Unit 12 Managing, Growing, Harvesting Entrepreneurship PDF

ENTREPRENEURSHIP: BUS 403 UNIT 12: MANAGING, GROWING, AND HARVESTING THE ENTREPRENEURIAL FIRM  Unit 12: Managing,  Content: Growing, And 1. Describe how firms can properly prepare for growth. Harvesting 2. Discuss the six most common reasons firms pursue...

ENTREPRENEURSHIP: BUS 403 UNIT 12: MANAGING, GROWING, AND HARVESTING THE ENTREPRENEURIAL FIRM  Unit 12: Managing,  Content: Growing, And 1. Describe how firms can properly prepare for growth. Harvesting 2. Discuss the six most common reasons firms pursue growth. The 3. Explain the importance of being able to manage the stages of growth. Entrepreneuri 4. Describe the challenges of firm growth, particularly al Firm those of adverse selection and moral hazard.  Three Things a Business Can Do to 13-3 Prepare for Growth 1 of 3 Important Realities: Not all businesses have the potential to be aggressive growth firms A business can grow too fast Business success doesn’t always scale Three Things a Business Can Do to 13-4 Prepare for Growth 2 of 3 Stay Committed to a Core Strategy - It is important that a business not lose sight of its core strategy as it prepares to grow If a business becomes distracted or starts pursuing every opportunity for growth that it’s presented, it can easily stray into areas where it’s at a disadvantage Plan for growth Three Things a Business Can Do to Prepare for Growth 13-5 3 of 3 Plan for Growth - A firm should establish growth-related plans Writing a business plan greatly assists in preparing growth plans It’s also important for a firm to determine, as soon as possible, what its growth strategies will be. Warning Signs That a Business is Growing Too Fast 13-6 Reasons for Growth 1 of 3 13-7 Reason for Growth Explanation Economies of Occur when increasing production lowers the scale average cost of each unit produced. Economies of Occur when the scope (or range) of a firm’s scope operations creates efficiencies. Reasons for Growth 2 of 3 13-8 Reason for Growth Explanation Occurs when a firm holds the number one or Market the number two position in an industry or Leadership niche market in terms of sales volume. Influence, Larger businesses usually have more Power, and influence and power than smaller firms. Survivability Reasons for Growth 3 of 3 13-9 Reason for Growth Explanation Accommodate Sometimes firms are compelled to grow to the Growth of accommodate the growth of a key customer. Key Customers Attract and Growth is a firm’s primary mechanism to Retain Talented generate promotional opportunities for Employees employees. Managing Growth 13-10 It’s important for a business owner to know the stages of growth, along with the unique opportunities and challenges that each stage entails.  Stages of Growth 1 of 5 13-11  Introduction  Start-up phase where a business determines what its core strengths and capabilities are.  The main challenge is to make sure the initial product or service is right.  It’simportant to document what works and what doesn’t work during this stage. Stages of Growth 2 of 5 13-12  Early Growth  Generally characterized by increasing sales and heightened complexity.  Two important things must happen for a business to be successful in this stage.  The founder must start working “on the business” rather than “in the business.”  Increased formalization must take place, and the business has to start developing policies and procedures.  Stages of Growth 3 of 5 13-13  Continuous Growth  The need for structure and formalization increases.  Often the business will start developing related products and services.  The toughest decisions take place in this stage.  One tough decision is whether the owner of the business and the current management team have the experience and the ability to take the business further. Stages of Growth 4 of 5 13-14  Maturity  A business enters the maturity stage when its growth stalls after peaking.  At this point, a firm is typically more intently focused on managing efficiently than developing new products.  Well-managed firms often look for partnering opportunities or opportunities for acquisitions or licensing deals to breathe new life into the firm.  If new growth cannot be achieved through a firm’s existing product mix, the “next generation” of products should be developed.  Stages of Growth 5 of 5 13-15  Decline  It is not inevitable that a business enter the decline stage.  Many American businesses have long histories and have adapted and survived over time. A business’s ability to avoid decline hinges on the strength of its leadership and its ability to adapt over time. Challenges of Growth 13-16 Two categories of challenges for firm growth: 1. Managerial Capacity Problem 2. Day-to-Day Challenges of Growing a Firm  Managerial Capacity Problem 1 of 6 13-17  Managerial Capacity  Firms are collections of productive resources that are organized in an administrative framework.  As a firm goes about its routine activities, it recognizes opportunities to grow.  The problem with this scenario is that firms are not always prepared or able to grow, because of limited “managerial capacity.”  Managerial Capacity Problem 2 of 6 13-18 A Firm’s Administrative Framework A firm’s administrative framework consists of two kinds of services that are important to firm growth.  Entrepreneurial services generate new market, product, and service ideas, while managerial services administer the routine functions of the firm and facilitate the profitable execution of new opportunities.  New product and service ideas require substantial managerial services (or managerial capacity) to be successfully implemented.  This is a complex problem because if a firm has insufficient managerial services to properly implement its new product and service ideas, it can’t grow.  Managerial Capacity Problem 3 of 6 13-19 A Firm’s Administrative Framework (continued)  Continuation From Previous Slide  The reason a firm can’t quickly increase its managerial services (to take advantage of new product or service ideas) is that it is expensive to hire new employees, it takes time for new hires to be socialized into the culture of a firm, and it takes time for new employees to acquire firm-specific skills and establish trusting relationships with other members of the firm.  When a firm’s managerial resources are insufficient to take advantage of its new product and service opportunities, the subsequent bottleneck is referred to as the managerial capacity problem.  Managerial Capacity Problem 4 of 6 13-20  Additional Challenges  As a firm grows, it is faced with the dual challenges of adverse selection and moral hazard.  Adverse selection means that as the number of employees a firm needs increases, it becomes increasingly difficult for the firm to find the right employees, place them in appropriate positions, and provide adequate supervision.  Moral hazard means that as a firm grows and adds personnel, the new hires typically do not have the same ownership incentives as the original founders, so the new hires may not be as motivated as the founders to put in long hours and may even try to avoid hard work. Managerial Capacity Problem 5 of 6 13-21 Basic Model of Firm Growth Managerial Capacity Problem 6 of 6 13-22 Impact of the Managerial Capacity Problem Day-to-Day Challenges of Growing a Firm 13-23 1 of 3 Challenge Explanation Cash Flow A firm requires an increasing amount of cash Management as it grows. If growth comes at the expense of a Price Stability competitor’s market share, a price war could ensue. Day-to-Day Challenges of Growing a Firm 13-24 2 of 3 Challenge Explanation An increase in firm activity can result in Quality quality control issues if a firm is not able to Control increase its resources to handle the extra work. Capital Capital constraints are an ever-present Constraints problem for growing firms.  13-25 The End  14-26 Unit 12.B Strategies for Firm Growth  Chapter Objectives 14-27 1. Identify and discuss the core internal growth strategy for entrepreneurial firms. 2. Describe additional internal product-growth strategies entrepreneurial firms can use. 3. Examine international expansion as a growth strategy. 4. Discuss different types of external growth strategies. Internal and External Growth Strategies 1 of 2 14-28 Internal Growth Strategies External Growth Strategies Involve efforts taken Rely on establishing within the firm itself, relationships with third such as new product parties, such as mergers, development, other acquisitions, strategic product-related alliances, joint ventures, strategies, and licensing, and international expansion franchising Internal and External Growth Strategies 2 of 2 14-29 Internal Growth Strategies 14-30 New product Other product- development related strategies International expansion  Advantages and Disadvantages of Internal Growth Strategies 14-31 Advantages Disadvantages Incremental, even-paced growth Slow form of growth. Provides maximum control Need to develop new resources. Preserves organizational culture. Investment in a failed internal growth Encourages internal strategy can be difficult to recoup. entrepreneurship. Adds to industry capacity. Allows firms to promote from within.  New Product Development 1 of 3 14-32  New Product Development  Involvesthe creation and sale of new products (or services) as a means of increasing firm revenues.  Inmany fast-paced industries, new product development is a competitive necessity.  For example, the average product life cycle in the computer software industry is 14 to 16 months. New Product Development 2 of 3 14-33 Keys to Effective New Product and Service Development Find a niche and fill it. Develop products that add value. Get quality right and pricing right. Focus on a specific target market. Conduct ongoing feasibility analysis. New Product Development 3 of 3 14-34 Other Product-Related Strategies 1 of 2 14-35 Product Strategy Description Improving an Often a business can increase its Existing Product or revenues by simply increasing the Service quality of an existing product or service. Increasing Increasing the sales of a product or service Market through greater marketing efforts or through Penetration increased production capacity. Other Product-Related Strategies 2 of 2 14-36 Product Strategy Description Extending Product Making additional variations of a Lines product so it will appeal to a broader range of clientele. Geographic Growth via expanding to additional Expansion geographic locations.  International Expansion 1 of 3 14-37  International Expansion  Another common form of growth for entrepreneurial firms.  International new ventures are businesses that, from their inception, seek to derive significant competitive advantage by using their resources to sell products or services in multiple countries.  Although there is vast potential associated with selling overseas, it is a fairly complex form of growth.  International Expansion 2 of 3 14-38  Foreign-Market Entry Strategies  Exporting  Producing a product at home and shipping it to a foreign market.  Licensing  An arrangement whereby a firm with the proprietary rights to a product grants permission to another firm to manufacture that product for specified royalties or other payments.  Joint Ventures  Involvesthe establishment of a firm that is jointly owned by two or more otherwise independent firms.  International Expansion 3 of 3 14-39  Foreign-Market Entry Strategies  Franchising  An agreement between a franchisor (a company like McDonald’s Inc., that has an established business method and brand) and a franchisee (the owner of one or more McDonald’s restaurants).  Turnkey Project  A contractor from one country builds a facility in another country, trains the personnel that will operate the facility, and turns over the keys to the project when it is completed and ready to operate.  Wholly Owned Subsidiary  A company that has made the decision to manufacture a product in a foreign country and establish a permanent presence. External Growth Strategies 14-40 Mergers and Licensing Acquisitions Strategic Alliances Franchising and Joint Ventures (Chapter 15)  Advantages and Disadvantages of External Growth Strategies 14-41 Advantages Disadvantages Reducing competition. Incompatibility of top management. Gaining access to proprietary Clash of corporate cultures. products or services. Operational problems. Gaining access to new products Increased business complexity. and markets. Loss of organizational flexibility. Obtaining access to technical expertise. Antitrust implications. Gaining access to an established brand name. Economies of scale. Diversification of business risk. Mergers and Acquisitions 14-42  Mergers and Acquisitions A merger is the pooling of interests to combine two or more firms into one.  An acquisition is the outright purchase of one firm by another.  Purpose of Acquisitions  Acquiringanother business can fulfill several of a company’s needs, such as:  Expanding its product line.  Gaining access to distribution channels.  Achieving competitive economies of scale. The Process of Completing an Acquisition 14-43  Licensing 1 of 2 14-44  Licensing  The granting of permission by one company to another company to use a specific form of its intellectual property under clearly defined conditions.  Virtually any intellectual property a company owns that is protected by a patent, trademark, or copyright can be licensed to a third party.  Licensing Agreement  The terms of a license are spelled out by a licensing agreement. Licensing 2 of 2 14-45 Type of Licensing Description Technology The licensing of proprietary technology Licensing that the licensor typically controls by virtue of a utility patent. Merchandise The licensing of a recognized trademark or and Character brand that the licensor typically controls Licensing through a trademark or copyright.  Strategic Alliances 1 of 2 14-46  Strategic Alliances A strategic alliance is a partnership between two or more firms developed to achieve a specific goal.  Strategic alliances tend to be informal and do not involve the creation of a new entity.  Participatingin strategic alliances can boost a firm’s rate of product innovation and foreign sales. Strategic Alliances 2 of 2 14-47 Type of Alliance Description Technological Feature cooperation in R&D, Alliances engineering, and manufacturing. Marketing Typically match a company with excess Alliances distribution capacity with a company that has a product to sell.  Joint Ventures 1 of 2 14-48  Joint Ventures A joint venture is an entity created when two or more firms pool a portion of their resources to create a separate, jointly owned organization. A common reason to form a joint venture is to gain access to a foreign market. In these cases, the joint venture typically consists of the firm trying to reach a foreign market and one or more local partners. Joint Ventures 2 of 2 14-49 Type of Joint Venture Description Partners collaborate at a single point in Scale Joint Venture the value chain to gain economies of scale in production or distribution. Link Joint Positions of the partners are not Venture symmetrical, and the partners help each other access adjacent links in the value chain. Advantages and Disadvantages of 14-50 Participating in Strategic Alliances and Joint Ventures Advantages Disadvantages Gain access to a specific resource. Loss of proprietary information. Economies of scale. Management complexities. Risk and cost sharing. Financial and organizational risks. Gain access to a foreign market. Risk becoming dependent on a partner. Learning. Partial loss of decision autonomy. Speed to market. Partners’ cultures may clash. Neutralizing or blocking Loss of organizational flexibility. competitors.  14-51 The End