launching new ventures – an entrepreneurial approach, 7e kathleen r. allen – © 2016 cengage...

LAUNCHING NEW VENTURES – AN ENTREPRENEURIAL APPROACH, 7E

Kathleen R. Allen

– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Planning for Growth and Change

Chapter 17


Chapter ObjectivesExplain the stages of growth in a

new ventureDiscuss the differences between

market exploitation and market exploration

List three ways to grow within your industry

Explore ways to go globalIdentify the various risks facing a

growing venture and how to mitigate them

Discuss how to plan for harvest and exit


Planning for Growth and Change

Expansion is a natural by-product of a successful startup◦Some entrepreneurs shy away from

growth because they fear losing control◦Many businesses falter during rapid

growth because of the enormous demand placed on company resources

◦Lesson: don’t grow before your business is ready

◦Growth requires a successful strategy, but not the strategy followed in the past


Table 17.1- Top 10 Inc 500 Companies by Growth Rate


17.1 Stages of Growth in a New Venture

Rates and stages of growth in a new venture vary by industry and business type

But common issues arise: strategic, administrative, and managerial problems ◦Need to know when these issues will

rise◦Plan to anticipate events and

requirements before they occur◦Organizations progress sequentially

through major stages in their lives and development


Figure 17.1- Stages of Growth and Company Focus


17.1a Startup SuccessDuring startup, your main concerns

are to ensure sufficient capital, seek customers and design a way to deliver your product or service◦You are a jack-of-all trades, doing what is

needed◦Your primary goal in the first year is

survival◦But watch for these signs of growth:

Customers are coming to you faster than you expected; you don’t have to go get them

You’re easily meeting your goals Your sales have caught up to the capital

invested, and you can spend on growth; you have the right team and skills


17.1b Initial GrowthYour venture survives startupYour business is generating revenue

and your focus shifts to cash flow◦Can the business generate enough cash

flow to pay its expenses and support the growth of the firm?

◦You are still small with few employees, and you are still playing an integral role in all facets of the business, particularly securing resources for growth

◦A crucial stage; decisions made now will determine whether you remain small, or rapidly grow Growth will require changes in organization and

strategy


17.1c Rapid GrowthIf the decision is to growth, need

sufficient resources to finance growth◦Very risky; need to scale production &

distribution; need control systems to monitor quality

◦To maintain control of rapid growth, must delegate control and accountability at various levels

◦If growth is accomplished, many entrepreneurs sell at this stage at a substantial profit; some displaced by boards of directors; co. needs different skills now If you are a vital part of the vision of the firm

and can identify a new role, you can remain; but most don’t


17.1d Stable Growth and MaintenanceOnce your business successfully

passes through rapid growth, and you can manage the financial gains, you are reached stage 4

The firm is usually large at this point, and can remain fairly stable as long as it continues to be innovative, competitive and flexible◦ If not, it will lose market share, shrink or fail

High-tech firms an exception to typical growth patterns◦ They move out of Phases 1 & 2 rapidly◦ During phases 3 & 4, they can become hugely

successful


17.1e Factors That Affect GrowthMarket and Industry Factors

◦As your firm grows, it may need to move beyond the unserved niche it served at startup

◦Tackle those forces that may work against you: Supplier power Customer power Established competitors New entrants Substitutes


17.1e Factors That Affect GrowthManagement Factors

◦With success comes a belief that you are doing things right, but growth requires change; consider these 4 leadership tendencies which can backfire: Loyalty to the original founding team (can

become a problem when the need is now for professional management)

Task orientation – focus (a single-minded focus no longer serves well; must see larger picture)

Single-mindedness of vision – discipline (must avoid tunnel vision; listen to all areas of the company)

Working in isolation (must learn to work with a diverse group of external stakeholders outside your comfort zone)


17.1e Factors That Affect GrowthScaling Factors

◦Among all the factors affecting growth, the most critical appears to be an inability to understand and respond to the environment of the business

◦Must continually understand the environment, assess it for change and emerging competitors

◦Scaling more important than growing the business, as scaling adds revenue at an exponential rate and increases margins of profitability Find areas of your business model that can be

replicated and applied in new ways at low cost


Table 17.2- A Framework for Growth


Figure 17.2- Categories of Growth Strategies for Entrepreneurs


17.2 Growing the MarketThe choice is often between

maximizing the value from the current market vs seeking new value from new markets◦But continuing success is not about the

choice of market, but about the essential design of a firm

◦Its about continuous improvement and innovation

◦ Capture markets beyond the first target market by looking at adjacent markets

◦Two broad methods for implementing growth


17.2a Market ExploitationIn this method, you attempt to

increase sales by using more effective marketing strategies with the current target market◦The company expands gradually from

the initial target market, however defined

◦Attract customers from competitors by offering a value proposition that better meets their needs

◦Go after noncustomers who have not purchased because of price, a steep learning curve, or high switching costs


17.2b Market ExplorationIn this method, you seek out new

markets, approaches, products or distribution channels

Franchising◦A franchisee does business under your

name with your product, and pays fees and royalties to you

Licensing◦A licensee permits another to use your

intellectual property in return for payment of a royalty

These methods enable your business to grow quickly into several markets at once


17.3 Growing Within the Industry

Entrepreneurs may pursue integrative growth strategies – to grow their ventures through acquisition◦Less about your financial ability to

purchase another firm, and more about the ability to negotiate a good deal

◦More than 75% of all acquisitions damage shareholder value, so proceed carefully

◦Consider vertical and horizontal strategies, and alliances– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17.3a Vertical Integration Strategies

An entrepreneurial venture can grow by moving backward or forward within the distribution channel; vertical integration◦Backward strategy – firm gains control of

some or all of its suppliers, or becomes its own supplier

◦Forward strategy – firm controls the distribution of its products either by selling direct to consumer or acquiring the distributors of its products


17.3b Horizontal Integration Strategies

Buy up competitors or start a competing business (sell the same product under another label); horizontal integration◦Example: major food producers may put

their brand name food items into packaging labeled with the name of a major grocery store


17.3c Alliance StrategiesAnother way to grow is to focus on

what you do best, and let others do the rest◦Form alliances or partnerships with

entities that offer some capability of product you need

◦Less interaction and coordination than a merger, but more than a license agreement

◦Usually formed as joint ventures to develop new technology, conduct research, produce products

◦The two firms must have similar cultures, values and ways of doing things


17.4 Growing by Going GlobalCharacteristics of a successful global

startup:◦1. A global vision from the start◦2. Internationally experienced managers◦3. Strong international business

networks◦4. Preemptive technology◦5. A unique intangible asset, such as

know-how◦6. Closely linked product or service

extensions◦7. Closely coordinated organization on a

worldwide basis


17.4a Finding the Best Global Market

Begin with the International Trade Statistics Yearbook of the U.S. available in any major library or online

The Standard Industrial Trade Classification (SITC) system is a way of classifying commodities used in international trade

In this reference book, it is possible to locate information about international demand for a product or service in specific countries


17.4b Export FinancingMany entrepreneurs assume that if

they have a large enough order, getting financing to fill it will be no problem◦Entrepreneurs who want to export can

seek capital from bank financing, internal cash flow, venture capital, and prepayment, down payment or progress payments from the foreign company placing the order

◦Currency fluctuations can be challenging; an international ban can help you mitigate the risk


17.4c Foreign Agents, Distributors, and Trading CompaniesEvery country has sales reps, agents

and distributors who specialize in importing U.S. goods◦Sales reps work on commission; they do

not buy and hold products; you must collect receivables

◦Agents purchase the product at a large discount, sell it, and handle collection themselves, but you lose control of the price and the customer

◦Consider an ad in a U.S. trade journal for international sale


17.4d Choosing an IntermediaryBefore deciding, do your due

diligence◦Check the intermediary’s current listing of

products; is yours a good match?◦Understand the competition and question

whether the intermediary also represents competitors

◦Does the intermediary have enough reps in the foreign country to handle the market?

◦Look at the intermediary’s sales volume, warehouse space, communication system, marketing plan and servicing for the product

◦Have an experienced attorney draft an agreement


17.5 Preparing for ChangeThe entrepreneur must plan ahead:

◦1. In the event of a problem, which suppliers will be willing to extend the repayment time?

◦2. What nonessential assets does the business have that can be sold for cash?

◦3. Can we find additional investment capital?

◦4. Does the business have customers willing to prepay?

◦5. Do we have a good relationship with a banker?


17.5a Identifying Potential Risks

Supply Chain Risks (stability, financial health)

Taxes and Regulations (new laws, regs)

Intellectual Piracy (software, film & pharma firms suffer most)

Product Liability (insurance covers defense, but not lost sales or the cost of product redesign)

Cyber Risk (hackers, phishing, spybots, viruses, worms)

Decline in Sales (loss of positive cash flow


Figure 17.3- Managing Risk in a New Venture


17.5b Calculating Risk Probability and the Cost to the BusinessDifficult to calculate the probability

that a risk will occur with accuracy, but must try

The overall risk of loss is the product of the probability of occurrence times the cost of the impact to the business times the level of significance of that impact:

◦Risk of Loss = (P x C x S) – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license


17.6 Leadership SuccessionNo firm can keep same management

team over the life of the businessOther firms will constantly be trying

to woo the best people away from the best firms

Chances of losing a key executive to death are significantly greater than losing a business to fire

Succession planning: identify people in the firm who can take over key positions – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license


17.6a Change of Ownership in Small Enterprises

Promote from within or hire from outside?◦1. Situation assessment. Determine

timing of succession, criteria for selection, etc.

◦2. Announcement of the process. Announce plans and process to relevant stakeholders

◦3. Execution of the search. Management searches & selects internal or external candidate

◦4. Transition. Help the new leader during the transfer of power, smooth the transition, make a graceful exit


17.6b Succession Planning in Family-Owned Businesses

Entrepreneurs who head family-owned firms face special problems◦Less than a third of all family-owned

business survive the transition from 1st to 2nd generation

◦Owner must deal not only with business issues, but also with death or relationship issues with family members

◦Tends to expose family issues hidden in the background but building over time


17.6b Succession Planning in Family-Owned Businesses

To plan for succession, family members active in the business should form committee to prepare, and ask:◦Is the next generation being prepared

to take over the business when the time comes?

◦What is the 2nd generation’s expectation for the future of the business?

◦What skills and experience must they acquire?

◦What would the ideal succession plan look like?


17.7 Planning for Harvest and Exit

Many entrepreneurs are not concerned with how they will get out of the business◦Some prefer the role of entrepreneur to

that of managing a stable, mature firm◦They plan to continue in the role of

entrepreneur in another venture◦But the entrepreneur should have a

plan for harvesting the rewards of the business he or she started


17.7a Selling the BusinessYou may wish to sell the business,

but find after it’s sold, you experience a sense of loss

Knowing you intend to sell from the beginning places you in best position ◦Audited financial statements for

credibility◦Tax strategy will not be to minimize

taxes by showing low profits, but r to show actual profits and pay taxes; leads to higher valuation on sale

Consider a business broker or investment bank to handle the sale


17.7b Cashing Out but Staying In

Entrepreneurs may want to take their investment out of the business but not leave◦If your firm still privately owned,

remaining shareholders may purchase your stock (should be in shareholder’s agreement)

◦If your firm is publicly traded, selling stock simple unless you own a substantial portion

◦If you want to turn business over to a son, daughter, or someone else, you can split firm in two, retain assets, and lease them to the other firm, which owns the operating aspect


Figure 17.4- Restructuring the Family Business


17.7b Cashing Out but Staying In

A Phased SaleSome entrepreneurs soften the

emotional blow of selling the business (and the tax consequences) by agreeing with the buyer to sell in 2 phases◦Phase 1 – Sell a percentage of the firm,

but remain in control of operations, and continue to grow the firm

◦Phase 2 – The business is sold at a prearranged price, usually a multiple of earnings– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license


17.7c Being AcquiredToday, the IPO is no longer the holy

grailIn the past decade, mergers and

acquisitions have increased significantly◦A private firm that goes public is on its

own, but it if merges with another firm, it shares those resources

◦Many ventures today offer part of a solution that must be combined with another

Being acquired will continue to be the most common way entrepreneurs and investors harvest the wealth they have created


17.7d Dealing with Failure: Bankruptcy

What precipitates a bankruptcy is the failure to pay debt but that is caused by a myriad other events◦Business owners may have the option to

save their businesses through restructuring (Ch 11) A reorganization of the company’s finances so

that it continues to operate, within strict rules, but creditors must agree

A pure liquidation of the business (Ch 7) ◦Before considering bankruptcy seek the

advice of an attorney and/or turnaround specialist


17.8 Some Final ThoughtsThis book has focused on the birth

and early growth of innovative, growth-oriented new ventures and has used a classic definition of the term entrepreneurship:◦The creation, evaluation and

exploitation of opportunities that are innovative, growth oriented, and that create new value for customers

Entrepreneurship is a way of viewing the world and a skill set that can be learned– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license


New Venture Action PlanIdentify market, management, and

scale factors that may affect the growth for your business

Determine which growth strategy is most appropriate for your business

Identify potential international markets for the product or service

Develop a plan for globalization of the company at some point in the future


New Venture Action PlanThink about an exit or harvest

strategy and what impact your choice might have on your business


launching new ventures – an entrepreneurial approach, 7e kathleen r. allen – © 2016 cengage...

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