Week 11

SPPE 4332
ENTREPRENEURSHIP
WEEK 11
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innovative entrepreneurial global
Chapter 13
Preparing for and Evaluating the Challenges
of Growth
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Chapter Objectives
1 of 2
1. Explain the term sustained growth.

2. Describe how firms can properly prepare for
growth.
3. Discuss the six most common reasons firms pursue
growth.
4. Explain the importance of knowing the stages of
growth.
5. Describe the most important factors for firms to
focus on during each stage of growth.
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Chapter Objectives
2 of 2
6. Describe the managerial capacity problem and how

7.
8.
9.
10.
it inhibits firm growth.

Discuss the challenges for firms growth imposed by
adverse selection and moral hazard.
Discuss the day-to-day challenges of growing a
firm.
Explain why cash flow management is a
challenge for growing a firm.
Explain how quality control can become a
challenge for growing a firm.
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Three Things a Business Can Do to Prepare

For Growth 1 of 3
#1--Appreciate the
Nature of Business
Growth
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Important Realities
Not all businesses have the
potential to be aggressive
growth firms.
A business can grow too
fast.
Business success doesnt
always scale.

For Growth 2 of 3
Stay Committed to a
Core Strategy
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It is important that a business

not lose sight of its core
strategy as it prepares to
grow.
If a business becomes
distracted or starts pursuing
every opportunity for growth
thats its presented, it can
easily stray into areas where
its at a disadvantage.

For Growth 3 of 3
Plan for Growth
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A firm should establish

growth-related plans.
Writing a business plan
greatly assists in preparing
growth plans.
Its also important for a firm
to determine, as soon as
possible, what its growth
strategies will be.
Reasons for Growth

1 of 3
Reason for
Growth
Explanation
Economics of
scale
Occur when increasing production

lowers the average cost of each unit
produced.
Economics of
scope
Occur when the scope (or range) of

a firms operations creates
efficiencies.
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Reasons for Growth

2 of 3
Reason for
Growth
Explanation
Market
Leadership
Occurs when a firm holds the number

one or the number two position in an
industry or niche market in terms of
sales volume.
Influence,
Power, and
Survivability
Larger businesses usually have more

influence and power than smaller
firms.
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Reasons for Growth

3 of 3
Reason for
Growth
Explanation
Accommodate
the Growth of
Key Customers
Sometimes firms are compelling to

grow to accommodate the growth of
a key customer.
Attract and Retain

Talented
Employees
Growth is a firms primary

mechanism to generate promotional
opportunities for employees.
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Managing Growth
Its important for a business owner to know the stages of growth, along
with the unique opportunities and challenges that each stage entails.
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Stages of Growth
1 of 5
Introduction
Start-up phase where a business determines what its core
strengths and capabilities are.
The main challenge is to make sure the initial product or
service is right.
Its important to document what works and what doesnt
work during this stage.
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Stages of Growth
2 of 5
Early Growth
Generally characterized by increasing sales and
heightened complexity.
Two important things must happen for a business to be
successful in this stage.
The founder must start working on the business rather
in the business.
Increased formalization must
take place, and the business
has to start developing policies
and procedures.
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Stages of Growth
3 of 5
Continuous Growth
The need for structure and formalization increases.
Often the business will start developing related products
and services.
The toughest decisions take place in this stage.
One tough decision is whether the owner of the business
and the current management
team has the experience and
the ability to take the business
further.
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Stages of Growth
4 of 5
Maturity
A business enters the maturity stage when its growth stalls.
At this point, a firm is typically more intently focused on
managing efficiently than developing new products.
Well-managed firms often look for partnering
opportunities or opportunities for acquisitions or licensing
deals to breath new life into the firm.
If new growth cannot be achieved
through a firms existing product
mix, the next generation of
products should be developed.
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Stages of Growth
5 of 5
Decline
It is not inevitable that a business enter the decline stage.
Many American businesses have long histories and have
adapted and survived over time.
A businesss ability to avoid decline hinges on the strength
of its leadership and its ability to adapt over time.
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Challenges of Growth
Managerial Capacity Problem
Two categories of
challenges for
firms growth
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Day-to-Day Challenges of
Growing a Firm

1 of 6
Managerial Capacity
Firms are collections of productive resources that are
organized in an administrative framework.
As a firm goes about its routine activities, it recognizes
opportunities to grow.
The problem with this scenario is that firms are not
always prepared or able to grow, because of limited
managerial capacity."
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2 of 6
A Firms Administrative Framework

A firms administrative framework consists of two kinds
of services that are important to firm growth.
Entrepreneurial services generate new market, product, and
service ideas, while managerial services administer the routine
functions of the firm and facilitate the profitable execution of new
opportunities.
New product and service ideas require substantial managerial
services (or managerial capacity) to be successfully implemented.
This is a complex problem because if a firm has insufficient
managerial services to properly implement its new product and
service ideas, it cant grow.
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3 of 6
A Firms Administrative Framework (continued)

Continuation From Previous Slide
The reason a firm cant quickly increase its managerial
services (to take advantage of new product or service ideas) is
that it is expensive to hire new employees, it takes time for
new hires to be socialized into the culture of a firm, and it
takes time for new employees to acquire firm-specific skills
and establish trusting relationships with other members of the
firm.
When a firms managerial resources are insufficient to take
advantage of its new product and service opportunities, the
subsequent bottleneck is referred to as the managerial
capacity problem.
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4 of 6
Additional Challenges
As a firm grows, it is faced with the dual challenges of
adverse selection and moral hazard.
Adverse selection means that as the number of employees
a firm needs increases, it becomes increasingly difficult
for the firm to find the right employees, place them in
appropriate positions, and provide adequate supervision.
Moral hazard means that as a firm grows and adds
personnel, the new hires typically do not have the same
ownership incentives as the original founders, so the new
hires may not be as motivated as the founders to put in
long hours and may even try to avoid hard work.
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5 of 6
Basic Model of Firm Growth
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6 of 6
Impact of the Managerial Capacity Problem
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Day-to-Day Challenges of Growing a Firm

1 of 3
Challenge
Explanation
Cash Flow
Management
A firm requires an increasing amount

of cash as it grows.
Price
Stability
If growth comes at the expense of a

competitors market share, a price war
could ensue.
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2 of 3
Challenge
Quality
Control
Capital
Constraints
Explanation
An increase in firm activity can result
in quality control issues if a firm is not
able to increase its resources to handle
the extra work
Capital constraints are an ever-present
problem for growing firms
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3 of 3
There are few things more stressful than cash-flow challenges.

This entrepreneur is diligently managing his cash-flow to make
sure there is money in the bank to pay his vendors and meet his
payroll.
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SPPE 4332

innovative entrepreneurial global

innovative entrepreneurial global

1. Explain the term sustained growth.

innovative entrepreneurial global

6. Describe the managerial capacity problem and how

it inhibits firm growth.

innovative entrepreneurial global

Three Things a Business Can Do to Prepare

innovative entrepreneurial global

Three Things a Business Can Do to Prepare

It is important that a business

Three Things a Business Can Do to Prepare

Plan for Growth

A firm should establish

innovative entrepreneurial global

Reasons for Growth

Occur when increasing production

Occur when the scope (or range) of

innovative entrepreneurial global

Reasons for Growth

Occurs when a firm holds the number

Larger businesses usually have more

innovative entrepreneurial global

Reasons for Growth

Sometimes firms are compelling to

Attract and Retain

Growth is a firms primary

innovative entrepreneurial global 10

innovative entrepreneurial global 11

innovative entrepreneurial global 12

innovative entrepreneurial global 13

innovative entrepreneurial global 14

innovative entrepreneurial global 15

innovative entrepreneurial global 16

innovative entrepreneurial global 17

Managerial Capacity Problem

innovative entrepreneurial global 18

Managerial Capacity Problem

A Firms Administrative Framework

innovative entrepreneurial global 19

Managerial Capacity Problem

A Firms Administrative Framework (continued)

innovative entrepreneurial global 20

Managerial Capacity Problem

innovative entrepreneurial global 21

Managerial Capacity Problem

Basic Model of Firm Growth

innovative entrepreneurial global 22

Managerial Capacity Problem

Impact of the Managerial Capacity Problem

innovative entrepreneurial global 23

Day-to-Day Challenges of Growing a Firm

A firm requires an increasing amount

If growth comes at the expense of a

innovative entrepreneurial global 24

Day-to-Day Challenges of Growing a Firm

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