1. 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.

2. Planning for Growth and Change Chapter 17 – © 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.

3. Chapter Objectives Explain the stages of growth in a new venture Discuss the differences between market exploitation and market exploration List three ways to grow within your industry Explore ways to go global Identify the various risks facing a growing venture and how to mitigate them Discuss how to plan for harvest and exit – © 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.

4. 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 – © 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.

5. Table 17.1- Top 10 Inc 500 Companies by Growth Rate – © 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.

6. 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 – © 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.

7. Figure 17.1- Stages of Growth and Company Focus – © 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.

8. 17.1a Startup Success During 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 – © 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.

9. 17.1b Initial Growth Your venture survives startup Your 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 – © 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.

10. 17.1c Rapid Growth If 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 – © 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.

11. 17.1d Stable Growth and Maintenance Once 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 – © 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.

12. 17.1e Factors That Affect Growth Market 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 – © 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.

13. 17.1e Factors That Affect Growth Management 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) – © 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.

14. 17.1e Factors That Affect Growth Scaling 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 – © 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.

15. Table 17.2- A Framework for Growth – © 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.

16. Figure 17.2- Categories of Growth Strategies for Entrepreneurs – © 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. 17.2 Growing the Market The 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 – © 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.

18. 17.2a Market Exploitation In 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 – © 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.

19. 17.2b Market Exploration In 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 – © 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.

20. 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.

21. 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 – © 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.

22. 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 – © 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.

23. 17.3c Alliance Strategies Another 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 – © 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.

24. 17.4 Growing by Going Global Characteristics 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 – © 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.

25. 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 – © 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.

26. 17.4b Export Financing Many 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 – © 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.

27. 17.4c Foreign Agents, Distributors, and Trading Companies Every 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 – © 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.

28. 17.4d Choosing an Intermediary Before 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 – © 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.

29. 17.5 Preparing for Change The 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? – © 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.

30. 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 – © 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.

31. Figure 17.3- Managing Risk in a New Venture – © 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.

32. 17.5b Calculating Risk Probability and the Cost to the Business Difficult 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 distributed with a certain product or service or otherwise on a password-protected website for classroom use.

33. 17.6 Leadership Succession No firm can keep same management team over the life of the business Other 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 distributed with a certain product or service or otherwise on a password-protected website for classroom use.

34. 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 – © 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.

35. 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 1 st to 2 nd 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 – © 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.

36. 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 2 nd generation’s expectation for the future of the business? ◦ What skills and experience must they acquire? ◦ What would the ideal succession plan look like? – © 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.

37. 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 – © 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.

38. 17.7a Selling the Business You 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 – © 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.

39. 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 – © 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.

40. Figure 17.4- Restructuring the Family Business – © 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.

41. 17.7b Cashing Out but Staying In A Phased Sale Some 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 distributed with a certain product or service or otherwise on a password-protected website for classroom use.

42. 17.7c Being Acquired Today, the IPO is no longer the holy grail In 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 – © 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.

43. 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 – © 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.

44. 17.8 Some Final Thoughts This 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 distributed with a certain product or service or otherwise on a password-protected website for classroom use.

45. New Venture Action Plan Identify 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 – © 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.

46. New Venture Action Plan Think about an exit or harvest strategy and what impact your choice might have on your business – © 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.