MGT 710Managing Entrepreneurial Organizations

Steven E. Phelan

Overview of Tonight

Pedagogy Syllabus Review Team Assignment

Discuss team charter and client acquisition strategy Lecture on Growth Lecture on Consulting Models Consulting skills (Diagnosing with financials)

Z scores Financial benchmarking (guest Debra Scanlan, NSBDC)

Pedagogy

Syllabus

Assessment Weekly Deliverables (50%) Diagnosis Presentation (10%) Analysis Presentation (10%) Personal Log (20%) Client Satisfaction (10%)

See BB for deadlines and grades

Team Formation

Teams and assignments have been pre-assigned Team change requires agreement from both

teams Team charter

What will be each member's responsibility as far as coming prepared to class and meeting as well as doing assigned work? What will be the rules for resolving conflict or differences? How will members stay in touch with each other? Who will do the work?

Client Acquisition Strategy

Some are ultimately responsible for finding your own client (5-50 employees, >$3m rev)

What are you selling, who are you targeting? The NSBDC has agreed to email its clients to

offer your services if you require This needs to be coordinated as a class A draft of the email needs to be sent to me for

approval and then to Lisa Chan (lisa.chan@unlv.edu)

You need to highlight the offering and the process

THE CHALLENGES OF GROWTH

Managing Entrepreneurial Organizations

Under Rapid Growth . . .

Entrepreneurs face: Challenges Pressure Physical wear and tear Emotional wear and tear A possible business harvest

Entrepreneurial Leadership and Organization

Flat, flexible, think/act like an owner (ego?)

Stepwise and disruptive change

Fearless, relentless experimentation

Specialize in new mistakes

Opportunity obsessed Frontline, customer

driven, niche markets

Creativity – capital Resource frugality and

parsimony Systems and nonlinear Global perspective Create and share the

wealth People want to be led,

not managed Manage risk, reward and

fit.

Traditional General Management

Pyramidal/hierarchical Incremental

improvement Risk avoidance/embrace

stability Avoid and punish failure Resource allocation,

budget driven Central command and

control

Resource optimization Cost oriented Linear, sequential Local focus Compensate and reward Manage and control Zero defects/error free Economies of scale

Growth Stages

Greiner (1972)

1. Creativity

The birth stage of an organization. The founders are usually technically or

entrepreneurially oriented. Communication is frequent and informal. Long hours of work are rewarded with modest

salaries and the promise of ownership benefits.

Decisions and motivations are highly sensitive to market feedback.

1. Creativity (cont.)

Eventual Problems: Informal communication becomes infeasible. Additional functions must be implemented.

*The first critical decision in an organizations development is to locate and install a strong

business manager. Drucker maintains that managers must fight

urge to resist change.

2. Direction

Functional organizational structure. Different departments are designed. Formal communication results as

hierarchy and employees increase. Increased efficiency. Systems need to be set up for inventory

control, accounting, order processing

2. Direction(cont.)

Eventual Problems: “Crisis of Autonomy.” Impersonal environment. Lower-level employees often possess more

knowledge about markets and machinery than management.

*The next decision for management is decentralization.

Once again, managers have difficulty relinquishing authority.

Issues Leading to Possible Crises Opportunity overload

Choosing from among an abundance of sales or new market opportunity

Abundance of capital Evaluating investors as “partners” and the terms of

deals with which they were presented Misalignment of cash burn and collection rates

Cash burn rates racing ahead of collections

Working Capital Gap

Issues Leading to Possible Crises Decision making

Executing functional day-to-day and week-to-week decisions, rather than strategizing

Expanding facilities and space . . . and surprises Coping with surprises, delays, organizational

difficulties, and system interruptions spawned by space or facility expansion

External Causes for Failure Recession Interest rate changes Changes in government policy Inflation The entry of new competition Industry/product obsolescence

Internal Causes for Failure Inattention to strategic issues

Misunderstood market niche Mismanaged relationships with suppliers and

customers Diversification into an unrelated business area Mousetrap myopia The big project Lack of contingency planning

Internal Causes for Failure General management problems

Lack of management skills, experience, and know-how

Weak finance function Turnover in key management personnel Big-company influence in accounting

Internal Causes for Failure Poor planning, financial/accounting systems,

practices, and controls Poor pricing, overextension of credit, and excessive

leverage Lack of cash budgets/projections Poor management reporting Lack of standard costing Poorly understood cost behavior

Nonquantitative Signals of Trouble

Inability to produce financial statements on time Changes in behavior of the lead entrepreneur Change in management or advisors, such as

directors, accountants, or other professional advisors

Accountant’s opinion that is qualified and not certified

Nonquantitative Signals of Trouble

New competition Launching of a “big project” Lower research and development expenditures Special write-offs of assets and/or addition of

“new” liabilities Reduction of credit line

Telltale Trends of Organizations in Trouble

Ignore outside advice People (including and usual, most especially, the

entrepreneur) have stopped making decisions and also have stopped answering the phone

Nobody in authority has talked to the employees Rumors are flying

Telltale Trends of Organizations in Trouble

Inventory is out of balance Accounts receivable aging is increasing Customers are becoming afraid of new

commitments A general malaise has settled in while a still high-

stressed environment exists (an unusual combination)

Turning Around a Troubled Company

Diagnosis of the problem Strategic analysis Management analysis Cash flow analysis

Cash Flow Analysis

Steps in identifying and quantifying the profitable core of the business Determine available cash Determine where money is going Calculate percent-of-sales ratios for different areas of

a business and then analyze trends in costs Reconstruct the business Determine differences

Potential Cuts/Improvements

Most common areas for potential cuts/improvements Working capital management Payroll Overcapacity and underutilized assets

Longer-Term Remedial Action

Systems and procedures Asset plays Creative solutions

CONSULTING MODELS

Consulting Models

Peter Block “Flawless Consulting”

Two aspects of implementation The technical work (the tangible)

Technical changes, work processes, structure The question of building support for the

change you are planning (the intangible) Relationships, faith, commitment

The secondary goal of consulting: Teach clients how to solve the problem

themselves next time Risk of being surrogate manager not

consultant

Block ctd.

Building emotional commitment: Design new ways for people to engage each

other Balance between presentation &

participation Full disclosure & public expression of doubt Real choice on the table New conversations A physical structure that supports

community and common purpose

Block’s Values

Choose learning over teaching See learning as a social adventure Know the struggle is the solution See the question as more important than the

answer Mine moments of tension for insight Focus on strengths rather than deficiencies Take responsibility for one another’s learning Let each moment be an example of the destination Include ourselves as learners Be authentic

Covey’s Seven Habits

Dependence to Independence (Self-Mastery) Habit 1: Be Proactive: Principles of Personal Choice Habit 2: Begin with the End in Mind: Principles of Personal

Vision Habit 3: Put First Things First: Principles of Integrity &

Execution Independence to Interdependence

Habit 4: Think Win/Win: Principles of Mutual Benefit Habit 5: Seek First to Understand, Then to be Understood:

Principles of Mutual Understanding Habit 6: Synergize: Principles of Creative Cooperation

Continual Improvement Habit 7: Sharpen the Saw: Principles of Balanced Self-

Renewal

Weiss “Ultimate Consultant”

Problems in small business consulting The owner thinks he or she knows it all Money is always a problem – coming straight

out of owner’s pocket The problem is often the owner (or a family

member) Decisions will be influenced by non-business

members Things can change quickly Nothing happens without the owner’s

blessing (which can be a curse)

Ultimate Rules (Weiss)

Relationship is even more important in small business market – no owner support = failure

Scope creep and small “favors” are common. Guard against them like a junkyard dog.

Your ultimate job is to improve your client’s condition – not protect your client’s feelings or yourself

Small business has less margin for error. Keep the projects simple and focused. “The need to try something else” may be bankruptcy

CONSULTING TOOLS

Bankruptcy Rule

Altman Z-Model

http://www.creditguru.com/CalcAltZ.shtml

Z-Model for Small Business

http://www.bankruptcyaction.com/bankpred2.htm

An Empirical Test of Financial Ratio Analysis for Small Business Failure Prediction http://www.jstor.org/stable/2329929

FINANCIAL BENCHMARKING

Debra Scanlan, NSBDC