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The Small Business Difference: How Smaller Companies Manage with Less The Small Business Difference: How Smaller Companies Manage with Less
These concerns, Bowen told his audience, closely conformed with those expressed by the companies in his research pool and are issues that are central to top management in companies of five hundred or fewer employees. He then shared some of his findings. “All companies that start small, whether they grow tremendously or stay modest in size, deal with the question of how to put systems in place that will ensure the company’s longevity and continued success,” Bowen said. “An important part of that process is developing systems and measurements to ensure that the people you hire, beyond their résumé qualifications, will fit the firm’s culture. That’s a big problem for small companies. “People often equate small business growth with financing,” Bowen continued, “but we found that businesses more often than not are constrained by nonfinancial considerations, such as ‘How fast can I hire and acculturate people into my company?’ and ‘How fast can I develop a special set of customers?’ ” Bowen then presented a brief video featuring Gregory Slayton (MBA ’90) discussing the situation he faced in 1997 when he took over as president and CEO of a small company called MySoftware. The firm was a struggling Silicon Valley business that developed and sold software for a variety of small-business needs such as creating direct marketing campaigns, brochures, and Web sites. While making moves to cut costs and stabilize the company for the short term, Slayton sought new ideas from his team for future growth possibilities. “The company needed a high-growth idea that would work or else it might be doomed,” Bowen noted. Slayton’s plan was to pursue a number of new avenues simultaneously, to be very honest about what was working and what was not, and to cut any losses early. While several seemingly promising approaches went nowhere, one looked particularly good, even though it was a departure from the firm’s core business. The new product was software that could mine huge databases and organize information that was both usable and affordable for small businesses. But when it didn’t take off with its target customers, Slayton and his team were quick to adapt. Sensing a new opportunity, they merged with another company, with the result that MySoftware became a division of a new entity called ClickAction, which specializes in e-mail marketing programs for both small and large companies. What, Bowen asked the audience, are some of the lessons to be drawn from Slayton’s experience and those of other small business operators? He quoted educator John Holt: “The true test of intelligence is not how much we know how to do, but how we behave when we don’t know what to do.” This formulation seems especially applicable in the small-business realm, Bowen said. “We find that time and time again, in the absence of certainty, business leaders exemplify the kind of intelligent thinking that Holt describes. They experiment and learn. And in a fluid environment, winners are those who know how to take risks but can cut any losses quickly, in order to take advantage of changes and new opportunities in the marketplace.” — Garry Emmons (send e-mail to the author) RETURN TO THE TOP OF THE PAGEBig Deals: Project Finance Helps Mitigate Risk in Large-Scale Investments
Both the size and the uniqueness of the projects Esty examines make them difficult to manage and prone to conflicts between actual and optimal investment behavior. An inherent lack of flexibility compounds these challenges, because most projects involve binary “go/no-go” decisions. Esty uses the forthcoming 550-passenger Airbus A380 jet as an example: “You can’t build a wing and learn anything about underlying demand for the plane. Instead, you have to sink the full $12 billion into the project before learning if there is, or is not, sufficient demand.” Given the level of uncertainty involved with these projects, they require years of negotiation, including careful allocation of risks and returns among the various parties so that they have incentives to manage efficiently. Also important is the possibility for adjustments in risk allocation and responsibilities should the project’s definition or underlying conditions change. Overall, a key element in risk mitigation is the use of off-balance sheet project finance instead of traditional, on-balance sheet corporate finance. Consider, for instance, Iridium LLC, a $5.5 billion global satellite communications firm backed by Motorola that filed for bankruptcy in August 1999. “At the time it set up Iridium, Motorola was a $9 billion company with a AA-rating,” says Esty. “If Motorola had financed Iridium on its balance sheet, the project’s bankruptcy might have dragged down an otherwise healthy corporation. By using project finance, Motorola shielded itself from much of the damage, while retaining some ability to benefit had Iridium been successful. This ability to facilitate large, risky investments without jeopardizing sponsoring companies is one of the main benefits of project finance.” More and more firms are turning to project finance to support large capital investments, and the trend is likely to continue due to privatization, deregulation, and globalization. “In an increasingly global business environment, achieving minimum efficient scale in production requires massive capital investment,” Esty explains. In one case coauthored by Esty and HBS research associate Fuaad A. Qureshi, the subject is a $1.4 billion aluminum smelter in Mozambique known as the Mozal project. Ravaged by a seventeen-year civil war that claimed 700,000 lives and destroyed much of the country’s infrastructure, Mozambique presented formidable risks as a project site. The cost of the plant, which was approximately equal to the country’s gross domestic product, made the investment decision even more of a gamble. Despite these challenges, the sponsors believe the country has turned a corner. They appear to be winning their bet, since the project was completed ahead of schedule and under budget. “The social, environmental, and developmental influence of these large-scale projects can be enormous,” Esty notes. “The Mozal project employed seven thousand people during the construction phase. Along with the enduring benefits of technology transfer, it offers opportunities for local people to learn from skilled outside workers and managers while providing good wages in a country where the average person makes under $100 per year. Equally important is the project’s catalytic impact on future investment. The sponsors have decided to spend another $1 billion to double the plant’s capacity, while other companies have announced plans for additional billion-dollar investments in Mozambique.” After a brief slowdown in 1997 and 1998 because of the Asian and Russian financial crises, the project finance market has come roaring back in the last two years. According to Esty, the use of project finance in new geographic markets and for new types of undertakings, combined with an increasing need to finance development in countries with limited resources, suggest that project finance should continue to loom large in the years ahead. — Julia Hanna (send e-mail to the author) This article was adapted from material that originally appeared in Working Knowledge, Vol. IV, No. II. For related links and research information on project finance, visit Professor Esty’s portal at www.hbs.edu/projfinportal. RETURN TO THE TOP OF THE PAGE
Brand New
by Nancy F. Koehn
The creation of a powerful, widely recognized brand is the ultimate goal that every entrepreneur dreams of but few achieve. In her new book, Brand New: How Entrepreneurs Earned Consumers’ Trust from Wedgwood to Dell, HBS associate professor Nancy Koehn examines six business pioneers across three centuries to better understand, as she puts it, how “individual entrepreneurs and companies translate a few buyers’ curiosity about new products into widespread customer loyalty.” The six individuals she selects — Josiah Wedgwood, Henry Heinz, Marshall Field, Estée Lauder, Howard Schultz of Starbucks, and Michael Dell — are drawn from the three periods of major economic transition, or business revolutions, that began in the mid-18th century and extend to the present day. In addition to relentless persistence despite often limited resources, these visionaries shared an ability to anticipate the significant shifts in consumer needs and desires being generated by changing times and mores. Koehn draws from diaries, correspondence, interviews, and official business records to tell the fascinating stories of how these entrepreneurs built their products, organizations, and brands. She explains how they used their brands as strategic tools to create best-of-class companies that maintained close connections with customers and to fashion new markets for their products. These entrepreneurs succeeded, Koehn notes, in the face of intense competition from other players in their respective industries. Many factors contributed to their success but much hinged on their ability, as Koehn writes, to create “products and connections to buyers that offered not only quality, convenience, and reliability but also a powerful sense of self-expression, fashion, status, community, and control.” The six entrepreneurs achieved this, Koehn found, by maintaining total familiarity with their product or service; learning from mistakes and adjusting quickly; distinguishing their offerings and responding to customers’ changing priorities; educating and listening to customers by means of ongoing two-way communication; and building organizational capabilities that delivered on the promise of their brands. From Wedgwood’s making of a large market for his china in 18th-century Britain, to Schultz’s creation of the Starbucks experience and brand, to Dell’s marketing of customer-tailored computers — along with the achievements of Heinz, Field, and Lauder — Brand New underscores the power of brands not only to transform start-ups and gain competitive advantage but also to shape new industries and create better ways of doing business. RETURN TO THE TOP OF THE PAGEA Nation Transformed by Information
Edited by Alfred D. Chandler, Jr., and James W. Cortada
In their new book, A Nation Transformed by Information: How Information Has Shaped the United States from Colonial Times to the Present, HBS professor emeritus Alfred Chandler and IBM consultant and coeditor James Cortada travel back in time to seek enlightenment about the future. To a large extent, they write, “historical perspective is crucial to our understanding of information in the role of the transformation of the United States from the colonial period to the present.” Chandler and Cortada each write an essay and coauthor a third in their contribution to the collection’s total of nine essays; the other six are written by experts on history, technology, and business. The book’s central message is that the country’s foundation and subsequent rise to its position of leadership in the world can be traced to the proliferation of information and to the technologies, systems, and infrastructure built to convey it. Americans’ commitment to democratic ideals, their fascination with technology, and their commercial and entrepreneurial spirit created fertile ground for this growth. By the time the United States was founded, a postal system (including roads) for the distribution of mail, copyright laws to protect intellectual property, and a plethora of newspapers and books were extant. The advent of electricity spawned the telegraph, telephone, radio, and motion pictures and engendered a tidal wave of information that makes recent technological innovations seem measured by comparison. Television, computers, and the Internet would later continue this tradition of information as a driver of the country’s social, economic, and political evolution. (continued on next page) Fundamental to this information-enabled society is the acknowledgment of the importance and value of sharing information itself and of adopting common technology standards to further this end. Thus, IBM in computers, RCA in television, and AT&T in transistors, to cite three examples, pragmatically shared hot new technologies through adoption of open systems or licensing agreements. Their actions stimulated entire industries and innumerable start-ups that would further facilitate and propagate the flow of information. Americans, the editors conclude, “have demonstrated a clear penchant to develop, exploit, distribute, and profit from a large array of information technologies. Now, as we enter a new century, we can view the Internet and its related technologies (e.g., telephony and computing) as a historical extension of much that has gone on in this nation for some three hundred years.” RETURN TO THE TOP OF THE PAGE
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few years ago, 
In the spirit of his research, Bowen began his presentation, titled “Running and
Growing the Small Company: General Management Déjà Vu,” by asking his audience
about their concerns, as owners and operators of small businesses. A number of issues
were voiced: sales and marketing; cash flow; hiring and motivating employees; smooth
succession within family companies; expanding beyond a successful business niche;
systematizing a business so it will run without the owner’s hands-on attention;
and dealing with government, especially over tax and regulation matters.
orget millions; think billions. That’s what HBS associate professor 
Project finance — Esty’s specialty and the focus of his course —
involves highly leveraged deals and risk-taking, something that has interested Esty
since he wrote his doctoral thesis on risk-taking in the savings-and-loan industry
during the 1980s. “I’ve long been intrigued with high leverage and its
effects on managerial incentives and firm performance,” says Esty. “The
projects I currently study are financed with 65 to 90 percent debt, compared with 25
to 35 percent for the typical industrial firm.”
Inside Chinese Business: A Guide for Managers Worldwide reveals the social and
cultural values that underpin Chinese business practices and influence day-to-day
corporate decisions. Written by Ming-Jer Chen, an expert on business strategy and
competition and founding director of the Global Chinese Business Initiative at The
Wharton School, the book distills a set of critical insights Western managers can use
to compete aggressively while creating and sustaining successful professional
relations in Chinese business communities around the globe.
The HR Scorecard: Linking People, Strategy, and Performance, by Brian Becker,
Mark Huselid, and Dave Ulrich, is an ongoing study of nearly three thousand firms
that describes a seven-step process for embedding HR systems within the firm’s
overall strategy — what the authors call an HR Scorecard — and then
measuring its activities in terms that line managers and CEOs will find compelling.
The Death of Distance: How the Communications Revolution Is Changing Our
Lives, a completely new edition of the best-selling book by journalist Frances
Cairncross of the Economist, explains how the world is changing with the introduction
of the Internet and wireless technology. Cairncross argues that the story today is
not only the diminishing importance of distance but also the mobility and ubiquity of
technology.