Strategic Management II

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Entrepreneurial Ventures and Small Businesses


Definition of Small Business Firms A small business firm is independently owned

and operated, is not dominant in its field, and does not engage in innovative practices.

One that employs fewer than 500 people and has sales of < $20 million annually.

Definition of entrepreneurial ventures An entrepreneurial venture is any business

whose primary goals are profitability and growth and that can be characterized by innovative strategic practices.


Entrepreneurial Venture vs. Small Business Firms

Small Business Firms1. Independently owned

and operated2. Not dominant in its

field3. Not engaged in

innovative practices

Entrepreneurial Ventures1. Primary goals profit

and growth2. Innovative strategic

practices


Entrepreneur as Strategist An entrepreneur as a person who organizes

and manages a business undertaking and who assumes risk for the sake of a profit.

He is known as the ultimate strategist. He or she makes all the strategic as well as

operational decisions. All three levels of strategy- corporate, business,

and functional-are the concerns of this founder and owner-manager of a company.

Entrepreneurs are strategic planners without realizing it.


Importance of Small Businesses and Entrepreneurial Ventures

1. 22 million2. >95% of all businesses3. 85% new jobs created by small firms4. 2X R&D dollars on fundamental research

compared to large firms5. 50% of businesses found in any given year,

not in business w/i 5 years


Use of strategic planning and strategic management

Strategic planning is strongly related to small business financial performance.

The reason of not using strategic planning and management in small businesses and entrepreneurial ventures are as follows.

1. Not enough time2. Unfamiliar with strategic planning3. Lack of skills4. Lack of trust and openness


Degree of formality Strategic planning will be more informal than in

large corporation in small businesses and entrepreneurial ventures

Too much formalization also reduces productivity of the organization

Strategic planning can be used by banks and venture capitalists when the entrepreneur is searching for capital

It is dysfunctional to small firms to make structured plans and written document because small firms are far more flexible


As entrepreneurial firm matures, its strategic planning process tends to become more formal.

These firms use entrepreneurial mode at very first stage then planning mode at growth stage and adaptive mode at a established stage to choose stability over growth.


Usefulness of the strategic management model

Evaluation and Control

and ControlStrategy Formulation

Strategy Implementation

Mission

Objectives

Strategies

Policies

Feedback/Learning

Environmental

Scanning

Societal Environment

General Forces

Task Environment

Industry Analysis

Structure Chain of Command

Resources Assets, Skills

Competencies, Knowledge

Culture Beliefs, Expectations,

Values

Reason for existence

What results to accomplish by when Plan to

achieve the mission & objectives Broad

guidelines for decision making

Programs

Activities needed to accomplish a plan

Budgets

Cost of the programs Procedures

Sequence of steps needed to do the job

Process to monitor performanceand take corrective action

Performance

External

Internal

Evaluationand Control


Informal Questions to Begin the Strategic Management Process in a Small Company or Entrepreneurial Venture

Formal InformalDefine mission What do we stand for?

Set objectives What are we trying to achieve?

Formulate strategy How are we going to get there? How can we beat the competition?

Determine policies What sort of ground rules should we all be following to get the job done right?

Establish programs How should we organize this operation to get what we want done as cheaply as possible with the highest quality possible?

Prepare pro forma budgets How much is it going to cost us and where can we get the cash?

Specify procedures In how much detail do we have to lay things out, so that everybody knows what to do?

Determine performance measures What are those few key things that will determine whether we can make it? How can we keep track of them?


Usefulness of strategic decision making process


Strategic Decision-Making Process1. Develop the basic business idea A product and/or service having target customers and/or markets2. Scan the external environment Locate factors in the societal and task environments that pose opportunities and threats3. Scan the internal factors Objectively consider personal assets, expertise, abilities, and experience4. Analyze the strategic factors SWOT and SFAS Table 5. Decide go or no go Feasibility to go or further development6. Generate a business plan Specify how the idea will be transformed into reality/(Strategic audit) Framework oriented toward future7. Implement the business plan Action plans and procedures8. Evaluate the implemented business plan Compare actual performance against projected performance results


Corporate Governance1. Simpler in entrepreneurial firms2. Owner as manager3. No board unless incorporated4. Closely-held firms have passive boardsAdvisory board A group of external business people

voluntarily meeting with owner to discuss strategic issues


Issues in Environmental Scanning and Strategy Formulation

Environmental scanning in small businesses is much less sophisticated than it is in large corporations

The business is too small to justify hiring someone to do only environmental scanning and strategic planning.

Top managers, especially if they are the founders, tend to believe that they know the business and can follow it better than anyone else.


Most small business owner-managers rely more on internal as opposed to external sources of information.

Five forces of competition analysis is impossible because small local business do not analyze the competitors remained in wider geographic scope.

Small business owner or manager’s personal and family needs strongly affect a small business’s mission and objectives and can overrule other considerations.


A small company choose a stability strategy because the entrepreneur is interested mostly in

1. Generating employment for family members2. Providing the family a decent living3. Being the boss of a firm small enough that he or

she can manage it comfortably. Some business owners don’t like a growth

strategy because of loss of control or bank debt or sale of stock to the public

Some managers believe that the company will buyout by competitors if it goes to the public


SWOT analysis will be more focused on towards entrepreneurs characteristics-his or her assets,expertise,abilities,and experiences.

The success and growth of the business are assumed on competencies, motivations and connections etc.

Intangible assets such as leadership,strategy,human and intellectual capital are more important than traditional financial ones.


Sources of innovation Peter Drucker proposes seven sources for innovation

that should be monitored in starting an entrepreneurial venture.

1. The unexpected An unexpected success, an unexpected failure, or an

unexpected outside event can be a symptom of a unique opportunity

2. The incongruity /unease A discrepancy between reality and what everyone

assumes it to be or between what is and what ought to be can create an opportunity for innovation.


3. Innovation based on process need When a weak link is evident in a particular

process but people work around it instead of doing something about it an opportunity is present for the person or company willing to build a stronger one

4. Changes in industry or market structure A business is ready for an innovative

product,service,or approach to the business when the underlying foundation of the industry or market shifts


5. Demographics Changes in the population’s size, age structure,

composition, employment, level of education, and income can create opportunities for innovation.

6. Changes in perception,mood,and meaning Opportunities for innovation can develop when a

society’s general assumptions,attitudes,and beliefs change.

7. New knowledge Advances in scientific and nonscientific knowledge

can create new products and new markets Advances in two different areas can sometimes be

integrated to form the basis of a new product.


Factors affecting a new venture’s success Three factors have a substantial impact on a

new venture’s performance. These are 1. The structure of the industry entered2. The new venture’s business strategy3. Behavioral characteristics of the entrepreneur


Industry structure The chances for success are more in rapidly

changing industries than stable industries. Prospects are better in early, high growth

stages of development. Competition is often less intense Fast growth market also provides the

mistakes without serious penalty. The patents does not provide competitive

advantage in a high tech or in hypercompetitive industry.


Most ventures enter into industries where low degree of industry concentration is present/no dominant competitors.

New venture will success with heterogeneous products than homogeneous products.

In heterogeneous market the venture can differentiate it’s products with its competitors.

The venture will be successful when the product is unimportant to the customers’ total purchasing need.

Because the customer will test the product in low cost manner.


Business strategy The key’s to success for most new ventures are1. To differentiate the product from those of other

competitors in the areas of quality and service 2. To focus the product on customer needs in a

segment of the market in order to achieve a dominant share of that part of the market.

Adopting guerrilla warfare tactics, these companies go after opportunities in market niches too small or too localized to justify retaliation/reject from the market leaders.


A new venture analyzes its competitors to assess their likely response to the company’s entry into the market.

To continue its growth once it has found a niche, an entrepreneurial firm can emphasize continued innovation and pursue natural growth in its current markets.

The firm can also expand into related markets in which the company’s core skills, resources, and facilities offer the keys to further success.


Entrepreneurial Characteristics The followings are the entrepreneurial

characteristics to a new venture success1. The ability to identify potential venture

opportunities better than most people Focus on opportunities not on problems Try to learn from failures Goal oriented Visionary Innovative proactive and willing to take risks


2. A sense of urgency that makes them action oriented High need for achievement Motivation Internal locus of control Capacity to tolerate ambiguity and stress Strong need for control3. A detailed knowledge of the keys to success in the

industry and the physical stamina to make their work their lives

Better than average education Significant work experience on industry


4. Access to outside help to supplement their skills,knowledge,and abilities

Networking, making friends who have key skills and knowledge

Close relationships with investors,partners,creditors,and employees.


Some Guidelines for New Venture Success

• Focus on industries facing substantial technological or regulatory changes, especially those with recent exits by established competitors.

• Seek industries whose smaller firms have relatively weak competitive positions.• Seek industries that are in early, high-growth stages of evolution.• Seek industries in which it is possible to create high barriers to subsequent entry.• Seek industries with heterogeneous products that are relatively unimportant to the

customer’s overall success.• Seek to differentiate your products from those of your competitors in ways that are

meaningful to your customers.• Focus such differentiation efforts on product quality, marketing approaches, and

customer service—and charge enough to cover the costs of doing so.• Seek to dominate the market segments in which you compete. If necessary, either

segment the market differently or change the nature and focus of your differentiation efforts to increase your domination of the segments you serve.

• Stress innovation, especially new product innovation, that is built on existing organizational capabilities.

• Seek natural, organic growth through flexibility and opportunism that builds on existing organizational strengths.


Issues in strategy implementation1. Organizing and staffing the growing company2. Transferring ownership of the company to the

next generationOrganizing and staffing the growing company (sub

stages of small business development) Implementation issues arises when small

business changes as the company grows and develops over time.

The managerial problems arises when companies grow from one stage to the next stage.


How a company can move through the entrepreneurial stage I into a functionally oriented, professionally managed stage II

Stage A : Existence An entrepreneurial venture faces the problems of

obtaining customers and delivering the promised product or service.

The organization culture is simple The entrepreneur does everything and directly

supervises subordinates Systems are minimal The owner is the business


Stage B : Survival Those ventures able to satisfy a sufficient

number of customers enter in this stage The rest close when their owners run out of

startup capital. Those reaching out this stage are concerned

about generating cash flow needed to repair and replace capital assets.

They are concerned to finance the growth to continue satisfying the market segment they have found

The organization structure is simple


The major problem is finding a manager in the absence of entrepreneur at a modest salary

The entrepreneur will search family member instead of hiring someone from outside

Because we cannot found the dedication or outsiders as entrepreneur’s.

We also called lifestyle company in this stage Because the firm will run as per the

owner/entrepreneur lifestyles.


Stage C : Success The firm is not only profitable but has

sufficient cash flow to reinvest in itself. The issue in this stage is whether the company

should be used as a platform for growth or as a means of support for the owners.

The company will transformed into functional organization

The entrepreneur still will have full control over the firm

The two options are


1. Disengagement The company will follow stability strategy The company will remain in this stage forever The environmental changes does not destroy its

niche Poor management reduce its competitive abilities The company will be incorporated The BODs will be rubber stamp The strategic management decisions are based on

personal desires and the founder’s background


2. Growth The entrepreneur risks all available cash and

borrowings to finance further growth Strategic and operational planning are

extensive and deeply involve the owner Visionary managers are hired The firm wants to remain at fortune 500 lists The company will follow team work rather

than entrepreneurs personal desires The personal values and philosophy of the

founder are transformed to the culture.


Stage D : Take off The key problem in this stage are how to grow

rapidly and to finance the growth The firm is incorporated and has sold for or is

planning to sell stock in its company via an IPO. The company will formed professional team to

manage top level management Operational and strategic planning greatly

involve the hired managers, but the company is still dominated by the entrepreneur’s presence and stock control.


The big issue is whether the entrepreneur will have full control even he has lack of managerial skills

The succession plan will be developed so as to replace the current managers

Stage E: Resource maturity In this stage the firm adopted some characteristics of

large one. It is small and SMEs and recognized as an important

force in the industry and possible candidate for Fortune 500.

The main problem is to incorporate the entrepreneurial spirit of the entrepreneur in the organization.

The firm will enter into Stage II


Transfer of power and wealth in family business The small businesses will have problem when

they transfer managerial control to the outsiders.

The outside managers will charge more amount than the company expected.

The founder will handover the ownership to the family.

Some of the reasons family businesses may fail to successfully transfer ownership to the next generation are


1. Inherited wealth destroys entrepreneurial drive2. The entrepreneur does not allow for a changing

firm3. Emphasis on business means the family is

neglected4. The business’ financial growth can’t keep up with

rising family lifestyles5. Family members are not prepared to turn a

business6. The business becomes an arena for family conflicts7. The succession planning will not succeed due to

siblings rivalry, family’s refusal etc.


Transfer of power in family business1. Phase I : Owner Managed Business The founder and the business are one2. Phase II : Training and Development of New Generation The family begins to identify itself with the business3. Phase III : Partnership Between Generations A son or daughter of the founder will involved in key

managerial and business decisions4. Phase 4 : Transfer of Power The founder will sell the company to its family members The founder will be Chairman and son or daughter will

be CEO


Issues in Evaluation and Control1. Line between debt and equity is blurred The retained earning column will not be shown in the balance

sheet because it will be used to acquire fixed assets so as to reduce the burden of tax.

2. Lifestyle is part of financial statements Some assets are used by the family3. Standard financial formulas don’t always apply Short term debt is used to finance fixed assets 4. Personal preference determines financial policies Dividend policies are based on personal desires and lifestyles5. Banks combine personal and business wealth Personal assets are put as collateral by the bank If collateral is not available the owner has to pay high interest

rate.


The End

Strategic Management II

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