CHAPTER 14
Strategies for Firm Growth

Internal Growth Strategies

Internal growth strategies involve efforts taken within the firm itself, such as new product development, other product-related strategies, and international expansion, for the purpose of increasing sales revenue and profitability.

New Product Development

New product development involves designing, producing, and selling new products (or services) as a means of increasing firm revenues and profitability. In many fast-paced industries, new product development is a competitive necessity.

Additional Internal Product-Growth Strategies

Along with developing new products, firms grow by improving existing products or services, increasing the market penetration of an existing product or service, or pursuing a product extension strategy.

Improving an Existing Product or Service

A business can often increase its revenue by improving an existing product or service enhancing quality, making it larger or smaller, making it more convenient to use, improving its durability, or making it more up-to-date. Improving an item means increasing its value and price potential from the customer’s perspective.

Increasing the Market Penetration of an Existing Product or Service

A market penetration strategy involves actions taken to increase the sales of a product or service through greater marketing efforts or through increased production capacity and efficiency. An increase in a product’s market share is typically accomplished by increasing advertising expenditures, offering sales promotions, lowering the price, increasing the size of the sales force, or increasing a company’s social media efforts.

Extending Product Lines

A product line extension strategies involves making additional versions of a product so that it will appeal to different clientele or making related products to sell to the same clientele. Firms also pursue product extension strategies as a way of leveraging their core competencies into related areas.

Geographic Expansion

Geographic expansion is another internal growth strategy. Many entrepreneurial businesses grow by simply expanding from their original location to additional geographic sites. This type of expansion is most common in retail settings.

International Expansion

International expansion is another common form of growth for entrepreneurial firms. International new venture are businesses that, from inception, seek to derive competitive advantage by using their resources to sell products or services in multiple countries.

Selling Overseas

Many entrepreneurial firms first start selling overseas by responding to an unsolicited inquiry from a foreign buyer. It is important to handle the inquiry appropriately and to observe protocols when trying to serve the needs of customers in foreign markets.

Foreign Market Entry Strategies

The majority of entrepreneurial firms first enter foreign markets as exporters, but firms also use licensing, joint ventures, franchising, turnkey projects, and wholly owned subsidiaries to start international expansion.

External Growth Strategies

External growth strategies rely on establishing relationships with third parties. Mergers, acquisitions, strategic alliances, joint ventures, licensing, and franchising are examples of external growth strategies. Each of these strategic options is discussed in the following sections.

Mergers and Acquisitions

Many entrepreneurial firms grow through mergers and acquisitions. A merger is the pooling of interests to combine two or more firms into one. An acquisition is the outright purchase of one firm by another. In an acquisition, the surviving firm is called the acquirer, and the firm that is acquired is called the target.

Licensing

Licensing is the granting of permission by one company to another company to use a specific form of its intellectual property under clearly defined conditions. Virtually any intellectual property a company owns that is protected by a patent, trademark, or copyright can be licensed to a third party. Licensing also works well for firms that create novel products but do not have the resources to build manufacturing capabilities or distribution networks, which other firms may already have in place.

Strategic Alliances

A strategic alliance is a partnership between two or more firms that is developed to achieve a specific goal. Various studies show that participation in alliances can boost a firm’s rate of patenting, product innovation, and foreign sales. Alliances tend to be informal and do not involve the creation of a new entity (such as in a joint venture).

Joint Ventures

A joint venture is an entity created when two or more firms pool a portion of their resources to create a separate, jointly owned organization. Gaining access to a foreign market is a common reason to form a joint venture. In these cases, the joint venture typically consists of the firm trying to reach a foreign market and one or more local partners.

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CHAPTER 13
Preparing for and Evaluating the Challenges of Growth

Preparing for Growth

Most entrepreneurial firms want to grow. Especially in the short term, growth in sales revenue is an important indicator of an entrepreneurial venture’s potential to survive today and be successful tomorrow. Growth is exciting and, for most businesses, is an indication of success. Many entrepreneurial firms have grown quickly, producing impressive results for their employees and owners as a result of doing so; consider Google, Dropbox, and Warby Parker, among others, as examples of this.

Appreciating the Nature of Business Growth

The first thing that a business can do to prepare for growth is to appreciate the nature of business growth. Growing a business successfully requires preparation, good management, and an appreciation of the issues involved. The following are issues about business growth that entrepreneurs should appreciate.

Not All Businesses Have the Potential to Be Aggressive Growth Firms

The businesses that have the potential to grow the fastest over a sustained period of time are ones that solve a significant problem or have a major impact on their customers’ productivity or lives. This is why the lists of fast-growing firms are often dominated by health care, technology, social media, and entertainment companies. These companies can potentially have the most significant impact on their customers’ businesses or lives.

A Business Can Grow Too Fast

Many businesses start fast and never let up, which stresses a business financially and can leave its owners emotionally drained. Sometimes businesses grow at a measured pace and then experience a sudden upswing in orders and have difficulty keeping up. This scenario can transform a business with satisfied customers and employees into a chaotic workplace with people scrambling to push the business’s product out the door as quickly as possible. 

Business Success Doesn’t Always Scale

Unfortunately, the very thing that makes a business successful might suffer as the result of growth. This is what business experts often mean when they say growth is a “two-edged sword.” For example, businesses that are based on providing high levels of individualized service often don’t grow or scale well. For example, an investment brokerage service that initially provided high levels of personalized attention can quickly evolve into providing standard or even substandard service as it adds customers and starts automating its services.

Staying Committed to a Core Strategy

The second thing that a business can do to prepare for growth is to stay committed to a core strategy. A firm’s core strategy is largely determined by its core competencies, or what it does particularly well. While this insight might seem self-evident, it’s important that a business not lose sight of its core strategy as it prepares for growth.

Planning for Growth

The third thing that a firm can do to prepare for growth is to establish growth-related plans. This task involves a firm thinking ahead and anticipating the type and amount of growth it wants to achieve. A business plan normally includes a detailed forecast of a firm’s first three to five years of sales, along with an operations plan that describes the resources the business will need to meet its projections.

Reasons for Growth

Although sustained, profitable growth is almost always the result of deliberate intentions and careful planning, firms cannot always choose their pace of 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. This section examines the six primary reasons firms try to grow to increase their profitability and valuation

Managing Growth

Many businesses are caught off guard by the challenges involved with growing their companies. One would think that if a business got off to a good start, steadily increased its sales, and started making money, it would get progressively easier to manage the growth of a firm. In many instances, just the opposite happens. As a business increases its sales, its pace of activity quickens, its resource needs increase, and the founders often find that they’re busier than ever. Major challenges can also occur.

Knowing and Managing the Stages of Growth

The majority of businesses go through a discernable set of stages referred to as the organizational life cycle. The stages, pictured below, include introduction, early growth, continuous growth, maturity, and decline. Each stage must be managed differently. It’s important for an entrepreneur to be familiar with these stages, along with the unique opportunities and challenges that each stage entails.

Challenges of Growth

There is a consistent set of challenges that affect all stages of a firm’s growth. The challenges typically become more acute as a business grows, but a business’s founder or founders and managers also become more savvy and experienced with the passage of time. The challenges illustrate that no firm grows in a competitive vacuum. This section is divided into two parts. The first part focuses on the managerial capacity problem, which is a framework for thinking about the overall challenge of growing a firm. The second part focuses on the four most common day-to-day challenges of growing a business.

Managerial Capacity

As an administrative framework, the primary purpose of a firm is to package its resources together with resources acquired outside the firm as a foundation for being able to produce products and services at a profit. As a firm goes about its routine activities, the management team becomes better acquainted with the firm’s resources and its markets.

Day-to-Day Challenges of Growing a Firm

Along with the overarching challenges imposed by the managerial capacity problem, there are a number of day-to-day challenges involved with growing a firm. The following is a discussion of the four most common challenges.

Cash Flow Management

As a firm grows, it requires an increasing amount of cash to service its customers. In addition, a firm must carefully manage its cash on hand to make sure it maintains sufficient liquidity to meet its payroll and cover its other short-term obligations.

Price Stability

If firm growth comes at the expense of a competitor’s market share, price competition can set in. The best thing for a small firm to do is to avoid price competition by serving a different market and by serving that market particularly well.

Quality Control

One of the most difficult challenges that businesses encounter as they grow is maintaining high levels of quality and customer service. As a firm grows, it handles more service requests and paperwork and contends with an increasing number of prospects, customers, vendors, and other stakeholders. If a business can’t build its infrastructure fast enough to handle the increased activity, quality and customer service will usually suffer.

Capital Constraints

Although many businesses are started fairly inexpensively, the need for capital is typically the most prevalent in the early growth and continuous growth stages of the organizational life cycle. The amount of capital required varies widely among businesses. Some businesses, like restaurant chains, might need considerable capital to hire employees, construct buildings, and purchase equipment. If they can’t raise the capital they need, their growth will be stymied.

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CHAPTER 12
The Importance of Intellectual Property

The Importance of Intellectual Property

Intellectual property is any product of human intellect that is intangible but has value in the marketplace. It is called “intellectual” property because it is the product of human imagination, creativity, and inventiveness.

Determining What Intellectual Property to Legally Protect

There are two primary rules of thumb for deciding if intellectual property protection should be pursued for a particular intellectual asset. First, a firm should determine if the intellectual property in question is directly related to its competitive advantage. The second primary criterion for deciding if intellectual property protection should be pursued is to determine whether an item has value in the marketplace.

The Four Key Forms of Intellectual Property

Patents, trademarks, copyrights, and trade secrets are the four key forms of intellectual property. We discuss each form of intellectual property protection in the following sections.

Patents

A patent is a grant from the federal government conferring the rights to exclude others from making, selling, or using an invention for the term of the patent. The owner of the patent is granted a legal monopoly for a limited amount of time. However, a patent does not give its owner the right to make, use, or sell the invention; it gives the owner only the right to exclude others from doing so.

Trademarks

A trademark is any word, name, symbol, or device used to identify the source or origin of products or services and to distinguish those products or services from others. All businesses want to be recognized by their potential clientele and use their names, logos, and other distinguishing features to enhance their visibility. Trademarks also provide consumers with useful information.

Copyrights

A copyright is a form of intellectual property protection that grants to the owner of a work of authorship the legal right to determine how the work is used and to obtain the economic benefits from the work. The work must be in a tangible form, such as a book, operating manual, magazine article, musical score, computer software program, or architectural drawing. If something is not in a tangible form, such as a speech that has never been recorded or saved on a computer disk, copyright law does not protect it.

Trade Secrets

Most companies, including start-ups, have a wealth of information that is critical to their success but does not qualify for patent, trademark, or copyright protection. Some of this information is confidential and needs to be kept secret to help a firm maintain its competitive advantage. An example is a company’s customer list.

Conducting an Intellectual Property Audit

The first step a firm should take to protect its intellectual property is to complete an intellectual property audit. This is recommended for all firms, regardless of size, from start-ups to mature companies. An intellectual property audit is conducted to determine the intellectual property a company owns.

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CHAPTER 11
Unique Marketing Issues

Selecting a Market and Establishing a Position

To succeed, a new firm must know who its customers are and how to reach them. A firm uses a three-step process to determine who its customers are.

Branding

A brand is the set of attributes—positive or negative—that people associate with a company. These attributes can be positive, such as trustworthy, innovative, dependable, or easy to deal with. Or they can be negative, such as cheap, unreliable, arrogant, or difficult to deal with. The customer loyalty a company creates through its brand is one of its most valuable assets.

The 4Ps of Marketing for New Ventures

Once a company decides on its target market, establishes a position within that market, and establishes a brand, it is ready to begin planning the details of its marketing mix.  Most marketers organize their marketing mix into four categories: product, price, promotion, and place (or distribution). For an obvious reason, these categories are commonly referred to as the 4Ps.

Product

A firm’s product, in the context of its marketing mix, is the good or service it offers to its target market. Technically, a product is something that takes on physical form, such as an Apple iPhone, a bicycle, or a solar panel.

Price

Price is the amount of money consumers pay to buy a product. It is the only element in the marketing mix that produces revenue; all other elements represent costs. Price is an extremely important element of the marketing mix because it ultimately determines how much money a company can earn.

Promotion

Promotion refers to the activities the firm takes to communicate the merits of its product to its target market. Ultimately, the goal of these activities is to persuade people to buy the product

Place (or Distribution)

Place, or distribution, encompasses all the activities that move a firm’s product from its place of origin to the consumer. A distribution channel is the route a product takes from the place it is made to the customer who is the end user.

Sales Process and Related Issues

A firm’s sales process depicts the steps it goes through to identify prospects and close sales. It doesn’t matter whether a firm is selling directly to customers or through intermediaries; it still has a process through which it makes sales. If it’s selling through an intermediary, like a distributor, it has to convince the distributor to carry its products and has to offer the distributor varying levels of support.

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