December 16, 2012
Startup White Board

Leading an Enterprise in Phase Two: Making it Happen

At the end of Phase One entrepreneurs feel pretty good. They have found real customers for their prototype product or service. In Phase Two entrepreneurs must figure out how to: 1) deliver their product or service, and 2) satisfy customers while finding new customers, and 3) run the enterprise. It does not make sense to invest any time into doing any of these things before you actually know what you’ll be selling and what sort of customers will be buying. Most entrepreneurs never make it out of Phase Two because it requires a great deal of extra effort beyond just delivering products or service one at a time and finding customers one at a time.

Unfortunately beyond Phase One there are no good guides to how to be successful. I do recommend reading Jason Fried and David Hansson’s book ReWork because it offers a great deal of common sense wisdom that applies to how to stay focused on the important things that help you grow your enterprise. The objective of my blog is to provide guidance on how to grow your business with the least amount of risk and angst.

Phase Two ends with a demonstrated capability to reliably deliver the product such that the product provides the expected value to the customer, and that a reasonable demand for the product or service exists to warrant scaling up to the point where it can be produced, delivered, and sold effectively. With actual customer intensively using a product or service an enterprise must become more formal. There are 3 major tasks Leadership must accomplish in Phase Two.

  • First, a process has to be developed to make and deliver the product or service such that it reliably meets the customers’ expectations.
  • Second, a process has to be developed that brings in orders.
  • Third, the ongoing administrative support must be made into a reliable set of processes such that the operation of the enterprise is not distracted; for example by bookkeeping, payroll, servicing facilities, procuring necessary tools, etc.

The team responsible for the successful completion of Stage One may or may not include the skills and experiences necessary to build these three sets of processes. Phase One was a ‘project’ phase requiring ingenuity and resilience to get ‘it’ done while Phase Two requires skill and expertise in setting up to do things repetitively. Although the creation of a process is itself a project, the project objectives for creating a good process should come from somebody who knows and understands how an effective and reliable process would operate. The Leader will likely have to recruit additional people into the organization, with proclivities towards “getting it right” rather than “getting it done.”

The original team, being expert now in design of the original product or service, need to be full participants in these projects, but have to be prepared to turn over responsibility for ‘their baby’ to somebody skilled, if not gifted, in process design and management in order for the organization to be maximally successful. Phase Two does not require the Leader give up leadership of the overall vision or team. Indeed, this is a critical stage for leveraging the Leader’s vision into repetitive self-sustaining activities, in other words, processes. But this transition cannot take place unless the Leader supports others taking charge of producing and/or selling his product or service. Many Founders fail or stumble at this stage. This is that selfish versus selflessness dichotomy again.

Early in Phase Two the Leader must identify who will lead and manage the product production and delivery efforts, who will lead and manage the sales/funding efforts, and who will lead and manage the administrative processes. Perhaps some or all of these people need to be found and recruited into the organization. The Leader can fill one of these roles, but unless the enterprise is to remain small, the Leader cannot manage all three efforts. Additional people will likely have to be recruited to staff the 3 separate teams (maybe just a team of one person working just part-time) that must be created and supported as they design and implement their respective processes. Fortunately for the Leader the success of completing Phase One increases confidence in her leadership by those aware of her success and makes it easier to recruit experienced process managers into the organization.

The project-to-process transition is challenging and stressful. Increased staff, requiring more support and resources, means cash is consumed much more rapidly. Delays and setbacks are disturbing and costly. Also, there is at least one committed customer and their continued approval and delight is a major proof milestone that the enterprise is viable. But resource and funding limitations often require that the planning, if not the implementation, of the product delivery process starts early in Phase Two, before extensive client feedback is received. Changes required to meet customer expectations that come after initial process designs have been approved cause setbacks that are a major risk to budget[1].

Since cash management is critical during this Phase, cash flow becomes the overriding control mechanism for what goes forward and what gets delayed. Either the Leader, or somebody he trusts who is savvier than she in controlling cash, must make the ultimate decisions about what can and cannot be afforded. The person controlling the cash should approve every commitment before it is made. The planning horizon now extends to the time it takes to get an order, fulfill it and get paid for it. Longer planning horizon are not worth it. If supply and demand become predictable then this would be an indication that the Leader should start planning to enter Phase Three.

Priority setting within a Phase Two enterprise must rapidly transition from the as-required huddle to regular status reviews. These reviews should be attended by the Leader plus his “keeper of the checkbook” and each of the 3 project leaders, Product, Sales, and Admin, plus any other experts that can give insights on how best to keep the projects on schedule. At the end of Phase Two priority setting must change again to become based upon regular discussions between the Leader and the managers of the Product, Sales, and Administration processes, utilizing a set of ongoing metrics that accurately indicate how the processes are performing.

Phase Two is particularly prone to major setbacks because an actual product can work well but still disappoint the original customers’ expectations. Once customers start using a product, customer reaction is sometimes muted and the Leader is forced to reconsider the entire premise of the enterprise. These mismatches between intended and actually perceived product performance are ideally caught in Phase One, but sometimes cannot be detected without more extended actual use. If survived, such setbacks yield major insights into alternatives that will work better than the original product concept and can result in a significantly improved value generation for the company and its customers. A relatively high percentage of all start-ups throw out their first product or service concept and go on to succeed in becoming value producing self-sustaining enterprises. Reconsidering the premise of an enterprise puts enormous stress on the leader to keep the confidence of the team and to perpetuate an exciting vision of the team’s future.

The entrepreneurial leader will be required in Phase Two to make risky go/no-go decisions relative to significant investments required to design and implement even basic product delivery and selling processes. The Leader will be intensely judged by his team, the market, investors, and other stakeholders by whatever results ensue. Although all stakeholders realize at some level that these decisions were risky, they nonetheless will personally decide on how they feel about the enterprise’s chance of success. Many enterprises lose key people during Phase Two, but successful enterprises do not loose so many key people that they can no longer reliably deliver or sell their products.

Only the Leader can manage the feelings generated throughout the enterprise in Phase Two. He sets the expectations, including expectations of potential setbacks. He instills confidence in stakeholders by detailing how the enterprise will be able to recover from problems. In Phase Two the Leader can also choose not to disclose potential risks. If the potential distraction from worrying about a given risk could be worse than the resulting anxieties caused by an actual setback she may not want to discuss it. Leaders have to make many tough choices!

How the Leader deals with the tough choices and all the changes required in Phase Two starts to coalesce a company culture. How responsibility is apportioned, how problems are received and addressed, how much risk is tolerated or encouraged, how early employees are supported – or not – in their skill enhancement, are all noticed by the entire team and strongly influence how they decide they should behave.

The big challenges to Leadership in Phase Two come from 4 areas.

  1. The Leader will be judged by how well his latest vision is accepted by customers. His leadership is held in the balance with each adjustment to the original vision. Each employee ultimately reaffirms their commitment to the Leader at the successful completion of the Phase Two.
  2. An expanding team puts significant stress on the Leader and the organization to communicate priorities and status, as well as the excitement of the vision, to everyone within the greater enterprise. Team members that do not come into regular direct contact with the Leader or other people within ‘the inner circle’ can feel a sense of alienation. This alienation can impede critical information from getting back to those setting priorities, resulting in poor decisions. Anytime there is a project-to-process transition there are numerous areas of coordination that must occur informally and that require everyone understand their role while communicating all important information.
  3. The motivations of the new “getting it right” type team members must be reconciled with the original “getting it done” types. Both Phase One and Phase Two hires share the motivation of being part of something new and being able to influence the direction of the organization. But some of the original Phase One team will be upset that they no longer can tinker with the product or discuss new exciting ideas with the customer. They could feel the Leader is giving into bureaucracy and could feel this as a betrayal. Expectations should be set ahead of time about how Phase One team members can continue to play influential roles in the expanding organization.
  4. Project to process transitions are particularly stressful as they are prone to costly setbacks and because it is hard to simultaneously control both the project to create a process and the resulting process. This anxiety will cause some team members to question the Leader’s vision, saying the stress is “just not worth it.”

At the end of a successful Phase Two the team is exhausted and somewhat frightened because even more work lies ahead. They can produce and sell their product or service, but not at the right cost, nor in the right quantities, nor with the reliability, scalability and flexibility required. A best-case end of Phase Two is that the enterprise has plenty of untapped demand and no competition; but even then, the enterprise faces a challenge of producing enough quantity and variation to satisfy demand. In this best case, customers cause stress throughout the enterprise because if their demands are not quickly satisfied they will actively encourage and help potential competition.

Phase Two processes are a practice set, now the enterprise must do it over again and incorporate the accumulated learning and experience to deliver the benefits of scale that are required to become consistently value producing and self-sustaining.

[1] Making changes to products once they have been designed and delivered to customers is extremely complicated and expensive. Similarly, changing the processes that produce or deliver products is very tricky, prone to mishaps, and is extremely costly and resource intensive to manage. For these reasons, making changes to any product or process poses a major risk to the enterprise’s budget.

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