©2008 Prentice Hall 13-1 Chapter 13 Entrepreneurship: Successfully Launching New Ventures, 2/e Bruce R. Barringer R. Duane Ireland

©2008 Prentice Hall 13-2 Chapter Objectives (1 of 2) 1.Explain the term sustained growth. 2.Describe the potential downsides to firm growth. 3.Discuss the seven most common reasons firms pursue growth. 4.Explain the advantages of having a scalable business model. 5.Describe the basic idea behind benchmarking and how benchmarking can be used to help a firm execute a successful growth strategy.

©2008 Prentice Hall 13-3 Chapter Objectives (2 of 2) 6.Describe the managerial capacity problem and how it inhibits firm growth. 7.Discuss the day-to-day challenges of growing a firm. 8.Identify the three myths surrounding firm growth. 9.Identify the most prevalent growth-related firm attributes. 10.Describe the importance of having a commitment to growth.

©2008 Prentice Hall 13-4 Growth: A Double-Edged Sword Nature of Firm Growth –Most entrepreneurial firms want to grow. –Growth in sales revenue is exciting and is an important indicator of an entrepreneurial venture’s potential for future success. Double-Edged Sword –Growth, however, is a double-edged sword. –While growth is an indication of a firm’s success, it can threaten the stability of a firm’s operations in every area, from human resources to finances, if not managed properly. –Sometimes, if a firm’s product takes off, it is forced into a rapid-growth mode sooner than it would like.

©2008 Prentice Hall 13-5 Reasons for Firm Growth (1 of 3) Reasons for Firm Growth Reason for GrowthWhy This Reason May Motivate a Firm to Grow Capturing Economies of Scale Capturing Economies of Scope Executing a Scalable Business Model 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 situation is typically found in companies that have large up-front costs but have products with small per-unit variable costs. Economics of scope are similar to economies of scale, expect the advantage comes through the scope (or range) of a firm’s operations rather then from its scale of production.

©2008 Prentice Hall 13-6 Reasons for Firm Growth (2 of 3) Reasons for Firm Growth (continued) Reason for Growth Market Leadership Influence, Power, and Survivability Need to Accommodate the Growth of Key Customers 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. Why This Reason May Motivate a Firm to Grow Many firms work hard to achieve market leadership, to realize economies of scale in production and be recognized as the brand leader. Sometimes firms are compelled to grow to accommodate the growth of a key customer.

©2008 Prentice Hall 13-7 Reasons for Firm Growth (3 of 3) Reasons for Firm Growth (continued) Reason for Growth Ability to Attract and Retain Talented Employees Why This Reason May Motivate a Firm to Grow Growth is a firm’s primary mechanism to generate promotional opportunities for employees.

©2008 Prentice Hall 13-8 Benchmarking Against Successful Growth Firms Benchmarking –By benchmarking, a firm improves 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.

©2008 Prentice Hall 13-9 Challenges of Growth –Although growth has many advantages, it is a challenging and rigorous process. –Firm growth often includes: Raising additional capital. Recruiting new employees. Learning how to supervise a larger organization. Accepting more risk. Increased anxiety for the owners and managers of a firm.

©2008 Prentice Hall Managerial Capacity Problem (1 of 6) Managerial Capacity –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 scenario is that firms are not always prepared or able to grow because of limited “managerial capacity.”

©2008 Prentice Hall Managerial Capacity Problem (2 of 6) 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. New product and service ideas require substantial managerial services (or managerial capacity) to be successfully implemented. 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.

©2008 Prentice Hall Managerial Capacity Problem (3 of 6) A Firm’s Administrative Framework (continued) –Continuation From Previous Slide 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. 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.

©2008 Prentice Hall Managerial Capacity Problem (4 of 6) 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 the firm 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.

©2008 Prentice Hall Managerial Capacity Problem (5 of 6) Basic Model of Firm Growth

©2008 Prentice Hall Managerial Capacity Problem (6 of 6) The Impact of the Managerial Capacity Problem

©2008 Prentice Hall Typical Challenges of Growing a Firm (1 of 2) ChallengeExplanation Cash Flow Management Price Stability 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. 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.

©2008 Prentice Hall Typical Challenges of Growing a Firm (2 of 2) ChallengeExplanation Quality Control Capital Constraints 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. Capital constraints are an ever-present problem for growing firms. Growth increases rather than decreases the challenges in this area.

©2008 Prentice Hall Myths About Growth (1 of 2) Myth 1: Growth Companies are Predominately Technology and Health Care Companies 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. Myth 2: Rapid-Growth Firms Emerge Only In Rapid-Growth Industries 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.

©2008 Prentice Hall 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 grown quickly by entering an industry later on.

©2008 Prentice Hall Attributes of Successful Growth Firms (1 of 2) Growth-Oriented Vision –A growth-oriented vision and/or mission statement clearly communicates to relevant stakeholders the importance of growth to an organization. Commitment to Growth –A drive and commitment to achieve growth is frequently mentioned as a necessary precursor for successful growth. Business Growth Planning –Planning helps a firm organize for growth and address the relevant managerial and strategic issues necessary to maintain growth.

©2008 Prentice Hall Attributes of Successful Growth Firms (2 of 2) Participation in Business Alliances –Business alliances help firms share costs, increase speed to market, gain economies of scale, and gain access to essential resources, knowledge, and foreign markets. Geographic Location that Facilitates Knowledge Absorption –A firm located in a geographic area that is in close proximity to important external sources of knowledge will have better access to the knowledge and will be able to substitute a portion of the externally derived knowledge for more expensive internally generated knowledge.