The Coming Collapse of the Economic Frontier

To an encouraging, possibly unprecedented, degree, people are finding entrepreneurial success outside of the urban mainstream.

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By W. David Bayless

Small World Networks, Inc.

Solutions that Accelerate and Enhance Entrepreneurial Learning

406.587.1900 ph | 419.710.7131 fx | 406.581.3212 cell

Web: http://www.pioneerentrepreneurs.com

Personal: http://www.wdbayless.com

Weblog: http://radio.weblogs.com/0111718/

(Many thanks to Chris Gibbons form passing this along- Russ)

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However, the very conditions that have created opportunity also harbor a trap – a trap that could lead to a cascade of costly failures that frontier communities can ill-afford. Is the collapse of the economic frontier inevitable? No, but to avoid the loss of hard-won momentum, entrepreneurs, economic development professionals, and other community leaders need to be thinking – and acting – a few steps ahead of the game.

An Unexpected Source of Advantage

In some places on the economic frontier, entrepreneurial growth companies are being formed at rates significantly higher than the national average. That’s great news for those communities, because such companies account disproportionately for job growth, innovation, and wealth creation. Lest we forget, it’s wealth creation that allows us to make investments in the environment, our communities, and in social goods.

So, how might this entrepreneurial success be explained? I believe the following is part of the answer:

A number of trends – technological, social, and economic – have conspired to the benefit of places such as Santa Fe, Truckee, Bozeman, and scores of similar communities across the country. These places are the beneficiaries of immigrant talent – people with significant work and life experience who seek a change in lifestyle. Upon their arrival to their new homes, these talented newcomers confront reality: there are few, if any, high-paying, professional jobs. Consequently, if they remain committed to staying in their adopted community, the immigrant must adapt to what an economist would call diminished opportunity cost. So, unlike past waves of immigration, which have been largely composed of lower-skilled workers seeking greater opportunity, this wave is composed of highly skilled people facing a decline in their economic opportunities.

Curiously enough, this upside-down set of circumstances creates a breeding ground for promising startups – companies marked by relatively high uncertainty, low initial investment, and at least a small chance of a big upside. Ambitious, self-confident immigrant talent – not satisfied with financially and psychologically unrewarding jobs – has to create its own opportunity by bootstrapping.

For example, the other day I heard about a woman – let’s call her “Sue” – who immigrated to Bozeman a couple of years back. Sue, it turns out, is opening a new retail store on Main Street that will feature products for cooking enthusiasts. She has 20+ years of corporate experience and an MBA from a prestigious school. In other words, Sue doesn’t fit the class profile of a mom-and-pop retailer. That’s because she’s not setting out to create a mom-and-pop, income-substitution business. Sue is investing in the design, corporate identity, e-commerce capabilities, and systems that will be the foundation of an anticipated franchising strategy. Will she succeed? An objective analysis would conclude that she’s a long shot. Nevertheless, Sue is setting the stage for success. Her’s may be a long shot, but it’s a legitimate shot. Sue just might succeed.

What then?

The Vexing Mathematics of Growth

Some promising startups begin to fulfill their promise and become entrepreneurial growth companies. Companies can, and do, see their revenue grow exponentially. The human capacity required to meet demand, however, grows more or less linearly. That’s particularly true for knowledge and talent-based businesses. The combination of exponential revenue growth and linear capacity growth is a recipe for disaster. In other words, this mathematical mismatch is a looming problem for nearly every promising startup launched in the boondocks.

Here’s the kicker: by the time you experience the mismatch between demand and capacity, it’s too late. It’s highly likely that your business will spin out of control as you oversteer in a vain attempt to re-establish balance.

Most businesses avoid the problem in a straightforward way: they stay small. While small businesses comprise the vast majority of establishments and a big chunk of the economy, they account for a relatively small percentage of net job growth, innovation, and wealth creation.

The alternative to staying small is to increase human productive capacity in anticipation of future growth. In order to do so, a business must (a) hire more people and/or (b) find ways to become more productive while avoiding (c) going broke. As I’ll explain below, the very character of the frontier makes it harder and riskier to rely primarily on throwing bodies at the problem. That leaves pioneering entrepreneurs with but one option: start developing your human resources today in anticipation of tomorrow’s revenue growth. On its face, this makes fundamental economic sense. After all, if a resource is both scarce and valuable, use it sparingly.

Let me take this one step further. I believe that to be successful in the long-run, entrepreneurs on the frontier simply have to be better at managing and developing human resources than their urban counterparts.

The Red Queen Effect

When your company is located outside the urban mainstream, it’s very difficult to grow if your market is locally proscribed – there just aren’t enough customers. Consequently, most promising startups in the boondocks are built these days with an eye toward national and global markets. (Even Sue’s Main Street retail business is being launched in anticipation of a national franchising strategy.) The good news is that technological and transportation innovations make that feasible. What’s the bad news? Everybody on the planet – including our urban cousins – have access to the same (or better) technologies. The upshot is successful companies – whether they are located in Bozeman or Boston – compete, more or less, on the same competitive field. There is no place to hide.

George Gendron – who was editor-in-chief of Inc. magazine for 20 years – tells an interesting story about how the source of sustainable advantage has changed. Every year, the founders of Inc. 500 companies complete a survey. A standard question is in regard to the the companies’ source of sustained advantage. Prior to five or so years ago, the answer was typically, “We offer a unique product or service.” However, innovation spreads very rapidly in the Internet era. Not surprisingly, more recently, the answer has changed to, “Better execution.” Promising startups in the boondocks have to execute better and better just to keep up with their urban competitors.

Whew, that’s a mouthful. But hold on, there’s more. The trip through the looking glass gets even stranger and darker.

The Pace of Critical Decision-making

Jan Twombly and Jeff Shuman at The Rhythm of Business rightly emphasize the iterative nature of entrepreneurial decision-making. He who identifies, tests, and adapts his assumptions regarding customers sufficiently quickly and cheaply is the most likely to succeed. My collaborator Don Greer, one of the principals at Greer Black Consulting, takes a similar approach. Don emphasizes the pacing of the observe-orient-decide-act (“OODA”) cycle. Superior execution, in a fundamental sense, is equivalent to having an organizational OODA cycle that is in line with the evolution of the market, and a well-functioning OODA cycle corresponds to well-developed critical decision-making skills.

Founders of promising startups tend to be very good at the decide-act (DA) part of the cycle. By the very definition of a promising startup, there is an initial dearth of analyzable market data, so the entrepreneur must act in order to generate data. However, being fast at deciding and acting is not sufficient, even if it is necessary. After all, taking the wrong steps faster and faster doesn’t bring business success. As a promising startup begins to gain traction in the form of positive market feedback (also known as sales), the observe-orient (OO) part of the cycle comes into its own. Choosing the right data to pay attention to from the flood of data now available – and making sense of that data – is an enormously challenging proposition.

In most cases, as his or her company grows, the entrepreneur will find himself or herself facing a constant stream of novel situations. There’s no time to learn everything from personal experience. A proven learning strategy is to draw upon the expertise of others – employees, consultants, and other entrepreneurs. In the parlance of The Rhythm of Business, entrepreneurs must become effective “choreographers” of an expanding and evolving network of resources.

So, in order to succeed, entrepreneurs on the frontier have to coordinate, and learn from, a network of experts. Furthermore, they must ensure that the pace of their organizational OODA cycles is competitive. Easier said than done. On the economic frontier, challenges abound at the environmental, organizational, and personal levels.

The Environmental Challenge

The slower pace of rural places is a big part of their charm. Life is more balanced. There is time to be contemplative. We have more time to connect with our families, communities, and the natural environment. Viewing the world through the clear air at the top of a mountain can yield insight. Some of my most productive business conversations have been in a chairlift at Bridger Bowl ski area.

That said, even if a mañana culture is conducive to attracting world-weary immigrant talent, it’s not particularly supportive of an accelerating OODA cycle for a company dependent upon execution as a source of sustained advantage. Even if an entrepreneur is successful in cultivating an action-oriented culture (fast DA), the relative social isolation of rural areas means that it’s harder to tap into a sufficiently diverse pool of ideas, experience, and perspectives (good and fast OO).

The Organizational Challenge

Given the competitive environment faced by an emerging growth company, it’s apparent that having a founder that is a good entrepreneurial learner and decision-maker is, again, necessary but insufficient. A successful company has to have good players at all positions. As Tom Petzinger – former Wall Street Journal columnist turned hometown entrepreneur – is fond of saying, “All of us are smarter than any one of us.” Smart in a business context means adaptive, and adaptability is a function of your organizational OODA cycle.

There are at least three strategies to address the organizational challenge of developing sufficient human capacity. First, one could hire skilled, experienced role players from the outside and move them to the boonyack. Second, one could open branch offices in urban centers in order to tap deeper and broader pools of talent. Third, one could hire the best available talent locally and develop their critical decision-making and leadership skills. All are feasible in certain circumstances, but I believe the third is likely to be the most successful.

Starting a new job is hard. So is moving. Throw the two together – and layer on the fact that the move is likely to be from an urban center to the boondocks and from an established company to a startup – and the chances are that an outside hire of an experienced employee is likely to fail. If the external hire doesn’t have a pre-existing connection to your community, he or she is likely to leave.

The risk involved in setting up satellite offices with long lines of communication from a startup in the boondocks is obvious. Only the most accomplished, experienced entrepreneurs need apply for this job, and most of those won’t have founded promising startups. (Recall that entrepreneurs with low opportunity costs usually start promising startups. Serial entrepreneurs, who have high opportunity cost, tend to start venture capital-backed companies.)

In the spirit of Sherlock Holmes, when considering all conceivable strategies, whatever remains after eliminating the impossible, no matter how unlikely, must be the solution. If importing human capacity from the urban mainstream is not possible, one must "grow your own."

There’s no free lunch, though. Even if you become skilled at hiring for aptitude and attitude, just-in-time training in the context of a small, cash-strapped, growing company is no mean feat. Nevertheless, if you accept my logic, it’s the only solution that’s left, notwithstanding the difficulties of implementation.

When Virtue Becomes Vice

That leaves what may be the most difficult challenge of the bunch: the requirement of personal transformation faced by many, if not most, entrepreneurs. In the highly ambiguous and dynamic context of a promising startup, the attributes of self-reliance, self-confidence, and a propensity to act are highly advantageous. In the West, in particular, we celebrate these frontier characteristics in our fond portrayals of the lone gunman and the self-sufficient cowboy.

However, these virtues become vices very, very quickly as a company begins to grow. If the founder resists the imperative to decentralize decision-making, he risks almost certain failure. (That is, failure in the sense of squandered potential.) On the frontier, the moment for this personal transformation comes suddenly – and surprisingly early. Big-time business challenges come in small packages these days. As Gendron has noted, the popular solution consisting of replacing the founder with a "professional manager" is no solution at all. Personal transformation appears to be a requirement.

The Considerable Cost of Failure

To recap, here’s the story thus far:

1. The combination of immigrant talent and diminished opportunity cost create a breeding ground for promising startups that have the potential to become entrepreneurial growth companies.

2. Entrepreneurial growth companies drive wealth creation, which provides communities with the resources needed to invest in the environment and public goods.

3. Execution is the source of sustainable business advantage. Superior execution requires an organization that collectively reflects superior critical decision-making skills (i.e., a competitive organizational OODA cycle).

4. The reward for emerging success for a promising startup is likely to be a growing imbalance between demand and organizational capacity to fulfill that demand.

5. Pioneering entrepreneurs have to be better at developing their employees’ critical decision-making skills than their urban counterparts in order to remain competitive, because they can’t simply throw bodies at the preceding problem.

6. The very characteristics that define the economic frontier – and that offer a surprising source of advantage in the creation of promising startups – also conspire to create challenging barriers to the successful transition from promising startup to entrepreneurial growth company.

7. The consequences of failure are, at best, missed opportunity and, at worst, the business death penalty.

So what? Isn’t business failure a natural part of the econosphere? What’s it all mean for frontier communities?

The death of individual businesses is a natural – and essential – part of the evolution of the economy. As Rich Karlgaard at Forbes has observed, startups – and their failures – provide us with essential opportunities to learn. That said, the most effective learning comes from repeated, low-cost failure. The real-world failure of an emerging growth company in a frontier community, on the other hand, can be very costlly for at least three reasons. First of all, there is the aforementioned opportunity cost of foregone wealth creation. A once-promising startup that fails to fulfill its potential is a huge waste. Second, the outright failure of an emerging company can lead to a net loss of local talent. Discouraged employees who have been through the startup wringer are often tempted to return to the “real world” to get a “real job.” Third, the psychology of failure can quickly permeate a small community and turn a virtuous cycle into a vicious cycle. “Acme Company failed” can quickly translate into “You can’t build a successful company here.”

Faced with the above, there is the tendency on the part of many communities to compound and exacerbate the underlying problem by subsidizing entrepreneurs and companies that failed to adapt at a critical juncture in their business evolution. Doesn’t work. Anesthesia numbs the pain, but it offers no real cure.

So, is all darkness and gloom? Should communities sit back and watch, hoping for the best but fearing the worst?

I don’t think so.

Giving People Safe Ways to Fail and Learn

The entrepreneurial promise of the frontier is real. The challenges, on the other hand, are daunting. People, as a rule, aren’t very good at decision-making in complex, dynamic, ambiguous environments – the very characteristics that define a promising startup. Psychologist Dietrich Dörner, in his classic book, The Logic of Failure, noted:

The slowness of our thinking, and the small amount of information we can process at any one time, our tendency to protect our sense of our competence, the limited inflow capacity of our memory, and our tendency to focus only on immediately pressing problems – these are the simple causes of the mistakes we make in dealing with complex systems.

Hmm…the challenge faced by entrepreneurs on the frontier are not unique in nature, even if they might be in intensity.

My colleague Jason Barrett at Bias for Action helps companies develop leadership and initiative. He’s also an active duty Major in the U.S. Marine Corps. Notwithstanding the obvious differences between warfighting and business, the Marines face a set of dynamics that parallel those of promising startups: ubiquitous uncertainty, limited resources, constant change, and punitive repercussions for bad decision-making. The Marine Corps response to this reality is twofold: decentralize decision-making and concurrently develop the decision-making skills of its people.

When you boil it down, the Marines delegate a huge amount of critical decision-making to its platoon leaders – inexperienced, 22 year-old 2nd lieutenants who lead groups of roughly 40 men and women. The price of success is early and constant training. The price is high, but it yields results. That’s important because the cost of failure is counted in lives lost and ruined.

More from Dörner:

Mistakes are essential to cognition. But when we are dealing with real complex systems, it is hard to pinpoint our errors…As a result, mistakes in handling demanding situations tend to teach us little of value…But we can learn to deal with different situations that place different demands on us. And we can teach this skill, too – by putting people into one situation, then into another, and discussing with them their behavior and, most important, their mistakes. The real world gives us no chance to do this.

The Marines train young lieutenants how to make battlefield decisions before a shot is fired in anger. There are no blanks in business, but we can help entrepreneurs and their employees to develop the skills that are essential for their survival and success – and the long-term success of our communities. It’s imperative that we do so.

What Can We Do?

My company was founded on the premise that we can make it easier for Pioneer Entrepreneurs® to connect with each other and with other sources of expertise in order to learn more efficiently and make better decisions, faster. It’s not easy, and we’ve had to go back to the drawing board in order to develop new, more effective tools and approaches. Recently, we’ve launched an initiative aimed at pre-qualifying a targeted network of consultants and thinkers who can help entrepreneurs with the “OO” in OODA. Over the last year, we’ve been developing a new peer-to-peer software tool we call the Water Cooler™ that we believe will help catalyze connections and conversations among entrepreneurs and other sources of expertise. We’re also working with people such as Don Greer and Jason Barrett to develop affordable and effective content, simulations, and programs that will allow leaders of promising startups to begin to prepare now for the challenges that success will bring.

Community-based economic development agencies have their work cut out, too. Entrepreneurial and employee development programs need to be expanded and made more ambitious in scope. Familiar, remedial employee training programs are undoubtedly valuable to the majority of businesses, but are insufficient when it comes to the needs of the most promising startups. Emerging growth companies face big-time challenges and world-class competition. They need to have access to world-class expertise on a just-in-time basis. Progressive economic development professionals will help their local entrepreneurs be aware of the coming challenges that are the reward of success. Furthermore, they’ll build and maintain the connectivity to the resources those entrepreneurs will need in order to survive and thrive.

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Special thanks to Laura Black, Don Greer, Jason Barrett and the other members of the Maneuver Business™ group for shaping my thinking and giving me a safe place to experiment and fail.

Copyright 2003 W. David Bayless

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