Entrepreneurship:

Successfully Launching
New Ventures, 1/e
Bruce R. Barringer
R. Duane Ireland

Chapter 13

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 Chapter Objectives
(1 of 2)

1. Explain the term “sustained growth.”

2. Describe the potential downsides to firm growth.
3. Discuss the six most common reasons firms pursue
growth.
4. Explain the advantages of having a scalable
business model.
5. Describe the basic idea behind benchmarking and
how benchmarking can be used to help a firm
execute a successful growth strategy.
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 Chapter Objectives
(2 of 2)

1. Describe the managerial capacity problem and how it

inhibits firm growth.
2. Discuss the day-to-day challenges of growing a firm.
3. Identify the three myths that surround firm growth.
4. Identify the most prevalent growth-related firm
attributes.
5. Describe the importance of having a commitment to
growth.

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 Growth: A Double-Edge Sword
(1 of 2)

• Nature of Firm Growth

– Most entrepreneurial firms want to grow. Especially in the
short run, growth in sales revenue is an important indicator
of an entrepreneurial venture’s potential to survive today
and be successful in the future.
• Growth is exciting and fast-paced and for most firms is an
indication of success.
– Growth, however, is a double-edge sword. It can threaten
the stability of a firm’s operations in every area, from
human resources to finance, if it is not managed properly.

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 Growth: A Double-Edge Sword
(2 of 2)

• Nature of Firm Growth (continued)

– Firms pursue growth deliberately. That is not to say,
however, that firms can always choose the pace of their
growth.
– A firm’s pace of growth is the rate at which it is growing
on an annual basis.
• Sometimes firms are forced into a high-growth mode sooner than
they would like. For example, when a firm develops a product or
service that meets such a pervasive need that orders roll in very
quickly, it must adjust quickly or risk faltering.

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 Reasons for Firm Growth
(1 of 2)

Reasons for Firm Growth

Reason for Growth Why This Reason May Motivate a Firm to Grow

Capturing Economies of Economies of scale occur when increasing production lowers

Scale the average cost of each unit produced.

A scalable business model is one in which increased revenues

Executing a Scalable cost less to deliver than current revenues, so profit margins
Business Model increase as sales go up. This is typically found in companies
that have large up-front costs but have products with small
per-unit variable costs.

Many firms work hard to achieve market leadership, to

Market Leadership realize economics of scale in production, and be
recognized as the brand leader.

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 Reasons for Firm Growth
(2 of 2)

Reasons for Firm Growth (continued)

Reason for Growth Why This Reason May Motivate a Firm to Grow

Larger businesses usually have more influence and power

Influence, Power, and than smaller firms in regard to setting standards for an
Survivability industry, getting a “foot in the door” with major customers
and suppliers, and garnering prestige.

Need to Accommodate Sometimes firms are compelled to grow to accommodate the

the Growth of Key growth of a key customer.
Customers

Ability to Attract and Growth is a firm’s primary mechanism to generate

Retain Talented promotional opportunities for employees.
Employees

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Benchmarking Against Successful Growth
Firms
(1 of 1)

• Benchmarking
– The basic idea behind benchmarking is that a firm can
improve the quality of an activity by identifying and
copying the methods of other firms that have been
successful in that area.
• For example, if a small electronics firm in the Midwest decided to
start exporting to Europe, it would be wise to identify other small
electronics firms in the Midwest that export to Europe so it could
study their methods and experiences.
• If the firm you try to “benchmark against” is not a direct or indirect
competitor, it will usually be willing to help.

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 Managerial Capacity Problem
(1 of 4)

• Managerial Capacity
– In her thoughtful book, The Theory of the Growth of the
Firm, Edith T. Penrose argues that firms are collections of
productive resources that are organized in an administrative
framework.
– As a firm goes about its routine activities, it recognizes
opportunities to grow.
– The problem with this is that firms are not always prepared
or able to grow, because of limited “managerial capacity."

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 Managerial Capacity Problem
(2 of 4)

• A Firm’s Administrative Framework

– A firm’s administrative framework consists of two kinds of
services that are important to firm growth.
• Entrepreneurial services generate new market, product, and service
ideas, while managerial services administer the routine functions of
the firm and facilitate the profitable execution of new
opportunities.
• However, the introduction of new product and service ideas
requires substantial managerial services (or managerial capacity) to
be properly implemented and supervised.
• This is a complex problem because if a firm has insufficient
managerial services to properly implement its entrepreneurial
ideas, it can’t grow.
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 Managerial Capacity Problem
(3 of 4)

• A Firm’s Administrative Framework (continued)

– Continuation From Previous Slide
• The reason a firm can’t quickly increase its managerial services to
accommodate new product or service ideas, is that it is expensive
to hire new employees, and it takes time for new managers to be
socialized into the firm’s culture, acquire firm-specific skills and
knowledge, and establish trusting relationships with other members
of the firm.
• When a firm’s managerial resources are insufficient to take
advantage of its new product and service opportunities, the
subsequent bottleneck is referred to as the managerial capacity
problem.

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 Managerial Capacity Problem
(4 of 4)

• Additional Challenges
– As a firm grows, it is faced with the dual challenges of
adverse selection and moral hazard.
• 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.
• 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 and may even try to avoid hard
work.

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Typical Challenges of Growing a Firm
(1 of 2)

Challenges

Challenge Explanation

As discussed in Chapters 7 and 9, as a firm grows, it requires

an increasing amount of cash to service its customers. Growth
Cash Flow usually increases rather than decreases the challenges involved
Management with cash flow management because an increase in sales means
that more cash will be flowing in and out of the firm.

If firm growth comes at the expense of a competitor’s market

Price Stability share, a price war can result. Because a price war typically helps
no one but the customer, any growth strategy should consider
competitors’ responses and their effect on price stability.

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Typical Challenges of Growing a Firm
(2 of 2)

Challenges

Challenge Explanation

Firm growth is typically accomplished by an increase in firm

activity. This means that a firm must handle more service
Quality Control requests and paperwork and contend with more customers and
vendors. If a firm does not increase its resources to manage
growth, then product or service quality may decline.

Capital Capital constraints are an ever-present problem for growing

Constraints firms. Growth increases rather than decreases the challenges
in this area.

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 Myths About Growth
(1 of 2)

Myth 1: Growth Companies are Myth 2: Rapid-Growth Firms Emerge

Predominately Technology and Health Only In Rapid-Growth Industries
Care Companies

Because so much attention has been Of course, rapid-growth firms do

paid to how quickly some well-
known technology and health-care
companies have grown, it is easy to
get the idea that growth companies
are primarily technology and health-
care. This is not necessarily the case.
exist in rapid-growth markets, but
there are many examples of firms in
fairly ordinary industries that have
maintained impressive growth rates.

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 Myths About Growth
(2 of 2)

Myth 3: To Grow Quickly, You Must

Have a First-Mover Advantage

As discussed in Chapter 3, a first-

mover advantage is not always
advantageous. Many firms have
grown quickly by capturing a first-
mover advantage, but many firms
have also growth quickly by entering
an industry later on.

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