Posts Tagged managing innovation
Entrepreneurs do best in the face of uncertain conditions, but mature firms have a hard time with uncertain conditions because they plan for what is certain and has worked for them in the past. Entrepreneurs can succeed by doing what they do best and creating uncertain conditions for mature competitors.
ImproMed is one such company that has made “attack never defend” its mantra. Ron Detjen, ImproMed’s founder and president, says his company continues to grow and add employees because it keeps a competitive attitude. Detjen argues companies that go on the defensive can never grow as fast as companies that go on the offensive. Detjen encourages his employees to go on the offensive by finding something they excel at and keep working on it (Anonymous, 2011). What an excellent approach!
ImproMed is a company that helps veterinary practices deal with complex recordkeeping needs and has developed the world’s leader software products for both the business and medical needs of veterinary practices. ImproMed stresses a consultative approach for its employees is the key to its extraordinary growth (Anonymous, 2011).
A company that focuses on what its employees do well wins. Employees are critical to a small company because they are responsible for how the company performs. Encouraging employees to focus on strengths puts competitors at a distinct disadvantage because they do not know what to expect. A good entrepreneur works from his or her strengths and not weaknesses.
How does your company attack? I would love to hear your comments. If you want to know more about how you can design a way to attack using strengths you can learn more here.
Anonymous. (2011). 2011 Winners small business success stories Corporate Report Wisconsin, 26(7), 30-35. Retrieved from http://search.proquest.com/docview/864104598?accountid=35812
Most small businesses start with a business plan to get financing for a venture, but entrepreneurs prefer managing risk through effectuation. Effectuation entails entrepreneurial control over what an entrepreneur can do to achieve a wanted result when the means to that result involves taking an uncertain action. The effectual thinker takes action toward an imagined state incapable of continuous planning because the entrepreneur is uncertain about the result of the action (Gabrielsson & Politis, 2011; Read & Sarasvathy, 2005; Sarasvathy, 2001; Sarasvathy & Dew, 2005).
Entrepreneurs create business plans to achieve early financing and develop plans like they understand the outcome of their actions, but this often is not the case. Entrepreneurs performance typically is significantly off from early plans not because of bad planning, but because of uncertain actions taken toward imagined outcomes. Planning is valid when actions are certain to produce a known result.
Financiers fail to recognize this disconnect, and conventional planning does not fit when an entrepreneur works toward an imagined outcome. Financial planners rely on existing business models and not newly created ones. Not until the entrepreneur perfects the model can planning have true substance in predicting a wanted result.
Financial planning done for business plans at best presents a plan conforming to existing conditions. When an entrepreneur wants to create a new market or product conditions do not yet exist to support such plans. Such conditions cause financiers to rely on risky projections.
This disconnect raises a question about how to evaluate a venture without a financial track record when future actions are dubious. What can an entrepreneur do to convince a financier of the merits of the venture when financial planning projections are so far-off from true results? I want to know your thoughts. Do you want to learn more?
Gabrielsson, J., & Politis, D. (2011). Career motives and entrepreneurial decision-making: examining preferences for causal and effectual logics in the early stage of new ventures. Small Business Economics, 36(3), 281-298. doi: 10.1007/s11187-009-9217-3
Read, S., & Sarasvathy, S. D. (2005). Knowing what to do and doing what you know: Effectuation as a form of entrepreneurial expertise. Journal of Private Equity, 9(1), 45-62. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19164962&site=bsi-live
Sarasvathy, S. D. (2001). Causation and effectuation: Toward a theoretical shift from economic inevitability to entrepreneurial contingency. Academy of Management. The Academy of Management Review, 26(2), 243. Retrieved from http://proquest.umi.com/pqdweb?did=72362644&Fmt=7&clientId=13118&RQT=309&VName=PQD
Sarasvathy, S. D., & Dew, N. (2005). New market creation through transformation. Journal of Evolutionary Economics, 15(5), 533-565. doi: 10.1007/s00191-005-0264-x
“History repeats itself” is a saying I hear on occasion and often wonder about. Today, for example, some businessmen say they cannot work because of uncertain conditions, yet Adam Smith designed capitalism as the “epitome of risk taking” (Bernstein, 1996, p. 19). According to Bernstein, up to the time of the reformation, the stable Protestant tradition stressed abstinence to avoid risk. Protestants considered the danger inherent in risk-taking as akin to gambling. Adam Smith (1904) introduced capitalism believing the danger attached to risk also came with opportunity. Instead of looking at risk as a zero-sum game where someone wins and someone loses, Smith believed trade resulted in a mutually worthwhile pursuit. Smith believed both parties to trade and risk taking could become wealthier contrary to practice before the reformation that relied on exploitation to gain wealth (Bernstein, 1996).
Recent conversations have talked about how unacceptable the transfer of wealth is from the elite to its underlings. Some business people espouse the pre-reformation idea that wealth transfer should only come from exploitation of underlings, while others see wealth transfer more like Adam Smith did. Smith believed business is risky, but full of opportunity and new wealth came to those adventuresome people willing to innovate (Bernstein, 1996). Today with the coming of supply-side economics, some want to return to the days of exploitation and stymie adventuresome entrepreneurs willing to innovate and create new trade. Does history repeat itself? Has the pendulum swung too far in the wrong direction?
I believe an efficient economic system has to balance opportunities with risk taking. If business people do not take risk, I do not see where innovation comes from under such conditions. Stable well-established businesses do not like to remove themselves from their comfort zone and their products and services eventually become stale and do not satisfy consumer needs. Meanwhile, society needs to provide more incentives to entrepreneurs to innovate and create new trade.
What do you think? Is our economic system returning to the stable pre-reformation days bereft of any risk taking relying solely on exploitation? Are you willing to take a risk in today’s economic setting? What incentives do you believe would help entrepreneurs to resume their efforts to innovate new trade? Please leave your thoughts here. Do you want to know more about incentives to small business entrepreneurship to its rightful role? Click here.
Bernstein, P. L. (1996). Against the gods: The remarkable story of risk. Hoboken, NJ: John Wiley & Sons, Inc.
Smith, A. (1904). The wealth of nations (5th ed.). London: UK: Methuen & Co., Ltd.
I have heard the words “employees are our most valuable asset” many times, but have rarely seen accountants embrace the idea of capitalizing human capital as an asset on the balance sheet. The theory goes that companies expense wages as employees earn them. If employees are an asset I believe the part of workers’ employment cost that adds value to the organization should appear on the balance sheet.
Although accounting rules forbid capitalizing human capital, they only recognize human capital on the income statement. Despite this oversight, many call accounting the language of business. At least one article admitted the problem and recommended alternatives for capitalizing human capital. Chen and Ku (2004) concluded, “The succession of the human intellect over machines and equipment in the contribution to industrial value makes a financial statement that relegates human capital expenditure to expenses inadequate if not obsolete” (p. 129). If accounting is the language of business why is the value of its most valuable asset excluded from the balance sheet?
This disparity leads one to believe companies’ accounting standards look at employees not as an asset, but as a liabilities. For example, in finance the main goal of the firm is to maximize shareholder wealth and accounting rules treat human capital as a period cost (expense) instead of an asset. In recent years many companies have reconsidered the view shareholders are the only stakeholders in a firm, and have expanded stakeholders to include customers, suppliers, and employees. Even with the coming of triple bottom-line reporting I have not seen accounting rule-making bodies espouse the capitalizing human capital (Elkington, 1994; Slaper & Hall, 2011).
Similarly, Reimers-Hild, Fritz, and King (2007) described human capital as a continuous investment leading to increased earning power. Reimers-Hild et al. further described human capital as responsible for innovation, creativity, and keeping pace with change. Chen and Ku (2004) developed a theoretical classification framework that would capitalize certain formation and acquisition costs in early stages of development, learning costs in middle stages of development, and replacement costs in final stages. Chen and Ku argued for disclosing these costs as investments if the costs are unique and add value.
Do you believe employees are your greatest asset? I would like to hear your thoughts. Should your greatest asset show on the balance sheet? Please let leave your comments? Click here if you want to understand more about accounting for human capital.
Chen, H. M., & Ku, J. M. (2004). The role of human capital cost in accounting. Journal of Intellectual Capital, 5(1), 116-130. doi: 10.1108/14691930410512950
Elkington, J. (1994). Towards the sustainable corporation: Win-win-win business strategies for sustainable development. California Management Review, 36(2), 90-100. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9410213932&site=ehost-live
Reimers-Hild, C. I., Fritz, S. M., & King, J. W. (2007). Entrepreneurial Career Development: Using Human Capital, Social Capital, and Distance Education to Achieve Success. Advancing Women in Leadership, 24, 1-N_A.
Slaper, T. F., & Hall, T. J. (2011). The triple bottom line: What is it and how does it work? Indiana Business Review, 86(1), 4-8. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=66506015&site=ehost-live
About 10 years ago the owner of Bimba Manufacturing Company located in Monee, Illinois decided to sell 90% of his stock to employees through an employee stock ownership plan (ESOP). The company produced aluminum cylinders and had two classes of employees. These classes included the managers who made policies and workers who obeyed the policies and performed the work. Under the ESOP instead of workers just obeying the orders of the managers, the company formed cross-functional teams to address problems and improve quality. The teams decided to meet regularly with customers to consider their needs and improve working relations (Jones, 2004).
The ESOP plan changed the workforce orientation improving working relations, accentuating excellence, and leading to a high quality products. Each cross-functional team hired its own workers and socialized together creating a cooperative new culture in the company. Employees effectively relearned their jobs by actively listening and interacting with each other instead of focusing on managers and workers. Managers acted more like advisers and workers gained a more cooperative spirit. Because of this organizational change the company increased sales 70% and the workforce grew 59% (Jones, 2004).
Although when first starting a business an owner can design a hierarchical organization for expedience, the firm stands to improve performance by reconsidering the organizational form. In my experience, hierarchical organizations in a small business can stymie the growth of the organization. I have personally experienced the difference and realized the benefits of redesigning the organizational form.
A more nimble team orientation can improve performance and cross-functional communication. The organization can respond better to the companies’ customers and better address their needs. The case of Bimba Manufacturing offers a good lesson in organizational change designed to improve worker and customer relations.
Have you reconsidered the organizational design in your firm? I would like to hear your ideas about changes that can benefit the organizational design in your firm. If you need help I urge you to act now and we can start to help you. Learn more.
Jones, G. R. (2004). Organizational theory, design, and change (4th ed.). Upper Saddle River, NJ: Prentice Hall.
Companies can achieve superior performance and gain competitive advantage by using the VRINE model emphasizing value, rarity, inimitability, non-substitutability, and exploitability. These five factors influence a firm’s resources and capabilities to compete and achieve superior performance (Carpenter & Sanders, 2009).
First, a resource must add value to meet demand in the market. The ability to compete by itself does not offer an advantage, but can produce a normal profit. The value added assumes the firm can control costs and the product or services offer potential to consumers. Second, scarce (rare) resources can add competitive advantage at least temporarily. Until competitors can normalize this competitive advantage, the firm can achieve above normal profits. Third, if the products or services added are incapable of reproduction by competitors, the firm can achieve a sustainable competitive advantage earning above normal profits for an extended period. These products or services are such that competitors cannot imitate or substitute for them. Last, a firm has to have the capability to exploit the above four characteristics to achieve competitive advantage. The ability to exploiting these resources allows the firm to achieve improved financial performance than if it can only control them (Carpenter & Sanders, 2009).
Small businesses looking to achieve competitive advantage should employ the VRINE model and ask if it can meet these characteristics. The model shows how a firm can sustain superior financial performance by developing resources that meet the VRINE characteristics.
How does your firm do? Does it meet the VRINE model’s characteristics? Learn more.
Carpenter, M., & Sanders, W. G. (2009). Strategic Management: A Dynamic Perspective Concepts and Cases (Second ed.). Upper Saddle River, NJ: Prentice-Hall.