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MODULE 4E7 – ENTERPRISE AND BUSINESS DEVELOPMENT Session 2 Feb 4 2004 Dr E. Garnsey

MODULE 4E7 – ENTERPRISE AND BUSINESS DEVELOPMENT Session 2 Feb 4 2004 Dr E. Garnsey. ENGINEERING TRIPOS PART IIB. Last week. How do under-resourced new firms make breakthroughs? What explains the success of many entrepreneurial innovators?

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MODULE 4E7 – ENTERPRISE AND BUSINESS DEVELOPMENT Session 2 Feb 4 2004 Dr E. Garnsey

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  1. MODULE 4E7 – ENTERPRISE AND BUSINESS DEVELOPMENT Session 2Feb 4 2004Dr E. Garnsey ENGINEERING TRIPOS PART IIB Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 1

  2. 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. Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 2

  3. 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 - BioRobotics Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 3

  4. COURSEWORK BRIEFINGA complete session on this Wednesday 25 Feb 2-3pmPreviewA report of around 2000 -3000 words. Aim is for you toapply knowledge gained in classes.There are several options. Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 4

  5. A. Case Study of a High Tech BusinessResearch 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, Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 5

  6. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 6

  7. C. Evaluate a Business PlanProvide 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. Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 7

  8. Part One Types of business activity and business modeEarly growth paths Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 8

  9. Entrepreneurs juxtapose information on two planes: resources and opportunities •Resource use: Economy Leverage Combine Create • Opportunities continually scan and reassess •Enlist others, create network to open opportunities & obtain resources Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 9

  10. Enterprise Opportunity Space Resources Value “Enterprise involves the pursuit of opportunities to create valueby combining resources in new ways in order to secure returns.” Opportunity = possibility of reaching a preferred state Resources are means to achieve ends. Entrepreneur - one who engages in enterprise (= entrepreneurial activity). An enterprise - a business organization Entrepreneurship: study or practice of entrepreneurial activity. Economic value is created whenOutput > Input Returns Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 10

  11. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 11

  12. Secure / create resources reinvest Business Idea Set up new activity Secure returns distribute exit Create value Not all entrepreneurial activity involves business creation. Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 12

  13. A company is a legal entity that can sustain activity and ownership over recurrent production cycles, cumulatively. output Firm revenue Customers Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 13

  14. Business creation involves recurrent production cycles.Company itself may become valuable: develop productive capacity, financial assets Productive base Value creating output sold reinvest Asset base distribute exit Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 14

  15. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 15

  16. Survival all US New Firms 1970s/80s (SBA data) Source Kirchoff 1994 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 16

  17. Hard Model Soft Model Exposure Create infrastructure High In house manufacture Mass Market Manufacturing Product sub-contracted OEM's Niche Market License IP Technical services Contract R&D Design studies Consultancy Testing reports Low Analytical reports Resource commitment Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 17

  18. Some business models involve commitment and sunk costs Product concept The range of options being considered reduces over time The cost of design changes increases over time Graphic: J. Allwood Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 18

  19. Soft Start: services, software, licensing Lower capital requirements Fewer sunk costs - flexibility Attractive when cost of capital is high. So why manufacture? Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 19

  20. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 20

  21. Global Enterprise Monitor 2001, 2003 showsmanufacturing start ups that survive are more robust than service companies: survive longer grow larger Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 21

  22. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 22

  23. Soft Start example Cash Flow (£000s) 1000 500 Cumulative Cash Flow 1 2 3 4 5 0 Years -200 -500 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 23 Source: Presentation by M. Bullock of Barclays Bank to British Technology Group Conference, 1986

  24. Hard Start example Cash Flow (£000s) 1000 Cumulative Cash Flow 500 Net Cash Product Launch Flow Quarterly 3 4 1 2 5 Years 0 - 500 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 24 Source: Presentation by M. Bullock of Barclays Bank to British Technology Group Conference, 1986

  25. “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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 25

  26. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 26

  27. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 27

  28. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 28

  29. Every new firm is uniqueSo how do we compare them? Business realities provide a basis for comparing cases Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 29

  30. New firms must solve a common set of problemsas 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 30

  31. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 31

  32. Relative employment growth of 6 Cambridge software companies Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 32

  33. COMPARING CASES - evidence THROUGHPUT measures: productivity p.e. WIP, stocks/ sales, lead times Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 33

  34. 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. Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 34

  35. Generate & Sustain Revenues Secure Resources & Set Up Search & Select It simplifies comparison to look at problem-solving sequentially 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 35

  36. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 36

  37. 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. Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 37

  38. Burn rate can exhaust endowment resources Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 38

  39. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 39

  40. Firms that solve initial problems often grow for a while … but do not sustain growth. o R? Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 40

  41. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 41

  42. Most Cambridge Tech Firms Remain Small Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 42 Source: CCRU Database

  43. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 43

  44. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 44

  45. Under and over production in young firms.Capacity-build is uneven; demand is unpredictable Demand Output Capacity Time Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 45

  46. Early growth problems o R • Returns from output may not keep up with inputcosts (scale and scope issues ) • Timing and coordination (resource mix) problems • under-production and over-production problems • delay in recovery of resources from output - cash flow blocked • Output does not create real or perceived value • Quality problems (does output create value for customers?) • Demand below forecast Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 46

  47. 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? Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 47

  48. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 48

  49. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 49

  50. 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 Module 4E7 2004 Elizabeth Garnsey Session 1 Slide 50

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