Growing Pains. Flamholtz Eric G.

Although this distinction will be discussed more fully in Chapter 6, which deals with strategic planning, it should be noted that, in contrast to popular usage and its implicit connotation, a market niche does not have to be small. A true market niche can be very large, as illustrated by Microsoft and its control over most of the operating system software in the PC market. Similarly, Amgen, a leading biotechnology-based pharmaceutical company, has a niche in the market for kidney dialysis with its product Epogen, which historically controlled about 95 % of the market for this type of product. In both Microsoft's and Amgen's case, part of their niche is derived from patent protection. Another and more important contributing factor to the creation of the niche for both of these companies, however, is the focus they have placed on understanding and meeting their customers' needs.

      The first challenge to organizational survival or success, then, is identifying a market need for a product or service to which the company will seek to respond. This can be either a need that has not yet been recognized or that is not currently being satisfied by other companies. The chances for organizational success are enhanced if an organization identifies a need that is not being adequately fulfilled or that has little competition for its fulfillment. This challenge is faced by all new ventures; indeed, it is the challenge for a new venture to overcome. It has also been the critical test of growing concerns and has even brought many once proud and great companies to near ruin or total demise.

      Many businesses have achieved great success merely because they were one of the first in a new market. For example, Apple Computer grew from a small entrepreneurship in a garage to a $1 billion firm in a few years because its founders identified the market for a personal computer. Dreyer's, a manufacturer of ice cream (which is a relatively undifferentiated product), went from sales of $14.4 million to sales of $55.8 million in just five years because the company saw and cultivated a market segment between the super-premium ice creams such as Häagen-Dazs and the generic (commodity) ice cream sold in most supermarkets. Many Internet companies (like Amazon.com, eBay, and Alibaba) have also experienced rapid growth as a result of developing ways to sell products leveraging this transformational technology.

      The reverse side of this happy picture is seen in businesses that have experienced difficulties and even failed either because they did not clearly define their market or because they mistakenly abandoned their historical market for another. For example, a medium-sized national firm that manufactured and sold specialty clothing wished to upgrade its image and products and become a high-fashion boutique. However, it failed to recognize that its historical market was the medium market, and its efforts to rise out of this market were unsuccessful. Similarly, Custom Printing Corporation with more than $10 million in annual revenues found itself in difficulty after trying to upgrade its position in the medium-priced printing market. Attracted by the market segment where the highest-quality work was done (with accompanying high profit margins), the company purchased the best equipment available. It also hired a high-priced sales manager to recruit a sales force that could compete in the new market segment. However, the company had underestimated the strength of existing companies in that market segment, and it found itself unable to break into this higher-priced market as easily as managers had hoped. Moreover, the additional investments it had made and the related increases in its overhead made the company's cost structure higher than that of its former competitors, so it began losing business from its historical market. Thus, the company found itself in a cost-price squeeze.

      The first task in developing a successful organization, then, is the definition of the market in which a business intends to compete and the development of a strategy to create a potential niche. This process involves the use of strategic market planning to identify potential customers, their needs, and so on. It also involves laying out the strategy through which the company plans to compete with others for its share of the intended market. The nature and methods of strategic planning will be described in Chapter 6.

       Develop Products and Services . The second task of an entrepreneurial organization is “productization.” This is the process of analyzing the needs of present and potential customers in order to design products and/or services that will satisfy their needs. For example, the founders of Google, Larry Page and Sergey Brin, met in 1995 while they were PhD students at Stanford University. They saw the need for an Internet search engine “to organize a seemingly infinite amount of information on the web.”13 By 1996, they had built a search engine (initially called BackRub) that used links to determine the importance of individual webpages.

      Although many organizations are able to correctly perceive a market need, they are not necessarily able to develop a product that is capable of sustainably satisfying that need adequately. For example, Myspace (an online social networking service) was one of the first of its kind. It was launched in July 2003 and by April 2004 it had 1 million unique U.S. visitors. It was later acquired by News Corporation; but over time it lost its cool image and was abandoned by users. Myspace was overtaken by Facebook in the number of unique U.S. and worldwide visitors in May 2009.

      Similarly, there were many companies that developed coffee bars or cafes such as Peet's Coffee, Coffee Bean and Tea Leaf, Gloria Jeans, and others; but Starbucks has grown to dominate this market. Thus, being the first to recognize a need and the so-called “first mover advantage” can be useful but is not necessarily sufficient for sustainable success.

      The productization process involves not only the ability to design a “product” (defined here to include services as well) but also the ability to produce it. For a service firm, the ability to “produce” a product involves the service delivery system, the mechanism through which services are provided to customers. For example, although coffee is nominally the core product of Starbucks, the real product is the coffee experience provided by Starbucks' cafés. The company called EAS (Experimental and Applied Sciences), founded by entrepreneur Bill Phillips, markets and sells performance nutrition products. However, the company is also committed to providing education and information (provided through articles that appear in their magazine Muscle Media and The Sports Supplement Review) on what people can do to become more physically fit.

      The development of successful products depends to a great extent on effective innovation and strategic market planning. This involves understanding potential customers, their needs, how they buy, and what they perceive to be value in a product or service.

      The success of productization depends, to a very great extent, on success in defining the company's market (i.e., its customers and their needs). The greater the degree to which a company understands the market's needs, the more likely that its productization process will be effective in satisfying those needs. Productization is the second key development task in building a successful organization.

      These first two tasks of organizational development can be thought of as the entrepreneurial building blocks of the enterprise. They are required for proof of concept of the business; that is, whether the business has a valid market and product. Once they are established, the next tasks relate to organizational scale-up, which involves acquiring the resources required for growth and developing the operational systems needed for day-to-day functioning of the enterprise.

       Acquire Resources . The third major task of developing an organization is acquiring and developing the additional resources it needs for its present and anticipated future growth. A company may have identified a market and created products but may not have sufficient resources to grow. For example, once Starbucks established proof of concept of its retail/café, it required resources to grow. Stated differently, “No bucks – no Starbucks!”

      An enterprise's success in identifying a market and in productization creates increased demand for its products and/or services. This, in turn, stretches the organization's resources very thin. The organization may suddenly find that it requires additional physical resources (space, equipment, and so on), financial resources, and human resources. The need for human resources, especially in management, will become particularly acute. At this stage of development, the organization's very success ironically creates a new set of problems. These are the problems of organizational growth and scale-up.