Entrepreneurship: Successfully Launching New Ventures, 1/e Bruce R. Barringer R. Duane Ireland Chapter 13

Chapter Objectives (1 of 2) Explain the term “sustained growth.” Describe the potential downsides to firm growth. Discuss the six most common reasons firms pursue growth. Explain the advantages of having a scalable business model. Describe the basic idea behind benchmarking and how benchmarking can be used to help a firm execute a successful growth strategy.

Chapter Objectives (2 of 2) Describe the managerial capacity problem and how it inhibits firm growth. Discuss the day-to-day challenges of growing a firm. Identify the three myths that surround firm growth. Identify the most prevalent growth-related firm attributes. Describe the importance of having a commitment to growth.

Growth: A Double-Edge Sword (1 of 2) Nature of Firm Growth Most entrepreneurial firms want to grow. Especially in the short run, growth in sales revenue is an important indicator of an entrepreneurial venture’s potential to survive today and be successful in the future. Growth is exciting and fast-paced and for most firms is an indication of success. Growth, however, is a double-edge sword. It can threaten the stability of a firm’s operations in every area, from human resources to finance, if it is not managed properly.

Growth: A Double-Edge Sword (2 of 2) Nature of Firm Growth (continued) Firms pursue growth deliberately. That is not to say, however, that firms can always choose the pace of their growth. A firm’s pace of growth is the rate at which it is growing on an annual basis. Sometimes firms are forced into a high-growth mode sooner than they would like. For example, when a firm develops a product or service that meets such a pervasive need that orders roll in very quickly, it must adjust quickly or risk faltering.

Reasons for Firm Growth (1 of 2) Reason for Growth Why This Reason May Motivate a Firm to Grow Capturing Economies of Scale Economies of scale occur when increasing production lowers the average cost of each unit produced. A scalable business model is one in which increased revenues cost less to deliver than current revenues, so profit margins increase as sales go up. This is typically found in companies that have large up-front costs but have products with small per-unit variable costs. Executing a Scalable Business Model Many firms work hard to achieve market leadership, to realize economics of scale in production, and be recognized as the brand leader. Market Leadership

Reasons for Firm Growth (2 of 2) Reasons for Firm Growth (continued) Reason for Growth Why This Reason May Motivate a Firm to Grow Larger businesses usually have more influence and power than smaller firms in regard to setting standards for an industry, getting a “foot in the door” with major customers and suppliers, and garnering prestige. Influence, Power, and Survivability Need to Accommodate the Growth of Key Customers Sometimes firms are compelled to grow to accommodate the growth of a key customer. Ability to Attract and Retain Talented Employees Growth is a firm’s primary mechanism to generate promotional opportunities for employees.

Benchmarking Against Successful Growth Firms (1 of 1) The basic idea behind benchmarking is that a firm can improve the quality of an activity by identifying and copying the methods of other firms that have been successful in that area. For example, if a small electronics firm in the Midwest decided to start exporting to Europe, it would be wise to identify other small electronics firms in the Midwest that export to Europe so it could study their methods and experiences. If the firm you try to “benchmark against” is not a direct or indirect competitor, it will usually be willing to help.

Managerial Capacity Problem (1 of 4) In her thoughtful book, The Theory of the Growth of the Firm, Edith T. Penrose argues that 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 is that firms are not always prepared or able to grow, because of limited “managerial capacity."

Managerial Capacity Problem (2 of 4) A Firm’s Administrative Framework A firm’s administrative framework consists of two kinds of services that are important to firm growth. 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. However, the introduction of new product and service ideas requires substantial managerial services (or managerial capacity) to be properly implemented and supervised. This is a complex problem because if a firm has insufficient managerial services to properly implement its entrepreneurial ideas, it can’t grow.

Managerial Capacity Problem (3 of 4) A Firm’s Administrative Framework (continued) Continuation From Previous Slide The reason a firm can’t quickly increase its managerial services to accommodate new product or service ideas, is that it is expensive to hire new employees, and it takes time for new managers to be socialized into the firm’s culture, acquire firm-specific skills and knowledge, and establish trusting relationships with other members of the firm. 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.

Managerial Capacity Problem (4 of 4) Additional Challenges As a firm grows, it is faced with the dual challenges of adverse selection and moral hazard. Adverse selection means that as the number of employees a firm needs increases, it becomes increasingly difficult for it to find the right employees, place them in appropriate positions, and provide adequate supervision. 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.

Typical Challenges of Growing a Firm (1 of 2) Explanation As discussed in Chapters 7 and 9, as a firm grows, it requires an increasing amount of cash to service its customers. Growth usually increases rather than decreases the challenges involved with cash flow management because an increase in sales means that more cash will be flowing in and out of the firm. Cash Flow Management If firm growth comes at the expense of a competitor’s market share, a price war can result. Because a price war typically helps no one but the customer, any growth strategy should consider competitors’ responses and their effect on price stability. Price Stability

Typical Challenges of Growing a Firm (2 of 2) Explanation Firm growth is typically accomplished by an increase in firm activity. This means that a firm must handle more service requests and paperwork and contend with more customers and vendors. If a firm does not increase its resources to manage growth, then product or service quality may decline. Quality Control Capital Constraints Capital constraints are an ever-present problem for growing firms. Growth increases rather than decreases the challenges in this area.

Myths About Growth (1 of 2) Myth 1: Growth Companies are Predominately Technology and Health Care Companies Myth 2: Rapid-Growth Firms Emerge Only In Rapid-Growth Industries Because so much attention has been paid to how quickly some well-known technology and health-care companies have grown, it is easy to get the idea that growth companies are primarily technology and health-care. This is not necessarily the case. Of course, rapid-growth firms do exist in rapid-growth markets, but there are many examples of firms in fairly ordinary industries that have maintained impressive growth rates.

Myths About Growth (2 of 2) Myth 3: To Grow Quickly, You Must Have a First-Mover Advantage As discussed in Chapter 3, a first-mover advantage is not always advantageous. Many firms have grown quickly by capturing a first-mover advantage, but many firms have also growth quickly by entering an industry later on.