Chapter 13: Preparing for and Evaluating the Challenges of Growth
CHAPTER 13
PREPARING FOR AND EVALUATING THE
CHALLENGES OF GROWTH
LEARNING OBJECTIVES
1.
Describe how firms can properly prepare for growth.
2.
Discuss the six most common reasons firms pursue growth.
3.
Explain the importance of being able to manage the stages of growth.
4.
Describe the challenges of firm growth, particularly those of adverse selection and
moral hazard.
CHAPTER OVERVIEW
This chapter focuses on the important topic of preparing for and evaluating the challenges
of growth. It is the first of two chapters that focus on firm growth. The chapter begins
with a section focused on preparing for growth, and includes sections on appreciating the
nature of business growth, staying committed to a core strategy, and planning for growth.
The chapter then focuses on the reasons for growth. The chapter transitions to a section
on managing growth. The chapter ends with a discussion on challenges of growth,
including a discussion of the managerial capacity problem and the day-to-day challenges
of growing a firm.
CHAPTER OUTLINE
I. Preparing for Growth
A. Appreciating the Nature of Business Growth
1. Not All Businesses Have the Potential to Be Aggressive Growth Firms
2. A Business Can Grow Too Fast
3. Business Success Doesn’t Always Scale
B. Staying Committed to a Core Strategy
C. Planning for Growth
II. Reasons for Growth
A. Capturing Economies of Scale
B. Capturing Economies of Scope
C. Market Leadership
D. Influence, Power, and Survivability
E. Need to Accommodate the Growth of Key Customers
F. Ability to Attract and Retain Talented Employees
III. Managing Growth
A. Knowing and Managing the Stages of Growth
1. Introduction Stage
2. Early Growth Stage
Chapter 13: Preparing for and Evaluating the Challenges of Growth
3. Continuous Growth Stage
4. Maturity Stage
5. Decline Stage
IV. Challenges of Growth
A. Managerial Capacity
B. Day-to-Day Challenges of Growing a Firm
1. Cash Flow Management
2. Price Stability
3. Quality Control
4. Capital Constraints
CHAPTER NOTES
I. Preparing for Growth
1. Not all businesses have the potential to be aggressive growth firms.
2. A business can grow too fast.
3. Business success doesn’t always scale.
a. Unfortunately, the very thing that makes a business successful might
suffer as the result of growth.
B. Staying Committed to a Core Strategy
C. Planning for Growth
II. Reasons for Growth
Chapter 13: Preparing for and Evaluating the Challenges of Growth
A. Capturing Economies of Scale
1. Economies of scale are generated when increasing production lowers the
average cost of each unit produced.
B. Capturing Economies of Scope
1. Economies of scope are similar to economies of scale, except the advantage
comes through the scope (or range) of a firm’s operations rather than from its
scale of production.
C. Market Leadership
1. Market leadership occurs when a firm holds the number one or the number
two position in an industry or niche market in terms of sales volume.
2. Many firms work hard to achieve market leadership, to realize economies of
scale and economies of scope, and to be recognized as the brand leader.
D. Influence, Power, and Survivability
1. Larger businesses usually have more influence and power than smaller firms
E. Need to Accommodate the Growth of Key Customers
1. Sometimes firms are compelled to grow to accommodate the growth of a key
customer.
F. Ability to Attract and Retain Talented Employees
1. It is natural for talented employees to want to work for a firm that can offer
opportunities for promotion, higher salaries, and increased levels of
responsibility.
2. Growth is a firm’s primary mechanism to generate promotional opportunities
for employees.
III. Managing Growth
A. Knowing and Managing the Stages of Growth
1. Introduction Stage—This is the start-up phase where a business determines
Chapter 13: Preparing for and Evaluating the Challenges of Growth
a. Adverse selection means that as the number of employees a firm needs
increases, it becomes increasingly difficult for it to find the right
employees, place them in appropriate positions, and provide adequate
supervision.
b. Moral hazard means that as a firm grows and adds personnel, the new
hires typically do not have the same ownership incentives as the original
founders, so the new hires may not be as motivated as the founders to put
in long hours or may even try to avoid hard work.
B. Day-to-Day Challenges of Growing a Firm
1. Cash Flow Management. As discussed in Chapters 8 and 10, as a firm grows,
it requires an increasing amount of cash to service its customers. Growth
2. Price Stability. If firm growth comes at the expense of a competitor’s market
share, a price war can result.
3. Quality Control. Firm growth is typically accomplished by an increase in firm
4. Capital Constraints. Capital constraints are an ever-present problem for
growing firms.
BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING
What Went Wrong?
1.
If you were the owner or manager of a restaurant, would you have used Dishero’s
service? Why or why not?
Answer: This is an opinion question and so students’ opinions may differ. It is
important to consider what Dishero offers to a restaurant: photographs of menu
items. In this day and age, photography is not a rare skill and most anybody can
take a good photo using an error-proof device like a smartphone or a camera.
What Dishero offered was a high-quality photograph. It is obvious that Dishero’s
service would appeal to only a select few restaurants. We don’t know the price for
Chapter 13: Preparing for and Evaluating the Challenges of Growth
Answer: Options 1 and 2 listed in the case – dropshipping and working with a
fulfillment company – are good options for a company that wants to focus on its
core activities of product sales and R&D. This way, the firm doesn’t have to invest
in a non-core activity such as distribution.
3.
RedStag Fulfillment (www.redstagfulfillment) is a start-up fulfillment service that
maintains fulfillment locations in several U.S. cities. Spend some time studying
RedStag’s website. Describe the fulfillment services that RedStag could offer an
online company that sells running shoes and apparel.
Answer: This is a good question for an individual or group assignment. The
website has a 2-minute video that introduces the company and the various features
of its services. The “What We Do” tab at the top scrolls down to describe its three
types of fulfillment services.
4.
Skip ahead to Chapter 14 and read the “Opening Profile” feature, which focuses on
FilterEasy. According to the feature, is FilterEasy a dropshipper, does it use a
fulfillment service, or does it maintain warehouses and fulfill its own orders?
Explain why you think FilterEasy made the choice it did regarding fulfillment and
shipping.
Answer: The second-to-last paragraph of the case indicates that FilterEasy
purchased two small filter delivery services. This obviously increases its
subscriber base, giving it more orders to fulfill. While the feature does not
explicitly say so, order fulfillment (in this case, timely order fulfillment) is
FilterEasy’s core business and so it does it in-house.
REVIEW QUESTIONS
13-1.
What is sustained growth? Why is it important?
Answer: Sustained growth is defined as growth in both revenues and profits
over an extended period of time. Sustained growth is important for a number of
reasons. Depending on a firm’s individual circumstances, growth may be
important for one or more of the following reasons:
Economies of scale
Economies of scope
Market leadership
Influence, power, and survivability
Need to accommodate the growth of key customers
Ability to attract and retain talented employees
13-17.
Why is price stability such an important issue for a firm entering a period of
rapid growth?
Answer: If firm growth comes at the expense of a competitor’s market share, a
price war can result. Normally, no one benefits from a price war other than the
customer.
13-18.
According to the chapter, one of the most difficult challenges involved with
rapid growth is quality control. Why is this so?
Answer: Firm growth is typically accomplished by an increase in firm activity.
This means that a firm must handle more service requests and paperwork and
contend with more customers, stakeholders, and vendors. If a firm can’t build
its infrastructure fast enough to handle the increased activity, quality control
will usually suffer.
13-19.
In what stage or stages of the organizational life cycle are capital constraints
most prevalent?
Answer: The need for capital is typically the most prevalent in the early growth
and continuous growth stages of the organizational life cycle.
13-20.
What are the differences between entrepreneurial services and managerial
services?
Answer: Entrepreneurial services generate new market, product, and service
ideas, whereas managerial services administer the routine functions of the firm
and facilitate the profitable execution of new opportunities.
APPLICATION QUESTIONS
13-21.
Pete Martin just purchased a copy of Inc. magazine’s annual issue that ranks the
top 500 fastest-growing privately owned companies in America. Pete was
amazed by some of the stories that were told in different articles appearing in
the magazine and as a result, is more encouraged than ever to start his own art
restoration firm. Pete believes his firm can grow 100 percent or more per year.
He is ready to cash out his savings and get started. Is Pete starting this venture
with realistic expectations? If not, what should his expectations be?
Answer: Most students will say that Pete is not starting out with realistic
expectations. The majority of firms do not grow at an accelerated pace. As
detailed in the chapter, it’s important for Pete to realize (1) not all businesses
have the potential to be aggressive growth firms and (2) business success
doesn’t always scale. Pete may have a profitable and excellent business, but it
doesn’t really solve a big problem (usually necessary for a business to grow
Chapter 13: Preparing for and Evaluating the Challenges of Growth
YOU BE THE VC 13.1
Company: Double Robotics (www.doublerobotics.com)
Business Idea: Design and manufacture a telepresence robot that allows someone to
remotely inhabit the body of the robot and have the freedom to roam around an office
building, school, or other facility even though the person inhabiting the body of the robot
is hundreds or thousands of miles away.
You Be the VC Scorecard
Double Robotics
(www.doublerobotics.com)
Score/Comments
1 2 3 4 5
Double Robotics was founded by David Cann and Marc
DeVidts. Cann is a former independent iOS developer
for Disney, ABC News, and many start-ups. Previously
lead software developer at BattleBots, DeVidts is an
electrical/embedded systems engineer. He is a former
product development engineer for Syntheon.
Double Robotics went through the Y Combinator
accelerator program in 2012.
1 2 3 4 5
The strength of Double Robotics’ opportunity is hard to
assess. It seems like an elegant solution to the exact
problem it solves (as described in the pitch). But how
many businesses would actually buy this solution is
unknown. There are also emerging alternative products
that solve the same problem that Double Robotics is
trying to solve. Videoconferencing platforms are now
readily available for tablets and mobile devices. That
makes videoconferencing more mobile and convenient
than people sitting in a room talking to each other on a
video screen via an application such as Skype. It’s our
sense that Double Robotics may find applications where
its solution works best, but not at scale. As a result, we
see it as a fairly small opportunity.
Chapter 13: Preparing for and Evaluating the Challenges of Growth
The global robotics industry is growing at a rate of more
than 10 percent per year. This includes robotics in all
sectors, including manufacturing. It is not known how
fast the industry for personal robotics, such as the
product build by Double Robotics, is growing. The
video conferencing industry is strong, which roughly
solves the same problem that Double Robotics is trying
to solve (but perhaps not as elegantly).
1 2 3 4 5
Double Robotics has a strict retail business model. It
sells its devices and as far as we can tell there are no
additional revenue streams that it gleans from its
customers.
3.00/5.00
Decision: We would not fund this firm. Although the demo videos that Double Robotics
has posted on its Web site are impressive, we see the company’s opportunity as relatively
small. Its management team is also fairly inexperienced. The company’s product may be
the best solution in a specific setting, but video conferencing is now available on almost
all platforms and the majority of use cases can be accommodated inexpensively via these
options. We wish the Double Robotics folks well, but will not be investors.
YOU BE THE VC 13.2
Company: Savioke (www.savioke.com)
Business Idea: Create a hotel delivery robot that will deliver snacks and amenities to
hotel guests, freeing hotel staff to focus on other guest needs.
You Be the VC Scorecard
Savioke
(www.savioke.com)
Score/Comments
1 2 3 4 5
Steve Cousins is the founder and CEO of Savioke. He
Chapter 13: Preparing for and Evaluating the Challenges of Growth
includes key people in engineering, robotics, operations,
and finance. The team appears quite capable of driving
growth in the firm.
1 2 3 4 5
The opportunity is moderate to high. Savioke’s flagship
product is Relay, the delivery robot. As the case points
out, presently the opportunity is in the hotel industry,
particularly in the area of room service. We don’t know
where else Relay can be used.
1 2 3 4 5
While industrial robotics is an established field, robotics
at the intersection of businesses and consumers, such as
the room service situation, is still emerging. It still
remains to be seen if the price point is attractive enough
for the product to be used for consumer interface.
1 2 3 4 5
As the case points out, 12 hotels in the San Francisco
Bay area and Los Angeles use it and so far they have
made over 12,000 successful deliveries. The adoption
rate is still low, which means the jury is still out on the
product’s value proposition. Only the large hotels can
afford Relay and large hotels often differentiate via
customer service.
4.0/5.0
CASES
Case 13.1
13-34.
There is a discussion early in this chapter about the need to prepare for
growth. What actions did Scott Norton and Mark Ramadan take that
demonstrate their commitment to trying to fully understand growth and its
ramifications for their firm?
Answer: As illustrated throughout the case, Norton and Ramadan focused
intently on the three aspects of preparing for growth highlighted in the
chapter: Appreciating the Nature of Business Growth, Staying Committed to
a Core Strategy, and Planning for Growth.
In regard to appreciating the nature of growth, Sir Kensington grew
deliberately, using the technology adoption life cycle as a guide. In regard to
staying committed to a core strategy, Norton and Ramadan recognized Sir
Kensington’s competitive advantages, and made sure to maintain those
advantages through the course of the company’s growth. Finally, in regard to
planning for growth, the case clearly emphasizes that Sir Kensington’s
growth was pursued in a thoughtful and conscientious manner.
13-35.
We noted in this chapter that core competencies are essentially what a firm
does particularly well. What are the core competencies of the firm Sir
Kensington’s? How sustainable are these core competencies?
Answer: Sir Kingston’s core competencies are product quality, product
positioning, branding, and bottle design and labeling. Most students will
argue that these core competencies are sustainable.
13-36.
Look at Figure 13.2, which shows the organizational life cycle. In which of
these stages is Sir Kensington’s located? To what issues do Sir Kensington’s
founders need to be particularly sensitive in this stage?
Answer: Most students will argue that Sir Kensington’s is in the continuous
growth stage of the product life cycle. The major issues that the founders of
Sir Kensington’s need to be sensitive to in this stage are:
The need for structure and more formal relationships
The need for additional resources to fuel growth
The need for additional products to expand into new markets
The possibility of acquiring smaller firms
Expanding in areas that leverage the business’s core competencies
Discerning whether the current management team is sufficient