Managing Growth in an Established

Company. Exit and Harvest:

Learning objectives
Module 5
• To add additional understanding on the
conflict between remaining entrepreneurial
and turning professional (or just
bureaucratic)
• To understand how a company can outlive
its founder(s)
• To be aware of different exit options for the
entrepreneur
 Organizational transformation
Role and management mode of
necessary so that structure &
entrepreneur must change.
strategy of firm matches its size
Organizational culture
becomes an issue

Size Remaining entrepreneurial. The

company must not lose its soul
in this transformation
Rapid growth.
Growing pains
start to mount

Management & ownership

transition. The life of the
entrepreneur and the company
are not inseparable

Time
 Contents
• If pursuit of new opportunities, creativity and
serendipitous innovation are your key strengths,
should you really transform into a professionally
managed company (the risk being you end up a
bureaucratic one)?
– Preserving entrepreneurship as companies grow
• You want and/or need to hand over – hopefully after
having successfully transformed your company from
entrepreneurial to professionally managed. Now what?
– Different exit and harvest options (ownership &
management transitions)
 Firm characteristics

Resources
_ - Small
-Young
-Independent + Flexibility

Exploitation Discovery
ability _ ability

+ +
Profitability

+ +
Economies of scale;
Market power

Growth
 Apple example
• 1977 Steve Jobs and Steve Wozniak start in
garage and develop first personal computer
• Tremendous growth leads to “Organization
growing pains”
• Informal organization: Creative
organization serving creative
customers;little management
 Apple resolution
• Jobs becomes chair-person and John Sculley is
brought in from Pepsi as CEO (“Do you want to spend the
rest of your life selling sugar water or do you want to change the
world?”)
• Transition to professional organization; but Jobs
and Sculley clash – Jobs is kicked out
• More legal battles: less innovative leadership
• Apple loses creative image; financial losses;
Sculley leaves
• Jobs returns; Creativity returns – iMac, iPod, etc
 Strategic orientation
Driven by Driven by
perception of resources currently
opportunity controlled

Commitment to opportunity
Revolutionary Evolutionary
with of
short duration long duration

Promoter Trustee
 Commitment of resources
Multistage Single-staged
minimal exposure Complete commitment
at each stage upon decision

Promoter Trustee

Control of resources
Episodic use or Ownership or
rent of employment of
required resources required resources

Promoter Trustee
 Management structure
Flat
informal Formalised
networks hierarchy

Promoter Trustee

Reward philosophy
Performance-based Resource-based
Team-oriented Promotion oriented

Promoter Trustee
 Don’t lose your soul in the
transition
• Transition to professional management creates
platform for further growth but
– Core competencies or raison d’etre must be nurtured
(L.L. Bean; MIB)
– Systems and structures must support the effective
application of core competencies
– Special implications if entrepreneurial behaviour is “core
competence”
– Being systematic is not only about bureaucracy – you can
(and may need to) become systematically innovative
(Drucker)
 A Better Recipe for Successful Growth?

Opportunity orientation
propensity for pursuit of opportunity
Entrepreneurial
firms apt for high
performance

Current product/ Resource orientation

market orientation focus on core competencies

Inactive orientation
 Remaining entrepreneurial after
transition to professional management
• Transition to professional management 
formalisation/institutionalisation
• When the organization is formalised  formalise/
institutionalise entrepreneurial behaviour
• From entrepreneurial organization to
entrepreneurial organization
 Perils of growth and success
• Entrepreneurs may become fat cats. Why?

Yes Entrepreneur Satisfied

Self-perceived
manager
power and
ability to realise
Frustrated Classic
goals manager bureaucrat
No

Yes No
Desired future state characterised by
growth or change
 Stevenson: remaining
Entrepreneurial
 perception of Build desire to Make people believe
opportunity pursue opp’ty they can succeed

• Put employees and • Reward risk taking • Short-term slack (allow

managers close to front (downside?*) people time to work on
line innovation)
• Reduce risk of failure
• Institutionalise change: (dealing with failure*) • Multistaged resource
make it desirable and a allocation – VC style*
• Accept flexibility in
corporate goal
implementation (plans • Share resources
• Culture: always are only plans)
challenge the status quo
 Stevenson/3M practices
Top management/culture
• Core competence -- innovation (William Coyne,
senior VP 1998)
• Vision: “To be the most innovative enterprise and the
preferred supplier”
• Objectives: “Generate 30% of sales from products introduced
last 4 years. Generate 10% of sales from products that have
been in the market just 1 year” (institutionalise change)
• Human resources: “Encourage the initiative of each employee
by providing both direction and the freedom to work
creatively. Risk taking and innovation are requirements for
growth. Both are to be encouraged and supported.” (build
desire to pursue opportunity)
 Stevenson/3M practices
Encouraging entrepreneurial behaviour
• Freedom to fail (reducing the risk/consequences of
failure/acceptable types of failure)
– Failure when trying not to be punished ”you only stumble
when you move”
• Bootlegging (short-term slack, multi-staged resource allocation)
– Access to resources/people during off hours/weekends
(sharing resources is the norm)
– Skunkwork not supported by superiors is encouraged [?]
(Astrazeneca, Ericsson, Post-it)
– e.g. USD 200.000 divided into smaller chunks available for
independent projects
– “I have a lot of freedom to try crazy ideas”
• The 15% rule (increasing the perception of opportunity)
– Researchers allowed to spend 15% of their time on unrelated
projects of their choice
– Opportunity to explore ideas unrelated to regular assignments
 Stevenson/3M practices
Institutionalised practices
• Foresight
– Customer inspired innovation (real-time market input)
– Lead user research (real-time market input)
• Stretch goals*
– 30% sales goal
– Pacing plus program
• Empowerment
– 15% rule (increasing the perception of opportunity)
– Genesis grants (multi-staged resource allocation)
– Dual ladder system (reward the pursuit of opportunity)

* What are the pros and cons?

 Institutionalised practices
(continued)
• Communication/networking (balancing functional
needs)
– Technical forum
• Recognition and rewards (reward the pursuit of
opportunity)
– Carlton society
– Golden step award
– Technical circle of excellence
– Profit sharing
 Harvest and Exit Options

• Family succession
• Outright sale
• Management buy out
• Public offering (control given up)
 Harvest options
?
•
(retained ownership)
Employee ownership plan
• Merger, strategic alliance
• Public offering (control retained)
• Wealth-building vehicles
• Capital cow
 Exit options (ownership &
management transition)

• Family succession
• Outright sale
• Management buy out
• Public offering (control given up)
 Stop!
and think for a minute

In family succession, does ownership and

management have to be
- …handed over at the same time?
- …handed over to the same individual(s)?
 Exit
• Ownership transition
AND
• Management transition
• …
• Forcing event  selling for the wrong reasons at the wrong time
OR
• Planned process
• …
• Crucial questions
– Can the company survive without the entrepreneur?
– Can the entrepreneur ‘survive’ without the company?
Reasons for explicit exit strategy
at early stage
• Avoid stifling conflict among founders
• Equity sharing with employees or heirs should be
started at early stage for tax reasons
• Outside investors demand a thoughtful exit
strategy before investing
• The unthinkable can happen (death, sickness, etc.)
• Facilitates a sound “detached total commitment”
attitude
 Transferring power in family firms

• selecting a successor
• intergenerational conflict
• different agendas
• training
• transition timing
 Selecting a successor
- Is there a potentially apt candidate? (Q1)
- What steps do you need to take? (Q2)
- Is there a willing candidate?
- Are there more than one willing and able?
- Is selecting one of these optimal for the firm? For the
entrepreneur? For the successor? For the family?
- How to choose among them? Selection as team effort
involving outsiders and non-family employees
- What competence needs to be further developed?
How?
- Did you come up with other steps? Which?
 Intergenerational conflict
• Different current personal goals
• Sandwich generation (cf. L.L. Bean)
• Incumbent/successor power struggles
• Building vs. receiving value/wealth
• What about the case?
 Different agendas
• Can the business reliably support all family
members?
• Agendas of non-active family owners
requires strategic planning (Bonniers)
• What about the case?
 Training/grooming
• Needed competence depend on the
company’s core competence and stage of
development
– Technical know-how, Marketing, Managing
people etc.
– Within the firm, within other firms, through
education, etc
– Suggestions for Jack?
 Timing
• Succession planned early on
– Neither too fast nor too slow
– Options open to Jack?

Advantage Disadvantage
•Conflicts when owner won’t let go
•Knows the business •Normal mistakes may be viewed as
Early •Has developed tacit skills
incompetence
•Acceptance & credibility within firm
entry •Strong relations with constituents
•Limited knowledge of outside world
•Risk of ‘inbreeding’

•Expertise in key success factors & culture

•Successor’s skills viewed objectively
are limited
Late •Development of self-esteem •Set pattern of outside activity may conflict
•Uninfluenced by family practices
entry •Outside success establishes credibility
with those of family firm
•Resentment may result when successor is
•Broadened perspective on environment
advanced ahead of long-term employees
 Q3
If you were going to advise Jack, what
would you recommend he do first? How
should he get started with his succession
plan? What should he do next? Offer him
some general guidance
 Business & private reasons for
selling a business
• Lack of capital to carry out needed change
• The business has outgrown the owner
• No heirs to leave the business to
• Desire for liquidity
• Aging & health problems
• Boredom & burnout
• Desire to pursue other interests
• Should Jack consider this option instead?
 Exit: Preparing a business for
outright sale
• The business can not depend solely on you
• Timing
– Sell when there is still plenty of untapped growth
potential
• Make sure financials are in order and audited
• Show earnings in balance sheet
– Don’t withdraw excessive salary
– Don’t utilize the informal economy too much
• Make a business plan for the future
• Value the business
• Prepare a prospectus
• Involve a broker?
 Important issues
• Will the buyer handle the company the way
you wish?
• Remain with the business for how long?
• Will you be more liquid?
– Cash
– Shares in private company
– Shares in public company
 Management buy out
• When family successors aren’t present
• Existing managers are likely to develop the
business as you would
• Other buyers don’t exist
• Financial caveats
– Unlikely to pay much cash
– full payment will take long time
– risky if payment is tied to future profits
 Public offering
• Stock usually gets higher valuation on stock
market (greater financial rewards for
entrepreneur)
• Mixed blessing
– Short term performance demands
– Disclosure requirements
 Employee stock ownership plan
• Normally only limited liquidity – mainly a (good)
motivational tool
• If the firm plans to go (and goes) public makes a
big difference
• Can have unwanted side effects
– In Silicon Valley 90% (not corroborated source) of
employees exercise options on the day of float
– Many quit shortly after and join new venture with new
stock options
– Employees can become fat cats, too
Capital cow and wealth building
vehicle
• Capital cow
– Firm generates more profits than needed for its
own continued development
– Used to facilitate other entrepreneurial options
• Wealth building vehicle
– Capital transferred to own pockets