BUSI 1052: Managing Innovation and Entrepreneurship Value Creation: Harvesting the Business centre for entrepreneurship ©2003

Value Creation: Harvesting the Business Entrepreneurial organisations compete with each other using generic strategies. These differ in the way they wish to offer new value to the marketplace. Typically, the entrepreneur selects the product-market domain in which to establish their venture: Products Markets Resources (Wickham, 2001: page )

Value Creation: Harvesting the Business Entrepreneurial entry strategies to offer value to the marketplace Products Markets Products Markets FOCUS ENTRY -addressing a single well-defined product- market domain. Resources (Wickham, 2001: page )

Value Creation  Entrepreneurial entry strategies to offer value to the marketplace Products Markets Products Markets Resources PRODUCT SPREAD -offering a wide range of products to a single well- defined market CUSTOMER SPREAD -delivering a single or narrow range of products to a wide base of customers

Value Creation  Entrepreneurial entry strategies to offer value to the marketplace Products Markets ADJACENCY - Offering a wide range of products to a broad customer base. All product-market segments are adjacent in that the characterising features of each segment are continuous or can be related to each other Products Markets SCATTER - A variety of different products are offered to a variety of different customers. The segments are not adjacent.

Value Creation Ansoff (Corporate Strategy, 1965)… “..any expansion strategy must involve a decision as to whether to base expansion on existing products or to develop new ones, and whether to rely on established market presence or to enter new markets”.

Value Creation Expansion from any base can be achieved by: 1. Increasing core market share 2. Launching new products 3. Entering new markets, and by 4. Acquiring established businesses Wickham, 2001 (Chapter 21)

Value Creation Strategies for expansion Sales growth is:  Increase in volume of the venture’s sales  Increase in market share Hence, Sales growth = Overall market growth + increase in share of the market

Value Creation  ACQUISITION An entrepreneur grow the venture by using retained profits or investor funds. Investment of these funds within the Ansoff Matrix’ “low and medium risk strategies” is organic growth. Acquiring other businesses in their entirety and adding them on to the venture is growth by acquisition.

Value Creation  TYPES of ACQUISITION Customers The Venture Suppliers Competitors Unrelated businesses Horizontal integration Lateral integration Backward vertical integration Forward vertical integration Industry Value-addition chain

After value creation Harvesting the Business  What is harvesting? It is the sale of some or all of the equity of a company. A number of possible “exit routes”: 1. A trade sale to another company 2. The sale of the investment to another corporate investor such as a venture capitalist 3. The sale of equity to another individual – such as a “business angel” or a fellow shareholder – or through management busy-out or buy-in 4. The sale of equity to “the public” through an IPO (initial public offering) on a stock exchange.

Harvesting the Business For the entrepreneur or venture capitalist: - find the right time to sell - decide on the exit route - agree a price with the purchaser However, in a private company, there may be restrictions on the ability to sell: e.g.  Owner-manager may be required to offer to the existing shareholders (who cannot/will not buy)  May only be a minority shareholder without power to sell the entire venture  Minority shareholding may be worthless to potential buyer although an agreed, and binding, exit mechanism with pricing formula may already exist.

Harvesting the Business  The decision to sell is mostly related to price you expect to receive for your equity – it’s a lifestyle decision: Hence, 1. What is the company worth? 2. Will this give me sufficient capital to enjoy the rest of my life in the manner to which I wish to become accustomed? (Depends partly on your pension plan and how you enjoys the proceeds of the sale) THIS IS DEPENDENT ON TWO FACTORS:  The size and profitable track record of the company  The state of the market These decisions cannot be made overnight, nor without advice. You will also need a valuation (yours may not agree with that of the buyer’s).

Harvesting the Business Hence, questions for the entrepreneur:  Do I wish to realize all or only part of my investment?  Do I wish to continue to be associated with the company after the sale?  What form of payment do I want from the sale –equity in another company, cash on deferred terms. A pension, a consultancy retainer?  Which exit route will give me the greatest returns?  If I decide to float, what will it cost and who will help me?  If I decide to seek a trade sale or sale to a third party, how do I find a buyer?

References  P.A. Wickham, Strategic Entrepreneurship: A Decision-Making Approach to New Venture Creation and Management 2nd edition (Prentice Hall, 2001), chap. 11, P , chap, 21.  S.Birley and D.Muzyka, Mastering Entrepreneurship: Your Single-Source Guide to Becoming a Master of Entrepreneurship (Prentice Hall, 2000), Chapter10: Harvesting