A Note on Managing the Growing Ventur1

8/9/2019 A Note on Managing the Growing Ventur1

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A Note on Managing the Growing VentureThe earlier modules of The Entrepreneurial Manager have focused primarily on getting into business—finding an attractiveopportunity, developing a viable business model and systematically reducing the risks associated with it, attracting financial andother resources required to actually start the venture, and managing the early phase of operations.

In this module of the course we will move beyond that initial phase to a stage in the life of the venture where the original businessmodel is arguably proven, and the concern of the entrepreneur— as well as the management team and investors—shifts to

growing the venture. Typically, this involves expanding the scope of activities to new geographic or product markets and/or

finding new groups of customers to serve. or an organi!ation that has been focused solely on its survival, this impetus for growth represents a new—and fundamentally different—set of challenges for the entrepreneur and the organi!ation.

"reating a venture and leading it through a prolonged period of growth may require different skills. #y definition, many start$ups must rely on assets not controlled by the entrepreneur. The vision and values of the founder can be communicated directly byan entrepreneur who may perform many tasks personally while directly supervising an entire implementation effort. #y contrast,the challenges facing an entrepreneurial manager in the high$growth phase are those of organi!ing tasks, attracting talent,delegating responsibility and authority, fighting bureaucratic %creep% and the natural tendency to acquire assets vs.leveraging others& assets, and in general maintaining momentum while communicating the vision and values to a larger andlarger number of people.

The fact that many organi!ations fail to make the transition to a sustainable, financially successful business is well$known. 'venthe most successful venture capital firms rarely %make money% on much more than ()* of their investments. irms fail for awide variety of reasons including those related to strategy, organi!ation, and execution.

+uring the growth phase, many things are changing at once. The tasks of developing new products or services, as well asserving new customers in new markets, create more complexity within the firm. s the number of employees grows, theexisting, largely informal organi!ation is taxed in new ways, and typically some of the classic tools of professional management—

budgets, organi!ation charts, formali!ed policies and procedures—are introduced for the first time. The entrepreneur must beginto develop new ways of getting work done—and must institutionali!e some of what is in her head—or the task of managingthe firm&s day$to$day operations will become overwhelming.

In this note we describe a systematic way to think about and analy!e the challenges of managing a growing entrepreneurialventure. -e begin with analysis of the venture&s growth strategy and the risks of that strategy. -e then move to the changes thatthis growth strategy requires in the areas of People, Opportunity, Context, and Deal, which we refer to collectively as the "+framework.0 inally, we discuss how achieving a growth strategy and the associated changes in "+ inevitably requiresmanagement to display considerable execution skills. igure summari!es this framework.

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Growth Strategy

s a venture enters the growth phase, its business model becomes more stable. This stability, however, does not reduce the need for critical strategic choices. nd growth by itself raises new strategic challenges.

The first set of strategic choices deals with how the venture is to grow. 1ost ventures begin by proving their business model in anarrowly defined product/market space, achieving market and/or operating focus that can result in either a low$cost or differentiated result for customers. s shown in igure #, growth can be achieved by extending the venture&s geographic markets,

its product line, or its customer base.6 'ach of these paths poses challenges and risks. Geographic growth can be as

straightforward as entering a new city or state, or as complex as starting operations in a foreign country. Productgrowth can range from simple product$line extensions, to adapting current products to new markets, to usingexisting capabilities to enter entirely new product/market areas. ll of these growth strategies assume that the basic

business model remains stable. If the growth strategy requires a fundamental shift in the business model, this becomes

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an additional source of risk.

Figure B Alternative Growth Strategies

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managing their newly acquired assets and resources. The leadership challenge during the growth phase is to systemati!e theoperations of the business to achieve efficient operations while maintaining an entrepreneurial, opportunity$focused culture.

Opportunity

The main opportunities during the growth phase are derived from the choice of the venture&s growth strategy—i.e., geographic, product line, or customer base. The nature and challenges of each strategy must be carefully assessed. 'qually important, theoriginal business model, which has now gained some traction, may also need to be reconsidered.

-hen a venture is Fust beginning, it may not encounter much direct competition. #ut with initial success and continued growth,competitive responses are inevitable. This may take the form of direct imitation, strategic leapfrogging, or the application of

large resources—such as a sales force or financial strength—by a large company. These competitive challenges requireleadership that can think beyond the creation of a viable business model to how sustainable competitive advantage can beachieved. -hereas the original business model may have met with success because of its uniqueness, succeeding amidstcompetition requires that a venture has an underlying and durable competitive advantage.

Two examples illustrate how the nature of the opportunity can shift in the growth phase. The first deals with scale anddemonstrates how capitali!ing on initial success can require the rapid achievement of national or global scale. or example,a medical device company might make significant progress at a few leading hospitals. #ut long$term success and growthrequires that it achieve manufacturing and distribution capacity on a large scale. Indeed, many medical device startups concludethey cannot achieve scalability fast enough and end up selling to one of the large integrated health$care companies.

4imilarly, businesses requiring high levels of customer responsiveness and satisfaction need to move beyond the enthusiasm anddedication of the founding team to a systematic way of hiring and training for customer service. or example, when 1eg -hitman

Foined e#ay as "' in 0DD;, sales were EG million and customer service was hapha!ard at best. -hitman, who previously

worked at roctor H 2amble, +isney, and :asbro, instituted powerful systems to institutionali!e customer service and by 6))@,sales exceeded E< billion.(

Context

8ust as the original venture idea exists in a context, so does the opportunity to grow the venture. 4ometimes a change in contextcan increase the si!e of an opportunity. or example, changes in tax laws tend to increase the demand for tax services. n theother hand, tougher regulatory enforcement by governmental agencies such as the + can limit the opportunity of new health$care ventures to grow.

ne essential element of context for a rapidly growing venture is the set of conditions in the private and public capitalmarkets. 9apid growth almost always requires large infusions of new capital, but venture capital investing and the frequency of Is are notoriously cyclical and can have a large effect on how aggressively a venture can grow.

Deal

venture&s growth phase nearly always requires considerable capital. -hile it is easier to attract capital once a venture hasdemonstrated early success, the availability of larger amounts of capital from a broader variety of sources makes the choice of afinancing strategy complicated. inancing alternatives can range from additional venture capital and equity funds, to debtfinancing, to a public offering, to the outright sale of the venture to a larger company. 'ach of these options has different financialterms and implications for loss of control.

2iven the complexity of deal options and the need for larger amounts of capital, a venture may sometimes need to bring in a professional " during the growth phase.

Execution

4uccess in the growth phase ultimately depends on the venture&s ability to execute the numerous tasks required to achieve rapidgrowth. 4uccessful execution requires a more disciplined approach to management than is usually seen in the early phase of a

business.G

or example, successful execution usually requires a more hierarchical organi!ational structure, with clearly definedtasks and responsibilities, as discussed in the section on People on p. @.

4uccessful execution during the growth phase also brings the need for more and tighter control mechanisms. +uring the start$up phase, flexibility to experiment and learn quickly is key to success. s the business model becomes stable and si!e increases andgrowth accelerates, however, it becomes critical to have systems that assure that all parts of the organi!ation achieve their obFectives in a coordinated manner. s a result, more detailed budgeting procedures are often introduced, 1# >1anagement

by bFectives? systems are put in place, and managers are held accountable >often quarterly? to achieve specific obFectives.

ltimately, executing a successful growth strategy requires attention to numerous operating details. The task requiresentrepreneurial leadership with tremendous energy and discipline. The establishment of growth and profitability obFectives isonly the starting point of execution. It then requires a clear articulation of the accomplishments that must be achieved to meet theobFectives and finally taking the actions needed to make those accomplishments a reality.

Conclusion: Discipline and EntrepreneurshipThis note has reviewed the range of growth strategies available to new ventures and how achieving a growth strategy oftenrequires changes in the organi!ation&s processes and people, as well as excellence in execution throughout the firm. >4ee Exhiit! for a list of questions for assessing a venture&s growth potential.? In general, each of these tasks requires a more disciplinedapproach to management than was needed in the startup phase. If taken to an extreme, the growth phase can bring an end to

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the opportunity$driven entrepreneurial approach to management that made the venture successful in the first place. To somedegree, it is inevitable that ventures will lose some of their focus on opportunity as they concentrate more on the challenge of

building a larger sustainable enterprise. #ut this does not mean that entrepreneurial management is no longer necessary. This,then, is the ultimate leadership challenge of managing the growing venture—to establish the discipline within theorgani!ation to remain in control and grow while remaining driven and open to the opportunities in the environment. chieving

both of these obFectives isn&t easy. #ut achieving only one of them leaves the company vulnerable to either an inability to perceiveand respond to new opportunities or an inability to execute the many tasks required to grow profitably.

Exhiit ! "uestions #or Assessing Growth Potential

Strategy• -ill the venture grow via new customer segments, new geographic markets, or new products and servicesC

• If growth is to be achieved via new customer segments, how much emphasis will be placed on delivering results for

existing versus newly$targeted customersC

• -hat groups of customers, geographies, or technologies are excluded from new product/market targets, thus

providing the basis for market and operating focusC

• -hat share of the newly$defined growth opportunity must be captured to achieve >a? breakeven and >b? profit goalsC

People

• +oes leadership possess the values, character, and behaviors necessary to execute the vision for growthC

• :as the organi!ation evolved to facilitate expertise in specific functional areasC

• :ave Fob responsibilities been clearly definedC

• Is the chain of command and degree of individual autonomy clearly definedC

Opportunity

• -hat is the total potential for the new product/market opportunities being targeted, as well as the realistic share to

which the organi!ation might aspireC

• -hat are the maFor risks of the growth strategyC

• -hat could go rightC -hat could go wrongC

•re competitors likely to respond to the venture&s initial successC

• -hat scale needs to be achieved for the venture to sustain successC

• :ow can high levels of customer responsiveness be maintainedC

Context

• :ave there been any changes in the macro$economy, tax laws, regulation, or sociopolitical environment that could

affect the venture&s ability to growC

• Is the context for target growth opportunities different than that for markets in which the organi!ation has been

competing thus farC

Deal

B Is the free cash flow sufficient to fund the desired rate of growth as well as investment in innovationC If not, does theorgani!ation have sufficient access to capital markets and the capital structure to obtain the funding needed to supportthe desired rate of growthC

B +oes management track the rate of growth in enterprise value in relation to the perceived level >among investors? of prospective growth opportunitiesC

B Is an effort made to identify points at which a change in ownership would be advisableC

Execution

B :ave key processes, especially for dealing with customer interactions, been definedC

B re systems and measures in place to evaluate departmental and individual performanceC

B re all individuals aware of their key performance metrics and how they relate to the overall goals of the organi!ationC

B re critical tasks being accomplishedC

B Is the decision process fast and thoroughC

B Is the entire management team able to translate the company&s obFectives into specific accomplishments and action

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plansC

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Documents

A Note on Managing the Growing Ventur1