Lecture 2 Entrepreneurship: from cradle to growth GOVERNANCE AND ACCOUNTING IN SMES PROF. ENRICO BRACCI

Transcription

1 Lecture 2 : from cradle to growth GOVERNANCE AND ACCOUNTING IN SMES PROF. ENRICO BRACCI

2 Agenda Entrepreneur and entrepreneurship: a definition Entrepreneur main traits The conditions towards entrepreneurship How to start a business The growth cycle of a new venture 2 2

3 Entreprenuer: a definition The term entrepreneur, a French word meaning literally «between-taker» or «go-between», has several definitions. The definitions tend to share the following entrepreneurial behaviour: - Creation. A new business is started from an idea - Innovation. The business innovates with new products, process, market, material or organisation. - Risk assumption. The entrepreneur bears the risk of potential failure - General management. The owner guides the business and allocates the resources - Performance intention. High levels of growth and/or profit expected However, a definition may be: «An individual who establishes and manages a business for the principal purpose of profit and growth. The entrepreneur is characterised principally by innovative behaviour, and will employ strategic management practices in the business» (Carland, Hoy, Boulton and Carland, 1984) 3 3

4 Entreprenuer: a profile 1. Desire and willingness to take initiative. Entrepreneurs feel a personal responsibility for the outcome of ventures they start. They prefer being in control of the resources and to use them to achieve their goals. 2. Preference for moderate risk. Calculating risk takers believing that their goals are reasonable and attainable. 3. Confidence in their ability, and self-reliance. Entrepreneurs tend to rely on their ability and tend to be optimistic about the chance to succeed, they don t shy away from the responsibility for making their business succeed. 4. Perseverance and tenacy. Even when things don t go the right way they keep trying. Japanese motto Fall seven times; stand up eight. 5. Desire for immediate feedback. Entrepreneurs like to know how the business is going, looking for reinforcement. 6. High level of energy. Stats say that entrepreneurs work on average between hours a week. 7. Competitiveness. Entrepreneurs tend to be highly competitive in life, sports and all other activities. 8. Forward looking orientation. Entrepreneurs tend to look ahead, searching for new opportunities. They are less interested in what they have achieved in the past, instead are vigilant observing of event. 9. Skill at organising. Starting a business from scratch means putting the right people and resources together to accomplish the task. 10. Value of achievement over money. Money is not the main motive to start a venture, but a nice outcome. Entrepreneurs have achievement as one of the primary motivating forces. 4 4

5 Seven Rules for Building a Successful Business 1. Recognize an opportunity 2. Evaluate it with critical thinking (SWOT) 3. Build a team 4. Write a realistic business plan 5. Gather resources 6. Decide ownership 7. Create wealth 5

6 A model of entrepreneurship start-up process Communication Opportunity Business Plan Resources Ambiguity Creativity Uncertainty Fits and gaps Team Exogenous forces Leadership Capital market context Source: Mazzarol, Reboud,

7 The Potential Drawbacks of Financial insecurity: uncertainty of income Business failure: risk of losing your entire invested capital Long hours and hard work Lower quality of life until the business gets established High levels of stress Complete responsibility Discouragement Loneliness 7

8 Entreprenuership Vs SMEs business manager is the process of identifying opportunities for which marketable needs exist and assuming the risk to set up a venture to satisfy them. It is also a process of creating value by bringing together resources to exploit an opportunity involves the start-up process. Small business management focuses on running a business through time and may or may not involve a start-up. Entreprenuership and small business management can be considered a continuum in the start-up process. 8 8

9 process Innovation It is possible to envisage 6 steps: Triggering event process Implement ation Entrepreneurial event Source: Hatten, 2014, p. 29 Growth Maturity Harvest SME management process 9 9

10 process Innovation It is possible to envisage 6 steps: Triggering event process Implement ation Entrepreneurial event Source: Hatten, 2014, p. 29 Growth Maturity Harvest SME management process Innovation: - An initial idea - Start discussing it, asking for opinion, information. - Looking for suggestion - The initial idea is re-worked continuously 10 10

11 Shumpeter s Sources of Opportunity Use a new technology to produce a new product (i.e. Genetic therapy). Use an existing technology to produce a new product (i.e. Ipod). Use an existing technology to produce an old product in a new way (i.e. Electric car). Find a new source of resources to produce more efficiently. Develop a new market for an existing product. 11

12 Creating Business Ideas Listen. Get ideas by listening others. Create one business idea by listening. Observe. Get idea by observing and use imagination to create a business idea, from problems, unsolved needs, or better way to satisfy a need. Analyze. Strategically and critically think about what product/service could solve the problem. Drucker: exploit changes in the world. 12

13 Not All Ideas Are Opportunities An opportunity is an idea that is based on what consumers need or want and are willing to buy sufficiently often at a high enough price to sustain a business. Opportunity is situational: dependent on variable circumstances. 13

14 Business Opportunity = Idea + Four Characteristics 1. Attractive to customers. 2. Will work in the business environment. 3. Can be executed in an existing window of opportunity. 4. Can be implemented with the right team to make it durable. Source: Timmons, J. (1999, p.7) 14

15 Five Roots of Opportunity 1. Problems 2. Changes 3. Inventions 4. Competitive advantage 5. Technological advances The best business opportunities often combine both internal and external factors. 15

16 process Innovation It is possible to envisage 6 steps: Triggering event process Implement ation Entrepreneurial event Source: Hatten, 2014, p. 29 Growth Maturity Harvest SME management process Triggering event: - Loss of a job - Successful gathering of resources (not only financial) - Any other event Elisabeth Holmes Theranos 16 16

17 process Innovation It is possible to envisage 6 steps: Triggering event process Implement ation Entrepreneurial event Source: Hatten, 2014, p. 29 Growth Maturity Harvest SME management process Implementation: - The organisation is formed, the idea begins to be brought into reality - The level of commitment at this stage is relevant - Implementation may involve (Schumpeter, 1934): 1. Introducing new products/services 2. Introducing new methods of production 3. Opening new markets 4. Opening new supply sources 5. Industrial reorganisation 17 17

18 Pathways to Start and build a new business. Inherit a business. Secure franchise rights. Buy an existing business. License or purchase technology. Respect the intellectual property of others, and other ethical issues. 18

19 process Innovation It is possible to envisage 6 steps: Triggering event process Implement ation Entrepreneurial event Source: Hatten, 2014, p. 29 Growth Maturity Harvest SME management process Growth: - It means achieving a critical mass - Satisfying level of profitability is achieved - Enough resources to be invested in the business Maturity: - Business is well established, the survival of the business seems assured - Still many problems, but manageable - Many entrepreneur may leave at this point, SME managers tend to hold for longer, in some cases till retirement. - Still needs to grow and evolve 19 19

20 Firm growth: key questions How can we tell whether a business is growing? Do businesses need to grow? What affects the growth of organisations? How can we model growth and is it useful? 20

21 Business growth Financial Growth Profitability, sales turnover Resources Performance Strategic Growth New products Strategic alliances Asset accumulation Direction Structural Growth Net assets Use of assets Organisational Growth Number of people (Source: Wickham, p.224) 21

22 Type of growth: Mice, Elephants and Gazelles Mice Small, vulnerable, hardworking, little market influence power, quick to change direction if needed, very few aspire to grow, maintain their profitability Elephants Large, command respect, cannot change direction quickly, can influence the market place and conditions, likely to be contracting in size Gazelles Growth oriented with above average profitability, seek growth rather than control, ultimately become large employers, agile, at least 20% growth a year for 4 years Source Birch (1988) 22

23 A Gazelle Company: Facebook 23

24 A Social Enterprise Uses engaged ethics buying cocoa beans from multiple growers The company s sales have soared 226% a year from an annualised 533,000 in 2005 to 18.4m in In 2016 was floated at the LSE at a market value of 167milions. 24

25 Principals theories of Life Cycles These theories suggest that small business growth characterised by a number of predictable, common, discrete and consistent stages or phases sequential in nature and occur as a hierarchical progression not easily reversed tend to be metamorphosis models (d Amboise and Muldowney, 1988) Crises are an important feature periods of relatively stable growth interspersed with periods of more rapid, discontinuous change 25

26 The small business life cycle Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Inception Survival Growth Expansion Maturity Size Age of business Source: Scott and Bruce (1987) Evolution Crisis 26

27 What are crises? growing pains (Steinmetz, 1969) developmental problems (Kazanjian, 1988) developmental hurdles (Parks, 1977) Consensus that different problems during different stages of the growth process sequential (Dodge and Robbins, 1992) Certain problems more dominant at certain times and sequential pattern to crises 27

28 Greiner Model: Evolutions and revolutions as organisations grow Size of Firm 4. Crisis of Red Tape 5. Crisis of? 1. Crisis of Leadership 1. Growth through Creativity 2. Crisis of Autonomy 2. Growth through Direction 3. Crisis of Control 5. Growth through 4. Growth Collaboration through 3. Growth Co-ordination through Delegation Age of Firm From: Greiner (1972) 28

29 Criticism of models of growth Empirical studies confirmed that growth stages not discrete and highly specific Stages are fluid and non-sequential, with developmental problems often overlapping between different stages Grow or fail hypothesis criticised. Small businesses often reach a plateau in their development and can remain in one growth stage for prolonged period of time 29

30 process Innovation It is possible to envisage 6 steps: Triggering event Implement ation Growth Maturity Source: Hatten, 2014, p. 29 Harvest process Entrepreneurial event SME management process Harvest: - Beginning with the end in mind (Covey S.), exit needs to be planned. - Ownership can be transferred through; - Employee stock ownership plan (ESOP) - Initial public offering (IPO) - Acquisition by another company - Management buy-out - There are psychological issues - Entrepreneurial learning continued as an entrepreneur - Serial entrepreneurs, portfolio entrepreneurs 30 30

31 Readings Greiner, Larry E., (1972), Evolution and Revolution as Organizations Grow, Harvard Business Review Mariotti and Glackin (2015), Entreprenurship and small business management, Pearson, Chapter 1 Scott and Bruce (1987), The 5 stages of small business growth, Long Range Planning, Vol. 20, No. 3, pp. 45 to 52 Additional readings: Hatten, T. (2014), Small business management, Cengage, Chapter 2. The Wall Street Journal, (March 2008) Facebook CEO Seeks Help as Site Grows Up