Small Business Management MGMT5601 Workshop 2 Part B ... · Small Business Management MGMT5601...

© Mazzarol 2018 all rights reserved

Small Business Management MGMT5601

Workshop 2 Part B: Managing

Growth

Professor Tim Mazzarol – UWA Business School

UWA Business School MBA Program [email protected] MGMTG5601

©Mazzarol 2018 all rights reserved


• Understand the growth cycle of small

firms.

• Understand the importance of the

owner-manager’s influence on growth.

• Understand models of small business

growth.

• Examine the owner-manager’s

perceptions of growth.

• Recognise the key problems facing

small business growth.

• Review the Small Business Diagnostic.

• Address Action Learning Task 8

Workshop Overview


In this workshop we aim to:


Action Learning Tasks and Small

Business Diagnostic


ALT 8 – Industry Awareness

• Understand your industry’s “Game Rules”.

• Understand the process of strategic partnering and networking.

• Consider the factors influencing partnership success.

• Understand the importance of trust and interpersonal communications.

• Understand the nature of global supply chain management.

• Understand Customer Relationships Management.

• Understand the process of innovation within the firm.

The ability to scan your business environment and understand your

industry and your firm’s place in it.


ALT 8/External Integration

How to build a strategic information and support network around you:

• Holding regular management meetings to

discuss strategy.

• Taking advice and making changes based

on KPI measures and market feedback.

• Keeping business partners and external

stakeholders informed of business

progress using regular reports.

• Informal networking to gather market and

industry intelligence.

• Making regular use of your accountant to

assist in business planning.

• Maintaining a strategic relationship with

your bank manager.

• Creating a strategic support network.

• Partnering with suppliers.


ALT 8/Strategy and Innovation

How to build a competitive advantage and add real value to the business:

• Identify points of differentiation.

• Make sales and marketing teams aware of strategic competitor and market issues.

• Make sales team fully aware of the total product or service offering.

• Monitor changes in the market segments you are targeting and systematically track the customer’s buying cycle.

• Build sales forecasts from sound data.

• Monitor customer value assessments for products and services.

• Prepare a formal mission statement and business plan with long term horizon.

• Protect valuable IP.

• Partner to achieve growth.


Managing business growth


Discussion

The Process of Growth in a Small Business

• What were the key challenges that this

business faced in its growth?

• How important was formal planning to

their management of growth?

• What were their major resource issues?

• How did they fund their growth?


The owner-manager’s influence on growth

• Owner related factors influencing

growth are:

– goal setting, operational abilities,

technical, managerial and strategic

planning skills

• Business related factors influencing

growth are:

– financial resources, personnel,

planning and control systems, process

technologies

Small Business Owner Managers are the key to growth


The decision to grow

• Not all small business owners seek to

grow

– a 1994 study of 1,996 SMEs in Japan found

64% did not wish to grow

– a Yellow Pages survey of 1,000 Australian

SMEs found less than 10% wanted to grow

• Growth involves risk and the need for

finance

• Major impediments to SME growth are

– lack of management skills

– lack of strategic planning skills

– lack of finance

– lack of access to information and technology


Reasons for growth – discussions with small

business owners

INTERNAL

• Financial security

• Personal challenge

• To improve lifestyle

• Ego

• To increase wealth

EXTERNAL

• Grow to sell the business

• Response to market pressures

• Take advantage of an opportunity

• Grow or die!

ALTRUISTIC

• Generate employment

• Benefit others in the community

Source: Mazzarol (1999)

Focus groups with small business owners seeking to embark on a growth

strategy identified reasons for seeking growth which encompassed internal,

external and altruistic factors.


Means of achieving growth

0 2 4 6 8 10

Accessing professionals

Succession Planning

Marketing

Production Management

Technology

Finance

Quality

Personal Development

Strategic Management

Human Resource Management

Management Skill

Profitability

Importance rating

Source: Mazzarol (1999)Of no

importance

Extremely

important


Key considerations for growth

• Profitability - enhanced profits and turnover

• Management skill - balancing ‘hands on’ doing with ‘hands off’ managing & learning to communicate with employees

• HRM - recruiting, training, retaining good staff

• Strategic Management - setting vision, direction and mission and planning

• Personal Development - coping with stress, family and work demands and conflict resolution

• Finance - better financial reporting and control

• Quality - TQM, customer service, QA & ASA

• Technology - information & production



Issues in growth management

Managing growth requires careful attention to a number of key factors:

• Lack of capital

• Internal resistance to change

(ossification)

• Increasing demand on

resources

• Shifting control of managerial

functions

• Devolving decision-making

• Cost v. quality

• Flexibility v. formalized

strategies

• Bureaucracy v. decentralization


Measures of small business growth

• Growth is measured by:

– Turnover

– Profit

– Number of employees

– Increased assets

– Net worth of business

– Value adding of business

– Productivity

Growth is a change in structural quantity

Development is a change in functional quality


Characteristics of high growth SMEs


Key Data Awareness

• They possess key data on customers to ensure delivery of customer delight

• Knowing how business is won and knowing what information to get on market trends

Business Generating System

• Selling proven products into established markets

• Planning for new products & markets

• Have a positive outlook for current markets

• Possess a new business generating system

Not Price Driven

• Confident that price increases will not affect the demand for their products or services

• Confident that price is not the key buying criteria for their customers

Use of Experts & Family

• Owner-Manager uses outside experts for assistance and advice

• Owner-Manager makes time for family and friends (e.g. work-life balance)

Key Success Factors for Small Business Growth


Opportunity

Recognition

Resource

Accumulation

A B CCapacity

Building

1. Entrepreneurship:

(Personal characteristics) • Creativity

• Desire for Achievement

• Desire for Autonomy

• Calculated risk taking

• Internal locus of control

2. Innovation:

(New Ideas & New Entry) • New products

• New Processes

• incremental innovations

• synthetic innovations

• discontinuous innovation

3. Strategic Networking:

(Partnerships & Alliances) • Production Network Layer

• Resource Network Layer

• Social Network Layer

• Creating new value

• Building capability

• Defending market position

4. The Growth Vector:

(Strategic Growth Options) • Existing product & market

• Existing product-New market

• Existing market-New product

• Diversification

The

Strategic

Triangle

Strategy

Structure Resources

• Firm’s strategic intent

• Entrepreneur’s strategic intent

• Product/Market Growth strategy

• Financial capital & Cash Flow

• Human capital

• Intellectual capital

• Physical capital

• Corporate governance

• Organizational design

• Networks & Alliances

5

Su

sta

ina

ble

Gro

wth

ove

r Tim

e

• Turnover

• Employees

• Assets/Equity

• Market Share

• Profitability

C

Source: Mazzarol, 2004©Mazzarol 2018 all rights reserved


Product-Market Growth

©Mazzarol 2018 all rights reserved

Growth by New Product Development

Growth by Diversification

ConsolidationGrowth by

New Market Development

New Product

Existing Product

New MarketExisting

Market

Source: Ansoff (1965)

RISK


Strategies for growth

Organic

Maintained within firm’s existing

resources.

Funding by retained profits

and debt financing.

New product and market

combinations internally

generated.

Slow and sustainable.

Inorganic

Facilitated by the merger and acquisition.

Funding by equity capital

raising.

New product and market

combinations externally generated.

Fast but higher risk.


D

E

G

R

E

E

O

F

C

H

A

N

G

E

T

I

M

E

Where

The BusinessCould

GoThe Outcomes

Key Internal

Influences

On the

Development

Process

Vehicle for

Growth

(Product

or Market

Development)

Key External

Influences

On the

Development

Process

POTENTIAL

FOR GROWTH

CURRENT

PERFORMANCE

A MODEL OF GROWTH THROUGH PRODUCT/MARKET

DEVELOPMENT IN THE SMALL FIRM

Source: Gibb & Davies (1992)


The growth potential

The Change Plan (is the growth strategy sound?)

The Objectives The MarketThe scale & resources required

The ability & commitment

The financial projection

The Potential for Future Growth

Resources Base

Experience Base

Leadership Base

Control Base Ideas Base

The Performance (over past years)

In the Market In ProductionIn overall financial & profit

terms

Source: (Gibb & Davies, 1992)

A

B

C


A – measuring the performance


A

B

C

External Internal Utilisation Efficiency Trends in: Trends in:

Trends in sales &

profits by:

• Product

• Customers

• Channels

• Areas

Knowledge of the

market place

• Competition

• Technology

• Market size

• Market share

• Environment

Selling:

• Organisation

• Performance

• Controls

How it reaches

the market:

• Price

• Promotion

• Delivery

• Packaging etc.

Use of:

• Labour

• Capital

• Space

Wastage of

materials:

• Yields

• Leakage

Use of:

• Labour

• Capital

• Space

Quality

measures:

• Complaints

• Rejects

• Rework

• Net Worth

• Return on

capital

• Overall liquidity

• Gearing

• Debtor control

• Creditor control

• Cash Flow Mgt

• Sales

• Gross Profit

• Net Profit

• Overheads

• Labour costs

• Product margins

• Variance control

In the Market In Production In Financial Profitability

THE

STRATEGY

STANDARDS &

PERFORMANCE

PAST, PRESENT,

BUDGET


B – measuring the potential


Resource Base Experience Base Control Base Leadership

Base

The Ideas Base

• Liquidity & supply

of finance

• Technology – type

and capability

• Physical assets

(age & state)

• Labour – quality,

skills, culture,

flexibility

• Product range and

lifecyle

• Managerial

resources and time

available for

pursuing new

growth

• Age of business

Experience of:

• Borrowing money

• New Product

Development

• Different markets

• External advisors

• Moving locations

• Managing growth

• Adequacy of ICT

and control systems

• Professionalism and

responsibility of the

management team

• Adequacy of

planning and

budgeting

• Degree of

delegation to teams

• Ownership and the

involvement of

owner manager(s)

• Age of owner(s)

• Professional and

career history of

owner(s)

• Personal goals of

the owner(s)

• Education level of

the owner(s)

• Family support

• Management style

• Personal ability to

change

• Strategic

awareness

• R&D and innovation

• Number of ideas or

innovations under

consideration

• Degree of testing of

new ideas

• Degree of market

planning of new

ideas


C – evaluating the project


The Objectives The Market The Resource The Ability &

Commitment

The Financial

Projection

• What?

• Where?

• When?

• The sales volume

targets

• The proposed new

products or services

• The market need

Evidence of:

• Customer

acceptance of the

proposed price

• Ability to produce

the volume required

• Enough customers

to justify the

investment

• Ability to enter the

market

• Ability to match or

beat the competition

• How it will reach the

customers

• The scale of the

planned operations

• Reasons for this

• What additional new

physical resources

will be needed (e.g.

land, labour,

equipment)?

• What additional

financial resources

are required and

how will they be

obtained?

• The specific new

abilities required if

any

• Management skills

• Workforce skills

• Who will run the

project?

• How well has it

already been

planned?

• The awareness of

risks involved

• The additional costs

involved

The financials:

• Balance sheet

• P&L statement

• Cash Flow Forecast

• Contingency

provisions


Managing resources in growth


Discussion

Managing Resources during the Growth of a Small Business

• What were the key challenges that this

business faces in its growth?

• How important is resource allocation in

the management of growth?

• What are the key resource allocation

issues?


Business Cycle and Economic Forecasting

• The business cycle is seen as a secular

movement around a long-term trend.

• There are general cyclical indicators:

– Leading indicators:

• e.g. Business confidence surveys

– Coincident indicators

• e.g. industry production

– Lagging indicators

• e.g. consumer price index

• The trend depends on the economy’s

place in the development lifecycle.

• The business cycle is more volatile than

its normal representation suggests.

• However, there are common features.

• Economic indicators reflect causal

factors that offer useful tools for

managers.


Economic indicators

Sources: Hall (2011); Conference Board (2016); Reserve Bank of Australia (2018)

• Leading indicators

– Measures of economic activity that may predict

the onset of a business cycle:

• Average weekly work hours in manufacturing

• Business confidence surveys

• Housing construction permits

• Factory orders for goods

• Stock market prices

• Consumer expectations surveys

• Coincident indicators

– Aggregate measures of economic activity that

change as the business cycle progresses:

• Unemployment rate

• Industrial production

• Personal income levels

• Lagging indicators

– Measures of economic activity that change after

a business cycle has commenced:

• Labor cost per unit of manufacturing output

• Consumer Price Index (CPI)

• Commercial lending activity by banks


Business Cycles Theory

• Kondratiev’s long wave cycle theory

– Nikolai Kondratiev, Russian economist (1930s).

– Economic cycles lasting approx. 50 years.

– Caused technological disruption.

• Kuznet’s “building” cycle theory

– Simon Kuznet, American economist (1970s).

– Economic cycles lasting 15-25 years.

– Caused by investment in property and

infrastructure.

• Juglar “investment” cycle theory

– Clement Juglar, French economist (1860s).

– Boom and bust waves 9 to 11 years.

– Caused by investment flows.

• Kitchin “inventory” cycle theory

– Joseph Kitchin, British economist (1920s).

– Short economic cycles of approx. 40 months.

– Caused by movements in inventories.

Source: Barrow (2011)


Kondratiev’s long-wave cycle theory

• Each cycle lasts approximately 50 years and involves four stages: i) prosperity; ii)

recession; iii) depression, and iv) improvement.

• Cycles are driven by economic and social inequality, opportunity and social freedom,

technological disruption, rising-declining birthrates, political upheaval, popularism.

• Contemporary analysis suggests six “long-wave” cycles triggered by technological

change:

– 1. (1600-1780) Financial agricultural revolution

– 2. (1780-1880) Industrial revolution

– 3. (1880-1940) Technical revolution

– 4. (1940-1985) Scientific-technical revolution

– 5. (1985-2015) ICT revolution

– 6. (2015-2035) 4th Industrial revolution

• However,

• Long-wave economic cycles are difficult to predict and there is not sufficient evidence

to confirm that this theory holds across time, or is driven by the same factors.

• Of potential importance is what Perez describes as ‘technological styles’, which are in

essence business models for economic production. These seem to drive economic

change and the overall economic trends as they diffuse.

Sources: Tylecote (1993) Rursus (2009)


The 4th Industrial Revolution


Four stages of the industrial revolution

Source: Kagerman et al. (2013)


Impact of the 4th Industrial Revolution

Source: Pereira and Romero (2017); Santos et al. (2017); Schwab (2016; 2018)

• The 4th industrial revolution (4IR) or “Industry

4.0” refers to the convergence of digital and

AI systems:

– 1st industrial revolution 18th-19th century “steam age”

– 2nd industrial revolution 19th-20th century “electrical &

chemical age”

– 3rd industrial revolution 20th century “ICT & electronics”

• 4th industrial revolution drivers

– Physical – autonomous vehicles, 3D printing,

advanced robotics, new materials (e.g. graphene)

– Digital – Internet of Things, Blockchain, Internet of

Services, Big Data, Cloud Manufacturing, VR/AR,

Robotics, AI, Cyber-Physical Systems (CPS)

– Biological – genetic engineering, synthetic biology

• Impacts anticipated on:

– Manufacturing “smart factory” systems

– Smart products – CPS able to operate autonomously

– Business models – collaborative, networked, flexible

– Customers – co-creation due to real-time engagement

and feedback


Industry Analysis

Source: Lewis, 1999

• Existing competitors

• Potential new entrants

• Possible substitutes

• The power of buyers

• The power of suppliers

• The “Rules of the Game”

Analyse current industry structure

• Trends (historical PEST analysis)

• Political trends

• Economic trends/cycles

• Social trends

• Technological trends

Analyse changes in industry structure • Define the scope of sector

• Identify key stakeholders

• Identify key trends

• Identify key uncertainties

• Develop scenarios

• What is known / unknown

• Assess plausible futures

Analyse future industry structure


Rules of the Game

• Five key elements:– Players – customers, suppliers,

complementors, substitutes, company

– Added Value – what each player brings to the game

– Rules – the structure of the game (no universal rules in business)

• One price to all or ‘Judo economics’

• (MCC) Meet the competition clause

– Tactics – moves used to shape the game

• “Lifting the Fog”

– Scope – boundaries or limits of the game

• Sega versus Nintendo

Source: Brandenburger and Nalebuff, 1995


The five forces that shape strategy

OVERVIEW OF THE STRATEGIC MANAGEMENT

PROCESS


5-FORCES INDUSTRY ANALYSIS

Intensity of industry rivalry

Threat of new entrants

Buyer bargaining

power

Threat of substitutes

Supplier bargaining

power

Source: Porter (1995)

Entry barriers

• Economies of scale

• Proprietary product differences

• Brand identity

• Switching costs

• Capital requirements

• Access to distribution

• Absolute cost advantages:

-Proprietary learning curve

-Access to necessary inputs

-Proprietary low-cost product design

• Government policy

• Expected retaliation

Rivalry determinants

• Industry growth

• Fixed (or storage) costs/value model

• Intermittent overcapacity

• Product differences

• Brand identity

• Switching costs

• Concentration and balance

• Informational complexity

• Diversity of competitors

• Corporate stakes

• Exit barriers

Determinants of supplier power

• Differentiation of inputs

• Switching costs of suppliers/industry

• Presence of substitute inputs

• Supplier concentration

• Importance of volume to supplier

• Cost relative to total purchases in

industry

• Threat of forward integration relative to

• threat of backward integration by firms in

• the industry

Determinants of Buyer Power

Bargaining leverage Price sensitivity

Buyer concentration Price/total

purchases

Vs. firm concentration Product differences

Buyer volume Brand identity

Buyer switching costs Impact on quality/

relative to firm performance

Ability to backward Buyer profits

integrate Decision makers’

Substitute products incentivesDeterminants of substitution threat

• Relative price performance of substitute

• Switching costs

• Buyer propensity to substitute


Generic positioning strategies

Cost

LeadershipDifferentiation

Focus

Differentiation

Focus

Cost

Leadership

COMPETITIVE ADVANTAGE

Lower Cost Differentiation

Broad

Target

Market

Narrow

Target

Market

COMPETITIVE

SCOPE

Source: Porter, 1990


SMEs Alliances and Innovation

Source: Lasagni 2012

Antecedents•SME characteristics

•Relationship characteristics

•Environmental characteristics

Processes•Strategy planning

•Relationship management

Outcomes•Organization development

•Competitive advantage

•Performance & innovation

A

B

D

C

Innovation performance is higher for

SMEs that have strong alliances with

suppliers, users & customers.

Innovation

performance is

higher for SMEs

that have strong

alliances with

R&D centres &

universities.

Patents and Trademarks

registration also important to

innovation performance.

Plus access to new geographic

markets.


How entrepreneurial firms benefit from

alliances with large partners

Source: Alvarez & Barney 2001

• Large firms get benefits from partnering

with SMEs via new technology, but SMEs

often suffer from alliances with large firms.

• SMEs are most vulnerable if all they bring to

the relationship is new technology.

• Large firms typically can absorb technology

faster than SMEs can imitate the large firm’s

organisational resources & capabilities.

• The first partner to learn what it needs to

learn from its partner can withdraw at low

cost.


Strategic partnering

The 8 I’s for Successful We

1. Individual excellence – each partner must have strengths.

2. Importance – the relationship must be of value to both.

3. Interdependence – partners should need each other.

4. Investment – partners should invest in the relationship.

5. Information – communication should be two-way and open.

6. Integration – strong links should be developed between people.

7. Institutionalization – the relationship should be formalized in time.

8. Integrity – each partner must respect the other.Source: Kanter (1994)


Options for commercialisation of new

technologies by small firms

Source: Alvarez & Barney 2001

Alternatives Firm Execution Advantages Disadvantages

Go it alone. Acquire and build internal

resources & capabilities.

Retains value and benefits of

R&D and commercialisation.

Costly and time consuming.

Slow down the large firm’s

rate of learning.

Limit large firm’s access to

the small firm’s technology.

Only selected parts

disclosed.

Keeps the large firm from

appropriating the SME’s

technology & IP.

Slows down the rate of

commercialisation and flow

of cash to SME.

Use detailed & elaborate

legal contracts to define

alliance relationship.

Engage lawyers with alliance

or JV expertise to set up

contract. Perform due

diligence.

Provides milestone timeline

and specific terms and goals.

Contracts cannot address all

likely contingencies and can

be costly to enforce.

Build a relationship of

trust.

Keep lines of communication

open with partners. Do not

promise to deliver more than

what can be delivered.

Enhances the value of the

alliance by not having to

depend on legal contracts.

May provide incentive for

large firm to invest in

relationship.

Relies heavily on trust and

might expose SME to future

exploitation by larger firm.

Bring other resources to

the alliance besides a

single technology.

Maintain the ability to be

inventive and produce a

stream of new technologies.

Provides strong incentive for

large firm to keep investing in

relationship.

Provides large investments

in basic R&D.


Predictors of innovation in small firms

The 7 Predictors of small business innovation

1. Having the right products and services – offering quality products and services that satisfy customers’ needs with unique selling points.

2. Monitoring key indicators – possessing systems for reporting internal and external performance, and acting promptly when KPIs not met.

3. Owners don’t dominate – owners have clear set of values and encourage employees to innovate, but they allow autonomy and don’t stifle alternative views.

4. Positive role modelling – owners lead by example, instill positive vision and display strong values, time management and technical skills.

5. Leadership – owners set a clear vision for the future and communicate this to all employees to encourage action and ideas.

6. Quality assurance – owners are committed to formal QAMS and embrace these systems.

7. Staff partnering – owners collaborate with they employees and view them as a key to their competitiveness.



ALT 8 – Industry awareness & business cycle

Task Requirements:

1. Describe the “rules of the game” for your industry.

2. Undertake an industry analysis.

3. Review your industry’s competitive rivalry.

4. Examine key supplier relationships.

5. Examine leading customer relationships.

6. Assess networking strategy

7. Examine your firm’s innovation performance.

Key Documents

• ALT8 Industry awareness and business cycle

• ALT8 PARTS Framework

• Selected readings

End of Presentation

Small Business Management MGMT5601 Workshop 2 Part B ... · Small Business Management MGMT5601...

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