Addressing small firm Chapter

growth 9
 PERFORMANCE OBJECTIVES
AFTER THIS LECTURE, YOU SHOULD BE ABLE TO COMPLETE THE FOLLOWING PERFORMANCE OBJECTIVES

1. Explain the difference between internal growth strategies and external growth
strategies.
2. Describe how firms can properly prepare for growth.
3. Discuss the most common reasons firms pursue growth.
4. Explain the importance of knowing the stages of growth.
5. Describe the most important factors for firms to focus on during each stage of
growth.
6. Discuss the day-to-day challenges of growing a firm.
7. Explain why “cash flow management” and “quality control” can be a challenge
for growing a firm.
8. Explain “licensing” and how it can be used as a growth strategy.
9. Explain “strategic alliances” and describe the difference between
technological alliances and marketing alliances.
10. Explain “joint ventures” and describe the difference between a scale joint
venture and a link joint venture. 1–2
WHY SHOULD A FIRM
GROW?
SHOULD EVERY FIRM
PURSUE GROWTH?

A–3
 WHY GROWING?

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.
 Initial success doesn’t imply subsequent success.
Stay Committed to a Core Strategy
 It is important not to lose sight of the core strategy while growing.
 If a business “distracts” from its core strategy, or starts pursuing every
opportunity for growth that it’s presented, it can easily stray into areas where
it’s at a disadvantage.

1–4
 WHY GROWING?

Reason for Growth Explanation

Economies of Occur when increasing production lowers

scale the average cost of each unit produced.

Economies of Occur when the scope (or range) of a firm’s

scope operations creates efficiencies.

1–5
 WHY GROWING?

Reason for Growth Explanation

Occurs when a firm holds the number one or
Market
the number two position in an industry or
Leadership
niche market in terms of sales volume.

Influence, Larger businesses usually have more

Power, and influence and power than smaller firms.
Survivability

1–6
 WHY GROWING?

Reason for Growth Explanation

Accommodate
Sometimes firms are compelled to grow to
the Growth of
accommodate the growth of a key customer.
Key Customers

Attract and Growth is a firm’s primary mechanism to

Retain Talented generate promotional opportunities for
Employees employees.
… BUT REMEMBER MACAULAY KULKIN

Growing up is hard to do!!

… BUT REMEMBER MACAULAY KULKIN

A–9
 THE BIG PROBLEM

Transitioning from a “micro-business” (<12 empl. < 1M sales) …

to a middle-sized company
Entrepreneurial organizations need:
1. To maintain their entrepreneurial characteristics as they
grow
 Ability to encourage innovation & creativity
 Avoiding risks, keep flexible cost structures
 Exploiting market opportunities
2. At the same time, they need to become professional
organizations
 Professional control systems
 Professional accounting and cost control
 Quality policy
10
 “SUCH POLISH FOR ONE SO YOUNG”
 Remember the case study
 The company
 How did it get started?
 What drives growth?
 How are they handling rapid growth?
 Which were the basic problems?
 MANAGING RAPID GROWTH

Growth can be too much of a good thing.

 What kind of problems??:
1. New limits on the creativity of entrepreneurs
2. Confusion, resentment over roles, responsibilities.
 Entrepreneurs are forced to become managers, not
necesarily what they want (Vittorio & Luccino)
 Entrepreneurs: risk taking, creative, innovative
 Managers: organizational abilities
§ Need for specialization and the problems that it creates
for collaboration

12
 WHAT HAPPENS TO THE COMPANIES IN RAPID
GROWTH

1. Sales outpace manufacturing capacity

2. As more capacity is added, systems can not keep
up
3. Cash Burn rates accelerate & Cash collections lag
4. Opportunity/capital overload
 How much capital to take.
 Decisions need to be made about where to
compete

13
 COMPLEXITIES OF FAST GROWTH

Personnel Management
 Early years
 Time management
 Setting goals
 Measuring performance
 Direct supervision
 As business grows…
 Finding, retaining, motivating employees
 Move from direct to indirect management
 Do not micromanage
 COMPLEXITIES OF FAST GROWTH

Accounting issues:
 Company cannot pay short-term costs incurred in pursuit
of growth – you need cash!!
 It becomes difficult Manage accounts receivables to
collect funds in a timely manner
 Black money? Then you cannot:
 Sell the company
 Ask for funding (to banks, investors…)
 Make proper investment decisions
 …and you will be robbed!!!
 THE TRANSITION FROM ENTREPRENEUR TO
MANAGER
Balancing the focus (entrepreneur and manager)
 Administrative point of view
 What opportunity is appropriate?
 What resources do I control?
 What structure determines our organization’s relationship to its market?
 How can I minimize the impact of others on my ability to perform?
 Entrepreneurial point of view
 Where is the opportunity?
 How do I capitalize on it?
 What resources do I need?
 How do I gain control over them?
 What structure is best? Outside managerial assistance
 “Quasi-boards” are composed of experts who volunteer in an advisory capacity
to the owner

1–16
 KEY ELEMENTS OF GROWTH

 Keeping control of the quality and capacity of the company.

 Responsibility & effective delegation
 The delegation process entails three steps
1. Assigning specific duties
2. Granting authority to carry out these duties
3. Creating the obligation of responsibility for necessary action
4. Implementing a simple but effective control system
 Tolerance of failure. Important to differentiate:
 Moral failure  punishment
 Personal failure  educate constructively
 Uncontrollable failure  acceptance
 Staying Flexible (the company could stop growing)
 Managing Changes

1–17
 WHAT GROWTH
STRATEGIES DO EXIST?

A–18
INTERNAL AND EXTERNAL GROWTH
STRATEGIES

1–19
 WHICH ARE THE
ADVANTAGES AND
DISADVANTAGES OF
INTERNAL GROWTH
STRATEGIES?

A–20
 ADVANTAGES AND DISADVANTAGES OF
INTERNAL GROWTH STRATEGIES
Advantages
• Incremental, even-paced growth
• Provides maximum control
• Preserves organizational culture
• Encourages internal entrepreneurship
• Allows firms to promote from within
Disadvantages
• Slow form of growth
• Need to develop new resources
• Investment in a failed internal growth
strategy can be difficult to recoup
• Adds to industry capacity
1–21
 NEW PRODUCT DEVELOPMENT

New Product Development

 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.
 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

1–22
 OTHER PRODUCT-RELATED STRATEGIES

Product Strategy Description

Improving an Often a business can increase its

Existing Product or revenues by simply increasing the
Service quality of an existing product or service.

Increasing Increasing the sales of a product or service

Market through greater marketing efforts or through
Penetration increased production capacity.

1–23
 OTHER PRODUCT-RELATED STRATEGIES

Product Strategy Description

Extending Product Making additional variations of a

Lines product so it will appeal to a broader
range of clientele

Geographic Growth via expanding to additional

Expansion geographic locations

1–24
OTHER PRODUCT-RELATED STRATEGIES

1–25
 EXTERNAL GROWTH STRATEGIES

Mergers and
Licensing
Acquisitions

Strategic Alliances
Franchising
and Joint Ventures

1–26
 WHICH ARE THE
ADVANTAGES AND
DISADVANTAGES OF
EXTERNAL GROWTH
STRATEGIES?

A–27
 ADVANTAGES AND DISADVANTAGES OF
EXTERNAL GROWTH STRATEGIES
Advantages Disadvantages

• Reducing competition • Incompatibility of top management

• Gaining access to proprietary • Clash of corporate cultures

products or services • Operational problems

• Gaining access to new products • Increased business complexity
and markets • Loss of organizational flexibility
• Obtaining access to technical expertise
• Antitrust implications
• Gaining access to an established
brand name
• Economies of scale
• Diversification of business risk 1–28
 EXTERNAL EXPANSION

 Joint Ventures
 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
 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).
 Wholly Owned Subsidiary
 A company that has made the decision to manufacture a product in a
foreign country and establish a permanent presence.

1–29
 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.

1–30
 LICENSING

Type of Licensing Description

Technology The licensing of proprietary technology

Licensing that the licensor typically controls by
virtue of a utility patent.

Merchandise The licensing of a recognized trademark or

and Character brand that the licensor typically controls
Licensing through a trademark or copyright.

1–31
 LICENSING

• Character licensing, for example, represented a major source of revenue

for Pixar in its early years.
• Popular characters, like Marlin and Dory from Finding Nemo, adorn
products as diverse as dinner plates and sleeping bags

1–32
 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.

1–33
 JOINT VENTURES

Joint Ventures
 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.

1–34
 JOINT VENTURES

Type of Joint Description

Venture
Partners collaborate at a single point in
Scale Joint Venture the value chain to gain economies of
scale in production or distribution.

Link Joint Positions of the partners are not

Venture symmetrical, and the partners help each
other access adjacent links in the value
chain.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 14-35 1–35
 ADVANTAGES AND DISADVANTAGES OF PARTICIPATING
IN STRATEGIC ALLIANCES AND JOINT VENTURES

Advantages Disadvantages

• Gain access to a specific resource • Loss of proprietary information

• Economies of scale • Management complexities
• Risk and cost sharing • Financial and organizational risks
• Gain access to a foreign market • Risk becoming dependent on a partner
• Learning • Partial loss of decision autonomy
• Speed to market • Partners’ cultures may clash
• Neutralizing or blocking • Loss of organizational flexibility
competitors
1–36