Introduction. Operations Management for New Ventures Operations Management

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1 1 Introduction Operations Management for New Ventures Wide discipline Operations strategy Operations Management From configuring appropriate resources and processes into a production system that best contributes the organization s goals and competitive advantage Efficient execution of operations To managing the production system in order to provide the best match with demand and supply. The major/minor in operations and service management emphasizes the novel ways of encountering the challenges and utilizing the opportunities related to creating and transforming technology-based business.

2 2 Objectives of the course Analyze the performance of and the risks related to modern production systems through the relevant life cycle Manage value in production systems according to the requirements of the dynamic business environments. How operations management principles and methods support the design and control of high performance operations in technology-based new ventures and the respective demand-supply chain. Common learning targets & personal learning targets Weekly, in period III Lectures (Mon & Fri) and related articles Group work (20%) Course concept Exam (60%) Based on selected articles Course essay (20%) Due 26 February 3 cr Period IV Group assignment (2-3 students) Learning target agreed with the group Based on scientific articles and publicly available case material Due 1 April + 2 cr

3 3 Initiation of the Group Work Groups formed next Friday, 13 January Before that consider individually 2-3 new ventures that you are fairly familiar with but still interested in How have you learned of these companies? What do you know of operations management issues in them? 2-3 new ventures you are not familiar with but would like to learn more about (especially concerning operations management issues) Describe briefly the business of each company Indicate if you want to continue in period IV (to achieve 5 cr instead of 3 cr) Report you considerations via MyCourses (due 12 Jan, 22:00) Impacts your group work grading! New Venture Venture is a new activity, usually in business, that involves risk or uncertainty New technologies; new markets, application areas Start-up entity developed with the intent of profiting financially. A business venture may also be considered a small business. Young companies Surveys require a practical definition, e.g. 6 years from the formal founding or registration of the company Different business, different interpretation

4 4 High-growth companies Growth companies according to OECD At least 20 % growth in headcount three years in a row, min.10 employees in the beginning year Growth in annual sales E.g. 100 % in four years, ending with at least 5 million euros Unicorns are start-ups that do not have an established performance record, with a stock market valuation or estimated valuation of more than $1 billion Small and medium enterprises (SMEs) SME = less than 250 employees (EU definition) In Finland, such companies do not belong to the 150 largest manufacturing companies Definition varies across countries (less than ) Employees managed using the personal management style, i.e. without systems to support managers between 50 and 80 people depending on the complexity of the company and the skills and time commitment of the manager. Microenterprise Less than 10 people & started with a small amount of capital Usually focus for their local areas

5 5 The Resource-Based View of Small Business Growth Growth depends on the managerial resources available over time to plan and manage growth in addition to maintaining current operations A critical requirement of small firm founders is the strategic capability to identify opportunities for growth where large firms have left scope for small firms to grow. Empirical studies have also begun to explain small business performance measured as growth in profitability in terms of the degree of fit between the resource-base and the strategy of the business. Close to learning perspective & evolutionary models of growth Dobbs and Hamilton (2006) Other Approaches to Growth Stochastic no dominant theory to explain (too complex) Descriptive describe a growth process through a sequence of stages or crises; how a firm adapts to growth Evolutionary the nature and timing of growth is a result of a firm s own unique circumstances there is no standard model or sequence of stages Learning the critical resource of knowledge is created through learning (path) Deterministic a stable set of explanatory variables for growth Dobbs and Hamilton (2006)

6 6 Survival of New Ventures Estimated failure rates for start-ups Liquidating all assets, with investors losing most or all the money they put into the company: failure rate %; according to Franco and Haase (2010) 50 % within 5 years from founding Failing to see the projected return on investment: failure rate %. Declaring a projection and then falling short of meeting it: failure rate %. In Espoo area, 75 % of NVs do not grow (but may hang on even 10 years) In Tatikonda et al. (2013) Failure means officially discontinuing operations or not providing the required annual report information Failure rate over the 6-year period 64 % Lean Start-up Start-up: a temporary organization designed to search for a repeatable and scalable business model Existing companies execute a business model, start-ups look for one The ones that ultimately succeed go quickly from failure to failure, all the while adapting, iterating on, and improving their initial ideas as they continually learn from customers. Lean start-up techniques were initially designed to create fastgrowing tech ventures. Agile development in software industries A start-up produces a "minimum viable product" containing only critical features gathers feedback on it from customers, and then starts over with a revised minimum viable product. Based on Blank, S., 2013, Harvard Business Review

7 7 Key Elements in Lean Start-up Business Model Canvas Blank, S., 2013, Harvard Business Review Think big act small Balance of technology development, product development and business strategy The first minimum winning game is the product-market position that a high-tech startup venture can reasonably plan to achieve within a month time horizon. Limited enough to be vigorously pursued with the company s available financial and human resources Big enough to provide a solid foundation for defining the MWG for the next 2-3 years Based on Burgelman & Siegel, 2007, California Management Review

8 8 Operational Capabilities and New Venture Survival Tatikonda et al. (2013) Typical challenges of a New Venture Liabilities of newness Stem from lack of established routines in managing internal activities Inefficiencies Personnel can be unfamiliar with their roles Exchange relationships with clients, suppliers, other stakeholders are not fully established or stabilized Liabilities of smallness Lack of resources limits the ability to effectively prepare and respond to the range of changes in dynamic environment Operations management is about the efficient use of scarce resources

9 9 New Venture Phases Start-Up Growth Stability Informal relationships Formal organizational structure Increasing customer base Increasing diversity concerning the offering High responsiveness Reliable & solid operations Standard operating procedures, management systems Increasing production volume Capacity management (acquistion and utilization of resources) Key Capabilities & Start-Up Objectives: obtain initial and new customers & continue to modify and adapt the core product design Not cost-cutting or profitability Changes and improvements to the product design & rapid delivery customer responsiveness Resources in market development and R&D activities High inventory turnover less working capital more funds to critical activities Make-to-order, high velocity material flow

10 10 Key Capabilities & Venture Growth Ramping up the operations (scale up) Develop new organizational routines and implement operational changes to improve coordination, reduce costs, and increase margins manufacturability-based product design modifications, new supply chain relations, manufacturing process design Generate internal returns to fund the ramp-up Profit margins of products and the entire operations Resource constraints Which are the key routines, procedures, or systems that need to be developed first? Key Capabilities & Venture Stability Achieving sustainable volume production Established core product, large customer base, multiple distribution channels, increasing employee headcount Seek greater scale economies, more reliable & routinized production activity, further cost reductions External pressure to lower prices & defend sales volumes in extisting markets but also seek new growth opportunities in both existing and new markets Appropriate recruitment, selection, and retention (training, appraisal, rewarding) routines help identify and secure high-performance personnel

11 11 Attribute s of a firm s environment Munificence greater availabilty of critical resources allows the firm a wider range of strategic options increases likelihood of survival Dynamism uncertainty of the environment Instability [turbulence] Magnitude and frequency of change Unpredictability Irregular patterns Complexity heterogeneity of factors a firm must deal with in reconfiguring internal resoruces [multiple, different activities] Contingency theory Contingency theory an organization should match its strategies, structures and processes to its environment No universal best practice in terms of organization design External environment Strategy/Structure Processes Success Idea of the survival of the fittest often embedded Contingency-based hypotheses Fit between operational capability & survival likelihood at three venture phases

12 12 Constructs, Variables &Their Operationalization Single variable as a proxy for an operational capability Inventory Turnover - ratio of (annual) CoGS to average inventory level (year-end inventory) Gross Margin ratio of annual operating income (sales less CoGS) to annual sales [Should actually be called gross profit] Employee Productivity ratio of annual operating income to the number of employees in the given year Data 800 new manufacturing ventures in Sweden Failure or survival SMEs = less than 250 employees (EU definition) Robustness test & Post hoc analysis The results are consistent across firm sizes (1-9, 10-49, ) Stronger test results for discrete manufacturers (as compared to process manufacturers)