate selling price. Most states have laws that require brokers to work solely for the interest of the seller and to obtain the highest selling price possible. This creates a conflict of interest between the broker and you. The broker is trying to get the highest price. You’re trying to get the lowest.

The quality of broker services ranges from excellent to outright rip-offs. Only a few states have any education or licensing requirements, although some, such as Illinois, do require business bro- kers to register by filing a simple form. Accusations of misrepresentation and fraud by brokers are common in the business press.

Networking is an excellent way to find businesses for sale. While most businesses are for sale at any time, for competitive reasons most owners do not want to say so explicitly. Because customers, vendors, and employees are likely to feel threatened, openly advertising a business for sale can lead to the loss of revenue, credit from vendors, and key employees. For these reasons, it is common for business owners to make their intention to sell known only to trusted confidants in the industry and in the community. Attorneys, bankers, accountants, and insurance agents all will provide you with information only if they know that they can trust your discretion. You can usually get solid leads just by telling other businesspeople that you’re interested in buying a business.

There is a trade journal for every industry that exists. People in the mortuary business bone up with Embalmer and American Funeral Director. The replacement window industry looks through Fenestration. The electric sign industry is energized by Signs of the Times. The folks who process dead and decomposing animals into useable products digest Render magazine. The construction industry digs Rock and Dirt. No matter what type of business you might be considering, there is a magazine for it. They all have advertisements of businesses for sale.

The Internet also has numerous sites that advertise businesses for sale. A search using Google with the keyword “business” and the phrase “for sale” resulted in over 38 million pages listed. None of the advertisements that were inspected during the research for this book provided the name or the exact location of the advertised business. Rather, the sites have various ways you can obtain ad- ditional information. Some provide a link by which you can request more information. A very few listed phone numbers you can call. Others require becoming a member and paying a fee for access.

Your current employer is probably a ready source of information about businesses for sale in your industry. Most managers of small businesses are members of formal and informal groups of businesspeople, for example, the Chamber of Commerce, Rotary, Kiwanis, and other groups that have meetings and provide resources. Also, your employer probably has information about competi- tors and vendors in the area. Don’t forget the example of UltimateKeychains.com—your employer just might be interested in selling his or her business, as well.

Investigating Entrepreneurial Opportunities:

Performing Due Diligence

Suppose you’ve actually found a business you’d like to buy. Your job has just begun. Finding an appropriate business is merely the first, and easiest, step in the process. Buying a business is a lot like getting married—it is easy to get into, but if it turns out bad, it’s very hard to get out. Now that you’ve found that “perfect” business, you must make an exhaustive investigation to tell if it is re- ally suitable. Unlike residential real estate, which is highly regulated in the United States, sellers of businesses are not legally required to make disclosures of impairments or deficiencies. If you are outside the United States, your laws may be different. For example, in Canada, sales of businesses for a price less than $200,000 are tightly regulated. Sales for amounts greater than $200,000 are not regulated at all. As in the United States, it is your responsibility to fully investigate the business and to come to your own independent evaluation of its value.

Due diligence is the process of investigating to determine the full and complete implications of buying a business. During the process of due diligence every aspect of the business is examined in exacting detail. Nothing is taken for granted. No statement is accepted without evidence. Evidence is, itself, substantiated with sources external to the company. Properly performing due diligence minimizes the risk of failure and maximizes the probability of success by identifying the strengths and weaknesses of the business.

When a business is acquired, there is a clear order of steps that should be followed:

1.         Conduct extensive interviews with the sellers of the business. 2.      Study the financial reports and other records of the business. 3.           Make a personal examination of the site (or sites) of the business. 4. Interview customers and suppliers of the business. 5.       Develop a detailed business plan for the acquisition. 6.            Negotiate an appropriate price for the business, based on the business plan projections. 7. Obtain sufficient capital to purchase and operate the business.

The first five steps together make up the process of due diligence.18 A basic tenet of business law is caveat emptor, or “let the buyer beware.” This does not mean

that a seller can freely lie to you about the business. Deliberate misrepresentations can lead to law- suits and may be prosecuted as fraud. However, except for specific representations by the seller, you are responsible for understanding the condition and the facts of the business. It’s kind of a “don’t ask—don’t tell.” If you don’t ask the right questions, the seller has no obligation to tell you the right answers. Thus, as the buyer, you must determine how the business is currently being operated, and you must substantiate (or disprove) representations made by the seller regarding the existence and value of assets, liabilities, financial performance, and the condition of the business.

Due diligence has two primary goals. First, you are attempting to find any wrongdoing: (1) fraud committed by the owners or managers; (2) misrepresentations of the sellers, such as improperly recognized revenues or expenses; and (3) missing information, including pending or threatened xes. Second, you are trying to find any inefficiencies, unnoticed opportunities, waste, and mis- management. The first goal is information that greatly affects the value of the business and the advisability of purchasing it. The second goal is how you, as a new owner, can make changes to increase its value. Both goals can give you a negotiating advantage.

The first information that you get is usually a set of financial statements. There are four reasons why this is so: (1) the seller usually has financial statements available and incurs little added cost in providing them, (2) you, as a business person, are most likely familiar with financial statements and can extract useful information from them, (3) financial statements are accepted as representative of the business by bankers and investors, and (4) financial statements are considered to be indicators of future business results.

Financial statements should include (1) a balance sheet, (2) an income statement, and (3) a state- ment of cash flows. You should also examine the federal and state tax returns for at least the last five years. Information forms for partnerships, corporations, or limited liability companies should be examined also. Any financial statement prepared by or for the seller must be treated with skepti- cism. Some financial statements that you see will have been subjected to rigorous examination by professionals outside the business; some will have been dashed off by the owner at midnight on April 15. To be believable, the statements must be substantiated by external sources.

When you examine the income statement, you should focus on corroborating the amount and timing of revenues and expenses. Be aware that the income statements of small businesses are com- monly misstated. To avoid taxes, owners often charge personal expenses to the business, such as cars, country club memberships, travel, and even home office expenses. On the other hand, when preparing to sell the business, owners are motivated to overstate revenues and understate expenses to show the highest profit.

Balance sheet items that are likely to be misstated are intangibles, that is, things that have no physical existence, but rather are legal rights and obligations. Intangibles include accounts receiv- able, patents, licenses, and liabilities. Assets claimed on the balance sheet must be examined to ensure that they exist and that the stated value is reasonable. Because liabilities are legal require- ments to give up economic value in the future, such as debts for borrowed money or merchandise purchased on account, your risk is that there will be liabilities that are not disclosed. Your problem is that you are attempting to prove the absence of something. Once the examination is complete, you should adjust the amounts, contents, and format of the statements to reflect what you have discov- ered through due diligence.

During due diligence you should also try to answer many nonfinancial questions. Why is the business for sale? Who are key employees? What is the extent of obsolescence of equipment and key technologies? What are the prospects for the firm’s products and services? What opportunities can the firm reasonably expect to have in the near future?

1. According to this chapter, what are the 5 ways to get into small business management?

2. According to this chapter, what are the 12 ways to increase the chance of business start-up success?

3. What is the predominant method by which entrepreneurs open new businesses?

4. What is the greatest advantage of a franchise?

5. According to this chapter, what magazine is a good source of franchisors eager to sell you a franchise?

6. Before you as a potential franchisee sign on the dotted line what two documents should you study carefully?

C++ Data Structures:

Use Huffman coding to encode text in given file (Pride_and_Prejudice.txt).

TO_DO:

Define a struct for Huffman tree node. This struct contains links to left/right child nodes, a character, and its frequency.Define a function for file reading operation. This function should take in a filename (string type) as parameter and return a proper data structure object that contains characters and their frequencies that will be used to generate Huffman tree nodes.The construction of Huffman tree requires taking two nodes with smallest frequencies. Select a proper data structure to support this operation. Note this data structure object could be different to the object from step 2.

Design a function that takes in the root of Huffman coding tree, prints, and returns the encoding scheme in a data structure object.Design a function that takes in the encoding scheme and filename (string type), output encoded content (bit-string) to a file named pride.huff

Pride_and_Prejudice.txt:

Chapter 1

It is a truth universally acknowledged, that a single man in possession of a good fortune, must be in want of a wife. However little known the feelings or views of such a man may be on his first entering a neighbourhood, this truth is so well fixed in the minds of the surrounding families, that he is considered the rightful property of some one or other of their daughters. “My dear Mr. Bennet,” said his lady to him one day, “have you heard that Netherfield Park is let at last?” Mr. Bennet replied that he had not. “But it is,” returned she; “for Mrs. Long has just been here, and she told me all about it.” Mr. Bennet made no answer. “Do you not want to know who has taken it?” cried his wife impatiently. “You want to tell me, and I have no objection to hearing it.” This was invitation enough. “Why, my dear, you must know, Mrs. Long says that Netherfield is taken by a young man of large fortune from the north of England; that he came down on Monday in a chaise and four to see the place, and was so much delighted with it, that he agreed with Mr. Morris immediately; that he is to take possession before Michaelmas, and some of his servants are to be in the house by the end of next week.” “What is his name?” “Bingley.” “Is he married or single?” “Oh! Single, my dear, to be sure! A single man of large fortune; four or five thousand a year. What a fine thing for our girls!” “How so? How can it affect them?” “My dear Mr. Bennet,” replied his wife, “how can you be so tiresome! You must know that I am thinking of his marrying one of them.” “Is that his design in settling here?” “Design! Nonsense, how can you talk so! But it is very likely that he may fall in love with one of them, and therefore you must visit him as soon as he comes.” “I see no occasion for that. You and the girls may go, or you may send them by themselves, which perhaps will be still better, for as you are as handsome as any of them, Mr. Bingley may like you the best of the party.” “My dear, you flatter me. I certainly have had my share of beauty, but I do not pretend to be anything extraordinary now. When a woman has five grown-up daughters, she ought to give over thinking of her own beauty.” “In such cases, a woman has not often much beauty to think of.” “But, my dear, you must indeed go and see Mr. Bingley when he comes into the neighbourhood.” “It is more than I engage for, I assure you.” “But consider your daughters. Only think what an establishment it would be for one of them. Sir William and Lady Lucas are determined to go, merely on that account, for in general, you know, they visit no newcomers. Indeed you must go, for it will be impossible for us to visit him if you do not.” “You are over-scrupulous, surely. I dare say Mr. Bingley will be very glad to see you; and I will send a few lines by you to assure him of my hearty consent to his marrying whichever he chooses of the girls; though I must throw in a good word for my little Lizzy.” “I desire you will do no such thing. Lizzy is not a bit better than the others; and I am sure she is not half so handsome as Jane, nor half so good-humoured as Lydia. But you are always giving her the preference.” “They have none of them much to recommend them,” replied he; “they are all silly and ignorant like other girls; but Lizzy has something more of quickness than her sisters.” “Mr. Bennet, how can you abuse your own children in such a way? You take delight in vexing me. You have no compassion for my poor nerves.” “You mistake me, my dear. I have a high respect for your nerves. They are my old friends. I have heard you mention them with consideration these last twenty years at least.” “Ah, you do not know what I suffer.” “But I hope you will get over it, and live to see many young men of four thousand a year come into the neighbourhood.” “It will be no use to us, if twenty such should come, since you will not visit them.” “Depend upon it, my dear, that when there are twenty, I will visit them all.” Mr. Bennet was so odd a mixture of quick parts, sarcastic humour, reserve, and caprice, that the experience of three-and-twenty years had been insufficient to make his wife understand his character. Her mind was less difficult to develop. She was a woman of mean understanding, little information, and uncertain temper. When she was discontented, she fancied herself nervous. The business of her life was to get her daughters married; its solace was visiting and news. Chapter 2 Mr. Bennet was among the earliest of those who waited on Mr. Bingley. He had always intended to visit him, though to the last always assuring his wife that he should not go; and till the evening after the visit was paid she had no knowledge of it. It was then disclosed in the following manner. Observing his second daughter employed in trimming a hat, he suddenly addressed her with: “I hope Mr. Bingley will like it, Lizzy.” “We are not in a way to know what Mr. Bingley likes,” said her mother resentfully, “since we are not to visit.” “But you forget, mamma,” said Elizabeth, “that we shall meet him at the assemblies, and that Mrs. Long promised to introduce him.” “I do not believe Mrs. Long will do any such thing. She has two nieces of her own. She is a selfish, hypocritical woman, and I have no opinion of her.” “No more have I,” said Mr. Bennet; “and I am glad to find that you do not depend on her serving you.” Mrs. Bennet deigned not to make any reply, but, unable to contain herself, began scolding one of her daughters. “Don’t keep coughing so, Kitty, for Heaven’s sake! Have a little compassion on my nerves. You tear them to pieces.” “Kitty has no discretion in her coughs,” said her father; “she times them ill.” “I do not cough for my own amusement,” replied Kitty fretfully. “When is your next ball to be, Lizzy?” “To-morrow fortnight.” “Aye, so it is,” cried her mother, “and Mrs. Long does not come back till the day before; so it will be impossible for her to introduce him, for she will not know him herself.” “Then, my dear, you may have the advantage of your friend, and introduce Mr. Bingley to her.” “Impossible, Mr. Bennet, impossible, when I am not acquainted with him myself; how can you be so teasing?” “I honour your circumspection. A fortnight’s acquaintance is certainly very little. One cannot know what a man really is by the end of a fortnight. But if we do not venture somebody else will; and after all, Mrs. Long and her nieces must stand their chance; and, therefore, as she will think it an act of kindness, if you decline the office, I will take it on myself.” The girls stared at their father. Mrs. Bennet said only, “Nonsense, nonsense!” “What can be the meaning of that emphatic exclamation?” cried he. “Do you consider the forms of introduction, and the stress that is laid on them, as nonsense? I cannot quite agree with you there. What say you, Mary? For you are a young lady of deep reflection, I know, and read great books and make extracts.” Mary wished to say something sensible, but knew not how. “While Mary is adjusting her ideas,” he continued, “let us return to Mr. Bingley.” “I am sick of Mr. Bingley,” cried his wife. “I am sorry to hear that; but why did not you tell me that before? If I had known as much this morning I certainly would not have called on him. It is very unlucky; but as I have actually paid the visit, we cannot escape the acquaintance now.” The astonishment of the ladies was just what he wished; that of Mrs. Bennet perhaps surpassing the rest; though, when the first tumult of joy was over, she began to declare that it was what she had expected all the while. “How good it was in you, my dear Mr. Bennet! But I knew I should persuade you at last. I was sure you loved your girls too well to neglect such an acquaintance. Well, how pleased I am! and it is such a good joke, too, that you should have gone this morning and never said a word about it till now.” “Now, Kitty, you may cough as much as you choose,” said Mr. Bennet; and, as he spoke, he left the room, fatigued with the raptures of his wife. “What an excellent father you have, girls!” said she, when the door was shut. “I do not know how you will ever make him amends for his kindness; or me, either, for that matter. At our time of life it is not so pleasant, I can tell you, to be making new acquaintances every day; but for your sakes, we would do anything. Lydia, my love, though you are the youngest, I dare say Mr. Bingley will dance with you at the next ball.” “Oh!” said Lydia stoutly, “I am not afraid; for though I am the youngest, I’m the tallest.” The rest of the evening was spent in conjecturing how soon he would return Mr. Bennet’s visit, and determining when they should ask him to dinner. Chapter 3 Not all that Mrs. Bennet, however, with the assistance of her five daughters, could ask on the subject, was sufficient to draw from her husband any satisfactory description of Mr. Bingley. They attacked him in various ways—with barefaced questions, ingenious suppositions, and distant surmises; but he eluded the skill of them all, and they were at last obliged to accept the second-hand intelligence of their neighbour, Lady Lucas. Her report was highly favourable. Sir William had been delighted with him. He was quite young, wonderfully handsome, extremely agreeable, and, to crown the whole, he meant to be at the next assembly with a large party. Nothing could be more delightful! To be fond of dancing was a certain step towards falling in love; and very lively hopes of Mr. Bingley’s heart were entertained. “If I can but see one of my daughters happily settled at Netherfield,” said Mrs. Bennet to her husband, “and all the others equally well married, I shall have nothing to wish for.” In a few days Mr. Bingley returned Mr. Bennet’s visit, and sat about ten minutes with him in his library. He had entertained hopes of being admitted to a sight of the young ladies, of whose beauty he had heard much; but he saw only the father. The ladies were somewhat more fortunate, for they had the advantage of ascertaining from an upper window that he wore a blue coat, and rode a black horse. An invitation to dinner was soon afterwards dispatched; and already had Mrs. Bennet planned the courses that were to do credit to her housekeeping, when an answer arrived which deferred it all. Mr. Bingley was obliged to be in town the following day, and, consequently, unable to accept the honour of their invitation, etc. Mrs. Bennet was quite disconcerted. She could not imagine what business he could have in town so soon after his arrival in Hertfordshire; and she began to fear that he might be always flying about from one place to another, and never settled at Netherfield as he ought to be. Lady Lucas quieted her fears a little by starting the idea of his being gone to London only to get a large party for the ball; and a report soon followed that Mr. Bingley was to bring twelve ladies and seven gentlemen with him to the assembly. The girls grieved over such a number of ladies, but were comforted the day before the ball by hearing, that instead of twelve he brought only six with him from London—his five sisters and a cousin. And when the party entered the assembly room it consisted of only five altogether—Mr. Bingley, his two sisters, the husband of the eldest, and another young man. Mr. Bingley was good-looking and gentlemanlike; he had a pleasant countenance, and easy, unaffected manners. His sisters were fine women, with an air of decided fashion. His brother-in-law, Mr. Hurst, merely looked the gentleman; but his friend Mr. Darcy soon drew the attention of the room by his fine, tall person, handsome features, noble mien, and the report which was in general circulation within five minutes after his entrance, of his having ten thousand a year. The gentlemen pronounced him to be a fine figure of a man, the ladies declared he was much handsomer than Mr. Bingley, and he was looked at with great admiration for about half the evening, till his manners gave a disgust which turned the tide of his popularity; for he was discovered to be proud; to be above his company, and above being pleased; and not all his large estate in Derbyshire could then save him from having a most forbidding, disagreeable countenance, and being unworthy to be compared with his friend. Mr. Bingley had soon made himself acquainted with all the principal people in the room; he was lively and unreserved, danced every dance, was angry that the ball closed so early, and talked of giving one himself at Netherfield. Such amiable qualities must speak for themselves. What a contrast between him and his friend! Mr. Darcy danced only once with Mrs. Hurst and once with Miss Bingley, declined being introduced to any other lady, and spent the rest of the evening in walking about the room, speaking occasionally to one of his own party. His character was decided. He was the proudest, most disagreeable man in the world, and everybody hoped that he would never come there again. Amongst the most violent against him was Mrs. Bennet, whose dislike of his general behaviour was sharpened into particular resentment by his having slighted one of her daughters. Elizabeth Bennet had been obliged, by the scarcity of gentlemen, to sit down for two dances; and during part of that time, Mr. Darcy had been standing near enough for her to hear a conversation between him and Mr. Bingley, who came from the dance for a few minutes, to press his friend to join it. “Come, Darcy,” said he, “I must have you dance. I hate to see you standing about by yourself in this stupid manner. You had much better dance.” “I certainly shall not. You know how I detest it, unless I am particularly acquainted with my partner. At such an assembly as this it would be insupportable. Your sisters are engaged, and there is not another woman in the room whom it would not be a punishment to me to stand up with.” “I would not be so fastidious as you are,” cried Mr. Bingley, “for a kingdom! Upon my honour, I never met with so many pleasant girls in my life as I have this evening; and there are several of them you see uncommonly pretty.” “You are dancing with the only handsome girl in the room,” said Mr. Darcy, looking at the eldest Miss Bennet. “Oh! She is the most beautiful creature I ever beheld! But there is one of her sisters sitting down just behind you, who is very pretty, and I dare say very agreeable. Do let me ask my partner to introduce you.” “Which do you mean?” and turning round he looked for a moment at Elizabeth, till catching her eye, he withdrew his own and coldly said: “She is tolerable, but not handsome enough to tempt me; I am in no humour at present to give consequence to young ladies who are slighted by other men. You had better return to your partner and enjoy her smiles, for you are wasting your time with me.” Mr. Bingley followed his advice. Mr. Darcy walked off; and Elizabeth remained with no very cordial feelings toward him. She told the story, however, with great spirit among her friends; for she had a lively, playful disposition, which delighted in anything ridiculous. The evening altogether passed off pleasantly to the whole family. Mrs. Bennet had seen her eldest daughter much admired by the Netherfield party. Mr. Bingley had danced with her twice, and she had been distinguished by his sisters. Jane was as much gratified by this as her mother could be, though in a quieter way. Elizabeth felt Jane’s pleasure. Mary had heard herself mentioned to Miss Bingley as the most accomplished girl in the neighbourhood; and Catherine and Lydia had been fortunate enough never to be without partners, which was all that they had yet learnt to care for at a ball. They returned, therefore, in good spirits to Longbourn, the village where they lived, and of which they were the principal inhabitants. They found Mr. Bennet still up. With a book he was regardless of time; and on the present occasion he had a good deal of curiosity as to the event of an evening which had raised such splendid expectations. He had rather hoped that his wife’s views on the stranger would be disappointed; but he soon found out that he had a different story to hear. “Oh, my dear Mr. Bennet,” as she entered the room, “we have had a most delightful evening, a most excellent ball. I wish you had been there. Jane was so admired, nothing could be like it. Everybody said how well she looked; and Mr. Bingley thought her quite beautiful, and danced with her twice! Only think of that, my dear; he actually danced with her twice! and she was the only creature in the room that he asked a second time. First of all, he asked Miss Lucas. I was so vexed to see him stand up with her! But, however, he did not admire her at all; indeed, nobody can, you know; and he seemed quite struck with Jane as she was going down the dance. So he inquired who she was, and got introduced, and asked her for the two next. Then the two third he danced with Miss King, and the two fourth with Maria Lucas, and the two fifth with Jane again, and the two sixth with Lizzy, and the Boulanger—” “If he had had any compassion for me,” cried her husband impatiently, “he would not have danced half so much! For God’s sake, say no more of his partners. Oh that he had sprained his ankle in the first dance!” “Oh! my dear, I am quite delighted with him. He is so excessively handsome! And his sisters are charming women. I never in my life saw anything more elegant than their dresses. I dare say the lace upon Mrs. Hurst’s gown—” Here she was interrupted again. Mr. Bennet protested against any description of finery. She was therefore obliged to seek another branch of the subject, and related, with much bitterness of spirit and some exaggeration, the shocking rudeness of Mr. Darcy. “But I can assure you,” she added, “that Lizzy does not lose much by not suiting his fancy; for he is a most disagreeable, horrid man, not at all worth pleasing. So high and so conceited that there was no enduring him! He walked here, and he walked there, fancying himself so very great! Not handsome enough to dance with! I wish you had been there, my dear, to have given him one of your set-downs. I quite detest the man.”

Please read the article and answear about questions.

Strategy in the Small Business

Strategy is the idea and actions that explain how a firm will make its profit. Whether you know it or not, all small businesses have a strategy. The strategy may be a blueprint for planning or a standard to compare actions against. Either way, strategy defines for you, your customers, and your competi- tion how your business operates.

Good strategy leads to greater chances for survival and higher profits for a small business. What makes a strategy good is its fit to the particulars of your business and the resources you can bring to it. In this chapter, we consider how strategy can be created and applied to help your business be its best.

Strategy in small business is special because most small businesses are more imitative than inno- vative. If you are opening a home day care center, a machine shop, an Italian restaurant, or an online collectible figurine store, these types of businesses already exist. You can find examples, books, and often even magazines to study, as well as trade and professional associations to join. There are special strategies that aim to help imitative businesses be successful.

Getting to the useful strategies for a small business is a four-step process. Figure 7.1 shows the strategic planning process for small businesses. The first step involves reviewing and confirming the goals that define your firm and knowing your magic number. The second step is where you consider your customers and the benefits you want to offer them and plot these out in a procedure called perceptual mapping. The third step is to study the dynamics and trends of your industry using a technique called industry analysis in order to identify the best way and time to enter busi- ness. The fourth step involves building on the prior three steps to determine the best strategic direc- tion and strategy for the firm. After this four-step process, there is a continuing effort called post start-up which aims to refine your firm’s strategies and tactics in order to maintain a competitive advantage.

As you can see in Figure 7.1, strategy builds on four key types of decisions you make about your firm. These may be made formally or informally in your opportunity analysis or feasibility analysis. These decisions are:

1.         The major goals you set for your firm. 2.       The types of customers you seek and what benefits you plan to offer them.

3.         The stage and trend of your chosen industry. 4.         The specific generic and supra strategies you choose to pursue.

Goals: The First Step of Strategic Planning

Before getting into industry analysis, you as the entrepreneur need to make some very basic deci- sions about your goals for your prospective business—you, your idea, and your firm. These goal decisions will set the stage for the kind of business you will have and are the foundation for further analyses. There are five initial key goal decisions:

1.         As owner, what do you expect out of the business? 2.           What is your product or service idea (and its industry)? 3. For your product or service, how innovative or imitative will you be? 4.           Who do you plan to sell to—everyone or targeted markets? 5.    Where do you plan to sell—locally, regionally, nationally, globally?

Owner Rewards

For a small business that is starting out, all strategy starts with the owner. As owner, what do you want out of your business? In Chapter 1 we introduced the rewards sought by entrepreneurs from their businesses. Some, like flexibility, personal growth, and a solid personal income, were pretty universal. Skill Module 7.1 looks at how you can determine your magic number, which is the income you personally seek from the business. Knowing that number from the start, you are better able to evaluate if your proposed business can deliver on that very basic need that everyone reports needing. Other rewards like great wealth and developing a new product or service was mentioned occasionally, while recognition, admiration, power, and family tradition get mentioned least often of all rewards. For EnableMart, the original reward was to generate the wealth necessary to bring Mindnautilus to market, and also provide a service that made it easier for America’s 54 million disabled to get the products they need to make their lives better.

Whatever the reward or rewards you seek—it is fine to want more than one—it should be central to your creating the business. In a very real sense, what you want from the business is the core of your and your firm’s strategy. It is the “why” which drives the process of entrepreneurship.

in Chapter 5. Either way, the idea gets made real as a product (something physical a customer buys) or a service (activities undertaken on a customer’s behalf). It is possible to combine products and services, like a GM auto that comes with the OnStar cell phone service. You can learn more about that in Chapter 9.

If you have in mind a product or service, you also have an industry. Industry is the general name for the line of product or service being sold. Examples include the restaurant industry, the computer consulting industry, and the collectible doll industry. In addition to a name, industries have numeric codes, called SIC or NAICS codes,3 which are discussed below. Industry is vitally important to your core strategy decisions because simply put, there are industries that are more profitable than others.

In fact, picking the right industry is key to the success of your small business. Stanley and Danko,4 in The Millionaire Next Door, point out that two-thirds of all millionaires are self-employed. They say that the key to being successful is selecting an industry that offers good potential for making a profit and attractive opportunities to work with a minimum of risk and competition. These industries are described as having high industry attractiveness. Stanley and Danko were surprised to discover that most millionaires who owned businesses are in industries like scrap metal, coal mining, and dry cleaning. It turns out that industries that are attractive from a profit-making sense may not be the industries thought of as attractive places to work. But choosing one of these attractive industries can do a lot to help your firm survive and you to be successful.

Industries which do well in good times and poor historically include financial firms tied to bank- ing, health-related firms, insurance firms (especially related to health), and business consulting.5 When talking about the small business myths in Chapter 1, other occupations that came up included bookkeeping, credit counseling, and tax preparers.6 Figure 7.2 gives information about a number of industry sectors and some popular individual businesses to help you get an idea of the relative attractiveness of industries (based on their profitability), and the expected level of sales.

If you know the industry’s code number (see Skill Module 7.2 to find out how to do this), you can find out a tremendous amount of information about the industry. This is because most informa- tion is coded using the industry number. From the work done by marketing researchers Stanley and Danko7 as well as BizMiner.com and others, we know there are between 15,000 to 30,000 different industries in the United States.

There are two major classification systems that code industries: the new NAICS (North Ameri- can industry classification system) and the better-known standard industrial classification system, or SIC. SIC codes have four digits; NAICS have six. NAICS covers more industries and more of the newer types of industries. Skill Module 7.2 gives you help in finding the NAICS and SIC codes for the industry for your business. The Skill Module is also on the Online Learning Center.

The key to finding information about industries is knowing how to check the information, and NAICS and SIC codes are essential to that. It is also important to know that there are no “safe” industries. In much the same way that families and societies are living things—things that are born, mature, and can die—industries can be considered living too. Ten years ago, coffee shops were a dead industry in most of the country. However, today, with Starbucks, Panera Bread, Seattle’s Best, and a host of independent coffee shops blanketing the country, the industry has been revived through franchises, company-owned stores, and innovative independents.

Imitation and Innovation

This chapter’s subtitle is “Imitation with a Twist.” The idea reflects the fact that for most small busi- nesses, the owner wants to be a lot like others in the industry, but not exactly like them. Owners who elect to imitate their competitors still want to have something that distinguishes them from the oth- ers—something that makes the owner’s firm special and better. That special and better element—that innovation amid a lot of imitation—gives us the kind of entrepreneurial thinking behind the chapter title.

The choice between imitation and innovation is truly important and often overlooked. Busi- nesses, especially new firms, can do more or less what others are already doing—an imitative strategy—or they can start doing something that is very different from what others do—an innovative strategy. Imitation is the classic small business strategy. We know from the PSED that almost two-thirds of people starting businesses today plan to use imitation as their approach.8

There are several advantages to using an imitative strategy.9 You benefit from being able to buy existing technologies, such as industrial grade washing machines for a laundromat, web servers for a hosting service, or calligraphy pens for greeting card publishing. Architects, builders, real estate

agents, zoning boards, equipment manufacturers, equipment servicing companies, and banks are more likely to understand the industry and what is expected. Because of this, they can give you firm estimates of costs and schedules. With imitative approaches, there is also the possibility to buy existing businesses.

Perhaps the key benefit of an imitative strategy comes from your customers. Chances are they already know about the kind of product or service you are offering. This means your marketing ef- forts can focus on the benefits you offer instead of explaining the product itself.

When you elect an innovative strategy, you have the benefit of making your business precisely fit your own ideas and preferences. Take the example of snowboards. When Dimitrije Milovich built the first modern snowboard in 1969, he not only had to have the product available for purchase, but he also had to inform the customers that such a product existed and how it could be used. With highly innovative businesses, there is often not much opportunity to sell the business, and the owner spends a lot of energy in creating the processes and markets as well as informing suppliers, resellers, and investors about the new product or service.

In practice, most firms use imitation plus or minus one degree of similarity. Imitation minus one degree of similarity would be the business equivalent of cloning. It is franchising, first dis- cussed in Chapter 6, in which you purchase a precise and complete copy of an existing busi- ness from the franchisor. Imitation itself involves patterning a business on existing firms and processes. Your imitation is not likely to match the precision or completeness of copying seen in franchising, since you are unlikely to have all the information about the model businesses or processes. You may also adapt your business to fit local situations or your current situation. You might pattern your new Italian restaurant after the Olive Garden, but you end up buying your equipment and food from different sources and add local favorites, such as toasted ravioli in St. Louis, barbeque pizza in Memphis, or deep-dish pizza in Chicago. This approach is called parallel competition.

Imitation plus one degree of similarity is where you look at existing businesses and pattern yourself after them, with the exception of one or two key areas in which you seek to do things in a

new, and hopefully better, way. This is called incremental innovation and is second only to par- allel competition in frequency. You have seen it in the fast-food business where Burger King told customers “have it your way.” This approach was bettered by Wendy’s, which offered custom-built hamburgers that were, in addition, “hot and juicy.” Hardees moved into the fray with supersized custom burgers. Each company makes custom-built hamburgers, but each added a small innovation to differentiate it from its competition. Small businesses do the same thing, whether they are offer- ing haircuts or golf clubs.

The last type is pure innovation, also called a blue ocean strategy, which results in a new product or service. These situations are rare. Typically with a new product or service, you also have a unique setting. For example, Philadelphia chef Joseph Poon was one of the early developers of a food style called Asian Fusion, which combined Asian food with contemporary American and nouvelle cuisine elements. His restaurant reflected the Asian Fusion theme with light woods, simple lines, and oriental details. Other Asian Fusion restaurants, such as Roy’s of Seattle or the E&O Trading Company in San Jose, California,10 added different wines, beers, and liquors, and even new types of mixed drinks developed to complement the food. After all this, the Asian Fusion chefs had to convince diners to try these new combinations of flavors.

These ideas lead to a simple set of strategic moves that can help you think about how to compete better as an imitator. Think of the case of the upstart Netflix, which became a major player in the video rental business, but was a relative latecomer.11

?

?

Parallel Innovation ? Use the standard-setter’s approach for lower start-up costs: Blockbuster set the standard, so

the software and basic inventory for video rental existed. ? Don’t make the mistakes the leader is making: Blockbuster customers complained about

lack of selection, and out-of-stock movies, so Netflix had a larger selection and arranged to

avoid stock-outs. Incremental Innovation ?   Take it to the next level: Pick one area important to customers to do much better than the

pioneer. You can be easier, cheaper, or offer higher quality. Netflix offered avid movie

renters a better financial deal and better selection. ? Borrow from Outside: If another industry has a solution that works (and people know about

and like), imitate that idea in your home industry. Netflix married the book clubs’ use of mail and the video rental model of Blockbuster.

Remember that a lot of research shows that imitators do better than pioneers in the long run.12 For example, we know Boeing, Microsoft, and Google, but these are all imitative companies. The pio- neers in their industries were companies like Wright or Curtis (airplanes), Digital Research (PC operating systems), Wandex (web searching), and Overture (keyword ad sales). When you do imita- tion well, it can do well by you.

Markets

A market is the business term for the population of customers for your product or service. If you know your market inside and out, you are likely to know much of the key information for how to be successful in your line of business. There are two market decisions you need to make early in the process of going into business. One of these is the scale of the market, which is the size of the market—whether you plan to aim for a mass market or a niche market. The other is the scope of the market, which defines the geographic range covered by the market—from local to global. manufacturers in your city. Niche markets are specific and narrow, and in a niche market approach, you try to target only customers in the niche.

Most industries have both mass and niche markets. For example, the greeting card industry has mass-market giants like Hallmark and American Greetings, which advertise nationally on TV (a sure sign of a mass marketer). However, the industry is also full of niche markets. For example, Maria Peevey and Lisa Bicker started SimplyShe with greeting cards targeting women going through try- ing life experiences such as breaking up, motherhood, or weddings. Having identified their niche and its needs, they market their cards through specialty fashion boutiques such as Henri Bendel, as well as online.13

Scope: Local to Global

Market scope is related to market scale. Market scope refers to the geography of your target market. It can be local (like a neighborhood or a city), regional (e.g., a metropolitan area or a state), national, international (usually meaning two to a few countries), or global (meaning everywhere). Owners of the businesses studied in the PSED14 were asked how much of their business they thought would come from each of the geographic categories. Overall, they estimated that 58 percent of sales would be local (within 20 miles), 30 percent would be regional (from 21–100 miles), 22 percent would be national (from 100 miles out to the rest of the United States), and only 4 percent would be interna- tional (outside the United States).

Market scope is important for two reasons. First, knowing your market scope helps you decide where to focus your sales and advertising efforts. The second benefit is that knowing your target market gives you a way to determine which potential competitors you need to worry about most, namely those also in your market scope.

In the Goal step, the key is to bring together the decisions that underlie the business you hope to own. This starts with you and the rewards you seek; the product or service you plan to offer for sale to achieve those rewards; and the industry and markets with which you and your firm will plan to deal. Armed with this basic understanding of your firm, you are ready to begin developing a strategy to achieve your goals. Very often, it starts with a closer consideration of your potential customers and what you can do with your product or service to best catch their attention.

Customers and Benefits: The Second Step of Strategic Planning

In this second step of the strategic planning process, the focus is on the kind of customer to whom you want to sell, and the benefits that will attract them. Just as there are industries that offer better and worse opportunities, there are customers that entrepreneurs prefer. Customers who offer the kinds of rewards you are seeking are generally those you are most likely to view positively. If you are interested in great wealth, having customers who are themselves wealthy and not very sensitive to price issues would be seen as rewarding. If growth is your goal, having customers from whom you can learn and who expect things to be constantly new and improved will help you meet your goal.

There are also some types of customers often seen as particularly attractive. These include:

?          Corporate customers: Look at Figure 7.2 and compare the B2B (wholesale) to B2C (retail) sales. Selling to other businesses may produce greater profits.

? Loyal customers: Loyal customers return and are already presold, making your life easier. They also refer friends, another source of revenue.

?          Local customers: This was originally true because as the owner you could keep tabs on the sat- isfaction of local customers more easily than distant ones; but in the digital age, it is less about geographic proximity than about you taking the time to stay in touch with your customers.

?          Passionate customers: People who are not just loyal but are likely to rave about your business are likely to generate more potential customers than any other type.

There are literally dozens of beliefs about the best customers. Most of them have at least a germ of truth about them. You can learn about the types of customers in your intended line of business by

talking to other entrepreneurs already in the business, and by researching the business in the trade press (to find these, refer back to Skill Module 3.1). Look for terms like “customer profile” and “preferred customers” as well as articles about “loyalty programs” and “repeat customers.” These articles are most likely to have information about the most prized customers in your proposed line of business.

The point is that thinking ahead about the kind of customer with whom you want to deal is the best way to orient your strategic planning process toward finding those customers when you get to picking a strategy. As you decide on the type of customer you want to encounter, your next step is thinking about the kind of benefits you can offer them to help meet their needs with your product or service.

Value and Cost Benefits

Benefits are characteristics of a product or service that the target customer would consider worthwhile, such as low cost or high quality. The best way to identify desirable benefits is through potential customers. You can do this directly through interviews, focus groups, or ques- tionnaires (see Chapter 12 for more details on how to do this), or indirectly through reviewing websites using the techniques given in Skill Module 7.3. Ratings and complaints for products

and companies can give you valuable information on what benefits people want, and might want more of. Usually the benefits focus on value added to the product or service or on the cost of the product or service.

Benefits are usually characterized as value benefits or cost benefits. A value benefit displays characteristics related to the nature of the product or service itself. Things like quality, fashion, and reputation are elements that give a product or service value in the eyes of the customer. A complete list is given in The Thoughtful Entrepreneur box on value and cost benefits.15 Value benefits are important because they are almost always what lead to higher prices and higher prof- its. For example, McDonald’s Big Mac often costs $2 more than their double cheeseburger. The difference between them are some sesame seeds, a third piece of bun between the top and bottom patty, the “special” Big Mac sauce, and some lettuce. Both have two all-beef patties, two buns, and cheese, which you would figure (correctly) are the major costs of the sandwiches. But people pay far more for the Big Mac and pay it far more often. Next time, ask your friends why they do that. The answers you will get will tell you a lot about value benefits, and how much people will pay for them.

While value benefits refer to what the customer senses in the product or service, cost benefits refer to the ways by which a firm can keep costs low for the customer. These include scale and scope savings, and a full list is given in the same Thoughtful Entrepreneur box. It is often important for customers to know one of these cost benefit reasons why a product or service has a low price so that they do not erroneously conclude that your firm has cut price by cutting quality.

Benefits are central to how you appeal to your target customer base. Picking benefits customers find attractive makes your firm attractive to them. Picking customer-desired benefits that your com- petitors do not offer is a powerful way to make your firm stand out from the competition. Benefits drive your firm’s offering to its customers and influence every part of the strategy process. As we will see later, benefits can be combined to offer themed strategic packages.

Offering the benefits your customers want opens up the possibility of your being able to charge a premium price and make higher profits, since people are willing to pay for value-based benefits they desire. Having cost-based benefits can also increase profits by lowering your cost of doing business, and thereby increasing your margin relative to your competition’s. Therefore, it is easy to see how benefits help you select a strategy that improves your firm’s profitability.

As you decide what benefits to offer, you open up the possibility of using a powerful strategic analysis tool called a perceptual map. Perceptual maps are a graphic display of products, services, brands, or companies evaluated in two or more ways at once. Very often one of these ways is cost or price or one of the cost-related ideas from the Cost Benefits list in the Thoughtful Entrepreneur box, since most consumers have ideas about what they are willing to pay. So price becomes one of the dimensions of your perceptual map.

The other dimension can be what you think you or your customer will think is most important. It could be the stylishness of an item of clothing, the speed of a cell phone app or car, any of the Value Benefit ideas mentioned in the Thoughtful Entrepreneur box. You are not limited to one idea. Entrepreneurs often make different perceptual maps to find a benefit that the competition is

not delivering on, but their own company could. That kind of opportunity is the goal of perceptual mapping—a combination of Value and Cost benefits your firm provides and makes your firm stand out from others in your industry or market. Skill Module 7.4 takes you through developing a perceptual map.

Industry Dynamics and Analysis: The Third Step of Strategic Planning

Industry refers not only to your product or service, but also to all the firms also selling that product or service, in other words, your competitors. In setting strategy you need to look at your competitors in order to best position your firm, but you also want to look at the changes in competitors, sales, and prof- its in your industry—what are called the industry dynamics—to make sure it is a good time to enter it.

It turns out the fortunes of industries move in a predictable way. Figure 7.3 shows the two ways the number of firms in an industry change.16 Most industries’ introduction stage starts with only a few firms. These firms elected to be innovative in their approach, making a new product or offering a new service. The number of firms typically grows slowly at first. Sales are probably small, and most customers are largely unaware of the offering. When enough customers have bought the product so that it begins to draw the attention of the general public, there are two possibilities for the growth stage. Most products and services tend to grow at a regular rate, one at which the growth in the num- ber of firms more or less meets customer demand. However, some products or services turn out to be extremely popular or “hot” and grow very rapidly. In these cases, the original firms are unable to keep up with consumer demand. Other firms jump in to take advantage of the growth; this stage is often called the boom. Firms begin to compete on features and price, and there may seem to be an explosion

of choices. Eventually, all such booms come to an end, and there is a stage called the shake-out in which many of the firms close down. This phase ends as the rapid die-off of firms stops.

Whether through slow and steady growth or a boom and shake-out cycle, the industry eventually reaches a relatively stable number of firms, with minor variations and a slow drop in numbers. This is called the maturity stage. Eventually mature industries begin a decline stage. Some industries face death, while others find new life in a process called retrenchment. We will look at those later stages later in this chapter.

Starting early is not always a guarantee of eventual success. Consider cars—the original car com- panies were small businesses. Charles and Frank Duryea, brothers who created a family business, made the first production car in the United States in 1893. Firms from the start-up stage included Duryea, Winton, and Studebaker as well as Olds, Cadillac, and Ford. The boom started in 1905 and went to 1915 with over 75 auto manufacturers, many of them still small businesses. In the shake-out during World War I, the number dropped into the teens, settling into the maturity phase of the Big 3 (GM, Ford, and Chrysler) who survived into the 21st century.

Industry dynamics are important in telling you and potential partners or investors about the pros- pects for the industry as a whole. Obviously it is easier to sell people on your business when the whole industry is growing. But if the industry is not growing there are still ways to be successful, but as a start-up you need to have worked these through ahead of time. As mentioned before, the market relinquishment in the declining airline industry after 9/11 opened up opportunities for new small airlines in the cities abandoned by the major airlines. Remember, there are small businesses started in every industry at every stage of the industry life cycle. Knowing where your industry is in the life cycle helps you to craft the best strategy for success.

Tool: Industry Analysis

Armed with the concepts and preliminary information about the product/service and the market, you are ready to do a preliminary industry analysis. Industry analysis (IA) is a research process

that provides the entrepreneur with key information about the industry, such as its current situation and trends. Most entrepreneurs initially do an IA to find out what the profits are in an industry in order to better estimate possible financial returns. Taking this one step further, finding out how those profits are generated often makes the difference between success and failure. Armed with this information, the entrepreneur can tell if the industry is growing, stable, or in decline and what the degree of competition is. Skill Module 7.5 provides a how-to description for gathering the key types of information needed to perform an industry analysis. It also explains how the information is use- ful. For a complete example of an industry analysis, see this chapter’s appendix.

What are you looking for in your industry analysis? You want a business that can help you meet the magic number you determined earlier in the chapter. In looking at the other numbers in the industry

analysis, you may see ways to cut costs, or leverage friends or expertise or other resources available to you to make your business more profitable than the average one. That can be a tremendously useful finding.

Knowing the stage and trend in the industry is important to thinking about how you will enter the industry. Going into an established industry means it is easy to find locations, equipment, and experienced people (think pizza parlors). Going into an industry early may mean you have to spend more time and money doing things for yourself. It is better to know these things early. If the analysis tells you that you are facing a lot of competition, you want to pay particular attention in building or rebuilding your perceptual map to find a set of benefits that will help your firm stand out. All in all, an industry analysis is central to your plotting of your firm’s strategy.

Table 7.1 provides a listing of many of the key databases used in assembling industry analy- ses. Some are online, while others are in book form and available in local libraries. Armed withthe information from your industry analysis, you are in a better position to decide if the industry meets your needs for income (which comes from profits and operating revenues), financial growth (depending on the trend of the industry as a whole), and competitive challenge (depending on the number and concentration of competitors). It can also help you determine if you have or can get the expertise needed to run a profitable business (comparing how profits are made to how you would run your business if you started now). If the IA outcomes do not look promising, there are thousands of other industries to try, and it is time to think about what you can offer to attract customers to your business.

Strategy Selection: The Fourth Step in Strategic Planning

There are three classic strategies for businesses of all types—differentiation, cost, and focus.17 Because they are so widely applicable, they are called generic strategies. Differentiation strategies are aimed at mass markets—situations in which nearly everyone might buy your product or service. With this strategy, you try to show how your firm offers some combina- tion of value benefits that is different from and better for the customer than those offered by competitors.

Relatively few small businesses use differentiation strategies, because it is hard for small busi- nesses to have the resources to pursue mass markets. It happens most often when a small business offers a mass-market product or service locally. For example, a gas station offers a mass-market service, but its sales are naturally limited to a particular location. This business reality sets boundar- ies for where the firm competes, which help target advertising and pricing.

Cost strategies are also aimed at mass markets. In a cost strategy, you try to show how your firm offers a combination of cost benefits that appeal to the customer. Small businesses in a va- riety of industries make use of mass-market cost strategies. Typically, this comes when the small business can pursue a very low cost operation. For example, one gravel supplier in Memphis, Tennessee, was the undisputed low-cost provider. His secret? A farmer by trade, he discovered gravel under one of his farm fields. He sold directly to the users, cutting out intermediaries and their costs.

Focus strategies target a portion of the market, called a segment or niche. Instead of selling mass-market gravel for everyone, a focus strategy might target people seeking decorative gravel. For example, Scott Stone Company in Mebane, North Carolina, offers eleven different types of gravel that differ in color, stone size, and durability. By ensuring the quality and consistency of the gravel and knowing which types work best in specialized settings, such as oriental gar- dens or waterscapes, Scott Stone offers customers products and expertise not readily available elsewhere.

Small businesses often use a combination strategy that can use aspects of differentiation or cost approaches that are reformulated for the niche market. You identify a focus or combination strat- egy by figuring out what benefits your market most wants. This can be done by asking customers outright, through surveys, or by looking at what is working among your competitors locally or in more advanced markets. Often you will find that your market seems to want several benefits at once.

Building from this, strategy researchers such as Dean Shepherd and Mark Shanley as well as Mi- chael Porter have identified classic benefit combinations which they call supra-strategies 18 which are given in Exhibit 7.1. All are designed to work where there are many small businesses in an industry, along with a few larger firms.

Tightly managed decentralization can also work in more conventional firms too. The Men- love family mastered the auto business in southern Utah with a Dodge dealership that started in 1962. Family members opened a Toyota dealership in 1986, and a Mitsubishi-Subaru dealership in 2002. Each one is highly rated in customer satisfaction and sales volume.19 Part of the un- derlying reason for their success is their ability to transplant the skills they mastered in the first dealership. Armed with these strategic choices, it is possible to profile the most typical strategies for new businesses. Table 7.2 shows four types of start-ups and outlines how they align with the scope, ge- neric strategies, imitiation/innovation choice, and supra-strategies discussed above.

It might help to think about how Table 7.2 applies in a particular industry. Let’s look at Italian restaurants (part of NAICS 72211). There are probably several Italian restaurants where you live or go to school. If you think about it, the vast majority offer the same sorts of dishes. They are funda- mentally imitators of one another. Most of them differentiate themselves based on one or two menu items (one has cannoli, another has Italian wedding cake, etc.). That is their craftsmanship. Another may differentiate on the basis of atmosphere (i.e., best place to take a date) or location (close enough to walk to from class). They probably have nearly identical kitchens and bought most of their furni- ture and serving ware from the same restaurant supply store. That is their formula facility. Together, these restaurants are classic imitators.

There is also probably another Italian restaurant known as the place to go toward the end of the month, when money is tight. The menu has the same sort of items, but the quality of the ingredients may be less (e.g., more like institutional food) or the de?cor may be nothing to look at, but the prices are always low. That restaurant is your classic cost leader.

Last, think about the Italian restaurant that has the most different menu. It may be hard to find a marinara sauce on the menu. The de?cor may look more at home in a Scandinavian restaurant, and the menu may change with the season and what looks good locally. Here you have a firm pursuingan innovator strategy. It may appeal only to a few individuals. Because the food varies so much, they are more willing to tweak recipes to fit the customer’s wishes. Some of the equipment in the kitchen or the seating area will probably be different from what the other local Italian restaurants have. That too is part of the innovator strategy. Innovators either grow enough to become mainstream, or they die out fairly quickly.

Innovators may also come along as drivers of the retrenchment of an industry. The growth of northern Italian cuisine (Italian without red sauce) revitalized the Italian restaurant industry by ex- panding the menu and reenergizing bored customers to come back and learn about new dishes. The growth of the wine industry in the United States also led to a revitalization of Italian eating. The Internet version of the Italian restaurant is the online ordering system pioneered by big chains like Pizza Hut, but is now available for small restaurants everywhere. The food is the same. The prices are the same, but the difference is the ability to order online. For some other businesses, the online inventory may be larger than the one at the store, because the entrepreneur can fill an online order through their supplier, without adding to their own inventory. So it is possible to be more comprehensive online than in the store.

Most of the time your preferences for a particular type of business or industry and the industry analysis you perform are closely tied together. But there are times when opportunities pop up unex- pectedly, and suddenly you can find yourself trying to decide if the opportunity is the right business and industry for you. This ability to quickly pivot is one of the classic strengths of the entrepreneur. Retired entrepreneurship professor Karl Vesper21 named these opportunities entry wedges, and he identified seven that come-up again and again:

? Supply shortages: Supply shortages occur when a new product is in demand. The target audience is leading-edge buyers who are willing to pay a premium to be the first to have the product. This is a short-term market and one that changes rapidly. The key benefits are deliv- ery, shopping ease, and style.

?          Unutilized resources: Unutilized resources can be a physical resource like gravel in a farm field or even entire inner cities (see Small Business Insight: Initiative for a Competitive Inner City). It can also be a human resource. Tax Resources, Inc. was started in 1988 by people ex- perienced in dealing with the IRS in order to advise taxpayers on legal strategies to minimize their taxes or handle audits.22 The key benefits are lower costs, scale savings, or organizational practices.

? Customer contracting: Customer contracting occurs when a customer, most often a busi- ness, is willing to sign a contract with a small business to ensure a product or service. Because big businesses frequently downsize, they have ongoing needs to outsource work. Former em- ployees are often the preferred source for independent subcontractors. The key benefits are quality, delivery, technology, shopping ease, brand/reputation, and assurance. Style and per- sonalization are often factors too.

?          Second sourcing: Second sourcing seeks out customers who are already being serviced by another firm. The strategy is to offer customers a second place to obtain goods or services. Often the advantage the small business offers is being locally based. Second sourcing pro- vides the customer with greater certainty of supplies or services, and at its best provides a competitive pressure to keep both suppliers providing the best service and prices. Like cus- tomer contracting, the key benefits are quality, delivery, technology, shopping ease, brand/ reputation, and assurance.

?          Market relinquishment: Market relinquishment occurs when business firms leave a market. Since the 9/11 terrorist attacks, the major American airlines have dramatically scaled back their service. For small commuter airlines, these market relinquishments have been opportuni- ties to expand and provide ongoing service to smaller airports. Key benefits are place, shop- ping ease, quality, delivery, and service.

?          Favored purchasing: Favored purchasing occurs because government agencies, government- sponsored commercial contracts, and many big businesses have policies that provide for set- asides or quotas for purchases from small businesses. You can find out more at the SBA’s online government contracting site. Key benefits are quality, delivery, service, assurance, place, and belonging.

?          Government rules: Rule changes by the government can help small firms compete. For ex- ample, when the Environmental Protection Agency let small construction firms out of some of the water pollution treatment requirements that large firms must face, it gave the small businesses a savings of $1.5 billion, which made them more competitive. The Regulatory Flexibility Act of 1980 drives many of these rule changes in government.23 Key benefits here are technology, service, personalization, lower costs, and organizational practices.

The industry analysis helps confirm that you have chosen the right industry, and also where your competitors are and the current industry stage. That and your own decisions earlier about the scope of your business and whether you plan to pursue an imitative or innovative strategy give you the fundamentals for deciding the type of small business strategy that makes the most sense for your start-up. With that information in mind, it is time to think about how you will set up your firm to implement the strategy.

Post Start-Up Tactics

The goal of strategy after the start-up stage is to maximize profits (or any other reward you specify as meeting your criteria for success) and protect your business from the competition. To secure suc- cess, there is a step you need to take past picking and implementing the right strategy. It is the step of securing competitive advantage. Competitive advantage is the particular way you implement your customer benefits that keeps your firm ahead of other firms in your industry or market. Com- petitive advantage is your firm’s edge in meeting and beating the competition.

It can be harder than it looks. Why? In part because most small businesses face a lot more forms of competition than they initially realize. Strategy guru Porter25 identifies five different threats of competition for any business, see Figure 7.4. Imagine you plan to start a web development firm in Pocatello, Idaho.

The first place to look at for competitive threats are existing firms in your industry. Pretty much all the other web developers in the Pocatello vicinity pose the threat of rivalry. Since web development is even being taught in high schools, another potential competitive threat will be potential entrants, other web development firms that open after yours. If you think about why people come to a web developer, you realize that there is a very broad threat of substitutes with which you compete. Prepackaged website templates are offered by many hosting services, com- panies like monstercommerce.com and Amazon.com sell whole e-commerce sites already laid out using templates, and people can buy their own templates from companies on the Internet like websitetemplates.com or even freewebsitetemplates.com. But customers can substitute whole other approaches, so you compete with free blogs from Blogger.com and Wordpress.com, and the growing possibility of running a company site from MySpace.com and other social network- ing sites.

Part of what will make your web development firm special might be the advanced services you offer. Perhaps you licensed one of the large archives of photos to include in your customers’ Websites. If your supplier of photos raises prices, your profits could take a hit. Similarly, if your customers have done their homework and checked out what other local developers offer and are charging,

These five—rivals, entrants, substitutes, suppliers, and customers—are aspects of your industry which can change your profitability and give an edge to any of the many types of competitors you face. The major ways you cope with these competitive pressures is by undertaking some combi- nation of strategic actions and tactical actions. Exhibit 7.2 shows some of the best-knownProduct/Service Idea and Industry

Along with this pursuit of rewards, there is often an idea for the business. Recall in Chapter 4 we saw that 37 percent of businesses start with an idea which energizes the entrepreneur to start a firm. For 42 percent the idea of starting their own business comes first, while for 21 percent the idea and the desire to start a business are simultaneous.2 EnableMart was one of those cases where the idea (Mindnautilus) came first. This is an example of a pivot, described in Chapter 1. The feasibility study Nick and Dennis did showed that it would take time to bring this product to market (and for customers to be able to use it easily). Then came the idea for a business to sup- port Mindnautilus, which became EnableMart. Whichever applies in your case, the fact is that the idea for a product or service and the idea to start a business to earn rewards make up the core of strategy—what you plan to do and why you are doing that. The process for evaluating ideas, called the feasibility study, was detailed in Chapter 4. For the purposes of this chapter, we will assume you know your idea is feasible.

Some entrepreneurs may start a firm to get the product or service out, while others may create the product or service and have agents find firms to use it, which is the consignment process described

Post Start-Up Tactics

The goal of strategy after the start-up stage is to maximize profits (or any other reward you specify as meeting your criteria for success) and protect your business from the competition. To secure suc- cess, there is a step you need to take past picking and implementing the right strategy. It is the step of securing competitive advantage. Competitive advantage is the particular way you implement your customer benefits that keeps your firm ahead of other firms in your industry or market. Com- petitive advantage is your firm’s edge in meeting and beating the competition.

It can be harder than it looks. Why? In part because most small businesses face a lot more forms of competition than they initially realize. Strategy guru Porter25 identifies five different threats of competition for any business, see Figure 7.4. Imagine you plan to start a web development firm in Pocatello, Idaho.

The first place to look at for competitive threats are existing firms in your industry. Pretty much all the other web developers in the Pocatello vicinity pose the threat of rivalry. Since web development is even being taught in high schools, another potential competitive threat will be potential entrants, other web development firms that open after yours. If you think about why people come to a web developer, you realize that there is a very broad threat of substitutes with which you compete. Prepackaged website templates are offered by many hosting services, com- panies like monstercommerce.com and Amazon.com sell whole e-commerce sites already laid out using templates, and people can buy their own templates from companies on the Internet like websitetemplates.com or even freewebsitetemplates.com. But customers can substitute whole other approaches, so you compete with free blogs from Blogger.com and Wordpress.com, and the growing possibility of running a company site from MySpace.com and other social network- ing sites.

Part of what will make your web development firm special might be the advanced services you offer. Perhaps you licensed one of the large archives of photos to include in your customers’ Websites. If your supplier of photos raises prices, your profits could take a hit. Similarly, if your customers have done their homework and checked out what other local developers offer and are charging,

These five—rivals, entrants, substitutes, suppliers, and customers—are aspects of your industry which can change your profitability and give an edge to any of the many types of competitors you face. The major ways you cope with these competitive pressures is by undertaking some combi- nation of strategic actions and tactical actions. Exhibit 7.2 shows some of the best-known

examples of each type. Generally strategic actions require more time, money, and specialized expertise (which collectively are known as your firm’s resources) than most tactical actions. That means a tactical response is most often your first response, with strategic actions building behind the scenes.

From all this, you can see that strategy represents the way by which an entrepreneur plots a path to success. For strategy to work, it needs to draw on most of the elements discussed in the chapter. When Nick and Dennis were putting together the idea for Mindnautilus.com, they were trying to strategize the right way. You know by now that they did an industry analysis that led them to see that Mindnautilus faced significant threats, and at that time, the partners lacked the strengths, especially financial strength, to overcome the threats. They kept thinking through what they could offer and eventually found an innovative option, creating EnableMart, which was ultimately a very successful firm.

Long term or short, every small business has a strategy, and successful small businesses have strategies that fit their industry, market, and resources. Strategy is one of those areas in which you can take charge and think through the options available to you and your firm. For all the ideas on which strategy touches, in the end there are some straightforward ways to help you decide on strategies, such as industry analyses and perceptual maps. These analysis techniques can help you narrow down your choices to a model of strategy that can help you succeed. For the vast majority of small businesses, the most powerful technique is to pursue an imitative strategy. By following the industry standard practices, with only one or two innovations to differentiate your firm from others, you can gain many of the benefits of established businesses and industries and still benefit from the power of innovation along smaller lines, which can make a real difference for your customers. For many owners, strategy is the grand game of business, but it is a game in which winning can make a major difference in the success of your firm and your life.

1. What are the three classic strategies for businesses of all types?

2. According to this chapter, what are the 7 entry wedges specific to small businesses pursuing an imitation strategy?

Let Chaos Rein, and then Rein in Chaos – Repeatedly: Managing Strategic Dynamics for Corporate Longevity describes types of dynamics that confront a corporation and how they may destroy their corporate longevity. Linear dynamics are characterized by rule abiding strategic actions from industry competitors that are easy to respond to and have foreseen consequences. Nonlinear dynamics are characterized by rule changing strategic actions from industry competitors that are difficult to respond to and have unforeseen consequences. A case study of Intel from 1968 to 2005 is presented that describes their response to both P-independent and P-controlled dynamics in terms of leadership style and leadership strategy.

QUESTIONS

What is the balance of exploitation and exploration that will maximize a company’s survival chances when confronted by nonlinear dynamics?

How can a company’s strategy making process be designed as to maximize both fitness and ability to evolve?

How can both P-controlled and P-independent dynamics be rule changing?

What is strategic style? How is strategic style different than strategic leadership?

How does strategic style guide strategic leadership?

READINGS

Combining longitudinal field research and executive experience, we propose that corporate longevity depends on matching cycles of autonomous and induced strategy processes to different forms of strategic dynamics, and that the role of alert strategic leadership is to appropriately balance the induced and autonomous processes throughout these cycles. We also propose that such strategic leadership is the means through which leadership style exerts its influence on corporate longevity. Our findings can be related to organizational research on structural inertia, learning and adaptation, as well as to formal theories of complex adaptive systems. They also contribute to resolving the seeming contradiction between a study of corporations that attributes exceptional long-term success to leadership style, and the more common proposition that strategy is the determinant of long-term performance.

INTRODUCTION

It is generally acknowledged that relatively few companies survive as independent entities for very long periods of time. For instance, of the top100 US-based industrial companies listed in Fortune magazine in 1965 only 19 remain in the top 100 in 2005, 15 fell out of the top 100, and 66 were acquired or disbanded.1 We think that an important reason for this lack of institutional longevity is that most of the time companies operate in a stable industry structure and develop a strategy-making process geared toward coping with linear strategic dynamics, which are relatively easy to understand and predict (e.g., Porter, 1980); but at some times in their evolution they face nonlinear strategic dynamics that overwhelm their capacity for strategy-making. Nonlinearity is described as “the property that the magnitude of an effect or output is not linearly related to that of the cause or input” (Oxford English Dictionary, Supplement). Such nonlinear transformations of inputs into outputs are governed by positive feedback loops in the interactions of the components of complex social systems (Arthur, 1989), and their outcomes are difficult to understand and predict.

Nonlinear strategic dynamics come about as industry participants - sometimes incumbents, but probably more frequently new entrants - change the “rules of the game:” normative rules based on laws, customs, and administrative principles; technological rules based on available technical solutions; economic rules reflecting existing bargaining power relationships among the industry players (often captured in contracts); and cognitive rules that are widely shared judgments about key success factors (a kind of “industry recipe” (e.g., Spender, 1989)). Whether implicit or explicit, the rules of the game usually remain unchallenged for extended periods of time (Grove, 2003), thereby engendering a strong tendency toward strategic inertia among the industry incumbents.

Organizational ecology researchers have provided empirical evidence (e.g., Hannan and Freeman, 1989) and deductive theoretical support (Hannan, Polos, and Carroll, 2004) of the value of inertia for organizational survival. They point to the conundrum leaders intending to improve organizational performance face, for instance through what they call “architectural change”(e.g., form of authority, pattern of control relations, and so on): “Surely some architectural changes do improve performance and thereby reduce mortality hazards. Just as surely, others have the opposite effect. Should we assume the beneficial case as a default? We think not.” (Hannan et al., 2004: 229). Attempted changes are hazardous because the organization-specific contingencies on which the success depends are very difficult to assess a priori; many changes are imitative, simply reflecting fads and fashions; and changes often lead to unforeseen and unintended consequences (Hannan et al., 2004: 229-230). Similarly, leading researchers of organizational learning and adaptation warn about the potential dangers of change associated with exploratory activities, because while the upside of correct decisions is very high, the downside of wrong ones can “…lead to major disasters…” (March, 2006:

205).

Yet, while organizational change may be potentially hazardous for corporate longevity, equally dangerous is what we call the “creosote bush conundrum,” using a metaphor coined by Craig Barrett, Intel Corporation’s former Chief Executive Officer. The creosote bush is a desert plan that poisons the ground around it, preventing other plants from growing nearby. Accordingly, the creosote bush conundrum refers to the strategic inertia that a successful core business experiences as it gets locked-int its product-market environment. This makes it difficult to explore and exploit new business opportunities that are not directly related to it (Burgelman, 2002). To the extent that corporate longevity depends on the capacity of a company to enter into and exit from businesses in the face of changing strategic dynamics (Burgelman, 1994), this too is a serious conundrum of strategic leadership.

Nonlinear dynamics are systematically discussed in mathematical theories of complex adaptive systems in the physical and biological sciences (e.g., Prigogine, 1980; Kauffman, 1993; Gould, 2002), and increasingly also in social science (e.g., Axelrod and Cohen, 2000) and history (e.g., Gaddis, 2002). Management scholars have also attempted to introduce some of these theoretical ideas into administrative science (e.g., Burgelman, 1983; Thietart and Forgues, 1995; Brown and Eisenhardt, 1997; Levinthal, 1997; McKelvey, 1997; Anderson, 1999; Tsoukas and Chia, 2002; Meyer, Gaba, and Colwell, 2005). Discussing some of the original theorists’ work Gould, however, cautions against“… any pure theoretician’s claim that success in modeling logically entails reification in nature” (2002: 927).

We heed Gould’s caution. Grounded in a combination of longitudinal field research and executive experience at Intel Corporation, we construct a conceptual framework of strategic dynamics situations and examine the various nonlinear ones that the company has faced. Since the challenges posed by nonlinear strategic dynamics unavoidably need to be addressed by a company’s strategy-making process, we examine the role of induced and autonomous strategy processes (Burgelman, 1991), and associated developmental resource allocation that Intel has managed throughout its evolution.

We arrive at the same fundamental questions as posed in formal theories of complex adaptive systems: What is the balance of exploitation and exploration that will maximize a company’s survival chances in the face of different nonlinear strategic dynamics situations? (March, 1991; Axelrod and Cohen, 2000). How can a company’s strategy making process be designed to effectively maintain such balance so as to maximize both “fitness;” that is, adaptation to the current environment, and “evolvability;” that is, ability to adapt to a changing environment and/or to seek out new viable environments? (Kauffman, 1993; Gould, 2002). We propose to show that different nonlinear strategic dynamics situations require different balances of induced and autonomous strategy processes, and that balanced cycles of these processes are at the heart of corporate longevity.

These important questions, in turn, raise another fundamental one about the role of strategic leadership: How can the importance of designing a strategy-making process capable of simultaneously maintaining fit and evolvability be reconciled with the observation that strategy does not play a decisive role in the evolution of companies that make it from “good to great” in the long run, but that what matters is a certain leadership style (Collins, 2001)? Our single case study of Intel Corporation, described in more detail below, allows us to examine the role of strategy-making in great depth, and as a result we propose that strategic leadership - how top management designs the strategy-making process - is the means with which leadership style exerts its influence on corporate longevity.

Research method

Combining longitudinal field research and executive experience. We draw on longitudinal field research of Intel Corporation’s evolution between 1968 and 2005 to highlight some of the strategic dynamics situations the company has faced and the role of its strategy-making process in managing them. Our research design for this paper is thus comparative with respect to time: We compare Intel’s strategy-making approach in successive strategic dynamics situations over the course of its evolution. Our research design is also consistent with recommendations of scholars studying nonlinear change (Meyer, Gaba, and Colwell, 2005): we situate Intel’s evolution in the context of the highly dynamic industries in which it participates and focus on the periods when these were in flux, away from equilibrium, and discontinuous changes were taking hold.

The longitudinal field research has involved formal and informal interviews with many hundreds of Intel managers since 1988, the observation of strategic planning meetings, and the study of company documents (Burgelman, 1991; 1994; 1996; 2002a, 2002b). We augment relevant findings of this research with insights about managing Intel’s strategic dynamics gained through more than thirty-five years of experience in top executive and governance positions at the company (Grove, 1996). With the help of senior Intel finance staff, we also tried to reconstruct the developmental resource allocation related to induced and autonomous strategy processes throughout the company’s evolution. While dollar amount allocation alone does not fully reflect resource deployment, it provides a first approximation of the corporation’s efforts to cope with strategic dynamics.

Limitations. The usual caveats associated with case study research apply. Our combination of academic research and executive experience has provided a lens through which various strategic dynamics situations in Intel’s evolution could be studied comprehensively and in unusual depth, but it unavoidably contains a subjective element. Also, the personal computer industry is somewhat special because of the importance of increasing returns to adoption (Arthur, 1987), which creates conditions leading to winner take-all outcomes. Intel benefited from these conditions during part of its history. These limitations require caution about the extent to which our analysis can be generalized.

CONCEPTUAL FRAMEWORK

Strategic dynamics situations

We examine the various ways in which a focal company’s strategic actions can interact with the environment. Call this focal company Pi and the environment E, which includes the other players, Pj, that constitute the traditional industry forces (customers, suppliers, competitors, complementors, potential new entrants, and substitutes), as well as exogenous forces such as technological change, government regulation and deregulation, and major fluctuations in the capital markets. While E’s boundaries are relatively well defined at any given time, in a dynamic world other industries or newly emerging environmental segments may potentially affect E at some time. Call these other industries or emerging segments e, and consider (E, e) the relevant environment for our further discussion of strategic dynamics. Both Pi and other players in (E, e) most of the time engage in rule-abiding strategic actions: Actions that are consistent with the prevalent normative, technological, economic, and cognitive rules that determine how Pi and the other players in (E, e) compete and that have guided them toward achieving a relatively stable industry structure. Alternatively, they can seek to turn the basis of competition in the industry decisively to their advantage by engaging in rule-changing strategic actions. Note that (E, e) are never identical across a set of Pi comprising an industry; and, given that different Pi have different positional and competence characteristics, it matters which

Pi tries to change the rules.

Game theorists note that relatively small changes in the rules can produce enormous changes in outcomes (Brandenburger and Nalebuff, 1996); on the other hand, some rule changing behavior, such as switching from Cournot (simultaneous) to Stackelberg (leader-follower) strategic action, can lead to quite stable equilibriums (e.g., Saloner, 1991: 126). Organization theorists warn about unanticipated and unforeseen consequences (e.g., Hannan, Polos, and Carroll, 2004). Complexity theory suggests that small changes in the interaction pattern of a large number of rule-abiding agents can have

big effects (e.g., Gleick, 1987). In light of these observations, the criterion we adopt for distinguishing rule-changing from rule-abiding strategic actions is that rule-changing actions by one of the players materially changes the competitive context for the other players and thereby the expected outcomes of their strategic actions (Axelrod and Cohen, 2000: 8; Gaddis, 2002: 97; Grove, 2003). We view rule-abiding strategic actions as additive and producing linear and fairly predictable change. For instance, assume that competing by offering rebates has been part of the industry tradition. Typically, the advantage of a rebate given by one competitor is canceled out when another competitor offers a similar or slightly larger one, and the effect of these competitive moves is fairly predictable. Rule-changing strategic actions, on the other hand, are multiplicative and produce strategic dynamics that are nonlinear and more difficult to predict. For instance, when one competitor starts using innovative lean manufacturing to achieve lower costs and offer lower prices, the other competitors may continue to respond by giving rebates, but this may reduce their cash reserves and may make it more difficult to catch up with the innovative competitor, leading the other competitors to offer even larger rebates in the next round of competition and falling farther behind; in this situation it is harder to predict what the new equilibrium will be.  

Determining a priori whether a strategic action by Pi (or one of the other players in (E, e)) is rule changing - e.g., negotiating a new type of contractual arrangement with customers or suppliers, introducing a technological innovation, successfully lobbying the government, and so on - will often not be possible. Pi’s capacity for “strategic recognition” (Burgelman, 1983) of the rule-changing implications of a strategic action after it has been taken but before others see them seems critical. Such strategic recognition requires a mental state of constant alertness – metaphorically called “paranoia” (Grove, 1996) – widely distributed among P’s leadership, which could be measured, for instance, by Pi’s reaction time to changes in (E, e).

Most of the time Pi’s strategic actions are rule abiding because Pi does not have the resources necessary to try to change them or because Pi anticipates that the other players can respond in kind. For the same reasons, the other players in (E, e) also engage in rule abiding strategic actions. Our example of matching rebates with rebates illustrates this situation (see above). The interplay of rule-abiding strategic actions on the part of Pi and (E, e) preserves a stable industry structure, even though the industry participants compete vigorously. The competitive context facing the various players is not materially altered and the distribution of the potential industry earnings (PIE) (Saloner, Shepard, and

Podolny, 2001) is fairly predictable, with relatively small shifts one way or the other over time that are reversible. Some scholars have called this “Red Queen” competitive dynamics, as it evokes the image of the Alice in Wonderland character running as hard as she can just to stay in the same place (Barnett and Hansen, 1996).

Sometimes players in (E, e) engage in rule-changing strategic actions that adversely impact Pi. Such rule-changing strategic actions produce P-independent industry change, which significantly reduces Pi’s power relative to (E, e). P-independent industry change is nonlinear and disruptive (from Pi’s point of view): the rule-changing actions by players in (E, e) and Pi’s inertial rule-abiding actions combine multiplicatively to materially and unfavorably change the context from Pi’s perspective. This is likely to be reflected in Pi’s decreasing relative share of the PIE. Our example of a competitor responding with rebates to another competitor’s lower prices based on a new manufacturing strategy illustrates this situation (see above). In this case, Pi is rule abiding in the face of rule changing by others in (E, e). Conversely, sometimes Pi is able to engage in rule-changing strategic actions while the other players in (E, e) continue to engage in rule-abiding strategic action. Pi’s successful rule-changing strategic actions produce P-controlled industry change, which significantly increases Pi’s power relative to (E, e). P-controlled change is nonlinear and complex: Pi’s rule-changing actions lead the other players in (E, e) to respond defensively, which multiplies their effect and materially changes the context to Pi’s advantage. This is likely to be reflected in P’s increasing relative share of the PIE.

Rule-changing strategic actions may be planned, but probably more often are unplanned and depend on strategic recognition of an opportunity that arises in a more or less fortuitous way. Forces driving toward commoditization, for instance, may change the rules (e.g., lead customers to expect lower price and higher quality) so that manufacturing process rather than product innovation becomes the new basis of competition (e.g., Utterback and Abernathy, 1975); or, a “disruptive technology” (Christensen and Bower, 1996) becomes “good enough” to change the basis of competition. In other cases, increasing returns to adoption (e.g., Arthur, 1989), such as in the personal computer industry, and digitization of content, such as in the music industry, may make changing the rules possible. These sorts of technological developments, as well as some regulatory developments (e.g., the deregulation of the telecommunications industry), may engender P-independent industry change or make P-controlled industry change possible. Sometimes both Pi and other players in (E, e) engage in rule-changing strategic actions simultaneously. Such compounded rule-changing strategic actions lead to runaway industry change. Runaway industry change is nonlinear and can be characterized as chaotic. In contrast to complexity, “… chaos deals with situations such as turbulence (…) that rapidly become highly disordered and unmanageable…”(Axelrod and Cohen, 2000: xv). Accordingly, the rule-changing strategic actions of players in (E, e) with Pi’s rule changing action interact multiplicatively and change the context in ways that are difficult to anticipate. While a runaway industry is the least stable situation and will eventually revert back to one of the other situations, it is difficult to predict which one. In the mean time, it is unclear whether Pi’s rule-changing strategic actions will ultimately be to its advantage. Technological or regulatory forces driving the convergence or collision of different industry segments (e.g., Internet computing and desktop computing), or of entire industries (e.g., computing, communications, and consumer electronics), create conditions for runaway industry change.

Internal ecology of strategy making

The co-evolving interactions of Pi and (E, e) constitute an ecological system (e.g., Hannan and Freeman, 1989). We propose that Pi’s fate in this dynamic system depends, at least in part, on its own internal ecology of strategy making (Burgelman, 1991). Consequently, we view Pi as an ecological system within which strategic initiatives emerge in patterned ways and compete for Pi’s limited resources through two distinct processes. Through the induced strategy process Pi exploits opportunities in its familiar environment. To do so, Pi’s top management sets the corporate strategy and induces strategic actions by executives deeper in the organization that are aligned with it. The induced strategy process limits actions that deviate from the corporate strategy for at least two reasons. First, Pi survived environmental selection by satisfying its customers and other constituencies in reliable ways and wants to continue to abide by the rules. This reactive propensity constitutes a rational source of strategic inertia (Hannan and Freeman, 1989). Second, Pi successfully changes the rules and aligns all the forces at its disposition to reshape the environment to its advantage, but this proactive propensity results in co-evolutionary lock-in and becomes another rational source of strategic inertia (Burgelman, 2002a).

Through the autonomous strategy process Pi explores new opportunities that are outside the scope of the existing corporate strategy, relate to new environmental segments, and are often based, at least in part, on distinctive competencies that are new to the company. Autonomous strategic initiatives usually, but not necessarily, originate at operational or middle management levels. They often come about fortuitously and somewhat unexpectedly as a result of Pi’s dynamic capabilities (e.g., Teece, Pisano, and Shuen, 1997) that co-evolve with (E, e). To overcome the selective effects of the company’s structural context, which is set up to support initiatives that are aligned with the current corporate strategy (Bower, 1970), the initiators of these autonomous initiatives try to activate a process - which we call strategic context determination (Burgelman, 1983) - to convince top management to amend Pi’s corporate strategy, thereby integrating them into the induced process going forward. The key role of the autonomous process is to extend the boundaries of Pi’s competencies and opportunities and/or to help Pi prepare for disruptive technologies. On the other hand, resources can be spread thin if P supports too many autonomous initiatives (and halts too few), perhaps at the expense of its core businesses. Most dangerously, autonomous initiatives may undermine Pi’s existing competitive position without providing a secure new one.

In general, the effectiveness of Pi’s internal ecology of strategy making depends on maintaining Pi’s ability to exploit existing opportunities through the induced process, while simultaneously maintaining Pi’s ability to pursue new opportunities through the autonomous process.

MATCHING STRATEGY-MAKING AND STRATEGIC DYNAMICS:

OBSERVATIONS FROM INTEL’S EVOLUTION

P-independent industry change: Intel’s exit from DRAM

The entry into the dynamic random access memory (DRAM) industry of several large, vertically integrated Japanese companies, which were supported by the Japanese government in their quest for dominance of the DRAM industry, fundamentally changed the rules: As DRAM products became commoditized, customers demanded consistently high quality and low prices. Hence, it took manufacturing competence to win. Intel’s competence, however, was circuit design and process technology. For several product generations Intel’s inertial induced strategy process led the company to engage in strategic actions based on its existing distinctive competencies, which increasingly undermined its ability to compete in the changed DRAM industry.

Intel’s induced strategy process became unhinged, with stated strategy and strategic action in the DRAM business diverging, as middle-level product planning managers gradually allocated scarce manufacturing capacity away from DRAM products to other, higher-margin products, including microprocessors. These actions were consistent with Intel’s generic strategy of differentiation and product leadership, which favored specialty products over commodities. But it exacerbated the decline of Intel’s ability to compete in the DRAM industry. As a result of these external and internal forces, Intel’s share of the DRAM PIE declined rapidly.

The availability of new business opportunities associated with microprocessors facilitated exiting from the DRAM business and highlights the importance of Intel’s autonomous strategy process. Intel’s microprocessor business had emerged in the early 1970s outside the scope of the company’s official corporate strategy (focused on semiconductor memory products) and in relation to a set of new market segments (electronic calculators and other embedded applications). The growth of microprocessors as specialty products drove further development of Intel’s distinctive competencies, especially in circuit design; and by the mid-1980s, Intel had moved from a silicon-based distinctive competence in memory products to a distinctive competence in implementing design architectures in logic products. As long as they remained niche products, however, top management was not ready to embrace microprocessors as its new core business because the sum of these relatively small niches was not viewed as equivalent to the large DRAM business. Hence, between 1982 and 1985 Intel’s induced strategy process remained in disarray as top management was uncertain about how to proceed. The rapid growth of the

IBM PC business, however, facilitated top management’s decision to exit the DRAM business and focus the company on microprocessors. By 1985 top management officially adopted microprocessors for the PC market segment as Intel’s new core business. P-controlled industry change: Intel’s sole source strategy. It was not until after Intel had provided the first two generations of microprocessors for PCs (8088 and 286) under cross-licensing arrangements imposed by IBM, Intel’s largest original equipment manufacturer (OEM) customer, that top management realized that it was in effect giving away its designs to the competition (second-source agreements had generally been a strong industry legacy practice). Intel funded the development of next generation processors and the cross-licensees expected to get those designs for free from Intel because the OEM customers basically demanded it. Hence, Intel’s rivals got a free ride. And, in spite of its innovative design work, this arrangement made it difficult for Intel to take a significant share of the PIE. When Intel tried to change the arrangement, asking for compensation from second sources, these rivals declined. Rivals were ready to wait until the Original Equipment Manufacturer (OEM) customers would browbeat Intel into giving the designs away. Consequently, Intel insisted on becoming sole source supplier to the OEMs. This strategic action was rule-changing because it fundamentally changed the balance of power between Intel, its OEM customers, and its competitors. Fairly quickly this led to a major shift of influence toward Intel in terms of its ability to set industry-wide standards and to appropriate a rapidly increasing share of the PIE.

It worked because of the emergence of new patterns of behavior in the PC market segment associated with increasing returns to adoption and the “horizontalization”

(Grove, 1993; Farrell, Monroe, and Saloner, 1998) of the computer industry. These new patterns favored Intel because of the strong product-market position it had achieved as a result of IBM’s efforts to create a large installed base for its PC product in the emerging personal computer market segment, whose users demanded backward and forward compatibility (they wanted to be able to continue to use their application software). This motivated independent software developers to write new applications running on Intel microprocessors, creating thereby a fast growing ecosystem around the Intel Architecture. The resulting “virtuous circle” - based on increasing returns to adoption (Arthur, 1989) - favored Intel (and Microsoft), even though it had been caused by IBM and not by Intel (and Microsoft), because Intel (and Microsoft) owned the key technological components of the PC and were free to license these technologies to other OEMs (IBM had not insisted on exclusive licensing arrangements). Consequently, Intel didn't buckle under pressure to continue to cross-license its technology.2

During 1987-1997, Intel successfully maintained P-controlled industry change. The “Intel inside” marketing campaign, another rule-changing strategic action that changed the relationship with its OEM customers and solidified its leadership position, was instrumental in this. Still another rule-changing strategic action involved the bottom-up development and championing of Intel’s chipset business around a new technology coming out of the Intel Architecture Labs. Traditionally, specialized companies and the major OEM customers developed most of the chipsets for Intel’s microprocessors. Top management initially wanted to introduce the new technology into the industry through a consortium effort. The general manager of Intel’s declining chipset division, faced with highly mature products, however, successfully engaged in an autonomous strategic effort to turn chipsets into a major Intel business. Having gained strategic control of the chipset business turned out to be extremely important at the time of the ramp-up of Intel’s new Pentium product line.

Potential runaway industry change: The battle of RISC versus CISC within Intel

Reduced instruction set computing (RISC) had been developed in IBM’s research labs in the early-to-mid 1970s, but it was MIPS Computer Systems, a Silicon Valley startup that attempted to commercialize this alternative microprocessor architecture in the mid-1980s for workstation computers. Soon thereafter several other companies, including Sun, HP, IBM, and DEC began work on their own RISC architectures. During the late 1980s, the workstation market segment had settled on RISC-based machines, and many technologists had become convinced that the performance advantage of RISC would eventually make complex instruction set computing (CISC) obsolete. Intel’s vice president of corporate marketing, for instance, confirmed that in the late 1980s Intel, whose microprocessor architecture was CISC based, was perceived as a technology laggard and that this hurt the company’s growth in the workstation market.

In the late 1980s, Intel's official corporate strategy had been not to enter the RISC business, but rather to focus its induced strategy process on its x86 (CISC) architecture.

The sole-source strategy for the 386 processor was highly successful, and with the upcoming 486 microprocessor Intel was poised to further strengthen its position as the architectural leader in the early 1990s. Intel top management called RISC “the technology of the have not.” Operating autonomously, however, a young engineer had been attempting to get Intel into the RISC processor business ever since joining the company in 1982. He ventured to sell the design for the i860 processor to top management as a co-processor for the 486 rather than as a stand-alone processor. By the time top management realized what their "co-processor" was, he and two other champions had already lined up a workstation customer base that was different than the companies who purchased the 486 chips. Thus the i860 team could argue that they were broadening Intel's business rather than cannibalizing it. Even though top management had not officially sanctioned its development, Intel did in fact introduce the i860 as a standalone RISC microprocessor in February 1989. At the time, a top-level executive pointed out that RISC was still viewed as relatively less important than CISC in Intel's strategy, but that its availability made it possible for Intel to be a strong competitor in what might become an important new market.

The threat of RISC, however, took a different form than envisaged by the RISC supporters within Intel. Some industry observers interpreted the introduction of the i860 as a signal that Intel was endorsing RISC. But this could confuse Intel’s existing PC OEM customers, who might fear that Intel would reduce support for the x86 architecture in the future. That fear was not unfounded. The RISC team within Intel had created a strong following. Distinct CISC and RISC camps had formed and they were competing for the best engineering talent of the company. The RISC effort siphoned off hundreds of people just on the marketing side. By 1989, RISC-based processor development had begun to absorb about one third of the total resources allocated to microprocessor development. The two camps were also trying to gain allies in the industry (Microsoft encouraged the i860; Compaq opposed it). The battle between CISC and RISC within Intel had turned into “civil war.” RISC proponents prepared a development trajectory showing the Intel Architecture transitioning to RISC after the 486 and wanted to rename the i860 processor 486r to facilitate the transition. But in response to serious concerns by

Intel’s VP of Marketing and other senior executives, top management decided that the i860 could not be re-named 486r. Eventually, the i860 was not successful because demand for it petered out as every workstation vendor decided to develop its own RISC processor. By 1993, most of the technical people of the i860 team had left Intel. Intel, however, succeeded in retaining many members of the team who had honed skills in ecosystem development.

Looking back, this was a confusing period for Intel. The i860 was a very successful renegade product that could have destroyed the virtuous circle enjoyed by the Intel Architecture. Intel was helping RISC by legitimizing it. Yet the company was dabbling, trying to be the best of the second best. A key lesson was that not all purported “paradigm shifts” are in fact paradigm shifts. Another key lesson concerned Intel’s strategy-making process. Positively, it looked like a Darwinian process: Top management lets the best ideas win, adapts by ruthlessly exiting businesses, provides autonomy and is the referee who waits to see who wins and then re-articulates the strategy, and matches evolving skills with evolving opportunities. Negatively it looked like Intel is reactive, lacks focus and has no constancy of purpose. It looked like chaos – ready to reigned in. And so it was. Having concluded that RISC did not constitute a paradigm shift, top management determined to fully exploit Intel’s favorable strategic position by vectoring everybody in the same direction through the induced strategy process. Intel’s subsequent success with its highly focused strategy during 1991-97 then created “co-evolutionary lock-in” (Burgelman, 2002a) with the PC market segment. However, the associated strategic inertia then impeded the company’s autonomous strategy process. As a result, when the PC market segment growth started to slow down by 1998, the company experienced difficulty in extending itself into new directions for continued profitable growth. New P-controlled industry change: Intel’s “right hand turn”

As described above, during 1987-1997 Intel grew very successful by developing new microprocessors along the performance dimension, mainly by increasing clock speeds. Their success informed the expectations in the market for market processors, a clear example of P-controlled industry change. However, toward the end of the decade the market was beginning to place less value on high performance (customers still liked higher speed but were reluctant to pay for it). Also, by the early 2000s Intel’s traditional rival had begun to catch up on the speed dimension. Intel had in some ways come full cycle. It faced a second stable industry structure situation, this time in the core microprocessor business. It was a favorable one given its market segment share, but nevertheless one in which competition had become narrowly defined in terms of bringing out the faster microprocessor the fastest in the newly tightened race with the traditional competitor. Consequently, Intel began to broaden its view of microprocessor performance along different dimensions, primarily power consumption and communications capabilities. Top management referred to this as a “right hand turn,” and indeed it did signal a major course change for the company and provided the opportunity for a repeat of P-controlled industry change.

A key ingredient in this right hand turn was the acquisition of communications capabilities. This came about as a result of moves by Intel’s new CEO, who felt the need to turbo-charge the company’s autonomous strategy process. In 1998, top management concluded that the microprocessor business by itself would not be able to sustain the company’s future growth objectives. During 1998-2001, top management encouraged and supported initiatives in many different directions and spent many billions of dollars on acquisitions. Most of these ventures failed. However, some of them did significantly augment Intel’s distinctive competences in communications technologies, which was important in view of the rapid convergence of the computing and wireless communications industries.

It is important to note that in spite of the sharp declines in Intel’s revenues and profits during the early 2000s information technology slump, the Board of Directors decided to let top management maintain cash reserves sufficient to cover one year of R&D and one generation of capital investments. Maintaining sufficient financial reserves gave the company enough resources to fully pursue the existing opportunities in the induced strategy process through continued heavy capital and technology investments, and a time buffer to decide which new strategic direction to take.

At the time of the “right hand turn,” Intel’s Mobile Computing Group (MPG) had already begun to work autonomously on developing a Pentium processor architecture optimized for the mobile PC. In late 2002, the group launched a project codenamed “Banias,” a new mobile PC microprocessor featuring an entirely new micro-architecture. The Banias project was designed to provide PC makers with ingredients to build mobile PCs with extended battery life, improved performance, reduced/varied form factors, and easier-to use wireless connectivity. A PC based on Banias would include Wi-Fi capability through a communication device codenamed “Calexico,” which contained the first 802.11 chips made by Intel.  

It is important to note that the performance dimensions that the MPG sought were in conflict with those that had driven Intel's success in the past, particularly in the desktop market segment. One of the leaders of the group said: “Being located in Israel both helped and hurt the effort to convince the company to pursue mobility. The Israeli team has a ‘renegade’ culture, so we were very open to the idea of mobility in the first place.

However, being in Israel, far apart from Intel’s HQ, made it difficult to convince the company to move toward mobility. It took blood, sweat and tears.” He also said, however, that the effort was greatly helped by the fact that top Intel executives were concerned that the microprocessor was starting to use too much power, particularly in power-sensitive environments like mobile PCs, and that the CEO found the idea of a low power microprocessor very appealing (Burgelman and Meza, 2003).

In early 2003, Intel publicly launched Banias by for the first time branding a combination of technologies under the “Centrino” name. Intel decided to bet on Centrino and subsequently spent several hundred millions of dollars helping develop the “hot spot” infrastructure necessary for mobile users to take advantage of the Centrino capability in places ranging from airports to Starbuck coffee shops. The company also invested several hundred millions of dollars in 2003 and 2004 marketing Centrino. The investment paid off. Not only was Intel able to successfully launch a new, system-level brand, but Intel’s laptop and notebook computers with the Centrino capability increased the worldwide market segment for these types of computers, commanded higher average sales prices, and increased Intel’s share of the product’s bill of materials. In 2005, the success of the mobile group’s initiative was helping drive Intel toward becoming a “platform” company.

STRATEGIC LEADERSHIP OR LEADERSHIP STYLE - WHAT DID WE LEARN?

Our longitudinal study of Intel’s evolution focused on turbulent periods in the company’s history, when the existing equilibriums between it and its environment became undone, and strategic dynamics were nonlinear. Our framework of strategic dynamics helped identify the challenges that different nonlinear dynamics situations pose for top management. We were able to link these to our framework of induced and autonomous processes, and our findings suggest that the most important contribution top management can make is to appropriately balance induced and autonomous strategy processes to meet the challenges of different strategic dynamics situations.

Accumulating resources

Our research also attempted to track Intel’s developmental resource allocation to get an indication of how the company managed the balancing of induced and autonomous strategy processes throughout its evolution. We found that it was difficult to find information about conscious and formal decisions about developmental resource allocation to autonomous initiatives. This should perhaps not be surprising given that such initiatives, by definition, are not “planned.” Based on the second author’s executive experience and with the help of Intel’s senior finance staff, however, we were able to roughly estimate the percentage of developmental resource allocation to induced and autonomous strategy processes at critical times in Intel’s evolution.

We can see that most of the time a surprisingly large proportion of the company's developmental resources have been deployed in autonomous activities. It seems that companies naturally generate a “portfolio” of autonomous initiatives. Autonomous initiatives tend to emerge as middle managers search for opportunities to sustain their business in the face of internal and external selection pressures, and find resources that are not completely absorbed by the induced strategy process and use them for their initiative. For example, in the P-independent industry change situation, middle level managers allocated manufacturing capacity away from DRAM to microprocessors (even though the official corporate strategy was still focused on memory products); in the P controlled industry change situation, the chipset business development was initially funded by the general manager of a division that was on the decline with cash generated from its very mature products; in the potential runaway industry change situation, the RISC team was able to get almost a third of the company’s microprocessor development resources even though top management had not made a corporate-level strategic decision to pursue RISC; In a recent P-controlled industry change situation, Centrino grew out of a design team in Israel that faced disbanding, and the project was helped by the autonomous development, also in Israel, of a specialized chipset.

It is instructive to follow this development. What started as an autonomous initiative with Centrino during the tenure of one CEO became the driving force of the induced strategy process - by the name “platformization” - under the next CEO in early 2005. With the autonomous initiative of the last several years having become the driving force of the new induced strategy process, a new cycle of autonomous initiatives emerged; for example an effort to develop digital products for health care applications, which by year end represented about 2 percent of development spending.

Companies might be engaging in significantly more autonomous activity than is generally believed. This may surprise many management experts, who, as March (2006: 211) points out, tend to presume that the level of “exploration” is usually less than would be optimal. Yet, most of them don’t contribute significantly to the longevity of the company. This has several important implications. Most likely it is far more difficult for strategic initiatives to be truly effectively induced by the corporate strategy than is generally understood. And, it poses distinct challenges related to resource allocation and top management control.

Scaling up and vectoring resources

In order to take advantage of the portfolio of autonomous initiatives we propose that it is necessary for top management to adopt an approach of experimentation-and-selection with novel ideas that initially require only small bets (e.g., Burgelman, 1983; March, 1991, 2006). Such an approach implies that middle managers must be able to engage in autonomous initiatives before they actually have formally obtained resources to do so. However, since autonomous initiatives start small they need to scale-up in order to be relevant from the corporate strategy point of view. Scaling up depends on the capacity of middle-level executives to build on the initial success of an initiative by combining it with other autonomous initiatives from different parts of the company (often existing there as “orphan” projects), and/or with relatively small acquisitions. Such activities require “strategic context determination,” which, however, is beyond the purview of middle management. It is top management, who must evaluate how these initiatives fit into, or reshape or even radically change, the corporate strategy going forward.

We also propose that as an autonomous initiative gains impetus in the strategy-making process, a critical top management strategic role is to evaluate first, the extent to which the autonomous opportunity has been validated (through the process of strategic context determination), and second, the extent to which available cash reserves are sufficient to protect the company from disaster in case the scaled-up autonomous initiative ultimately fails. This suggests four possible strategic choices: (1) “safe bet:” validated opportunity and sufficient cash reserves; (2) “bet the company:” validated opportunity but insufficient reserves; (3) “wait to bet:” not-yet-validated opportunity and sufficient cash reserves; and (4) “desperate bet:” not-yet-validated opportunity and insufficient cash reserves.

Even though Intel lost almost 200 million dollars in 1986, when top management decided (in 1985) to give up on the DRAM business and re-focus the company on microprocessors for the PC market segment it was already a “safe bet;” while if done a few years earlier, it would have been a “bet the company” move. Having sufficient cash reserves but not yet being sure about the potential competitive threat of RISC, Intel decided to “wait to bet” for a while, but put restraints on the autonomous initiative (for example, no renaming of the i860) until strategic context determination took its course (the autonomous RISC initiative died out). Intel’s decision to move to a platform strategy based on the success with Centrino is another example of a “safe bet.” (So far, Intel has not faced a “desperate bet” strategic choice.)

Strategically balancing induced and autonomous processes

Based on our analysis of Intel’s evolution, we propose that different strategic dynamics situations call for different balances of induced and autonomous strategy processes. In the base case of limited industry change, Pi must continue to exploit the opportunities associated with the current corporate strategy, which is achieved through the induced strategy process. Pi’s sustained profitable growth, however, depends on being able to continue to develop new business opportunities to replace declining ones over time, which requires an active portfolio of autonomous initiatives and a commensurate degree of accessible uncommitted resources and looseness of managerial control. Hence, top management should watch evolving growth opportunities and marginally re-balance resource allocation to the induced and autonomous processes.

In the case of P-independent industry change, the autonomous strategy process becomes key. As other players are able to engage in rule-changing strategic action, Pi’s induced process does not readily respond to these changes because of strategic inertia. But even if Pi could adapt to the changing basis of competition it is unlikely that it would be better than an also-ran. Ultimately, Pi is better off pursuing new opportunities created by the autonomous strategy process that continue to capitalize on the company’s distinctive competencies. Hence, top management should significantly increase resource allocation to the autonomous strategy process to generate a higher rate of new initiatives in the portfolio, and gradually increase resource allocation to winning initiatives before existing opportunities in the induced process wither away.

In the case of P-controlled industry change the induced process becomes key. While opportunities for Pi’s potential rule-breaking strategic actions often can be traced back to initiatives that started in the autonomous strategy process, P-controlled change requires that Pi align the internal and external forces to its advantage and massively increases resource allocation to the induced strategy process. As a result, however, successful P controlled change may make it difficult to pay attention to future new business opportunities. Hence, top management should continue to allocate a minimum amount of resources to keep the autonomous process viable and maintain at least a limited portfolio of autonomous initiatives.

The extreme uncertainty of runaway industry change creates a resource allocation conundrum because Pi cannot support both processes at increased levels simultaneously. Top management must decide between two different courses of action with respect to the balance of induced and autonomous processes. If Pi already has a validated new opportunity to make a “safe bet” or “bet the company,” the induced strategy process is key to impose a new strategic direction. If Pi does not yet have a validated new opportunity and decides to “wait to bet,” the autonomous strategy process is key for discovering a viable new strategic direction. Figure 3 summarizes our proposed appropriate balancing of the induced and autonomous strategy processes for each of the strategic dynamics situations.

IMPLICATIONS AND CONCLUSION: STRATEGIC LEADERSHIP AS THE

EXPRESSION OF LEADERSHIP STYLE

Collins (2001) defined great companies as those 11 that for a period of 15 years after a major transition were able to achieve average cumulative stock returns at least 3 times those of the overall stock market.3 He and his research team found that such enduring greatness depended on “level 5” leadership style: “a paradoxical blend of personal humility and professional will.” Such leaders “get the right people on the bus before they figure out the best path to greatness;” are willing to “confront the brutal facts without losing faith;” pursue a fairly simple core business in which they can be the best in the world, feel passionate about, and get tremendous profits on a carefully chosen denominator (the “hedgehog concept”); develop a culture that combines discipline with entrepreneurship; and pioneer the use of carefully selected technologies to accelerate their profitable growth. Rather than the result of dramatic transformations, the process that generates greatness is metaphorically described as “…relentlessly pushing a giant heavy flywheel in one direction…” (2001: 14).   

While academic researchers have pointed at potential weaknesses in Collins’s methodology, for instance, the fact that “long leads in random walks” may produce sustained interfirm performance differences based on chance only (Denrell, 2004), this is not our concern here.4 We do, however, note that Collin’s large sample study, while thorough and capably carried out, did not examine the role of balancing cycles of induced and autonomous processes in the long-lived success of the companies studied, and thus may have missed a deeper and primal reinforcing relationship between leadership and strategy-making process.

The strategic management field has long been interested in developing a truly dynamic theory that explains how superior competitive positions are attained longitudinally (Porter, 1991). While Collins’s study finds, surprisingly, that strategy does not play a decisive role, we think the paradox is resolved if what sets apart such leaders is the ability to design a strategy-making process that is capable of effectively balancing induced and autonomous strategy processes to meet the various strategic dynamics situations that their companies unavoidably face as they evolve. Like the phenotype is the expression of the genotype in biology, we propose that strategic leadership is the expression of Collins’s level 5 leadership style in organizations.

Alert strategic leadership is cognizant of the important role of both induced and autonomous processes in strategy-making, tolerates a sufficient level of uncommitted resources and looseness in control to continue to maintain a portfolio of autonomous initiatives, and is able to select at the right time those that need to be converted to the discipline of the induced process in order to cope with nonlinear strategic dynamics. We think that our framework of different strategic dynamics situations may help top management to better identify the associated challenges and match the dynamics of the internal machinery of strategy making - characterized by the balance of induced and autonomous strategy processes – with the dynamics of the external ecology in which the company operates. Our fundamental proposition is that corporate longevity depends on the coincidence, at different key moments in a company’s evolution, of such alert strategic leadership and the complex, on-going cycles of induced and autonomous processes that renew the organization and keep it viable.

Our confidence in this fundamental proposition is bolstered by the fact that it parallels insights from formal theories of complex adaptive systems. Prigogine (1980: 128), for instance, observes that the continued evolution of complex adaptive systems depends on “mutations” and “innovations” occurring stochastically (in our terms: generated through the autonomous process) and becoming integrated into the system by the “deterministic relations prevailing at the moment” (in our terms: becoming part of the induced process). Similarly, it parallels the idea of “adaptation at the edge of chaos,” (Kauffman, 1993) which suggests, in Gould’s succinct translation “… that a system must be adaptive, but that too much (and too precise) a local fitting may freeze a system in transient optimality with insufficient capacity for future change. Too much chaos may prove fatal by excessive and unpredictable fluctuation, both in external environments and internal states. (…) Adaptation at the edge of chaos balances both desiderata of current functionality and potential for future change, or evolvability.” (2002: 1273-74).

Achieving such a balance by design as compared to evolution is difficult and requires the juggling of opposing tendencies. Lining up potentially diverging strategies and keeping them lined up through the induced strategy process is itself a demanding task. Yet, as we have seen in the Intel case, the company must also prepare itself for the next big opportunity by continuing to let middle management experiment with, and then select, new strategic initiatives through the autonomous process before converting them to the discipline of the induced process. The appropriate balance of induced and autonomous strategy processes at different times in a company’s evolution may be thought of in terms of linear combinations of the two processes, with varying weights on each of them over time, but with none of the weights ever becoming zero. Finding the right weights for each time period is the supreme challenge of top management. The process of changing these weights can be characterized by the exhortation that during times of nonlinear change, management should let chaos reign, then rein in chaos -- but, as we have learned, never quite completely.   

NOTES

1 These 19 survivors of the top 100 of 1965 are: General Motors, Exxon Mobile, Ford Motors, General Electric, IBM, Chevron Texaco, Boeing, Procter & Gamble, Lockheed Martin, Conoco Philips, United Technologies, Dow Chemical, Caterpillar, DuPont, International Paper, Honeywell International, Alcoa, Coca Cola, and Weyerhauser.

2 It is interesting to note that IBM probably lost its power because it did initially not recognize the enormous growth potential of the PC market segment (neither did Intel). This is probably why IBM did not insist on an exclusive technology licensing agreement with Intel. IBM was of course interested in keeping prices for microprocessors low and did insist that Intel cross-license its technology to other manufacturers. Without the constraint of an exclusive licensing agreement with IBM, Intel could sell its microprocessors to other PC manufactures, such as Compaq. Hence, if IBM did not want to bring to market PCs with the next generation Intel microprocessor, these other manufactures could; and given the importance of backward compatibility to customers (they wanted to continue to use the application software they had bought for the previous PC generation). This created the “virtuous circle” that gave Intel the power to adopt a sole source strategy as of the 386 microprocessor generation, and IBM little choice but to go along.

3 Intel was not part of the set of great companies. As Collins put it, “Most technology companies were eliminated from consideration because they are not old enough to show the good-to-great pattern. We required at least thirty years of history to consider a company for the study (fifteen years of good results followed by fifteen years of great results)… Intel, for example, never had a fifteen-year period of only good performance; Intel has always been great. … ”(2001: 213).

4 Since 2001, of the 11 “good-to-great” companies, two were acquired (Gillette by P&G, and Wells Fargo by Norwest); six have underperformed, or performed at the level of, the S&P 500 (Circuit City, Fannie Mae, Kimberly Clark, Kroger, Philip Morris, ands Pitney Bowes); and three have continued to outperform the S&P (Abbott, Nucor, and Walgreens).