Written By Gary C. Harrell
31 July 2017
Let’s start this missive with the kind of sobering admission that we all know to be true: many businesses – in fact, most businesses – do not work out. As we noted last year, according to statistics from the Small Business Administration, one-third of all new businesses close their doors within the first two years of operations, and half of the remainder, beyond that, do the same within their first five years. These statistics accurately point to the fact that, in spite of the best-laid plans, many entrepreneurs, whether new and experienced, find themselves making one of the most grueling decisions of their lives.
The decision to shutter a business for good is typically a financial one. Even still, the closure might have emotional ramifications on the business’s owner. An entrepreneur can be devastated by this loss, and there is an overwhelming sense of defeat, particularly as he recounts the possibilities that could have saved the business. What’s more, if the losses sustained by entrepreneur are great, the risk of the entrepreneur withdrawing from the world and sinking into depression can be equally real and just as concerning.
While there is no easy way to tell the owner of failed business that he should cheer up and prepare to move on, Axiom Strategy Advisors feels that it is important that every entrepreneur be equipped with the tools necessary to overcome the uncertainty and emotional challenges that might follow a business closure. Indeed, we recommend an entrepreneur prepare himself in five areas, in order to reduce the stress that will come in the long days and weeks following a closure:
1. Sources of Optimism
It is very easy to succumb to pessimism in the wake of a business closure. An entrepreneur may feel, among other things, drained and embarrassed, and he may simply not want to do anything for some time. After all, he has just shuttered the physical manifestation of his dream. Consequently, he may even begin to question the viability of any his other dreams or aspirations. But he should not do that. The best way for an entrepreneur to restore his hope in things to come, along with faith in his own abilities, is to find competing sources of optimism. He can look to things like his family, his hobbies, his civic involvement, and other personal interests as barometers for measuring his effectiveness and ability to still contribute to the world. As they preoccupy his time, these personal interests can also serve as the motivators necessary to galvanize the entrepreneur back into action.
2. Support System
Everyone needs a support system – and in the wake of a business closure, no one more so than an entrepreneur. In fact, being able to speak candidly to others helps the entrepreneur gain perspective, and it prevents him from bottling up difficult-to-process emotions. While family members and friends are acceptable outlets, it is extremely useful for an entrepreneur to include like-minded professionals and, when appropriate, mental-health clinicians in their support system. Those with experience in dealing with these challenges will offer the entrepreneur the best way to navigate through uncertainty.
We do not always win. We cannot always win. In fact, our moments of failure in life are just as common as our moments of success. That is perhaps the hardest realization for anyone to accept, let alone the entrepreneur – a man who stakes copious amounts of time, energy, and treasure on the physical manifestation of a dream. And so, when that dream proves unsuccessful, the entrepreneur might resist the notion that the failure is not personal, but it isn’t. It really just happens, irrespective of person, as would any social or behavioral phenomenon, and of course, there are times, statically speaking, when the risk of that failure is just greater, particularly for the adventurous and the intrepid, for the creative and the enterprising. That said, entrepreneurs are well-served to consider the words of Albert Einstein: “A person who never made a mistake never tried anything new.”
4. Objectivity & the Lesson of the Moment
Oprah Winfrey called failure, quote, “another steppingstone to greatness”. This is a description that should resonate with an entrepreneur. We all make mistakes, and some of those mistakes can be quite costly. Nevertheless, it is very important that an entrepreneur have the presence of mind to exploit even a difficult moment for what it is worth, by taking the opportunity to identify the lessons to be learned. For the owner of a failed business, the practice of taking a moment to step back, reevaluating the circumstances that led to such failure, and processing the lessons from those events are more than just about gaining perspective. These can become life-lessons that help to pave the way forward.
5. A Fresh Start
From the start, an entrepreneur possesses a unique sense for identifying opportunities that few others recognize, while also mustering the courage to act on them. That superpower is not lost in the wake of a business closure. In fact, it is just as keen as it would have been on the first day, when the entrepreneur originally conceived the idea for his first business. Consequently, it is very important for the entrepreneur to approach the next chapter of his life with the same confidence and zeal that enabled him to move forward in the past.
To the general public, business closures seem to occur swiftly, almost overnight, and in an orderly manner. We consultants and a world of entrepreneurs know differently. When a business is headed to its closure, it takes a long and agonizing march filled with unexpected twists and turns – glimmers of hope, waves of disappointment, moments of contention, and weeks of endless, new questions. Indeed, each day is more painful than the one before it, and each turn chips away at the veneer of a once-hopeful, once-determined entrepreneur. To that end, there is perhaps no greater evidence of the destructive consequences of a business closure than the toll it takes on the people involved, particularly the entrepreneur.
Understanding this, Axiom Strategy Advisors takes great care in working with entrepreneurs facing the decision to close a business. This is also the reason we elected to share these points. We hope to stress a singular message to entrepreneurs who, in the end, need to be reminded to remain positive, open, adaptive, and driven.
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Gary C. Harrell is the founder and managing principal of Axiom Strategy Advisors, LLC. For additional information, please write firstname.lastname@example.org.
© 2017. All rights reserved; Axiom Strategy Advisors, LLC.
With all of the talk about tariffs and trade wars, AxSA has been getting a lot of questions about what it’s like to manufacture products in China. The biggest one: Does China really cheat on intellectual property? And our answer is simple: Hell yeah, it does – and you are still going to do business there!
That is the reason we published this piece of wisdom four years ago.
Written By Gary C. Harrell
It is not uncommon for entrepreneurs to fear the idea of sourcing their products abroad, particularly to suppliers in a country like China, a place where the shanzhai culture of counterfeiting goods can be such a pervasive practice. Nevertheless, China still ranks among the world’s leading destinations for outsourcing. In spite of the risks, producers are still attracted to China because of its high technical prowess and relatively low costs. So are the fears warranted, or is what we are hearing simply overblown? Well, there is no discounting that the theft of intellectual property is a real risk in a country like China, but the fears of such risks may, in some cases, be misdirected.
In speaking with entrepreneurs, one thing this consultancy has found is that many are most afraid of the prospects that their own suppliers will be the culprits behind counterfeiting their goods. That is a real possibility, but we believe there are a few rules that entrepreneurs can follow to reduce the risk of this happening.
Select a reputable sourcing agent.
Many businesses, and particularly most small entrepreneurs, lack the knowledge to circumnavigate the business environments of foreign countries. Consequently, they may hire third-party sourcing agents to facilitate relationships with suppliers. This can be a useful entrée into those foreign countries, where differences in language, culture, and infrastructure may pose challenges. That said, though, entrepreneurs would be well-served to keep in mind some key points when selecting their sourcing agent:
- The sourcing agent must have real familiarity with the local business terrain, and he should also maintain an on-the-ground presence in that market.
- The sourcing agent should have a strong track record as a liaison, providing the entrepreneur with a fair number of references.
- The sourcing agent should report to the entrepreneur, in writing, on a regular basis, even if nothing new or unexpected is occurring.
- The sourcing agent is not a permanent fix. No business should foster an indefinite reliance on a third-party agency without cultivating its own direct channels for communications and accountability with its supplier.
- The sourcing agent needs to work for the entrepreneur, not the supplier. No exceptions.
Identify a reliable supplier.
Once the entrepreneur and the sourcing agent are ready to do so, the vetting and selection of a supplier really is no different from the way it is done domestically. The entrepreneur should verify that the supplier has the competency needed to build the products being sourced, the capacity to meet the requisite needs, and the ability to scale that capacity up when demand increases. Accessibility should also be a concern for the entrepreneur; a lack of critical infrastructure near the supplier can hinder both communications and transportations, thereby adding to logistics costs. And, of course, the entrepreneur will need to confer with references provided by the supplier, to evaluate the supplier’s track record on, among other things, quality, timely deliveries, services, communications, and ethical business practices.
Lawyer up—and document everything!
“Shanzhai” is a Cantonese word used to refer to the inferior knock-offs of well-known products being churned out of some Chinese factories. As more and more outsourcing came to China at the end of the last century, the number of knock-offs exploded. Today, the shanzhai culture is so pervasive—and, unfortunately, so much more improved—that counterfeiting in China is estimated to cost businesses nearly $20 billion in potential revenue.
For small entrepreneurs new to the sourcing world, this can be disconcerting. And while there may never be a way to completely head off the risk of counterfeiting, having product designs properly patented and trademarked, alongside working with legal counsel to draft comprehensive manufacturing agreements that conform to both domestic and foreign rules of law, promises to be the best way to reduce such risks. A well-drafted series of contracts between the entrepreneur and the supplier (as well as any subcontractors, if necessary) should help to make clear the terms and expectations in this new relationship. In addition to a number of other components, a good manufacturing agreement should specify, in detail, the following:
- Product specifications
- Product standards
- Procedure for manufacturing
- Identification and descriptions of any subcontracted parties
- Payment schedules
- Site inspections
- Framework for legal recourse
- Acknowledgement of intellectual property rights
- Confidentiality and non-use agreements
- Shipping specifications (with details about performance, control of goods, insurability, etc.)
If the supplier has a reasonable reputation for being above-board, then there is probably little reason for immediate concern that this partner will be the culprit of any counterfeiting. In fact, the problem, more than likely, may originate with manufacturers with whom the entrepreneur has no contact and, consequently, no working agreements. These unconnected manufacturers are notorious for reverse-engineering products, sometimes at the behest of an entrepreneur’s competitor, and mass producing replicas of, or developing slightly different versions of, the entrepreneur’s product. To this end, the entrepreneur would be well-served to use resources in the foreign market, like those provided by some larger sourcing agencies, to monitor the foreign marketplace and identify incidents of counterfeiting.
Conduct on-site inspections and establish communications channels.
An entrepreneur cannot rely too heavily on the efforts of the sourcing agent. He must travel to the supplier to assess the operations. These site inspections not only bolster the entrepreneur’s familiarity of the manufacturing process, they provide him with a great way to build a direct rapport with the supplier. The goal is not to completely usurp the inroads forged by the sourcing agent, who should continue to work as a tactical representative of the entrepreneur, but the direct channels of communication can be useful when unforeseen issues arise.
Understand the role of the foreign government and the legal landscape.
To simply say that an entrepreneur should have ready and competent legal counsel at his disposal is a glaring understatement. Many foreign countries—and China, particularly—can be a litigious minefield for even the savviest businessperson, and for a small entrepreneur, legal challenges in these markets could overwhelmed their personal savings and the finances of his new business. Therefore, it is quite imperative for an entrepreneur to retain legal counsel with a broad wingspan of resources in the market in question. He should also attempt to learn, in advance, as much as he can about the legal terrain of the foreign country, so as to fully understand where, if any, potential liability exposure may reside.
What’s more, it is important to have a clear picture of how intellectual-property rights are protected in the foreign country. China poses an interesting case, inasmuch as its overall handling of the shanzhai phenomenon has been spotty, yet foreign firms have still elected to outsource to this country. The proper treatment of intellectual property had not always been a matter of serious interest in this country. In fact, it was not until 1992 that the Chinese entered into a Memorandum of Understanding with the United States, wherein China agreed to acknowledge the trademarks and patents of companies filed in the U.S., and in doing so, agreed to provide similar protections against the infringement of those works within its borders. That language was largely codified into law in 1996 with the signing of the Sino-U.S. Agreement on Intellectual Property Rights. Suffice it to say, though, the law did little to reduce infringements, and the intellectual-property arena remains as murky and troublesome as ever in China.
Part of the problem in China exists in its patent framework, while another part of the problem is owing to the manner in which culture and biases trump the rule of law. First, China splits its patents into three significant types: invention patents (which, until recently, were only available for product made and originally made in China); utility model patents (which protect the shape, structure, and composition of a good for a period of ten years); and design patents (which, of course, only protect designs). In order to enforce these patents, officials in China deploy a “double-track” system that allows an aggrieved party to challenge an infringement through administrative channels or a judicial course of action via the courts. While the administrative approach may seem less costly, it can be tremendously time-consuming with no assurance of resolution. Meanwhile, costs notwithstanding, the courts pose their own hurdles. In 2004, the number of patent lawsuits filed in Chinese courts stood at just over 2000, but by the end of 2008, that number rose to 8000, creating a backlog of cases threatening to overwhelm an already-burdened system. Complimenting this, though, is a problem deeply rooted in xenophobia. Judges have shown suspicious deference for local companies, and since many of these judges do not consistently write or publish their rulings, it is often impossible to determine the motivations behind their decisions.
For all of these reasons and others, an entrepreneur should follow the lead of larger businesses, who elect to fight infringement cases, when or if the opportunities ever present themselves, in the United States or other countries with more transparent courts and histories of upholding the rule-of-law, rather than places like China.
The outsourcing of goods can, of course, saves many businesses significantly on production costs, while increasing the margins on those businesses’ products. This fact has proven itself true for companies as large as General Motors in Detroit and as small as an industrial clamp maker in South Texas. But what is also true is that both businesses face the risk of losing their intellectual property to the shadowy side of manufacturing in a place like China, where counterfeiting has become a lucrative business. For this reason, like their larger counterpart, small entrepreneurs must do everything they can to protect their intellectual property. The high points shared in this missive are a good first step in that process.
© 2014 All rights reserved; Axiom Strategy Advisors, LLC