Entrepreneurship: Successfully Launching

New Ventures
Sixth Edition

Chapter 13
Preparing for and
Evaluating the
Challenges of
Growth

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Learning Objectives

13.1 Describe how firms can properly prepare for growth.

13.2 Discuss the six most common reasons firms pursue
growth.
13.3 Explain the importance of being able to manage the
stages of growth.
13.4 Describe the challenges of firm growth, particularly
those of adverse selection and moral hazard.

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Three Things a Business Can Do to
Prepare for Growth (1 of 3)

Appreciate the Nature of Business Growth

Important Realities
 Not all businesses have the potential to be aggressive
growth firms.
 A business can grow too fast.
 Business success doesn’t always scale.

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Three Things a Business Can Do to
Prepare for Growth (2 of 3)
Stay Committed to a Core Strategy
 It is important that a business not lose sight of its core
strategy as it prepares to grow.
 If a business becomes distracted or starts pursuing every
opportunity for growth that it’s presented, it can easily stray
into areas where it’s at a disadvantage.

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Three Things a Business Can Do to
Prepare for Growth (3 of 3)

Planning for Growth

 A firm should establish growth-related plans.
 Writing a business plan greatly assists in preparing
growth plans.
 It’s also important for a firm to determine, as soon as
possible, what its growth strategies will be.

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Warning Signs That a Business is
Growing Too Fast
Table 13.1 10 Warning Signs That a Business Is Growing Too Fast
 Borrowing money to pay for routine operating expenses
 Extremely tight profit margins
 Over-stretched staff
 Declining product quality
 E-mail and text messages start going unanswered
 Customer complaints are up
 Employees dread coming to work
 Productivity is falling
 Operating in a “crisis” mode becomes the norm rather than the exception
 Those working with the business’s financial structure are starting to worry
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Reasons for Growth (1 of 3)

Reason for Growth Explanation

Economies of scale Occur when increasing production lowers the
average cost of each unit produced.
Economies of scope Occur when the scope (or range) of a firm’s
operations creates efficiencies.

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Reasons for Growth (2 of 3)

Reason for Growth Explanation

Market Leadership Occurs when a firm holds the number one or the
number two position in an industry or niche
market in terms of sales volume.
Influence, Power, Larger businesses usually have more influence
and Survivability and power than smaller firms.

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Reasons for Growth (3 of 3)

Reason for Growth Explanation

Accommodate the Sometimes firms are compelled to grow to
Growth of Key accommodate the growth of a key customer.
Customers
Attract and Retain Growth is a firm’s primary mechanism to
Talented Employees generate promotional opportunities for
employees.

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Managing Growth
It’s important for a business owner to know the stages of growth,
along with the unique opportunities and challenges that each
stage entails.
Figure 13.2 organizational life cycle

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Stages of Growth (1 of 5)
 Introduction Stage
– Start-up phase where a business determines what its core
strengths and capabilities are.
– The main challenge is to make sure the initial product or
service is right.
– It’s important to document what works and what doesn’t
work during this stage.

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Stages of Growth (2 of 5)
 Early Growth Stage
– Generally characterized by increasing sales and heightened
complexity.
– Two important things must happen for a business to be successful
in this stage.
 The founder must start working “on the business” rather than
“in the business.”
 Increased formalization
must take place, and the
business has to start
developing policies and
procedures.

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Stages of Growth (3 of 5)
 Continuous Growth Stage
– The need for structure and formalization increases.
– Often the business will start developing related products and
services.
– The toughest decisions take place in this stage.
– One tough decision is whether the owner of the business and the
current management team have the experience and the ability to
take the business further.

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Stages of Growth (4 of 5)
 Maturity Stage
– A business enters the maturity stage when its growth stalls.
– At this point, a firm is typically more intently focused on managing
efficiently than developing new products.
– Well-managed firms often look for partnering opportunities or
opportunities for acquisitions or licensing deals to breathe new life
into the firm.
– If new growth cannot be
achieved through a firm’s
existing product mix, the
“next generation” of products
should be developed.

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Stages of Growth (5 of 5)
 Decline Stage
– It is not inevitable that a business enter the decline stage.
– Many American businesses have long histories and have
adapted and survived over time.
– A business’s ability to avoid decline hinges on the strength
of its leadership and its ability to adapt over time.

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Challenges of Growth

Two categories of challenges for firm growth

 Managerial Capacity Problem
 Day-to-Day Challenges of Growing a Firm

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Managerial Capacity Problem (1 of 6)

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

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Managerial Capacity Problem (2 of 6)
 A Firm’s Administrative Framework
– A firm’s administrative framework consists of two kinds of
services that are important to firm growth.
 Entrepreneurial services generate new market, product,
and service ideas, while managerial services administer
the routine functions of the firm and facilitate the
profitable execution of new opportunities.
 New product and service ideas require substantial
managerial services (or managerial capacity) to be
successfully implemented.
 This is a complex problem because if a firm has
insufficient managerial services to properly implement
its new product and service ideas, it can’t grow.
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Managerial Capacity Problem (3 of 6)
 The reason a firm can’t quickly increase its managerial
services (to take advantage of new product or service
ideas) is that it is expensive to hire new employees, it
takes time for new hires to be socialized into the culture
of a firm, and it takes time for new employees to acquire
firm-specific skills and establish trusting relationships
with other members of the firm.
 When a firm’s managerial resources are insufficient to
take advantage of its new product and service
opportunities, the subsequent bottleneck is referred to
as the managerial capacity problem.

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Managerial Capacity Problem (4 of 6)
 Additional Challenges
– As a firm grows, it is faced with the dual challenges of
adverse selection and moral hazard.
 Adverse selection means that as the number of
employees a firm needs increases, it becomes
increasingly difficult for the firm to find the right
employees, place them in appropriate positions, and
provide adequate supervision.
 Moral hazard means that as a firm grows and adds
personnel, the new hires typically do not have the same
ownership incentives as the original founders, so the
new hires may not be as motivated as the founders to
put in long hours and may even try to avoid hard work.
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Managerial Capacity Problem (5 of 6)
Figure 13.3 Basic Model of Firm Growth

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Managerial Capacity Problem (6 of 6)
Figure 13.4 impact of the managerial capacity problem

Source: Based on material in E. T. Penrose, The Theory of the Growth of the Firm (New
York: Oxford University Press, 1959).

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Day-to-Day Challenges of Growing
a Firm (1 of 2)

Challenge Explanation
Cash Flow A firm requires an increasing amount of cash
Management as it grows.
Price Stability If growth comes at the expense of a
competitor’s market share, a price war could
ensue.

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Day-to-Day Challenges of Growing
a Firm (2 of 2)

Challenge Explanation
Quality Control An increase in firm activity can result in quality
control issues if a firm is not able to increase
its resources to handle the extra work.
Capital Constraints Capital constraints are an ever-present
problem for growing firms.

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 Copyright

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