Small Business Management MGMT5601 Workshop 1 Part B: The ... · SBM MGMTG5601 UWA Business School...
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Small Business Management MGMT5601
Workshop 1 Part B: The Small
Business Lifecycle
Professor Tim Mazzarol – UWA Business School
UWA Business School MBA Program [email protected] MGMTG5601
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The importance of small firms
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Discussion
Eden Organix Case
• What was the process Valerie Mason-
Robinson went through to get her
business launched?
• How did she screen the opportunity?
• How did she secure the necessary
resources needed?
• What has enabled her business to
survive over the past four years?
• What does this case suggest about the
process of start-up and survival in the
early years of a business?
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Growth cycle of small firms
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Stage 1 Stage 2 Stage 3 Stage 4 Stage 5
Start-up Survival Growth Expansion Maturity
Size
Age of BusinessYoung Mature
Decline
Contained
Contained
Decline
Fold
FoldCrisis
Crisis
Crisis
Crisis
Source: (Scott and Bruce, 1987)
Source: Scott & Bruce (1987)
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Small business development
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Launch (Getting Started)
Survival (Making a
Living)
Consolidation (Making a
Profit)
Early Growth (Moving from
the operational to strategic)
Team Building & Delegation
Team Based Development
Source: Hall (1992)
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Australian firms births and deaths
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Source: ABS (2016)
Over a five year period the “churn” rate of entries and exits was about the
same, the average % change in the total number of firms was minus 0.1%.
Business entries and exits 2011-2015
(100,000)
(50,000)
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2011-12 2012-13 2013-14 2014-15
Entries Exits Change
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Survival rates of new firms in Australia
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Source: ABS (2016)
The chance of a new start-up business surviving beyond five years is around 50%.
Survival rates of start-ups in Australia, 2011-2015100%
74.3%
59.2%
50.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011-12 2012-13 2013-14 2014-15
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The main causes of failure in small
business start-ups
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• Underestimation of the start up time
• Under capitalisation
• Overestimation of the market size
• Lack of expertise by management
• Lack of working capital
• Confusion of cash flow over profit
• Wrong location of the business
• No Unique Selling Point
• Recruitment of the wrong people to staff it
• Failure to monitor the business performance
• Failure to retain profits in the business to fund growth
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Key success factors
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• Management ability
• Management ability
• Management ability
• The existence of a suitable business opportunity
– a product
– a niche, and
– a marketing orientation.
• Good product or service
• Use of outside advisers
• Adequate capital and credit
• Modern business methods
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Three types of small firm
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Lions:
Growth focused, dynamic & innovative
Seeks Partnerships, new markets &
value added products or service. Is not
price driven.
Mules:
Satisfied with slow steady progress.
Does not embrace change willingly
but can do well in a stable environment.
Usually die in harness.
Turkeys
Lack clear focus & direction.
Price driven, with little interest in new
ideas or external environment.
Generally short life span.
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Dynamics of a healthy SME sector
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10% Premium SME
70%
Steady State SME
10% vulnerable SME
during recession
10% Cease trading
Market
Development
potential
LIONS
MULES
TURKEYS
Land
of the
Living
Dead
Black
Hole of
Death
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Vulnerable businesses
Vulnerable businesses
have:
– Low margin products or
services
– ‘Cut-throat’ competition
– Price sensitive customers
– Localised markets with
limited growth
opportunities
– Low wages for their
owner-managers
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The “Deadly Sins” of start-up
• Underestimation of the start-up time
• Undercapitalisation
• Overestimate market size
• Lack of expertise
• Lack of working capital
• Confusing cash with profit
• Wrong location of the business
• No Unique Selling Point
• Recruiting the wrong people
• Going into business with the wrong partners
• Failure to monitor cash flow
• Failure to listen to the customer
• Don’t retain profits for growth
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Opportunity screening – 3M AnalysisM
ark
et What is the customer
need?
What is the product/service?
What is the size, structure, growth rate and demand capacity of the market?
What market share is attainable?
What are the barriers to market entry?
Money What is the investment
requirement?
What are the fixed & variable costs?
What is the gross profit margin?
What is the profit after tax?
What is the time to break-even?
What are the cash flow dynamics?
What are the ROI & IRR capital requirements?
Managem
ent Is there potential for
value adding?
How much control is there over resources?
What is the timing?
What is the room for error?
Is there an exit strategy?
Who will comprise the team?
Is there a suitable fit?
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The importance of planning
• If you fail to plan you are
planning to fail! Benjamin Franklin
• Having a formal business plan is
not essential to small business
success…
• But
• Owner-managers that have one
are more likely to succeed than
those who don’t.
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Small Business Planning and Strategy
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Discussion
Small Business Planning and Strategy Video
• What were the key considerations
identified in starting up a new business?
• What was their approach to business
planning?
• How did these successful business
owners manage their finances?
• What was their approach to marketing
and creating customers?
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Common problems in strategy development
• Lack of market analysis
• Overestimating the impact of marketing effort
• Underestimating capabilities of competitors
• Limited consideration of the pros & cons of strategic options
• Little analysis of the cross-effects between products and markets
• Problems of conflicting opinions
• Lack of matching of resources to support strategy
• Insufficient and superficial financial analysis
• SWAG - Scientific Wild Arse Guess
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Lack of strategic thinking
• Small business owners
suffer from Strategic Myopia
• Short NOT long term vision
• Most owners do not plan
because they:
– lack the time to do this.
– lack the knowledge & skills
to develop a plan.
– are unwilling to share ideas
& strategies.
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The value of planning
• Few SME have formal plans.
• Lack of formal planning has been linked to failure.
• Debate continues over the link between formal planning and success.
• Formal planning does appear to be linked to
– enhanced start up survival.
– enhanced growth performance.
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The value of planning in entrepreneurial
ventures
• Value of Planning (49 empirical studies)– Small firms gain benefits from planning
– Specific nature of this remains unclear
– Entrepreneur remains the key element
• Past management experience
• Education
• Entrepreneurial orientation
– Most entrepreneurs don’t formally plan
• Formality not linked to performance
• More support for sophisticated planning
• Used by entrepreneurs to mitigate risk
Source: Mazzarol & Reboud (2009)
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What does research tell us about the
value of planning?
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Source: Brinckmann, Grichnik & Kapsa (2010)
A review of 46 quantitative research
studies found:
• Both young and established firms
benefit from planning.
• Planning is of more value to small
business owners.
• In uncertain environments basic
planning is a better option.
• Focus on “contingency plans” and the
control of resources.
• Planning works best in situations
where quality and quantity of
information is high.
• More formal and sophisticated
planning significantly improves
performance.
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Three “Generic” strategic options
Growth
• FOCUS:
• Market opportunity
• Innovation
• Profitability
• NEEDS:
• Visionary leadership
• Strategic thinking
Exit
• FOCUS:
• Preparation for sale
• Succession planning
• Wealth creation
• NEEDS:
• Operational management
Stasis
• FOCUS:
• Consolidation & Efficiency
• Low stress & Profitability
• NEEDS:
• Operational management
Source: Mazzarol & Reboud (2009)
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Strategy as a Process
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Customer Value Proposition
Distinctive Competencies
Processes
Positions
Paths
Products & Services
Dynamic Capabilities
OpportunitiesThreats
Weaknesses Strengths
• Competitive rivalry
• New market entrants
• Substitutions
• Regulatory
• Supplier power
• Buyer power
• Social & demographic
• Environmental
• Unmet market needs
• Ability to add value
• Ability to reduce cost
• Niche or mass-market
• Product innovation
• Process innovation
• Market innovation
Process weaknesses:
• Management
• Organisation Learning
Positional weaknesses:
• Technical, financial &
physical assets
• Systems
Path weaknesses:
• History, culture
• Valuable
• Rare
• Difficult to copy
• No substitutes
• Organisational ability
Types of assets:
• Tangible - Intangible
• Isolating mechanismsPath
dependencies
Gaps in
knowledge
& resources
Technical,
financial &
Physical
assets
Coordination &
Learning
VRIO
framework
Business Model Analysis
Lean Canvas Lean Start-Up
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SWOT Analysis
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Strengths
Internal analysis
Factors within an organisations control
Advantages over competition
Threats
External analysis
Factors largely beyond the control of people in
the organisation
Unfavourable circumstances or events
S W
O T
Weaknesses
Internal analysis
Factors within an organisations control
Disadvantages over competition
Opportunities
External environment
Factors largely beyond the control of people in the organisation
Favourable circumstance of event, potential or existing
Checklist:
Strengths + WeaknessesManagementEmployeesFinanceLegalProducts and servicesPurchasingResearch and developmentDistributionMarketingFacilitiesPosition in the industry
Opportunities + ThreatsPoliticalEconomicSocialTechnical
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How to approach an industry analysis
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Analyze the current industry structure
• Existing competitors in the industry – (strategy, structure, rivalry)
• Potential for new entrants in next 3-5 years
• Possible substitutes (emerging technologies)
• The bargaining power of customers
• The bargaining power of suppliers
• What are the “Rules of the Game”?
Analyze historical changes in the industry structure
• PEST Analysis:
• Political factors (e.g. government regulation or taxation)
• Economic factors (e.g. business cycle forecasts)
• Social factors (e.g. consumer tastes, public opinion)
• Technological (e.g. disruptive innovations)
Analyze future trends in the industry structure
• Define the scope – what are the boundaries of your “industry”
• Identify key stakeholders (e.g. competitors, customers, suppliers, third party actors)
• Identify key trends (e.g. PEST)
• Identify key uncertainties (risk assessment)
• Develop initial scenarios (best case, worse case)
• Assess plausibility of each scenario
• Develop learning scenarios (case studies)
• Indentify knowledge gaps
• Develop quantitative models (business case analysis)
• Evolve decision scenarios (what should we do?)
Source: Lewis, 1999
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Competitor analysis
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Current Strategy
How is the competitor currently
competing within the market?
Capabilities
What are the competitor’s key strengths
and weaknesses?
Competitor’s Response
Profile
Is the competitor satisfied with its current market
position?
What likely moves or strategy shifts will
the competitor make?
Where is the competitor vulnerable?
What will provoke the greatest and most
effective retaliation by the competitor?
Future Goals
What are the competitor’s likely future goals based on market signals?
Assumptions
What does the
competitor assume
about itself and the
industry?
What drives the competitor?What the competitor is doing and can do?
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Generic positioning strategies
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Cost Leadership
Differentiation
Focus Cost Leadership
Focus Differentiation
Source: Porter, 1990
Broad
Target
Market
Niche
Target
Market
Process Innovation Product Innovation
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Criteria for sustained competitive
advantage
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• Elements of Sustained Competitive Advantage:
– How the firm competes – marketing, production, financing
– Where the firm competes – location, markets, segments
– The basis of competition – skills, assets, resources
• For sustained competitive advantage a firm’s resources must be:
– Valuable – exploits opportunities or neutralizes threats
– Rare – not available to competitors
– Imperfectly imitable – difficult to copy
– Without strategically equivalent substitutes
Source: Aaker, 1989; Barney, 1991
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Dynamic Capabilities and Absorptive
Capacity
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Sources: (Teece, Pisano & Shuen 1997; Mazzarol 2015)
Customer Value Proposition
• What does the customer see as value?
Distinctive Competencies
• What are we best at doing to generate this value?
Processes
• What do we need to do to create that value?
Positions
• What resources do we need to assemble to produce that value?
Paths
• What paths do we need to follow to deliver the value?
Products and Services
• What products and services will provide that value?
Acquisition of knowledge
Assimilation of knowledge
Transformation of knowledge
Exploitation of knowledge
IDEAS
DATA PRODUCT
LEARN BUILD
MEASURE
Lean Start-UpProcess
Assumptions• Customer Value hypothesis• Growth hypothesis
Innovation Accounting• Use minimum viable product• Fine-tune towards ideal goal• Persevere or pivot
Focus on Metrics• Actionable – cause & effect• Accessible – simple to understand• Auditable – systematic & transparent
Business Plan Pivot• Be ready to change direction• Multiple options• Flexibility is the key
Adapt Innovate
Small batchesExperiment
StickyViralPaid
Review problemsMake mistakes once
Portfolio ThinkingResources; autonomy,
ownership
BatchGrow
Source: Ries 2011
The Canvas for Business Models
Strategic Partners Key Activities
Key Resources
Value Proposition Customer Relations Customer Segments
Channels
Cost structure (how much it cost?) Revenue Stream (Monetizing)
Sources: Osterwalder (2010)
Who is the customer?
What are their main problems or needs?
What goals do they have?
Demographics?
Psychographics?
How does the product or service help the customer :
• Save money• Save time• Add value• Increase profits
How do you reach your customers?
How can you deliver value to them?
Can you do this directly or do you need to work via others?
What are the customers’:
• Acquisition costs?• Retention costs?• Switching costs?• Life time value?
How much is the customer willing to pay?
How many customers will pay?
How frequently will they pay?
Cash cycle & cost-profit-volume analysis
Core competencies ?
Team structure?
Physical resources?
Financial resources?
Operations management
CRM systemsFinancial control systems
HRM SystemsRules, policies, metrics
Do you need to work with others or can you proceed alone?
If you need others who are the:
• Lead customers?• Key suppliers?• Resource network
actors?
What are the main over head (fixed) costs?
What are the anticipated variable costs?
What is the anticipated gross profit margin?
When will the business break even?
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Strategic planning response types
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Administrator
• New Product
• Existing Market
• Medium risk
• Operational efficiency
CEO
• New Product
• New Market
• High risk
• Strategic transformation
Shopkeeper
• Existing product
• Existing market
• Low risk
• Fine tuning
Salesman
• Existing Product
• New Market
• Medium risk
• Market development
Source: Mazzarol & Reboud (2009) Simple
Complex
Certain Uncertain
Structured
Strategic
Planning
Intuitive
Strategic
Planning
Structured
Operational
Planning
Ad-Hoc
Operational
Planning
RISK
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Product-Market Growth
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Growth by New Product Development
Growth by Diversification
ConsolidationGrowth by
New Market Development
New Product
Existing Product
New MarketExisting
Market
Source: Ansoff (1965)
RISK
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Strategic response types
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Source: Mazzarol & Reboud (2009)
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Major types of business plans
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Application for Finance
• Bank Financing• Collateral
• Capacity to repay
• Character
• Venture Capital• Team structure
• Market opportunity
• Product innovation
• Return on investment
• Payback period
Plans for Customers &
Suppliers
• Customers• Reliability of supply
• Quality of product
• Pricing
• Innovation
• Suppliers• Market share growth
• Maintenance of reputation
• Loyalty of relationship
Plans for Internal Use
• What is the vision?
• What is the mission?
• What are the values?
• What are the critical assets?
• What are the KPIs?
• When is the deadline?
• Who is responsible?
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The “Do’s” and “Don’ts” of business
plans
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DO’s
• A plan must be simple
• A plan must be accurate
• A plan must be useful
Don’ts
• Plans cannot save management from decision making
• Plans should not be rigid or inflexible
• Plans are only as good as the people who carry them out
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Outline of a business plan
1. Executive Summary
• Key issues
• Distinctive competencies
2. Market Analysis
• Industry & outlook
• Target markets
• Market research
• Lead times for orders
• Competition
• Regulatory requirements
3. Company Description
• Nature of the business
• Distinctive competencies
4. Marketing & Sales Activities
• Overall marketing strategy
• Sales strategy
Products & Services
• Description of products/services
• Product life-cycle
• Copyrights, patents, trade marks, trade secrets
• R&D activity
Operations
• Production & service delivery process
• Production & service delivery capability
• Operating competitive advantages
• Suppliers
Management & Ownership
• Staff structure
• Key managers
• Plans for new hires to management
• Legal structure of business
• Owners
• Board of directors
Funds Required & Application
• Current funding requirements
• Funding required over next 5 years
• Use of funds
• Long-range financial strategies
Financial Data
• Historical financial data (3 to 5 years)
• Future forecasts next 3 to 5 years
• Analysis of financial data (e.g. ratios & trends)
Appendices
• Resumes of key managers
• Photos of products
• Professional references
• Market studies
• Patent disclosures
• Insurances
Source: Ernst & Young (2001)
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Blueprint for a business plan
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Time Frame
When will you complete this prototype? Where will you be? How will you be in the business?
Organizational Design
Organize around functions NOT people.Prepare an organization chart for the
‘blueprint’ structure.Prototype the positions and ‘replace
yourself’ with a system.
Financials & Customers
Who is my customer?What is my value proposition
to my customer?What values does our
business work by?How much income is needed
to make this worthwhile?
Focus & Direction
What is the business of this business?
What should this business be like in 5 years time?
What will my role in the business be in 5 years time?
What standards will be needed for its operation?
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Developing a change plan
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Mark
etin
g Products & services
Markets
Customers
Geographic coverage
Distribution Channels
Competition
Sales organization
Distribution
Suppliers
Promotional Mix
Resou
rces N
eed
ed Premises and Access
Equipment
Employees
Materials
Transport & Logistics
Selling
Stock
Working Capital Requirements
Fixed Capital Investment
Mana
ge
ment Operations
Management
Marketing Management
Financial Management
HR Management
Production Systems
ICT Systems
Third Party Financing
What will be the likely impact on each of these areas of implementing
your new strategy?
What is the current capacity within the business of each area and is
there room for change?
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Group Discussion
Action Learning Task 1
• Review the questions in the
“Developing the Business Plan”
check list.
• Where are the gaps or
weaknesses in the plan?
• How can these be addressed?
• Prepare a “dot-point” mini-plan
with a “hot list” of the top five
things you need to address.
End of Presentation