© 2007 John Wiley & Sons Australia, Ltd

Chapter 15

Managing growth and transition

Chapter outline

• The dimensions of business growth• Conceptualising growth and

organisational change• From the entrepreneur to the manager• Harvesting

Learning objectives

• Explain the various dimensions of growth in a business enterprise

• Discuss the four basic theories that explain how and why organisations grow

• Explain the major stages in a typical business life cycle

Learning objectives

• Outline the changing role of the entrepreneur/small business owner as the business grows

• Identify different methods of ‘harvesting’ a business venture

Introduction

• Most small companies have one of the following broad goals: – to survive– to consolidate and continue to be

successful, or– to expand and grow.

Introduction

• On closer inspection, it becomes clear that these three basic activities are often variations on the same theme, and can be reduced to a focus on expansion and growth in one way or another.

The dimensions of business growth

Financial growth

• Financial growth relates to the development of the business as a commercial entity.

• It is concerned with increases in sales, the investment needed to achieve those sales, and the resulting profits.

Financial growth

• It is also concerned with increases in what the business owns — its assets.

Strategic growth

• Strategic growth relates to the changes that take place in the way in which the organisation interacts with its environment as a coherent (or strategic) whole.

Strategic growth

• Primarily, this is concerned withthe way the business develops its capabilities to exploit a presence in the marketplace (e.g. market share or reputation).

Organisational growth

• Organisational growth relates to the changes that take place in the organisational structure, process and culture as it grows and develops.

Organisational growth

• The structure of the organisation, and the way that structure develops as the organisation grows, is both a response to the circumstances in which the organisation finds itself and a reaction to business opportunities.

The choice of not growing

• Although market forces may press for the majority of owner-managers the need to maximise growth, or indeed to grow at all, it is not self-evident:– Firstly, growth relates to the personal

choice of the entrepreneur.

The choice of not growing

– Secondly, there is often a belief on the part of owner-managers that continued growth of the firm will lead to an erosion of their managerial and financial control over the business.

Conceptualising growth and organisational change

• There are four basic theories that explain how and why organisations change.

• These are based on the notion of:

– life cycle

– teleology

– evolution

– dialectic

Life cycle

• The notion of life cycle suggests that the business venture undergoes a pattern of growth and development, much like a living organism does.

Life cycle

• Typically, the stages follow a pattern of:– new venture development– start-up– growth– maturity– rebirth or decline

Life cycle stage characteristics

(continued)

Life cycle stage characteristics (cont’d)

Teleology

• The purpose or goal of management (e.g. growth) is the final cause for guiding movement of the organisation.

• This model views development as a cycle of goal formulation, implementation, evaluation and modification of goals based on what was learned by the organisation.

Teleology

• The entrepreneur can use their vision as a future state which pulls the organisation forward.

Evolution

• Evolution is a theoretical scheme which explains changes in structural forms of populations of organisations across communities or industries.

Evolution

• As in biological evolution, organisational change proceeds through a continuous circle of variation, selection and retention.

• As business ventures perform reliably and accountably over time, they demonstrate their fitness and may acquire legitimacy.

Dialectic

• This theory focuses on stability and change based on the collision of power between opposing entities.

• It is based on the assumption that organisations or members within organisations compete with each other for domination and control.

Dialectic

• Change is the result of the appearance of opposing views (thesis and antithesis) and (im)balance of power between entities.

From the entrepreneur to the manager

• Managing any business ventureis a tough job. Managing a rapidly growing enterprise, however, presents a particular challenge because the essential nature of the manager’s job changes with growth.

From the entrepreneur to the manager

• As the number of employees increases, and the volume and complexity of work expands, entrepreneurs must change their fundamental approach to managing.

Defining the manager’s job

• Strategy and operatingWhat task should the enterprise perform?

• OrganisingHow should tasks be structured and coordinated?

• StaffingWho should do the work?

The manager’s tools

• As managers execute their responsibilities in a time-related fashion, they need to:

– Anticipate the situation and doas much as possible to prepare to deal with it.

The manager’s tools

– Act to carry out plans, and at the same time deal with unanticipated issues.

– Review the situation to learn everything possible in order to apply it to the next round of events, and to reward employees according to their effort.

The steps towards professional management

• There are four key steps for a successful transition toward professional management:

– Recognise the need for change

– Developing human resources

– Delegating responsibility

– Developing formal controls

Harvesting

• If building and growing a business are the first two steps in creating wealth, harvesting can be regarded as the third.

Harvesting

• After a total immersion in the business, a huge workload, many sacrifices, and quite often burnout, many entrepreneurs want to reap a reward for the effort they have put into launching and nurturing a business venture.

Key elements to consider when planning an exit

• Strategic elements linked to the business environmentAn exit is attractive for the entrepreneur only if potential buyers are interested in the firm.

• Entrepreneur’s personal aspirationsFor most entrepreneurs, the business venture is a dominant part of their lives.

Key elements to consider when planning an exit

• Business financial situationFor example, it might be difficult to list a company that has a high debt to equity ratio (leverage).

Balancing of strategic, personal and financial goals in a harvest strategy

Key elements to consider when planning an exit

• Guidelines and cautions while preparing a harvest strategy (Timmons, 1997):– Patience

Several years are required to launch and build most successful companies.

– VisionThe other side of the patience coin is not to panic as a result of unexpected events.

Key elements to consider when planning an exit

– Realistic valuationIf impatience is the enemy of an attractive harvest, then greed is its executioner.

– Outside adviceIt is recommended to find an advisor who can help craft a harvest strategy while the business is still growing.

Sale to a financial or a strategic buyer

• Selling the business outright is by far the most common harvest method.

• Sales fall into several broad categories, depending on the buyers:– financial sales

Buyers look primarily to a firm’s stand-alone cash-generating potential as the source of value.

– strategic salesStrategic buyers expect synergies with their other holdings.

– management buyoutsThe founder sells to managers or existing partners in the business.

Sale to a financial or a strategic buyer

Management buyout (MBO)

• The MBO usually entails high levels of debt.

• This requires a company that is capable of generating large sums of cash on a regular basis or that has substantial assets that can be sold to pay off the debt.

Management buyout (MBO)

• Three factors must be considered:– the ability to borrow significant sums

against the company’s assets– the ability to retain or attract a strong

management team– the potential for each participant’s

investment to increase substantially in value

Strategic alliance and merger

• A strategic alliance is an ongoing relationship between two businesses in which they combine efforts for a specific purpose.

Strategic alliance and merger

• If the strategic alliance takes place between competitors, it can often lead to a merger of the two companies later. In this case, the two companies merge to form a new legal entity.

Initial public offering (IPO)

• Through the IPO, the company’s shares are placed for sale on a public stock exchange.

• The merits of going public, vis-à-vis being acquired, rest largely on the contention that IPOs provide higher valuations than what it would expect from being acquired.

Initial public offering (IPO)

• However, there are disadvantagesin going public, such the loss of privacy, a reduced control, and significant costs.

Summary

• The growth of the venture can be approached from a number of perspectives (financial, strategic and organisational).

• However, for the majority of owner-managers the need to maximise growth, or indeed to grow at all, is not self-evident.

Summary

• Four basic theories can explainhow and why organisations change: life-cycle, teleology, evolution and dialectic.

• Fundamentally, the key responsibilities of the manager revolve around operating, organising and staffing.

Summary

• There are a variety of common tools and techniques to help owner-managers in their responsibilities along the anticipating-acting-reviewing cycle of these responsibilities.

Summary

• There are four main exit strategies which entrepreneurs can use to harvest a venture: – sale to strategic partner or corporate

investor – management buyout – strategic alliance and merger, and – initial public offering.

Summary

• The exit process must be carefully prepared and special attention should be given to the business environment, stakeholders’ interests and corporate finance issues.