Preparing for and Evaluating the Challenge of Growth - Strategies for Firm Growth (Session 23-24)
Preparing for and Evaluating the Challenge of Growth (Session 23)
Three Things a Business Can Do to Prepare
1. Appreciate the Nature of Business Growth
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.
2. 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’s its presented, it can easily stray into areas where its at a disadvantage.
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.
Stages of Growth
• 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’s important to document what works and what doesn’t work during this stage.
• 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 “in the business.”
- Increased formalization must take place, and the business has to start developing policies and procedures.
• 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 has the experience and the ability to take the business further.
• Maturity
- A business enters the maturity stage when its growth stalls.
- 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 breath 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.
• 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.
Managerial Capacity Problem
• 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 firm’s are not always prepared or able to grow, because of limited “managerial capacity."
• A Firm’s Administrative Framework
- A firm’s administrative framework consists of two kinds of services that are important to firm growth.
o 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.
o New product and service ideas require substantial managerial services (or managerial capacity) to be successfully implemented.
o 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.
o 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.
o 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.
• Additional Challenges
- As a firm grows, it is faced with the dual challenges of adverse selection and moral hazard.
o 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.
o 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.
Strategies for Firm Growth (Session 24)
Internal and External Growth Strategies
Internal Growth Strategies
Involve efforts taken within the firm itself, such as new product development, other product related strategies, and international expansion.
External Growth Strategies
Rely on establishing relationships with third parties, such as mergers, acquisitions, strategic alliances, joint ventures, licensing, and franchising.
Rely on establishing relationships with third parties, such as mergers, acquisitions, strategic alliances, joint ventures, licensing, and franchising.
Strategies Internal Growth
New Product Development
New Product Developments
- Involves the creation and sale of new products (or services) as a means of increasing firm revenues.
- In many fast-paced industries, new product development is a competitive necessity.
o For example, the average product life cycle in the computer software industry is 14 to 16 months.
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.
Common Reasons That New Products Fail
- Inadequate feasibility analysis.
- Overestimation of market potential.
- Bad timing.
- Inadequate advertising and promotions.
- Poor service.
International Expansion
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.
• Foreign-Market Entry Strategies
- Exporting
o Producing a product at home and shipping it to a foreign market.
- Licensing
o 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
o Involves the establishment of a firm that is jointly owned by two or more otherwise independent firms.
Fuji-Xerox is a joint venture between an American and a Japanese company.
- Franchising
o 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
o 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
o A company that has made the decision to manufacture a product in a foreign country and establish a permanent presence.
External Growth Strategies
Mergers and Acquisitions
• Mergers and Acquisitions
- An acquisition is the outright purchase of one firm by another .
- A merger is the pooling of interests to combine two or more firms into one.
• Purpose of Acquisitions
- Acquiring another business can fulfill several of a company’s needs, such as:
o Expanding its product line.
o Gaining access to distribution channels.
o Achieving competitive economies of scale.
Licensing
• 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.
Strategic Alliances
• 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.
- Participating in strategic alliances can boost a firm’s rate of product innovation and foreign sales.
Joint Ventures
Joint Venture
- 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.
Three Things a Business Can Do to Prepare
1. Appreciate the Nature of Business Growth
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.
2. 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’s its presented, it can easily stray into areas where its at a disadvantage.
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.
Stages of Growth
• 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’s important to document what works and what doesn’t work during this stage.
• 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 “in the business.”
- Increased formalization must take place, and the business has to start developing policies and procedures.
• 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 has the experience and the ability to take the business further.
• Maturity
- A business enters the maturity stage when its growth stalls.
- 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 breath 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.
• 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.
Managerial Capacity Problem
• 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 firm’s are not always prepared or able to grow, because of limited “managerial capacity."
• A Firm’s Administrative Framework
- A firm’s administrative framework consists of two kinds of services that are important to firm growth.
o 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.
o New product and service ideas require substantial managerial services (or managerial capacity) to be successfully implemented.
o 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.
o 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.
o 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.
• Additional Challenges
- As a firm grows, it is faced with the dual challenges of adverse selection and moral hazard.
o 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.
o 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.
Strategies for Firm Growth (Session 24)
Internal and External Growth Strategies
Internal Growth Strategies
Involve efforts taken within the firm itself, such as new product development, other product related strategies, and international expansion.
External Growth Strategies
Rely on establishing relationships with third parties, such as mergers, acquisitions, strategic alliances, joint ventures, licensing, and franchising.
Rely on establishing relationships with third parties, such as mergers, acquisitions, strategic alliances, joint ventures, licensing, and franchising.
Strategies Internal Growth
New Product Development
New Product Developments
- Involves the creation and sale of new products (or services) as a means of increasing firm revenues.
- In many fast-paced industries, new product development is a competitive necessity.
o For example, the average product life cycle in the computer software industry is 14 to 16 months.
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.
Common Reasons That New Products Fail
- Inadequate feasibility analysis.
- Overestimation of market potential.
- Bad timing.
- Inadequate advertising and promotions.
- Poor service.
International Expansion
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.
• Foreign-Market Entry Strategies
- Exporting
o Producing a product at home and shipping it to a foreign market.
- Licensing
o 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
o Involves the establishment of a firm that is jointly owned by two or more otherwise independent firms.
Fuji-Xerox is a joint venture between an American and a Japanese company.
- Franchising
o 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
o 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
o A company that has made the decision to manufacture a product in a foreign country and establish a permanent presence.
External Growth Strategies
Mergers and Acquisitions
• Mergers and Acquisitions
- An acquisition is the outright purchase of one firm by another .
- A merger is the pooling of interests to combine two or more firms into one.
• Purpose of Acquisitions
- Acquiring another business can fulfill several of a company’s needs, such as:
o Expanding its product line.
o Gaining access to distribution channels.
o Achieving competitive economies of scale.
Licensing
• 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.
Strategic Alliances
• 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.
- Participating in strategic alliances can boost a firm’s rate of product innovation and foreign sales.
Joint Ventures
Joint Venture
- 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.
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