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Managing growth "SUPER - Start-Up Promotion for Entrepreneurial Resilience
SUPER - Start-Up Promotion for Entrepreneurial Resilience

Managing growth


TF_4_EN  

 Title
Managing growth

 Keywords
scale up, strategy, alignment, financial growth, strategic growth, structural growth, organizational growth, venture consolidation, business exit, exi

 Author
CU

 Languages
English

 Objectives/goals
Understand the nature of business scale up, learn potential scale up strategies. Understand different dimensions of business growth – financial, strategic, structural and organizational. Learn how to consolidate a venture. Learn how to plan business exit and which strategy to use. EU entre competencies: Mobilising others, Working with others, Planning and management, Mobilising resources


 Description
Majority of elementary knowledge on business and entrepreneurship is focused on early stages of starting and establishing a new venture. However, if successfully established, each venture should attempt for further growth. This training fiche will provide basic insights into business scale up, its strategies and strategy-structure-culture alignment. It will explain different dimensions of business growth, namely financial, strategic, structural and organizational growth. Finally, it will provide basic knowledge on consolidating ventures after the growth phase as well as on business exit and its strategies.

 Contents


  Managing growth

1. Scaling up


  1.1 From start up to scale up

  • Each venture typically goes through different stages of development. Figure 1 presents typical stages of development of new entrepreneurial venture.
  • Such lifecycle has to be understood as a simplification, as a venture can go through its stages in any order and can go through one or more stages several times. However, entrepreneurs need to understand that each stage requires different strategies and management techniques to be employed in order to make the venture successful.
  • Besides launching the business, perhaps the most difficult stage is the rapid growth. Here, failures frequently occur due to insufficient funding, inability to acquire necessary resources or produce product in required scope, or lack of skilled management.

 

Figure 1: Financial performance and stages of new venture development (Smith2Bliss)



  1.2 Scale up strategies

  • There are four basic growth strategy modes:
    • Market penetration strategy – increasing sales in the existing market.
    • Market development strategy – increasing sales by entering new markets.
    • Product/service development strategy – increasing sales by developing and selling new products/services.
    • Diversification strategy – selling new products/services to new markets. This is usually the most difficult alternative to implement.
  • In any case, a start-up has to assure that the considered growth strategy will be consistent with its capabilities, will draw upon and develop its competitive advantage, and will be viable given the competitive situation it would have to face. Growth targets must be demanding, but at the same time they have to be reasonable given the strategic constraints the start-up faces.


2 The dimensions of business growth


  2 The dimensions of business growth

  • Business growth means much more than just an increase in size. It is a dynamic process involving development and change within an organization, as well as changes in its interaction with environment. Due to the multifaceted nature of business organizations, an entrepreneur must understand the growth and development of the venture from many perspectives. These include mainly: financial, strategic, structural and organizational. These perspectives are not independent of each other – they are just different attributes of the same growth process.


  2.1 Financial growth (Wickham, 2006)

  • Financial growth is related to the development of the business as a commercial entity. It is concerned with increases in turnover, costs and investment needed to achieve the turnover, and the resulting profits. Financial growth is linked to the increase in company’s assets. Finally, it is related to the increase in the value of the company, i.e. what a potential buyer would be willing to pay for it.
  • Looking at the financial performance, investors would consider the following four perspectives:
    • The underlying performance of the venture.
    • The growth in the value of the venture.
    • The trend in the risk of the venture.
    • The dividend yielded by the venture.


  2.2 Strategic growth (Wickham, 2006)

  • Strategic growth relates to changes in how business interacts with its environment in a strategic whole. It is concerned with how a business develops its capabilities to exploit market presence, including selection of opportunities and acquiring assets (both tangible and intangible) to create sustainable competitive advantage.
  • It must be at the heart of the growth process, as strategy relates the needs of customers to the ability if the business to serve them.
  • From the strategy perspective, growth represent business’s success in drawing in resources from its environment, adding value to them and distributing the created value to customers. This means a business had built a competitive advantage. However, it is not static and requires continuous development and enhancing.
  • All competitive advantages are sensitive to business growth – in general, expansion can be used to enhance a competitive advantage, but only when it is actively managed as the business grows and develops.
  • One of the key competitive advantages related to growth are the cost advantages – they are mainly based on experience effects, as practice leads to reduction in costs and, most importantly, with linearly increasing output costs tend to fall exponentially. Thus, the entrepreneur can build cost advantages as the business grows.
  • Another competitive advantage related to growth is the knowledge advantage. It arises from knowing something about the customer, the market or the product that competitors do not know, enabling business to offer higher value to customers. Development of such advantage depends on two factors: 1) how significant (i.e. valuable to customers) is the knowledge advantage, and 2) how will it be eroded (e.g. how long will it take competitors to gain and use the knowledge themselves).
  • Competitive advantage of the growing business can be also built on relationship advantages. In  early stages, all relationships are built and maintained directly by the entrepreneur, who represents the business in front of all stakeholders. The important challenge is how to use such advantages to drive the growth of the business, and how to maintain them as it grows. As the business grows, the entrepreneur can no longer maintain all relationship on his own, and has to delegate part of the networking to new individuals (as relationships exist between people, not just organizations) on specialist basis.
  • Finally, structural advantages arise when business is organized in a way that enables it to be more flexible and responsive under the competitive pressure. This is often a strong advantage of entrepreneurial ventures, that are on contrary usually too small and young to enjoy cost and sometimes even relationship advantages. The challenge is to retain the flexibility and responsiveness as the business grows and matures.


   2.3 Structural growth (Wickham, 2006)

  • The structure of organization comprises of framework of hierarchical and reporting relationships (“hard” parts) and communications, role and power structures taking place within this framework (“soft” part).
  • The factors driving the structure of the organization as it grows are following:
    • Organization size – generally, the larger the organization, the more complex its structure will be.
    • Operational technology – i.e. the way it goes about performing its tasks. The tasks can be simple and straightforward, complex but still repetitive, and complex with little repetition.
    • Organization strategy – there is no simple relationship between strategy and structure. They need to be aligned and the key to determine the structure is the way how decisions related to strategy are made within the organization.
    • The organization’s environment – made up of macroeconomic features, stakeholders and competitors. The environment is defined by its complexity, speed of development and changes, and predictability.
    • Power, control and organizational politics – they determine the extent to which, and the way in which the entrepreneur can exert control over the organization as it grows. A powerful entrepreneur can be a great asset to the venture, as he provides vision and leadership, and keeps the organization focused. However, power also brings responsibility. It is important, especially for innovative fast-growing ventures, to create an environment where individuals can express and act upon their skills. Once the venture reaches a certain size, the entrepreneur is advised to create a support management team.


  2.4 Organizational growth (Wickham, 2006)

  • As the venture grows, the entrepreneur faces the task to design and create an organization. Here, one of the approaches may be to consider the resource requirements of the organization and to design its structure around them. It is a very organic approach, according to which the structure adopted by a particular organization can be thought of as a response to its requirements related to three key resources, namely:
    • Information,
    • Capital,
    • People.
  • Particular functions are then formed within a venture in order to manage acquisition of these resources (in large organizations, these would be represented by departments).
  • In addition, the complete organization will include two more functions: 1) operational system (which actually produces business’s outputs) and 2) strategic control function (co-ordinating the operation of the organization as a whole).


3 Consolidating the venture (Wickham: SE)


  3 Consolidating the venture (Wickham, 2006)

  • Even though entrepreneurial venture is characterized by growth, at some stage growth slows and it becomes a mature company. The company has to undergo a process of consolidation. In this stage, some of its success factors will change. Also, the concept intrapreneurship arises as a way to preserve the entrepreneurial spirit in the venture.
  • Maturity is associated with much more than a simple slowdown of growth. It is associated with number of changes in the main aspects of the organization (i.e. financial, strategic, structural and organizational dimension). These changes are referred to as consolidation.
    • Consolidating finance – growth in turnover and supporting assets will slow down (perhaps to the overall expansion of the economy). Investment in growth can be reduced. This is when investors will look for their returns.
    • Consolidating strategy – the market position has been successfully defined and established, and its development is rather organic. Aggressive competitive strategies will change to more defensive postures aimed at preventing competitors from taking the business away.
    • Consolidating structure – internal configuration of the business develops certain permanence. Key roles and responsibilities (that have been dynamically formed during the growth) are given longer-term definitions.
    • Consolidating organization – organization’s systems, procedures and operating practices are settled down into more permanent patterns. Also, firm’s culture gets its final shape.
  • Prospects and rewards offered to employees will also change. Job security will be higher. Positions within organizations and career paths will be more clear. Overall speed of changes will slow down. It will also decrease excitement and challenge coming from managing rapid growth.
  • Even the consolidated venture can preserve attributes of entrepreneurial organization through phenomenon of intrapreneurship. An intrapreneur is an entrepreneur working within an established organization while performing very same roles like entrepreneur. Intrapreneurial activity can be directed at four levels:
    • The management of specific projects
    • The setting up of new business unit
    • Reinvigorating the whole organization
    • Reinventing the business’s industry
  • However, there are also certain limitations to intrapreneurship that need to be considered:
    • Entrepreneur’s comfort with letting go of some control
    • Decision-making control and intrapreneur’s freedom
    • Internal politics and resistance
    • Rewards (economic, social, developmental) for the intrapreneur


4 Harvesting, business exits and exit strategies (Scarborough, Smith2Bliss)


  4 Harvesting, business exits and exit strategies (Scarborough, 2014; Smith et al., 2011)

  • Entrepreneurial ventures are not necessarily life-long projects. At certain stage of the venture lifecycle, entrepreneur can decide to exit the business and harvest by realizing its value.
  • It is good idea to clarify from the very beginning of the venture start-up the entrepreneur’s plans and expectations toward the exit. Also, VCs and investors normally negotiate harvesting options at the time of the initial investment.
  • In some cases (such as lifestyle ventures) entrepreneurs may not find exiting the business desirable. On contrary, serial entrepreneurs who especially enjoy creating and growing ventures will probably not be happy managing a mature businesses, and would instead prefer exit and harvest. Afterwards, they can use part of the earned resources to set up a new business.
  • There are two basic exit/harvesting alternatives: selling to outsiders and selling to insiders.
  • Selling to outsiders include the following harvesting/exit strategies:
    • Direct private sale (acquisition).
    • Going public (IPO).
  • Selling to insiders include the following harvesting/exit strategies:
    • Management buyout (MBO) – transferring the venture to management team or key employees.
    • Leveraged buyouts (LBO) – managers and/or employees borrow money from a financial institution to purchase a business, and then use money from the company’s operations to pay back the debt.
    • Employee stock ownership plans – establishing internal market for company’s shares by enabling employees to invest in the company’s equity.
  • Factors that should be considered when deciding upon a particular harvesting/exit strategy include: company size, the value of the public market for the shares, synergies, track record and ease of valuation, timing, ownership and control, taxes and transaction costs.

 

 Bibliography

1. Smith, J. K., Smith L. S., Bliss, R. T. (2011). Entrepreneurial Finance. Strategy, Valuation & Deal Structure. Stanford, CA: Stanford University Press.





2. Wickham, P. A. (2006). Strategic Entrepreneurship. 4th ed. Harlow, Essex: Pearson Education Limited.





3. Scarborough, N. M. (2014). Essentials of Entrepreneurship and Small Business Management. 7th ed. Harlow, Essex: Pearson Education Limited.




 Related material:
teachingnotesmanaginggrowth.docx
 Training Fiche PPT:
SUPER_training_presentation_CU_managing_growth_FINAL.pptx

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