4e7-l2 by dandanhuanghuang

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									     ENGINEERING TRIPOS PART IIB




           MODULE 4E7 – ENTERPRISE AND
             BUSINESS DEVELOPMENT

                                        Session 2
                                       Feb 4 2004

                                      Dr E. Garnsey


                                                      UNIVERSITY OF
                                                      CAMBRIDGE
Module 4E7 2004                                       Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 1
                                      Last week
•     How do under-resourced new firms make breakthroughs? What explains the
      success of many entrepreneurial innovators?

•     Entrepreneurs pursue an “emergent strategy” (Minzberg’s term), with
      economy and flexibility, responding to opportunities as these arise and as they
      are able to secure resources. Effective in a rapidly changing scene.

•     In contrast, managers in established companies work out a strategy, allocate
      resources on the basis of the budget and implement their strategy. This is
      required to meet shareholder expectations.

      To grow their new company, founders need to balance entrepreneurial and
      managerial approaches.

                                                                              UNIVERSITY OF
                                                                              CAMBRIDGE
Module 4E7 2004                                                               Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 2
          Today’s session will improve your ability to
            evaluate a new tech-based company
    • Situate its activity and its business model in relation to the main
      types of business activity and business model. Appropriate?

    • Identify the problems that must be solved if this enterprise is to
      achieve its objectives - grow and sustain growth.

    • Assess the role of the founding entrepreneur/s and whether this
      is changing appropriately as the business grows

    • Assess the enterprise’s track record in relation to typical growth
      paths of other similar companies.

    • Gain practice in relation to a case study firm - BioRoboticsUNIVERSITY OF
                                                                  CAMBRIDGE
Module 4E7 2004                                                   Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 3
COURSEWORK BRIEFING
A complete session on this
Wednesday 25 Feb 2-3pm


Preview
A report of around 2000 -3000 words. Aim is for you to
apply knowledge gained in classes.

There are several options.

                                                         UNIVERSITY OF
                                                         CAMBRIDGE
 Module 4E7 2004                                         Institute for Manufacturing
 Elizabeth Garnsey Session 1 Slide 4
A. Case Study of a High Tech Business

Research a case study of a high tech company, drawing on press reports,
websites and, if available, direct contact. Your case study should be in two
parts; a factual summary of the development of the company and an
analysis of the case, applying knowledge gained on the course.

You may prepare two or three shorter cases and compare their experience,
drawing out reasons for differences in their business success.

Examples: Cedar Audio Systems, Cambridge Positioning Systems, C3 Ltd (Computer-
based Telephony) One Ltd, Creature Labs (now Gamesware), Cambridge Silicon Radio,

                                                                      UNIVERSITY OF
                                                                      CAMBRIDGE
 Module 4E7 2004                                                       Institute for Manufacturing
 Elizabeth Garnsey Session 1 Slide 5
B. Discuss the opportunities for enterprise offered by an
emerging technology- based sector or industry. Examine the
activities of selected firms in that sector.
              •
                               Sectors examples:
                               geographical information systems,
                               global positioning systems,
                               a telecommunications sector,
                               voice recognition or imaging technologies,
                               satellite technologies,display technologies,
                               new materials, new instrumentation,
                               environmentally sustainable technologies, etc

                                                                               UNIVERSITY OF
                                                                               CAMBRIDGE
Module 4E7 2004                                                                Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 6
C. Evaluate a Business Plan

Provide a detailed evaluation of a business plan, whether from a
venture known to you or based on a plan available in the public
domain. Examine the strengths and weaknesses of the plan in terms
of the business opportunity identified and the business model
proposed to exploit it.

Marking criteria - have you effectively applied knowledge gained on
the course?

Marks are affected by business plan selected.
                                                                UNIVERSITY OF
                                                                CAMBRIDGE
  Module 4E7 2004                                               Institute for Manufacturing
  Elizabeth Garnsey Session 1 Slide 7
                     Part One
   Types of business activity and business mode
                Early growth paths




                                                  UNIVERSITY OF
                                                  CAMBRIDGE
Module 4E7 2004                                   Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 8
Entrepreneurs juxtapose information on two
planes: resources and opportunities

           •Resource use:                                • Opportunities
                            Economy                            continually
                            Leverage                           scan and
                            Combine                            reassess
                            Create

                                        •Enlist others,
                                        create network to
                                         open opportunities
                                        & obtain resources
                                                                   UNIVERSITY OF
                                                                   CAMBRIDGE
  Module 4E7 2004                                                  Institute for Manufacturing
  Elizabeth Garnsey Session 1 Slide 9
   “Enterprise involves the pursuit of opportunities to create value
   by combining resources in new ways in order to secure returns.”
                                                     Enterprise                   Opportunity = possibility of reaching
                                                                                  a preferred state



                       Resources are means to
                       achieve ends.

                                                                           Opportunity
                                                 Resources                   Space
Entrepreneur - one who
engages in enterprise
(= entrepreneurial activity).

An enterprise - a business organization

Entrepreneurship:                                            Value
study or practice of                                                   Economic value is created when Output > Input
entrepreneurial activity.

                                                             Returns                                UNIVERSITY OF
                                                                                                    CAMBRIDGE
          Module 4E7 2004                                                                           Institute for Manufacturing
          Elizabeth Garnsey Session 1 Slide 10
Enterprise - wider than new firm creation

 There are temporary entrepreneurial projects: e.g.
 expeditions,events, which don’t involve setting up a business.

 Some terms
 Business - common usage - imprecise term.
 Company - entity that is legally incorporated
 Firm - economic terminology
 Enterprise - business organization



                                                                  UNIVERSITY OF
                                                                  CAMBRIDGE
 Module 4E7 2004                                                  Institute for Manufacturing
 Elizabeth Garnsey Session 1 Slide 11
 Not all entrepreneurial activity involves business
 creation.

                                               Secure / create
                                               resources


 reinvest                 Business
                          Idea
                                                                   Set up
distribute               Secure returns                          new activity



      exit

                                                Create value
                                                                                UNIVERSITY OF
                                                                                CAMBRIDGE
        Module 4E7 2004                                                         Institute for Manufacturing
        Elizabeth Garnsey Session 1 Slide 12
 A company is a legal entity that can sustain activity and
ownership over recurrent production cycles, cumulatively.


                                                           output
                                                    Firm

                                          revenue




                                                                    Customers


                                                                            UNIVERSITY OF
                                                                            CAMBRIDGE
   Module 4E7 2004                                                              Institute for Manufacturing
   Elizabeth Garnsey Session 1 Slide 13
Business creation involves recurrent production cycles.
Company itself may become valuable: develop productive capacity,
financial assets
                                                   Productive base




                                                                     Value creating
                               reinvest                               output sold




                                                        Asset
                                 distribute             base

                                            exit                                      UNIVERSITY OF
                                                                                      CAMBRIDGE
     Module 4E7 2004                                                                  Institute for Manufacturing
     Elizabeth Garnsey Session 1 Slide 14
    Advantages of starting a business
•     Last time
        – Tax concessions
        – Limited liability
        – Protect ownership through incorporation

        –     Demonstrate product viability
        –     Embed learning in organization
        –     Store resources
        –     Create a community; create jobs

•     Possible to grow and accumulate wealth
•     But firm may be hostage to fortune
•     Paradox of enterprise



                                                    UNIVERSITY OF
                                                    CAMBRIDGE
Module 4E7 2004                                     Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 15
   Survival all US New Firms 1970s/80s (SBA data)




    Source Kirchoff 1994
                                              UNIVERSITY OF
                                              CAMBRIDGE
Module 4E7 2004                               Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 16
                  Exposure                                                     Hard Model
                                                               Create infrastructure
                 High
                                                                In house
                                                               manufacture
                                                      Mass
                                                      Market   Manufacturing
                                          Product
                                                      OEM's        sub-
                                                                contracted
                                                      Niche
                                                      Market

                                         License IP
                                         Contract      Technical services
                                          R&D
                                                    Design studies
                                        Consultancy Testing reports
                   Low
                                                    Analytical reports
                                                                               Soft Model

                                       Resource commitment                                  UNIVERSITY OF
                                                                                            CAMBRIDGE
Module 4E7 2004                                                                             Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 17
Some business models involve commitment and sunk costs
                                           Product concept




   The range of options                    The cost of design
    being considered                       changes increases
    reduces over time                          over time

       Graphic: J. Allwood
                                                        UNIVERSITY OF
                                                        CAMBRIDGE
    Module 4E7 2004                                     Institute for Manufacturing
    Elizabeth Garnsey Session 1 Slide 18
                Soft Start: services, software, licensing


   Lower capital requirements
   Fewer sunk costs - flexibility
   Attractive when cost of capital is high.

   So why manufacture?




                                                            UNIVERSITY OF
                                                            CAMBRIDGE
Module 4E7 2004                                             Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 19
Hard Start - Manufacturing

     Strengths: Automate, lower costs
     Reach markets beyond reach of a service

     Opportunities: Revenue growth
     through economies of scale and scope

     Strengths of in-house manufacture:
            control
            competitive advantage embedded in hard- to-
            imitate capabilities

                                                     UNIVERSITY OF
                                                     CAMBRIDGE
Module 4E7 2004                                      Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 20
Global Enterprise Monitor 2001, 2003 shows
manufacturing start ups that survive are more robust than
service companies:
       survive longer
       grow larger




                                                       UNIVERSITY OF
                                                       CAMBRIDGE
  Module 4E7 2004                                       Institute for Manufacturing
  Elizabeth Garnsey Session 1 Slide 21
Challenge of Manufacturing

Upfront capital costs to create production base

Sunk costs may be irrecoverable

Flexibility limited

Expertise - multi-functional, difficult for start up team to develop

Difficult to apply entrepreneurial problem solving
- but possible, as shown by Oxford Instruments and BioRobotics


                                                                       UNIVERSITY OF
                                                                       CAMBRIDGE
  Module 4E7 2004                                                      Institute for Manufacturing
  Elizabeth Garnsey Session 1 Slide 22
                                       Soft Start example
                Cash Flow (£000s)

                  1000




                   500                                                                            Cumulative
                                                                                                  Cash Flow



                                        1         2               3              4                5
                      0                                                                               Years

                  -200


                  -500




                                                                                                         UNIVERSITY OF
                                                                                                         CAMBRIDGE
Module 4E7 2004                             Source: Presentation by M. Bullock of Barclays Bank          Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 23        to British Technology Group Conference, 1986
                Cash Flow (£000s)
                                       Hard Start example
                  1000


                                                                                                 Cumulative
                                                                                                 Cash Flow
                   500
                                                                                                    Net Cash
                                        Product Launch                                                Flow
                                                                                                    Quarterly

                                         1           2             3            4            5      Years
                       0




                    -
                    500




                                                                                                                UNIVERSITY OF
                                                                                                                CAMBRIDGE
Module 4E7 2004                                  Source: Presentation by M. Bullock of Barclays Bank            Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 24             to British Technology Group Conference, 1986
                              “Revenues make a company”

• "How do you like our new offices?.. Now we look like a
  real company. But we're missing one thing ...
  Revenues. We look like a company, but we are only a
  venture. Ventures have investors, while companies
  have revenues. Every month we delay a revenue
  stream, we have to sell off more equity to stay alive. If
  we delay too long, the price of the equity goes down..
  eventually no one wants to buy..."

• Kaplan p 93
                                                          UNIVERSITY OF
                                                          CAMBRIDGE
Module 4E7 2004                                           Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 25
                                       Internet - Hope and Hype
• Concept of business model originated with the Internet
• Usually involved an existing activity, reconfigured for Internet
• Focus was on how to achieve returns
• Network of alliances created to produce and deliver by e-
  business
• Often customers were not users, but advertisers

• Miscalculated transaction costs of alliances
• Miscalculated marketing costs of attracting and retaining
  customers
• Few early entrants succeeded in achieving and sustaining
  revenues
                                                                  UNIVERSITY OF
                                                                  CAMBRIDGE
Module 4E7 2004                                                   Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 26
Other new business models - configured to reduce resource
intensity and improve rate of return. Facilitated by Internet.

• Contract research, consultancy for specific customers (biotech
   ventures)

• Licensing designs and inventions to manufacturing partners
   e.g. ARM - revenues from customer support

• Development Company - raise funds with partners to develop
   future product/service - e.g. biotech ventures, CDT, Plastic Logic

• Production company - with various outsourcing arrangements
   e.g. BioRobotics


                                                                   UNIVERSITY OF
                                                                   CAMBRIDGE
    Module 4E7 2004                                                Institute for Manufacturing
    Elizabeth Garnsey Session 1 Slide 27
            e.g. Cambridge Display Technology:
                 activity and business model
• Founded in 1992 as spin-out from University
• Work by Richard Friend (Cavendish) and Andrew Holmes (Melville)
• Developing Light Emitting Polymer technology
• Acts as systems integrator bringing together key
      technologies and competencies
• Relies on web of alliances - initially no manufacture


•       Partners include: Seiko-Epson, Phillips, DuPont

                                                           UNIVERSITY OF
                                                           CAMBRIDGE
    Module 4E7 2004                                        Institute for Manufacturing
    Elizabeth Garnsey Session 1 Slide 28
Every new firm is unique
So how do we compare them?
Business realities provide a basis for comparing cases




                                                         UNIVERSITY OF
                                                         CAMBRIDGE
  Module 4E7 2004                                        Institute for Manufacturing
  Elizabeth Garnsey Session 1 Slide 29
New firms must solve a common set of problems
as input-output systems in a market environment

 • Search for and choose a business opportunity

 • Secure resources for productive activity
 • Set up productive base and organize productive activity
 • Sustain inputs and outputs
  to survive in competitive market economy



                                                         UNIVERSITY OF
                                                         CAMBRIDGE
    Module 4E7 2004                                          Institute for Manufacturing
    Elizabeth Garnsey Session 1 Slide 30
                                 Compare growth measures
•Inputs - employees, investment, equipment, premises.
   R&D budget, patents

•Outputs - sales, revenues, profits

•Value - tangible assets, intangibles, market valuation

•Throughputs: sales per employee, lead time to market

All measures have limitations - qualitative evidence
                                   also needed
                                                           UNIVERSITY OF
                                                           CAMBRIDGE
   Module 4E7 2004                                         Institute for Manufacturing
   Elizabeth Garnsey Session 1 Slide 31
Relative employment growth of 6 Cambridge software companies
                                                   SOFTWARE FIRMS IN CAMBRIDGE - LARGE

               160


               140


               120


               100
  Employment




                80


                60


                40


                20


                 0
                             89/90                      91/92   93/94     95/96          97/98       99/00

                                                                                                 UNIVERSITY OF
                                                                                                 CAMBRIDGE
                 Module 4E7 2004                                                                 Institute for Manufacturing
                 Elizabeth Garnsey Session 1 Slide 32
COMPARING CASES - evidence
                                                                   THROUGHPUT measures:
                                                                   productivity p.e. WIP, stocks/ sales,
                                                                   lead times
                                                                                          OUTPUT
                                                                                           measures:
                                                    Generate & Sustain Revenues
                                                                                          revenues,
                                                                                          profit
                                                         INITIAL INPUT measures:
                      Secure Resources & Set Up          Investment funds, endowment
                          productive activity            assets, patents, recruits

                                       Pre-venture activities, ideas, contacts:
  Search & Select
                                       hard to measure (Reynolds and White 97)




                                                                                          UNIVERSITY OF
                                                                                          CAMBRIDGE
Module 4E7 2004                                                                           Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 33
             From start up to self sustaining business

• Early learning and problem-solving may be sequential
            - e. a new product is designed and production facility required
• Solutions needed before next problems can be dealt with?
• Dominant problems may give rise to phases of activity.
• As problems are solved, further ones arise.


• Stages of growth - common idea in literature.
• In practice there are often overlapping processes (chains of related
  activity) rather than distinct stages or phases.
                                                                        UNIVERSITY OF
                                                                        CAMBRIDGE
     Module 4E7 2004                                                    Institute for Manufacturing
     Elizabeth Garnsey Session 1 Slide 34
    It simplifies comparison to look at problem-solving sequentially

                                                     Generate & Sustain Revenues

                                              Secure Resources & Set Up

                               Search & Select


But in practice: there may not be separately identifiable phases.
Entrepreneurial problem solving is iterative.

Length and distinctiveness of specific problem solving processes depend on
activity and business model.
E.g. spin outs or de-mergers: start with ability to generate revenues through
activity and customers inherited from a parent organization
                                                                                   UNIVERSITY OF
                                                                                   CAMBRIDGE
       Module 4E7 2004                                                             Institute for Manufacturing
       Elizabeth Garnsey Session 1 Slide 35
Opportunities - Selected or Created?

Analysis, Telecomms Consulting founded by David Cleevely in 1986
Spin-out from CUED

1980s, rapid technology change and deregulation - policy challenge

Analysys provided decision-support software for telecommunications policy
makers at the European Commission, Brussels

Analysys created demand for what they could supply: decision support
software and telecomms industry analysis

Success of European mobile phone industries - policy re common standards
                                                                 UNIVERSITY OF
                                                                 CAMBRIDGE
    Module 4E7 2004                                              Institute for Manufacturing
    Elizabeth Garnsey Session 1 Slide 36
                                           Search and Select
Resources and opportunities - both are relative (means/ends)

Matching process - difficult because both are in flux

           Scientists have difficulty selecting a business opportunity
           Generic technologies - too many options
           E.g. holonic technology

At some point, entrepreneurs have to target and commit to a
specific opportunity, narrowing their options.

                                                               UNIVERSITY OF
                                                               CAMBRIDGE
    Module 4E7 2004                                            Institute for Manufacturing
    Elizabeth Garnsey Session 1 Slide 37
         Burn rate can exhaust endowment resources
                                         Figure 1 Anamartic: Revenue and Cash 1988-1991

         7000
                                              2nd Round Finance
         6000
                                                                              3rd Round Finance

         5000


         4000
 Cash                                                             Cash
£000's
         3000
                                                                                           Monthly
                                                                                           Revenue
         2000


         1000

           0
           Oct-88          Feb-88          Jun-89   Oct-89    Feb-90     Jun-90   Oct-90   Feb-91    Jun-91

                                                                                                     UNIVERSITY OF
                                                                                                     CAMBRIDGE
  Module 4E7 2004                                                                                     Institute for Manufacturing
  Elizabeth Garnsey Session 1 Slide 38
     Firms that grow early and fast
                                       Often incubated in an existing organization
                                       where early problems can be solved
                                                       with less risk of early mortality
                                                                e.g. BioRobotics




                                                                             UNIVERSITY OF
                                                                             CAMBRIDGE
Module 4E7 2004                                                              Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 39
Firms that solve initial problems often grow for a
while … but do not sustain growth.

                                       o




                                  R?




                                                 UNIVERSITY OF
                                                 CAMBRIDGE
Module 4E7 2004                                  Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 40
This spin out entrepreneur from CUED
did not want a big company:


• "I want to keep the personal feel because it's my life, this
  business, and I want it to be enjoyable and for the staff to enjoy
  it."
• … I see my job as people management and for me that means
  keeping the excitement running. They are very competent people
  and if they are excited and bouncy then they are extremely
  productive.”

• Comfort zone? Uncomfortable as soon as conditions change

                                                              UNIVERSITY OF
                                                              CAMBRIDGE
Module 4E7 2004                                               Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 41
Most Cambridge Tech Firms Remain Small
                 8 00


                 7 00
                             674

                 6 00


                 5 00


                 4 00
                                           339
                 3 00


                 2 00


                 1 00
                                                 78
                                                              38            21      9       1
                     0
                               10          50    1 00         2 00          5 00   10 00   20 00

                                                        E m p lo ym e n t

                                                                                                   UNIVERSITY OF
                                                                                                   CAMBRIDGE
    Module 4E7 2004                                                                                Institute for Manufacturing
    Elizabeth Garnsey Session 1 Slide 42           Source: CCRU Database
                                       Paradox of Enterprise
• Greater the success of the enterprise, more difficult it is to
  remain entrepreneurial
• Once returns are achieved, there is more to lose
• Pursuit of opportunity may endanger what has been gained
• Innovative entrepreneur often turns into conservative small
  business owner

• Habitual entrepreneurs often leave and start again once
  company has grown



                                                                   UNIVERSITY OF
                                                                   CAMBRIDGE
Module 4E7 2004                                                    Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 43
                     Unable to grow though aim to do so

• Can’t obtain development capital

• Cant overcome scale-up problems

        – Manufacturing - initial sunk costs before returns on scale

        – IT products
           High initial fixed cost, low variable cost of reproduction

        – May run out of cash before transition to lower costs is
          achieved


                                                                    UNIVERSITY OF
                                                                    CAMBRIDGE
Module 4E7 2004                                                         Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 44
                                                        Demand
    Output




                                            Capacity




                                                       Time
Under and over production in young firms.
Capacity-build is uneven; demand is unpredictable             UNIVERSITY OF
                                                              CAMBRIDGE
     Module 4E7 2004                                          Institute for Manufacturing
     Elizabeth Garnsey Session 1 Slide 45
  Early growth problems                              R
                                                           o



1. Returns from output may not keep up with input costs (scale and
   scope issues )
2. Timing and coordination (resource mix) problems
    1. under-production and over-production problems
    2. delay in recovery of resources from output - cash flow blocked
3. Output does not create real or perceived value
    1. Quality problems (does output create value for customers?)
    2. Demand below forecast                                    UNIVERSITY OF
                                                                CAMBRIDGE
  Module 4E7 2004                                                Institute for Manufacturing
  Elizabeth Garnsey Session 1 Slide 46
                                         Quality Crisis at Domino
At Domino Printing Sciences, the initial product, an industrial ink jet
printer was the first of its kind. It was very carefully designed.
However in production, one small component among hundreds had
not been inserted. This was vital to the automatic shutdown system if
the machine went wrong. When Domino’s engineers tested the
machines on-site before shipping them, they worked perfectly. The
designers had never had occasion to use the automatic shutdown
mechanism. But their customers proved less skilled at using the
equipment. Before long, three international customers phoned in
urgently on the same day. In each case a fire had started in the
equipment, with smoke and melt-down of components.

What would be a worst case scenario?                      How could this be averted?
                                                                               UNIVERSITY OF
                                                                               CAMBRIDGE
  Module 4E7 2004                                                              Institute for Manufacturing
  Elizabeth Garnsey Session 1 Slide 47
           Growth and Quality Problems in New Firms

                                                              Sales
                                                           revenues         +

                                                                   Time 1
                                                                            Customer       demand
                                 +                      +                                  Time 3
                                                Firm Growth                      +
        expanded volume of work                                                        -
                                                                                                    +

                                                                                               competitor
                                       Time 2                                                  products
                                                 Quality defects


                       Staff Shortages


                                                                                                        UNIVERSITY OF
                                                                                                        CAMBRIDGE
Module 4E7 2004                                                                                         Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 48
Revenue generation does not sustain growth until:
• Fix /sell Version One of product (takes some inventors years)
• Ensure recurrent production cycles
• Routines, rules and roles save time & effort. ‘Store’ (embed) knowledge
• Repeat custom and/ or market expansion provide revenues and
  credibility (early quality problems sorted out)


• May take a long time
    – e.g. biotech firms’ lengthy gestation
• If so, need interim funding/ revenue while product is developed
                                                                    UNIVERSITY OF
                                                                    CAMBRIDGE
   Module 4E7 2004                                                  Institute for Manufacturing
   Elizabeth Garnsey Session 1 Slide 49
  No Growth -
  Plateau or struggle to survive - when:

• New firm does not reach minimum efficient scale (MES) to
  achieve return on assets
• Resources are all absorbed maintaining current activity


• Plateau may be a prelude to growth, decline, failure, or merger
• Growth is least common scenario




                                                                UNIVERSITY OF
                                                                CAMBRIDGE
  Module 4E7 2004                                               Institute for Manufacturing
  Elizabeth Garnsey Session 1 Slide 50
           Growth of new instruments firms in Cambridge 1990-99
Employees
  60




                                              1990cohortInstrFsgrwth.10.9.01

  50
                                                                                             Series1
                                                                                             Series2
                                                                                             Series3
                                                                                             Series4
  40                                                                                         Series5
                                                                                             Series6
                                                                                             Series7
                                                                                             Series8
                                                                                             Series9
  30
                                                                                             Series10
                                                                                             Series11
                                                                                             Series12
                                                                                             Series13
  20                                                                                         Series14
                                                                                             Series15
                                                                                             Series16
                                                                                             Series17
                                                                                             Series18
  10




   0
              1                     2           3                       4      5   6
                                                                                       Age of Co.
                                                                                       UNIVERSITY OF
                                                                                       CAMBRIDGE
       Module 4E7 2004                                                                 Institute for Manufacturing
       Elizabeth Garnsey Session 1 Slide 51
                  INPUTS
                                         Firm’s
                                         Activity


      Business idea                                 OUTPUT




                                       RETURNS

    Over time, firm’s activity drives its growth path        UNIVERSITY OF
                                                             CAMBRIDGE
Module 4E7 2004                                              Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 52
Micromuse attracts major Internet firms as customers
                                                       IT industry network
                 Industry and technology
                                                       error-management
                 knowledge of CTO,
                                                       software required
                 develops software
                                                                  Specific customer
                                                                  needs at BT -
                 Business process
                                                                  Peter Shearan
                 knowledge of
                 Stephen Allott




                                            Brokerage by
                                            entrepreneur,
                                            early CEO
                                            who founded
                                            Micromuse (Chris Dawe)
                                                                              UNIVERSITY OF
                                                                              CAMBRIDGE
     Module 4E7 2004                                                          Institute for Manufacturing
     Elizabeth Garnsey Session 1 Slide 53
                                       Micromuse case

•     In early 1995, Micromuse made its first sales of its in-house developed
      Netcool IT network software. These were quite large and prompted the
      founder to plan an accelerated transition from the VAR business (distributing
      SUN software) to the Netcool business. He announced that the VAR business
      was no longer mainstream and that the company's future lay with Netcool. The
      VAR sales started to dwindle quite fast and key people in it started to leave.
      Meanwhile the strong Netcool sales in the March 95 qtr were a false dawn.
      Implementation and development resource constraints plus software bugs
      meant that no further Netcool sales occurred in the June and Sept qtrs.
•      Stephe Allott was appointed CFO in Sep 95. He found:
       – falling sales were feeding through to weak cash receipts and a £1m
          overdraft.
       – The company could not meet its obligations and was in danger of failing.

•     What should Stephen do?

                                                                             UNIVERSITY OF
                                                                             CAMBRIDGE
Module 4E7 2004                                                              Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 54
                                       Part Two

• Problems of successful growth




                                                  UNIVERSITY OF
                                                  CAMBRIDGE
Module 4E7 2004                                   Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 55
         What was done - Solving the cash flow crisis

1. Re-organise the company into Business Units, with a focus on re-launching
   the VAR business.
2. Going to see the bank to explain their plan and get their agreement to
   maintain their overdraft.
3. Re-assign salespeople to focus on the best short term prospects.
4. Implement more effective management information systems to prioritize
   revenue-generating activity.
5. Work flat out to bring in VAR custom.
6. Sign up a strategic deal with Sun Microsystems to develop Internet
   infrastructure business (ISP companies to become customers).



                                                                        UNIVERSITY OF
                                                                        CAMBRIDGE
Module 4E7 2004                                                         Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 56
250                                                                                 250


200                                                                                 200


150                                                                                 150


100                                                                                 100


50                                                                                  50


   0                                                                                0
         1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
-50                                                                                 -50

                       NetCool Revenue   VAR Revenue   NetCool Profit
                                                                            UNIVERSITY OF
                                                                            CAMBRIDGE
 Module 4E7 2004
 Elizabeth Garnsey Session 1 Slide 57
                                                               Micromuse Inc
                                                                    Institute for Manufacturing
    Strong growth can create further growth pressures
• Internal pressures for growth
• After effort of start-up, resources are released for growth
    – Under employed or under-used staff
    – Uneven resource mix: continual shortages and surpluses
           • Lead-lag growth dynamic (Penrose theory)
• External pressures for growth from:
    – funders
    – customers
    – distributors

• Excitement, high morale, stimulus to further effort
                                                                UNIVERSITY OF
                                                                CAMBRIDGE
    Module 4E7 2004                                             Institute for Manufacturing
    Elizabeth Garnsey Session 1 Slide 58
                                           Riding high
• A new enterprise has been performing well, though only five years old.
  Growth record is impressive (sales and revenues employee numbers).
  Early success makes it possible to expand further through retained
  earnings and externally obtained funds. Investors view its prospects
  favourably. Morale is high among its members their prospects are
  excellent in the expanding enterprise.
• One of its members is taken ill. After 6 months hospital and recovery
  he returns to work. He finds:
• Sales are down and unsold stocks have built up. The banks have
  withdrawn loan facilities. Creditors are demanding payment. There
  have been lay-offs and more are expected. The enterprise faces an
  enforced sell-out or bankruptcy.
• How could this happen?
                                                                 UNIVERSITY OF
                                                                 CAMBRIDGE
    Module 4E7 2004                                               Institute for Manufacturing
    Elizabeth Garnsey Session 1 Slide 59
Growth reinforcement in a young company can
easily tip into reverse
Why?




                                              UNIVERSITY OF
                                              CAMBRIDGE
Module 4E7 2004                               Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 60
 System dynamics in an open input-output system
 (Dissipative system requiring continual input of resources)

In natural language:
• If positive feedback (self reinforcing process) is interrupted for any
   reason, output falls. Inputs depend on revenue from outputs, so
   this reduces input availability.
• Input shortage prevents output growth.
• Positive feedback moves into reverse - unless there are reserves
   to draw on.
• Young companies have seldom built up reserves.



                                                                  UNIVERSITY OF
                                                                  CAMBRIDGE
 Module 4E7 2004                                                   Institute for Manufacturing
 Elizabeth Garnsey Session 1 Slide 61
                                                        CREATURE LABS
£ ,000
                                                                                                      Employment

 6000                                                                                                     80


 5000
                                                                                                          60
 4000


 3000                                                                                                     40

 2000
                                                                                                                         Turnover
                                                                                                          20             Profit
 1000
                                                                                                                         Current Assets
                                                                                                                         Fixed Assets
     0                                                                                                                   Net Worth
           1989       1990      1991      1992   1993    1994   1995   1996   1997   1998   1999   2000   0
                                                                                                                         Employment
-1000


-2000                                                                                                     -20


-3000
                                                                                                          -40
-4000


-5000                                                                                                     -60

                                                                                                                UNIVERSITY OF
                                                                                                                CAMBRIDGE
         Module 4E7 2004                                                                                        Institute for Manufacturing
         Elizabeth Garnsey Session 1 Slide 62
                                       Changing role of founder
• Qualities required for opportunity detection and start up a
  company - last week, lecture one

• As company grows, change of mind set required in leader.
  Qualities required to grow and increase returns include
   – Project management skills
   – Ability to delegate
   – Ability to interface with partners and retain investors’
     confidence

        – Difficult to change mindset. Crises often force changes.
                                                                     UNIVERSITY OF
                                                                     CAMBRIDGE
Module 4E7 2004                                                      Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 63
                    Growth Reversal - internal pressures
• Increased complexity is hard to manage
• Rapid growth - shortages, bottlenecks - decision making
  impaired.
• People problems
        – Constraints on co-ordination and decision making - cannot be
          remedied from outside
        – Jobs outgrow people and vice versa
        – Burn out and disaffection


                                                                UNIVERSITY OF
                                                                CAMBRIDGE
Module 4E7 2004                                                 Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 64
                                                               Case Studies
                                                                                                         Tadpole Technology
     100000                                                                  35000

      80000     Oxford Instruments                                           30000
                                                                             25000


                Last week
                                                                             20000
      60000
                                                                             15000
                                                                             10000
      40000
                                                                               5000
      20000                                                                       0
                                                                              -5000
            0                                                               -10000
                                                                            -15000
     -20000




                                                                                      1984

                                                                                             1985

                                                                                                      1986

                                                                                                             1987

                                                                                                                     1988
                                                                                                                             1989

                                                                                                                                    1990

                                                                                                                                           1991
                                                                                                                                                   1992

                                                                                                                                                          1993

                                                                                                                                                                 1994
                                                                                                                                                                        1995
                                                                                                                    Sales            Pre-tax Profit



                                     Datapaq                                                                                 Linx
     4000                                                                   18000
     3500                                                                   16000
     3000                                                                   14000
     2500                                                                   12000
                                                                            10000
     2000
                                                                              8000
     1500                                                                     6000
     1000                                                                     4000
      500                                                                     2000
        0                                                                        0
     -500                                                                    -2000
                1985   1986   1987   1988   1989   1990       1991   1992             1988          1989     1990           1991     1992         1993      1994        1995

                                 Sales       Pre-tax Profit                                                         Sales            Pre-tax Profit

                                                                                                                                                                               UNIVERSITY OF
                                                                                                                                                                               CAMBRIDGE
Module 4E7 2004                                                                                                                                                                Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 65
Cambridge high tech firms have relatively high survival rates
                       Garnsey and Heffernan 2002 on CTM CUED website

          1 10 %

          1 00 %

             90 %

             80 %

             70 %

             60 %

             50 %

             40 %
                                0       2       4             6              8   10

                                            A g e (Y e ar s)
                                                                                      UNIVERSITY OF
                                                                                      CAMBRIDGE
 Module 4E7 2004                                                                      Institute for Manufacturing
 Elizabeth Garnsey Session 1 Slide 66       Source: Garnsey and Heffernan 2002
But growth reversal was common even among ten year survivors

                        Continuous growth                        Growth reversal and three
                            6%                                     subsequent alternatives
         (e.g. sales)




                                                  (e.g. sales)
                                                                                        34%
            Size




                                                     Size
                                     Time                                 Time




                            Early growth                            Delayed take-off and growth
                            and plateau
         (e.g. sales)




                                                  (e.g. sales)
                                                                                      12%
            Size




                                                     Size




                                            28%
                                     Time                                 Time

Growth paths of 237 high tech ten year survivors, founded c 1990                             UNIVERSITY OF
                                                                                             CAMBRIDGE
   Module 4E7 2004                                                                           Institute for Manufacturing
   Elizabeth Garnsey Session 1 Slide 67
                     Ways of limiting pressures of growth
•     Managing rapid growth requires embedding problem-solving in effective
      procedures




      Avoid growth pressures through segmentation
      or spin-out.

•     Oxford Instruments

      TTP - “grow without getting too big”



                                                                              UNIVERSITY OF
                                                                              CAMBRIDGE
Module 4E7 2004                                                               Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 68
                                          Surviving Setbacks

Growth reversal processes induce intense strain.

Reversal after rapid growth can be a learning experience
Double-loop learning: challenge own assumptions

Build reserves against setbacks; continue to pursue opportunity

Firms that survive may become leaders

                                                               UNIVERSITY OF
                                                               CAMBRIDGE
   Module 4E7 2004                                             Institute for Manufacturing
   Elizabeth Garnsey Session 1 Slide 69
                                            Accumulation :
• Resource recovery (outputs-> inputs) exceeds demands of growth
• Reserves build up and allow firm to weather storms
• Can expand by buying other companies (O.I.,Domino,Microsoft, Cisco)


• Growing to be a dominant firm is an improbable event
   – 5% of firms provide 50% + jobs after 10yrs (Storey 1994)
   – 5% of firms provide VCs with 90% of their profits



                                                                UNIVERSITY OF
                                                                CAMBRIDGE
     Module 4E7 2004                                            Institute for Manufacturing
     Elizabeth Garnsey Session 1 Slide 70
                                       Attributes of Success
• Studies have shown startup more likely to succeed with


        – Team of entrepreneurs with right skill mix, education
                 • Growth ambitions for venture
                 • Business experience
        – Well endowed start up, founders share equity with investors
        – Protected technology
        – Fast growing market


                                                                  UNIVERSITY OF
                                                                  CAMBRIDGE
Module 4E7 2004                                                   Institute for Manufacturing
Elizabeth Garnsey Session 1 Slide 71
 Beware circular reasoning on success
• Success attribute studies of start ups leave 75+% of variance in
  performance unexplained
• Some ventures start with better odds than others
• Can identify losers more easily than winners. Self fulfilling aspect.


• Investors have not cracked secret of success
• Luck is a factor - but who makes the most of it?
• Solutions give rise to new problems (Greiner)
  But problems can be a source of novel entrepreneurial
  solutions - Oxford Instruments, Psion, Hotmail
                                                                   UNIVERSITY OF
                                                                   CAMBRIDGE
  Module 4E7 2004                                                   Institute for Manufacturing
  Elizabeth Garnsey Session 1 Slide 72

								
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