Copyright © 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin

Part Five The Entrepreneur’s Journey

Under Rapid Growth... Entrepreneurs face: Challenges Pressure Physical wear and tear Emotional wear and tear A possible business harvest

Chapter 17 Leading Rapid Growth, Crises, and Recovery

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

Entrepreneurial Leadership and Organization Flat, flexible, think/act like an owner Stepwise and disruptive change Fearless, relentless experimentation Specialize in new mistakes Opportunity obsessed Frontline, customer driven 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.

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Issues Leading to Possible Crises in Rapid Growth 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

Issues Leading to Possible Crises in Rapid Growth 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

Organizational Climate Six basic dimensions Clarity Standards Commitment Responsibility Recognition Esprit de corps

Common Approaches to Successful Leadership E-Leadership Roles, tasks, responsibilities, accountabilities, and appropriate approvals clearly defined Leadership based on expertise, not authority Emphasis placed on performing task-oriented roles Consensus Building Emphasis placed on overall goals Emphasis on participation and listening

Common Approaches to Successful Leadership Communication Information sharing Willingness to alter individual views Encouragement Encouragement of innovation and calculated risk-taking

Common Approaches to Successful Leadership Trust Do what they say they are going to do Traits include openness, spontaneity, and straightforwardness Development Develop human capital