ENTREPRENEURSHIP March 10, 2011 Maastricht School of Management Master Class Marius Ghenea Senior Adjunct Lecturer
AGENDA Strategies for Growth The Implications of Growth Managing Growth Pressure on Entrepreneurs/Managers and Time Management Resources for Growth Projects for Entrepreneurial/Intrapreneurial Education
The Learning Objectives To understand where to look for growth opportunities after start-up To understand the main challenges of business growth and how to manage them To recognize that different entrepreneurs (or shareholders/stakeholders) want different things for their businesses and to understand how this impacts growth To understand the possibilities to achieve growth through franchising, JV, M&A, LBO
Penetration Strategies Growing the company’s existing product in the existing market Encouraging existing customers to buy more of the company’s current products Marketshare increase, if any, comes from direct competitors This strategy aims to better exploit the initial market entry
Market Development Strategies Selling existing products to new groups of customers New Geographical Market New Demographic Market New Product Use
Businesses by geo-Market Proximity Business (or “Neighborhood Business”): customers are typically in walking distance, model is “pull” (e.g. convenience store, shoe repair, drugstore, small supermarket) Large Area Business: customers are within driving distance, model “push&pull” (e.g. large supermarket or hypermarket, DIY, sometimes a car dealer, if the network of car dealerships is not too crowded) Long Distance Business: customers are everywhere and they come to us remotely, model “push&pull” (mail order, catalogue sales, telephone order, TV shopping, Internet, eBay reseller) Direct Model Business: customers are everywhere and we go to them with the salesmen model, “push” (e.g. cosmetics or home appliances sold directly to consumers)
Product Development Strategies Developing and selling new products to existing customers Capitalizes on existing reputation and brand of the company Uses the experience with the existing group of customers Benefits of the existing distribution system, logistics, marketing etc.
Diversification Strategies Growing by selling a new product to a new market In manufacturing, diversification opportunities come from integration Bacward Integration, Forward Integration, Horizontal Integration These concepts refer to the value-added chain of production, but they also apply to service or trade-related businesses
The Trick about Diversification No matter if it goes forward, backward or horizontally, the new product or products should be somehow related to the existing ones Synergies come from using the raw-material in the existing process (backward), manufacturing the finished product or selling it directly (forward) or finally manufacturing a new product that is complementary and could be sold together with the existing one (horizontal) Again, these principles generally also apply to distribution businesses or service-related businesses If the new product is completely unrelated, this is probably just based on ego and is most likely to be a failure
Implications of Growth Growth makes a firm bigger BIGGER = BETTER? Economies of scale in operations More attractive to suppliers More credible for customers, banks, stakeholders More power of the entrepreneur to influence company performance! But there is also growing pressure resulting in challenges CHANGE CHALLENGE
Implications of Growth Pressure on Financial Resources Pressure on HR and Organization Pressure on EntrepreneursGrowth means pressure!
Overcoming Financial Pressure Growth Require the Acquisition of New Resources: expensive! Effective Financial Control: most important is Cash-Flow Management! Good Inventory and Asset Management Maintaining Good Records
Common Mistakes (Financial) No Cash-Flow projections or control Lack of understanding in terms of ageing inventory (slow-moving, non-moving, out-of-stock!) Confusing assets for equity! Taxes: entrepreneurs either pay too much taxes (due to lack of tax structure) or too little taxes (evasion!) The book-keeping software has no management reports, no real-time analysis, the entrepreneurs sees formal results 25 days after the month is over (too late!)
Overcoming HR Pressure Every entrepreneur/manager says “if only I had more time!”, but few act on this... There are dual pressures coming from the team, one is the pure HR problem, the other is the organizational issue An entrepreneur is initially the “de facto” HR Manager of the company (advantage for entrepreneurial teams, both in terms of allocation and in terms of competence) The company culture grows (but could also CHANGE) with the growth of the business
Overcoming HR Pressure Create a participative management style Grow and maintain the culture! Establish and foster team-spirit Communicate with employees Provide feedback Delegate responsibility to others Provide training, coaching mentoring
Overcoming Entrepreneurial Pressure Time of an entrepreneur/manager: the scarcest resource! Improvements possible through time management Results of better time-management:1. increased productivity2. increased job satisfaction3. improved relationships4. reduced time anxiety5. reduced tension6. better health
Basic Principles, Time Management Principle of Desire: recognizing the need to change personal attitudes for time allocation Principle of Effectiveness: focus on the most important issues! Principle of Analysis: understand the current structure of the time allocation and why/where this is inefficient Principle of Team-Work: understanding of the fact that most of our time is taken up by others and the need to delegate Principle of Prioritized Planning: the categorization of tasks by their degree of importance and urgency and a corresponding allocation of time Principle of Reanalysis: periodic review of time allocation, to make sure priorities have not changed or shifted
Time Management Chart importanceSTART PLANNING ACT ON IT! urgency ELIMINATE DELEGATE
Common Mistakes (HR) The “I know better” attitude of some entrepreneurs/managers (and the refusal to use third-party professionals in solving various HR issues) Inadequate time-management (e.g. he’s there all the time, but he is not prioritizing) Nepotism (intriguingly, this seems to be one of the BIGGEST issues in entrepreneurial organizations, but corporations are not much different!) No clear company culture, allowing any type of employee to join, and creating later organizational clashes The false “family spirit”: the entrepreneur pays lower salaries to employees, but treat them as family members to balance the low wages
Growth by Entrepreneurial typeThere is no “right” or “wrong” way about growing one’s business, it all depends on the entrepreneur(s) and his/her/their visionGrowth, however, is in the human nature, so it is also deeply rooted in any business venture
FranchisingAn arrangement whereby a franchisor gives exclusive rights of local distribution to a franchisee in return for royalties and compliance to standardsThe franchisee may acquire certain things with a franchise agreement:
Franchising, Pros and Cons The Franchisee typically gets product acceptance, management expertise, and increase operating control The Franchisee reduces capital requirements and market knowledge requirements. The Franchisor reduces the expansion risk and the capital requirements for this expansion The Franchisor can achieve cost savings through economies of scale The Franchisee depends too much on Franchisor’s continued success The Franchisee cannot control location, advertising or services There is no clear value in some franchises, and/or they start to expand too early
Franchising, Types of Dealership (e.g. car dealerships, but also most of the retail franchising) The Method Franchise, offering a brand-name, an image and a method of doing business (e.g. McDonalds) The Service Franchise: typically works as an affiliation (the business already existed and then applies to become a franchise member, e.g. in Real Estate agencies)
Franchising Trends Good Health franchises (bio, fresh-juice, etc.) Time saving or convenience (home delivery services, convenience stores) Health Care (franchised medical clinics) The new baby-boom (edutainment for kids, playgrounds, etc.)
Joint Ventures Two or more companies forming a new separate entity for a specific business purpose Private sector joint ventures (most common) Industry-University joint ventures International joint ventures Problem: business objectives can be quite different, this could result in problems of direction and growth of the new entity Joint ventures should be signed for increased profitability, not for lower profitability
Success Factors in Joint Ventures The chemistry of the two (or more) parties: an honest initial assessment is necessary! The degree of symmetry between partners (it is usually good that both partners bring symmetric value to the table) Reasonable expectations (don’t expect this to be a cure-all for other company problems) The timing must be right (the business environment is dynamic, so the right time is needed for a joint venture to succeed) The joint venture is not a panacea for expanding entrepreneurial venture, but rather one of many options to supplement resources and responding quicker to challenges and opportunities...
Acquisitions Acquisition = purchasing all or part of acompany Acquisition as seen from the acquireris a resource for growth Acquisition as seen from the acquiredis an exit route
Acquisitions, Pros and ConsPROS Established business (instead of starting from scratch) Location (the business is there already) Cost (normally, it should be lower cost compared to other organic methods of expansion,or else the acquisition is difficult to justify) Existing employees (an asset, if they can work in the new environment, depending oncompany cultures) More opportunity to be creative (spending time on creativity rather than on creating thebusiness and the processes)CONS Marginal success record (most ventures that are for sale only have marginal or erratictrack record) Overconfidence in ability (buying an established business creates the impression that“they know what they are doing”, and maybe they just don’t) Key employee loss (especially if they cannot work in the new environment, because ofdiscrepant company cultures) Overvaluation (depends on the due-diligence and the negotiation process) Is the whole greater than the sum of the parts?
Mergers Merger = the joining of two or more companyReasons for mergers:
M&A’s, golden rules1 + 1 ≥ 2 on the revenue side1 + 1 < 2 on the cost side
Conclusions, Resources for Growth ANY partnership (franchise, JV, M&A, etc.) should be done for “spreadsheet” reasons and for no other reason! Too often shareholders fall into the “we need a partnership” trap: they see a problem they cannot solve, so they hope a merger or a JV will solve that problem 1 + 1 rarely = 2 or more on the top line! 1 + 1 rarely = less than 2 on the cost line! These equations need to be considered in any merger or acquisition, but also in other forms of accessing external resources for growth, before going into such a deal
Other resources for growth LBO’s, Leveraged Buy Outs: purchasing of anexisting company by an entrepreneur or an employeegroup MBO, Management Buy Out: when the buyers arethe management team of the company Most of the funds in an LBO comes from externalfinancing (banks) The idea is that the buyers believe they could runthe company better and deliver better results
TEACHING ACTIVITIES The course I teach for theExecutive MBA program ofMaastricht School ofManagement is: Innovation and New Business Ventures Basically, this is a courseon Entrepreneurship andIntrapreneurship (so it isfor both entrepreneurs andcorporate managers)