Hobby Store Business Plan of Market
Growth
LAW 6003 - Business Law
University of Cincinnati
October 21, 2024
Executive Summary
Achieving a sustained market growth is a
major challenge that requires understanding
of various factors that affect a firm’s
operation. In this business plan, the focus
was on a hobby store that seeks to achieve
growth beyond the current market. The
report discusses how this firm should
prepare for growth, common reasons that
justifies the growth, the importance of
managing stages of growth, and challenges
that this firm may face in its effort to achieve
growth. The report also explains core
internal growth strategies, internal product-
growth strategies, international expansion
as a growth strategy, and different types of
external growth strategies. The report shows
that although there are numerous
challenges that a firm can face in its effort to
achieve growth, employing the right strategy
and having a team of skilled and dedicated
employees can enable this hobby store to
achieve its goal.
Introduction
The hobby and toy industry in North
America, especially in the United States and
Canada, has been growing rapidly. In
Canada, there are numerous companies
offering a wide range of products to meet
the needs of their clients. As the competition
gets stiff, it becomes essential for existing
players to find ways of meeting the needs of
their clients in the best way possible (Pepe,
2020). Achieving growth in such a highly
competitive market may be a challenge,
especially for small and medium-sized
companies. A firm must conduct a
comprehensive analysis of the market forces
to understand opportunities and threats. It
must then develop a unique plan of
overcoming the challenges while at the same
time taking advantage of the opportunities
that the market presents.
In this business plan, the discussion focuses
on how this hobby company can prepare for
and achieve growth in the market. Gupta
(2021) warns that without a carful plan for
growth, a company may end up using a
significant amount of resources without
achieving the intended goal. In such a case,
the company would face a major loss and it
may even lose its market share if appropriate
measures are not taken to address the
challenge. The company should not only
consider expanding to new markets but also
penetrating the existing one further in its
growth strategy. In this report, the
researcher looks at the unique strategies
that this firm can embrace to achieve the
desired growth while at the same time
ensuring that it meets the needs of its
current customers in the best way possible.
Preparing and for Market Growth
Preparing for Growth
It is critical for this company to have a clearly
defined plan on how to achieve growth in the
current competitive business environment.
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 firms examined in this book such
as Soul Cycle, Rent the Runway, and Casper,
among others, as examples of this.
Although there is some trial and error
involved in starting and growing any
business, the degree to which a firm
prepares for its future growth has a direct
bearing on its level of success. This section
focuses on three important things a business
can do to prepare for growth.
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. This point is affirmed by
contrasting the women’s clothing store
industry with the biotechnology industry.
From 2012 to 2017, the average growth rate
for women’s clothing stores in the United
States was negative (- 1.3 percent) while the
average growth rate for medical supplies’
companies was 2.8 percent. While there is
nothing wrong with starting and owning a
women’s clothing store, it is important to
have a realistic outlook of how fast the
business will likely grow. Even though an
individual women’s clothing store might get
off to a fast start, as it gets larger, its annual
growth will normally start to reflect its
industry norm.
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’ products out the door as
quickly as possible. The way to prevent this
from happening is to recognize when to put
the brakes on and have the courage to do it.
This set of circumstances played out early in
the life of The Pampered Chef, a company,
which sells kitchen utensils through home
parties. Just about the time the company
was gaining serious momentum, it realized
that it didn’t have a sufficient quantity of
products in its inventory to serve the busy
Christmas season. This reality posed a
serious dilemma.
The Pampered Chef couldn’t instantly
increase its inventory (its vendors were all
low in their own inventories and the
company was small, so it couldn’t make
extraordinary demands on its vendors), yet it
didn’t want to discourage its home
consultants from making sales or signing up
new consultants. One option was to institute
a recruiting freeze (on new home
consultants), which would slow the rate of
sales. Doris Christopher, the company’s
founder, remembers asking others for
advice. Most advised against instituting a
recruiting freeze, arguing that the lifeblood
of any direct sales organization is to sign up
new recruits. In the end, the company
decided to institute the freeze and slowed its
sales enough to fill all orders on time during
the holiday season. The freeze was lifted the
following January, and the number of The
Pampered Chef recruits soared. Reflecting
on the decision, Doris Christopher later
wrote:
Looking back, the recruiting freeze
augmented our reputation with our sales
force, customers, and vendors. People saw
us as an honest company that was trying to
do the right thing and not overestimating our
capabilities.
Other businesses have faced similar
dilemmas and have sometimes made the
right call, and other times haven’t. The
overarching point is that growth must be
handled carefully. As we emphasize
throughout this chapter, a business can only
grow as fast as its infrastructure allows.
Table 13.1 provides a list of 10 warning signs
that a business is growing too fast.
Table 13.1 10 Warning Signs That a Business
Is Growing Too Fast
• Borrowing money to pay for routine operating
expenses
• Extremely tight profit margins
• Over-stretched staff
• Declining product quality
• E-mail and text messages start going unanswered
• Customer complaints are up
• Employees dread coming to work
• Productivity is falling
• Operating in a “crisis” mode becomes the norm
rather than the exception
• Those working with the business’ financial
structure are starting to worry
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.” Businesses that are based on
providing high levels of individualized service
often do not 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. Its initial customers might find it
harder to get individualized service than it
once was and start viewing the company as
just another ordinary business.
There is also a category of businesses that
sell high-end or specialty products that earn
high margins. These businesses typically sell
their products through venues where
customers prioritize quality over price. These
businesses can grow, but only at a measured
pace. If they grow too quickly, they can lose
the “exclusivity” they are trying to project, or
can damage their special appeal. Fashion
clothing boutiques often limit the number of
garments they sell in a certain size or color
for a similar reason. Even though they know
they could sell more of a particular blouse or
dress, they deliberately limit their sales so
their customers don’t see each other
wearing identical items.
Reasons for Growth
It is necessary to discuss the most important
reasons for growth that should motivate the
management of this hobby company to
explore new markets. 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.
For example, when a firm develops a product
or service that satisfies a need for many
customers and orders roll in very quickly, it
must adjust quickly or risk faltering. In other
instances, a firm experiences unexpected
competition and must grow to maintain its
market share. This section examines six
primary reasons firms try to grow to increase
their profitability and valuation, as depicted
in Figure 13.1
• Capturing economies of scale.
Economies of scale are generated when
increasing production lowers the average
cost of each unit produced. Economies of
scale can be created in service firms as
well as traditional manufacturing
companies. This phenomenon occurs for
two reasons. First, if a company can get a
discount by buying component parts in
bulk, it can lower its variable costs per
unit as it grows larger. Variable costs are
the costs a company incurs as it
generates sales. Second, by increasing
production, a company can spread its
fixed costs over a larger number of units.
Fixed costs are costs that a company
incurs whether it sells something or not.
For example, in a manufacturing setting,
it may cost a company $10,000 per
month to air-condition its factory. The air
conditioning cost is fixed; cooling the
factory will cost the same whether the
company produces 10 or 10,000 units per
month. In a service setting, a hotel’s
registration areas, restaurants, and other
areas must be air conditioned regardless
of the number of rooms that have been
filled for a particular evening.
A related reason firms grow is to make use of
unused resources such as labor capacity and
a host of others. For example, a firm may
need exactly 2.5 full-time salespeople to fully
cover its trade area. Because a firm obviously
can’t hire 2.5 full-time salespeople, it may
hire 3 salespeople and expand its trade area.
Managing Growth
The management of this hobby store should
understand the importance of being able to
manage stages of 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. For example, a business
might project its next year’s sales and realize
it will need more people and additional
equipment to handle the increased
workload. The new equipment might need to
be purchased and the new people hired and
trained before the increased business
generates additional income. It’s easy to
imagine serious discussions among the
members of a new venture’s management
team trying to figure out how that will all
work out.
The reality is that a company must actively
and carefully manage its growth for it to
expand in a healthy and profitable manner.
As a business grows and becomes better
known, there are normally more
opportunities that present themselves, but
there are more things that can go wrong,
too. Many potential problems and
heartaches can be avoided by prudently
managing the growth process. This section
focuses on knowing and managing the stages
of growth. The final section in this chapter
focuses on a related topic- the challenges of
growth.
• 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 in Figure 13.2
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.
Figure 13.2 Organizational Life Cycle
• Introduction stage. This is the start-up
phase where a business determines what
its strengths and core capabilities are and
starts selling its initial product or service.
It’s a very “hands-on” phase for the
founder or founders, who are normally
involved in every aspect of the day-to-
day life of the business. The business is
typically very non-bureaucratic with no
(or few) written rules or procedures. The
main goal of the business is to get off to
a good start and to try to gain
momentum in the marketplace.
The main challenges for a business in the
introduction stage are to make sure the
initial product or service is right and to start
laying the groundwork for building a larger
organization. It is important to not rush
things. This sentiment is affirmed by the
growth pattern of Nest Labs, the subject of
Case 11.1. Nest sold a single product, the
Nest Learning Thermostat, for two years
before its second product, the Nest Protect,
which is a smoke and carbon monoxide
detector, was introduced. The company
needed two years to scale its operations and
management team before it was ready to
add a second product and accelerate its
growth. In regard to laying the groundwork
to build a larger organization, many
businesses use the introduction stage to try
different concepts to see what works and
what doesn’t, recognizing that trial and error
gets harder as a business grows. It’s
important to document what works and start
thinking about how the company’s success
can be replicated when the owner isn’t
present or when the business expands
beyond its original location.
This young entrepreneur sells women’s
clothing online. She started by hand tailoring
many of the garments she sold. Her ability to
grow her business will depend in part on her
willingness to step back from hand-tailoring
clothes and move into a more managerial
role.
• Early growth stage. A business’s early
growth stage is generally characterized
by increasing sales and heightened
complexity. The business is normally still
focused on its initial product or service
but is trying to increase its market share
and might have related products in the
works. The initial formation of policies
and procedures takes place, and the
process of running the business will start
to consume more of the founder’s or
founders’ time and attention.
For a business to be successful in this stage,
two important things must take place. First,
the founder or owner of the business must
start transitioning from his or her role as the
hands-on supervisor of every aspect of the
business to a more managerial role. As
articulated by Michael E. Gerber in his
excellent book The E-Myth Revisited, the
owner must start working “on the business”
rather than “in the business.” The basic idea
is that early in the life of a business, the
owner typically is directly involved in
building the product or delivering the service
that the business provides. As the business
moves into the early growth stage, the
owner must let go of that role and spend
more time learning how to manage and build
the business. If the owner isn’t willing to
make this transition or doesn’t know it needs
to be made, the business will never grow
beyond the owner’s ability to directly
supervise everything that takes place, and
the business’ growth will eventually stall.
The second thing that must take place for a
business to be successful in the early growth
stage is that increased formalization must
take place. The business has to start
developing policies and procedures that tell
employees how to run it when the founders
or other top managers aren’t present. This is
how franchise restaurants run so well when
they’re staffed by what appears to be a
group of teenagers. The employees are
simply following well-documented policies
and procedures. This task was clearly on the
mind of Emily Levy, the founder of EBL
Coaching, a tutoring service for children who
are struggling in school or trying to
overcome disabilities, when she was asked
by Ladies Who Launch (a support network
for female entrepreneurs) early in the life of
her business about her growth plans:
My future goals include continuing to spread
EBL Coaching’s programs nationally, using
our proprietary materials and self-contained
multisensory methods. I have already
developed a series of workbooks, called
“Strategies for Success,” addressing specific
study skills strategies, that are being used in
a number of schools across the country. The
real challenge will be figuring out how to
replicate our programs while maintaining
our high quality of teaching and personalized
approach.
• Continuous growth stage. The need for
structure and more formal relationships
increases as a business moves beyond its
early growth stage and its pace of growth
accelerates. The resource requirements
of the business are usually a major
concern, along with the ability of the
owner and manager to take the firm to
the next level. Often the business will
start developing new products and
services and will expand to new markets.
Smaller firms may be acquired, and the
business might start more aggressively
partnering with other firms. When
handled correctly, the business’s
expansion will be in areas that are related
to its strengths and core capabilities, or it
will develop new strengths and
capabilities to complement its activities.
The toughest decisions are typically made in
the continuous growth stage. One tough
decision is whether the owner of the
business and the current management team
have the experience and ability to take the
firm any further. This scenario played out for
Rachel Ashwell, the founder of Shabby Chic,
a home furnishing business. Ashwell
expanded her company to five separate
locations, inked a licensing deal with Target,
wrote five how-to books related to her
business, and hosted her own television
show on the Style Network before
concluding that her business had stalled. Her
choice was to continue running the business
or find more experienced management to
grow it further. She opted for the latter,
which reignited the company’s growth.
The importance of developing policies and
procedures increases during the continuous
growth stage. It’s also important for a
business to develop a formal organizational
structure and determine clear lines of
delegation throughout the business. Well-
developed policies and procedures lead to
order, which typically makes the process of
growing a business more organized and
successful.
• Maturity stage. A business enters the
maturity stage when its growth slows. At
this point, the firm typically focuses more
intently on efficiently managing the
products and services it has rather than
expanding in new areas. Innovation
slows. Formal policies and procedures,
although important, can become an
impediment if they are too rigid and
strict. It’s important that the firm
continues to adapt and that the
founders, managers, and employees
remain passionate about the products
and services that are being sold. If this
doesn’t happen, a firm can easily slip into
a no-growth situation.
A well-managed firm that finds its products
and services are mature often looks for
partnering or acquisition opportunities to
breathe new life into the firm. For example,
Coca-Cola, a firm in the maturity stage of its
life cycle, has a long history of acquisitions.
Among other purchases, it acquired Minute
Maid in 1960, the Indian cola brand Thums
Up in 1993, the Odwalla brand of fruit juices,
smoothies, and bars in 2001, Fuze Beverages
and Glaceau in 2007, Honest Tea in 2008 and
2011, a minority interest in Monster
Beverage in 2014, and Unilever’s Soy
Beverage Brand in 2016. If a company does
grow organically while in the maturity stage,
it normally focuses on the “next generation”
of products it already sells rather than
investing in new or related products or
services.
• Decline stage. It is not inevitable that a
business enter the decline stage and
either deteriorate or die. Many American
businesses have long histories and have
thrived by adapting to environmental
change and by selling products that
remain important to customers.
Eventually all businesses’ products or
services will be threatened by more
relevant and innovative products. When
this happens, a business’ ability to avoid
decline depends on the strength of its
leadership and its ability to appropriately
respond. A firm can also enter the decline
stage if it loses its sense of purpose or
spreads itself so thin that it no longer has
a competitive advantage in any of its
markets. A firm’s management team
should be aware of these potential
pitfalls and guard against allowing them
to happen.
A framework that is similar to the
organizational life cycle is the technology
adoption life cycle, which is suited primarily
for technology firms that are introducing
disruptive innovations to the market. The
technology life cycle is associated with the
concept of “crossing the chasm,” which
explains why some technology products
reach mainstream markets while others
don’t. An explanation of the technology life
cycle, the concept of “crossing the chasm,”
and an example of a start-up that
successfully crossed the chasm and reached
mainstream markets is provided in the
nearby “Savvy Entrepreneurial Firm”
feature.
• Savvy entrepreneurial firm. In 1991,
Geoffrey A. Moore, a lecturer and
management consultant, wrote an
influential book titled ‘Crossing the
Chasm’. The book became an instant
must-read for managers, entrepreneurs,
and investors. The book was updated in
2009 and again in 2014. It has been
described as the bible for understanding
why some technology-oriented start-ups
grow into large firms while others stall or
languish in terms of adoption and firm
growth.
The book’s premise is that there is a chasm
between the early adopters of a product (the
technology enthusiasts and visionaries) and
the early majority (the pragmatists). The key
insight is that to cross the chasm, firms must
first dominate a niche of early adopters and
expand from a position of strength. The
concept is related to the technology
adoption life cycle. The stages in the
technology adoption life cycle are
innovators, early adopters, early majority,
late majority, and laggards. Start-up
products initially appeal to “innovators,”
who are people who like to try new things
but are seldom willing to spend much. Then
come the early adopters, or visionaries, who
are willing to take a chance on a new product
if it solves a burning problem. After the early
adopters come the early majority, which is
the largest segment. The early majority will
only buy if a product is complete and is
heavily recommended by others. If it’s not
recommended, they won’t buy, regardless of
how well a product suits their needs. Next is
the late majority, which buys only after a
product has become the standard. The
laggards, who bring up the rear, rarely buy.
The chasm is hard to cross. Ironically, it is not
the early adopters who convince the early
majority to buy. In fact, the early majority
typically mistrusts the enthusiasm of
visionaries. They start buying when
credibility is established and momentum
within their own group starts to build. In his
book, Moore suggests techniques to
successfully appeal to the early majority, and
cross the chasm, including issues pertaining
to a firm’s target market, its positioning
strategy, its marketing strategy, and a
number of other important factors. It’s well
worth the time to read the book to learn the
techniques and capture the subtleties.
Salesforce.com is an example of a company
that has crossed the chasm. Prior to
Salesforce.com, software was a product that
was sold on discs that clients would install on
their computers. The software would then
need to be integrated into the clients’
system, which typically cost more than the
software itself. By the time the software was
installed, there were often updates
available. Many clients would forgo installing
the updates, at least for a period of time, to
simply avoid the additional hassle and
expense of installing them.
Salesforce.com introduced a better way. Its
better way was software-as-a-service, later
abbreviated as SaaS. The idea was that
instead of selling software on discs to be
installed on a client’s computers, there
would be only one copy of the software,
running on Salesforce.com computers,
which multiple users could access
simultaneously via the Internet. The sales
pitch was compelling. By adopting
Salesforce.com’s solution, a client would no
longer incur the costs and headaches
involved with installing, updating, and
maintaining software.
What’s interesting is the way Salesforce.com
managed the rollout of the product and how
the firm eventually crossed the chasm. In
regard to the rollout, the company picked a
single market to go after, salespeople, and
no one else. There was nothing in the
product for marketing, customer service, or
any other division in a company.
Salesforce.com focused exclusively on the
United States as its target market, partly to
stay close to its customer. The firm also
chose to initially target tech-savvy industries.
The result was a product designed to achieve
a singular objective—helping salespeople
make their quota. As a result, salespeople
loved it. And because they loved it, they told
other salespeople about it, and adoption
grew virally. The number of early adopters
grew. Credibility was built as the product
was displayed at tradeshows and was talked
about in mainstream media. Eventually,
companies such as Merrill Lynch saw the
merits of the service and signed on.
Salesforce.com crossed the chasm and
started appealing to the early majority and a
wider number of users.
The irony of the Salesforce.com story, which
is the essence of Moore’s insight, is that by
picking a single niche market, and
establishing sufficient credibility that the
early majority noticed, Salesforce.com was
able to cross the chasm faster than it would
have if it had created a much more robust
product initially and tried to appeal to a
broader cross-section of markets.
Challenges of Growth
The hobby company needs to identify and
address challenges that may affect its
growth, particularly those of adverse
selection and moral hazard. 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’ 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. As a business grows
and takes market share from rival firms,
there will be a certain amount of retaliation
that takes place. This is an aspect of
competition that a business owner needs to
be aware of and plan for. Competitive
retaliation normally increases as a business
grows and becomes a larger threat to its
rivals. 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. In her thoughtful
and seminal 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 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. This
knowledge leads to the expansion of a
firm’s productive opportunity set, which
is the set of opportunities the firm feels it
is capable of pursuing. The opportunities
might include the introduction of new
products, geographic expansion,
licensing products to other firms,
exporting, and so on. The pursuit of these
new opportunities causes a firm to grow.
Penrose points out, however, that there is a
problem with the execution of this simple
logic. The firm’s administrative framework
consists of two kinds of services that are
important to a firm’s growth-
entrepreneurial services and managerial
services. 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
quickly hire new managers to remedy the
shortfall. 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 their
firms. When a firm’s managerial resources
are insufficient to take advantage of its new
product and services opportunities, the
subsequent bottleneck is referred to as the
managerial capacity problem.
As the entrepreneurial venture grows, it
encounters 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. The faster a firm grows, the less
time managers have to evaluate the
suitability of job candidates and the higher
the chances are that an unsuitable candidate
will be chosen. Selecting “ineffective” or
“unsuitable” employees increases the
venture’s costs. 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. To
make sure the new hires are doing what they
are employed to do, the firm will typically
hire monitors (i.e., managers) to supervise
the employees. This practice creates a
hierarchy that is costly and isolates the top
management team from its rank-and-file
employees.
The basic model of firm growth articulated
by Penrose is shown in Figure 13.3 while
Figure 13.4 shows the essence of the growth-
limiting managerial capacity problem. Figure
13.4 indicates that the ability to increase
managerial services is not friction free. It is
constrained or limited by (1) the time
required to socialize new managers, (2) how
motivated entrepreneurs and/or managers
are to grow their firms, (3) adverse selection,
and (4) moral hazard.
Figure 13.3 Basic Model of Firm Growth.
Source: Based on material in E. T. Penrose,
The Theory of the Growth of the Firm (New
York: Oxford University Press, 1959).
Figure 13.4. The Impact of Managerial
Capacity. Source: Based on material in E. T.
Penrose, The Theory of the Growth of the
Firm (New York: Oxford University Press,
1959).
The reality of the managerial capacity
problem is one of the main reasons that
entrepreneurs and managers worry so much
about growth. Growth is a generally positive
thing, but it is easy for a firm to overshoot its
capacity to manage growth in ways that will
diminish the venture’s sales revenues and
profits. For firms that sell products online,
one decision they’ll need to make, which has
a bearing on the amount of managerial
capacity they need to maintain in-house, is
the manner in which they’ll fulfill their
orders. This topic is covered in the nearby
“Partnering for Success” feature.
• Partnering for success. It is necessary to
discuss the choices for fulfilling orders for
an online company. Imagine the
following. You go to an e-commerce site
and buy a pair of running shoes. You’re
anxious to get the shoes because the
shoes you have are worn out. The shoes
arrive in three days. You take the shoes
out of the box, which has the name of the
online company from which you bought
the shoes on it. You quickly glance at the
order form in the box, which also has the
name and logo of the website you bought
the shoes from. If someone asked you
where you thought the shoes were
shipped from, you’d probably say a
warehouse owned by the online
company you bought the shoes from.
Actually, you’d have no way of knowing
where the shoes were shipped from. As
shown below, there are three ways that
online businesses fulfill orders and ship
products. Each choice has pluses and
minuses. Two of the three choices
involve partnering with other companies.
Option #1: Partner with drop shippers. Drop
shipping is a distribution strategy in which
online retailers do not maintain inventory,
but instead when they get an order, they
pass the order on to a manufacturer,
wholesaler, or other retailer who fulfills the
order. Here’s how it works. An online site
that sells running shoes, for example, takes
an order. It then electronically transmits the
order to the appropriate shipper, such as
New Balance. New Balance then packages
and ships the item, usually in a day or so. The
product is shipped in a box with the online
retailer’s name and logo, and the buyer
never knows the difference. The advantage
of drop shipping, from the online retailer’s
point of view, is that it doesn’t need to
maintain warehouses or employ packaging
and shipping personnel. It also doesn’t need
to anticipate demand or get stuck with
outdated merchandise. The disadvantage is
that profit margins are reduced. The online
retailer must share the profits from each
order with one or more drop shippers.
Option #2. Partner with a logistics company.
Many online companies partner with
fulfillment companies that handle their
warehousing, packaging, and shipping for
them. Amazon Fulfillment, Shipwire, and
Rakuten Super Logistics are examples of
fulfillment services. Here’s how they work.
An online company offers a certain number
of products for sale. Those products are
shipped by the manufacturer or
manufacturers to the fulfillment company.
The fulfillment company then receives, tags,
and stores the online company’s inventory.
When the online company receives an order,
the order is electronically transferred to the
fulfillment company. The fulfillment
company then pulls the items from the
online company’s inventory, places them in
a box, and ships them to the customer. The
box will look like it came directly from the
online company. The fulfillment company
will also handle returns. Similar to drop
shipping, the advantage of this approach is
that the online company doesn’t need to
maintain warehouses or employ packaging
and shipping personnel. The disadvantage is
that there is a cost for the service the
fulfillment company provides.
Option #3: Fulfill your own orders. Some
companies fulfill their own orders. For
example, Riffraff, the women’s clothing
company that is discussed in Chapter 1:
“Opening Profile,” has a brick-and-mortar
store in Fayetteville, Arkansas. Adjacent to
the store is a warehouse, where the
company stores its inventory and fulfills all of
its online orders. The manufacturers of the
products Riffraff sells deliver Riffraff’s
inventory directly to its warehouse. When an
order is placed online, Riffraff employees
pull the merchandise from shelves in the
warehouse, place it in a box, and ship it to
the customer. The advantage of this
approach is tighter quality control in that
Riffraff controls the process. Its employees,
rather than a drop shipper’s employees or
the employees of a fulfillment company,
handle its merchandise, package it, and ship
it to the customer. Its employees also handle
customer returns. The disadvantage is that
the firm must maintain a warehouse and
employee packaging and shipping personnel.
Each of the three approaches has pluses and
minuses, so there is no one best choice.
Many companies fulfill their own orders
when they’re first starting out, because the
founders may have more time than money.
Also, companies that want their products
packaged or shipped in a unique way may
find that it works best for them to do it
themselves. Conversely, if a company has a
broad inventory, drop shipping may be the
best choice. E-Bags, for example, is an online
seller of luggage, backpacks, and travel
accessories. It has literally thousands of
products listed. E-Bags uses a drop shipper,
largely because it would be cost prohibitive
for e-Bags to warehouse all the products it
sells. Finally, for a company that’s in a rapid-
growth mode, using a fulfillment company
may be the best choice. Using a fulfillment
company frees the management of the firm
to focus on product development, customer
acquisition, and scaling the company rather
than fulfillment and shipping.
Strategies of Sustaining Growth
Internal Growth Strategies
The hobby company will need to understand
core internal growth strategies that will be
necessary for its entrepreneurial 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. Many businesses, such as Nest
Labs, Sir Kensington’s, and Zappos, are
growing through internal growth strategies.
The distinctive attribute of internally
generated growth is that a business relies on
its own competencies, expertise, business
practices, and employees. Internally
generated growth is often called organic
growth because it does not rely on outside
intervention. Almost all companies grow
organically during the early stages of their
organizational life cycles.
Effective though it can be, there are limits to
internal growth. As a company enters the
middle and later stages of its life cycle,
sustaining growth strictly through internal
means becomes more challenging. Because
of this, the concern is that a company will
“hit the wall” in terms of growth and will
experience flat or even declining sales. This
can happen when a company has the same
product or service that it tries to sell to the
same list of potential buyers. Companies in
this predicament need to either expand their
client list, add new products or services to
complement their existing ones, or find new
avenues to growth. Sometimes companies
face this challenge through no fault of their
own. We list the distinct advantages and
disadvantages of internal growth strategies
in Table 14.1.
Table 14.1 Advantages and Disadvantages of
Internal Growth Strategies
Advantages
Disadvantages
Incremental, even-paced
growth. A firm that grows at
an even pace can continually
adjust to changing
environmental conditions to
Slow form of growth. In
some industries, an
incremental, even-paced
approach toward growth
does not permit a firm to
fine-tune its strategies over
time. In contrast, a firm that
doubles its size overnight
through a merger or
acquisition is making a much
larger commitment at a
single point in time.
Provides maximum control.
Internal growth strategies
allow a firm to maintain
control over the quality of its
products and services during
the growth process. In
contrast, firms that grow
through collaborative forms
of growth, such as alliances
or joint ventures, must share
the oversight function with
their business partners.
Preserves organizational
culture. Firms emphasizing
develop competitive
economies of scale fast
enough. In addition, in
some industries it may
not be possible for a firm
to develop sufficient
resources to remain
competitive. A high level
of merger and acquisition
activity typically
characterizes these
industries.
Need to develop new
resources. Some internal
growth strategies, such
as new product
development, require a
firm to be innovative and
develop new resources.
While internal innovation
has many positive
internal growth are not
required to blend their
organizational culture with
another organization. As a
result, the venture can grow
under the auspices of a
clearly understood, unified
corporate culture.
Encourages internal
entrepreneurship. Firms
that grow via internal growth
strategies are looking for
new ideas from within the
business rather than from
outsiders. This approach
encourages a climate of
internal entrepreneurship
and innovation.
Allows firms to promote
from within. Firms
emphasizing internal growth
attributes, it is typically
slow, expensive, and
risky.
Investment in a failed
internal effort can be
difficult to recoup.
Internal growth
strategies, such as new
product development,
run the risk that a new
product or service idea
may not sell, making it
difficult to recoup the
development cost the
firm incurred.
Adds to industry
capacity. Some internal
growth strategies add to
industry capacity, and
this can ultimately help
force industry
strategies have the
advantage of being able to
promote within their own
organizations. The
availability of promotional
opportunities within a firm is
a powerful tool for employee
motivation.
profitability down. For
example, a restaurant
chain that grows through
geographic expansion
may ultimately force
industry profitability
down by continuing to
open new restaurants in
an already crowded
market.
• 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.
For example, the average product life
cycle in the computer software industry
is 14 to 16 months, at the most. Just
thinking of how quickly we are
introduced to new computers, new
smartphones, and related products
highlights for us how rapidly products
change in this industry. Because of these
rapid changes, to remain competitive,
software companies must always have
new products in their pipelines. For some
companies, continually developing new
products is the essence of their
existence.
Although developing new products can
result in substantial rewards, it is a high-risk
strategy. The key is developing innovative
new products that aren’t simply “me-too”
products that are entering already crowded
markets. When properly executed though,
there is tremendous upside potential to
developing new products and/or services.
Many biotech and pharmaceutical
companies, for example, have developed
products that not only improve the quality of
life for their customers but also provide
reliable revenue streams. In many cases, the
products are patented, meaning that no one
else can make them, at least until the
patents expire.
Successful new products can also provide
sufficient cash flow to fund a company’s
operations and provide resources to support
developing additional new products. For
example, Amgen, a large and historically
profitable biotech company, has several
stellar pharmaceutical products, including
Enbrel and Neupogen. Enbrel is a tumor
necrosis factor (TNF) blocker that is used to
treat rheumatoid arthritis as well as some
related conditions; Neupogen helps prevent
infection in cancer patients undergoing
certain types of chemotherapy. These
products have provided the company
sufficient revenue to cover its overhead,
fund new product development, and
generate profits for an extended period of
time.
These young entrepreneurs are hoping to
grow their organic food start-up via a
smartphone app for their store. Here, they
are reading some reviews about their app
that customers posted. The keys to effective
new product and service development,
which are consistent with the material on
opportunity recognition (Chapter 2) and
feasibility analysis (Chapter 3), follow:
• Find a need and fill it: Most successful
new products fill a need that is presently
unfilled. “Saturated” markets should be
avoided. For example, in the United
States as well as in most developed
countries, consumers have a more-than-
adequate selection of appliances, tires,
credit cards, and cell phone plans. These
are crowded markets with low profit
margins. The challenge for entrepreneurs
is to find unfilled needs in attractive
markets and then find a way to satisfy
those unfilled needs.
• Develop products that add value: In
addition to finding a need and satisfying
it, the most successful products are those
that “add value” for customers in some
meaningful way.
• Get quality and pricing right: Every
product represents a balance between
quality and pricing. If the quality of a
product and its price are not compatible,
the product may fail and have little
chance for recovery. To put this in slightly
different terms, customers are willing to
pay higher prices for higher-quality
products and are willing to accept lower
quality when they pay lower prices.
• Focus on a specific target market: Every
new product and service should have a
specific target market in mind, as we
have highlighted throughout this book.
This degree of specificity gives the
innovating entrepreneurial venture the
opportunity to conduct a focused
promotional campaign and select the
appropriate distributors. The notion that
“it’s a good product, so somebody will
buy it” is a naïve way to do business and
often contributes to failure.
• Conduct ongoing feasibility analysis:
Once a product or service is launched,
the feasibility analysis and marketing
research should not end. The initial
market response should be tested in
customer interviews, focus groups, and
surveys, and incremental adjustments
should be made when appropriate.
There is also a common set of reasons that
new products fail, as articulated by e-Seller
Media and shown in Table 14.2. It behooves
entrepreneurs to be aware of these reasons
and to work hard to prevent new product
failures as a result of poor execution in these
areas.
Table 14.2. The Top 5 Reasons New Products
Fail
1. The potential market was overestimated.
2. Customers saw the product as too expensive.
3. The product was poorly designed.
4. The product was no different than the
competition’s (“me too” products).
5. The costs of developing the product line were
too high.
This discussion is a reminder that to achieve
healthy growth, whether via the
development of new products or another
means, a firm must sell a product or service
that legitimately creates value and has the
potential to generate profits along with
sales.
Additional Internal Product-Growth
Strategies
The management of the hobby company
should understand the additional internal
product-growth strategies that it can use.
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. It is necessary
to discuss each of these strategies to
understand how they can facilitate the
growth of a firm in a highly competitive
business environment.
• 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. For example,
smartphone companies routinely
increase revenues by coming out with
“new” versions of their existing phones.
A mistake many businesses make is not
remaining vigilant enough regarding
opportunities to improve existing products
and services. It is typically much less
expensive for a firm to modify an existing
product or service and extend its life than to
develop a new product or service from
scratch. For example, many women have set
aside the flat irons that they’ve used for
years to do their hair and have bought a
ceramic flat iron because they’re safer and
do a better job. Selling “improved” flat irons
is a much less expensive way for curling iron
manufacturers to grow sales than to develop
a completely new product.
• Increasing the market penetration of an
existing product or service. Market
penetration is the most common yet
highly challenging product growth
strategies. It involves selling the already
existing product in the existing market. It
means that the firm must find a way of
doing things differently in the same
market to attract more clients. The aim of
market penetration is to expand the
market share of the product in the
existing market. The fact that the product
remains unchanged means that the firm
must find unique promotional and selling
strategies. In terms of promotion, the
company must find a way of convincing
customers that the product offers
superior value (Henry, 2021). The
promotional message must emphasize
the unique attribute of the products,
compared with the existing ones, to
convince customers that it is the best
alternative. The promotional message
should be designed in a way that it aligns
with the needs and expectations of the
targeted audience.
One of the best way of penetrating the
existing market is to redefine the approach
that a firm uses to sell its products. It may be
necessary to introduce additional channels
of selling products to ensure that customers
can conveniently purchase the items. It may
involve creating additional retail outlets or
distributors to increase sales. Online sales
platforms are also creating unique avenues
of reaching out to clients. The company can
use established online retail platforms such
as Amazon.com or eBay to reach out to
online customers. It can also develop its
independent online sales platforms such as a
website or an application that customers can
use to order an item that they need.
Enhanced communication with clients is also
essential in enhancing growth of a firm.
Customer loyalty depends on many factors,
one of which is the ease with which they can
contact a firm and express their concerns or
ask specific questions before, during, and
after making their purchases. To expand the
market share, a firm will need to create a
communication system that allows
employees of a firm to engage customers
and address concerns that they may have
(Gupta, 2021). Social media platforms such
as Facebook and WhatsApp have emerged as
alternatives to traditional methods of
communication.
• Pursuing a product extension strategy.
When a product has reached the
maturity phase of the lifecycle, it is likely
that it may start facing the decline stage,
which may render it meaningless to
customers. Product extension strategy
focuses on deliberately extending the life
of the product at the maturity stage as
long as possible. The firm will focus on
making the product relevant to
customers despite the changing tastes
and preferences in the market. It may
involve rebranding the product, offering
discounts, or seeking new markets (Pepe,
2020). Seeking of a new market is always
advisable if the firm is convinced that the
product will be attracting to the targeted
clients. The firm will retain the current
attributes of the product, including its
brand, but focus on identifying new
markets. On the other hand, rebranding
focuses on changing the perception of
the current customers. The product
remains the same, but rebranding
creates the feeling that it is serving a new
purpose. When rebranding a product,
focus should be placed on the changing
preferences in the market, the targeted
audience, and the need new products are
meeting.
International Expansion
The hobby company can consider
international expansion as a growth
strategy. International expansion is another
common form of growth for entrepreneurial
firms. According to the SBA Office of
Advocacy, U.S. companies exported goods
and services worth a record $2.3 trillion in
2014. In terms of individual businesses, 97
percent of all U.S. exports are accounted for
by small businesses. A look at the world’s
population and purchasing power statistics
affirms the importance of international
markets for growth-oriented firms.
Approximately 95.6 percent of the world’s
population and 70 percent of its total
purchasing power are located outside the
United States. Influenced by these data, an
increasing number of the new firms
launched in the United States today are
international new ventures.
International new ventures are businesses
that, from inception, seek to derive
competitive advantage by using their
resources to sell products or services in
multiple countries. From the time they are
started, these firms, which are sometimes
called “global start-ups” or “born global,”
view the world as their marketplace rather
than confining themselves to a single
country. Becoming an international new
venture can be intentional or can result from
unsolicited orders from foreign buyers. For
example, u-Ship is an Austin, TX, company
that operates an online marketplace for
shipping services. Shortly after it launched in
2003, overseas customers started arranging
shipments via u-Ship’s website. U-Ship is
now in approximately 20 countries and has
an office in Amsterdam.
Although there is vast potential associated
with selling overseas, it is a fairly complex
form of firm growth. Of course, alert
entrepreneurs should carefully observe any
changes in purchasing power among the
world’s societies that may result from a
financial crisis like the one the world
experienced in 2008 and 2009. Let’s look at
the most important issues that
entrepreneurial firms should consider in
pursuing growth via international expansion.
• Assessing a firm’s suitability for growth
through international markets. Table
14.3 provides a review of the issues that
should be considered, including
management/organizational issues,
product and distribution issues, and
financial and risk management issues,
when a venture considers expanding into
international markets. If these issues can
be addressed successfully, growth
through international markets may be an
excellent choice for an entrepreneurial
firm. The major impediment in this area
is not fully appreciating the challenges
involved.
Table 14.3. Evaluating a Firm’s Overall
Suitability for Growth through International
Markets
Management/Organizational Issues
Depth of management commitment. A firm’s first
consideration is to test the depth of its management
commitment to entering international markets.
Although a firm can “test the waters” by exporting
with minimal risk, other forms of internationalization
involve a far more significant commitment. A properly
funded and executed international strategy requires
top management support.
Depth of international experience. A firm
should also assess its depth of experience in
international markets. Many
entrepreneurial firms have no experience in
this area. As a result, to be successful, an
inexperienced entrepreneurial firm may
have to hire an export management
company to familiarize itself with export
documentation and other subtleties of the
export process. Many entrepreneurial firms
err by believing that selling and servicing a
product or service overseas is not that much
different than doing so at home.
Interference with other firm initiatives. Learning how
to sell in foreign markets can consume a great deal of
entrepreneurs’ or managers’ time. Overseas travel is
often required, and selling to buyers who speak a
different language and live in a different time zone can
be a painstaking process. Overall, efforts must be
devoted to understanding the culture of the
international markets the venture is considering. Thus,
a firm should weigh the advantages of competing in
international markets against the time commitment
involved and the potential interference with other firm
initiatives.
Product and Distribution Issues
Product issues. A firm must first determine if its
products or services are suitable for overseas markets.
Many pertinent questions need to be answered to
make this determination. For example, are a firm’s
products subject to national health or product safety
regulations? Do the products require local service,
supplies, or spare parts distribution capability? Will the
products need to be redesigned to meet the
specifications of customers in foreign markets? Will
foreign customers find the products desirable? All
these questions must have suitable answers before
entering a foreign market. A firm can’t simply
“assume” that its products are salable and easily
serviceable in foreign countries.
External Growth Strategies
The management of this firm should
understand the different types of 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,
with the exception of franchising, which we
consider separately in Chapter 15.
An emphasis on external growth strategies
typically results in a more fast-paced,
collaborative approach toward growth than
the slower-paced internal strategies, such as
new product development and expanding to
foreign markets. External growth strategies
level the playing field between smaller firms
and larger companies. For example, Pixar,
the small animation studio that produced
the animated hits Toy Story, Finding Nemo,
and Piper, had a number of key strategic
alliances with Disney before Disney acquired
Pixar in 2006. By partnering with Disney,
Pixar effectively co-opted a portion of
Disney’s management savvy, technical
expertise, and access to distribution
channels. The relationship with Disney
helped Pixar grow and enhance its ability to
effectively compete in the marketplace, to
the point where it became an attractive
acquisition target. There are distinct
advantages and disadvantages to
emphasizing external growth strategies, as
shown in Table 14.5.
Table 14.5: Advantages and Disadvantages
of Emphasizing External Growth Strategies
Advantages
Disadvantages
• Reducing
competition.
Competition is
lessened when a firm
acquires a competitor.
This step often helps a
firm establish price
stability by eliminating
the possibility of
getting in a price war
with at least one
competitor. By turning
potential competitors
into partners and
through alliances and
franchises, the firm
can also reduce the
amount of
competition it
experiences.
• Incompatibility of top
management. The top
managers of the firms
involved in an
acquisition, an alliance,
a licensing agreement,
or a franchise
organization may clash,
making the
implementation of the
initiative difficult.
• Clash of corporate
cultures. Because
external forms of
growth require the
combined effort of two
or more firms,
corporate cultures
often clash, resulting in
• Getting access to
proprietary products
or services.
Acquisitions or
alliances are often
motivated by a desire
on the part of one firm
to gain legitimate
access to the
proprietary property
of another.
• Gaining access to new
products and markets.
Growth through
acquisition, alliances,
or franchising is a quick
way for a firm to gain
access to new
products and markets.
Licensing can also
frustration and subpar
performance.
• Operational problems.
Another problem that
firms encounter when
they acquire or
collaborate with
another company is that
their equipment and
business processes may
lack full compatibility.
• Increased business
complexity. Although
the vast majority of
acquisitions and
alliances involve
companies that are in
the same or closely
related industries, some
entrepreneurial firms
provide a firm an initial
entry into a market.
• Obtaining access to
technical expertise.
Sometimes,
businesses acquire or
partner with other
businesses to gain
access to technical
expertise. In franchise
organizations,
franchisors often
receive useful tips and
suggestions from their
franchisees.
• Gaining access to an
established brand
name. A growing
company that has
good products or
acquire or partner with
firms in unrelated
industries. This
approach vastly
increases the
complexity of the
combined business. The
firm acquiring a brand
or partnership with
another company to
gain access to its brand
may subsequently fail to
further develop its own
brand and trademarks.
This failure can lead to
an increased
dependency on
acquired or partnered
brands, reducing the
firm’s ability to establish
and maintain a unique
services may acquire
or partner with an
older, more
established company
to gain access to its
trademark and name
recognition.
• Economies of scale.
Combining two or
more previously
separate firms,
whether through
acquisition,
partnering, or
franchising, often
leads to greater
economies of scale for
the combined firms.
• Diversification of
business risk. One of
identity in the
marketplace.
• Loss of organizational
flexibility. Acquiring or
establishing a
partnership with one
firm may foreclose the
possibility of acquiring
or establishing a
partnership with
another one.
• Antitrust implications.
Acquisitions and
alliances are subject to
antitrust review. In
addition, some
countries have strict
antitrust laws
prohibiting certain
the principal driving
forces behind all forms
of collaboration or
shared ownership is to
diversify business risk.
business relationships
between firms.
• 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. This section
focuses on acquisitions rather than
mergers because entrepreneurial firms
are more commonly involved with
acquisitions than mergers.
One thing that often surprises entrepreneurs
is that growing a firm is as challenging as
starting one. Here, a group of three
entrepreneurs is evaluating the merits of a
strategic alliance with another young firm.
Acquiring another business can fulfill several
of a company’s needs, such as expanding its
product line, gaining access to distribution
channels, achieving economies of scale,
gaining access to technology that will
enhance its current offerings, or gaining
access to talented employees. In most cases,
a firm acquires a competitor or a company
that has a product line or a core competence
that it needs. For example, as described in
Case 11.1, in 2014 Nest Labs acquired
Dropcam, a maker of security cameras. Nest
upgraded and rebranded the cameras, which
are now called Nest Cam Indoor and Nest
Cam Outdoor, and added them to its product
line. Similarly, in 2017 Walmart bought three
relatively small ecommerce companies,
Moosejaw, Shoebuy, and Modcloth. Each of
the acquisitions gives Walmart access to new
online buyers, and better positions the retail
giant to compete more effectively with
Amazon.com for Internet shoppers.
Although it can be advantageous, the
decision to grow the entrepreneurial firm
through acquisitions should be approached
with caution. Many firms have found that
the process of assimilating another company
into their current operation is not easy and
can stretch finances to the brink.
• Finding an appropriate acquisition
candidate. If a firm decides to grow
through acquisition, it is very important
for it to exercise extreme care in finding
acquisition candidates. Many
acquisitions fail not because the
companies involved lack resolve, but
because they were a poor match to begin
with. There are typically two steps
involved in finding an appropriate target
firm. The first step is to survey the
marketplace and make a “short list” of
promising candidates. The second is to
carefully screen each candidate to
determine its suitability for acquisition.
The key areas to focus on in
accomplishing these two steps are as
follows:
o The target firm’s openness to the idea
of being acquired and its ability to
receive consent for its acquisition
from key third parties. The third
parties from whom consent may be
required include bankers, investors,
suppliers, employees, and key
customers.
o The strength of the target firm’s
management team, its industry, and
its physical proximity to the acquiring
firm’s headquarters.
o The perceived compatibility of the
target company’s top management
team and corporate culture with the
acquiring firm’s top management
team and corporate culture.
o The target firm’s past and projected
financial performance.
o The likelihood the target firm will
retain its key employees and
customers if acquired.
o The identification of any legal
complications that might impede the
purchase of the target firm and the
extent to which patents, trademarks,
and copyrights protect the firm’s
intellectual property.
o The extent to which the acquiring
firm understands the business and
industry of the target firm.
The screening should be as comprehensive
as possible to provide the acquiring firm
sufficient data to determine realistic offering
prices for the firms under consideration. A
common mistake among acquiring firms is to
pay too much for the businesses they
purchase. Firms can avoid this mistake by
basing their bids on hard data rather than on
guesses or intuition. Steps Involved in an
Acquisition Completing an acquisition is a
nine-step process, as illustrated in Figure
14.2
Figure 14.2. The Process of Completing the
Acquisition of another Firm
• Step 1. Schedule a meeting with the
target firm’s executives: The acquiring
firm should have legal representation at
this point to help structure the initial
negotiations and help settle any legal
issues. The acquiring firm should also
have a good idea of what it thinks the
acquisition target is worth.
• Step 2. Evaluate the feelings of the
target firm’s executives about the
acquisition: If the target is in a “hurry to
sell,” it works to the acquiring firm’s
advantage. If the target starts to get cold
feet, the negotiations may become more
difficult.
• Step 3. Determine how to most
appropriately finance the acquisition:
The acquiring firm should be financially
prepared to complete the transaction if
the terms are favorable.
• Step 4. Actively negotiate with the
target firm: If a purchase is imminent,
obtain all necessary shareholder and
third-party consents and approvals.
• Step 5. Make an offer if negotiations
indicate that doing so is appropriate:
Both parties should have the offer
reviewed by attorneys and certified
public accountants (CPAs) who represent
their interests. Determine how payment
will be structured.
• Step 6. Develop a noncompeting
agreement with key target firm
employees who will be retained: As
explained in Chapter 7, this agreement
limits the rights of the key employees of
the acquired firm to start the same type
of business in the acquiring firm’s trade
area for a specific amount of time.
• Step 7. Hire an attorney to prepare the
closing documents: Complete the
transaction.
• Step 8. As soon as practical, meet with
all employees to explain the acquisition:
A meeting should be held as soon as
possible with the employees of both the
acquiring firm and the target firm.
Articulate a vision for the combined firm
and ease employee anxiety where
possible.
• Step 9. Move forward with the plan for
adding the acquired firm to the
organization: In some cases, the
acquired firm is immediately assimilated
into the acquiring firm’s operations. In
other cases, the acquired firm is allowed
to operate in a relatively autonomous
manner.
Along with acquiring other firms to
accelerate their growth, entrepreneurial
firms are often the targets of larger firms
that are looking to enter a new market or
acquire proprietary technology. Selling to a
large firm is often the goal of an investor-
backed company, as a way of creating a
liquidity event to allow investors to monetize
their investment. Some entrepreneurs allow
their companies to be bought by larger firms
as a way of accelerating their growth. For
example in 2016, Justin’s Nut Butter, the
subject of Case 14.2, sold itself to Hormel,
primarily as a means of integrating itself into
Hormel’s worldwide distribution channels.
Hormel is now providing Justin’s access to
markets it could never have penetrated on
its own.
References
Gupta, S. (2021). Business organization and
management. SBPD Publications.
Henry, A. (2021). Understanding strategic
management. Oxford University Press.
Pepe, L. J. (2020). Planning for success:
Strategies that enhance the process of goal
attainment. Rowman & Littlefield Publishers.
