© 2007 John Wiley & Sons Australia, Ltd

Chapter 15

Managing growth and transition

 Chapter outline

• The dimensions of business growth

• Conceptualising growth and
organisational change
• From the entrepreneur to the manager
• Harvesting
 Learning objectives

• Explain the various dimensions of growth

in a business enterprise
• Discuss the four basic theories that
explain how and why organisations grow
• Explain the major stages in a typical
business life cycle
 Learning objectives

• Outline the changing role of the

entrepreneur/small business owner as the
business grows
• Identify different methods of ‘harvesting’ a
business venture
 Introduction

• Most small companies have one of the

following broad goals:
– to survive
– to consolidate and continue to be
successful, or
– to expand and grow.
 Introduction

• On closer inspection, it becomes clear

that these three basic activities are often
variations on the same theme, and can be
reduced to a focus on expansion and
growth in one way or another.
The dimensions of business growth
 Financial growth

• Financial growth relates to the

development of the business as a
commercial entity.
• It is concerned with increases in sales,
the investment needed to achieve those
sales, and the resulting profits.
 Financial growth

• It is also concerned with increases in

what the business owns — its assets.
 Strategic growth

• Strategic growth relates to the changes

that take place in the way in which the
organisation interacts with its environment
as a coherent (or strategic) whole.
 Strategic growth

• Primarily, this is concerned with

the way the business develops its
capabilities to exploit a presence in the
marketplace (e.g. market share or
reputation).
 Organisational growth

• Organisational growth relates to the

changes that take place in the
organisational structure, process and
culture as it grows and develops.
 Organisational growth

• The structure of the organisation, and the

way that structure develops as the
organisation grows, is both a response to
the circumstances in which the
organisation finds itself and a reaction to
business opportunities.
 The choice of not growing

• Although market forces may press for the

majority of owner-managers the need to
maximise growth, or indeed to grow at all,
it is not self-evident:
– Firstly, growth relates to the personal
choice of the entrepreneur.
 The choice of not growing

– Secondly, there is often a belief on the

part of owner-managers that continued
growth of the firm will lead to an
erosion of their managerial and
financial control over the business.
 Conceptualising growth
and organisational change

• There are four basic theories that explain

how and why organisations change.
• These are based on the notion of:
– life cycle
– teleology
– evolution
– dialectic
 Life cycle

• The notion of life cycle suggests that the

business venture undergoes a pattern of
growth and development, much like a
living organism does.
 Life cycle

• Typically, the stages follow a pattern of:

– new venture development
– start-up
– growth
– maturity
– rebirth or decline
 Life cycle
stage characteristics

(continued)
 Life cycle
stage characteristics (cont’d)
 Teleology

• The purpose or goal of management

(e.g. growth) is the final cause for guiding
movement of the organisation.
• This model views development as a cycle
of goal formulation, implementation,
evaluation and modification of goals
based on what was learned by the
organisation.
 Teleology

• The entrepreneur can use their vision as

a future state which pulls the organisation
forward.
 Evolution

• Evolution is a theoretical scheme which

explains changes in structural forms of
populations of organisations across
communities or industries.
 Evolution

• As in biological evolution, organisational

change proceeds through a continuous
circle of variation, selection and retention.
• As business ventures perform reliably and
accountably over time, they demonstrate
their fitness and may acquire legitimacy.
 Dialectic

• This theory focuses on stability and

change based on the collision of power
between opposing entities.
• It is based on the assumption that
organisations or members within
organisations compete with each other
for domination and control.
 Dialectic

• Change is the result of the appearance of

opposing views (thesis and antithesis)
and (im)balance of power between
entities.
 From the entrepreneur
to the manager

• Managing any business venture

is a tough job. Managing a rapidly
growing enterprise, however, presents a
particular challenge because the essential
nature of the manager’s job changes with
growth.
 From the entrepreneur
to the manager

• As the number of employees increases,

and the volume and complexity of work
expands, entrepreneurs must change
their fundamental approach to managing.
 Defining
the manager’s job

• Strategy and operating

What task should the enterprise perform?

• Organising
How should tasks be structured and
coordinated?

• Staffing
Who should do the work?
 The manager’s tools

• As managers execute their

responsibilities in a time-related fashion,
they need to:
– Anticipate the situation and do
as much as possible to prepare to
deal with it.
 The manager’s tools

– Act to carry out plans, and at the

same time deal with unanticipated
issues.
– Review the situation to learn
everything possible in order to apply
it to the next round of events, and to
reward employees according to their
effort.
 The steps towards
professional management

• There are four key steps for a successful

transition toward professional
management:
– Recognise the need for change
– Developing human resources
– Delegating responsibility
– Developing formal controls
 Harvesting

• If building and growing a business are the

first two steps in creating wealth,
harvesting can be regarded as the third.
 Harvesting

• After a total immersion in the business, a

huge workload, many sacrifices, and quite
often burnout, many entrepreneurs want
to reap a reward for the effort they have
put into launching and nurturing a
business venture.
 Key elements to consider
when planning an exit

• Strategic elements linked to the

business environment
An exit is attractive for the entrepreneur
only if potential buyers are interested in
the firm.

• Entrepreneur’s personal aspirations

For most entrepreneurs, the business
venture is a dominant part of their lives.
 Key elements to consider
when planning an exit

• Business financial situation

For example, it might be difficult to list a
company that has a high debt to equity
ratio (leverage).
Balancing of strategic, personal and
financial goals in a harvest strategy
 Key elements to consider
when planning an exit

• Guidelines and cautions while preparing a

harvest strategy (Timmons, 1997):
– Patience
Several years are required to launch and
build most successful companies.

– Vision
The other side of the patience coin is not
to panic as a result of unexpected events.
 Key elements to consider
when planning an exit

– Realistic valuation
If impatience is the enemy of an
attractive harvest, then greed is its
executioner.

– Outside advice
It is recommended to find an advisor
who can help craft a harvest strategy
while the business is still growing.
 Sale to a financial or a
strategic buyer

• Selling the business outright is by far the

most common harvest method.
• Sales fall into several broad categories,
depending on the buyers:
– financial sales
Buyers look primarily to a firm’s
stand-alone cash-generating potential
as the source of value.
 Sale to a financial or a
strategic buyer

– strategic sales
Strategic buyers expect synergies with
their other holdings.

– management buyouts
The founder sells to managers or
existing partners in the business.
 Management buyout (MBO)

• The MBO usually entails high levels of

debt.
• This requires a company that is capable
of generating large sums of cash on a
regular basis or that has substantial
assets that can be sold to pay off the
debt.
 Management buyout (MBO)

• Three factors must be considered:

– the ability to borrow significant sums
against the company’s assets
– the ability to retain or attract a strong
management team
– the potential for each participant’s
investment to increase substantially in
value
 Strategic alliance and merger

• A strategic alliance is an ongoing

relationship between two businesses in
which they combine efforts for a specific
purpose.
 Strategic alliance and merger

• If the strategic alliance takes place

between competitors, it can often lead
to a merger of the two companies later.
In this case, the two companies merge
to form a new legal entity.
 Initial public offering (IPO)

• Through the IPO, the company’s shares

are placed for sale on a public stock
exchange.
• The merits of going public, vis-à-vis being
acquired, rest largely on the contention
that IPOs provide higher valuations than
what it would expect from being acquired.
 Initial public offering (IPO)

• However, there are disadvantages

in going public, such the loss of privacy,
a reduced control, and significant costs.
 Summary

• The growth of the venture can be

approached from a number of
perspectives (financial, strategic and
organisational).
• However, for the majority of owner-
managers the need to maximise
growth, or indeed to grow at all, is
not self-evident.
 Summary

• Four basic theories can explain

how and why organisations change:
life-cycle, teleology, evolution and
dialectic.
• Fundamentally, the key responsibilities
of the manager revolve around operating,
organising and staffing.
 Summary

• There are a variety of common tools and

techniques to help owner-managers in
their responsibilities along the
anticipating-acting-reviewing cycle of
these responsibilities.
 Summary

• There are four main exit strategies which

entrepreneurs can use to harvest a
venture:
– sale to strategic partner or corporate
investor
– management buyout
– strategic alliance and merger, and
– initial public offering.
 Summary

• The exit process must be carefully

prepared and special attention should be
given to the business environment,
stakeholders’ interests and corporate
finance issues.