Chapter 12Considering New Venturesand Renewal

2

OBJECTIVES

Define new ventures, initial public offerings (IPOs), and corporate renewal and describe how they are related to strategic management

1

Understand entrepreneurship and the entre-preneurial process

2

Describe the steps involved in new-venture creation and corporate new venturing

3

Map out the stages leading up to an IPO4

Understand the external and internal causes of organizational failure

5

Outline an action plan for strategic change and corporate renewal

6

3

Innovative practices

• Unique venues (e.g., ski shops, tattoo parlors)

• Outsourced distribution (e.g., contract packers, independent trucking companies)

Innovative products

• Turkey and gravy flavored soda

• Jones WhoopAss energy drink

• Jones Naturals juices

ENTREPRENEURSHIP AT JONES SODA

Urban Juice and Soda Co. born in Vancouver, Canada in 1987 by a former ski instructor

• $27 million in sales• Trade over the

counter (OTC)• Possible acquisition

target

4

JONES SODA FINANCIALS AT A GLANCE

Employees

Headquarters

Top management team

Sales ($ millions)

Net income ($ millions)

2003

20.1

0.3

2002

18.6

(1.2)

2001

23.3

(1.7)

2004

27.5

1.3

51

Seattle, Washington

Peter Van Stolk, CEO Jennifer Cue, COO & CFO

5

ORTHODOXIES DEVELOP ALONG SEVERAL DIMENSIONS

• Who the customer or end user is

• The type of interface and interaction with the customer or end user

• How benefit is defined and value is delivered

• How product/service functionality is defined

• What form the product/service should take

• How processes are structured and managed

• The “ideal” cost and pricing structure

All potentially create blind spots

6

SOME ORTHODOXIES THAT HAVE CREATED BLIND SPOTS

– Western Union internal memo, 1876“This ’telephone’ has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us”

– David Sarnhoff’s associates in response to his urgings for investmentin the radio in the 1920’s

“The wireless music box has no imaginable commer-cial value. Who would pay for a message sent to nobody in particular?”

– Ken Olson, President, Chairman and Founder of Digital EquipmentCorp., 1977

There is no reason anyone would want a computer in their home”

– A Yale University managementprofessor in response to Fred Smith’spaper proposing reliable overnightdelivery service. Smith went on tofound Federal Express Corp

“The concept is interesting and well-formed, but in order to earn better than a ‘C’, the idea must be feasible”

– Response to Debbi Field’s idea ofstarting Mrs. Field’s Cookies

“A cookie store is a bad idea. Besides, the market research reports say America likes crispy cookies, not soft and chewy cookies like you make”

– David Komansky, Merrill LynchChairman & CEO, 1999

“There will never be a market in selling stock over the internet”

7

THE ENTREPRENEURIAL PROCESS

Entrepreneur and

entrepreneurial team

OpportunityResources

and capabilities

8

STARTING POINT

Entrepreneur and

entrepreneurial team

OpportunityResources

and capabilities

New ventures start with an opportunity

Entrepreneur and

entrepreneurial team

OpportunityResources

and capabilities

While strategy for existing firms begins with the assessment of resources and capabilities

New Ventures Strategies for Existing Firms

9

ACTIVITIES IN NEW VENTURE CREATION

New Product Launch

Business Plan

ExternalFinancing

Idea

Opportunity

10

THE BUSINESS PLAN

Contents

1. Executive summary: One to three pages highlighting all key points in a way that captures the interest of the reader. Stress the business concept here, not the numbers. It is the unique value proposition and business model that really matter

2. Company description: Provide a brief description of the company’s business, organization, structure and strategy. Provide a summary of how the company’s patents or licenses to patents are connected with the development and introduction of products

3. Products and services: Include a layman’s overview of how the company’s technology and patents relate to its products and services. Describe the products or services the company will sell, including a discussion of why people will want them, what problems they solve, and how much customers are likely to pay for them (i.e., the willingness to pay criteria)

4. Market analysis: Identifies the need for the product, the extent of that need, who the customers will be, and why they will buy your product. This section should also include a discussion of competitors or potential competitors and why the product will have a competitive advantage over their offerings. Include considerations of barriers to entry in this market

5. Proprietary position: If the new venture’s market position will rely on patents or licenses to patents, discuss how these patents will contribute to the company’s competitive position and whether other patents (competitors or otherwise) might limit the company’s ability to market its products. If similar products do not already exist, discuss the alternative means by which customers are likely to meet the needs the product addresses

6. Marketing and sales plan: Show how the company plans to attract and maintain customers. Discuss product pricing, promotion, and positioning strategy

7. Management team: Describe the management team with special emphasis on its track record at accomplishing tasks similar to those it will face in making the company successful. Investors place major emphasis on the management team, viewing it as the critical ingredient in catalyzing the growth of the company and responding to the unexpected

8. Operations plan: Describe how the day-to-day operations of the company will be organized and carried out to produce the products and services described above

9. Finances: Identify the capital that will be required to build the business and how it will be used. Include projections of revenues and expenses that show investors how they will get their money back and what return they can expect on their investment

• Brings together all elements of venture

• Ensures stakeholder (e.g., investors) of venture plan

• Forces entrepreneur to examine all facets of strategy

11

CORPORATE NEW VENTURING – NEW VENTURE CREATION BY AN ESTABLISHED FIRM

Established firm New ventureCompanies that do this well include

• Merck

• 3M

• Motorola

• Rubbermaid

• Johnson & Johnson

• Corning

• General Electric

• Raychem

• HP

• Wal-Mart

Idea

12

Try to mitigate false starts and failures so miss out on learning experiences

Resist challenging assumptions, work practices, and skills

Lavish too many resources on new ventures

THREE OBSTACLES CORPORATE NEW VENTURES FACE

13

NEW VENTURE DIVISIONS AND BUSINESS INCUBATORS

Existing Firm

Process

Product

Technology

Incubator New venture

14

THE INITIAL PUBLIC OFFERING (IPO)

Hire investment bank and estimate value of company

File S-1 statement with SEC and other security commissions

Company decides it wants to tap public markets for invest-ment capital

Prepare and distribute investor prospectus

Price and sell share (“Go public”)

1

2 3

4

5

15

MINIMUM COSTS OF GOING PUBLIC TO RAISE $25 MILLION

Pre-IPO costs over two years,

Minimum Pre-IPO Costs 400,000

1. Upgrading accounting and MIS2. New personnel and board members3. Management/administrative time

150,000150,000100,000

IPO-process costs 90 days,

6.5% underwriter commission

$25 million IPO

IPO professional fees 1,625,000

Minimum IPO-Process Costs 2,055,000

Post-IPO costs every year thereafter,

Minimum Annual Post IPO-COSTS 405,000

Total Minimum Cost of a $25 million IPO 2,860,000

1. Legal fees2. Preliminary/final prospectus printing3. Translation4. Investors relations5. Accounting6. Road show and preparations7. Initial stock exchange listing fee

150,000100,000

30,00040,00050,00050,00010,000

430,000

1. Investor relations and Web site2. Directors’ fees, travel costs, etc.,3. Directors’ liability insurance4. Corporate image, public relations5. Annual stock exchange fee6. Management/administration costs

100,000100,000

50,00050,000

5,000100,000

Source:P. Downing, “IPO Launch Fraught with Perils,” The Ottawa Citizen, High-Tech Report, October 12, 1998

Minimum IPO professional fees

16

CORPORATIONS FAIL FROM FORESEEABLE EVENTS

A study of 51 failed organizations reveal ...

Source: S. Finkelstein, why smart executives fail (New York: Portfolio press, 2003)

Cause of failure

... they failed from foreseeable events

0

51

Not foreseeable

Foreseeable

17

EXTERNAL CAUSES OF FAILURE

Failure

Economic change

Competitive change

Social change

Technological change

Internal

External

18

INTERNAL CAUSES OF FAILURE

Strategy failure

Management failure

Failure

Internal

External

19

STRATEGIC CHANGE

Significant changes in resource-allocation choices or business activities that align the firm’s strategy with its vision, or changesto the firm’s vision

20

THE CHANGE PROCESS

ResourcesIncentivesSkills StructureExecution

PlanStrategic Change

ResourcesIncentivesSkills StructureExecution

PlanConfusion

ResourcesIncentives StructureExecution

PlanStress

ResourcesSkills StructureExecution

PlanGradual Change

IncentivesSkills StructureExecution

PlanFrustration

ResourcesIncentivesSkillsExecution

PlanConflict

ResourcesIncentivesSkills Structure Chaos

Source: A. Marcus, Management Strategy (New York: McGraw-Hill, 2004)

Communicate Vision

21

HOW WOULD YOU DO THAT? – JONES SODAIS JONES SODA LIKELY TO FAIL?

Conclusion?Test Jones’ scoreExplanation

Z-score Model

5 financial factors, when plugged into a formula, give a score that indicates probability of failure

Gambler’s Ruin Model

Net liquidation value (NLV) adjusted (net) cash flow, and variation of adjusted cash flow determine risk

Sustainable Growth Value

= ROE x (1 - Dividend -Payout ratio)

Operating Leverage

Gross margin

Net margin =

2.8 ?

Liquidation value in-creased to $4.3 m from $2.4 m and net cash flow decreased to $18,000 from $266,000

?

In 2003, sustainable growth rate was 12.5% and actual growth 37%

?

7.25 ?

22

STAGES IN THE TURNAROUND PROCESS

Stages

Objectives and Action Items

ManagementChange Evaluation Emergency

• Select a turnaround

• Developplan

• Raise cash

• Determine nature of turnaround

• Take charge

• Get control of cash

StabilizationReturn-to-Normal

• Select new top manage-ment team

• Can it survive?

• Survival • Enhance profitability

• Seek profitable growth

• Weed out impediments

• Identify strategy

• Positive cash flow

• Restructure business to increase ROI

• Build competitive strengths

Source:Adapted from Thomas D. Hays, III, CTP, Certified Turnaround Professional, Nachman Hays Brownstein

23

TURNAROUND CAVEATS TO BEAR IN MIND

Because every turnaround is unique, each stage is not necessarily distinguishable in every turnaround

1

2 The number of stages involved in each turnaround stage will depend on the seriousness of the financial crisis facing a given company. The more dire the trouble, the more stages the turnaround process will likely involve

3 The importance of each stage will vary from case to case. Sometimes, for instance, analysis will be more important than action, whereas the opposite will be true in other cases

4 A company can find itself involved in more than one stage at a time. Stages can overlap, and some tasks may affect more than one stage

5 The length of time required to address each stage is not only fluid but can vary greatly. The major factors in determining the amount of time entailed by each stage include the size of the company and the severity of its financial straits. Addressing every stage in the process may take 12 to 36 months

24

HOW WOULD YOU DO THAT? – ISH

In April 2002 ISH, formerly part of Deutsche Telekom, which supplied 4 million German homes with cable, was bleeding cash, losing money, and in default of nearly EURO 2.7 billion

What would you do?/what did ISH do?

Stage 1: Changing management

Stage 2: Situation analysis

Stage 3: Emergency action

Stage 4: Restructuring ISH

Stage 5: Normalcy and return to industry leadership

25

SUMMARY

Define new ventures, initial public offerings (IPOs), and corporate renewal and describe how they are related to strategic management

1

Understand entrepreneurship and the entre-preneurial process

2

Describe the steps involved in new-venture creation and corporate new venturing

3

Map out the stages leading up to an IPO4

Understand the external and internal causes of organizational failure

5

Outline an action plan for strategic change and corporate renewal

6

26

EXERCISE

Brainstorm a set of 10 ideas that could lead to the startup of a new business.Screen your ideas by:• Greatest market demand• Most attractive market structure and size• Best profit margins

Which of these screens caused most of the ideas to be discarded?What additional information would you need?Would an entrepreneurial or corporate setting have influenced your assessment of the opportunity? Why?