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CHAPTER 1 3Strategies for Growth and Managing the Implications of Growth

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380 PART 5 FROM FUNDING THE VENTURETO I.AUNCHING, GROWING, AND ENDINO THE NEW VENTURE

where employees are called team members, the dress is casual, and the focus is onsports. To Brian and Jennifer. it was important tht their employees enjoyed the work-place and developed an important loyalty'and iommitment to the company's misson.

In the early part of the 1990s, sales for the new venture increased by 50 to 60 per-cent. In 1997 sales began to slow and increased by only 23 peicent. tn 1995 Brian andJennifer turned down an opportunity to purchase Balance Ba6 a producer of an energybar that targeted the more casual athlete and those who were looking for a nutritioussnack. They had believed that their company did not need to add any new products andcould continue to grow with the one product. In retrospect, they realized this was a mis-take in strategy and that the venture could not survive on the one product, especiallywhen they saw sales begin to stall in 1995. At that time there were many flew competi.tors who recognized the opportunities in a larger market by introducing energy barsfor casual exercisers and snackers. So in 1997 Brian and Jennifer began efforts to findnew products. In 1998 they launched PowerBar Harvest, a crunchy, textured energy baravailable in a number of flavors that would target casual athletes and consumers look-ing for a nutritious snack. In 1999 a new cramy bar called Essentials and a new line ofsports drinks were launched.

Today PowerBar is still the leader in the serious athlete market, and Harves! has justpassed Clif bar to become the number three brand in this category. Sales in:1999 reached$135 million. The company also opened a state-of-the-art manufacturing facility inldaho and two distribution centers in ldaho and North Carolina. lt alsoestablished twosubsidiaries in Canada and Germany as opportunities for sales growth in internationalmarkets occurred.

Brian still runs 40 to 50 miles per week. Jennifer was recently recognized in the firstannual Working Women Entrepreneurial Excellence Awards competition by winningfor Harvel in the Best Innovation category. In 2000, PowerBar was purchased by NestlUSA, which intends to grow and expand it globally. Brian Maxwell will continue to playan integral role in the company.

ln this chapte4 important rnanagement decision areas are reviewed and discussed.Building a solid management team and a loyal employee base, recognized by entre-preneurs like Brian and Jennifer Maxwell as being very important during the earlyyears, is discussed in detail, along with financial and marketing control decisions.

GROWTH STRATEGIES: WHERE T0 L00KFOR GROWTH OPPORTUNITI ESIn Chapter 3 we discussed new entry as an essential act of entrepreneurship. A successfulnew entry provides the opportunity for the entrepreneur to grow his or her business. For ex-ample, introducing a new product into an existing market provides the opportunity to takemaket share from competitors; entry into a new market provides the opportunity to service

penehst,on stf-ateg!A strategy to grow byencouraging existingcustomers to buy mofeof the firm's currentproducts

CHAPTER .I3 STRATEGIES FOR GROWTH AND MANAGING THE IMPLICATIONS OF GROWTH 381

a new group of customers; and a new organization has a chance to make, and build upon,its first sales. Although it is difficult to provide direct guidance to entrepreneurs on a step-by-step process for generating a highly attractive opportunit in this chapter we provide amodel that offers suggestions on where to look for growth opportunities in which the hrmmay already have a basis for a sustainable competitive advantage. We then investigate theimplications of that growth for an economy, for the firm, and for the entrepreneur, as wellas the possible need to negotiate for resources from external sources to sustain hrm growth.

we know from chapter 3 that opportunities for new entry are generated by the knowl-edge of the entrepreneur and from organizational knowledge. We use this as a basis fordeciding on the best place to look for opportunities to grow the business. From a simpleperspective, we can assume that the entrepreneur and the firm have knowledge aboutthe product that they are cunently producing and selling (the existing product) and haveknowledge about the group of customers to which they are currently selling that product(the existing market).

Different combinations of different levels of these types of knowledge are representedin Figure 13.1 and provide a model of different growth strategies.2 Most of these growthstrategies can lead to a competitive advantage because they capitalize on some aspect of theentrepreneur's, and the firm's, knowledge base. These growth strategies are: (1) penetrationstratgies, (2) market development strategies, (3) product development strategies, and(4) diversification strategies.

Penetration Strateg iesA penetration strategy focuses on the frrm's existing product in its existing market. Theentrepreneur attempts to penetrate this product or market further by encouraging existingcustomers to buy more of the hrm's current products. Marketing can be effective in encour-aging more frequent repeat purchases. For example, a pizza company engages in an exten-sive marketing campaign to encourage its existing customer base of university students toeat its pizza three nights a week rather than only twice a week. This growth strategy does notinvolve anything new for the firm and relies on taking market share from competitorsand/or expanding the size of the existing market. Therefore, this growth strategy attemptsto better exploit its original entry.

Penetrationstrateges

Productdevelopment

strategies

Marketdevelopment

strategiesDiversification

strategies

' Existing : :: : -'. New

Souce: H. I Ansoff, Corporate Strategl:: An Awlytical Approach to B6ness policy for Crowth and Expanslon (New york:McGmw-Hill. 1965).

382 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING. AND ENDING THE NEW VENTURE

narket developmentstrate Str tegy togrow by selling the firm'sexisting products to newgroups ofcustomers

producl developmentstralegJ A stfatgy togrow by developing andselling new poducts topeopl who are alreadypurchasing the fifm'sexisting products

Market Devetopment Strateg iesGrowth also can occur through market development strategies. Market development strate-gles involve selling the frrm's existing products to new groups of customers. New groupsof customers can be categoized in terms of geographics or demographics and./or on thebasis of new product use.

New Geographical Market This simply refers to selling the existing product in new lo-cations. For example, a frrm selling its products in Singapore could stat selling its productsin Malaysia, Thailand, and Indonesia. This has the potential of increasing sales by offeringproducts to customers who have not previously had the chance to purchase them. The entre-preneur must be aware ofpossible regional differences in customer preferences, language,and legal requirements that may necessitate a slight change in the product (or packaging).

New Demographic Market Demographics ae used to characterize (potential) customersbased upon their income: where they live; their education, age, and sex; and so on. For anentrepreneur who is currently selling the frrm's existing product to a specihc demographicgroup, the business could grow by offering the same product to a different demographicgroup. For example, a studio currently produces and sells computer games (specializingin games on baseball and soccer) to males between the ages of 13 and 17. However, there isan opportunity for this company to expand its sales by also targeting males between the agesof 24 and 32 who are university educated, have high disposable incomes, and would likelyenjoy the escapism ofthese computer game products.

New Product Use An entrepreneurial hrm might find out that people use its product ina way that was not intended or expected. This new knowledge ofproduct use provides in-sight into how the product may be valuable to new groups of buyers. For example, when Imoved from Australia to Chicago, I bought a baseball bat. I did not use the bat to play base-ball; rather, I kept it beside my bed for security against anyone who might break into myapartment. Fortunately, I never had to use it, but I did sleep better knowing it was there.Recognition of this new product use could open up a whole new market for the manufac-turers of baseball bats. Another example is four-wheel-drive vehicles. The original produc-ers of this product thought that it would be used primarily for off-road recreational drivingbut found that the vehicle was also popular among housewives because it was big enoughto take the children to school and carry all their bags and sporting equipment. Knowledgeof this new use allowed the producers to modify their product slightly to better satisfy cus-tomers who use the product in this way. An advantage from using a market developmentstrategy is that it capitalizes on existing knowledge and expertise in a particular technologyand production process.

Prod uct Develo p ment Strateg iesProduct development strategies for growth involve developing and selling new products topeople who are already purchasing the hrm's existing products. Experience with a panicu-lar customer group is a source of knowledge on the problems customers have with existingtechnology and ways in which customers can be better served. This knowledge is an impor-tant resource in coming up with a new product. For example, Disney Corporation built onits existing customer base of Disney movie viewers and developed merchandising productsspecifically aimed at this audience. A further advantage of using a product developmentstrategy is the chance to capitalize on existing distribution systems and on the corporatereputation the firm has with these customers.

div e rs ifi c al'n n s t rate g yA stategy to grow byselling a new product toa new market

backward integrationA step back (up) in thevalue-added chain towardthe raw materials

forward integratonA step forward (down) onthe value-added chaintoward the customers

CHAPTER 13 STRATEGIES FOR GROWTH AND MANAGING THE IMPLICATIONS OF GROWTH 383

D iversification StrategiesDiversification strategies involve selling a new product to a new market. Even though bothknowledge bases appear to be new, some diversification strategies are related to the entre-preneur's (and the frrm's) knowledge. In fact there are three types of related diversificationthat are best explained through a discussion ofthe value-added chain.

As illustrated in Figure 13.2, a value-added chain captures the steps it takes to developraw materials into a product and get it into the hands of the cusromers. Value is added atevery stage ofthe chain. For the value added, each hrm makes some profit. If we focus onthe manufacturer, opportunities for growth arise from backward integration, forward inte-graon, and horizontal integration. Bacla,vard integration refers to taking a step back (up)on the value-added chain toward the raw materials, which in this case means that the man-ufacturer also becomes a raw materials wholesaler. [n essence the hrm becomes its ownsupplier. Forward integration is taking a step forward (down) on the value-added chain to-ward the customers, which in this case means that the hrm also becomes a f,rnished goodswholesaler. In essence the hrm becomes its own buyer.

Backward or forward integration provides an entrepreneur with a potentially attractiveoppofunity to grow his or her business. First, these growth opportunities are related to thefirm's existing knowledge base, and the entrepreneur could therefore have some advantageover others with no such experience or knowledge. Second, being one's own supplierand/or buyer provides synergistic opportunities to conduct these transactions more effr-ciently than they are conducted with independent firms fulfilling these roles. Third, operat-ing as a supplier and/or a buyer of the original business provides learning opportunities thatcould lead to new processes and/or new product improvements that would not have beenavailable if this integration had not taken place.

A5 SE EN .I N. EA/TRE P.REN E U RPROVIDE ADVICE TO AN ENTREPRENEURMARKETS USING THE INTERNET

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CHAPTER f 3 STMTEGIES FOR GROWTH ANO MANAGING THE IMPLICATIONS OF GROWTH 385

may Provide learning opportunities. Furtheq horizontal integration provides the opportu-nity to increase sales of the existing product. For exampte, the existing product and the newproduct may be bundled and sold together, which may provide increased value to cus-tomers and increase sales. Examples of bundled products include computer hardware andsoftware, televisions and video recorders, and telephones and answering machines.

What about introducing a new product into a new market that is not related to the ex-isting business (i-e., not forwad, backward, or horizontal integration)? The short answeris, "Don't do it." If it is not related to the current business, then what possible advantagecan this firm have over competitors? Ego and the mistaken belief in the benefits of afirm's diversifying its risk lead some entrepreneurs to pursue unrelated diversification totheir own peril.

Example of Growth StrategiesTo illustrate the use of the preceding model to explore possibilities for firm growth, we con-sider the early days of the Head Ski company, which, at that time, only produced and soldhigh-tech skis in the U.S. market. A penetration strategy for Head could be achievedthrough an increase in its marketing budget focused on encouraging existing customers to"upgrade" their skis more often. This could involve some sort of performance imperativethat encourages customers to desire the most up-to-date skis with the newest technologicalfeatures.

A mnrket development strategy could involve Head's selling its skis in Europe,Argentina, and New zc,aland. The advantage of moving into Argentina and New znalandisthat these makets are in the Southern Hemisphere and therefore sales are counerseasonalto those in the United States (and other Northern Hemisphere markets). Head could alsostart selling its skis to the mass market---those less affluent skiers who want a good-performance ski at a "reasonable" price.

To pursue aproduct developmcnt stategy, Head could develop and sell new products,such as hats, gloves, boots, and other ski accessories, to people who buy its skis. Headcould also manufacture tennis racquets or mountain bikes----equipment that is used by itsexisting customer group when not skiing. These new products would build on its customerreputation for high-tech, high-quality products and could capitalize on existing distributionsystems. For example, ski shops could sell Head tennis racquets and mountain bikes dur-ing the summer months, which would also smooth out seasonal variability in sales.

Diversification strategies also offer opportunities for growth. For example, backwardintegration could involve the design and manufacture of equipment used to make skis, for-ward integration could involve control ofa chain ofretail ski shops, and horizontal integra-tion could involve ownership of ski mountains (lifts, lodges, etc.).

As this example demonstrates, the model offers a tool for entrepreneurs, to force themto think and look in different directions for growth opportunities where the hrm may al-ready have a basis for a sustainable competitive advantage. The pursuit and achievement ofgrowth have an impact on the economy, the frrm, and the entrepreneur.

ECONOMIC IMPLICATIONS OF GROWTHIn 1996 Inc. magazine conducted a study of its 500 fastest-growing ventures in 1984 to as-certain what happens to those ventures that are entering a growth phase.3 In 1984 these 500fastest-growing ventures had aggregate sales of $7.4 billion and 64,000 full-time employ-ees and were all experiencing the beginning ofthe rapid growth described earlier. By 1995,among the original 500 ventures, there had been 95 failures or shutdowns and 135 had been

386 PART 5 FROM FUNDINGTHEVENTURETOLAUNCHING, GROWING.ANDENOINGTHE NEWVENTURE

Source: Matha E. Mangelsdorf, "The Staf lrg Truth about Growth Companies," /rc. (Nay 21, 1996). p 85 Copyright @ 1996 by Mansueto Ventures LrcReproduced with permission ofMansueto VentuH LLC via Copyright Clearance Cente.

sold to new owners. The 233 companies that were willing to report earnings, however,more than made up for the failures in jobs created and revenue generated- These 233 com-panies had reached sales of $29 billion and employed 127,ff[ people full time. Thus, these233 firms represented revenue and total numbers of employees that were signihcantlylarger than the original list of 500 ventures.

Figure 13.3 compues the 1984 results with the reported 1994 revenue and number offull-time employees. You can see how signihcant the growth has been when you comparethe 1994 sales and numbers of employees of the 233 companies that participated with the1984 sales and numbers of employees of the same 233 companies-

CHAPTER 13 STMTEGIES FOR GROWTH AND MANAGING THE IMPLICATIONS OF GROW]H 387

In addition to still pri_vately held under The factthat there were so thinkinsin entrepreneursh un". thigrowth. A comparison of the revealed that they hadachieved much larger growth se 32 companies fromthe 1984 list grew by $18.9 bi growth rate of 32per-

trepreneurial performers in theMany of these companies had

The sample of Inc. maqazine ventures does not capture those businesses that grow moremodestly, especially small businesses. However, modest levels of growth by small businessescan still have a dramatic impact on an economy. For examplg the majority of new jobs in mostindustrialized economies ae created by small business.a This does not necessarily mean thatmost small hrms do grow; rather, the population of small firms is so large that even when asmall percentage of them do grow, the impact on an economy is still significant and important.s

The sample of Inc- magazine ventures does capture some businesses that were at onestage growing rapidly but later failed. We should not consider business failure a negativeoutcome for an economy. On the contrary, entrepreneurs who pursue growth opportunities,even if such pursuit increases the potential for failure, generate knowledge that stimulaesimprovements in technologies and increases economic resilience.6

For example, an entrepreneur who "goes for it" and develops a new technology could hitthe jackpot, which obviously provides benefits to the economy in terms of tax revenue, em-ployment, reduction of the trade deficit, and so on. But what if the new technology does notwork as expected and the business is bankrupted? How does this improve the economy? Afailed attempt provides information for that entrepreneur and other entrepreneurs. Althoughthe new technology itself did not work, another entrepreneur may have learned from the at-tempt, which may have provided an important piece of the puzzle and,, ultimately, success(and the associated economic benefits).

An economy made up of entrepreneurs that do not fail is likely a poorly performingeconomy. Such an economy does not have entrepreneurs willing to pursue high-risk-high-potential-growth opportunities and therefore does not benefit from the rewards of technolo-gies that "hit" and does not learn from those that are pursued but fail. Next we address theimplications of hrm growth for the firm and then for the entrepreneur.

IMPLICATIONS OF GROWTH FOR THE FIRMBecause growth makes a firm bigger, the firm begins to beneht from the advantages of size.For example, higher volume increases production efficiency, makes the firm more attractiveto suppliers, and therefore increases its bargaining power. Size also enhances the legitimacyof the firm, because hrms that are larger are often perceived by customers, financiers, andother stakeholders as being more stable and prestigious. Therefore, the growing of a busi-ness can provide the entrepreneut more power to influence firm performance. But as the firmgrows, it changes. These changes introduce a number ofmanagerial challenges. These chal-lenges arise from the fotlowing pressures.

Pressures on Existing Financial ResourcesGrowth has a large appetite for cash. Investing in growth means that the firm's resourcescan become stretched quite thin. With financial resources highly stretched, the firm is more

388 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING. GROWING. AND ENDING THE NEW VENTURE

vulnerable to unexpected expenses that could push the rm over the edge and into bank-ruptcy. Resource slack (resources in reserve) is required to ensure against most environ-mental shocks and to foster further innovation.

Pressures on Human ResourcesGrowth is also fueled by the work of employees. If employees are spread too thin by thepursuit of growth, then the firm will face problems of employee morale, employee bumout"and an increase in employee turnover. These employee issues could also have a negativeimpact on the hrm's corporate culture. For example, an influx of a large number of newemployees (necessitated by an increase in the number of tasks and to replace those thatleave) will likely dilute the corporate culture, which is a concern, especially if the firmrelies on its corporate culture as a source of competitive advantage.

Pressures on the Management of EmptoyeesMany entrepreneurs hnd that as the venture grows, they need to change their managementstyle, that is, change the way they deal with employees. Management decision making thatis the exclusive domain of the entrepreneur can be dangerous to the success of a growingventure. This is sometimes difcult for the entrepreneur to realize since he or she has beenso involved in all important decisions since the business was created. However, to survive,the entrepreneur will need to consider some managerial changes.

Pressures on the Entrepreneur's TmeOne of the biggest problems in growing a frrm is encapsulated in the phrase "If I only hadmore time." While this is a common problem for all managers, it is particularly applicableto entrepreneurs who are growing their businesses. Time is the entreprenur's most pre-cious yet limited resource. It is a unique quantity: The entrepreneur cannot store it, rent it,hire it, or buy it. It is also totally perishable and irreplaceable. No matter what an entrepre-neur does, today's ration is 24 hours, and yesterday's time is already history. Growth is de-manding of the entrepreneur's time, but as the entrepreneur allocates time to growth, it mustbe diverted from other activities, and this can cause problems.

There ae actions the entrepreneur can take to better manage these issues and moreeffectively grow his or her business. We will now discuss some of these actions.

OVERCOMING PRESSURES ON EXISTINGFINANCIAL RESOURCESTo overcome pressures on existing hnancial resources, the entrepreneur could acquire newresources. The acquisition of new resources is expensive, whether in terms of the equitysold or the interest payments from debt. The need or the magnitude of the new resoluces re-quired can be reduced through better management of existing resources. Such importantmanagement activities include applying effective f,rnancial control, managing inventory,and maintaining good records.

FINANCIAL CONTROLThe financial plan, as an inherent part of the business plan, was discussed in Chapter [0. Justas we outlined how to prepare pro forma income and cash flow statements for the first threeyears, the entrepreneur will need some knowledge of how to provide appropriate controls toensure that projections and goals are met. Some financial skills ae thus necessary for the

business owner learn'from the mis-

A: So you wanted to own a multibillion-dollar corpo-

your 401(k). too. The excessej that caused this diinte-grat oroughly'examinedand hen their work is cothe find new governmrules and regulations to make doing business moredifficult. Well. don't despair-,,mistakes were made,,'but lessons can be learned.

And don't think for a minute the Enron problem issomething that only giant corporations face. Althoughthe magnitude of its collapse won,t be matched by thelocal print shop or pizza parlori the collapse of eventhe smallest of businesses impacts many people. Thefailure of your business will greatly and negatively im-pact you, your partners, your employees, customers,and vendors as well as the families of each of thosegroups. As business owners, we have a duty to operatein a prudent, lawful, and ethical manner.

5o what can we do? Every good business has a solidbusiness plan and a realistic design for implementingthat plan. While Enron is fresh in our minds. we thinkthe first thing to do is to examine our business planfrom the perspective of its fidelity to the prudence,legality. and ethics mentioned above, and then com-pare the business plan to the reality. Have business"necessities" caused us to step over the line? How willthe deviations from the plan come back to bite us andthose who depend on us? Try to recall your first day inbusiness-it wasn't about bending the rules, t wasn,tabout living high on the hog (or as they say today,

dirty, we won't iee ourselves on,national TV, but ournext-door neighbor. will knowthat side of our charac-ter we've tried to hide. So will our farnilies and closefriends.

Let's think about the things we may be doing now,things that were never in our plan and were nevef apart of our dreams..And let's purge them from ourbusiness practices. A few of the common legal andethical missteps some busiriess owners take, whichmust be ended today, are: '. Paying personal expenses out of business funds

and writing them off. Not reporting all cash receipts. Cheating customers on price, quality, delivery, or

warranty. Usng misleading advertising. Failing to pay our business bills on time. Lying to employees. customers, and vendors

Some may think these lapses pale in comparison tothe allegations against Enron. They don't. lf you actillegally or unethically in your business, given theopportunity, you'd do so if your canvas were larger.Take a good look at the list above and ask yourself,"What is the penalty if | get caught?" Then ask your-self a more important question: "ls this who I reallyam?" Finally, fix it.

We may yet get to fly in that Lear jet, but we'llonly deserve to if we're honest, hard-working busi-ness owners.

Source: Reprinted with permission ofEntrepreneur Media, Inc-,"Even the Smallest Business Can Learn What Nol to Do from ThisGiant Company," by Rod Walsh and Dan Carison, February 20O2,Entrepreneur ma9azine: www.entrepreneuf.com.

entrepreneur to manage the venture during these early years. Cash flows, the income state-ment, and the balance sheet are the key financial aeas that will need careful managementand control. Since Chapter l0 explains how to prepare these pro forma statements, the focusin this section will be controls and the management of these elements to alleviate financial"growing" pains.

390 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENOING THE NEW VENTURE

Managing Cash FlowSince cash outflow may exceed cash inflow when growing a business, the entrepreneurshould try to have an up-to-date assessment of his or her cash position. This can be accom-plished by preparing monthly cash flow statements, such as that found in Thble 13.1, andcomparing the budgeted or pro forma statements with the actual results. The July budgetedamounts are taken from the pro forma cash flow statement of MPP Plastics. The entrepre-neur can indicate the actual amounts next to the budgeted amounts- This will be useful foradjusting the pro forma for the remaining months, as well as for providing some indicationas to where cash flow problems may exist.

Table 13.1 shows a few potential problem areas. First, sales receipts were less thananticipated. Management needs to assess whether this was due to nonpayment by somecustomers or to an increase in credit sales. If the lower amount is due to nonpayment bycustomers, the entrepreneur may need to try enforcing faster payment by sending re-minder letters or making telephone calls to delinquent customers. Bounced checks fromcustomers can also affect cash flow since the entrepreneur has likely credited theamount to the account and assumed that the cash is readily available. If the lower re-ceipts are resulting from higher credit sales, the entrepreneur may need to either con-sider short-term financing from a bank or try to extend the terms of payment to his orher suppliers.T

Cash disbursements for some items were greater than budgeted and may indicate aneed for tighter cost controls. For example, cost of goods was $22,500, which was $1'700

DisbursementsEquipmentCost of goodsSelling expensesSalaries

AdvertisingOffice suppliesRentUtlits

lnsurance :Taxes

Loan principal and interestTotal disb.ursernents -

Cash flowBeginning balanceEnding balance

CHAPTE R 13 STRATEGIES FOR GROWTH AND MANAGING THE IMPLICATIONS OF GROWTH 391

more than budgeted. The entrepreneur may find that suppliers increased their prices,which may require a search for alternative sources or even raising the prices of theproducts/services offered by the new venture. If the higher cost of goods resulted fromthe purchase of more supplies, then the entrepreneur should assess the inventory costsfrom the income statement. It is possible that the increased cost of goods resulted from thepurchase of more supplies because sales were higher than expected. However, if theseadditional sales resulted in more credit sales, the entrepreneur may need to plan to bonowmoney to meet short-term cash needs. Conclusions can be made once the credit sales andlnventory costs are evaluated.

The higher selling expenses also may need to be assessed. Ifthe additional selling ex-penses were incurred to support increased sales (even ifthey were credit sales), then thereis no immediate concern. Howeve if no additional sales were generated, the entrepreneurmay need to review all these expenses and perhaps institute tighter controls.

Projecting cash flow in the early stages can also beneht by conducting sensitivityanalysis. For each monthly expected cash flow, the entrepreneur can use I plus and minus 5for an optirnistic and pessimistic cash estimate, respectively. Thus, our MPP Plastics ex-ample (Table 13.1) might have projected in the prior month sales receipts of g24,000 and,using the I plus and minus 5 percent, would have a column indicating a pessimisticamount of $22,800 and an oprimistic amount of $25,200. This sensitivity analysis wouldthen be computed for all disbursements as well. In this manner the entrepreneur would beable to ascertain the maximum cash needs given a pessimistic outcome and could preparefor any cash needs.

For the very new venture it may be necessary to prepare a daily cash sheet. Thismight be particularly beneficial to a retail store, restaurant, or service business. Table 13.2provides an illustration of the cash available at the beginning of the day with additionsand deletions of cash recorded as indicated. This would provide an effective indication

Note: If the finl nLmber s negatve or positive, then an error has ccuned n collrctions or payilens

392 PART 5 FROM FUNDING T}IE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

of any daily shortfall and give a clear sense of where problems exist or where errorshave occurred.

Comparison of budgeted or expected cash flows with actual cash flows can provide theentrepreneur with an important assessment of potential immediate cash needs and indicatepossible problems in the management of assets or control of costs. These items ae discussedfurther in the next sections.

Managing InventoryDuring the growth of a new venture, the management of inventory is an important task. Toomuch inventory can be a drain on cash flow since manufacturing, transportation, and stor-age costs must be bome by the venture. On the other hand, too little inventory to meet cus-tomer demands can also cost the venture in lost sales, or it can create unhappy customerswho may choose another frrm if their needs are not met in a timely manner.

Growing ventures typically tie up more cash in their inventory than in any other partof the business. Skolnik Industries. a $10 million manufacturer of steel containersfor storage and disposal of hazardous materials, developed an inventory controlsystem that allowed it to ship products to its customers within 24 to 48 hours. This wasaccomplished with a very lean inventory, thanks to the installation of a computerizedinventory-control system that allows the hrm to maintain records of inventory on aproduct-by-product basis- In addition fo this capability, the system allows the com-pany to monitor gross margin return on investment, inventory turnover, percentageof orders shipped on time, length of time to frll back orders, and percentage of cus-tomer complaints to shipped orders. Software to accomplish these goals is readily avail-able and in many cases can even be modified to meet the exact needs of the business.The reports from this system are generaied every two to four weeks in normal sales pe-riods and weekly in heavy sales periods. This system not only provides Skolnik with anearly warning system but also frees up cash normally invested in inventory and im-proves the overall profitability of the firm.8 Perpetual inventory systems can be struc-tured using computers or a manual system. As items are sold, inventory should be re-duced. To check the inventory balance, it may be necessary to physically countinventory periodically.

Effrcient electronic data interchanges (EDIs) among producers, wholesalers, and retailerscan enable these hrms to communicate with one another. Linking the needs of a retailer withthe wholesaler and producer allows for a fast order entry and response. These systems also al-low the frrm to track shipments internationally.e The linking of firms in a computerized sys-tem has also been developed by the grocery and pharmaceutical industries using a softwaesystem called efficient consumer response (ECR). Supply chain members work together inthis system to manage demand, distribution, and marketing such tht minimum inventory lev-els ae necessary to meet consumer demands. Computerized checkout machines are usuallypart of these systems so that linked members are able to anticipate inventory needs beforestock-outs occur.lo

Transport mode selection can also be important in inventory management. Sometransportation modes, such as air transport, are very expensive. Rail and truck arethe most often used methods of transportation when a next-day delivery for a customeris not necessary. Careful management of inventory through a computerized systemand by working with customers and other channel members can minimize transporta-tion costs. Anticipating customer needs can avoid stock-outs and the unexpected cost ofhaving to meet a customer's immediate need by shipping a product by next-day air.

CHAPTER 13 STRATEGIES FOR GROWTH AND MANAGING THE IMPLICATIONS OFGROWTH 393

These mistakes can be costly and are likely to significantly reduce the margins on anytransaction.

Managing Fixed Assets

Less cost of goods iold . 100.0 66J 60.0

.

,Gross margin r: 50.0 , 33.3 4O,O

Operating expensesSelling expenses

. : I1.7 7.g g.OSalaries 19.8 13.2 12.0Advertiring .' . -'.,: : 5.2 , .-, 3,5 4.0Office sgpplies. '

. a,, ,' '

I .9 1.3 .|.0Rent r -. ,1 ,,'

.' t 6.0 l, .0 3.0

Utilities 1.3 .' .. 0.9 1.0Insurance 0.6 0.4 0.5:

394 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING. AND ENDING THE NEW VENTURE

Managing Costs and ProfitsAlthough the cash flow analysis discussed ealier in the chapter can assist the entrepreneurin assessing and controlling costs, it is also useful to compute the net income for interimperiods during the year. The most effective use of the interim income statement is to estab-lish cost standards and compare the actual with the budgeted amount for that time period.Costs ae budgeted based on percentages of net sales. These percentages can then be com-pared with actual percentages and can be assessed over time to ascertain where tighter costcontrols may be necessary.

Table 13.3 compares actual and expected (standard) percentages on MPP Plastic's in-come statement for its first quarter of operation. This analysis gives the entrepreneur theopportunity to manage and control costs before it is too late. Thble 13.4 shows that cost ofgoods sold is higher than standard. Part of this may result from the initial small purchases

CHAPTER 13 STMTEGIES FOR GROWTHAND MANAGINGTHE IMPLICATIONS OFGROWTH 395

ofinventory, which did not provide any quantity discounts. Ifthis is not the case, the entre-preneur should consider finding other sources or raising prices.--

Most of the expenses appear to be reasonably close stana or expected percentages.The entrepreneur should assess each item .o determine whether these costs can be reducedor whether it will be necessary to raise prices to ensure future positive profits (although theeffectiveness of raising prices is determined by the market and couldsulstantially lower thenumber of items sold and reduce maket share). As the venture begins to evolve into thesecond and third years of operation, the entrepreneur should aho mpare current actualcosts with in the second y"* otope.ution, the entrepre_neur may selling expenses incurred in the f,rrst year ofoperation. month_to_month basis (i.e., January, year l, toJanuay, year 2) or even quarterly or yearl depending on the volatiiity of the costs in theparticular business.

where expenses or costs have been much higher than budgeted, it may be necessary forthe entrepreneur to carefully analyzn, the account to determine what is the exact cause ofthe ovemn- For example, utilities represent a single expense account ye. may include anumber of specific payments for such things as heat, eletricity, gas,

- not water. Thus,the entrepreneur should retain a running balance of all these ply^"nt, to ascertain thecause of an unusually large utility expense. In Thbre 13. l we ,""ihut the utility expensewas $500, which was $200 over the budgeted amount, or a 67 percent increase. whatcaused the increase? Was any paficular utiliry responsible for the ovemrn, or was it a re-sult of higher oil costs, which affected all the utility expenses? These questions need to beresolved before the entrepreneur accepts the results and makes any neeiea adjustments forthe next period.

Comparisons of the actual and budgeted expenses in the income statement can be mis-leading for those new ventures where there are multiple products or services. For hnarcia1reporting purposes to shareholders, bankers, or other investors, the income staement wouldsummaflze expenses across all products and services. This information, although helpful toprovide an overview ofthe success ofthe venture, does not indicate the marketingcost foreach product, the performance o s, or the most prof_itable product(s). For example, (Thble 13.3) were$ I 1,700. These selling expenses which case the en_trepreneur would need to ascertain the amount of selling expense for each product. He orth"--t1y be tempted to prorate the expense across each product, which would not provide arealistic picfirre of the relative success of each product. Thus, if Mpp plastics Inc. producedthree different products, the se[ing expense for each might be assumed to be $,90o perproduct, when the actuar sening expenses could be much more or less.

Some products may require more advertising, insurance, administrative time, ranspona-tron, storage, and so on, which could be misleading if the entrepreneur chooses to allocatethese expenses equally across all products. In response to this pioblem, it is recommendedthat the entrepreneur allocate expenses as effectively as possibie, by product. Not only is itimportant to evaluate these costs across each product, but also it s important to evaluatethem by region, customer,,distribution channel, a"pu.t-.nt, and so on. Arbitrary allocationofcosts should be avoided to get a real profit persiective ofevery product marketed by thenew venture.

TaxesDon't forget the tx agent! The entrepreneur will be required to withhold federal andstate taxes for his or her employees. Each month or quarter (depending on the size of the

396 PA RT 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING. AND ENDING THE NEW VENTURE

for fundsMedicueshould beterest and

the tax department can be contacted.The federal and state governments will also require the entrepreneur to file end-of-

expenses.

Record Keeping

about the company and its products and services'

OVERCOMING PRESSURES ON EXISTING HUMAN RESOURCES

Generally, the new vent department thatcan in0erview, hire, and be the responst-bility of the entreprene The process of

participative style ofnnagemenl Themanager involves othersin the decision-makingProcess

CHAPTER 13 STRATEGIES FOR GROWTH ANO MANAGINGTHE IMPLICATIONS OFGROWTH 3g7

should oot be any different from what was previously dis_outline some of the important procedures for preparing jobfor new employees.ng professional employer organizations (pEOs). One such

company is TriNet Employer Group Inc., which came t,o the rescue of Robert Teal,cofounder of a Silicon Valley start-up, Quinta Corporation. Robert had found it time con-suming and costly to hire and retain employees. His banker suggested he consider TriNet.After an assessment of TriNet's services, he hied the firm to assume most of the humanresourc tasks of the new venture. This involved such things as recruiting, hiring, settingup beneht programs' payroll, and even firing decisions. Thilas given Robert more time todevote to other aspects of his growing venture. l r

In growing the worKorce, entrepreneurs face the decision of what proportion of theworKorce should be oermanent and what proportion should be pan'ime, and this decisioninvolves a number of trade-offs. on the one hand, a greaterpercentage of pa.t_tim" *o.k_ers represents a lower fixed cost, which provides the firm greater nexiuitity in dealing withchanges in the the other hand, personnel instability is more likelywith part-time is fypically higherl2 and part_time workers are lesscommifted to t less of a personal stake in its performance. There_fore, building a functional organizational culture is more difihcult wtren ttre worporce hasa greater proportion of part-time workers-

Regardless of the composition of the firm's workforce, mistakes will be made inthe selection and hiring of some people. This leads to one of the most dilficult decisionsfor an entrepreneur to make-the firing of rncompetent employees- Having a fair em-ployee evaluation proce,ss is essential in justifying the firin! of an employee. Employ-ees should be given feedback on a regular basis, and any problems strout be identifiedwith a proposed solution agreeable to the employee and the entrepreneur. In this man_ner, continued problems with the employee that necessitate a firing decision will be welldocumented.

An integral part of the firm's human resource strategy for effectivery growing thebusiness must take into consideration how to maintain ihe corporate culcure despitethe influx of new employees. New employees can be inculcated itrrougtr early trainingsessions that perpetuate the stories and rituals that form the basis of the culture. Butthe majority of this responsibility falls on the shoulders of the entrepreneur. The entre-preneur must be the walking, talking embodiment of the culture, alitrough in cases ofrapid growth the work of the entrepreneur can be complemented by the work of a cul_tural ambassador. For example, as IKEA expanded internationally, Ingvar Kampradtook a number of steps to ensure that the corporate culture would still have an impactin foreign stores. For example, he documented the ,.IKEA way" and used culturalambassadors and training sessions to inculcate new employees of new stores in foreignlocations.

OVERCOMING PRESSURES ON THE MANAGEMENTOF EMPLOYEESAs the venture grows, it changes. Managing change is often a complex task, one that isbetter undertaken with a participative style of manageme nt. A, participative style ofmanagement is one in which the entrepreneur involves others in the decision-makingprocess. There are a number of advantages to using a participative management stylewhen a firm is growing- First, the complexity of growing a business and managingchange increases the information-processing demands on the entrepreneur. Involving

ELEVATOR EVESTFORPITCH

A wealthy frend has asked you to keep your eye-Qutfor attractive businesses in which she can invest. Yourwealthy friend is very busy, and you only want tointroduce those businesses that are genuinely attrac-tive, After hearing the following pitch, would youintroduce Scott to your wealthy friend?

Entrepreneur: Scott Jordan,38, founder and CEO ofScott evest LLC-

Company: Clothing and licensing company featuringa line of vests/jackets with 16 to 22 pockets thatdiscreetly hold tech gadgets.

Sales Projections for the Current Year: $5 million'Weighed Down: "l was practicing law and commut-

ing back and forth, carrying the things thatmost businesspeople carry with themnowadays-PDA, cell phone, an expandablekeyboard. Working in a business casual environ-ment. I would wear sports jackets just to havethe extra pockets to put my stuff in. I startedasking around and found the need for morepockets was common."

Source: Reprinted with permission of Entepreneur Media" Inc.''"This Eotrepreneur Will Nevet Find His Pockets Empty-No MattorHow Many of Them He Has," by April Y. Pennington, February2@3, Entre p renear magazine: www.entfepreneur-com.

others in the decision-making process is a way of reducing these demands. Second,highly qualihed managernew ways to tackle cuffemaking process, they arecourse of action. Finatly,making decisions and taking initiative. In such a case, a participative management stylewill enhance job satisfaction. The fotlowing captures some of the activities the entrepre-neur can do to institute a more participative style of management and successfully growthe business.

Estabtish a Team the belief by everyone in the organiza-tion that they are orking together great things can beachieved. Small bu preneur can create this team spirit. Forexample, the entrepreneur should establish a "we" spirit-not a "me" spirit-in meetingsand memoranda to employees as well as to other stakeholders.

Communicate with Emptoyees Open and frequent communication with employeesbuilds trust and diminishes fear. Often the fear of change associated with hrm growth isworse than the reality of change, and communication will alleviate some of that anxiety-Open and frequent communication is a two-way street. The entrepreneur must listen towhat is on the minds of his or her employees. The entrepreneur should solicit suggestionson how a department or the firm as a whole can mor effectively manage growth andimprove its performance.

time management TIteprocess of improving anindividual's productivitythrough more effrcientuse of time

CHAPTER 13 STMTEGIES FOR GROWTH AND MANAGINGTHEMPLICATION5 OFGROWrH 399

Provide Feedback The entrepreneur should frequently provide feedback to employees.Feedback needs to be constructive such that it enables the employee to improve the qualityof a particular task but does not attack the person and create a fear of failure. The entrepre-neur should also seek feedback from others. For this feedback to be valuable it must be

a culture that values open and honest communication. An entrepre-her own abilities, and with a desire to effectively grow the business,should encourage, this type offeedback.

Delegate some Responsibitty to Others with an increasing number of rasks for theentrepreneur, he o ake every managlment decision. Key em_ployees must be g initiative and make decisions without thefear of failure. Th r to create a culture that values and rewardsemployees for taking initiative and sees failure as a positive attempt rather than a nega-tive outcome_

Provide continuous Training for Employees By training employees, the entrepre-neur lncreases employees' ability and cap rcity to improve their own performance at aparticular task and, as a result, improves the chance tf successfully growing the firm.Training should reflect the new management style by involving

",,,pty"", in decidingupon training session topics.

OVERCOMING PRESSURES ON ENTREPRENEURS' TIMEEntrepreneurs can always make better use of their time, and the more they strive to do so,the more it will enrich their venture as well as their personal lives. How does one more ef--fectively manage time? Time management is the process of improving an individual,s pro_ductivity through more efficient use of time. The entrepreneur reaps numerous benefitsfrom effectively managing his or her time, some of which follow.

Increased Productivity Time management helps the entrepreneur determine the tasks ofgreatest importance and focuses his or her attention on successfully completing those task.This means that there will always be suffrcient time to accomplish the most importantthings.

Increased Job Satisfaction Increased productivity means that more of the importanttasks are successfully completed, which in turn enhances the entrepreneur,sjob satisfac-tion' The entrepreneur is less likely to feel "swamped" and overwheimed by the increasingnumber of tasks generated from irrm growth. Getting more important things done and be_ing more successful in growing and developing the venture wiligive the entrepreneur morejob satisfaction.

lmproved Interpersonat Retationships Although the total rime an entrepreneur spendswith other individuals in the company may in fact decrease through better time manage_ment, the time spent will be of a higher quality (quality time), allo-wing him or her to im_prove relationships with others inside and outside the frrm (including furnify). Furthermore,as-others in the company experience less time pressure, better resuits, anj greater job sat-isfaction, relationships within the firm become more harmonious and the f,rrm can build anesprit de corps.

IOO PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING. AND ENDING THE NEW VENTURE

principle of desire Arecognition of the need tochange personal attitutlesand habits regarding theallocation of time

prnc ip le oJ effective nessA focus on the mostimportant issues

principle o.f analysisUnderstanding howtime is currently beingallocated, and where it isbeing inetciendy invested

principle of teamworkAcknowledgment thatonly a small amount oftime ls actually underone's control and thatmost of one's time istaken up by others

Reduced Time Anxiety and Tenson Worry, guilt, and other emotions tend to reducethe entrepreneur's information-processing capacity, which can lead to less effective as-sessments and decisions. Effective time management reduces concerns and anxieties,which "frees up" information processing and improves the quality of the entrepreneur'sdecisions.

Befter Heatth By reducing anxiety and tension and improving productivitf job satisfac-tion, and relationships with others, there is less psychological and physiological strain onthe mind and body, resulting in improved health. Time management can also include sched-uling time to eat well and exercise. Good health, and the energy that it brings, is vital for anentrepreneur growing his or her business.

Basic Principtes of Time ManagementTime management provides a process by which the entreprener can become a time saver,not a time server. This effrcient use of time enables the entrepreneur to expand and grow theventure properlf increase personal and frrm productivity, and lessen the encroachment ofthe business into his or her private life. An entrepreneur develops good time managementby adhering to six basic principles, as follows.

Principte of Desire The principle of desire requires that the entrepreneur recognize thathe or she is a time waster, that time is an important resource, and that there is a need tochange personal attitudes and habits regarding the allocation of time. Therefore, effectivetime management depends on the entrepreneur's willpower, self-discipline, and motivationto optimize his or her time-

Principle of Effectiveness The principle of ffictiveness requires the entrepreneur tofocus on the most important issues, even when under pressure. Whenever possible, anenrrepren a single session, which requires thatenough ti This eliminates time wasted in catch-ing up to of course important, perfectionism isnot and 6 lltrepreneur must not spend excessivetime on trying to make a small improvement in one area when time would be betterspent in another area.

Principte of Anatysis \\re principle of analysis provides information to the entrepreneurabout how time is currently being allocated, which will also highlight inefficient or inap-

be developed for all recurring events and operations.

Principte of Teamwork Analysis of time will likely reveal to the entrepreneur thatonly a small amount of time is actually under his or her control-most of his or her timeis taken up by others. The principle of teamwork acknowledges the increasing impor-lance of delegation for an entrepreneur of a growing f,rrm; that is, the entreprenur mustrequire others to take responsibility for the completion of tasks previously undertaken by

princip Ie of prioritizedptannng Categorizationoftasks by their degree ofimportance and then theallocation of time to tasksbased on this categorization

principle of reandysisPeriodic review of one'stime management process

CHAPTER 13 STRATEGIES FOR GROWTH AND MANAGING THEIMPLICATIONS OF GROWTH TO1

'pend-tively.of all

IMPLICATIONS OF FIRM GROWTH FOR THE ENTREPRENEUR

4O2 PART 5 FROM FUNDING THE VENTURE TO LAUNCI{ING, GROWING, AND ENDING THE NEW VENTURE

of growing beyond its means. . . . Employees just don't seem to be enamored of the ideathat bigger is better."l4 Growth may not be pursued because there is a belief that in doingso hrm profitability and/or the fum's chances of survival will be sacrificed.

Even if there is a belief that the pursuit of growth will improve firm performance and en-hance personal wealth, some entrepreneurs will still avoid growing their business. Theseentrepreneurs are not necessarily motivated by financial gain. Consider an individual whochooses to start a business because she or he is tired of being controlled by others-thisperson wants the independence that comes from being one's own boss. Growth may not bean attractive option for this entrepreneur, because acquiring the necessary resources forgrowth will mean selling equity (for example, to a venture capitalist) or raising debt capi-tal (for example, from a bank). Both sources of resources place limits on the entrepreneur'sability to make strategic decisions for the hrm. In this case the entrepreneur may prefer tohave full ownership, be debt free, and remain small.

Evan Douglas is a professor of entrepreneurship and dean of the University of theSunshine Coast in Australia. His dream is to creae and manage a business that rents a smallnumber of yachts to tourists. The office (preferably a shack) would be on the beach some-where on the Great Banier Reef. When he achieves this dream, the last thing that he wantsto do is to grow the business such that his task moves to one ofprofessional manager andaway from the task of "beach bum." His dream business is an example of a lifestyle busi-ness. Growth can be perceived by such lifestyle entrepreneurs as threatening the very rea-son for becoming an entrepreneur in the first place,

A eategorization of Entrepreneurs and Their Firms'GrowthBased on the preceding arguments, Figure l3-4 categorizes entrepreneurs in terms of twodimensions: The first dimension represents an entrepreneur's abilities to successfully makethe transition to more professional management practices, and the second dimension repre-sents an entrepreneur's growth aspirations. Depending on the entrepreneur's position alongthese two dimensions, four types of firm growth outcomes ae identified.

Aetual Growth of the Firm Enhepreneurs in the upper-right quadrant possess both thenecessary abilities to make the transition to a more professional management approach and

Entrepreneur's Highability toinstitute

professionalmanagementpractices Low

No

Unusedpotential

Actualgrowth

Littlepotential Constrained

*Bred on abitity to make a transtion to professional mmagement and aspimtion.Source: Adapted frcm J- Wiklund and D. A. Shepherd, 'Aspiring for md Achieving Growth: The Modeating Role of Ruourcesand Opportunities," Jourul of Mrugement Sudies (20[3), vol. 40. no. 8, pp 191942

CHAPTER 13 STRATEGES FOR GROWTH AND MANAGING THE IMPLICATIONS OF GROWTH 403

the aspiration to grow their businesses. These are the entrepreneurs who ae the most likelyto achieve firm growth.

unused Potentiat forGrowth Entrepreneurs in the upperJeft quadrant possess the nec-essary abilities for transitionbut do not aspire to do so. ttrese are te entrepreneurs of firmsthat have unused potential. A relatively iarge proportion of all lifestyle frrms are repre-sented by this classihcation.

constrained Growth Entrepreneurs in the lower-right quadrant aspire to grow theirbusinesses but do not possess suffrcient abilities to successfully satisfy this aspiration.These entrepreneurs are most likely to be frustrated by the firm's lack or growth and arein the most danger of failure because the firm may be pushed toward the pursuit of growthopportunities and beyond the enrrepreneur's ability to cope. However, ihe entrepieneurmight replace himself or herself as the CEo with a professional manager. This will allowthe aspiration to be fulfilled (move to the upper-right quadrant). This d"oes not necessarilymean that the entrepreneur will leave the business; rather, the entrepreneur might manageR&D, new products, and./or new markets where his or her strengths are highry valued andenhance rather than constrain the growth of the hrm-

Littte Potential for Firm Growth Enhepreneurs in the lower-left quadrant possess nei-ther the necessary abilities to make the transition to a more professional managemenr ap-proach northe aspirations to grow their businesses. These businesses have little potentialfor growth, and due to the limited abilities of the entrepreneur to manage growth, thesehrms may actually perforrn better if they remain at a smaller scale.Although the abilities of the entrepreneur and ttre existing resources of the firm canlimit the effective pursuit of growth opportunities, the resources necessary for growth

can be acquired externally-we refer to these sources as external growth mechanisms.These external mechanisms for growth, which incrude joint veitures, acquisitions,mergers' and so on, each offer a number of different advantages and disadvantages inproviding the resources for effective growth, but all require th-e entrepreneur to negoti-ate a new relationship. For example, negotiation is a critical element io forming a jointventure.

Chapter 14 introduces the basic concepts and skills required for an entrepreneur to ne-gotiate the best agreement with these potential growth p".tn..r-un agreement that maxi-mizes the entrepreneur's interests. It then describes each external groltf, mechanism andits advantages and disadvantges.

IN REVIEW

SUMMARYThis chapter provides a model that suggests where an entrepreneur can look for (orcreate) opportunities to grow his or her business-opportunities that can provide abasis for a sustainable competitive advantage. The relevant growth strateges are:(1) penetration strategies--encouraging existing customers to buy more of the firm,sproducts, (2) market development strateges-selling the firm,s existing products to

4O4 PA RT 5 FROM FUNDING THE VENruRE TO LAUNCHING, GROWINO, AND ENDING THE NEW VENTURE

new groups of customers, (3) product development strategies-developing and sellingnew products to people who are already purchasing the firm's existing products, and(4) diversification strategies-selling a new product to a new market. Most of thesegrowth strategies can lead to a competitive advantage because they capitalize onsome aspect.of the entrepreneur's, and the firm's, knowledge base.

Business growth has important implications for the ecoriomy, the firm. and the en-trepreneur. High-growth businesses can stimulate an economy, improve its interna-tional compettiveness, and reduce unemployment. Even modest levels of growth bysmall businesses can have a dramatic impact on an conomy because the populationof small firms is so large. lt is also important to acknowledge that growth strategesoften involve th entrepreneur's taking some risk, which means that sometimes theywill not succeed. A failed attempt provides information for that entrepreneur andother entrepreneufs, and learning from failure has an important positive impact onan economy.

Because growth makes a firm bigge the firm begins to benefit from the advan-tages of size but also introduces a number of managerial challenges. lt puts pressureon existing financial resources, human resources. the management of employees, andthe entrepreneur's time. There are actions the entrepreneur can take to better managethese pressures and more effectively grow his or her business-

To vercome pressures on existing financial resources, the entrepreneur shouldapply more effective financial control. record keeping, and inventory managementtechniques. To overcome pressures on existing human resources, the entrepreneurmust address the question of what proportion of the workforce should be permanentand what proportion should be part time, should be prepared to fire incompetentemployees, and, at the same time, should build and maintain a functional organiza-tional culture. lt is important that the entrepreneur interact with employees, so as toestablish a team spirit; effect open and frequent communication to build trust andprovide constructive feedback; provide key employees with the flexibility to take theinitiative and make decisions without the fear of failure; and provide continuoustraining for employees.

Entrepreneurs can always make better use of their time, and the more they strive todo so, the more it will enrich their venture as well as their personal lives. Better use oftime can lead to increased productivity, increased job satisfaction, improved interper-sonal relationships with people inside and outside the business. reduced anxiety andtension, and possibly even better health. Efficient use of time enables the entrepre-neur to expand and grow the venture properly, increase personal and firm productiv-ity, and lessen the encroachment of the business into his or her private life. Effectivetime management requres adherence to six basic principles: desire, effectiveness,analysis, teamwork, prioritized planning, and reanalysis.

Some entrepreneurs lack the ability to make the transition to this more profes-sional management approach, while others may be unwilling to do so. Entrepreneurswho possess both the necessary abilities and the aspiration are most likely to achievefirm growth. Entrepreneurs who possess the necessary abilities but do not aspire todo so will manage firms that have unused potential and/or lifestyle firms. Entrepre-neurs who aspire to grow their business but do not possess sufficient abilites aremost likely to be frustrated by the firm's lack of growth and are in the most dangerof business failure unless the entrepreneur replaces himself or herself. Finally, entre-preneurs who possess neither the necessary abilities nor the aspirations to grow theirbusinesses may run businesses that provide a sufficient income if the businessesremain at a smaller scale.

. .. ]...: CHAPTER 13 STRATEGIESFORGROWTHANDMANAGINGTHEIMPLICATIONSOFGROWIH 405

RE.SEAR.CH TASKS.A=\

\)1' what packages are avairabre to herp entrepreneurs with theirdiffer and control activities? How effective do you believesoftw of these tasks?2. e fastest-growing companies in the country? What

they pursued to achieve this level of growihl Whathave they used (internal, joint venture, acquisitions,

4' Keep a record of how you use your time by documenting what you are doingevery 15 minutes over a two-day perod. Then analyze these records to determinewhere you waste time and what you could do to eliminate (or minimize) these' time wasters.

DISCUSSION1. To what extent does the use of software help and hnder the entrepreneur,s

ability to perform the important tasks of record keeping and fnaniialcontrol?

2. The firm needs to make sares. what is the best way to motivate sarespeopreto make more sales and improve the performance of the firm? How wourdyou effectively monitor their performance under the proposed motivationsystern? what are the pros and cons of your motivation and monitoringsystem?

3. categorize those people in the class who you believe would be well suited forstarting a business and managing initial growth but would be less effective atconducting the professionar management tasks when the firm became rarger.What can they do to improve their ability to successfully make the transition withthe firm? categorize those peopre in your crass who you berieve wourd be werlsuited to the role of professionally managing a larger (more established) firm butless effective at startng a firm and managing early growth. what can they do toimprove their ability to manage a firm earlier n its developrnent? ls there anybodyin the class (except maybe yourserf) who you berieve wourd be equarry effective atboth tasks?

4' Think of a company that produces one product and seils t to one group ofcustomers (or make one up). Advise the entrepreneur of the many opportuntiesthere are for growth-opportunities for penetration strategies, marketdevelopment strategies, product development strategies, and diversificationstrategies.

5. Are you a time waster or a time server? what time management techniques doyou use? How can you better manage your time?

406 PART 5 FROM FUNDINGTHEVENTURETO LAUNCHING.GROWING,AND ENDINGTHENEWVENTURE

SELECTED READINGSBaum, J. Robert; Edwin A. Locke; and Ken G. Srnith. (2001). A Multidimensional.Modelrf Venture Growth. Academy of Management lournal, vol44, no. 2, pp. 292-104' .,

The authors formed an integrated model of vetencr'es and motivations and firm competitivepredictors of venture growth. CEOs' traits andronment had significant indirect effects.

Fl"1,miu:';"T":#:I"l;,ii,l::'."#,il:*J3ff l;,lT#'j:?;"","!$51'turing, vol.20, no.6, pP.769-91

tn this article the authors further develop a theory of guided preparation and newventure performance and test its fundamental relationships on a sample of 1.59.new ventures that had received outsider assistance 5 to 9 years earlier and hadbeen in business for 3 to B years. The results suggest that the long-term growth 9fthe ventures since start-up is signifcantly related to guided preparation. H9wevela curvilinear mode!, rather than a linear model, was found to best capture therelationships of i nteresL

Danneels. Erwin. (2002). The Dynamics of Product Innovation and Firm Competences.Strategic Management Journal,vol. 23, no. 12, pp. 1095-1122.

This study examines how product innovation contributes to the renewl of the firmthrough its dynamic and reciprocal relation with the firm's g.ompetences.

Davidsson, Per; Bruce Kirchhoff; Abdulnasser Hatemi-J.; and Helena Gustavsson.. (2002)-Empirical Analysis of Business Growth Factors Using Swedish Data. Journal'of SmallBusiness Management, vol. 40, no. 4, pp. 332-50.

Although business growth differs among industrial sectors, youth, ownership inde-pendence, and small size are found to be major factors that underlie growth acrossall industries.

Delmar, Frdric; Per Davidsson; and William B. Gartner. (2003). Arriving at the High-Growth Firm. Journal of Business Venturng, vol. 18, no. 2, pp. 189-217 .

lJsing 19 different measures of firm growth (such as relative and absolute salesgrowth, relative and absolute employee growth, organic growth versus acquisitiongrowth, and the regularity and volatitity of growth rates over the | o-year period),the authors dentified seven different types of firm growth patterns. These patternswere related to firm age and size as well as industry affiliation. tmplications forresearch and practice are offered.

Park. Choelsoon. (2003). Prior Performance Characteristics of Related and UnrelatedAcquirers. Strategic Management Journal, vol.24, no. 5, pp. 47!a1 .

This paper focuses on a single event of a large acquisiton, which enabtes the au-thors to better identify the sequential relationships between prior firm profitability,prior industry profitabitity, and subsequent acquisition strategies. By doing so, thispaper makes clearer the causal relationships betvveen firm profitability, industryprofitabi I ity, a nd acqu isiti o n strateg es.

Penrose, Edith. (1959). The Theory of the Growth of the Business. Oxford: Oxford Uni-versity Press.Pettus, Michael L. (2001). The Resource-Based View as a Developmental GrowthProcess: Evidence from the Deregulated Trucking Industry. Academy of ManagementJournal, vol.44, no.4, pp. 878-97.

This paper develops a resource-based perspective for predicting the sequencing of afirm's resources that best provides for firm growth. The sequencing that generated

CHAPTER 13 STRATEGIES FOR GROWTH AND MANAGING THE IMPLICATIONS OF GROWTH &7

the highest firm grovvth combines a Penrosian (1959) perspective with the morerece nt resou rce-based I ite ratu re.

Qian, Gongming. (2002). Multnationality, Product Diversification. and profitabilityof Emergng u-5. Small- and Medium-size Enterp rises. lournal of Business venturng,vol.17, no.6, pp. 611-34.

This paper examines empirically individua! and joint effects of multinationality andproduct diversification on profit pertormance ior a sample of eerging smai- andmedium-sized enterprises (sMEs). The results suggest a'curuitinear letltionship be-tween them: that is, they are positively related up to a poin{ after which a furtherincrease in multinationality and product diversification-was associated with declin-ing performance.

Reuber, Rebecca A.; and Eileen Fischen (2002). Foreign sales and small Firm Growth:The Moderating Role of the Management Team. Enteprenewship, ineory & practice,vol.27, no. 1, pp.29-46.

a small firm plays a keythe beh avi ora I integ ra-'between foreign sales

Rugman. Alan M.; and Alan verbeke. (2002). Edith penrose,s contribution to theResource-Based View of Strategic Management . strategic Management Journal, vol. 2g,no. 8, pp. 769-81.

e Theory of the Growth of the Firm, s considered b,vfield to be the seminal work that provided the intei_odern, resource-based theory of the firm. Howeve

resource,based thinkins n* o3ir,i,:i2:;;"i:f't or intended contribution toSchulze, William S., Michael H. Lubatkin; and Richard N. Dino. (2003). A Social Capi_taf Model of High-Growth Ventures. Academy of Management iournt, vor. 46, no. 3,pp. 374-85.

ln this article the authors use social capital theory to explain how human and socialcapitat affect a venture's ability to accumulate financiat capital during its growthstages and its performance during the two-year period after going publi. rhei foundindications that social capital leverages the productvity of i veltires resource baseand provides the venture with a durable source of competitive advantage.

shepherd, Dean A.; and Johan wikrund (2009). Are we comparing Appres with Appresor A.pples with oranges? Appropriateness >f Knowledge nctumuLti'on across GrowthStudies. Entrepreneurship: Theory & practice, vol.33, no. t. pp. 105_23.

ln this paper the authors conduct analyses on all Swedsh firms incorporated durngthe 1 994 to 1998 period (68,830 f irms) and track ther growrth (or demise) over theirf irst 6 years of existence. Although they typicalty findlow shaied variance betweendifferent growth measures, there is iariabitity such that some measures demon-strate high andlor moderate concurrent vatidity. These findings have implicationsfor how we delineate the boundaries of firm growth resea-rch and accumulateknowledge-when we are comparing appres with appres and when we are compar-ing apples wth oranges. [Abstract from author.]

wiklund, Johan; and Dean A. shepherd. (2003). Aspiring for; and Achieving Growth:The Moderating Role of Resources and opportun ites. JoJrnal of Management studes,vol.40, no.8, pp. 191942.

ln this article, the authors find that small-business managers' asprations toexpand their business actvities are positively related to actual {rowth. However, therelationship between aspirations and growth appears moreiomplex than stated.

408 PA RT 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, ANB ENDING THE NEW VENTURE

Education, experience, and environmental dynamism magnifir the effect of growthaspratons on the realization of growth.

Wiklund, Johan; Per Davidsson; and Frdric Delmar' (2003). What Do They Think andFeel about Growth? An Expectancy-Value Approach to Small Business Managers' Atti-tudes toward Growth. Entrepreneurship: Theory & Practice, vol.27, no. 3, pp. 247-71 '

This study focuses on small-business managers' motivation to expand their firms.The results suggest that concern for employee well-being comes out strongly in de-termining the overall attitude toward growth. The authors interpret this as reflect-ing a concern that the positive atmosphere of the small organzation nay be lostin growth, which might cause recurrent conflict for small-business managers whendeciding about the future route for their firms.

Wiklund, Johan; Holger Patzelt; and Dean A. Shepherd. (2009). Building an IntegratveModef of Small Business Growth. Small Business Economics, vol.32, no.4 pp. 351-74.

The purpose of this article is to develop an integratve model of small-businessgrowth that is both broad in scope and parsmonious in nature. Based on an analyssof data from 413 small businesses, the authors derive a set of propositions that sug-gest how entrepreneural orientation, environmental characteristics, firm resources,nd managers' personal attitudes directty andlor indirectly influence the growth ofsmall businesses. lAbstract from authors.]

Zimmerman, Monica A.; and Gerald l.zeitz. (2002). Beyond Survival: Achieving NewVenture Growth by Building Legitimacy. Academy of Management Reviery uol.27,no. 3, pp. 414-32.

ln this artcle the authors argue that (t ) legitimacy is an mportant resource for gain'

legtimacy threshold.

END NOTES1.

2.

3.4.

5.

6.

See, "PowerBar Reaps Bounty with New Harvest Bar; Crunched for f me,Americans Devour Energy Bars," Business Wire (August 4, 1998), p. 1; C. Adams."A Lesson from PowerBar's Slow Start to Diversity," The Wall Street Journal(June 14, 1999), p. 4; and "The PowerBar Story" Company Web sitewww.powerbar.com.H. f . Ansoff, Corporate Strategy: An Analytical Approach to Business Policy forGrowth and Expansion (New York: McGraw-Hill, 1965).Martha E. Mangelsdorf, "Growth Compaies," /nc. (May 21,1996')' pp.85-92'P. Davidsson, L. Lindmark, and C. Olofsson, Dynamiken i svenskt nringsliv(Business Dynamics in Sweden) (Lund, Sweden: Studentlitteratur, 1994)'J. Wiklund, Smalt Firm Growth and Performance: Entrepreneurship andBeyond, Doctoral Dissertation (Jnkping: Jnkpin9 International BusinessSchool, 1998).R. Gunther McGrath, "Falling Forward: Real Options Reasoning and Entrepre-neurial Failure," Academyof ManagementReview24 (1999). pp' 13-30; F.A. Hayek,"The Use of Knowledge in Society," American Economic Review 5 (1945).pp.519-30.E. Pofeldt, "Collect Calls," Success (March 1998), pp. 22-23-J. Fraser; "Hidden Cash," /nc. (February 1991). pp.8'l-82.

7.8.

CHAPTER 13 STRATEGtE"S FORGROWTH ANO MANAGING lHE IMPUCATlONS OF GROWTH 409 . . "

9. Ival) T. Hoffrnan, "Cyrrent Trends in Small Package Shipping," International Business (March 1994), p. 33.

10. "Uhlocking the S"ecr~s ofECR," Progressive Groter (January 1994), p. 3. 11. uYou 00 the Workj Thy Do;the "Paperwork," Busin!lliW!i!e (Novernber 17,

1997), p. 54. 12. K. ~arley, "Or~ani:z;ati?nall~ar.ning and Personnel Turnover," Organizaton

Sciehce 3, no. 1 (1992), pp. 20-47. 13. 1. Mochari, uTo"o Much, Too Soon;" Ine. (November 19"99), p. 119. 14. M. A. Hitt, R. D. Ireland, and"R. E. Hoskisson, Strategic Man;Jgement: Competitive-

ness and G/obalization: 3rd ed. (London: South-Western College Publishing, 1999).