LECTURES 11, 12 & 13:

LEADING, GROWING AND EXITING THE BUSINESS

I. Leadership Styles
II. Leading and Growing
III. Exiting the Business
 LEADERSHIP STYLES
 3 common typologies:
 Autocratic / democratic / laissez-faire.
 Task-oriented vs. people-oriented.
 Transformational vs. transactional*

 Findings* :
◦ Transactional leaders - able to make followers do
what is exactly needed.

◦ Transformational leaders - can inspire followers

to do more than necessary. Transformational
leaders are visionary and high on autonomy,
creativity and innovativeness.
 Characteristics of transformational leaders:

Have a clear vision

Long-term emphasis
Experimental
Participative
Knowledge-oriented
Integrated Model of Entrepreneurial Leadership

Employee
Behavior
Team cohesiveness
Level of motivation
Knowledge orientation
Leadership Attitude towards mistakes Business
Style R&D activities Performance

Transformational Innovativeness
Transactional Growth
Consumer Market position
etc.
Behavior
Awareness
Desire
Loyalty
Brand attitude
Satisfaction
 LEADING AND GROWING
• The primary function of entrepreneurial leadership is to influence
employee and consumer behaviors.

• Within the organization, entrepreneurs need to keep employees

highly motivated => knowledge of motivation theories is critical!
Note: Please revise the following major motivation theories:
Needs theories (Maslow, McClelland), Goal-setting, Reinforcement,
Adams’ Equity Theory, Vroom’s Expectancy Theory, Job Characteristics
Model

• Entrepreneurs also have to create an organizational culture which

stimulates learning, discovery of new knowledge, and rejuvenation
among employees.
 To influence consumer behavior => key activities are marketing-related, e.g.
customer survey, product development, promotion, after-sales services, etc.

 Deep knowledge about “product life cycles” is important => through

innovation, new PLCs can be generated continuously.
 To grow a business, entrepreneurs have 4 alternative
strategies => again, innovation plays an important
role!
Penetration

 A strategy to grow by encouraging existing customers to

buy more of the firm’s current products.

◦ Marketing can be effective in encouraging frequent repeat

purchases.
◦ Relies on taking market share from competitors and/or
expanding the size of the existing market.
◦ Develop new uses of the same product for existing customers.
◦ E.g. increased health benefits by increasing intake of mineral
water.
 Market Development Strategies
Market Development
 Strategy to grow by selling the firm’s existing
products to new groups of customers.

◦ New geographical market: selling existing

product in new locations.
◦ New demographic market: selling to a
different demographic group.
◦ New product use: selling an existing
product, which may have a new use, to new
groups of buyers.
◦ Examples include franchising and exporting.
Product Development

 A strategy to grow by developing and selling new products

to people who are already purchasing the firm’s existing
products.

 Advantages:
◦ Chance to capitalize on existing distribution systems.
◦ Capitalizing on the corporate reputation firm has with these
customers.
◦ Examples include “piggyback” products and services such as a
car service centre selling spare parts.
Diversification

 A strategy to grow by selling a new product to a new

market.

◦ Backward integration: a step back (up) in the value-added chain

toward the raw materials (e.g. KFC has its own chicken supply).
◦ Forward integration: a step forward (down) on the value-added
chain toward the customers (e.g. BATA sells its shoes through its
own outlets).
◦ Horizontal integration: occurs at the same level of the value-
added chain but simply involves a different, but complementary,
value-added chain (e.g. a farm simultaneously operating a
homestay program).
Challenges Associated with Growth

 Existing financial resources

◦ Firm’s resources can become stretched quite thin.
 Human resources
◦ Problems of employee morale, employee burn out, and an increase
in employee turnover.
 Management/ leadership style
◦ May require change in personal style especially in dealing with
control issues.
 Entrepreneur’s time
◦ Diverting time to several activities can cause problems.
 EXITING THE BUSINESS

 Age/health related factors: old age or ill-health may

force the entrepreneur to retire.

 New blood/direction for the business: the founder

is not able to cope with environmental changes and
needs someone else to take over to provide new
ideas.
 Other interests: Entrepreneur may want to pursue
other personal interests such as philanthropy,
traveling, writing.

 Business failure: the business is closed down due

to prolonged losses.

 Note: “Exiting the business” refers to

entrepreneur’s diminished role as owner/manager
=> it does not necessarily mean the end of the
business.

 Specific reason for exiting the business will

determine choice of exit strategy.
Exit Strategies

• Succession: transfer of ownership/management either to a

family or nonfamily member.

• Harvesting: selling the business to another person or firm.

• Liquidation: filing for bankruptcy either by entrepreneur or

creditors.

• In most exit cases, negotiation skills are crucial.

Succession

 Evaluate potential successors based on their own merit – not on how

much they resemble you!

 Successors are given some ownership in the business through transfer

of shares.

 If family members are involved, make sure they have the required skills
and motivation.

 Provide a transition period for adequate learning.

 Set a date for the handover and stick to it!

 Usually high equity and control are retained.

Harvesting

 Direct sale to outsiders

 Determine value based on goodwill & asset appraisal (may have to
hire a valuation expert to do it).
 Can retain some equity but usually control is lost.

 Employee stock option

 2-3 year plan to sell to employees.
 Create fund for employees to save up for the buy-out.
 Can retain some equity AND control.
Liquidation

 Voluntary vs. involuntary.

◦ Voluntary: entrepreneur’s decision to file for
bankruptcy.
◦ Involuntary: petition of bankruptcy filed by
creditors without consent of entrepreneur.

 Involuntary Requirements
◦ Debts not being paid when due.
◦ Fair value of assets < debts (balance sheet test).
◦ Custodian appointed to act as “go-between” in
debt settlement process e.g. through disposal of
assets.
 REVISION
• Why is employee motivation important to
entrepreneurs? Do you expect
transactional and transformational
leaders to apply different motivation
theories to their employees?

• Discuss how innovation contributes to

business growth. Please provide
appropriate examples in your answer.