Chapter 12 Considering New Ventures and Renewal

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Chapter 12Considering New Venturesand Renewal
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OBJECTIVES
Define new ventures, initial public offerings
(IPOs), and corporate renewal and describe how
they are related to strategic management
1
Understand entrepreneurship and the
entre-preneurial process
2
Describe the steps involved in new-venture
creation and corporate new venturing
3
Map out the stages leading up to an IPO
4
Understand the external and internal causes of
organizational failure
5
Outline an action plan for strategic change and
corporate renewal
6
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ENTREPRENEURSHIP AT JONES SODA
Innovative products

• Turkey and gravy flavored soda
• Jones WhoopAss energy drink
• Jones Naturals juices

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JONES SODA FINANCIALS AT A GLANCE
2004
2003
2002
2001
Sales ( millions)
20.1
18.6
23.3
27.5
Net income ( millions)
0.3
(1.2)
(1.7)
1.3
Employees
51
Headquarters
Seattle, Washington
Top management team
Peter Van Stolk, CEO Jennifer Cue, COO CFO
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ORTHODOXIES DEVELOP ALONG SEVERAL DIMENSIONS
All potentially create blind spots
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SOME ORTHODOXIES THAT HAVE CREATED BLIND SPOTS
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THE ENTREPRENEURIAL PROCESS
Entrepreneur and entrepreneurial team
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STARTING POINT
Strategies for Existing Firms
New Ventures
Opportunity
New ventures start with an opportunity
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ACTIVITIES IN NEW VENTURE CREATION
Idea
Business Plan
ExternalFinancing
New Product Launch
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THE BUSINESS PLAN

• Brings together all elements of venture
• Ensures stakeholder (e.g., investors) of venture
  plan
• Forces entrepreneur to examine all facets of
  strategy

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CORPORATE NEW VENTURING NEW VENTURE CREATION BY
AN ESTABLISHED FIRM
Companies that do this well include
Established firm
New venture

• Merck
• 3M
• Motorola
• Rubbermaid
• Johnson Johnson
• Corning
• General Electric
• Raychem
• HP
• Wal-Mart

Idea
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THREE OBSTACLES CORPORATE NEW VENTURES FACE
Lavish too many resources on new ventures
Resist challenging assumptions, work practices,
and skills
Try to mitigate false starts and failures so miss
out on learning experiences
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NEW VENTURE DIVISIONS AND BUSINESS INCUBATORS
Existing Firm
Incubator
New venture
Process
Product
Technology
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THE INITIAL PUBLIC OFFERING (IPO)
Hire investment bank and estimate value of company
File S-1 statement with SEC and other security
commissions
2
3
Company decides it wants to tap public markets
for invest-ment capital
1
Prepare and distribute investor prospectus
4
Price and sell share (Go public)
5
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MINIMUM COSTS OF GOING PUBLIC TO RAISE 25 MILLION
Pre-IPO costs over two years,

• 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
1,625,000

• Legal fees
• Preliminary/final prospectus printing
• Translation
• Investors relations
• Accounting
• Road show and preparations
• Initial stock exchange listing fee

150,000 100,000 30,000 40,000 50,000 50,000 10,000
430,000
Minimum IPO professional fees
Minimum IPO-Process Costs
2,055,000
Post-IPO costs every year thereafter,

• Investor relations and Web site
• Directors fees, travel costs, etc.,
• Directors liability insurance
• Corporate image, public relations
• Annual stock exchange fee
• Management/administration costs

100,000 100,000 50,000 50,000 5,000 100,000
Minimum Annual Post IPO-COSTS
405,000
Total Minimum Cost of a 25 million IPO
2,860,000
Source P. Downing, IPO Launch Fraught with
Perils, The Ottawa Citizen, High-Tech Report,
October 12, 1998
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CORPORATIONS FAIL FROM FORESEEABLE EVENTS
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A study of 51 failed organizations reveal ...
Source S. Finkelstein, why smart executives fail
(New York Portfolio press, 2003)
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EXTERNAL CAUSES OF FAILURE
Economic change
Competitive change
Social change
Failure
Technological change
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INTERNAL CAUSES OF FAILURE
Failure
Strategy failure
Management failure
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STRATEGIC CHANGE
Significant changes in resource-allocation
choices or business activities that align the
firms strategy with its vision, or changesto
the firms vision
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THE CHANGE PROCESS
Resources
Incentives
Skills
Structure
Execution Plan
Strategic Change
Communicate Vision
Resources
Incentives
Skills
Structure
Execution Plan
Confusion
Resources
Incentives
Structure
Execution Plan
Stress
Resources
Skills
Structure
Execution Plan
Gradual Change
Incentives
Skills
Structure
Execution Plan
Frustration
Resources
Incentives
Skills
Execution Plan
Conflict
Resources
Incentives
Skills
Structure
Chaos
Source A. Marcus, Management Strategy (New
York McGraw-Hill, 2004)
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HOW WOULD YOU DO THAT? JONES SODAIS JONES
SODA LIKELY TO FAIL?
Conclusion?
Test
Jones score
Explanation
Z-score Model
5 financial factors, when plugged into a formula,
give a score that indicates probability of failure
Gamblers Ruin Model
Net liquidation value (NLV) adjusted (net) cash
flow, and variation of adjusted cash flow
determine risk
Sustainable Growth Value
ROE x (1 - Dividend -Payout ratio)
Operating Leverage
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STAGES IN THE TURNAROUND PROCESS
ManagementChange
Return-to-Normal
Stages
Evaluation
Emergency
Stabilization
Objectives and Action Items

• Select new top manage-ment team

• Can it survive?

• Survival

• Enhance profitability

• Seek profitable growth

• Weed out impediments

• Identify strategy

• Positive cash flow

• Restructure business to increase ROI

• Build competitive strengths

• Select a turnaround

• Developplan

• Raise cash

• Determine nature of turnaround

• Take charge

• Get control of cash

Source Adapted from Thomas D. Hays, III, CTP,
Certified Turnaround Professional, Nachman Hays
Brownstein
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TURNAROUND CAVEATS TO BEAR IN MIND
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HOW WOULD YOU DO THAT? ISH
What would you do?/what did ISH do?
Stage 1 Changing management
In April 2002 ISH, formerly part of Deutsche
Telekom, which supplied 4 million German homes
with cable, was bleeding cash, losing money, and
in default of nearly EURO 2.7 billion
Stage 2 Situation analysis
Stage 3 Emergency action
Stage 4 Restructuring ISH
Stage 5 Normalcy and return to industry
leadership
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SUMMARY
Define new ventures, initial public offerings
(IPOs), and corporate renewal and describe how
they are related to strategic management
1
Understand entrepreneurship and the
entre-preneurial process
2
Describe the steps involved in new-venture
creation and corporate new venturing
3
Map out the stages leading up to an IPO
4
Understand the external and internal causes of
organizational failure
5
Outline an action plan for strategic change and
corporate renewal
6
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EXERCISE

• Brainstorm a set of 10 ideas that could lead to
  the startup of a new business.
• Screen your ideas by
• Greatest market demand
• Most attractive market structure and size
• Best profit margins
• Which of these screens caused most of the ideas
  to be discarded?
• What additional information would you need?
• Would an entrepreneurial or corporate setting
  have influenced your assessment of the
  opportunity? Why?