ENTREPRENEURSHIP

March 10, 2011

Maastricht School

of Management

Master Class

Marius Ghenea

Senior Adjunct Lecturer

AGENDA

Strategies for Growth

The Implications of Growth

Managing Growth

Pressure on Entrepreneurs/Managers and Time Management

Resources for Growth

Projects for Entrepreneurial/Intrapreneurial Education

The Learning Objectives

To understand where to look for growth opportunities after start-up

To understand the main challenges of business growth and how to manage them

To recognize that different entrepreneurs (or shareholders/stakeholders) want different things for their businesses and to understand how this impacts growth

To understand the possibilities to achieve growth through franchising, JV, M&A, LBO

Growth Strategies

Penetration Strategies

Growing the company’s existing product in the existing market

Encouraging existing customers to buy more of the company’s current products

Marketshare increase, if any, comes from direct competitors

This strategy aims to better exploit the initial market entry

Market Development Strategies

Selling existing products to new groups of customers

New Geographical Market

New Demographic Market

New Product Use

Businesses by geo-Market

Proximity Business (or “Neighborhood Business”): customers are typically in walking distance, model is “pull” (e.g. convenience store, shoe repair, drugstore, small supermarket)

Large Area Business: customers are within driving distance, model “push&pull” (e.g. large supermarket or hypermarket, DIY, sometimes a car dealer, if the network of car dealerships is not too crowded)

Long Distance Business: customers are everywhere and they come to us remotely, model “push&pull” (mail order, catalogue sales, telephone order, TV shopping, Internet, eBay reseller)

Direct Model Business: customers are everywhere and we go to them with the salesmen model, “push” (e.g. cosmetics or home appliances sold directly to consumers)

Product Development Strategies

Developing and selling new products to existing customers

Capitalizes on existing reputation and brand of the company

Uses the experience with the existing group of customers

Benefits of the existing distribution system, logistics, marketing etc.

Diversification Strategies

Growing by selling a new product to a new market

In manufacturing, diversification opportunities come from integration

Bacward Integration, Forward Integration, Horizontal Integration

These concepts refer to the value-added chain of production, but they also apply to service or trade-related businesses

Diversification through Integration

The Trick about Diversification

No matter if it goes forward, backward or horizontally, the new product or products should be somehow related to the existing ones

Synergies come from using the raw-material in the existing process (backward), manufacturing the finished product or selling it directly (forward) or finally manufacturing a new product that is complementary and could be sold together with the existing one (horizontal)

Again, these principles generally also apply to distribution businesses or service-related businesses

If the new product is completely unrelated, this is probably just based on ego and is most likely to be a failure

Exercise: Growth Strategies

Implications of Growth

Growth makes a firm bigger

BIGGER = BETTER?

Economies of scale in operations

More attractive to suppliers

More credible for customers, banks, stakeholders

More power of the entrepreneur to influence company performance!

But there is also growing pressure resulting in challenges

CHANGE CHALLENGE

Implications of Growth

Pressure on Financial Resources

Pressure on HR and Organization

Pressure on Entrepreneurs

Growth means pressure!

Overcoming Financial Pressure

Growth Require the Acquisition of New Resources: expensive!

Effective Financial Control: most important is Cash-Flow Management!

Good Inventory and Asset Management

Maintaining Good Records

Overcoming Financial Pressure

Managing Cash-Flow

Managing Inventory

Managing Fixed Assets

Managing Cost and Profits

Managing Taxes

Record Keeping

Common Mistakes (Financial)

No Cash-Flow projections or control

Lack of understanding in terms of ageing inventory (slow-moving, non-moving, out-of-stock!)

Confusing assets for equity!

Taxes: entrepreneurs either pay too much taxes (due to lack of tax structure) or too little taxes (evasion!)

The book-keeping software has no management reports, no real-time analysis, the entrepreneurs sees formal results 25 days after the month is over (too late!)

Overcoming HR Pressure

Every entrepreneur/manager says “if only I had more time!”, but few act on this...

There are dual pressures coming from the team, one is the pure HR problem, the other is the organizational issue

An entrepreneur is initially the “de facto” HR Manager of the company (advantage for entrepreneurial teams, both in terms of allocation and in terms of competence)

The company culture grows (but could also CHANGE) with the growth of the business

Overcoming HR Pressure

Create a participative management style

Grow and maintain the culture!

Establish and foster team-spirit

Communicate with employees

Provide feedback

Delegate responsibility to others

Provide training, coaching mentoring

Overcoming Entrepreneurial

Pressure

Time of an entrepreneur/manager: the scarcest resource!

Improvements possible through time management

Results of better time-management:

1. increased productivity

2. increased job satisfaction

3. improved relationships

4. reduced time anxiety

5. reduced tension

6. better health

Time management

Basic Principles, Time Management

Principle of Desire: recognizing the need to change personal attitudes for time allocation

Principle of Effectiveness: focus on the most important issues!

Principle of Analysis: understand the current structure of the time allocation and why/where this is inefficient

Principle of Team-Work: understanding of the fact that most of our time is taken up by others and the need to delegate

Principle of Prioritized Planning: the categorization of tasks by their degree of importance and urgency and a corresponding allocation of time

Principle of Reanalysis: periodic review of time allocation, to make sure priorities have not changed or shifted

Time Management Chart

urgency

imp

ort

an

ce

START PLANNING ACT ON IT!

ELIMINATE DELEGATE

Common Mistakes (HR)

The “I know better” attitude of some entrepreneurs/managers (and the refusal to use third-party professionals in solving various HR issues)

Inadequate time-management (e.g. he’s there all the time, but he is not prioritizing)

Nepotism (intriguingly, this seems to be one of the BIGGEST issues in entrepreneurial organizations, but corporations are not much different!)

No clear company culture, allowing any type of employee to join, and creating later organizational clashes

The false “family spirit”: the entrepreneur pays lower salaries to employees, but treat them as family members to balance the low wages

Growth by Entrepreneurial type

Growth by Entrepreneurial type

There is no “right” or “wrong” way about growing one’s business, it all depends on the

entrepreneur(s) and his/her/their vision

Growth, however, is in the human nature, so it is also deeply rooted in any business venture

Franchising

Joint Ventures

Acquisitions

Mergers

Leveraged buyouts

Accessing External Resources for

Growth

Franchising

An arrangement whereby a franchisor gives exclusive rights of local distribution to a franchisee in return for royalties and compliance to

standards

The franchisee may acquire certain things with a franchise agreement:

Franchising, Pros and Cons

The Franchisee typically gets product acceptance, management expertise, and increase operating control

The Franchisee reduces capital requirements and market knowledge requirements.

The Franchisor reduces the expansion risk and the capital requirements for this expansion

The Franchisor can achieve cost savings through economies of scale

The Franchisee depends too much on Franchisor’s continued success

The Franchisee cannot control location, advertising or services

There is no clear value in some franchises, and/or they start to expand too early

Franchising, Types of

Dealership (e.g. car dealerships, but also most of the retail franchising)

The Method Franchise, offering a brand-name, an image and a method of doing business (e.g. McDonalds)

The Service Franchise: typically works as an affiliation (the business already existed and then applies to become a franchise member, e.g. in Real Estate agencies)

Franchising Trends

Good Health franchises (bio, fresh-juice, etc.)

Time saving or convenience (home delivery services, convenience stores)

Health Care (franchised medical clinics)

The new baby-boom (edutainment for kids, playgrounds, etc.)

Joint Ventures

Two or more companies forming a new separate entity for a specific business purpose

Private sector joint ventures (most common)

Industry-University joint ventures

International joint ventures

Problem: business objectives can be quite different, this could result in problems of direction and growth of the new entity

Joint ventures should be signed for increased profitability, not for lower profitability

Success Factors in Joint Ventures

The chemistry of the two (or more) parties: an honest initial assessment is necessary!

The degree of symmetry between partners (it is usually good that both partners bring symmetric value to the table)

Reasonable expectations (don’t expect this to be a cure-all for other company problems)

The timing must be right (the business environment is dynamic, so the right time is needed for a joint venture to succeed)

The joint venture is not a panacea for expanding entrepreneurial venture, but rather one of many options to supplement resources and responding quicker to challenges and opportunities...

Acquisition = purchasing all or part of a

company

Acquisition as seen from the acquirer

is a resource for growth

Acquisition as seen from the acquired

is an exit route

Acquisitions

PROS

Established business (instead of starting from scratch)

Location (the business is there already)

Cost (normally, it should be lower cost compared to other organic methods of expansion,

or else the acquisition is difficult to justify)

Existing employees (an asset, if they can work in the new environment, depending on

company cultures)

More opportunity to be creative (spending time on creativity rather than on creating the

business and the processes)

Acquisitions, Pros and Cons

CONS

Marginal success record (most ventures that are for sale only have marginal or erratic

track record)

Overconfidence in ability (buying an established business creates the impression that

“they know what they are doing”, and maybe they just don’t)

Key employee loss (especially if they cannot work in the new environment, because of

discrepant company cultures)

Overvaluation (depends on the due-diligence and the negotiation process)

Is the whole greater than the sum of the parts?

Merger = the joining of two or more company

Reasons for mergers:

Mergers

M&A’s, golden rules

1 + 1 ≥ 2 on the revenue side

1 + 1 < 2 on the cost side

Conclusions, Resources for Growth

ANY partnership (franchise, JV, M&A, etc.) should be done for “spreadsheet” reasons and for no other reason!

Too often shareholders fall into the “we need a partnership” trap: they see a problem they cannot solve, so they hope a merger or a JV will solve that problem

1 + 1 rarely = 2 or more on the top line!

1 + 1 rarely = less than 2 on the cost line!

These equations need to be considered in any merger or acquisition, but also in other forms of accessing external resources for growth, before going into such a deal

LBO’s, Leveraged Buy Outs: purchasing of an

existing company by an entrepreneur or an employee

group

MBO, Management Buy Out: when the buyers are

the management team of the company

Most of the funds in an LBO comes from external

financing (banks)

The idea is that the buyers believe they could run

the company better and deliver better results

Other resources for growth

(or Google search)

Profile: www.ghenea.ro

The new book on entrepreneurship

SOCIAL ACTIVITIES

TEACHING

ACTIVITIES

TEACHING

ACTIVITIES

The course I teach for the

Executive MBA program of

Maastricht School of

Management is:

Innovation and

New Business Ventures

Basically, this is a course

on Entrepreneurship and

Intrapreneurship (so it is

for both entrepreneurs and

corporate managers)

Q&A