New Ventures, IPOs, and Renewal in Strategic Management

1. Chapter 12Considering New Venturesand Corporate Renewal

2. OBJECTIVES 1 Understand how new ventures, initial public offerings, and corporate renewal are related to strategic management 2 Understand entrepreneurship and the entrepreneurial 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

3. $27 million in sales • Traded over the counter • Possible acquisition target Urban Juice and Soda Co. formed in 1987 in Vancouver, Canada, by a former ski instructor Innovative practices • Unique venues (e.g., ski and skate 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

4. 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

5. “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 commercial value. Who would pay for a message sent to nobody in particular?” – David Sarnoff’s associates in response to his urging investmentin the radio in the 1920s “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 Fields’ idea ofstarting Mrs. Fields’ 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

6. Resources and capabilities Opportunity THE ENTREPRENEURIAL PROCESS Entrepreneur and entrepreneurial team

7. Resources and capabilities Opportunity Resources and capabilities Entrepreneur and entrepreneurial team Entrepreneur and entrepreneurial team 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

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

9. Contents • Executive summary • Company description • Products and services • Market analysis • Proprietary position • Marketing and sales plan • Management team • Operations plan • Finances • Brings together all elements of the venture • Assures stakeholders (e.g., investors) of venture plan • Forces entrepreneur to examine all facets of strategy THE BUSINESS PLAN

10. CORPORATE NEW VENTURING Companies that have done this well Established firm New venture • Merck • 3M • Motorola • Rubbermaid • Johnson & Johnson • Corning • General Electric • Raychem • Hewlett-Packard • Wal-Mart Idea

11. OBSTACLES CONFRONTING CORPORATE NEW VENTURES 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

12. NEW VENTURE DIVISIONS Existing Firm Incubator New venture Process Product Technology

13. THE INITIAL PUBLIC OFFERING (IPO) 2 Hires investment bank and estimates value of company 3 Files S-1 statement with SEC and other security commissions 1 Company decides it wants to tap public markets for investment capital 4 Prepares and distributes investor prospectus 5 Prices and sells shares (“Go public”)

14. 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 Pre-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

15. 0 ... they failed from foreseeable events Cause of failure Foreseeable 51 Not foreseeable 0 CORPORATE FAILURES A study of 51 failed organizations revealed Source: S. Finkelstein, Why Smart Executives Fail (New York: Portfolio Press, 2003)

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

17. External Internal INTERNAL CAUSES OF FAILURE Failure Strategy failure Management failure

18. 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

19. 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)

20. STAGES IN THE TURNAROUND PROCESS • ManagementChange • Return-to-Normal • Stages • Evaluation • Emergency • Stabilization • Objectives and Action Items • Select new TMT • 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 manager • 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

21. SUMMARY 1 Define new ventures, initial public offerings, and corporate renewal and describe how they are related to strategic management 2 Understand entrepreneurship and the entrepreneurial 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