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Business Lessons from Sialkot

Sialkot is an old city in Pakistan with many thousands of years of history, but these days the city is mostly known for its export oriented industries and business culture. The mean income of Sialkot's 800,000 residents is almost double the national average and inside Pakistan the city is infamous for the constant stream of nouveau riche it produces with regularity.

The entrepreneurs responsible for the relative wealth of the city are no role models. Hardly any of them are competent in any sense of the word. Very few have had decent education, fewer still have any managerial competence, and a good chunk are flat-out unscrupulous. However, these shortcomings haven't stopped these individuals from becoming US dollar millionaires. (This is quite an accomplishment in a country where the per capita income is $652 a year.)

Even more surprisingly, entrepreneurs in Sialkot start with next to nothing; the city has no venture capitalists and startups are not well-funded. Consequently, new businesses in Sialkot often make their start by marketing undifferentiated goods and services in saturated markets.

The fact that many of Sialkot's entrepreneurs succeed indicates that the conventional wisdom about startups is wrong: underfunded startups run by incompetent managers and lacking all competitive advantages can succeed in very competitive markets. Clearly, entrepreneurs in Sialkot are doing something important right which is not generally acknowledged to be a critical factor in the success of a startup.

Most successful businesses in Sialkot are export oriented. The city has healthy leather, sportsware, gloves, surgical instruments, and a few other old economy industries. There is little emphasis on innovation in these industries, and everyone is selling almost the same stuff as everyone else.

One would expect profit margins to be non-existent in Sialkot, but to the contrary many companies have decent profit margins. It turns out customers are fairly reluctant to change suppliers and are willing to pay a premium to stick with suppliers they trust.

This environment is good for established players, but for startups the odds are stacked against them as they have little chance of winning over customers. Of course, startups do succeed in Sialkot, but they do things somewhat atypically.

A traditional startup uses a business plan to focus its attention on a perceived opportunity and tries to gain a competitive advantage by spending money on innovative product/service development. Some entrepreneurs have succeeded in Sialkot by employing this approach, but the vast majority got by without business plans, product development, and other niceties altogether.

Instead of creating a detailed business plan, entrepreneurs in Sialkot pick a general direction for their businesses. Typically, the goal is to get started in some industry and export related industries are frequently targeted. Only after settling on a general direction for business and starting a company, Sialkot's entrepreneurs start thinking of what they are actually going to sell.

The choice of direction is the key to Sialkot's success as export markets are big, margins are good, and the orders are large. All of this simplifies many management issues and facilitates quick growth. However, these factors come into play only later in the life of a company. The options for startups entering export oriented industries are not that great, and such companies only manage to find low margin niches. Some become suppliers to established players, and others manage to get small-scale export orders. Of course, if startups stopped here they would get nowhere, and they don't stop at this.

Working in an industry brings a startup access to insider information, and general know-how about how the industry works. Information such as market trends, margins for different products, buyer contacts, etc., can be extremely valuable in the right hands, and Sialkot's entrepreneurs use this information in all sorts of imaginative ways. Some startups are able to grab onto dissatisfied customers of other businesses, others manage to get large export orders through their contacts (emigrant Pakistanis are very useful), and still others are able to identify high margin products to specialize in.

This approach of getting in an industry to search for opportunities works very well in practice. The costs of getting in are low, and the risks are low as entrepreneurs do not commit to anything until they are reasonably sure of the returns.

Sialkot's entrepreneurs are an extreme case, but this mindset is not at all peculiar to Sialkot. Some very well-known and successful companies were built this way.

Bill Gates used this approach to great effect. His decision to quit school to enter a hot new market paid off when Microsoft got the IBM PC operating system deal in 1981. Microsoft didn't have an operating system for the IBM PC when IBM was shopping around, but Gates was resourceful enough to find and purchase QDOS for $25,000 to clinch the deal.

Most people don't give Bill Gates enough credit for the QDOS deal and believe the QDOS deal to be a lucky break for Microsoft. The point everyone is missing is that there were very few prerequisites required to get that deal; anyone with $25,000 and knowledge of IBM's plans could have grabbed it. (Actually, even the $25,000 wasn't required, some resourcefulness could have served as a substitute.) Bill Gates clinched the QDOS deal because he was an insider in the software industry; he had understanding of the software market and access to information which outsiders did not have.

John Walker and the rest of Autodesk's founders are another example of this kind of thinking. Autodesk's founders were in a dead-end computer related business but knew the software market was going to takeoff, so they decided to switch businesses. At the outset they didn't have any specific software niche in mind but eventually settled on the CAD market. The rest is history. (Autodesk's early history is well-documented in the Autodesk files. )

A more recent example is one of Yahoo. Yahoo started as a personal website and quickly turned into a business after the potential of the website became clear to Yahoo's founders. Yahoo has evolved with the internet, and Yahoo's founders have tried to cash in on every major internet trend. From instant messaging to personal websites, and ecommerce, Yahoo has everything covered.

Yahoo's success illustrates something very important: the most successful companies are successful because they respond quickly to market changes and are not obsessed with coming up with the next big idea. Companies like Microsoft, and Yahoo try to leverage the infrastructure they have built up to take advantage of whatever is hot and happens to come their way.

This is the approach preferred by Sialkot's entrepreneurs and this is the reason for their success: Sialkot's entrepreneurs count on changing market conditions to provide them with opportunities and are not saddled with the emotional baggage of the next big idea.

Strategic thinking and a business vision is very important for a startup, but a conventional business plan only constrains these. Starting a new business is a lot like a game of chance. Smart players don't plan games of chance before the start of play; they plan as they play and make full use of any luck that comes their way.

The conventional business plan driven startup is simply the wrong model for starting a business. Coming up with a business plan that is not a complete waste of paper is an agonizingly hard problem. Yes, there are things which must be written down, but writing down fluff is counterproductive. Most conventional startups eventually wake-up to the world around them when their business plans don't pan out. Unfortunately, too often they do this only after digging a deep hole for themselves.

Business plans are good for appeasing venture capitalists and bankers, but apart from this they are not good for much. Businesses can and do succeed without business plans. Businesses are about selling and not about competitive advantages and big ideas. Find something to sell to someone at a profit and you have a business. Sadly, way too many entrepreneurs forget this.




by Usman Latif  [Nov 01, 2004]


Updated: Dec 14, 2005

Links:

Autodesk Files
History of MS-DOS
QDOS from Wikipedia
A bit of Scotland thrives in Pakistan