There is an old banker’s rule of thumb according to which one assumes that bills will have to be paid sixty days earlier than expected and receivables will come in sixty days later.
Entrepreneurs starting new ventures are rarely unmindful of money; on the contrary, they tend to be greedy. They therefore focus on profits. But this is the wrong focus for a new venture, or rather, it comes last rather than first. Cash flow, capital, and controls come much earlier. Without them, the profit figures are fiction—good for twelve to eighteen months, perhaps, after which they evaporate. Growth has to be fed. In financial terms this means that growth in a new venture demands adding financial resources rather than taking them out. The healthier a new venture and the faster it grows, the more financial feeding it requires.
The new venture needs cash-flow analysis, cash-flow forecasts, and cash management. The fact that America’s new ventures of the last few years (with the significant exception of high-tech companies) have been doing so much better than new ventures used to do is largely because the new entrepreneurs in the United States have learned that entrepreneurship demands financial management. Cash management is fairly easy if there are reliable cash-flow forecasts, with “reliable” meaning “worst case” assumptions rather than hopes. If the forecast is overly conservative, the worst that can happen is a temporary cash surplus.
The more successful a new venture is, the more dangerous the lack of financial foresight.
The lack of adequate financial focus and the right financial policies is the greatest threat to the new venture in the next stage of its growth. It is, above all, a threat to the rapidly growing new venture. Suppose that a new venture has successfully launched its product or service and is growing fast. It reports “rapidly increasing profits” and issues rosy forecasts. The stock market then “discovers” the new venture, especially if its is high-=tech or in a field otherwise currently fashionable. Predictions abound that the new venture’s sales will reach a billion dollars within five years.
Eighteen months later, the new venture collapses. It is suddenly awash in red ink, lays off 180 of its 275 employees, fires the president, or is sold at a bargain price to a big company. The causes are always the same: lack of cash; inability to raise the capital needed for expansion; and loss of control, with expenses, inventories, and receivables in disarray. These three financial afflictions often hit together at the same time. yet any one of them by itself endangers the health, if not the life, of the new venture. Once this financial crisis has erupted, it can be cured only with great difficulty and considerable suffering.
Above all, the people who are running a new venture need to spend time outside: in the marketplace, with customers, and with their own sales force, looking and listening. The new venture needs to build in systematic practices to remind itself that a “product” or a “service” is defined by the customer, not by the producer. It needs to work continuously on challenging itself in respect to the utility and value that its products or services contribute to customers. The greatest danger for the new venture is to “know better” than the customer what the product or service is or should be, how it should be bought, and what it should be used for. Above all, the new venture needs willingness to see the unexpected success as an opportunity rather than as an affront to its expertise. And it needs to accept that elementary axiom of marketing: Businesses are not paid to reform customers. They are paid to satisfy customers. Lack of market focus is typically a disease of the “neonatal,” the infant new venture. It is the most serious affliction of the new venture in its early stages—and one that can permanently stunt even those that survive.
Technologies crisscross industries and travel incredibly fast.
What accounts for the decline in the number of major corporate research labs? The company-owned research laboratory was one of the nineteenth century’s most successful inventions. Now many research directors, as well as high-tech industrialist, tend to believe that such labs are becoming obsolete. Why? Technologies crisscross industries and travel incredibly fast, making few of them unique anymore. And increasingly, the knowledge needed in a given industry comes out of some totally different technology with which, very often, the people in the industry are quite unfamiliar. As a result the big research labs of the past are becoming obsolete.
The research laboratory of the big telephone companies, the famous Bell Laboratories of the U.S., was for many decades the source of all major innovations in the telephone industry. But no one in that industry worked on fiberglass cables or had ever heard of them. They were developed by a glass company, Corning. Yet they have revolutionized communications worldwide.
Steinmetz’s technology-driven science is anathema to many academic scientists.
Steinmetz’s innovation also lead to the “lab without walls,” which is America’s specific, and major, contribution to very large scientific and technological programs. The first of these, conceived and managed by President Franklin D. Roosevelt’s former law partner, Basil O’Connor, was the National Foundation for Infantile Paralysis (March of Dimes), which tackled polio in the early 1930s. This project continued for more than twenty-five years and brought together in a planned, step-by-step effort a large number of scientists from half a dozen disciplines, in a dozen different locations across the country, each working on his own project but within a central strategy and under overall direction.
This then established the pattern for the great World War II projects: the RADAR lab, the Lincoln Laboratory, and, most massive of them all, the Manhattan Project for atomic energy. Similarly, NASA organized a “research lab without walls” when this country decided, after Sputnik, to put a man on the moon. Steinmetz’s technology-driven science is still highly controversial. Still, it is the organization we immediately reach for whenever a new scientific problem emerges, for example, when AIDS suddenly became a major medical problem in 1984-85.
Management is increasingly becoming the agent of social innovation.
The research lab dates back to 1905. It was conceived and built for the General Electric Company in Schenectady, New York, by one of the earliest “research managers,” the German-American physicist Charles Proteus Steinmetz. Steinmetz had two clear objectives from the start: to organize science and scientific work for purposeful technological invention and to build continuous self-renewal through innovation into that new social phenomenon—the big corporation.
Steinmetz’s lab radically redefined the relationship between science and technology in research. In setting the goals of his project, Steinmetz identified the new theoretical science needed to accomplish the desired to obtain the needed new knowledge. Steinmetz himself was originally a theoretical physicist. But every one of his “contributions” was the result of research he had planned and specified as part of a project to design and to develop a new product line, for example, fractional horsepower motors. Technology, traditional wisdom held and still widely holds, is “applied science.” In Steinmetz’s lab, science—including the purest of “pure research”—is technology-driven, that is, a means to a technological end.
Often a prescription drug designed for a specific ailment sometimes ends up being used for some other quite different ailment.
When a new venture does succeed, more often than not it is in a market other than the one it was originally intended to serve, with products or services not quite those with which it had set out, bought in large part by customers it did not even think of when it started, and used for a host of purposes besides the ones for which the products were first designed. If a new venture does not anticipate this, organizing itself to take advantage of the unexpected and unseen markets; if it is not totally market-focused, if not market-driven, then it will succeed only in creating an opportunity for a competitor.
The new venture therefore needs to start out with the assumption that its product or service may find customers in markets no one thought of, for uses no one envisaged when the product or service was designed, and that it will be bought by customers outside its field of vision and even unknown to the new venture. If the new venture does not have such a market focus from the very beginning, all it is likely to create is the market for a competitor.
Being the one who makes your product, process, or service obsolete is the only way to prevent your competitor from doing so.
Innovating organizations spend neither time nor resources on defending yesterday. Systematic abandonment of yesterday alone can free the resources, and especially the scarcest resource of them all, capable people, for work on the new.
Your being the one who makes your product, process, or service obsolete is the only way to prevent your competitor from doing so. One major American company that has long understood and accepted this is DuPont. When nylon came out in 1938, DuPont immediately put chemists to work to invent new synthetic fibers to compete with nylon. It also began to cut nylon’s price—thus making it less attractive for would-be competitors to find a way around DuPont’s patents. This explains why DuPont is still the world’s leading synthetic-fiber maker, and why DuPont’s nylon is still in the market, and profitably so.