Chapter 12
Considering New Ventures
and Corporate Renewal
OBJECTIVES
1
Define new ventures, initial public offerings (IPOs),
and corporate renewal and describe how they are
related to strategic management
2
Understand entrepreneurship and the entrepreneurial process
3
Describe the steps involved in new-venture creation
and corporate new venturing
4
Map out the stages leading up to an IPO
5
Understand the external and internal causes
of organizational failure
6
Outline an action plan for strategic change
and corporate renewal
1
SNOCAP AND NAPSTER
With the music industry experiencing
major changes, the old business models
were disintegrating as numerous new
models were being developed.
2
ENTREPRENEURSHIP AT JONES SODA
Innovative products
• Turkey and gravy flavored
•
Urban Juice and Soda
Co. born in Vancouver,
Canada in 1987 by a
former sky instructor
•
soda
Jones WhoopAss energy
drink
Jones Naturals juices
Innovative practices
• Unique venues (e.g., sky
•
• $27 million in sales
• Trade over the
•
counter (OTC)
Possible acquisition
target
shops, tattoo parlors)
Outsourced distribution (e.g.,
contract packers, independent
trucking companies)
3
JONES SODA FINANCIALS AT A GLANCE
2004
2003
2002
2001
27.5
20.1
18.6
23.3
Net income ($ millions)
1.3
0.3
(1.2)
(1.7)
Employees
51
Sales ($ millions)
Headquarters
Seattle, Washington
Top management team
Peter Van Stolk, CEO
Jennifer Cue, COO & CFO
4
ORTHODOXIES DEVELOP ALONG SEVERAL DIMENSIONS
• Who the customer or end user is
• The type of interface and interaction
with the customer or end user
• How benefit is defined and value is
delivered
• How product/service functionality is
defined
All potentially create blind spots
• What form the product/service should
take
• How processes are structured and
managed
• The “ideal” cost and pricing structure
5
SOME ORTHODOXIES THAT HAVE CREATED BLIND SPOTS
“This ’telephone’ has too many shortcomings to be
seriously considered as a means of communication.
The device is inherently of no value to us”
– Western Union internal memo, 1876
“The wireless music box has no imaginable commercial value. Who would pay for a message sent to
nobody in particular?”
– David Sarnhoff’s associates in
response to his urgings for investment
in the radio in the 1920’s
There is no reason anyone would want a computer
in their home”
– Ken Olson, President, Chairman
and Founder of Digital Equipment
Corp., 1977
“The concept is interesting and well-formed, but in
order to earn better than a ‘C’, the idea must be
feasible”
– A Yale University management
professor in response to Fred Smith’s
paper proposing reliable overnight
delivery service. Smith went on to
found Federal Express Corp
“A cookie store is a bad idea. Besides, the market
research reports say America likes crispy cookies,
not soft and chewy cookies like you make”
– Response to Debbi Field’s idea of
starting Mrs. Field’s Cookies
“There will never be a market in selling stock over
the internet”
– David Komansky, Merrill Lynch
Chairman & CEO, 1999
6
THE ENTREPRENEURIAL PROCESS
Resources
and
capabilities
Opportunity
Entrepreneur
and
entrepreneurial
team
7
STARTING POINT
Strategies for
Existing Firms
New Ventures
Resources
and
capabilities
Opportunity
Resources
and
capabilities
Opportunity
Entrepreneur
and
entrepreneurial
team
Entrepreneur
and
entrepreneurial
team
New ventures start with
an opportunity
While strategy for existing firms
begins with the assessment of
resources and capabilities
8
ACTIVITIES IN NEW VENTURE CREATION
Idea
Business
Plan
External
Financing
Opportunity
New Product Launch
9
THE BUSINESS PLAN
Contents
1. Executive summary: One to three pages highlighting all key points in a way that captures the interest of the reader.
Stress the business concept here, not the numbers. It is the unique value proposition and business model that really
matter
2. Company description: Provide a brief description of the company’s business, organization, structure and strategy.
Provide a summary of how the company’s patents or licenses to patents are connected with the development and
introduction of products
3. Products and services: Include a layman’s overview of how the company’s technology and patents relate to its
products and services. Describe the products or services the company will sell, including a discussion of why people
will want them, what problems they solve, and how much customers are likely to pay for them (i.e., the willingness to
pay criteria)
4. Market analysis: Identifies the need for the product, the extent of that need, who the customers will be, and why they
will buy your product. This section should also include a discussion of competitors or potential competitors and why the
product will have a competitive advantage over their offerings. Include considerations of barriers to entry in this market
5. Proprietary position: If the new venture’s market position will rely on patents or licenses to patents, discuss how
these patents will contribute to the company’s competitive position and whether other patents (competitors or
otherwise) might limit the company’s ability to market its products. If similar products do not already exist, discuss the
alternative means by which customers are likely to meet the needs the product addresses
6. Marketing and sales plan: Show how the company plans to attract and maintain customers. Discuss product pricing,
promotion, and positioning strategy
7. Management team: Describe the management team with special emphasis on its track record at accomplishing tasks
similar to those it will face in making the company successful. Investors place major emphasis on the management
team, viewing it as the critical ingredient in catalyzing the growth of the company and responding to the unexpected
8. Operations plan: Describe how the day-to-day operations of the company will be organized and carried out to
produce the products and services described above
9. Finances: Identify the capital that will be required to build the business and how it will be used. Include projections of
revenues and expenses that show investors how they will get their money back and what return they can expect on
their investment
• Brings
together all
elements of
venture
• Ensures
stakeholder
(e.g.,
investors) of
venture plan
• Forces
entrepreneur
to examine
all facets of
strategy
10
CORPORATE NEW VENTURING – NEW VENTURE CREATION BY AN
ESTABLISHED FIRM
Established firm
Idea
New venture
Companies that do this
well include
•
•
•
•
•
•
•
•
•
•
Merck
3M
Motorola
Rubbermaid
Johnson & Johnson
Corning
General Electric
Raychem
HP
Wal-Mart
11
THREE OBSTACLES CORPORATE NEW VENTURES FACE
Too many lavish
resources on
new ventures
Try to mitigate
false starts and
failures so miss
out on learning
experiences
Resist challenging
assumptions,
work practices,
and skills
12
NEW VENTURE DIVISIONS AND BUSINESS INCUBATORS
Existing Firm
Incubator
New venture
Process
Product
Technology
13
CORPORATE NEW VENTURES ARE MORE LIKELY TO SUCCEED WHEN…
Developed in firms with
supportive climates
Test concepts with potential
users
Have senior sponsorship
Experiment repeatedly
Based on related products
Balance profitability with time
lines
Appeal to an emerging
subset of customers
Don’t introduce too early
Employ market-experienced
people
Combine disciplined
oversight with autonomy
14
THE INITIAL PUBLIC OFFERING (IPO)
2 Hire investment
bank and estimate
value of company
1
Company decides it
wants to tap public
markets for investment capital
3 File S-1 statement with
SEC and other security
commissions
4 Prepare and distribute
investor prospectus
5 Price and sell share
(“Go public”)
15
MINIMUM COSTS OF GOING PUBLIC TO RAISE $25 MILLION
Pre-IPO costs over two years,
1.
2.
3.
Upgrading accounting and MIS
New personnel and board members
Management/administrative time
150,000
150,000
100,000
Minimum Pre-IPO Costs
400,000
IPO-process costs 90 days,
6.5% underwriter commission
$25 million IPO
IPO professional fees
1.
2.
3.
4.
5.
6.
7.
Legal fees
Preliminary/final prospectus printing
Translation
Investors relations
Accounting
Road show and preparations
Initial stock exchange listing fee
1,625,000
150,000
100,000
30,000
40,000
50,000
50,000
10,000
Minimum IPO professional fees
430,000
Minimum IPO-Process Costs
Pre-IPO costs every year thereafter,
1. Investor relations and Web site
2. Directors’ fees, travel costs, etc.,
3. Directors’ liability insurance
4. Corporate image, public relations
5. Annual stock exchange fee
6. Management/administration costs
2,055,000
100,000
100,000
50,000
50,000
5,000
100,000
Minimum Annual Post IPO-COSTS
Total Minimum Cost of a $25 million IPO
Source: P. Downing, “IPO Launch Fraught with Perils,” The Ottawa Citizen, High-Tech Report, October 12, 1998
405,000
2,860,000
16
CORPORATIONS FAIL FROM FORESEEABLE EVENTS
A study of 51 failed
organizations reveal ...
... they failed from foreseeable events
Cause of failure
Foreseeable
51
Not foreseeable 0
Source: S. Finkelstein, why smart executives fail (New York: Portfolio press, 2003)
17
EXTERNAL CAUSES OF FAILURE
Economic change
Competitive change
External
Social change
Failure
Technological change
Internal
18
INTERNAL CAUSES OF FAILURE
External
Failure
Strategy failure
Internal
Management failure
19
STRATEGIC CHANGE
Significant changes in resource-allocation
choices or business activities that align the
firm’s strategy with its vision, or changes
to the firm’s vision
20
STRATEGIC CHANGE
Cost
reduction
Asset
reduction
Restructuring
Sometimes requires short-term
reduction in staffing or the
elimination of expenses
Identify assets that may be
undervalued on the books and
then sold to realize their true
market value
Major change in the
composition of a firm’s assets;
usually involves selling off
businesses
21
EIGHT STEPS TO TRANSFORMING YOUR ORGANIZATION
1. Establishing a sense of urgency
2. Forming a powerful guiding coalition
3. Creating a vision
4. Communicating the vision
5. Empowering others to act on the vision
6. Planning for and creating short-term wins
7. Consolidating improvements and producing still more change
8. Institutionalizing new approaches
22
THE CHANGE PROCESS
Communicate
Vision
Skills
Incentives
Resources
Structure
Execution
Plan
Strategic
Change
Skills
Incentives
Resources
Structure
Execution
Plan
Confusion
Incentives
Resources
Structure
Execution
Plan
Stress
Resources
Structure
Execution
Plan
Gradual
Change
Structure
Execution
Plan
Frustration
Execution
Plan
Conflict
Skills
Skills
Incentives
Skills
Incentives
Resources
Skills
Incentives
Resources
Source: A. Marcus, Management Strategy (New York: McGraw-Hill, 2004)
Structure
Chaos
23
TURNAROUND CAVEATS TO BEAR IN MIND
1
Because every turnaround is unique, each stage is not necessarily
distinguishable in every turnaround
2
The number of stages involved in each turnaround stage will depend on
the seriousness of the financial crisis facing a given company. The more
dire the trouble, the more stages the turnaround process will likely involve
3
The importance of each stage will vary from case to case. Sometimes, for
instance, analysis will be more important than action, whereas the opposite
will be true in other cases
4
A company can find itself involved in more than one stage at a time.
Stages can overlap, and some tasks may affect more than one stage
5
The length of time required to address each stage is not only fluid but can
vary greatly. The major factors in determining the amount of time entailed by
each stage include the size of the company and the severity of its financial
straits. Addressing every stage in the process may take 12 to 36 months
24
STAGES IN THE TURNAROUND PROCESS
Stages
Objectives
and Action
Items
Management
Change
Evaluation
Emergency
Stabilization
Return-toNormal
• Select new
• Can it
• Survival
• Enhance
• Seek
top management team
• Weed out
impediments
• Select a
turnaround
survive?
• Identify
strategy
• Develop
profitability
• Positive cash • Restructure
flow
business to
increase ROI
profitable
growth
• Build
competitive
strengths
• Raise cash
plan
• Determine • Take charge
nature of
turnaround
• Get control of
cash
Source: Adapted from Thomas D. Hays, III, CTP, Certified Turnaround Professional, Nachman Hays Brownstein
25