Why 20 Million of You Can't Be Wrong
If you want to scope out the prospects for growing companies over the next five to 10 years, the last people you'd want to talk with would be your fellow entrepreneurs. Reason: They will give you a universally positive outlook. I am reminded of my late father-in-law, himself an entrepreneur, whose stock answer to the question "How are you?" was a cheery "Never better!" One day when his wife was in the hospital, he had to be gently reminded that this might not be the most appropriate occasion to declare himself never better.
This spring the nation's company builders might not describe their own situations as never better. They haven't yet forgotten the late 1990s. But those I have asked about the future, to a man and to a woman, exhibit that congenital optimism. They reply that the economy has turned. They believe that, yes indeed, the next several years will be off-the-charts great. Even the scholars who study these companies share this sunny outlook. "I'm hugely optimistic!" exclaims William B. Gartner, professor of entrepreneurship at the University of Southern California's Marshall School of Business. "There will be more and more opportunities to make things happen."
But is all this optimism justified? For a contrarian view--and a sobering one at that--you need look no further than what the business press is telling us about the U.S. economy right now, recovery or no recovery. Among the recurrent themes:
Consolidation. Bank of America buys FleetBoston. Hewlett-Packard ingests Compaq Computer. Consolidation--the big getting humongous--is the name of today's game in financial services, computers, entertainment, and a dozen other more or less mature industries, as well as in some that are far from mature. In the rapidly growing (and fast-consolidating) business of pharmacy benefits management, for instance, the three largest players own more than 70% of the market.
Globalization, Round II. Remember when America's large corporations first found themselves threatened by overseas competition? They began downsizing and outsourcing, thereby creating huge market opportunities for entrepreneurial companies. Large corporations today continue to farm out their work, but not necessarily to U.S. suppliers. Outsourcing "remains an opportunity," says one expert, "but primarily for entrepreneurs in India and China."
No New New Thing. The major inventions of the recent past have passed their explosive-growth phase. Right now would not be the best time to launch a PC manufacturing company, say, or an Internet bookstore. Trouble is, no other technology on the near horizon is likely to create vast new markets. Biotech proceeds in fits and starts, as it has for the past two decades. Nanotechnology, says BusinessWeek, "might blossom in 20 years, not two."
These factors alone might provoke questions about the prospects for growth companies. But there's one more sizable negative, which might be dubbed The Empire Strikes Back. Remember when big corporations--we liked to call them dinosaurs--were bumbling and inept, saddled with high costs and slow to capitalize on new technologies? Some of them still merit the reptilian description. But more and more have turned into nimble, aggressive competitors. It's no accident that Wal-Mart and Starbucks, to pick two, have shoved so many smaller competitors out of business. Both are world-class operators, with a level of technological and managerial savvy to rival anybody's. Even older-line companies have caught up; Dow Chemical, for instance, reports that 15% of its transactions are now conducted online. "It used to be that there were new economy and old economy firms," says Roger Alcaly, author of a recent book, The New Economy. "Today everyone is going to be a user of the technologies and best practices of the new economy."
As the Empire gathers its forces, moreover, the rebels find themselves fighting for survival. Entrepreneurial software companies frequently face a sorry choice: to sell out to Microsoft or watch the Colossus of Redmond drive them out of business. Small manufacturers get beaten down on price by big customers until they can barely stand--at which point the customers move their sourcing to Mexico. Sometimes the battle is head-to-head. Ten-year-old Under Armour, a marketer of performance clothing, was No. 2 in last year's Inc. 500 and racked up more than $110 million in annual sales in 2003. By the end of last year, big competitors were targeting the young Baltimore-based company. "Under Armour is smack in the middle of Nike's sights," an industry journalist told The New York Times. "The first time, they might miss, but they never miss the second time."
So assessing growth-company prospects requires more than reflexive optimism. It seems plain, as all these trends suggest, that the next five or 10 years will usher in a tougher marketplace. But does that mean that entrepreneurs will somehow cave, or that the entrepreneurial sector of the U.S. economy won't be as dynamic? Not likely. Both research and experience suggest there will be plenty of ambitious young businesses fighting for chunks of that marketplace, however tough it may be. What's more, these companies enjoy some built-in edges over their larger competitors.
Who Are Those Guys?
Paul Reynolds is the kind of graying-at-the-temples, soft-spoken academic who in another age would have worn patched tweed jackets and smoked a pipe. About a decade ago--he was then at Marquette University--he hit on the idea that would define his academic career.
America was already experiencing a resurgence of entrepreneurship, and companies seemed to be sprouting up all over. But how widespread was the entrepreneurial urge? Young businesses didn't show up on anybody's censuses until they had been in operation a while or until they reached a certain size, so nobody knew how many might be in gestation or early operation. Reynolds, a sociologist, began surveying random samples of adults and simply asking them, Had they started their own business recently? Or were they launching a start-up--and if so, what specific steps had they taken? Soon Reynolds moved to Babson College in Wellesley, Mass., and other scholars were joining his effort. The Ewing Marion Kauffman Foundation of Kansas City, Mo., signed up to help finance some larger-scale studies.
The result: a multiyear, multinational, ongoing research project known as the Global Entrepreneurship Monitor, or GEM, which counts (in effect) the number of working-age adults who are engaged in acts of company creation. GEM has come up with some startling findings. In the United States, according to the most recent data, some 11.3% of the working-age population are either running a young business--less than three years old--or are actively trying to start one. Since there are about 180 million Americans between 18 and 64, that means more than 20 million of us are prospective entrepreneurs. Even allowing for a healthy number of wishful thinkers in the bunch, it's a good-sized group.
As Butch said to Sundance, who are those guys? Many of the company starters, of course, aren't guys at all. Though men outnumber women in these ranks by about 60 to 40, that leaves maybe 8 million female entrepreneurs along with 12 million males. Compared with the general population, more entrepreneurs have a college education, and proportionally more live in urban areas. Otherwise they are spread out all over--among regions of the country, among income levels, and among ethnic groups. A friend of mine is one of the people who would have answered "yes" to the GEM survey, and his story is probably pretty common in this age of downsizing and restructuring. For 20 years, Bob Grant was a top sales rep for Thomas Publishing, the century-old company behind the famous product guide known as the Thomas Register. But in 2002 Thomas was reorganizing, and Grant began to question his future with the company. Presto: Scarcely six months later he was CEO of Grant Inc., now a rapidly growing marketing-communications firm in the Boston suburbs.
What all this means, of course, is that entrepreneurship has become an accepted occupational choice in the United States, occasioning a continuing boom of company building that fluctuates modestly with economic conditions but persists at a generally high level. Part of the boom is attributable to today's technology: The ubiquity of personal computers and the Internet gives company builders market-access and information-processing capabilities they couldn't have had 25 years ago. And part is surely attributable to corporate downsizing, which has provided a cadre of experienced businesspeople such as Grant to undertake the building of new companies. But by now this is a self-sustaining phenomenon. Entrepreneurship is taught in more than 1,500 colleges and business schools. It is supported financially by millions of people. To imagine that many of those eager company starters are suddenly going to go out and get a real job--well, it strains credulity. Opportunities are limited? Tough: Guess they'll have to create their own.
As to how they're likely to go about creating opportunity, some will do what entrepreneurs have always done. They'll hit upon a hot new concept in restaurants, say, or in toys, or in clothing. They'll target a growing market, such as the burgeoning Hispanic population. But what we have learned in recent years is that you don't need a lucky hit or an expanding market to create a growing company. What you do need is a smart CEO--one who understands how entrepreneurial businesses can carve out niches in today's economy right under the noses of larger competitors, simply by playing to their own strengths. One such strength is the ability to pursue certain kinds of innovation. A second: the ability to create a company that people actually want to be part of.
Seven years ago a lanky (six-foot-eight) Harvard Business School professor named Clayton M. Christensen published an unassuming book titled The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. It was a scholarly work, densely packed with research. But it promptly hit the bestseller list on the strength of its novel and provocative thesis. Some innovations, said Christensen, sustain an industry--they offer better performance, more features, everything that existing customers are looking for. Other innovations disrupt an industry. They may not work as well as what's already out there, but they bring useful products or services to people who never had them before. A classic example is Canon's small-scale copiers, in wide use by the early 1980s. The inexpensive copiers couldn't do nearly as much as the big Xerox machines of the time, but they made desktop copying available to small businesses that couldn't afford a Xerox. Christensen's insight was that disruptive innovations are rarely attractive to the companies that dominate an industry, just because they carry lower profit margins and don't serve the needs of those companies' best customers.
Much of Christensen's message--elaborated in a subsequent series of articles and in a second book published just last year--is designed to help large companies become more innovative. But it's easy to see how growth companies can compete in a Christensenian marketplace. For one thing, smaller businesses always have a built-in advantage as experimenters and explorers. Almost by definition, large companies have high cost structures. To grow they need big new markets. So they hesitate to invest in innovations where the profit margins and the market size are essentially unknown.
It's hard to imagine a better description of today's technology world. A reasonable observer in 1984 might have foreseen the explosive growth in PCs, and in 1994 the rapid expansion of the Internet. But in 2004? Um, quick, how big will the market be for Internet-based telephony? For polymer-based computing chips? Large companies are nosing around many such markets, but nervously--which means that much of the innovation will be undertaken by start-ups and nimble young companies that sniff out a niche worth exploring. Right now, for instance, a handful of entrepreneurial businesses are leading the charge into wireless networks composed of tiny interacting sensors that can monitor aspects of the physical world, from the performance of commercial refrigeration units to the movement of armored vehicles on a battlefield. Kris Pister, CEO of Dust Inc. in Berkeley, Calif., has told more than one reporter that sensor networks will be "hugely revolutionary," capable of doing "for the physical world what the Net did for the world of ideas." He may be right--but who knows? And who knows how big the margins in such a business would be? Absent clear answers to such questions, this and many other high-tech markets will be the province of entrepreneurs for years to come.
When you look at innovation through Christensen's lens, you see ways in which entrepreneurs can create their own markets.
Nor is it only technology businesses that face daunting uncertainty. Take what may be the biggest new consumer market to come down the pike in some time, that created by the aging of the baby boom generation. "The over-50 population will represent 80% of all the growth in the United States," argues marketing guru Ken Dychtwald, of Age Wave Inc. "There will be double-digit growth for decades to come in this marketplace." Parts of the new market are highly predictable: more demand for homes in Arizona and Florida, more need for walkers and wheelchairs. The big companies in these industries are already gearing up. But wait! This is the baby boom, and those frisky boomers are apt to want things that past generations of elderly wouldn't have known what to do with. Adventure travel! Back-to-school learning opportunities! Bill-paying services! Some such niches may turn out to be huge--but until somebody finds out which ones, the large companies will hold back. "Dreaming up novel ideas, getting them launched, proving they can work--the Fortune 500 can't do that," says Dychtwald. "So they have respect for, and interest in, the entrepreneurs who can take the ideas and make them real."
Christensen also shows that real disruptive innovation typically occurs when an industry has overshot its mark: when its products or services offer more than most customers need, and when they are so costly that large portions of the market are excluded. If there is one industry that fits this description today, it is health care. Many people who visit a hospital don't need its expensive technology and services. Many who visit a doctor could make do with a nurse. The solution? Disrupt the health care system, of course. "You bring technology that enables people to do in their homes what they used to have to go to a doctor's office to do, and to do in a doctor's office what they used to do in a hospital," says Christensen. "You enable less expensive venues of care to become more capable, and less expensive caregivers to become more capable."
Medical-device upstarts have already created new business opportunities from such disruption. LifeScan Inc., now owned by Johnson & Johnson, developed portable blood glucose meters for diabetes, enabling patients to monitor their own glucose levels without relying on large-scale hospital labs. Sonosite, based in Bothell, Wash., developed an inexpensive handheld ultrasound device that for some applications can replace big cart-based ultrasound systems. Now disruptive innovation may be changing the delivery of health care services. A company called MinuteClinic, headquartered in Minneapolis, has placed a dozen health care kiosks in Target and Cub Food stores around its area. Staffed by nurses, the clinics offer diagnosis and treatment for a carefully circumscribed list of common conditions, including strep throat, ear infections, and sinus infections, plus screenings for such measures as cholesterol and blood pressure. They can't provide everything a doctor's office can, but they do offer convenient walk-in service (typically requiring 15 minutes or less), and they charge only $41 (or an insurance copay) per visit.
When you look at innovation through Christensen's lens, you see ways in which entrepreneurial companies can create their own markets. They can experiment and explore in terrain that big companies fear. They can introduce products or services that undercut the market by making something simpler, more convenient, cheaper, or more accessible. Entrepreneurs are natural-born disrupters: Look for more of them in the next five to 10 years.
Small companies, it was once thought, would always be at a disadvantage in the marketplace because large companies were, well, big. They had deeper pockets. They could build bigger factories and stores, hence take advantage of economies of scale. They had access to more capital. But consider how different things are now:
One, we live and work in a knowledge-based world, with human capital more important than physical or financial capital. The point is a cliche. But note that it extends well beyond the industries--high tech, professional services, entertainment, etc.--with which the idea is usually associated. Trucking companies don't just need trucks and drivers, they need software engineers who can develop economical route algorithms. Specialty retailers don't just need stores, they need knowledgeable salespeople who can answer questions and steer customers toward what they need. Even machine operators in factories aren't just tightening bolts anymore, they're programming and monitoring the computers that run things.
Two, this environment puts a premium on attracting and retaining good people. It isn't just the cost of hiring replacements that matters when valuable people leave, though those costs can add up. It's that their knowledge and experience leave with them. Though companies have grown complacent about keeping employees over the last few years--where were they going to go?--that situation is about to change. Baby boomers are aging. Younger workers are scarce. "We're looking at a shortage of over 10 million people by 2010," says Roger Herman, a consultant whose 2003 book Impending Crisis (co-authored with Tom Olivo and Joyce Gioia) documents the claim. Which companies will get and keep the people who are available? Time was, a job with a big corporation was out-and-out preferable to a job with a small one. It paid more. The benefits were better, as was the job security. Intangibles like reputation mattered too: You could tell your neighbors you worked for IBM or Xerox and they'd know you had a job with a respected company. But let's go back to our counting.
What if the next big thing isn't so much a new technology as it is an entirely new way of thinking about business?
Three, a lot of those big-company advantages in the labor market have vanished. Job security: pffft. Reputation: double pffft. (The big brokerage firm Edward Jones ranked No. 4 in Fortune's 2004 listing of the 100 Best Companies to Work For. The list appeared just days before the scandal broke about Jones getting payments to tout certain mutual funds. Oops.) The pay and benefits with most large corporations are still pretty good, so long as you keep your job. But cubicle life? Thanks to Dilbert, the corporate workplace has become a national joke. Thanks to Enron, et al., the corporation itself now seems suspect.
And four, finally, we got a glimmer of an alternative: Hey, work life doesn't have to be like that. It started in the early heyday of Silicon Valley. The engineers began coming to work in casual clothes. They played foosball during breaks and held beer bashes on Friday afternoons. But it wasn't just fun and frills. Employers were offering employees the chance to move up rapidly, to learn new stuff and take on new responsibilities. They were asking them to get involved in the business--to think and act like owners, not just hired hands. Companies began passing out profit-sharing checks and stock options, not just to top executives but all the way down the line, and soon there were tales circulating of millionaires in the making. The dot-coms, of course, carried all these notions to the point of caricature, discrediting them in the eyes of the press. But guess what? The fundamental ideas didn't go away. On the contrary, growing companies of all sorts have been developing share-the-wealth, expand-your-horizons, have-a-good-time-and-build-the-business cultures right along.
Examples? Take a quick cross-country tour. Start in Tucson, where 60 or so employees of Community Psychology & Education Services Inc. (CPES) have gathered for a quarterly meeting to review the company's financial performance. Granted, this particular meeting looks like an out-of-control third-grade class. Presenters such as regional director Bob Bennetti are shot with Silly String by kibitzers in the front row. Whoops and blasts from noisemakers greet every slide. But there's a serious purpose here, made more palatable by the fun and games. CPES provides services to people with developmental disabilities and mental illnesses--a tough, high-turnover business, and one where every nickel counts. (The state's reimbursement rates aren't exactly opulent.) These employees--managers, supervisors, and frontline workers--are learning where they can economize (vehicle maintenance) and where they can't (their clients' diets), and how they all are doing at keeping costs low, revenue up, and service quality impeccable. Shareholders all, they know they will benefit when the company does well. And it has, growing from $5 million in revenue a decade ago to an estimated $22 million this year.
Then visit Scot Forge, an hour or so northwest of Chicago, where Leo Szlembarski and his co-workers turn raw steel into giant rings, gearwheels, and other forged products. There isn't much silliness at Scot, unless you count the loud tartan blazer worn by CEO John Cain, but there is a lot of sociability--picnics, parties, monthly lunches where everyone gets a $2 bill for every two million dollars' worth of product the company ships. A trivial amount, you say? Sure, it's a token, a token of the fact that here, too, the employees own a chunk of the company. They receive, typically, from $3,000 to $12,000 a year in dividends and profit sharing on top of their regular pay; and they can build up some nice nest eggs in company stock (which has risen steadily in value). Szlembarski, a lathe operator with 34 years at Scot, tells a visitor that a lot of blue-collar employees there retire with $700,000 or $800,000 in their share accounts--and that he himself has "a little more."
Last stop: Waterbury, Vt., where the Green Mountain Coffee Roasters plant seems to make much of the town smell like fresh-brewed java. Roger Garufi runs one of the "frac" lines at GMCR, turning out fraction-of-a-pound packages of coffee designed for restaurants. Garufi arrived at Green Mountain about four years ago. Since then--in addition to his regular job--he has helped design and teach a three-session, seven-hour course on what it means to be a shareholder of the company, which nearly all employees are; has helped plan a so-called Appreciative Inquiry conference charged with exploring the future of GMCR; and has begun scoping out opportunities for advancement because, as he says, "I plan on retiring here." Garufi's co-worker Randy Lewey repeats approvingly a phrase the company uses in its literature: Green Mountain, he says, is "a destination workplace."
A destination workplace. In this economy, such a reputation is not just a nicety, it's a huge competitive advantage. CPES enjoys a turnover rate well below the industry average--and can enlist its dedicated employees for extracurricular projects like creating a community center for its clients. Scot Forge keeps the skilled blacksmiths and machinists it needs (and who are increasingly hard to find)--and it regularly gets them involved in figuring out how to do jobs faster and cheaper while maintaining quality. Growing companies with such involvement and rewards transform themselves from places where people collect paychecks to places where people pursue personal goals and have good times along the way. Try that at Megacorp Inc.
A really new new thing?
So growing companies will thrive in the next several years, though the marketplace may be tough. Of course, it's always tempting to look beyond the next half decade or decade and speculate. What will the prospects for growth companies be when this magazine turns 50 in 2029? To be sure, that's a time frame that can cloud anyone's crystal ball. Maybe those sensor networks will be ubiquitous, so that we know where everything (maybe everybody) is at any given moment. Maybe we will produce our energy from hydrogen, so that fossil fuels can be consigned to history's dustbin. Entrepreneurs will undoubtedly play a role in any such transformation, just because they always do.
But what if the next big thing isn't so much a technology as it is a way of thinking about business--an angle of vision that promises to create new kinds of markets entirely? At least one pair of thinkers has recently offered a 25- to 50-year, future-shock outlook that could get anybody's juices flowing, provided only that the would-be company builders can figure out how to translate a grand vision of economic change into down-to-earth business opportunities.
The pair is Shoshana Zuboff and Jim Maxmin, a married couple who make their home in backwoods Maine. Zuboff is a Harvard Business School professor; Maxmin has a Ph.D. in philosophy and real-world experience as CEO of Volvo UK and two other companies. Maybe befitting their blue-chip backgrounds, their recent book, The Support Economy, is grandly ambitious. The era of industrial capitalism is over, they claim. The business enterprise as we know it today is collapsing. Vast new markets already exist and are waiting to be opened up by innovators willing to create a new kind of company and to offer services different from anything offered in the past. "The old business model is dying, and the new one hasn't emerged," says Maxmin bluntly.
A brief summary can't do justice to their analysis, which draws on rich historical research to argue that capitalism develops in stages and that we're on the cusp of a new one. But here's a good way to get a sense of what they're saying. First, stop to think about all the ways in which your current life as a consumer is difficult and frustrating--all the ways in which it eats up your own or somebody else's time and still produces unsatisfying results. Figuring out what phone service to buy. Arranging to be at home when your new computer is delivered, and then learning how to hook it up. Finding the right camp for your kid. Making time to buy groceries and clothes. Arranging a new mortgage. Worrying about whether you have enough insurance. Any one example seems trivial, but they add up to a majority of consumers constantly feeling anxious and overburdened--and that's before you get to major stress-inducers like health care and air travel. The result of all this, argue Zuboff and Maxmin, is a rising fury on the part of consumers, and a near-total mistrust of service businesses that simply don't meet people's needs. "Only four percent of Americans trust their HMOs!" exclaims Zuboff with animation. "Only seven percent say that they trust health insurance! Only twelve percent trust telecom providers!"
But now, indulge in a flight of imagination. Think how all such matters would be handled if you were very wealthy and you had a staff devoted to them. Suddenly the inconveniences and frustrations of daily living vanish, because somebody else is handling them. Suddenly service providers like insurance companies and travel agents are at your beck and call. Suddenly the doctor comes to your home, and the hospital arranges instant admission--no paperwork necessary--to a room that looks and feels like a four-star hotel. You wouldn't have many gripes about your service providers then.
Of course, services for the rich are hugely expensive. But that's where Zuboff and Maxmin argue that we're entering a new stage of capitalism. Information technology and the Internet make it possible for service providers to offer customized services at ever lower costs. They make it possible for a single federation of companies to act as the consumer's advocate and to create and coordinate a network of specialized vendors providing unique services. "Today I need to travel, and my kid needs a summer camp, and my roof is leaking, and I need a new homeowner's policy," explains Maxmin. "Tomorrow it will be six different things." In the current environment, the consumer has to handle it all. In the Zuboff-Maxmin environment, a single advocate will coordinate the services--and the services themselves will be tailored to individual needs. Need a new computer? Don't call Dell, just call your advocate, who will help you figure out what to buy. If all this boggles the mind, Zuboff and Maxmin ask us to remember how fast technology and an economy can change. Imagine asking somebody in 1900, they suggest, whether automobiles would ever be so cheap that an average family could afford one.
One day last fall I spent a couple of hours talking with the pair, and I kept asking for real-world examples of companies that are already doing such things. I didn't get far. It hasn't happened yet, they told me. What's more, they are outlining a big picture. The people who fill in the details will not be scholars like themselves. Zuboff and Maxmin don't know the secrets. But there will be those who figure them out.
Of course. Entrepreneurs.
Contributing writer John Case, who coined the term "open-book management," has been writing for Inc. for 20 years.