Entrepreneurial Management and CSR February 27, 2012

Managing, Growing and Ending the New Venture

Entrepreneurial Strategies

New Entry Strategies

Growth Strategies

Exit Strategies

Managing, Growing and Ending the New Venture

Presenter: Arjay Garcellano

Part I - Entrepreneurial Strategy

- Generating and Exploiting New Entries

Entrepreneurial Strategy
A set of decisions, actions, and reactions that first generate and then exploit over time a new entry.

Three key stages of entrepreneurial strategy are: 1. The generation of a new entry opportunity. 2. The exploitation of a new entry opportunity. 3. A feedback loop from the culmination of the new entry and exploitation back to stage 1.

New Entry Strategies

Generating and Exploiting New Entries

Definition: New Entry

New product to
established/ new market Established product to new market New organization

Generation of a New Entry Opportunity

1. Resources as a Source of Competitive Advantage It is hoped the new entry will provide the firm with a sustainable competitive advantage. Resources are the basic building blocks to a firms functioning and performance. Valuable when it enables the firm to pursue opportunities, neutralize threats, and offer products and services that are valued by customers; Rare when it is possessed by few competitors; and Inimitable when replication of this combination of resources would be difficult and costly for potential competitors.

Creating a Resource Bundle that is unique

The ability to obtain and then recombine resources into a bundle that is valuable, rare, and inimitable. Knowledge is in itself is valuable. The cumulative knowledge of the management team is difficult to duplicate. This combination of experiences of the management team can lead to innovation. Market knowledge is the possession of information that provides insight into the market and its customers. Technological knowledge is the possession of information, technology, know how, and skills that provide insight into ways to create new knowledge. Often, technology has been invented for a specific purpose. Sometimes that specific purpose leads to a broader base of use. (Tang, freeze dried coffee, Velcro & Teflon created fro NASA space flights)

Assessing the Attractiveness of a New Entry Opportunity

Information on a New Entry Prior knowledge used to create a new venture can also benefit in assessing the attractiveness of a particular opportunity. Knowledge can be increased by searching for information that will shed light on the attractiveness of the new entry. The search process is in itself a dilemma. The time it takes to properly search for information may allow for the opportunity to pass or someone else takes advantage of the venture. Window of Opportunity The period of time when the environment is favorable for entrepreneurs to exploit a particular new entry. When the window is open the environment is favorable for entrepreneurs to exploit a new product.

Assessing the Attractiveness of a New Entry Opportunity

Comfort with Making a Decision under Uncertainty The trade-off of needing more information and the window of opportunity closing creates a dilemma. The dilemma is a choice of which error you prefer to commit;

1. Error of commission is creating an error by acting. 2. Error of omission is a negative outcome from not acting.

Entering Existing or New Markets

Business owners design entry strategies to gain a foothold against existing players in a new market.

A wide range of options are available to help small businesses secure a reasonable market share from which to grow in an established industry. Entering an emerging industry or being a first-mover can provide even more profitable opportunities for effective entry strategies.

Entry Strategies

Marketing Strategies

Strategic Partnership

First Mover/ Close Follower

Gaining a foothold in a market

A. Marketing Strategies

Marketing departments have a great deal of responsibility when it comes to gaining market share in a new industry.
Market penetration, a fairly straightforward entry strategy, is an attempt to gain new customers by offering products and services comparable in quality to existing competitors at lower prices. This is a temporary technique; prolonged market penetration can lead to price wars in the industry, leaving new companies at a severe disadvantage. A more sophisticated marketing entry strategy is offering a novel or unique value proposition. Introducing a product or service that significantly improves upon existing competitors' offerings in a way that customers value can encourage large numbers of customers to switch brands.

B. Partnerships
Forming strategic partnerships or alliances with existing players in an industry can help an entrepreneur to make valuable contacts and gain experience in the industry while spreading his company name at minimal risk. (Franchising) Seek to leverage existing companies' distribution systems, marketing presences and economies of scale to gain an early competitive advantage. For example, a talent agency breaking into the music industry in Los Angeles, could benefit by partnering with established concert promoters to gain exposure for their clients. A clothing manufacturer breaking into the shoe industry may benefit by contracting with established manufacturers to handle their excess orders rather than investing in larger facilities.

C. 1st Mover or Close Follower

First movers and close follower create new industries by offering truly new products and services in the marketplace.
A first mover can gain a significant advantage by being the first name customers associate with the new industry. Consider Ford, for example, which mass produced the first automobile and remains one of the United States' most recallable brands. A close follower (Me too strategy) watches first movers very closely, and waits for the perfect time to enter a brand new industry. Close followers build a product or service that eliminates all of the problems with the first mover's prototype offering, while using initial customer feedback to add new features to the product. Close followers can often push first movers out of the industry with their superior products.

Entry Strategy for New Exploitation

1. First movers develop a cost advantage. 2. First movers face less competitive rivalry. 3. First movers can secure important channels for suppliers and distribution. 4. First movers are better positioned to satisfy customers because they have the chance to select the preferred segment and establish their product as the industry standard. 5. First movers gain expertise through participation in the market.

Environmental Instability and First Mover (Dis)Advantages

Industries that have been newly formed and are growing. Must determine the key factors for success. Advantage is the entrepreneur being first means you have considerable freedom in how you achieve success.

Disadvantage would be that the demand is uncertain. Difficult to determine how fast the market will grow, and the key dimensions that make it grow.
Technology may be uncertain because its performance is not proven.

Environmental Instability and First Mover (Dis)Advantages

Customers may have difficulty assessing the products value to them.

Lead time is the grace period from the first entrepreneur entering the industry under conditions of limited competition. 1. Build customer loyalty. 2. Building switching costs is a mechanism which customer loyalty is enhanced through rewards programs. (Ex. Flyer miles, points toward cash, user discounts, etc.) 3. You must product your product uniqueness through patents, copyrights, trademarks, etc. 4. Develop exclusive relationships with key sources of supply will limit access to future competitors.

RISK REDUCTION STRAGEIES FOR NEW ENTRY EXPLOITATION

1. Scope is a choice by the entrepreneur about which customers groups to serve and how to serve them. 2. Narrow Scope Strategy Produce customized products with localized business operations and high level of craftsmanship. Focus on special group of customers that can build specialized expertise and knowledge. The high end of the market typically represents a highly profitable niche that is well suited to those firms that can produce customized products. 3. Broad Scope Strategy Offering a range of products across many different market segments. Open the firm to increased exposure of competition. Must develop a broader knowledge base to understand your customers.

RISK REDUCTION STRAGEIES FOR NEW ENTRY EXPLOITATION

4. Imitation Strategies

Copying the practices of other firms. It is easier to imitate than go through the long process of developing new strategies. It may help the entrepreneur to practice already successful skills. You will be perceived by the customer as well established. 5. Managing Newness New firms face costs in learning new tasks. It will take new people time to develop skills and assume responsibilities. New firms sometimes have difficult developing communication channels. New firms do not have the stigma of old habits and are more flexible to attempt new ways of conducting business.

- Arjay Garcellano

Presenter: Maria Paz T. Castro

Part II - Strategies for Growth

- Managing Implications of Growth
- Accessing Resources for Growth from External

Sources

Growth Strategies

Managing the implications of growth

Growth Strategy
A growth strategy is chosen by many businesses, particularly in their early stages of development.

Growth may occur through the acquisition of more customers or an increase in sales. Companies that are interested in growth will look to new market opportunities, as well as new market segments that they may be able to interest in their products or services. Increased sales may be generated by changing or introducing new products.

Growth Strategies

Integration Strategies

Intensive Strategies

Diversification Strategies

Defensive Strategies

Managing growth

Strategy
A. Integration Strategies

Definition

2007 Examples

Forward Integration

Gain ownership or increased control over distributors and retailers

Southwest Airlines just began selling tickets through Galileo Hilton Hotels could acquire a large furniture manufacturer Huntington Bancshares and Sky Financial Group in Ohio merged

Backward Integration

Seeking ownership or increased control of a firms suppliers

Horizontal Integration Seeking ownership or increased control over competitors

Strategy

Definition

2007 Examples
McDonalds spent millions on its Shrek the 3rd promotions to convince consumers it offers healthy items Burger King opened its 1st restaurant in Japan

B. Intensive Strategies Market Penetration Seeking increased market share for present products services in present markets through greater marketing efforts

Market Development

Introducing present products or services into new geographic area Seeking increased sales by improving present products/services or developing new ones

Product Development

Google introduced Google Presents to complete with Microsofts Powerpoint

Strategy
C. Diversification Strategies Related diversification

Definition

2007 Examples

Adding new but related products or services Adding new, unrelated products or services

MGM Mirage opened its first noncasino luxury hotel Ford Motor Company entered the industrial bank business

Unrelated diversification

Strategy
D. Defensive Strategies Retrenchment

Definition

2007 Examples

Regrouping through cost and asset reduction to reverse declining sales and profit Selling a division or part of an organization Selling all of a companys assets, in parts, for their tangible worth

Discovery Channel closed its 103 mall-based and standalone stores to focus on the Internet and laid off 25% or its workforce Whirlpool sold its struggling Hoover floor-care business to Techtronic Industries Follow Me Charters sold all of its assets and ceased doing business

Divestiture

Liquidation

Michael Porters 5 Generic Strategies

Type 1: Cost Leadership Low Cost Type 2: Cost Leadership Best Value Type 3: Differentiation Type 4: Focus Low Cost

Cost leadership emphasizes producing standardized products at very low per unit cost for consumers who are price sensitive. Differentiation aimed at producing products/ services considered unique industry-wide and directed at consumers who are relatively price insensitive. Focus producing goods/services that fulfill the needs of small groups of consumers.

Type 5: Focus Best Value

Porters Five Generic Strategies

Cost Leadership
1: Cost Leadership Low Cost

Differentiation

Focus

SIZE OF MARKET

Large

3: Differentiation 2: Cost Leadership Best Value

Small

3: Differentiation

4: Focus Low Cost 5: Focus Best Value

Source: Adapted from Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980): 35-40

Cost Leadership Strategy Considerations

A primary reason for pursuing forward, backward, and horizontal integration strategies is to gain low-cost or best value cost leadership benefits. But cost leadership generally must be pursued in conjunction with differentiation. Cost elements affect the relative attractiveness of generic strategies, including economies and diseconomies of scale achieved, learning experience curve effects, the percentage of capacity utilization achieved, linkages with suppliers and distributors, R&D , labor, shipping, & energy costs & tax rates. Striving to be a low-cost producer in an industry is effective when buyers are price sensitive, there are few ways of differentiation & buyers dont care much for brand differences and a large number of buyers have significant bargaining power.

Differentiation Strategy Considerations

Differentiation does not guarantee competitive advantage, especially if standard products sufficiently meet customer needs or if rapid imitation by competitors is possible. Durable products protected by barriers to quick copying by competitors are best.

Successful differentiation can mean greater product flexibility, greater compatibility, lower costs, improved service, less maintenance, greater convenience, or more features.
A differentiation strategy should be pursued only after a careful study of buyers needs and preferences. It allows a firm to charge a higher price for its unique product and to gain customer loyalty.

Focus Strategy Considerations

A successful focus strategy depends on an industry segment that is of sufficient size, has good growth potential, and is not crucial to the success of other major competitors. Strategies like market penetration, and market development offer substantial focusing advantages.

Focus strategies are most effective when consumers have distinctive preferences or requirements and when rival firms are not attempting to specialize in the same target segments.
Risks of pursuing a focus strategy include the possibility that numerous competitors will recognize the successful focus strategy and copy it or that consumers preferences will drift toward the product attributes desired by the market as a whole.

Implications of Growth

Role of the business owner will change Adjustments to the functions Structure and roles of the personnel need to be made Sometimes this is not easy for the business owner to do. The original tasks or duties that he/she carried out, and may have felt comfortable doing, may need to be taken on by others. Or, the business owner may not have the opportunity to use his/her original skill or competence that made the business grow in the first place as he/she takes on other responsibilities including paperwork and administration. This can often be a source of frustration.

Implications of Growth

Business owner must learn how to give up control and let others take over certain responsibilities in the business. The business owner cannot do everything, and trying to pretend that he will only stifle the growth of the business, and may lead to staffing problems. In some instances, he may have to step aside as the CEO or MD to allow others with more appropriate skills to run the business. As the business becomes more complex, owners need to recognize the need for skilled employees and seek advice and training to overcome deficiencies and skill-up for the future. Specialist skills may be needed through consultants or certain functions may need to be outsourced.

Implications of Growth

As a business grows and new structures come into place, owners can often feel isolated as they have no one to talk to about business issues and problems. Many small businesses cannot afford the luxury of having someone else, besides the owner, in a senior managerial role leaving the business owner with no one to talk to about key issues and problems. Thus, it is a good idea to find mentor, either paid or someone you know and respect from business or a trusted peer that can listen and provide you with advice and guidance. There are also business support networks that bring together business owners to discuss issues and provide advice. These forums not only help with personal development, but can aid in your business growth through contacts made.

In summary, as entrepreneurs . . .
realize that your role as a business owner and that this role will change as the business grows; thus, figure out what you are best at doing; give up control, as appropriate, and let others take on responsibilities so the business can grow; recognize weaknesses, and develop your skills with advice and training; seek out a mentor, trusted peer or business support network that you can talk to about your business issues.

- Maria Paz Castro

But wait Theres More!

Presenter: Huey Z. Escao

Part III - Going Public

- Ending the Venture

Exit Strategies

Ending the business

Exit Strategies
If you're thinking ahead to the day when you'll no longer run your business, think about these five exit strategies now so you'll be prepared for your future. Entrepreneurs live for the struggle of launching their businesses. But one thing they often forget is that decisions made on day one can have huge implications down the road. You see, it's not enough to build a business worth a fortune; you have to make sure you have an exit strategy, a way to get the money back out.

The Modified Nike Maneuver: Just Take It

One favorite exit strategy of some forward-thinking business owners is simply to bleed the company dry on a daily basis - pay themselves a huge salary/ reward with a gigantic bonus regardless of actual company performance, and issue a special class of shares that only they own that gives them ten times the dividends the other shareholders receive. Although we frown upon these practices in public companies, in private companies, this actually isn't such a bad idea. It's called a "lifestyle company." Rather than reinvesting money in growing their business, in lifestyle companies, they keep things small, take out a comfortable chunk, and simply live on the income. Remember, money in the wallet is no longer money in the business. If you're in a business that must invest to grow, taking out too much money can hurt you down the road.

The Modified Nike Maneuver: Just Take It

Pros Who doesn't like seven figures of take-home pay? Private jets are fun. There's no need to think hard about getting out: Just pull out the money when you need it. Cons The way you pull the money out may have negative tax implications. For example, a high salary is taxed as ordinary income, while an acquisition could bring money in the form of capital gains. Without careful long-term planning, you may end up pulling out money now you'll need later.

Liquidation
Even lifestyle entrepreneurs can decide that enough is enough. One often-overlooked exit strategy is simply to call it quits, close the business doors, and call it a day. I don't know anyone who's founded a business planning to liquidate it someday, but it happens all the time. If you liquidate, however, any proceeds from the assets must be used to repay creditors. The remainder gets divided among the shareholders--if there are other shareholders, you want to make sure they get their due.

Liquidation
Pros It's easy and it's natural. Everything comes to an end. There's no negotiations involved. There's no worrying about transfer of control. Cons Get real; it's a waste! At most, you get the market value of your company's assets. Things like client lists, your reputation, and your business relationships may be very valuable, and liquidation just destroys them without an opportunity to recover their value. Other shareholders may be less than thrilled at how much you're leaving on the table.

Selling to a Friendly Buyer

If an entrepreneur becomes emotionally attached to what he has built, even easier than liquidating his business is the option of passing ownership to another true believer who will preserve his legacy. Interested parties might include customers, employees, children or other family members. Entrepreneurs can weed out all but the most dedicated successors/devotees. An owner can also sell his business to current employees or managers. Often, the seller finances the sale and lets the buyer pay it off over time. He still makes more this way than he would by closing, and the buyer gets to earn his way into owning a business. It's a winwin for everyone involved. The purest friendly buyout occurs when the business is passed down to the family. But sometimes they'll end up fighting over who got the larger share, who does/doesn't deserve ownership , and who gets the final word while the business slowly declines into ruin.

Selling to a Friendly Buyer

Pros You know them; they know you. There's less due diligence required. The buyer will most likely preserve what's important to you about the business. If management buys the business, they have a commitment to making it work. Selling to family makes good on that regrettable promise made 30 years ago, "Someday, son/daughter, all this will be yours." Cons You can get so attached to being bought by someone nice that you leave too much money on the table. If you sell to a friend, they'll be peeved when they discover they just bought the liability for that decade's worth of taxes you forgot to pay. Selling to family can tear the company apart with jealousies and promotions that put emotion way ahead of business needs.

Acquisition
Acquisition is one of the most common exit strategies: You find another business that wants to buy yours and sell, sell, sell. In an acquisition, you negotiate price. This is good. Public markets value you relative to your industry. Who wants that? In an acquisition, the sky's the limit on your perceived value. You see, the person making the acquisition decision is rarely the owner of the acquiring company, so they don't feel the pain of acquisition cost. Convince them you're worth a billion dollars, and they'll gladly break out their employer's checkbook. If you choose the right acquirer, your value can far exceed what would be reasonable based on your income. How do you select the right company? Look for strategic fit: Which acquirer can buy you to expand into a new market, or offer a new product to their existing customers?

Acquisition
Pros If you have strategic value to an acquirer, they may pay far more than you're worth to anyone else. If you get multiple acquirers involved in a bidding war, you can ratchet your price to the stratosphere. Cons If you organize your company around a specific be-acquired target, that may prevent you from becoming attractive to other acquirers. Acquisitions are messy and often difficult when cultures and systems clash in the merged company. Acquisitions can come with non-compete agreements and other strings that can make you rich, but make your life unpleasant for a time.

Go Public with an Initial Public Offering (IPO)

If you're a bootstrapper, believing in a fair IPO is a touchingly naive act of faith. Besides, do you have any idea what's actually involved in an IPO? Before you start selling shares of stock to get added capital to grow your business, you start by spending millions just preparing for the road show, where you convince investors your stock should be worth as much as possible. Unlike an acquisition, where you craft a good fit with a single suitor, here you romancing hundreds of analysts and investors. If the romance fails, you've blown millions. And if you succeed, you end up married to analysts. You also have to pay for underwriting fees to investment bankers. Also lockout periods or down markets can tank your wealth despite having a healthy business and sometimes IPO-raised funds distort your income statement. In short, IPOs are not only rare, but when you're founding your company, consider them just one of many exit strategies. Realize that there are a lot of ways to get value out of your company.

Go Public with an Initial Public Offering (IPO)

Pros You'll be on the cover of Newsweek. Your stock will be worth in the tens--or maybe even hundreds--of millions of dollars. Your VCs will finally stop bugging you as they frantically try to insure their shares will retain value even when the lockout period expires (Warning: they won't necessarily be looking out for your shares, too.) Cons Only a very few number of small businesses actually have this option available to them since there are very few IPOs completed annually in the United States. You need financial and accounting rigor from day one far above what many entrepreneurs generally put in place.

- Huey Z. Escao

Entrepreneurial Management and CSR February 20, 2012

Managing, Growing and Ending the New Venture