UNIVERSITY OF CAMBRIDGE Institute for Manufacturing Module 4E7 2004 Elizabeth Garnsey Session 1...
-
date post
19-Dec-2015 -
Category
Documents
-
view
221 -
download
0
Transcript of UNIVERSITY OF CAMBRIDGE Institute for Manufacturing Module 4E7 2004 Elizabeth Garnsey Session 1...
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 1
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
MODULE 4E7 – ENTERPRISE AND BUSINESS DEVELOPMENT
Session 2Feb 4 2004
Dr E. Garnsey
ENGINEERING TRIPOS PART IIB
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 2
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Last week
• How do under-resourced new firms make breakthroughs? What explains the success of many entrepreneurial innovators?
• Entrepreneurs pursue an “emergent strategy” (Minzberg’s term), with economy and flexibility, responding to opportunities as these arise and as they are able to secure resources. Effective in a rapidly changing scene.
• In contrast, managers in established companies work out a strategy, allocate resources on the basis of the budget and implement their strategy. This is required to meet shareholder expectations.
To grow their new company, founders need to balance entrepreneurial and managerial approaches.
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 3
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Today’s session will improve your ability to evaluate a new tech-based company
• Situate its activity and its business model in relation to the main types of business activity and business model. Appropriate?
• Identify the problems that must be solved if this enterprise is to achieve its objectives - grow and sustain growth.
• Assess the role of the founding entrepreneur/s and whether this is changing appropriately as the business grows
• Assess the enterprise’s track record in relation to typical growth paths of other similar companies.
• Gain practice in relation to a case study firm - BioRobotics
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 4
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
COURSEWORK BRIEFINGA complete session on this Wednesday 25 Feb 2-3pm
PreviewA report of around 2000 -3000 words. Aim is for you toapply knowledge gained in classes. There are several options.
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 5
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
A. Case Study of a High Tech Business
Research a case study of a high tech company, drawing on press reports, websites and, if available, direct contact. Your case study should be in two parts; a factual summary of the development of the company and an analysis of the case, applying knowledge gained on the course.
You may prepare two or three shorter cases and compare their experience, drawing out reasons for differences in their business success.
Examples: Cedar Audio Systems, Cambridge Positioning Systems, C3 Ltd (Computer-based Telephony) One Ltd, Creature Labs (now Gamesware), Cambridge Silicon Radio,
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 6
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
B. Discuss the opportunities for enterprise offered by an emerging technology- based sector or industry. Examine the activities of selected firms in that sector.
•Sectors examples:geographical information systems, global positioning systems,a telecommunications sector, voice recognition or imaging
technologies, satellite technologies,display
technologies, new materials, new instrumentation, environmentally sustainable technologies,
etc
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 7
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
C. Evaluate a Business Plan
Provide a detailed evaluation of a business plan, whether from a venture known to you or based on a plan available in the public domain. Examine the strengths and weaknesses of the plan in terms of the business opportunity identified and the business model proposed to exploit it.
Marking criteria - have you effectively applied knowledge gained on the course?
Marks are affected by business plan selected.
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 8
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Part One Types of business activity and business mode
Early growth paths
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 9
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
•Enlist others, create network to open opportunities& obtain resources
• Opportunitiescontinuallyscan and reassess
•Resource use:EconomyLeverageCombineCreate
Entrepreneurs juxtapose information on two planes: resources and opportunities
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 10
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
“Enterprise involves the pursuit of opportunities to create valueby combining resources in new ways in order to secure returns.”
Enterprise
Opportunity SpaceResources
Value
Entrepreneur - one whoengages in enterprise(= entrepreneurial activity).
An enterprise - a business organization
Entrepreneurship:study or practice ofentrepreneurial activity.
Economic value is created when Output > Input
Resources are means to achieve ends.
Opportunity = possibility of reaching a preferred state
Returns
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 11
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Enterprise - wider than new firm creation
There are temporary entrepreneurial projects: e.g. expeditions,events, which don’t involve setting up a business.
Some terms
Business - common usage - imprecise term.Company - entity that is legally incorporated Firm - economic terminologyEnterprise - business organization
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 12
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Not all entrepreneurial activity involves business creation.
Business Idea
Secure returns
Secure / createresources
Create value
reinvest
distribute
exit
Set up new activity
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 13
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
A company is a legal entity that can sustain activity and ownership over recurrent production cycles, cumulatively.
Firmoutput
revenue
Customers
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 14
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Business creation involves recurrent production cycles.Company itself may become valuable: develop productive capacity, financial assets
reinvest
Productive base
distribute
exit
Value creating output sold
Assetbase
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 15
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Advantages of starting a business• Last time
– Tax concessions– Limited liability– Protect ownership through incorporation
– Demonstrate product viability– Embed learning in organization– Store resources– Create a community; create jobs
• Possible to grow and accumulate wealth• But firm may be hostage to fortune• Paradox of enterprise
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 16
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Survival all US New Firms 1970s/80s (SBA data)
Source Kirchoff 1994
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 17
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Exposure
ContractR&D
ConsultancyDesign studiesTesting reports
Analytical reports
Product
Mass Market
OEM's
Niche Market
In housemanufacture
Manufacturing sub-
contracted
Low
Hard Model
Soft Model
Resource commitment
License IP
HighCreate infrastructure
Technical services
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 18
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
The range of options being considered reduces over time
The cost of design changes increases
over time
Some business models involve commitment and sunk costs
Graphic: J. Allwood
Product concept
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 19
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Soft Start: services, software, licensing
Lower capital requirementsFewer sunk costs - flexibilityAttractive when cost of capital is high.
So why manufacture?
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 20
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Hard Start - Manufacturing
Strengths: Automate, lower costsReach markets beyond reach of a service Opportunities: Revenue growth through economies of scale and scope
Strengths of in-house manufacture:controlcompetitive advantage embedded in hard- to- imitate capabilities
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 21
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Global Enterprise Monitor 2001, 2003 showsmanufacturing start ups that survive are more robust than service companies:
survive longergrow larger
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 22
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Upfront capital costs to create production base
Sunk costs may be irrecoverable Flexibility limited
Expertise - multi-functional, difficult for start up team to develop Difficult to apply entrepreneurial problem solving- but possible, as shown by Oxford Instruments and BioRobotics
Challenge of Manufacturing
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 23
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Soft Start exampleCash Flow (£000s)
Cumulative Cash Flow
-500
0
500
1000
1 32 4 5 Years
-200
Source: Presentation by M. Bullock of Barclays Bank to British Technology Group Conference, 1986
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 24
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Hard Start example
Source: Presentation by M. Bullock of Barclays Bank to British Technology Group Conference, 1986
Cash Flow (£000s)
Product Launch
Cumulative Cash Flow
Net Cash
Flow Quarterly
- 500
0
500
1000
1 32 4 5
Years
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 25
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
“Revenues make a company”
• "How do you like our new offices?.. Now we look like a real company. But we're missing one thing ... Revenues. We look like a company, but we are only a venture. Ventures have investors, while companies have revenues. Every month we delay a revenue stream, we have to sell off more equity to stay alive. If we delay too long, the price of the equity goes down.. eventually no one wants to buy..."
• Kaplan p 93
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 26
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Internet - Hope and Hype
• Concept of business model originated with the Internet• Usually involved an existing activity, reconfigured for Internet• Focus was on how to achieve returns• Network of alliances created to produce and deliver by e-
business• Often customers were not users, but advertisers
• Miscalculated transaction costs of alliances• Miscalculated marketing costs of attracting and retaining
customers• Few early entrants succeeded in achieving and sustaining
revenues
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 27
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Other new business models - configured to reduce resource intensity and improve rate of return. Facilitated by Internet.
• Contract research, consultancy for specific customers (biotech ventures)
• Licensing designs and inventions to manufacturing partners e.g. ARM - revenues from customer support
• Development Company - raise funds with partners to develop future product/service - e.g. biotech ventures, CDT, Plastic Logic
• Production company - with various outsourcing arrangementse.g. BioRobotics
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 28
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
e.g. Cambridge Display Technology:activity and business model
• Founded in 1992 as spin-out from University
• Work by Richard Friend (Cavendish) and Andrew Holmes (Melville)
• Developing Light Emitting Polymer technology
• Acts as systems integrator bringing together key
technologies and competencies
• Relies on web of alliances - initially no manufacture
• Partners include: Seiko-Epson, Phillips, DuPont
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 29
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Every new firm is uniqueSo how do we compare them? Business realities provide a basis for comparing cases
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 30
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
New firms must solve a common set of problemsas input-output systems in a market environment
• Search for and choose a business opportunity
• Secure resources for productive activity
• Set up productive base and organize productive activity
• Sustain inputs and outputs to survive in competitive market economy
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 31
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Compare growth measures
•Inputs - employees, investment, equipment, premises.R&D budget, patents
•Outputs - sales, revenues, profits
•Value - tangible assets, intangibles, market valuation
•Throughputs: sales per employee, lead time to market
All measures have limitations - qualitative evidencealso needed
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 32
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Relative employment growth of 6 Cambridge software companies
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 33
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
COMPARING CASES - evidence
Search & Select
Secure Resources & Set Upproductive activity
Generate & Sustain Revenues
Pre-venture activities, ideas, contacts: hard to measure (Reynolds and White 97)
INITIAL INPUT measures:Investment funds, endowmentassets, patents, recruits
OUTPUT measures:revenues,profit
THROUGHPUT measures: productivity p.e. WIP, stocks/ sales, lead times
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 34
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
From start up to self sustaining business
• Early learning and problem-solving may be sequential
- e. a new product is designed and production facility required
• Solutions needed before next problems can be dealt with?
• Dominant problems may give rise to phases of activity.
• As problems are solved, further ones arise.
• Stages of growth - common idea in literature.
• In practice there are often overlapping processes (chains of related activity) rather than distinct stages or phases.
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 35
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
It simplifies comparison to look at problem-solving sequentially
But in practice: there may not be separately identifiable phases. Entrepreneurial problem solving is iterative.
Length and distinctiveness of specific problem solving processes depend on activity and business model.E.g. spin outs or de-mergers: start with ability to generate revenues through activity and customers inherited from a parent organization
Generate & Sustain Revenues
Search & Select
Secure Resources & Set Up
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 36
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Opportunities - Selected or Created?
Analysis, Telecomms Consulting founded by David Cleevely in 1986Spin-out from CUED
1980s, rapid technology change and deregulation - policy challenge
Analysys provided decision-support software for telecommunications policy makers at the European Commission, Brussels
Analysys created demand for what they could supply: decision support software and telecomms industry analysis
Success of European mobile phone industries - policy re common standards
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 37
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Search and Select
Resources and opportunities - both are relative (means/ends)
Matching process - difficult because both are in flux
Scientists have difficulty selecting a business opportunityGeneric technologies - too many optionsE.g. holonic technology
At some point, entrepreneurs have to target and commit to a specific opportunity, narrowing their options.
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 38
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Burn rate can exhaust endowment resources
2nd Round Finance
3rd Round Finance
Monthly
Revenue
Cash
Oct-88 Feb-88 Jun-89 Oct-89 Feb-90 Jun-90 Oct-90 Feb-91 Jun-91
7000
6000
5000
4000
3000
2000
1000
0
Cash
£000's
Figure 1 Anamartic: Revenue and Cash 1988-1991
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 39
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Firms that grow early and fast
Often incubated in an existing organization where early problems can be solved
with less risk of early mortality e.g. BioRobotics
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 40
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Firms that solve initial problems often grow for a while … but do not sustain growth.
o
R?
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 41
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
This spin out entrepreneur from CUED did not want a big company:
• "I want to keep the personal feel because it's my life, this business, and I want it to be enjoyable and for the staff to enjoy it."
• … I see my job as people management and for me that means keeping the excitement running. They are very competent people and if they are excited and bouncy then they are extremely productive.”
• Comfort zone? Uncomfortable as soon as conditions change
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 42
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Most Cambridge Tech Firms Remain Small
674
339
7838 21 9 1
0
100
200
300
400
500
600
700
800
10 50 100 200 500 1000 2000
Employment
Source: CCRU Database
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 43
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Paradox of Enterprise
• Greater the success of the enterprise, more difficult it is to remain entrepreneurial
• Once returns are achieved, there is more to lose• Pursuit of opportunity may endanger what has been gained• Innovative entrepreneur often turns into conservative small
business owner
• Habitual entrepreneurs often leave and start again once company has grown
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 44
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Unable to grow though aim to do so
• Can’t obtain development capital
• Cant overcome scale-up problems
– Manufacturing - initial sunk costs before returns on scale
– IT products High initial fixed cost, low variable cost of reproduction
– May run out of cash before transition to lower costs is achieved
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 45
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Time
Ou
tpu
t
Demand
Capacity
Under and over production in young firms.Capacity-build is uneven; demand is unpredictable
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 46
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Early growth problems
1. Returns from output may not keep up with input costs (scale and
scope issues )
2. Timing and coordination (resource mix) problems
1. under-production and over-production problems
2. delay in recovery of resources from output - cash flow blocked
3. Output does not create real or perceived value
1. Quality problems (does output create value for customers?)
2. Demand below forecast
oR
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 47
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Quality Crisis at DominoAt Domino Printing Sciences, the initial product, an industrial ink jet printer was the first of its kind. It was very carefully designed. However in production, one small component among hundreds had not been inserted. This was vital to the automatic shutdown system if the machine went wrong. When Domino’s engineers tested the machines on-site before shipping them, they worked perfectly. The designers had never had occasion to use the automatic shutdown mechanism. But their customers proved less skilled at using the equipment. Before long, three international customers phoned in urgently on the same day. In each case a fire had started in the equipment, with smoke and melt-down of components.
What would be a worst case scenario? How could this be averted?
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 48
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Growth and Quality Problems in New Firms
Firm Growth
Salesrevenues
Customer demand
Staff Shortages
Quality defects
expanded volume of work
Time 1
Time 2
+
+ +
- +
competitor products
Time 3
+
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 49
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Revenue generation does not sustain growth until:
• Fix /sell Version One of product (takes some inventors years)
• Ensure recurrent production cycles
• Routines, rules and roles save time & effort. ‘Store’ (embed) knowledge
• Repeat custom and/ or market expansion provide revenues and credibility (early quality problems sorted out)
• May take a long time
– e.g. biotech firms’ lengthy gestation
• If so, need interim funding/ revenue while product is developed
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 50
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
No Growth - Plateau or struggle to survive - when:
• New firm does not reach minimum efficient scale (MES) to achieve return on assets
• Resources are all absorbed maintaining current activity
• Plateau may be a prelude to growth, decline, failure, or merger• Growth is least common scenario
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 51
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Growth of new instruments firms in Cambridge 1990-99
0
10
20
30
40
50
60
1 2 3 4 5 6
Series1
Series2
Series3
Series4
Series5
Series6
Series7
Series8
Series9
Series10
Series11
Series12
Series13
Series14
Series15
Series16
Series17
Series18
1990cohortInstrFsgrwth.10.9.01
Employees
Age of Co.
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 52
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
INPUTS
OUTPUT
RETURNS
Business idea
ActivityFirm’s
Over time, firm’s activity drives its growth path
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 53
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Brokerage byentrepreneur,early CEOwho foundedMicromuse (Chris Dawe)
IT industry networkerror-management software required
Specific customer needs at BT - Peter Shearan
Industry and technologyknowledge of CTO,develops software
Business process knowledge of Stephen Allott
Micromuse attracts major Internet firms as customers
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 54
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Micromuse case
• In early 1995, Micromuse made its first sales of its in-house developed Netcool IT network software. These were quite large and prompted the founder to plan an accelerated transition from the VAR business (distributing SUN software) to the Netcool business. He announced that the VAR business was no longer mainstream and that the company's future lay with Netcool. The VAR sales started to dwindle quite fast and key people in it started to leave. Meanwhile the strong Netcool sales in the March 95 qtr were a false dawn. Implementation and development resource constraints plus software bugs meant that no further Netcool sales occurred in the June and Sept qtrs.
• Stephe Allott was appointed CFO in Sep 95. He found:– falling sales were feeding through to weak cash receipts and a £1m
overdraft. – The company could not meet its obligations and was in danger of failing.
• What should Stephen do?
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 55
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Part Two
• Problems of successful growth
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 56
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
What was done - Solving the cash flow crisis
1. Re-organise the company into Business Units, with a focus on re-launching the VAR business.
2. Going to see the bank to explain their plan and get their agreement to maintain their overdraft.
3. Re-assign salespeople to focus on the best short term prospects.4. Implement more effective management information systems to prioritize
revenue-generating activity.5. Work flat out to bring in VAR custom.6. Sign up a strategic deal with Sun Microsystems to develop Internet
infrastructure business (ISP companies to become customers).
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 57
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
-50
0
50
100
150
200
250
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
-50
0
50
100
150
200
250
NetCool Revenue VAR Revenue NetCool Profit
Micromuse Inc
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 58
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Strong growth can create further growth pressures • Internal pressures for growth
• After effort of start-up, resources are released for growth
– Under employed or under-used staff
– Uneven resource mix: continual shortages and surpluses
• Lead-lag growth dynamic (Penrose theory)
• External pressures for growth from: – funders – customers – distributors
• Excitement, high morale, stimulus to further effort
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 59
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Riding high• A new enterprise has been performing well, though only five years old.
Growth record is impressive (sales and revenues employee numbers). Early success makes it possible to expand further through retained earnings and externally obtained funds. Investors view its prospects favourably. Morale is high among its members their prospects are excellent in the expanding enterprise.
• One of its members is taken ill. After 6 months hospital and recovery he returns to work. He finds:
• Sales are down and unsold stocks have built up. The banks have withdrawn loan facilities. Creditors are demanding payment. There have been lay-offs and more are expected. The enterprise faces an enforced sell-out or bankruptcy.
• How could this happen?
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 60
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Growth reinforcement in a young company can easily tip into reverseWhy?
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 61
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
System dynamics in an open input-output system (Dissipative system requiring continual input of resources)
In natural language:• If positive feedback (self reinforcing process) is interrupted for any
reason, output falls. Inputs depend on revenue from outputs, so this reduces input availability.
• Input shortage prevents output growth.• Positive feedback moves into reverse - unless there are reserves
to draw on.• Young companies have seldom built up reserves.
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 62
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
CREATURE LABS
-5000
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
6000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
£ ,000
-60
-40
-20
0
20
40
60
80
Employment
Turnover
Profit
Current Assets
Fixed Assets
Net Worth
Employment
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 63
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Changing role of founder
• Qualities required for opportunity detection and start up a company - last week, lecture one
• As company grows, change of mind set required in leader. Qualities required to grow and increase returns include – Project management skills– Ability to delegate– Ability to interface with partners and retain investors’
confidence
– Difficult to change mindset. Crises often force changes.
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 64
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Growth Reversal - internal pressures
• Increased complexity is hard to manage
• Rapid growth - shortages, bottlenecks - decision making impaired.
• People problems
– Constraints on co-ordination and decision making - cannot be remedied from outside
– Jobs outgrow people and vice versa – Burn out and disaffection
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 65
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Case StudiesTadpole Technology
-15000-10000
-50000
5000100001500020000250003000035000
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
Sales Pre-tax Profit
Linx
-2000
02000
4000
60008000
1000012000
1400016000
18000
1988 1989 1990 1991 1992 1993 1994 1995
Sales Pre-tax Profit
Datapaq
-500
0
500
1000
1500
2000
2500
3000
3500
4000
1985 1986 1987 1988 1989 1990 1991 1992
Sales Pre-tax Profit
-20000
0
20000
40000
60000
80000
100000
Oxford InstrumentsLast week
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 66
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Cambridge high tech firms have relatively high survival ratesGarnsey and Heffernan 2002 on CTM CUED website
Source: Garnsey and Heffernan 2002
40%
50%
60%
70%
80%
90%
100%
110%
0 2 4 6 8 10
Age (Years)
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 67
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Size
(e
.g. s
ales
)
Time
Size
(e
.g. s
ales
)
Time
Size
(e
.g. s
ales
)
Time
Size
(e
.g. s
ales
)
Time
Continuous growth
Early growthand plateau
Delayed take-off and growth
Growth reversal and three subsequent alternatives
But growth reversal was common even among ten year survivors
6%34%
28%12%
Growth paths of 237 high tech ten year survivors, founded c 1990
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 68
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Ways of limiting pressures of growth
• Managing rapid growth requires embedding problem-solving in effective procedures
Avoid growth pressures through segmentationor spin-out.
• Oxford Instruments
TTP - “grow without getting too big”
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 69
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Surviving Setbacks
Growth reversal processes induce intense strain.
Reversal after rapid growth can be a learning experienceDouble-loop learning: challenge own assumptions
Build reserves against setbacks; continue to pursue opportunity
Firms that survive may become leaders
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 70
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Accumulation :
• Resource recovery (outputs-> inputs) exceeds demands of growth
• Reserves build up and allow firm to weather storms
• Can expand by buying other companies (O.I.,Domino,Microsoft, Cisco)
• Growing to be a dominant firm is an improbable event
– 5% of firms provide 50% + jobs after 10yrs (Storey 1994)
– 5% of firms provide VCs with 90% of their profits
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 71
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Attributes of Success
• Studies have shown startup more likely to succeed with
– Team of entrepreneurs with right skill mix, education
• Growth ambitions for venture
• Business experience
– Well endowed start up, founders share equity with investors
– Protected technology– Fast growing market
Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 72
UNIVERSITY OFCAMBRIDGE
Institute for Manufacturing
Beware circular reasoning on success
• Success attribute studies of start ups leave 75+% of variance in performance unexplained
• Some ventures start with better odds than others
• Can identify losers more easily than winners. Self fulfilling aspect.
• Investors have not cracked secret of success
• Luck is a factor - but who makes the most of it?
• Solutions give rise to new problems (Greiner)But problems can be a source of novel entrepreneurial solutions - Oxford Instruments, Psion, Hotmail