university of cambridge institute for manufacturing module 4e7 2004 elizabeth garnsey session 1...

Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 1

UNIVERSITY OFCAMBRIDGE

Institute for Manufacturing

MODULE 4E7 – ENTERPRISE AND BUSINESS DEVELOPMENT

Session 2Feb 4 2004

Dr E. Garnsey

ENGINEERING TRIPOS PART IIB




Last week

• How do under-resourced new firms make breakthroughs? What explains the success of many entrepreneurial innovators?

• Entrepreneurs pursue an “emergent strategy” (Minzberg’s term), with economy and flexibility, responding to opportunities as these arise and as they are able to secure resources. Effective in a rapidly changing scene.

• In contrast, managers in established companies work out a strategy, allocate resources on the basis of the budget and implement their strategy. This is required to meet shareholder expectations.

To grow their new company, founders need to balance entrepreneurial and managerial approaches.




Today’s session will improve your ability to evaluate a new tech-based company

• Situate its activity and its business model in relation to the main types of business activity and business model. Appropriate?

• Identify the problems that must be solved if this enterprise is to achieve its objectives - grow and sustain growth.

• Assess the role of the founding entrepreneur/s and whether this is changing appropriately as the business grows

• Assess the enterprise’s track record in relation to typical growth paths of other similar companies.

• Gain practice in relation to a case study firm - BioRobotics




COURSEWORK BRIEFINGA complete session on this Wednesday 25 Feb 2-3pm

PreviewA report of around 2000 -3000 words. Aim is for you toapply knowledge gained in classes. There are several options.




A. Case Study of a High Tech Business

Research a case study of a high tech company, drawing on press reports, websites and, if available, direct contact. Your case study should be in two parts; a factual summary of the development of the company and an analysis of the case, applying knowledge gained on the course.

You may prepare two or three shorter cases and compare their experience, drawing out reasons for differences in their business success.

Examples: Cedar Audio Systems, Cambridge Positioning Systems, C3 Ltd (Computer-based Telephony) One Ltd, Creature Labs (now Gamesware), Cambridge Silicon Radio,




B. Discuss the opportunities for enterprise offered by an emerging technology- based sector or industry. Examine the activities of selected firms in that sector.

•Sectors examples:geographical information systems, global positioning systems,a telecommunications sector, voice recognition or imaging

technologies, satellite technologies,display

technologies, new materials, new instrumentation, environmentally sustainable technologies,

etc




C. Evaluate a Business Plan

Provide a detailed evaluation of a business plan, whether from a venture known to you or based on a plan available in the public domain. Examine the strengths and weaknesses of the plan in terms of the business opportunity identified and the business model proposed to exploit it.

Marking criteria - have you effectively applied knowledge gained on the course?

Marks are affected by business plan selected.




Part One Types of business activity and business mode

Early growth paths




•Enlist others, create network to open opportunities& obtain resources

• Opportunitiescontinuallyscan and reassess

•Resource use:EconomyLeverageCombineCreate

Entrepreneurs juxtapose information on two planes: resources and opportunities




“Enterprise involves the pursuit of opportunities to create valueby combining resources in new ways in order to secure returns.”

Enterprise

Opportunity SpaceResources

Value

Entrepreneur - one whoengages in enterprise(= entrepreneurial activity).

An enterprise - a business organization

Entrepreneurship:study or practice ofentrepreneurial activity.

Economic value is created when Output > Input

Resources are means to achieve ends.

Opportunity = possibility of reaching a preferred state

Returns




Enterprise - wider than new firm creation

There are temporary entrepreneurial projects: e.g. expeditions,events, which don’t involve setting up a business.

Some terms

Business - common usage - imprecise term.Company - entity that is legally incorporated Firm - economic terminologyEnterprise - business organization




Not all entrepreneurial activity involves business creation.

Business Idea

Secure returns

Secure / createresources

Create value

reinvest

distribute

exit

Set up new activity




A company is a legal entity that can sustain activity and ownership over recurrent production cycles, cumulatively.

Firmoutput

revenue

Customers




Business creation involves recurrent production cycles.Company itself may become valuable: develop productive capacity, financial assets

reinvest

Productive base

distribute

exit

Value creating output sold

Assetbase




Advantages of starting a business• Last time

– Tax concessions– Limited liability– Protect ownership through incorporation

– Demonstrate product viability– Embed learning in organization– Store resources– Create a community; create jobs

• Possible to grow and accumulate wealth• But firm may be hostage to fortune• Paradox of enterprise




Survival all US New Firms 1970s/80s (SBA data)

Source Kirchoff 1994




Exposure

ContractR&D

ConsultancyDesign studiesTesting reports

Analytical reports

Product

Mass Market

OEM's

Niche Market

In housemanufacture

Manufacturing sub-

contracted

Low

Hard Model

Soft Model

Resource commitment

License IP

HighCreate infrastructure

Technical services




The range of options being considered reduces over time

The cost of design changes increases

over time

Some business models involve commitment and sunk costs

Graphic: J. Allwood

Product concept




Soft Start: services, software, licensing

Lower capital requirementsFewer sunk costs - flexibilityAttractive when cost of capital is high.

So why manufacture?




Hard Start - Manufacturing

Strengths: Automate, lower costsReach markets beyond reach of a service Opportunities: Revenue growth through economies of scale and scope

Strengths of in-house manufacture:controlcompetitive advantage embedded in hard- to- imitate capabilities




Global Enterprise Monitor 2001, 2003 showsmanufacturing start ups that survive are more robust than service companies:

survive longergrow larger




Upfront capital costs to create production base

Sunk costs may be irrecoverable Flexibility limited

Expertise - multi-functional, difficult for start up team to develop Difficult to apply entrepreneurial problem solving- but possible, as shown by Oxford Instruments and BioRobotics

Challenge of Manufacturing




Soft Start exampleCash Flow (£000s)

Cumulative Cash Flow

-500

0

500

1000

1 32 4 5 Years

-200

Source: Presentation by M. Bullock of Barclays Bank to British Technology Group Conference, 1986




Hard Start example

Source: Presentation by M. Bullock of Barclays Bank to British Technology Group Conference, 1986

Cash Flow (£000s)

Product Launch

Cumulative Cash Flow

Net Cash

Flow Quarterly

- 500

0

500

1000

1 32 4 5

Years




“Revenues make a company”

• "How do you like our new offices?.. Now we look like a real company. But we're missing one thing ... Revenues. We look like a company, but we are only a venture. Ventures have investors, while companies have revenues. Every month we delay a revenue stream, we have to sell off more equity to stay alive. If we delay too long, the price of the equity goes down.. eventually no one wants to buy..."

• Kaplan p 93




Internet - Hope and Hype

• Concept of business model originated with the Internet• Usually involved an existing activity, reconfigured for Internet• Focus was on how to achieve returns• Network of alliances created to produce and deliver by e-

business• Often customers were not users, but advertisers

• Miscalculated transaction costs of alliances• Miscalculated marketing costs of attracting and retaining

customers• Few early entrants succeeded in achieving and sustaining

revenues




Other new business models - configured to reduce resource intensity and improve rate of return. Facilitated by Internet.

• Contract research, consultancy for specific customers (biotech ventures)

• Licensing designs and inventions to manufacturing partners e.g. ARM - revenues from customer support

• Development Company - raise funds with partners to develop future product/service - e.g. biotech ventures, CDT, Plastic Logic

• Production company - with various outsourcing arrangementse.g. BioRobotics




e.g. Cambridge Display Technology:activity and business model

• Founded in 1992 as spin-out from University

• Work by Richard Friend (Cavendish) and Andrew Holmes (Melville)

• Developing Light Emitting Polymer technology

• Acts as systems integrator bringing together key

technologies and competencies

• Relies on web of alliances - initially no manufacture

• Partners include: Seiko-Epson, Phillips, DuPont




Every new firm is uniqueSo how do we compare them? Business realities provide a basis for comparing cases




New firms must solve a common set of problemsas input-output systems in a market environment

• Search for and choose a business opportunity

• Secure resources for productive activity

• Set up productive base and organize productive activity

• Sustain inputs and outputs to survive in competitive market economy




Compare growth measures

•Inputs - employees, investment, equipment, premises.R&D budget, patents

•Outputs - sales, revenues, profits

•Value - tangible assets, intangibles, market valuation

•Throughputs: sales per employee, lead time to market

All measures have limitations - qualitative evidencealso needed




Relative employment growth of 6 Cambridge software companies




COMPARING CASES - evidence

Search & Select

Secure Resources & Set Upproductive activity

Generate & Sustain Revenues

Pre-venture activities, ideas, contacts: hard to measure (Reynolds and White 97)

INITIAL INPUT measures:Investment funds, endowmentassets, patents, recruits

OUTPUT measures:revenues,profit

THROUGHPUT measures: productivity p.e. WIP, stocks/ sales, lead times




From start up to self sustaining business

• Early learning and problem-solving may be sequential

- e. a new product is designed and production facility required

• Solutions needed before next problems can be dealt with?

• Dominant problems may give rise to phases of activity.

• As problems are solved, further ones arise.

• Stages of growth - common idea in literature.

• In practice there are often overlapping processes (chains of related activity) rather than distinct stages or phases.




It simplifies comparison to look at problem-solving sequentially

But in practice: there may not be separately identifiable phases. Entrepreneurial problem solving is iterative.

Length and distinctiveness of specific problem solving processes depend on activity and business model.E.g. spin outs or de-mergers: start with ability to generate revenues through activity and customers inherited from a parent organization

Generate & Sustain Revenues

Search & Select

Secure Resources & Set Up




Opportunities - Selected or Created?

Analysis, Telecomms Consulting founded by David Cleevely in 1986Spin-out from CUED

1980s, rapid technology change and deregulation - policy challenge

Analysys provided decision-support software for telecommunications policy makers at the European Commission, Brussels

Analysys created demand for what they could supply: decision support software and telecomms industry analysis

Success of European mobile phone industries - policy re common standards




Search and Select

Resources and opportunities - both are relative (means/ends)

Matching process - difficult because both are in flux

Scientists have difficulty selecting a business opportunityGeneric technologies - too many optionsE.g. holonic technology

At some point, entrepreneurs have to target and commit to a specific opportunity, narrowing their options.




Burn rate can exhaust endowment resources

2nd Round Finance

3rd Round Finance

Monthly

Revenue

Cash

Oct-88 Feb-88 Jun-89 Oct-89 Feb-90 Jun-90 Oct-90 Feb-91 Jun-91

7000

6000

5000

4000

3000

2000

1000

0

Cash

£000's

Figure 1 Anamartic: Revenue and Cash 1988-1991




Firms that grow early and fast

Often incubated in an existing organization where early problems can be solved

with less risk of early mortality e.g. BioRobotics




Firms that solve initial problems often grow for a while … but do not sustain growth.

o

R?




This spin out entrepreneur from CUED did not want a big company:

• "I want to keep the personal feel because it's my life, this business, and I want it to be enjoyable and for the staff to enjoy it."

• … I see my job as people management and for me that means keeping the excitement running. They are very competent people and if they are excited and bouncy then they are extremely productive.”

• Comfort zone? Uncomfortable as soon as conditions change




Most Cambridge Tech Firms Remain Small

674

339

7838 21 9 1

0

100

200

300

400

500

600

700

800

10 50 100 200 500 1000 2000

Employment

Source: CCRU Database




Paradox of Enterprise

• Greater the success of the enterprise, more difficult it is to remain entrepreneurial

• Once returns are achieved, there is more to lose• Pursuit of opportunity may endanger what has been gained• Innovative entrepreneur often turns into conservative small

business owner

• Habitual entrepreneurs often leave and start again once company has grown




Unable to grow though aim to do so

• Can’t obtain development capital

• Cant overcome scale-up problems

– Manufacturing - initial sunk costs before returns on scale

– IT products High initial fixed cost, low variable cost of reproduction

– May run out of cash before transition to lower costs is achieved




Time

Ou

tpu

t

Demand

Capacity

Under and over production in young firms.Capacity-build is uneven; demand is unpredictable




Early growth problems

1. Returns from output may not keep up with input costs (scale and

scope issues )

2. Timing and coordination (resource mix) problems

1. under-production and over-production problems

2. delay in recovery of resources from output - cash flow blocked

3. Output does not create real or perceived value

1. Quality problems (does output create value for customers?)

2. Demand below forecast

oR




Quality Crisis at DominoAt Domino Printing Sciences, the initial product, an industrial ink jet printer was the first of its kind. It was very carefully designed. However in production, one small component among hundreds had not been inserted. This was vital to the automatic shutdown system if the machine went wrong. When Domino’s engineers tested the machines on-site before shipping them, they worked perfectly. The designers had never had occasion to use the automatic shutdown mechanism. But their customers proved less skilled at using the equipment. Before long, three international customers phoned in urgently on the same day. In each case a fire had started in the equipment, with smoke and melt-down of components.

What would be a worst case scenario? How could this be averted?




Growth and Quality Problems in New Firms

Firm Growth

Salesrevenues

Customer demand

Staff Shortages

Quality defects

expanded volume of work

Time 1

Time 2

+

+ +

- +

competitor products

Time 3

+




Revenue generation does not sustain growth until:

• Fix /sell Version One of product (takes some inventors years)

• Ensure recurrent production cycles

• Routines, rules and roles save time & effort. ‘Store’ (embed) knowledge

• Repeat custom and/ or market expansion provide revenues and credibility (early quality problems sorted out)

• May take a long time

– e.g. biotech firms’ lengthy gestation

• If so, need interim funding/ revenue while product is developed




No Growth - Plateau or struggle to survive - when:

• New firm does not reach minimum efficient scale (MES) to achieve return on assets

• Resources are all absorbed maintaining current activity

• Plateau may be a prelude to growth, decline, failure, or merger• Growth is least common scenario




Growth of new instruments firms in Cambridge 1990-99

0

10

20

30

40

50

60

1 2 3 4 5 6

Series1

Series2

Series3

Series4

Series5

Series6

Series7

Series8

Series9

Series10

Series11

Series12

Series13

Series14

Series15

Series16

Series17

Series18

1990cohortInstrFsgrwth.10.9.01

Employees

Age of Co.




INPUTS

OUTPUT

RETURNS

Business idea

ActivityFirm’s

Over time, firm’s activity drives its growth path




Brokerage byentrepreneur,early CEOwho foundedMicromuse (Chris Dawe)

IT industry networkerror-management software required

Specific customer needs at BT - Peter Shearan

Industry and technologyknowledge of CTO,develops software

Business process knowledge of Stephen Allott

Micromuse attracts major Internet firms as customers




Micromuse case

• In early 1995, Micromuse made its first sales of its in-house developed Netcool IT network software. These were quite large and prompted the founder to plan an accelerated transition from the VAR business (distributing SUN software) to the Netcool business. He announced that the VAR business was no longer mainstream and that the company's future lay with Netcool. The VAR sales started to dwindle quite fast and key people in it started to leave. Meanwhile the strong Netcool sales in the March 95 qtr were a false dawn. Implementation and development resource constraints plus software bugs meant that no further Netcool sales occurred in the June and Sept qtrs.

• Stephe Allott was appointed CFO in Sep 95. He found:– falling sales were feeding through to weak cash receipts and a £1m

overdraft. – The company could not meet its obligations and was in danger of failing.

• What should Stephen do?




Part Two

• Problems of successful growth




What was done - Solving the cash flow crisis

1. Re-organise the company into Business Units, with a focus on re-launching the VAR business.

2. Going to see the bank to explain their plan and get their agreement to maintain their overdraft.

3. Re-assign salespeople to focus on the best short term prospects.4. Implement more effective management information systems to prioritize

revenue-generating activity.5. Work flat out to bring in VAR custom.6. Sign up a strategic deal with Sun Microsystems to develop Internet

infrastructure business (ISP companies to become customers).




-50

0

50

100

150

200

250

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

-50

0

50

100

150

200

250

NetCool Revenue VAR Revenue NetCool Profit

Micromuse Inc




Strong growth can create further growth pressures • Internal pressures for growth

• After effort of start-up, resources are released for growth

– Under employed or under-used staff

– Uneven resource mix: continual shortages and surpluses

• Lead-lag growth dynamic (Penrose theory)

• External pressures for growth from: – funders – customers – distributors

• Excitement, high morale, stimulus to further effort




Riding high• A new enterprise has been performing well, though only five years old.

Growth record is impressive (sales and revenues employee numbers). Early success makes it possible to expand further through retained earnings and externally obtained funds. Investors view its prospects favourably. Morale is high among its members their prospects are excellent in the expanding enterprise.

• One of its members is taken ill. After 6 months hospital and recovery he returns to work. He finds:

• Sales are down and unsold stocks have built up. The banks have withdrawn loan facilities. Creditors are demanding payment. There have been lay-offs and more are expected. The enterprise faces an enforced sell-out or bankruptcy.

• How could this happen?




Growth reinforcement in a young company can easily tip into reverseWhy?




System dynamics in an open input-output system (Dissipative system requiring continual input of resources)

In natural language:• If positive feedback (self reinforcing process) is interrupted for any

reason, output falls. Inputs depend on revenue from outputs, so this reduces input availability.

• Input shortage prevents output growth.• Positive feedback moves into reverse - unless there are reserves

to draw on.• Young companies have seldom built up reserves.




CREATURE LABS

-5000

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

6000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

£ ,000

-60

-40

-20

0

20

40

60

80

Employment

Turnover

Profit

Current Assets

Fixed Assets

Net Worth

Employment




Changing role of founder

• Qualities required for opportunity detection and start up a company - last week, lecture one

• As company grows, change of mind set required in leader. Qualities required to grow and increase returns include – Project management skills– Ability to delegate– Ability to interface with partners and retain investors’

confidence

– Difficult to change mindset. Crises often force changes.




Growth Reversal - internal pressures

• Increased complexity is hard to manage

• Rapid growth - shortages, bottlenecks - decision making impaired.

• People problems

– Constraints on co-ordination and decision making - cannot be remedied from outside

– Jobs outgrow people and vice versa – Burn out and disaffection




Case StudiesTadpole Technology

-15000-10000

-50000

5000100001500020000250003000035000

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Sales Pre-tax Profit

Linx

-2000

02000

4000

60008000

1000012000

1400016000

18000

1988 1989 1990 1991 1992 1993 1994 1995


Datapaq

-500

0

500

1000

1500

2000

2500

3000

3500

4000

1985 1986 1987 1988 1989 1990 1991 1992


-20000

0

20000

40000

60000

80000

100000

Oxford InstrumentsLast week




Cambridge high tech firms have relatively high survival ratesGarnsey and Heffernan 2002 on CTM CUED website

Source: Garnsey and Heffernan 2002

40%

50%

60%

70%

80%

90%

100%

110%

0 2 4 6 8 10

Age (Years)




Size

(e

.g. s

ales

)

Time

Size

(e

.g. s

ales

)

Time

Size

(e

.g. s

ales

)

Time

Size

(e

.g. s

ales

)

Time

Continuous growth

Early growthand plateau

Delayed take-off and growth

Growth reversal and three subsequent alternatives

But growth reversal was common even among ten year survivors

6%34%

28%12%

Growth paths of 237 high tech ten year survivors, founded c 1990




Ways of limiting pressures of growth

• Managing rapid growth requires embedding problem-solving in effective procedures

Avoid growth pressures through segmentationor spin-out.

• Oxford Instruments

TTP - “grow without getting too big”




Surviving Setbacks

Growth reversal processes induce intense strain.

Reversal after rapid growth can be a learning experienceDouble-loop learning: challenge own assumptions

Build reserves against setbacks; continue to pursue opportunity

Firms that survive may become leaders




Accumulation :

• Resource recovery (outputs-> inputs) exceeds demands of growth

• Reserves build up and allow firm to weather storms

• Can expand by buying other companies (O.I.,Domino,Microsoft, Cisco)

• Growing to be a dominant firm is an improbable event

– 5% of firms provide 50% + jobs after 10yrs (Storey 1994)

– 5% of firms provide VCs with 90% of their profits




Attributes of Success

• Studies have shown startup more likely to succeed with

– Team of entrepreneurs with right skill mix, education

• Growth ambitions for venture

• Business experience

– Well endowed start up, founders share equity with investors

– Protected technology– Fast growing market




Beware circular reasoning on success

• Success attribute studies of start ups leave 75+% of variance in performance unexplained

• Some ventures start with better odds than others

• Can identify losers more easily than winners. Self fulfilling aspect.

• Investors have not cracked secret of success

• Luck is a factor - but who makes the most of it?

• Solutions give rise to new problems (Greiner)But problems can be a source of novel entrepreneurial solutions - Oxford Instruments, Psion, Hotmail

university of cambridge institute for manufacturing module 4e7 2004 elizabeth garnsey session 1...

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