Chapter Five

Managing Growth and transaction

Preparing for the launch of the venture

E
ntrepreneurship and the actual entrepreneurial decisions
have resulted in several million new businesses being
started throughout the world. Indeed, millions of
ventures are formed despite recession, inflation, high interest
rates, and lack of infrastructure, economic uncertainty and the
high probability of failure.

The entrepreneurial decision process entails a movement from

something to something— a movement from a present life style
to forming a new enterprise.

To leave a present live-style to create something new comes from

a negative force--disruption. Many companies are formed by
people who have retired, moved, or been fired. Another cause of
disruption is completing an educational degree.

The decision to start a new company occurs when an individual

perceives that forming a new enterprise is both desirable and
possible.

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Although the desire of new venture formation derived from the
individual’s culture, subculture, family, teachers and peers needs
to be present before any action is taken, the second feature
necessary centers around this question “What makes it possible to
form a new company?”

Formal education and previous business experience give a

potential entrepreneur the skills needed to form and manage a
new enterprise. Although educational systems are important in
providing the needed business knowledge, individual will tend to
be more successful in forming in fields in which they have
worked. The government also contributes by providing the
infrastructure to help a new venture.

The market must be large enough and the entrepreneur must have
the marketing know-how to put together the entire package.

Finally, financial resources must be readily available. Although

most start-up money comes from personal savings, credit, and
friends, but there is often a need for additional capital. Risk-
capital availability plays an essential role in the development and
growth of entrepreneurial activity.

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 5.1. Managing early growth of venture

I. RECORD KEEPING

It is necessary to have good records for effective control and for

tax purposes. The entrepreneur should be comfortable and able to
understand what is going on in the business. With software
packages, much of the record keeping can be maintained on a
personal computer. The goals of a good record keeping system
are to identify key incoming and outgoing revenues that can be
effectively controlled.

Sales (Incoming Revenue)

It is useful to have knowledge about sales by customer both in

terms of units and dollars. The entrepreneur of a retail store might
try to identify the profile of the type of customer that patronizes
the store. Retailers also like to have information on specific
customers. Credit card purchases can be tracked for information
on the type and amount of merchandise purchased. An Internet
venture can maintain purchase history data on the types of
produces purchased. Customers’ e-mail addresses can be
requested so the customer can be notified of sales. Some Internet
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firms have established a free membership as a means of following
up. In a service venture, records would need to be maintained on
when a customer paid their monthly fee. As cash flow problems
are the most significant cause of new venture failure, good
payment records are necessary.

Record keeping of payments can either be handled by a computer

software package or a simple card file system. If payments are
late beyond a reasonable time, it may be necessary to hire a
collection agency, but only as a last resort.

Expenses/Costs (Outgoing Revenue)

Records of expenses are easily maintained through the checking

account. It is good business practice for the entrepreneur to use
checks as payment for all expenses in order to maintain records
for tax purposes.

Canceled checks provide proof of payment. In the early stage, it

may be desirable to make all payments on time to establish
credibility with suppliers. The entrepreneur should maintain
information about employee either in a software program or in a

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card file. It may be necessary to maintain records on all assets
owned by the business.

Other Records

The entrepreneur should maintain information about employees

either in a software program or in a card file. Records on all
assets owned may be needed. With a good record keeping system
it is easy to maintain controls over cash disbursements, inventory,
and assets.

II. RECRUITING AND HIRING NEW EMPLOYEES

The entrepreneur will generally need to establish procedures and

criteria for hiring new employees. Advertising in local
newspapers and referrals from friends and associates is most
effective for entry-level positions. For senior management the
most effective strategy is networking with friends and business
associates. Personnel agencies may also be considered if there are
no other effective options. Once resumes have been collected
some basis of determining each candidate’s strengths should be
made.

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Some criteria must be used in the resume evaluation. Factors such
as education, prior experience, entrepreneurial activities, and
interests can be used to assess candidates. From the initial
screening of resumes, a few candidates can be invited in for an
interview. Most firms use an interview form with critical factors
listed for evaluating the interview candidates. The goal should be
to hire not only the best candidate but also someone who will
perform well in the entrepreneurial environment and provide a
long-term solution to the available position.

The interview: The interviewer should ask all of his or her

questions at the beginning of the interview. It allows the
interviewer to evaluate the candidate’s behavior. It avoids talking
too much and not listening. Upon completion of the interview, the
firm should be sure to check all of the candidate’s references.

III. MOTIVATING AND LEADING THE TEAM

1. The entrepreneur will usually be a role model for any other

employees.
2. It is important that the founder assume the role of leader to
the management team and employees.
3. Communication with managers and employees is one of the
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 most important leadership qualities
The entrepreneur will usually be a role model for any other
employees.

Good work ethic will go a long way toward achieving financial

and emotional success. During the early stages employees need
incentives to remain committed and loyal to the long run success
of the new venture.

It is important that the founder assume the role of leader to

the management team and employees.

Leadership is also influencing and inspiring others in the

organization to strive to meet the mission of the venture. Below
are some behaviors that can exhibit the leadership qualities
necessary for the new venture. Set an example with an ethical set
of values for other managers and employees. Show respect and
concern for the personal well-being of employees. Don’t try to do
everything yourself. Recognize the diversity of employees and
how they should be treated. Encourage and praise others in the
organization when deserved. Provide incentives and awards for
quality work effort and new ideas. Recognize the importance of
employees having fun at their jobs. Be aware of the need for
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future strategic planning. Communication with managers and
employees is one of the most important leadership qualities.

IV. FINANCIAL CONTROL

The entrepreneur will need some knowledge of how to provide

appropriate controls to ensure that projections and goals are met.
Financial skills are needed for the entrepreneur to manage during
early years. The cash flow statement, income statement, and
balance sheet are key areas needing careful management and
control. Some financial skills are necessary for the entrepreneur
to manage the venture during the early years.

Managing Cash Flow

An up-to-date assessment of cash position, such as a monthly

cash flow statement, is needed. The cash flow statement may
show the actual amounts next to the budgeted amounts. It is
useful for adjusting the pro forma and indicating potential cash
flow problems. A cash flow crisis can occur suddenly and
unexpectedly. Cash flow analysis can also involve sensitivity
analysis: for each monthly expected cash flow the entrepreneur
can use a +/-5% that would provide a pessimistic and optimistic

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cash estimate. For the very new venture it may be necessary to
prepare a daily cash sheet. Comparison of budgeted or expected
cash flows with actual cash flows can provide an assessment of
potential cash needs and indicate possible problems in the
management of assets and control of costs.

The growth of a business firm is similar to that of a human being

who passes through the stages of infancy, childhood, adulthood,
and old age. An enterprise may be considered growing when
there is a permanent increase in its sales turnover, assets; volume
of output, etc. business growth is natural and ongoing process.
Many business firms started small and have become big through
continuous growth. But growth may be restricted by constraints
of market demand, finance, technology, management skills, etc.
Need for Growth
In modern business, very few firms remain static for long. Most
of the firms are in a state of continued flux, either expanding or
contracting but always changing like time. Business firms grow
on account of several factors. The important motives which drive
business firms towards growth are the advantages of growth
which are described below:

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 Survival: severe competition forces a firm to grow and gain
competitive strength.
 Economies of scale: large scale operations provide several
economies in production, marketing, finance, and
management.
 Expansion of market: increase in demand for goods and
services have led business firms to expand in size.
Population explosion and transportation led to widening of
markets which in turn resulted in mass production.
 Owner’s mandate: the owner of a company gets the
ultimate benefit of growth in the form of higher dividends
and rise in the market value of shareholdings. Therefore,
they may direct the management to ensure growth of the
company through continuous plugging back of profits
instead of distributing the entire earnings.
 Technology: business firms also grow in order to reap the
benefits of modern technology.
 Prestige and power: some business people have a lust for
economic and social power. Big business commands power
and respect.

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  Government policy: generally, business firms operate under
a plethora of government controls. Government may provide
several incentives in the form of subsidies and tax
concessions to industrial units in backward areas and those
producing goods for export purposes. A firm may grow to
face government controls or to secure these incentives.
 Self-sufficiency: some firms grow to become independent in
terms of marketing of raw materials or marketing of
products.

7.3 NEW VENTURE EXPANSION STRATEGIES AND

ISSUES

Types of Growth Strategies

Different firms may adopt different strategies in order to grow.
The main strategies for growth are as follows:
 Expansion  Franchising/
 Diversification Licensing
 Mergers  Sub-contracting
 Acquisition
Merger

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Merger is an external growth strategy. A merger means a
combination of two or more firms into one. It may occur in two
ways: 1) takeover or acquisition of one company by another, and
2) creation of new company by complete consolidation of two or
more units. The former is called absorption whereas the latter is
called amalgamation.
Types of mergers
Mergers are of four types:
1) Horizontal mergers: these take place when there is a
combination of two or more firms engaged in the same
production or marketing process. For instance, Brook Bond
and Lipton India Ltd. Merged together and formed a new
company ‘Brook Bond Lipton India Ltd.’ (BBIL).
2) Vertical mergers: it takes place when the combining firms
are complementary to each other either in terms of supply of
inputs or marketing of output. For example, a footwear
company may take-over a leather tannery.
3) Concentric mergers: when the combining firms are similar
either in terms of technology or marketing system there is
concentric merger.

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 4) Conglomerate mergers: it occurs when two unrelated firms
combine together, i.e., a footwear company combining with
a cement firm.
Advantages of mergers
Mergers are used due to the following reasons:
 A merger provides economies of large-scale operations
 Better utilization of funds can be made to increase profits
 There is possibility of diversification
 More efficient use of resources can be made
 Sick firms can be rehabilitated by merging them with strong
and efficient concerns.
 It is often cheaper to acquire an existing unit than to set up a
new one
 It is possible to gain quick entry into new lines of business
 It can provide access to scarce raw materials and
distribution network and managerial expertise.
Disadvantages of Mergers
Mergers are not always successful due to the following
drawbacks.
 The combined enterprise may be unwieldy. Effective
coordination and control becomes difficult. As a result
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 efficiency and profitability may decline.
 Mergers give rise to monopoly and concentration of
economic power, which often operate against the interest of
the society and the country.
Licensing
Under a licensing agreement, one firm permits another to
use its intellectual property for compensation designated as
royalty.
The property licensed may include:
Patents
Trademarks
Copyrights
Technology
Technical know-how
Specific business skills
Benefits and Costs of Licensing
Benefits
It requires neither capital investment nor detailed
involvement with foreign customers.
It capitalizes on research and development already
conducted.
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 It helps avoid host country regulations applicable to equity
ventures.
Costs
It is a very limited form of foreign market participation.
It does not guarantee a basis for future expansion.
The licensor may create its own competitor.

Key Reasons for Franchising/Licensing

 Saturated Domestic Markets
 Market Potential
 Financial Gain
Inter-firm Cooperation
A strategic alliance is an arrangement between two or more
companies with a common business objective.
To better compete, many companies form strategic alliances
with suppliers, customers, competitors, and companies in
other industries to achieve goals.
Reasons for inter-firm cooperation include:
Market development
To share risk or resources
To block and co-opt competitors
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Contractual Agreements

Strategic alliance partners may join forces for R&D,

marketing, production, licensing, cross-licensing, cross-
market activities, or outsourcing.

Contract manufacturing allows the corporation to separate

the physical production of goods from the R&D and
marketing stages.

Management contracts involve selling one’s expertise in

running a company while avoiding the risk or benefit of
ownership.

A turnkey operation is a contractual agreement that permits a

client to acquire a complete system following its completion.

Joint Ventures

A joint venture involves the participation of two or more

companies in an enterprise in which each party contributes
assets, has some equity, and shares risk.

The 3 reasons for establishing a joint venture are:

Government policy or legislation.

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 One partner’s needs for another partner’s skills.

One partner’s needs for another partner’s attributes or

assets.

The key to a joint venture is the sharing of a common

business objective.

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