small business management mgmt5601 workshop 1 part b: the ... · sbm mgmtg5601 uwa business school...

© Mazzarol 2018 all rights reserved

Small Business Management MGMT5601

Workshop 1 Part B: The Small

Business Lifecycle

Professor Tim Mazzarol – UWA Business School

UWA Business School MBA Program [email protected] MGMTG5601

©Mazzarol 2018 all rights reserved


The importance of small firms


Discussion

Eden Organix Case

• What was the process Valerie Mason-

Robinson went through to get her

business launched?

• How did she screen the opportunity?

• How did she secure the necessary

resources needed?

• What has enabled her business to

survive over the past four years?

• What does this case suggest about the

process of start-up and survival in the

early years of a business?


Growth cycle of small firms


Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

Start-up Survival Growth Expansion Maturity

Size

Age of BusinessYoung Mature

Decline

Contained

Contained

Decline

Fold

FoldCrisis

Crisis

Crisis

Crisis

Source: (Scott and Bruce, 1987)

Source: Scott & Bruce (1987)


Small business development


Launch (Getting Started)

Survival (Making a

Living)

Consolidation (Making a

Profit)

Early Growth (Moving from

the operational to strategic)

Team Building & Delegation

Team Based Development

Source: Hall (1992)


Australian firms births and deaths


Source: ABS (2016)

Over a five year period the “churn” rate of entries and exits was about the

same, the average % change in the total number of firms was minus 0.1%.

Business entries and exits 2011-2015

(100,000)

(50,000)

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2011-12 2012-13 2013-14 2014-15

Entries Exits Change


Survival rates of new firms in Australia


Source: ABS (2016)

The chance of a new start-up business surviving beyond five years is around 50%.

Survival rates of start-ups in Australia, 2011-2015100%

74.3%

59.2%

50.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011-12 2012-13 2013-14 2014-15


The main causes of failure in small

business start-ups


• Underestimation of the start up time

• Under capitalisation

• Overestimation of the market size

• Lack of expertise by management

• Lack of working capital

• Confusion of cash flow over profit

• Wrong location of the business

• No Unique Selling Point

• Recruitment of the wrong people to staff it

• Failure to monitor the business performance

• Failure to retain profits in the business to fund growth


Key success factors


• Management ability



• The existence of a suitable business opportunity

– a product

– a niche, and

– a marketing orientation.

• Good product or service

• Use of outside advisers

• Adequate capital and credit

• Modern business methods


Three types of small firm


Lions:

Growth focused, dynamic & innovative

Seeks Partnerships, new markets &

value added products or service. Is not

price driven.

Mules:

Satisfied with slow steady progress.

Does not embrace change willingly

but can do well in a stable environment.

Usually die in harness.

Turkeys

Lack clear focus & direction.

Price driven, with little interest in new

ideas or external environment.

Generally short life span.


Dynamics of a healthy SME sector


10% Premium SME

70%

Steady State SME

10% vulnerable SME

during recession

10% Cease trading

Market

Development

potential

LIONS

MULES

TURKEYS

Land

of the

Living

Dead

Black

Hole of

Death


Vulnerable businesses

Vulnerable businesses

have:

– Low margin products or

services

– ‘Cut-throat’ competition

– Price sensitive customers

– Localised markets with

limited growth

opportunities

– Low wages for their

owner-managers


The “Deadly Sins” of start-up

• Underestimation of the start-up time

• Undercapitalisation

• Overestimate market size

• Lack of expertise

• Lack of working capital

• Confusing cash with profit

• Wrong location of the business

• No Unique Selling Point

• Recruiting the wrong people

• Going into business with the wrong partners

• Failure to monitor cash flow

• Failure to listen to the customer

• Don’t retain profits for growth


Opportunity screening – 3M AnalysisM

ark

et What is the customer

need?

What is the product/service?

What is the size, structure, growth rate and demand capacity of the market?

What market share is attainable?

What are the barriers to market entry?

Money What is the investment

requirement?

What are the fixed & variable costs?

What is the gross profit margin?

What is the profit after tax?

What is the time to break-even?

What are the cash flow dynamics?

What are the ROI & IRR capital requirements?

Managem

ent Is there potential for

value adding?

How much control is there over resources?

What is the timing?

What is the room for error?

Is there an exit strategy?

Who will comprise the team?

Is there a suitable fit?


The importance of planning

• If you fail to plan you are

planning to fail! Benjamin Franklin

• Having a formal business plan is

not essential to small business

success…

• But

• Owner-managers that have one

are more likely to succeed than

those who don’t.


Small Business Planning and Strategy


Discussion

Small Business Planning and Strategy Video

• What were the key considerations

identified in starting up a new business?

• What was their approach to business

planning?

• How did these successful business

owners manage their finances?

• What was their approach to marketing

and creating customers?


Common problems in strategy development

• Lack of market analysis

• Overestimating the impact of marketing effort

• Underestimating capabilities of competitors

• Limited consideration of the pros & cons of strategic options

• Little analysis of the cross-effects between products and markets

• Problems of conflicting opinions

• Lack of matching of resources to support strategy

• Insufficient and superficial financial analysis

• SWAG - Scientific Wild Arse Guess


Lack of strategic thinking

• Small business owners

suffer from Strategic Myopia

• Short NOT long term vision

• Most owners do not plan

because they:

– lack the time to do this.

– lack the knowledge & skills

to develop a plan.

– are unwilling to share ideas

& strategies.


The value of planning

• Few SME have formal plans.

• Lack of formal planning has been linked to failure.

• Debate continues over the link between formal planning and success.

• Formal planning does appear to be linked to

– enhanced start up survival.

– enhanced growth performance.


The value of planning in entrepreneurial

ventures

• Value of Planning (49 empirical studies)– Small firms gain benefits from planning

– Specific nature of this remains unclear

– Entrepreneur remains the key element

• Past management experience

• Education

• Entrepreneurial orientation

– Most entrepreneurs don’t formally plan

• Formality not linked to performance

• More support for sophisticated planning

• Used by entrepreneurs to mitigate risk

Source: Mazzarol & Reboud (2009)


What does research tell us about the

value of planning?


Source: Brinckmann, Grichnik & Kapsa (2010)

A review of 46 quantitative research

studies found:

• Both young and established firms

benefit from planning.

• Planning is of more value to small

business owners.

• In uncertain environments basic

planning is a better option.

• Focus on “contingency plans” and the

control of resources.

• Planning works best in situations

where quality and quantity of

information is high.

• More formal and sophisticated

planning significantly improves

performance.


Three “Generic” strategic options

Growth

• FOCUS:

• Market opportunity

• Innovation

• Profitability

• NEEDS:

• Visionary leadership

• Strategic thinking

Exit

• FOCUS:

• Preparation for sale

• Succession planning

• Wealth creation

• NEEDS:

• Operational management

Stasis

• FOCUS:

• Consolidation & Efficiency

• Low stress & Profitability

• NEEDS:

• Operational management



Strategy as a Process


Customer Value Proposition

Distinctive Competencies

Processes

Positions

Paths

Products & Services

Dynamic Capabilities

OpportunitiesThreats

Weaknesses Strengths

• Competitive rivalry

• New market entrants

• Substitutions

• Regulatory

• Supplier power

• Buyer power

• Social & demographic

• Environmental

• Unmet market needs

• Ability to add value

• Ability to reduce cost

• Niche or mass-market

• Product innovation

• Process innovation

• Market innovation

Process weaknesses:

• Management

• Organisation Learning

Positional weaknesses:

• Technical, financial &

physical assets

• Systems

Path weaknesses:

• History, culture

• Valuable

• Rare

• Difficult to copy

• No substitutes

• Organisational ability

Types of assets:

• Tangible - Intangible

• Isolating mechanismsPath

dependencies

Gaps in

knowledge

& resources

Technical,

financial &

Physical

assets

Coordination &

Learning

VRIO

framework

Business Model Analysis

Lean Canvas Lean Start-Up



SWOT Analysis


Strengths

Internal analysis

Factors within an organisations control

Advantages over competition

Threats

External analysis

Factors largely beyond the control of people in

the organisation

Unfavourable circumstances or events

S W

O T

Weaknesses

Internal analysis

Factors within an organisations control

Disadvantages over competition

Opportunities

External environment

Factors largely beyond the control of people in the organisation

Favourable circumstance of event, potential or existing

Checklist:

Strengths + WeaknessesManagementEmployeesFinanceLegalProducts and servicesPurchasingResearch and developmentDistributionMarketingFacilitiesPosition in the industry

Opportunities + ThreatsPoliticalEconomicSocialTechnical


How to approach an industry analysis


Analyze the current industry structure

• Existing competitors in the industry – (strategy, structure, rivalry)

• Potential for new entrants in next 3-5 years

• Possible substitutes (emerging technologies)

• The bargaining power of customers

• The bargaining power of suppliers

• What are the “Rules of the Game”?

Analyze historical changes in the industry structure

• PEST Analysis:

• Political factors (e.g. government regulation or taxation)

• Economic factors (e.g. business cycle forecasts)

• Social factors (e.g. consumer tastes, public opinion)

• Technological (e.g. disruptive innovations)

Analyze future trends in the industry structure

• Define the scope – what are the boundaries of your “industry”

• Identify key stakeholders (e.g. competitors, customers, suppliers, third party actors)

• Identify key trends (e.g. PEST)

• Identify key uncertainties (risk assessment)

• Develop initial scenarios (best case, worse case)

• Assess plausibility of each scenario

• Develop learning scenarios (case studies)

• Indentify knowledge gaps

• Develop quantitative models (business case analysis)

• Evolve decision scenarios (what should we do?)

Source: Lewis, 1999


Competitor analysis


Current Strategy

How is the competitor currently

competing within the market?

Capabilities

What are the competitor’s key strengths

and weaknesses?

Competitor’s Response

Profile

Is the competitor satisfied with its current market

position?

What likely moves or strategy shifts will

the competitor make?

Where is the competitor vulnerable?

What will provoke the greatest and most

effective retaliation by the competitor?

Future Goals

What are the competitor’s likely future goals based on market signals?

Assumptions

What does the

competitor assume

about itself and the

industry?

What drives the competitor?What the competitor is doing and can do?


Generic positioning strategies


Cost Leadership

Differentiation

Focus Cost Leadership

Focus Differentiation

Source: Porter, 1990

Broad

Target

Market

Niche

Target

Market

Process Innovation Product Innovation


Criteria for sustained competitive

advantage


• Elements of Sustained Competitive Advantage:

– How the firm competes – marketing, production, financing

– Where the firm competes – location, markets, segments

– The basis of competition – skills, assets, resources

• For sustained competitive advantage a firm’s resources must be:

– Valuable – exploits opportunities or neutralizes threats

– Rare – not available to competitors

– Imperfectly imitable – difficult to copy

– Without strategically equivalent substitutes

Source: Aaker, 1989; Barney, 1991


Dynamic Capabilities and Absorptive

Capacity


Sources: (Teece, Pisano & Shuen 1997; Mazzarol 2015)

Customer Value Proposition

• What does the customer see as value?

Distinctive Competencies

• What are we best at doing to generate this value?

Processes

• What do we need to do to create that value?

Positions

• What resources do we need to assemble to produce that value?

Paths

• What paths do we need to follow to deliver the value?

Products and Services

• What products and services will provide that value?

Acquisition of knowledge

Assimilation of knowledge

Transformation of knowledge

Exploitation of knowledge

IDEAS

DATA PRODUCT

LEARN BUILD

MEASURE

Lean Start-UpProcess

Assumptions• Customer Value hypothesis• Growth hypothesis

Innovation Accounting• Use minimum viable product• Fine-tune towards ideal goal• Persevere or pivot

Focus on Metrics• Actionable – cause & effect• Accessible – simple to understand• Auditable – systematic & transparent

Business Plan Pivot• Be ready to change direction• Multiple options• Flexibility is the key

Adapt Innovate

Small batchesExperiment

StickyViralPaid

Review problemsMake mistakes once

Portfolio ThinkingResources; autonomy,

ownership

BatchGrow

Source: Ries 2011

The Canvas for Business Models

Strategic Partners Key Activities

Key Resources

Value Proposition Customer Relations Customer Segments

Channels

Cost structure (how much it cost?) Revenue Stream (Monetizing)

Sources: Osterwalder (2010)

Who is the customer?

What are their main problems or needs?

What goals do they have?

Demographics?

Psychographics?

How does the product or service help the customer :

• Save money• Save time• Add value• Increase profits

How do you reach your customers?

How can you deliver value to them?

Can you do this directly or do you need to work via others?

What are the customers’:

• Acquisition costs?• Retention costs?• Switching costs?• Life time value?

How much is the customer willing to pay?

How many customers will pay?

How frequently will they pay?

Cash cycle & cost-profit-volume analysis

Core competencies ?

Team structure?

Physical resources?

Financial resources?

Operations management

CRM systemsFinancial control systems

HRM SystemsRules, policies, metrics

Do you need to work with others or can you proceed alone?

If you need others who are the:

• Lead customers?• Key suppliers?• Resource network

actors?

What are the main over head (fixed) costs?

What are the anticipated variable costs?

What is the anticipated gross profit margin?

When will the business break even?



Strategic planning response types


Administrator

• New Product

• Existing Market

• Medium risk

• Operational efficiency

CEO

• New Product

• New Market

• High risk

• Strategic transformation

Shopkeeper

• Existing product

• Existing market

• Low risk

• Fine tuning

Salesman

• Existing Product

• New Market

• Medium risk

• Market development

Source: Mazzarol & Reboud (2009) Simple

Complex

Certain Uncertain

Structured

Strategic

Planning

Intuitive

Strategic

Planning

Structured

Operational

Planning

Ad-Hoc

Operational

Planning

RISK


Product-Market Growth


Growth by New Product Development

Growth by Diversification

ConsolidationGrowth by

New Market Development

New Product

Existing Product

New MarketExisting

Market

Source: Ansoff (1965)

RISK


Strategic response types




Major types of business plans


Application for Finance

• Bank Financing• Collateral

• Capacity to repay

• Character

• Venture Capital• Team structure

• Market opportunity

• Product innovation

• Return on investment

• Payback period

Plans for Customers &

Suppliers

• Customers• Reliability of supply

• Quality of product

• Pricing

• Innovation

• Suppliers• Market share growth

• Maintenance of reputation

• Loyalty of relationship

Plans for Internal Use

• What is the vision?

• What is the mission?

• What are the values?

• What are the critical assets?

• What are the KPIs?

• When is the deadline?

• Who is responsible?


The “Do’s” and “Don’ts” of business

plans


DO’s

• A plan must be simple

• A plan must be accurate

• A plan must be useful

Don’ts

• Plans cannot save management from decision making

• Plans should not be rigid or inflexible

• Plans are only as good as the people who carry them out


Outline of a business plan

1. Executive Summary

• Key issues

• Distinctive competencies

2. Market Analysis

• Industry & outlook

• Target markets

• Market research

• Lead times for orders

• Competition

• Regulatory requirements

3. Company Description

• Nature of the business

• Distinctive competencies

4. Marketing & Sales Activities

• Overall marketing strategy

• Sales strategy

Products & Services

• Description of products/services

• Product life-cycle

• Copyrights, patents, trade marks, trade secrets

• R&D activity

Operations

• Production & service delivery process

• Production & service delivery capability

• Operating competitive advantages

• Suppliers

Management & Ownership

• Staff structure

• Key managers

• Plans for new hires to management

• Legal structure of business

• Owners

• Board of directors

Funds Required & Application

• Current funding requirements

• Funding required over next 5 years

• Use of funds

• Long-range financial strategies

Financial Data

• Historical financial data (3 to 5 years)

• Future forecasts next 3 to 5 years

• Analysis of financial data (e.g. ratios & trends)

Appendices

• Resumes of key managers

• Photos of products

• Professional references

• Market studies

• Patent disclosures

• Insurances

Source: Ernst & Young (2001)


Blueprint for a business plan


Time Frame

When will you complete this prototype? Where will you be? How will you be in the business?

Organizational Design

Organize around functions NOT people.Prepare an organization chart for the

‘blueprint’ structure.Prototype the positions and ‘replace

yourself’ with a system.

Financials & Customers

Who is my customer?What is my value proposition

to my customer?What values does our

business work by?How much income is needed

to make this worthwhile?

Focus & Direction

What is the business of this business?

What should this business be like in 5 years time?

What will my role in the business be in 5 years time?

What standards will be needed for its operation?


Developing a change plan


Mark

etin

g Products & services

Markets

Customers

Geographic coverage

Distribution Channels

Competition

Sales organization

Distribution

Suppliers

Promotional Mix

Resou

rces N

eed

ed Premises and Access

Equipment

Employees

Materials

Transport & Logistics

Selling

Stock

Working Capital Requirements

Fixed Capital Investment

Mana

ge

ment Operations

Management

Marketing Management

Financial Management

HR Management

Production Systems

ICT Systems

Third Party Financing

What will be the likely impact on each of these areas of implementing

your new strategy?

What is the current capacity within the business of each area and is

there room for change?


Group Discussion

Action Learning Task 1

• Review the questions in the

“Developing the Business Plan”

check list.

• Where are the gaps or

weaknesses in the plan?

• How can these be addressed?

• Prepare a “dot-point” mini-plan

with a “hot list” of the top five

things you need to address.

End of Presentation

small business management mgmt5601 workshop 1 part b: the ... · sbm mgmtg5601 uwa business school...

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