The Entrepreneurial Mindset: Strategies for Continuously Creating Opportunity in an Age of Uncertaintyby Rita Gunther McGrath, Ian MacMillan
The Entrepreneurial Mindset offers a refreshingly practical blueprint for thinking and acting in environments that are fast-paced, rapidly changing, and highly uncertain. It provides both a guide to energizing the organization to find tomorrow's opportunities and a set of entrepreneurial principles you can use personally to transform the arenas in which you compete. The authors present simple but powerful ways to stop thinking and acting by the old rules and start thinking with the discipline of a habitual entrepreneur.
They show how to: eliminate paralyzing uncertainty by creating an entrepreneurial frame that shapes a shared understanding of what is to be accomplished; create a richly stocked opportunity register to redesign existing products, find new sources of differentiation, resegment existing markets, reconfigure market spaces, and seize the huge upside potential of breakthroughs; build a dynamic portfolio of businesses and options that continuously move your organization toward the future while simultaneously leaving the past behind; execute dynamically your ideas so that you can move fast, with confidence and without undue risk; and develop your own way of leading with an entrepreneurial mindset to create a vibrant entrepreneurial climate within your organization.
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Chapter 2: Framing the ChallengeYOUR FIRST OBJECTIVE IN CREATING AN ENTREPRENEURIAL
mindset is to make sure that you have clearly established what your business needs to do to make the effort worthwhile. You must create a mindset that pushes you and your team beyond mere incremental improvement to entrepreneurial actions that really make a difference. In other words, you should frame what you must do to create a genuine win for your organization in terms of growth in both profits and profitability. It may sound obvious, but stop right now and think about whether you and your co-workers are truly clear about which results from your efforts would make these efforts good investments for your shareholders. People can be surprisingly vague on this point. This has lots of negative consequences, among them a temptation to be complacent and a tendency to look for incremental improvements rather than major wins.
A vivid demonstration of this tendency toward vagueness constantly crops up in the Wharton Small Business Development Center, which helps hundreds of would-be entrepreneurs each year. Our first assignment to would-be entrepreneurs requires these potential entrepreneurs to describe their new business idea in terms of profit potential. Today, we typically get ideas like creating communities on the Internet for consumers of natural skin-care products. The problem is that these are customarily not businesses that would offer a competitive risk-adjusted return compared to the wanna-be's current secure salary. We force them to think through the profit implications of the idea instead of just focusing on the revenue component and their (natural) tendency toincrementally expand on their current income.
Then we ask the aspiring entrepreneurs to go out and look only for business opportunities with the potential to generate twice as much income for themselves (when the venture is mature) as they would earn if they continued to work in their present position. Sometimes our participants are at firms like GE or major banks and insurance companies, or professors from the engineering or life sciences faculties, or MBA students with job offers from Goldman Sachs or McKinsey & Company. As a result, the standard is quite high. We insist that they double this amount to earn them a premium for taking on the task of starting a business. Then we insist that they design a business to get them there within two to three years.
The results are almost always fascinating. The entrepreneurs leave behind the easy-to-do businesses and get creative with ideas that may not be as quantifiable, but that are usually far more interesting and potentially profitable than the first batch. Setting forth a clear and unambiguous standard for what the business must deliver galvanizes their effort, gives them a force for focus, and helps them get on with it. Notice that we didn't do anything more than tell them how good the idea had to be. Once they knew that, they could do the rest.
SETTING CHALLENGING GOALS
So, how do you get started? The best way to begin is with a hardnosed look at your business's current performance. Ask yourself, If I were to do something in the next three to five years that I, my boss, and my company's investors would regard as a major win, what would this performance record have to look like? The answer will help you to create what we call the entrepreneurial frame. This is a specific, measurable challenge to enhance the value of your piece of the business. The frame provides focus and creates a sense of urgency for you and those you work with.
The entrepreneurial frame has two components. First, you should be clear on the minimum amount of additional profits you need from a new venture (at maturity) to make a difference to your business. You should stress profits, or bottom-line growth, not merely growth in sales revenues. Second, you need to specify what increase in profitability (meaning return on assets or equivalent number for your industry) your new opportunities need to achieve as well. Opportunities less profitable than your existing businesses are hardly likely to get anyone excited and are poor candidates for investment of either your time or your money. The exception to this general principle is in the case of disruptive technologies, which represent potentially important new solutions that don't seem that way at first.' More on these in chapter 4.
Note that this thinking doesn't just apply to people who run profit centers. Even if you are running a cost center, you can still develop an entrepreneurial frame. In this case, you specify how to significantly reduce the costs and increase the asset productivity of your operation.
Try to make your goal a stretch, without making it ludicrous. If firms in your industry are growing profits at a rate of 5 percent a year, then expecting 10 percent growth from a new initiative may be reasonable. You decide what is possible-the main thing is to hone in on a number that will frame the challenge. Your job as a leader is to set challenges that push your fellow workers to the limits of their abilities without pushing them beyond those limits-a theme we will revisit several times.
Establishing a frame helps people to realize exactly what is expected of them. It can also begin to create a sense of urgency about becoming more entrepreneurial. For instance, we did some work with Hewlett-Packard in which we speculated on what a frame for HP might look like. Table 2-1 provides some baseline data.
CREATING AN ENTREPRENEURIAL FRAME
As you can see, to add 10 percent to the company's profits at current profitability levels, a new business would have to generate $4-5 billion in sales! Not many brand new businesses are this big, which implies that HP would have to grow by developing multiple new businesses. At the same time, since HP is well positioned in a rapidly growing set of markets, has deep managerial and technical skills, and is able to form strong alliances with other firms, it is not unrealistic to think that the company could meet such a significant growth challenge.
The exercise in Table 2-2 will get you started on creating a working frame for your business. It's meant to be a start; you will almost certainly want to elaborate on this as your ideas develop. This is the business equivalent of asking the MBA to find a business to start that will pay at least twice as well as getting a job on Wall Street. The major difference is that we are asking you to define how well your new business must perform to make a substantive contribution to what you are already doing.
Begin by finding out what your organization's profits were for the last full year, and enter these in cell 1. Then enter your return on sales (profit margin) for the same period in cell 2. This should then allow you to calculate the revenues you needed to generate last year's profits, by dividing profit by return on sales (cell 1/cell 2). Put this result in cell 3. Next, put your return on assets for the same period in cell 4. You can then calculate the assets you required to create last year's profits by dividing profit by return on assets (cell 1/cell 4). Put this result in cell 5. What you now have is a very concise description of the performance that today's business model is delivering.
The next step is to specify how you need to improve on this performance by taking entrepreneurial action. To do this, specify the magnitude of additional profits that your business needs to deliver to achieve a compelling business result. Start off with, say, a 10 percent increase in profits. You can calculate this easily by multiplying the cell 1 figure by 110 percent and entering it in cell 6. Since your new businesses should be more profitable than your existing activities, specify a level of enhancement to return on sales that you require. Again, for illustrative purposes, let's say that it's a 5 percent improvement. As before, you can calculate this by multiplying cell 2 by 105 percent, and entering the result in cell 7. This will then allow you to calculate the revenues you'll need to achieve that level of performance, by dividing cell 6 by cell 7. To reflect your need to improve your return on assets, the calculation would go into cell 9. You can then specify the assets allowed by dividing cell 6 by cell 9...
Meet the Author
Rita Gunther McGrath is Associate Professor of Management at Columbia Business School. Ian C. MacMillan is the Dhirubhai Ambani Professor of Entrepreneurship and Innovation at the University of Pennsylvania's Wharton School. They are coauthors of MarketBusters (Harvard Business School Press, 2005).
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Although this book focuses upon larger entrepreneurial companies, it is a great read for all entrepreneurs. A solid focus upon meeting market demand.
Bottom line first: Buy this book. Not only can you immediately implement the tools described, but it will also serve as an excellent reference tool. It is well worth the time invested to read it. Consider it as a $20 option on your career with limitless upside. The Entrepreneurial Mindset illustrates the process for rationally generating, choosing among, executing, and monitoring strategic opportunities in the face of uncertainty. Starting from the premise that no market is so mature that you cannot further differentiate your offerings, the authors offer action-oriented, simple tools that help to assess opportunities for launching new products and entering new markets. And those tools aren't just simple, they're also smart and unconventional, providing insight into the minds of habitual entrepreneurs who have honed their skill in creating value time and again. McGrath and MacMillan publish the checklists, questions, quizzes, and models it took them years to develop while working with management teams in established firms to discern original responses to business challenges. You can start applying the principles and tools in each chapter immediately, getting some good quick hits even before finishing the book. For example, Chapter 11 alone contains 8 tools for developing leading indicators of the business to help tell if a project is heading in the right direction, long before the results become available. Chapter 10 is a gem too. It is based on one of Harvard Business Review¿s most popular articles, ¿Discovery Driven Planning,¿ (written by the authors of this book) which was then developed into a course at Wharton¿s Executive Education Programs for several years. Anyone who reads and implements the principles, strategies, and tools outlined in this book is sure create value, regardless of their corporate title, and it is a must-read for any strategy professional or executive manager. If you think your industry or business is too mature to benefit from this book, consider one of McGrath and MacMillan¿s many case studies that are fresh and actually worth studying: Blyth Industries boosted sales from $3 million in 1982 to nearly $500 million in 1996 by exploiting a mature industry. How mature? More than 5,000 years old: Blyth Industries sells candles. Creating and nurturing an Entrepreneurial Mindset is a lot of fun and carries a lot of rewards, both professionally and personally. To quote the authors at the end of their first chapter: ¿If nobody knows what the future will hold, your vision of how to navigate it is as good as anyone¿s. The future may well belong to you.¿
The abilities of entrepreneurs have always fascinated me. They can start up new businesses and create new products without blinking an eye. The problem for most companies is they are stuck in tradional ways of doing business. These authors say that traditional companies CAN create new business models in the changing business environment. They present the common characteristics of entrepreneurs and provide a guide for organizations to model and create new products and services even when the conditions are uncertain. I would recommend this book for any company and any manager as the tools and guidelines that McGrath and MacMillan present can be used immediately and can help generate excitement within an organization of size and in any industry.