Business Growth Models and the Place of the Entrepreneur

in a Growing Business
Table of Contents

Table of Contents.............................................................................................................................2

Introduction......................................................................................................................................4

Definitions........................................................................................................................................6

Confirming Models as a Prelude......................................................................................................6

Beginning Sequence.........................................................................................................................7

Business Growth Models.................................................................................................................8

Structural Growth Model.........................................................................................................8

Strategic Growth Model ..........................................................................................................9

Financial and Human Growth Model......................................................................................9

Organizational Growth Model.................................................................................................9

A Place for the Entrepreneur .........................................................................................................10

Strategic Awareness...............................................................................................................10

Planned Growth Process........................................................................................................10

Step-Change Management.....................................................................................................11

Market Takeover Ahead........................................................................................................11

Winning through High-Impact Innovation............................................................................12

Keeping Track of it All..........................................................................................................13

Riskier....................................................................................................................................13
Conclusion.....................................................................................................................................14

Future Possibilities.........................................................................................................................15

Reference.......................................................................................................................................16
Introduction

A business model is a framework for creating economic, social, and/or other forms of value. The
term business model is thus used for a broad range of informal and formal descriptions to
represent core aspects of a business, including purpose, offerings, strategies, infrastructure,
organizational structures, trading practices, and operational processes and policies.

In the most basic sense, a business model is the method of doing business by which a company
can sustain itself -- that is, generate revenue. The business model spells-out how a company
makes money by specifying where it is positioned in the value chain.

Only a small fraction of all firms aim for, or ever achieve rapid growth. Despite positive
outcomes in business growth, rapid growth is difficult to achieve and maintain. The growth rate
of companies often comes to a halt because of the changing needs at different growth models
during the company life cycle. In fact, according to Zook and Allen (1999), only one in seven
companies could generate and keep sustained, profitable growth. In an earlier study, Hambrick
and Crozier (1985) suggested that coping with the stress imposed by instant size, sense of
infallibility, internal turmoil, and extraordinary resource needs are persistent challenges that
managers of rapid-growth firms have to face. Missteps in the management of any one of these
challenges might lead to the failure of an otherwise successful rapid-growth firm (Yuli Zhang,
2001).

Having the right business model may hold the key to sustained growth and competitive
advantage. Finding new and innovative models can help a business towards future prosperity. A
business model can be defined as consisting of various components that a company uses to
supply its products and services, and to develop its resources for future action.

An innovative business growth model can mean using the following processes:

• Prices being altered to persuade customers to make more purchases. This can sometimes
even create the perception that an entrepreneur is providing more for less.
• Offering additional products or services without increasing prices. This benefits the
customer and helps to expand sales. The provision of such “extras” persuades existing
 customers to buy more while luring new customers who attach importance to the extras
being offered.
• Reducing the operating costs of the company, the customers or other end users.
• Solutions being combined to help customers grow their market faster.

The more of these processes that can be incorporated into the model, the greater the scope for
advantage. And if it is difficult for rivals to imitate the actions, the impact may increase further.

As an example, organizations that have not made major acquisitions before and have no process
in place may be at risk. In the absence of a sound process, such organizations often pick
inappropriately large businesses to acquire, pay too much for them, and have great difficulty
managing the new operations. By contrast, every experienced organization with a track record of
acquisition success behind it that we have investigated has established a well-oiled process that is
constantly being improved. Even with a smooth-running process for acquisitions, many errors
will occur, but a process helps to reduce their number and severity.

Most organizations now find that they have more competitors than ever before, especially from
companies based in other countries. In addition, competitors are launching new products and
services more often. Pricing is complicated by more frequent and larger currency shifts. Tastes
and needs of customers seem to change all the time. These trends are expected to continue. In
response, some organizations have established elaborate processes for tracking and forecasting
the environment and developing plans to respond quickly to unexpected shifts. Other
organizations are doing elaborate scenario development to create plans to weather the
unexpected. With neither process approach, however, can an organization hope to leapfrog ahead
of the competition by taking actions that regularly create new sustainable advantages translating
into larger revenue and profit margin. This suggests that continuing business growth model
innovation, a process currently used by relatively few firms, offers this potential.

As a result of repeated business growth model innovations, the firms rapidly improve their
competitive position. They see their profit margins and revenues expand faster than competitors
while their access to low-cost capital give them additional ways to outstrip the competition
through acquiring businesses and paying employees less expensively. It is not unusual for a firm
with a modest market share that practice continuing business growth model innovation to expand
into worldwide leadership within a very short while.

Definitions

A business growth model improvement is any successful change in any business model element
(“who”, “what”, “when”, “why”, “where”, “how” and “how much”) that delivers substantially
enhanced ongoing sales, earnings and cash flow advantages versus competitors and what
customers can supply for themselves. Matching what competitors and customers are already
doing is merely business model catch-up, not business model improvement. Improvements
affecting four or more business model elements constitute a business model replacement. Such
replacements that offer products and services previously unavailable to customers are also
business model innovations. The ongoing management process of developing and introducing
improvements and replacements is what we mean by continuing business model innovation.

Confirming Models as a Prelude

Before launching business growth model innovation processes, many companies and nonprofit
organizations find it valuable to reexamine their values and understand what parts of their history
might apply to business model innovation.

In a business growth model, this shows how this can be evaluated to be in place.

• whether the company has a solid base in values;

• whether taking affordable risks could reduce or eliminate bigger, unaffordable risks;
• whether the company’s past performance can serve as a surrogate for experiments in
adding benefits, adjusting prices and reducing costs for all stakeholders;
• whether the company can make fast progress on several fronts at once in adding value for
customers and other stakeholders;
• whether the kind of organizational structure can work best for creating and implementing
the future experiments in business model innovation; and
• whether one can instill a better spirit of teamwork and cooperation for mutual advantage.
Beginning Sequence

Most companies go through various sequences to become more adept than their competitors in
using business growth model to continually reinvent themselves:

• they learn how to make one business model improvement or replacement from their
existing business model base;
• encouraged by the benefits from their first improvement, they make a second one and
need to expand the scope of what they consider and which stakeholders they tap for help;
• further encouraged by additional success, they turn business model improvement into a
repeating activity, which requires a shift in corporate priorities and attention – the activity
becomes an ongoing process; and
• their business model improvements and replacements eventually propel them beyond the
boundaries of their original marketplaces – they need new targets of opportunity for their
subsequent business model improvements and must begin searching for them before
momentum slows.

This evolution is typical of how most new processes are established in major organizations.
Managers want to get experience in a small effort before committing more time and resources to
the new activity. More recent practitioners of continuing business model innovation, though, are
likely to commit at the start to an ongoing process and regular, rapid improvements in business
models.

A continuing business model innovation processes require at least the following four dimensions
operating simultaneously:

• Understand and optimally apply the current business model: supply goods and
services in the best way possible by accurately and completely informing all stakeholders
(including customers, end users, employees, partners, distributors, suppliers,
shareholders, lenders and the communities which the company or organization affects)
about what needs to be done to deliver and receive the most benefits.
 • Establish, understand and follow an appropriate business model innovation vision:
identify the ideal benefits to deliver to all stakeholders as a guide for developing future
generations of business model improvements, replacements and innovations.
• Ongoing design and testing of potential business model improvements, replacements
and innovations: probe stakeholders for the potential of various possibilities and test
promising concepts for their alignment with the innovation vision and effectiveness
through checking stakeholder reactions to new benefits and various ways of supplying
them.
• Understand and begin installing the next business model improvement or
replacement: specify both the next set of enhancements to provide more stakeholder
benefits through your goods and services and how the transition to providing those
enhancements will evolve – this can only occur after the third dimension has begun to
regularly provide usable enhancements.

A more valuable process for continuing business growth model innovation also simultaneously
describes more than one future generation of innovations in terms of dimension four.

Business Growth Models

Structural Growth Model

The relationship between entrepreneurial structure or attitudes and firm growth is important for
at least three reasons. First, it is widely believed that the entrepreneurs of a firm place a lasting
stamp on their companies that influences the cultures and behaviors of their firms (Mullins,
1996). Second, investors and others often assess the potential of a new venture by evaluating the
attributes of its entrepreneurs. One of the most important criterions used by venture capitalists,
for example, in deciding whether to fund a firm is their perception of the entrepreneur's or the
entrepreneurial team's ability to successfully launch the venture. Third, launching a new firm is a
challenging process. As a result, individual difference variables, such as educational attainment
and prior industry experience, have in many instances been found to be critical in successfully
launching a new firm (Barringer et al., 2005).
Strategic Growth Model

Entrepreneurial strategy is an important factor for difference between rapid-growth firms and
lower-growth firms (Wiklund, 1998). First, SME strategy is different from the strategy taken by
large firms. Entrepreneurial strategy may affect all business activities in the progress of firm
growth. Second, after a firm gets established and starts growing, the smaller firms usually are
under bigger influence from entrepreneurs. And larger firms are in need of more professional
management. Entrepreneurial strategy functions all the time. Hence, it is important for
entrepreneurship researchers to recognize the importance of entrepreneurial dimensions of
strategy in addition to individual level entrepreneurship (Miller, 1983). Wiklund (1998) suggests
that entrepreneurial dimensions of a firm's strategy are seen as a combination of risk-taking,
proclivity, and innovativeness.

Financial and Human Growth Model

Financial and human resources are basic inputs in the production process, whereas capabilities
refer to the capacity for coordinating resources to perform certain tasks or activities. However, it
is difficult from a measurement perspective to separate financial resource availability from the
capacity to utilize these resources (Chandler and Hanks, 1993). The resource typology used in
business growth is the one outlined above: fianacial capability, present size, number of
employees that hold university degree, involvement of employees in decision making, present
size (sales), formal professional cooperation, day-to-day advisors cooperation, decision making,
and creating unique value for customers, product superiority, innovation (Barringer et al., 2005).

Organizational Growth Model

Wiklund suggests that task organizational characteristics in terms of dynamism, hostility and
heterogeneity have been argued to be critical for suitable strategic choices, i.e. particular
strategies are likely to lead to better performance depending on the level of organizational
dynamism, hostility and heterogeneity. These dimensions are frequently used in small business
growth and performance literature (Brown and Eisenhardt, 1996). Furthermore, Zahra (1991)
suggests that each of these three dimensions should influence entrepreneurship orientation (EO),
i.e. depending on the degree of organizational dynamism, hostility and heterogeneity; firms with
a higher or lower degree of EO may perform better or worse.

A Place for the Entrepreneur

Strategic Awareness
This first component of the business growth focuses on building a set of strategic awareness
capabilities to help understand and learn from the environment in which an entrepreneur
operates. This will explore how small businesses and their owner-managers perceive and respond
to events and influences in their external environments.
By helping an entrepreneur to ‘read’ his external environment and relate that to how it influences
the growth of his business, the strategic awareness component will provide him with a
framework through which he can understand, manage and benefit from a turbulent and
unpredictable environment.

Planned Growth Process

This component of business growth is based on a growth model, which has been applied since
1985. It provides a framework for determining a firm’s performance and potential for growth.
Regarding firm performance, the programme will provide an assessment of how a business is
performing in the market, in its operations, and in financial terms. In measuring growth potential,
the programme will measure the firm’s potential for growth based on an assessment of its
resource base, experience base, control base, ideas base and the leadership capabilities within the
business.
This part of the programme will also require each participating owner-manager to identify a
specific ‘growth project’ within their business to focus attention around a specific, practical
project to move the business from where it is (point A) to where it wants to be (point B).
The ‘growth project’ also helps one embed what one learn on the course into the businesses so
that the programme has an immediate and practical impact.
Step-Change Management
The third component of business growth to the entrepreneur builds on the first two, and focuses
on bringing about step-change in an entrepreneur’s business by helping him develop innovative
responses and solutions to business problems and opportunities. Activities in this component will
also focus on helping him to ‘step out’ of his own personal perceptions and pre-conceptions.
This will be achieved by helping him to champion his own personal development and improve
his leadership and management capabilities.

Market Takeover Ahead

The proliferation of new high-growth zones at the bottom of the income pyramid in many
countries represents risk as well as opportunity. The risk is that entrepreneurs are developing
new, ultra-low-cost business designs to cater to the base segment profitably. They start in the
lower left corner of the price/performance map, but the powerful magnet of high profitability
will pull them to the upper right corner. Although they will meet resistance from established
competitors, the newcomers will add performance levels faster than price in order to travel up the
diagonal. This phenomenon will threaten established business positions from machinery to
retailing to media to banking.

Forward-looking entrepreneurs see this risk clearly and are already working to own the low end,
not by discounting but by building new business models that closely and cost-effectively match
the priorities of that segment. In the 1980s, this was done perfectly by Swatch in the watch
market. Today, it is being done by Lever in India and General Motors with its minivan business
in China. Building a low-cost business design is not the only way to respond. The US furniture
industry provides an example of “market takeover” and different reactions by domestic
incumbents. Chinese furniture imports to the US grew at 27 percent a year in the 1990s. In 2000,
US furniture employment began to drop and within three years fell 23 percent.

Competitor evolution will not stop at low cost plus high technology; it will also include
extensive acquisition. For many of the new players, the combination of low cost and high
technology is generating enormous amounts of cash, which they will use to acquire facilities,
brands, sales and service networks, customer sets, and entire companies.
Winning through High-Impact Innovation

At the other end of the new value chain is the innovation network. Here, too, there are metrics
and performance gap, as well as under-investment, even greater than that found on the customer
connections side. The backlog of unsolved science problems, meanwhile, is as great as ever.
Smart entrepreneurs’ will collaborate with others to close this gap, since they cannot afford to do
it on their own.

They will also redefine the concept of business models. It is no longer research and development
on product and process alone, but rather any mode of innovation that creates value for the
customer and the entrepreneur. This includes innovation in science, product, production process,
infrastructure, business process, channel, service, and demand innovation.

Entrepreneurs will carefully adjust the balance of their investments among these categories,
based on which ones will be the most productive in the next two to three years. Bottlenecks in an
industry's economic system will move once today's problems are solved. Breakthroughs in
product and infrastructure innovation may be followed by channel growth models. Production
process models may give a company the highest returns over the next year or two, followed by
several years of high returns in service innovation. Therefore, companies will periodically
rebalance the investment mix to generate the highest returns.

For many entrepreneurs, then, the most powerful moves will be to take advantage of university
alliances and global talent sourcing. Every company today, large or small, has to draw the global
map of the key talent pools for its business, whether that talent consists of software
programmers, machinists, biotechnologists, materials scientists, cinematographers, financial
analysts, medical technicians, call center operators, or electronics engineers.

The key point is to spend more on the highest-impact activities. One way is to practice the “open
innovation” approach as described by Professor Henry Chesbrough of the University of
California at Berkeley, which advocates building on the innovations of others. There is
tremendous leverage in shifting entrepreneurs thinking from “not invented here” to “invented
elsewhere, monetized here.”
Keeping Track of it All

Between the customer connection activities at one end of the activity chain and the innovation
engines at the other end, there will be a few physical or back-office activities that remain where
an entrepreneur can add value. These should be kept and strengthened. Most of these physical
activities, however, are becoming commodity processes.

Value is shifting instead to the proprietary information chain that connects customers to
innovation. The information chain includes the purposeful generation, dissemination,
management and revision of information pertaining to a variety of customer, logistics,
technology, and purchasing issues.

Entrepreneurs with highly sophisticated information chains seek to create proprietary

information, actionable information, and continuous information. They gain an advantage in
value creation by concentrating not on being the first to deploy a technology but on being the
best at designing and using their information.

Riskier

The globalized economy feels more like a jungle than a country club. Managers will confront
new risks, more risks, or a different combination of risks, including supply chain vulnerability,
overcapacity, accelerated or more unpredictable price movements, and theft of intellectual
capital (“piracy defense”). Effective risk management was always valuable; it has now become
critical. One of the universal risks is anticipating and adjusting to a new competitive game and
how much time do companies have to make the transition.

Because the global world is a riskier world, it will be harder to protect a business. In fact,
globalization will turn established businesses into start-ups again, with no cushion from
yesterday's success, just a focus on creating new success tomorrow.

The entrepreneur should try to perfect new products too early in the development cycle and
before experiencing production problems that delay introduction of these new products. An
entrepreneur is needed to take more risk with early market experiments with prototypes to see
whether fine-tuning the products is worthwhile. The company has to work in organizational silos
so that product development and manufacturing managers have little to do with one another. The
organizational structures and development processes are changed to integrate these functions.
Also, the company should have a distinguished history of co-developing new products with
offshore joint venture partners who have both product and manufacturing skills. In part, this past
success is probably due to development managers working independently of manufacturing.
More of this type of co-development can be done with reduced costs and risks.

Although no two companies or organizations will find that the same values will be right for
them, there is the common denominator among organizations that have achieved the most
success and strongly ascribed that success to the importance of company values:

• pay attention to each stakeholder as an individual;

• respect each person’s views and interests;
• be honest;
• keep promises;
• seek to “do good while doing well”;
• create innovative solutions to important, unmet human needs;
• look for validation of ideas in customer and end-user acceptance;
• put the interests of all stakeholders on a par with each other;
• take pride in your work;
• serve others in continually improving ways; and
• be reliable in looking out for others.

Conclusion

Business growth, economic transition and institutional reform are developing together at a rapid
pace. Business growth depends on the course of economic reform and local environments. The
pace and extent of reform has an important impact on both a company’s strategic choices and its
growth, and on regional economic development. In fact, economic transition and business
growth are the same process, one whereby government –at various levels – intervenes less in
business activities and focuses its attention on public goods and services, while companies
become independent players on the market. Rather than passively adapting to new environments
and reform, businesses are taking an active role and setting the pace. Key goals include fair
competition, respect for regulations and knowledge building. By evolving from a growth model
based on external opportunities to one based on the development of quality and internal know-
how, businesses are adopting principles such as equity, respect and skill. The economic
environment also evolves as a result of this trend, which typifies business growth in a transition
economy.

Future Possibilities

Many other organizations have benefited from their own business model innovations, including
Hewlett-Packard, Goldcorp and Linear Technology. However, the paper finds little evidence of
organizations combining the different processes, so there is obviously scope to do much more.
Consequently, some of the things that entrepreneurs should do include:

• freeing up key people and resources for business model innovation by eliminating
existing business models with less potential;
• becoming more alert to developments and innovations in other companies and industries;
• ensuring that current and future leaders have the opportunity to acquire the skills needed
to develop and implement innovative business models; and
• Considering appointing to the board CEOs of other organizations noted for business
model innovation – their knowledge and experience could be vital.
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