Chapter 12 Considering New Ventures and Renewal

Chapter 12Considering New Venturesand Renewal

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

$27 million in sales • Trade over the counter (OTC) • Possible acquisition target • Urban Juice and Soda Co. born in Vancouver, Canada in 1987 by a former ski instructor • Innovative practices • Unique venues (e.g., ski shops, tattoo parlors) • Outsourced distribution (e.g., contract packers, independent trucking companies) ENTREPRENEURSHIP AT JONES SODA • Innovative products • Turkey and gravy flavored soda • Jones WhoopAss energy drink • Jones Naturals juices

JONES SODA FINANCIALS AT A GLANCE • 2004 • 2003 • 2002 • 2001 • Sales ($ millions) • 27.5 • 20.1 • 18.6 • 23.3 • Net income ($ millions) • 1.3 • 0.3 • (1.2) • (1.7) • Employees • 51 • Headquarters • Seattle, Washington • Top management team • Peter Van Stolk, CEO Jennifer Cue, COO & CFO

Who the customer or end user is • The type of interface and interaction with the customer or end user • How benefit is defined and value is delivered • How product/service functionality is defined • What form the product/service should take • How processes are structured and managed • The “ideal” cost and pricing structure ORTHODOXIES DEVELOP ALONG SEVERAL DIMENSIONS • All potentially create blind spots

“This ’telephone’ has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us” • – Western Union internal memo, 1876 • “The wireless music box has no imaginable commer-cial value. Who would pay for a message sent to nobody in particular?” • – David Sarnhoff’s associates in response to his urgings for investmentin the radio in the 1920’s • There is no reason anyone would want a computer in their home” • – Ken Olson, President, Chairman and Founder of Digital EquipmentCorp., 1977 • “The concept is interesting and well-formed, but in order to earn better than a ‘C’, the idea must be feasible” • – A Yale University managementprofessor in response to Fred Smith’spaper proposing reliable overnightdelivery service. Smith went on tofound Federal Express Corp • “A cookie store is a bad idea. Besides, the market research reports say America likes crispy cookies, not soft and chewy cookies like you make” • – Response to Debbi Field’s idea ofstarting Mrs. Field’s Cookies • “There will never be a market in selling stock over the internet” • – David Komansky, Merrill LynchChairman & CEO, 1999 SOME ORTHODOXIES THAT HAVE CREATED BLIND SPOTS

Resources and capabilities • Opportunity THE ENTREPRENEURIAL PROCESS • Entrepreneur and entrepreneurial team

Resources and capabilities • Opportunity • Resources and capabilities • Entrepreneur and entrepreneurial team • Entrepreneur and entrepreneurial team • While strategy for existing firms begins with the assessment of resources and capabilities STARTING POINT • Strategies for Existing Firms • New Ventures • Opportunity • New ventures start with an opportunity

Opportunity ACTIVITIES IN NEW VENTURE CREATION • Idea • Business Plan • ExternalFinancing • New Product Launch

Contents • Executive summary: One to three pages highlighting all key points in a way that captures the interest of the reader. Stress the business concept here, not the numbers. It is the unique value proposition and business model that really matter • Company description: Provide a brief description of the company’s business, organization, structure and strategy. Provide a summary of how the company’s patents or licenses to patents are connected with the development and introduction of products • Products and services: Include a layman’s overview of how the company’s technology and patents relate to its products and services. Describe the products or services the company will sell, including a discussion of why people will want them, what problems they solve, and how much customers are likely to pay for them (i.e., the willingness to pay criteria) • Market analysis: Identifies the need for the product, the extent of that need, who the customers will be, and why they will buy your product. This section should also include a discussion of competitors or potential competitors and why the product will have a competitive advantage over their offerings. Include considerations of barriers to entry in this market • Proprietary position: If the new venture’s market position will rely on patents or licenses to patents, discuss how these patents will contribute to the company’s competitive position and whether other patents (competitors or otherwise) might limit the company’s ability to market its products. If similar products do not already exist, discuss the alternative means by which customers are likely to meet the needs the product addresses • Marketing and sales plan: Show how the company plans to attract and maintain customers. Discuss product pricing, promotion, and positioning strategy • Management team: Describe the management team with special emphasis on its track record at accomplishing tasks similar to those it will face in making the company successful. Investors place major emphasis on the management team, viewing it as the critical ingredient in catalyzing the growth of the company and responding to the unexpected • Operations plan: Describe how the day-to-day operations of the company will be organized and carried out to produce the products and services described above • Finances: Identify the capital that will be required to build the business and how it will be used. Include projections of revenues and expenses that show investors how they will get their money back and what return they can expect on their investment 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

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

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

NEW VENTURE DIVISIONS AND BUSINESS INCUBATORS • Existing Firm • Incubator • New venture • Process • Product • Technology

THE INITIAL PUBLIC OFFERING (IPO) 2 • Hire investment bank and estimate value of company 3 • File S-1 statement with SEC and other security commissions 1 • Company decides it wants to tap public markets for invest-ment capital 4 • Prepare and distribute investor prospectus 5 • Price and sell share (“Go public”)

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 • Minimum IPO professional fees • 430,000 • 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

0 • ... they failed from foreseeable events • Cause of failure • Foreseeable • 51 • Not foreseeable • 0 CORPORATIONS FAIL FROM FORESEEABLE EVENTS • A study of 51 failed organizations reveal ... • Source: S. Finkelstein, why smart executives fail (New York: Portfolio press, 2003)

External • Internal EXTERNAL CAUSES OF FAILURE • Economic change • Competitive change • Social change • Failure • Technological change

External • Internal INTERNAL CAUSES OF FAILURE • Failure • Strategy failure • Management failure

STRATEGIC CHANGE • Significant changes in resource-allocation choices or business activities that align the firm’s strategy with its vision, or changesto the firm’s vision

THE CHANGE PROCESS Communicate Vision Skills Incentives Resources Structure Execution Plan Strategic Change Skills Incentives Resources Structure Execution Plan Confusion Incentives Resources Structure Execution Plan Stress Skills Resources Structure Execution Plan Gradual Change Skills Incentives Structure Execution Plan Frustration Skills Incentives Resources Execution Plan Conflict Skills Incentives Resources Structure Chaos Source: A. Marcus, Management Strategy (New York: McGraw-Hill, 2004)

2.8 • ? • Liquidation value in-creased to $4.3 m from $2.4 m and net cash flow decreased to $18,000 from $266,000 • ? • In 2003, sustainable growth rate was 12.5% and actual growth 37% • ? • Gross margin • 7.25 • ? • = • Net margin HOW WOULD YOU DO THAT? – JONES SODAIS JONES SODA LIKELY TO FAIL? • Test • Explanation • Jones’ score • Conclusion? • Z-score Model • 5 financial factors, when plugged into a formula, give a score that indicates probability of failure • Gambler’s 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

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

1 Because every turnaround is unique, each stage is not necessarily distinguishable in every turnaround 2 The number of stages involved in each turnaround stage will depend on the seriousness of the financial crisis facing a given company. The more dire the trouble, the more stages the turnaround process will likely involve 3 The importance of each stage will vary from case to case. Sometimes, for instance, analysis will be more important than action, whereas the opposite will be true in other cases 4 A company can find itself involved in more than one stage at a time. Stages can overlap, and some tasks may affect more than one stage 5 The length of time required to address each stage is not only fluid but can vary greatly. The major factors in determining the amount of time entailed by each stage include the size of the company and the severity of its financial straits. Addressing every stage in the process may take 12 to 36 months TURNAROUND CAVEATS TO BEAR IN MIND

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 EURO2.7 billion Stage 2: Situation analysis Stage 3: Emergency action Stage 4: Restructuring ISH Stage 5: Normalcy and return to industry leadership

SUMMARY 1 • Define new ventures, initial public offerings (IPOs), and corporate renewal and describe how they are related to strategic management 2 • Understand entrepreneurship and the entre-preneurial process 3 • Describe the steps involved in new-venture creation and corporate new venturing 4 • Map out the stages leading up to an IPO 5 • Understand the external and internal causes of organizational failure 6 • Outline an action plan for strategic change and corporate renewal

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?

Chapter 12 Considering New Ventures and Renewal