Let's take two companies doing similar businesses with nearly identical revenues, net profits and balance sheet numbers. The first company is able to generate those numbers with very little management effort. In other words, management is mostly spending their time playing golf and evaluating (and mostly rejecting) new opportunities. In the second company, management is stretched to the limit. They work 12 hour days, partly because they tend to go after many opportunities and partly because they have fewer systems in place.
Which is a better company?
I'd argue that the first company is a better company since they have more entrepreneurial headroom. If the next big opportunity comes along or the next big crisis comes along, they have the reserves (of cash and manpower) to handle it.
Examples of companies with entrepreneurial headroom include Google where employees work only 4 good days a week and Berkshire Hathaway which has a very small central office in relation to the scale of its operations. Another example is Microsoft in mid-nineties when it was able to shift into Internet mode and take advantage of opportunities within months.
In Richard Koch's earlier book - The 80/20 Principle, Richard speaks about Return on Management Effort or ROME. Is a company with Entrepreneurial Headroom the same as a high ROME company? Probably. At any rate, a company with high EH has the resources and the adaptive capacity to pursue new entrepreneurial opportunities.
So how do you build a high EH company?
1. Evaluate many opportunities but pursue very few of those.
2. Pursue activities that deepen your company's differentiation and focus.
3. Ensure that employees have time on their hands to pursue non-urgent tasks so that if a need arises, they can be shifted around to pursue a new opportunity.
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