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Small Business Management MGMT5601
Workshop 2 Part B: Managing
Growth
Professor Tim Mazzarol – UWA Business School
UWA Business School MBA Program [email protected] MGMTG5601
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• 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
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In this workshop we aim to:
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Action Learning Tasks and Small
Business Diagnostic
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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.
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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.
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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.
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Managing business growth
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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?
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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
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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
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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.
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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
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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
Source: Mazzarol (1999)
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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
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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
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Characteristics of high growth SMEs
Source: Mazzarol (1999)
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
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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
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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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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.
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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)
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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
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A – measuring the performance
Source: (Gibb & Davies, 1992)
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
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B – measuring the potential
Source: (Gibb & Davies, 1992)
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
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C – evaluating the project
Source: (Gibb & Davies, 1992)
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
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Managing resources in growth
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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?
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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.
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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
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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)
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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)
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The 4th Industrial Revolution
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Four stages of the industrial revolution
Source: Kagerman et al. (2013)
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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
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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
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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
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The five forces that shape strategy
OVERVIEW OF THE STRATEGIC MANAGEMENT
PROCESS
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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
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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
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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.
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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.
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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)
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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.
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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.
Source: Mazzarol (2002)
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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
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