The Evolution of Entrepreneurial Value: Unpacking the Layers of Corporate Success and Failure

— How did you go bankrupt? — Bill asked.
— Two ways, — said Michael. —First gradually, and then all at once.
Ernest Hemingway

In today's technologically advanced market, the computing power of a smartphone surpasses that of the computer used in the 1969 moon landing. Despite such leaps in technology, business strategies have remained relatively unchanged for decades.

I initiated a Business Intelligence research project in 2015 to investigate the alarmingly high failure rate in entrepreneurship. On average, 70-80% of startups don't survive past their fifth year. While these statistics fluctuate by region and industry, the trend is generally consistent.

The situation is akin to a hospital where only two or three out of ten admitted patients are successfully treated, while the others meet unfortunate ends. It suggests that there's a systemic issue within the entrepreneurial landscape, rather than isolated, fixable glitches.

My research indicates that the systemic flaw lies in the disconnect between entrepreneurs and consumers. Businesses often overlook the human aspects of their customer base, focusing instead on consumers as mere financial entities. This perspective dates back to traditional economic theories, like those expressed by Milton Friedman 70 years ago, which often disregard the 'human factor.'

Ignoring human elements in customer relations is akin to disregarding family members in familial relationships—both are doomed to fail. Contemporary business models frequently neglect not just the financial, but also the emotional and spiritual dimensions of their customer base. This lack of understanding distorts the reality of consumer behavior and business dynamics.

Albert Einstein famously stated that problems can't be solved at the same level they were created. My eight-year-long research journey was prompted by this very notion.

Entrepreneurship is not a monolithic activity but rather a multifaceted one, comprised of various layers or 'contexts.' These contexts are interconnected and often nested within one another. Just as a sentence gains meaning within the context of a paragraph, and a paragraph within a chapter, businesses exist within broader social, economic, and cultural frameworks. Misunderstanding any level of this context can lead to skewed perceptions and, ultimately, business failure.

Some layers of entrepreneurship are readily observable, while others demand deeper insight and effort to understand. To illustrate the multifaceted nature of business issues, consider the following metaphor.

Imagine an aquarium housing a goldfish. Within its watery world, the fish seems autonomous. It decides its swimming speed, the water temperature, what food to eat, and even which fellow fish to befriend. However, what the fish doesn't realize is that its aquarium exists within a larger environment—someone's home—that can impact it in numerous ways. For example, if the room temperature drops suddenly, the water in the aquarium could freeze, endangering the fish's life.

In this analogy, the entrepreneur is the goldfish, and the aquarium represents the well-defined boundaries of their business venture. While the entrepreneur might feel like a ruler within this domain, the influence of external factors often escapes their notice. Jack Welch, the renowned former CEO of General Electric, put it succinctly: "If the rate of change outside exceeds the rate inside, the end is near."

This lack of awareness of external dynamics can prove fatal for entrepreneurs. Management guru Peter Drucker perhaps said it best: "There is nothing more useless than doing efficiently that which should not be done at all."

In 2015, I formulated a central hypothesis for the high failure rate in entrepreneurship: Entrepreneurs often neglect a key task, the fulfillment of which would significantly increase their odds of success. Factors like high employee turnover and poor financial performance are often symptoms of a more deeply rooted issue that was overlooked from the beginning.

In today's digital economy, the landscape is shifting more rapidly than ever before, undermining the value propositions that entrepreneurs have painstakingly built. What's the point of a local company making consumer products when customers can easily purchase similar items on Amazon, eBay, or from numerous other global suppliers? As buying options expand, consumers gain more power, often at the expense of traditional businesses.

Understanding these complexities is crucial for entrepreneurs. Failure to adapt to the ever-changing external environment can lead to the collapse of a business, no matter how solid it may seem from within its own 'aquarium.'

Entrepreneurs, like their products, can quickly become obsolete and fade into history, often without a happy ending. A caterpillar's metamorphosis into a butterfly serves as a fitting analogy. A butterfly is not merely an enhanced caterpillar; it's a fundamentally different entity, albeit with traces of its former self. The same applies to consumer value. Over time, products must evolve beyond mere upgrades, offering something fundamentally new to consumers.

Consider the example of photographers. In the past, the number of photos produced was a measure of productivity, given the high costs associated with film. Nowadays, however, virtually anyone can take high-quality photos on their smartphones for free. The conversation around productivity in photography has shifted to focus on new opportunities, such as early cancer detection through machine learning.

Consumer perception of a product's value is not an inherent quality; it is contextual. The value of water skyrockets in a desert but diminishes in a city. Similarly, the value of a surgical scalpel is higher in an operating room than in a candy store. Value is a relative concept, dependent on various external factors.

Complex enterprises often face challenges that manifest at different 'layers' of the business. Addressing symptoms rather than root causes leads to recurring issues. Business activities can be divided into three layers: the operational layer, the management layer, and the layer overseeing the management, often termed the "development layer." It's at this layer that customer perceptions are shaped.

Growth and development are distinct. Growth is quantitative, marked by material gains and financial metrics. Development is qualitative, focused on enhancing product value from the consumer's perspective. The latter always occurs within specific contexts and circumstances, which inform an entrepreneur's resources, capabilities, and limitations.

Entrepreneurs often operate with a limited view, neglecting broader market contexts. This myopic focus can result in dwindling customer interest and eventual business decline. The tool of "contextual analysis" can help entrepreneurs identify and categorize the 'meaning' behind their activities, offering a path for sustainable business development.

To detect issues at the development layer early on, I recommend a straightforward methodology consisting of four questions:

What customer problem are you solving?
How has the client observed this problem in the past, present, and future?
Can you elucidate the origin and persistence of this problem for the client?
What solutions can you offer for this client's problem?

Uncertainty or vagueness in the answers to these questions signals potential issues within the development layer, possibly still invisible to company management. Time is of the essence in diagnosing and treating these issues effectively.

Jaroslavs Kaplans
The author of "Business Incognita: How to Push the Boundaries of Entrepreneurial Thinking," Yaroslav Kaplan is a renowned expert specializing in the sustainable development of organizations and the discovery of new avenues for growth. As the creator of the Contextual Market Research methodology, he has revolutionized the way businesses approach market analysis and decision-making. Kaplan is also a proud member of the Strategic and Competitive Intelligence Professionals (SCIP), a leading international association based in the USA.