Balancing faith is recognizing when you can win and when you can’t. It is going the distance when you can and cutting your losses when you can’t. Once again clichéd. In real life: Have you ever pulled the plug on the ventilator of a dying loved one? (I haven’t and never want to)
Now that we understand what each of these factors signify, let’s take a look at the tests. Selection and execution first:
Bruce Greenwald, a professor who defines business franchise in his Economics of Strategic Behavior and Value Investing classes at Columbia Business School, says, “Porter’s five forces are four forces too many; barrier to entry for competition is what creates a competitive edge and ensures sustainable profits. Everything else is irrelevant.”
In plain English Bruce’s law states that in order for you to kick butt of your competition you have to pick a business in which the competition is not just limited now but will remain limited for a very long period of time. This can only happen when it is exceedingly difficult for a new entrant to either enter your market or compete with you or both. That is a true business franchise. Transmitta and AMD against Intel; Coke and Pepsi against each other and every one else; Any regulated monopoly against recently de-regulated players: Within the Pakistani market, Life insurance – State Life; telecommunication – PTCL; banking – National Bank.
We fail as entrepreneurs because in our first few rounds, we are unaware of Bruce’s Law. At times we are aware of the law (we may not know it by that name) but either refuse to believe it or find it difficult to acknowledge that it applies to the opportunity we are evaluating.
Bruce’s Law or the business franchise test is the first selection requirement. If you begin with passing the business franchise test you have already improved your odds against failure.
Unwavering belief in the franchise test, however, is not the only requirement for success.
You can discover an opportunity where there is no competition or future competition will be very restricted due to a sustainable competitive advantage that your venture enjoys. But then you need the ability to convert this opportunity to cash and keep it that way, preferably before you run out of capital. Which is execution.
Entrepreneurs fail because they pick a bad idea or they can’t execute or both.
However if you look hard enough you will find businesses that got both the idea and the execution part wrong and yet function as viable businesses today that pay rent, make payroll, settle their bills, and generate a reasonable profit for their owners.
How do you reconcile the truth with the facts? Well, as Bruce put it, the business franchise test above indicates two things—the level of profitability and sustainability of that profitability. You can still make money if you fail test number one, just don’t count on making it last forever. On the execution front, momentum or inertia will carry you through some distance before you realize how much trouble you are in. Just because a runaway train passes other trains on other tracks and stations, it does not mean that it is well driven. The real test is when you break inertia, change directions, fight momentum or hit a hard stop. Throw any one of the above tests at the so called profitable businesses we just spoke about and you yourself will see how well run they are.