All entries for March 2010
March 23, 2010
Question: Your Great Uncle died and left you a company that you have neither the time nor inclination to run –hence you want to sell. Set out the options for which type of buyer might be interested and the differences in likely value that they might place on the business. Conclude by deciding which buyer you hope will buy it and describe why.
My starting point would be to get an overview of the assets and check the financial statement of my late uncle's firm. It will give me an overview of the state of affairs and the economical conditions the firm is at present. My intention with the company is to sell it off since I do not have time nor interest in running this company.
I would start with the looking for options and interested parties that would like to invest in buying my late uncle's firm. It this regard there may be several options that I will describe in more detail below.
I would respect my uncle's wish to keep the company intact and will not sell it off in pieces. I will also look for options that will maintain the welfare and balance for the employees that are working for the firm. At the same time there will be my personal interest in harvesting the best best possible price for the company.
I could opt for partial harvest retaining some of the control and selling part of the business to an interested party. Same goes for private placement where I would keep a certain percentage and interest in business.
Ideally, strategic sale would be my most preferred option since it would be a complete business transaction where I get the value for selling the company and the new buyers protects and develops the firm that they are buying from me. In this sense, most of the employees remain protected thus making less tubulence internally. Another option would be financial sale which is acquistion by individual investor meaning that an individual buyer is taking over company. ESOP (Employee Stock Ownership Plan) is another good solution for selling the company, this time to employees themselves through the stock option plans. This will increasingly transfer the ownership to the employees themselves making them more loyal and motivated to achieve good results for the company. At the same time I would not like to stay behind with too many stocks since this will require that I involve my self to a greater extent in the company's state of affairs. Mergers and Acquisitions (M&A) may also be an interesting option that will give me financial benefits while utilising the company's potential in synergy with another firm.
Management Buy Out (MBO) may be another preferred option where the management buys the company out on the basis of company's future potential for earnings. For me this would be a good option although since 1980-ies and after DOT.COM bubble bursts it may prove difficult to such initiatives to get financing for such undertakings. Management Buy In (MBI) would be very much the same as MBO except that the management team is external to the company. Both options may be of interest since such acquisitions are motivated by the belief that the company has future potential and that there is a real value that can be further explored, which will ultimately secure me a good selling price.
Some less preferred options would be siphoning cash where taking money out of the business would impact its operating cash flow and may be damaging the company's ability to invest in R&D and expansion, which would ultimately decrease its market value although I would make some initial financial gains. Transfer of Ownership to another family member that is willing and hopefully able to take over the running of company. This option may and may not be successful depending on the ability, charisma and internal power politics and rivalry between family members. Initial Public Offering (IPO) is also not a very feasible option since these are mostly for big companies wiith good account records and they generally take too long and are not suitable for this type of family owned businesses.
Extracting most of the financial worth of the company will be the ultimate incentive for me. That would be the ultimate why as a reason for selling the company. At the same time I would try to keep the company in one piece and try to protect the employees as far as possible. Selling price would be dependent on many factors such as the industry, technology, company's economy and expansion possibilities, prospect for future earnings and profit.
Reviewing the options and the potential I would primarily go for strategic or financial sale with ESOP, MBI or MBO as potential good second options.
March 15, 2010
There is this opportunity to lead a new team that will introduce a new (or substantially amended) service. Conduct a self-assessment exercise as suggested in the notes and outline how your sectoral, managerial and personal skills match the service.
Being a predominantly sales and sales support person for more than 10 years it may be seen as a challenge for me to start working for delivery and development part of the business. In case of getting a new comission and having responsibility for a team of system developers which I found nice and friendly, but mentally remote from the way I see things and the World at large.
The fun part of this tasks would be in the creativity of finding new and more user friendly solutions connected to internet banking. These are including new ways of payment and added services that system developers are continously making and improving.
It is in many ways amazing bordering woodoo how the technologies applied work under the hood and that I in generall know very little about coding, Java, HTML programming, de-bugging and many other wonderful terms. Applying Bhide's (1996) 3 steps of Evaluation Process I would say that the motivation for doing the best job is:
1. Clear goals are important
My motivation was to bring the department to another level since such departments are often mismanaged and ineffective and usually led by "programmer-turned to-manager" people manager. Although my predecessor is probably an excellent techical resource there will be a lack of right skills to manage people or organise work. My goal would be to set targets for the department and all empoyees within the department.
2. Ensure you have the right and achievable strategy
Bhide (1996) suggests that it is necessary for entrepreneurs to establish priorities among the opportunities and problems that are at hand. My priority was to make everbody feel like a team and that I have the right mix of skills for the tasks I expected were coming. Managing a team of developers a few years back, it took me a while to assess the situation and find out about gaps in our portfolio and assess our capabilities. Department consisted of many older guys some of whom were doing the same or similar job for 20 years. I solved this by employing new blood and most of the new people I hired were straight from the university and women! Needless to say, we achieved in a short time span (a matter of few months) to change the group and the team dynamics completely and start applying new methodology that was more fitted to our current work tasks.
3. Assess my capabilities
Looking back at the example above I can say that it took me a while to assess the situation and find out about gaps in our portfolio and assess my own and my team's capabilities. This was partly because the job itself that demanded a people manager but there was also a need for project manager and technical team leader that could help me in dividing tasks and projects among people. My capabilites came to short when it came to technical knowledge and I could not estimate how much time would for example a programming of change in the account statement take. For this I needed a strong technical lead that could assist me in meetings with the client and internally when the divison of tasks took place.
At the same time I was able to organise ie re-organise the entire team in small groups of 2 or 3 where there was always a senior and a junior in the same team, supporting and learning from each other.
Belbin (1984) give a good overview of people's managerial styles according to their personality. He further suggests that the best performing teams are a mix of different type of people that complement each other. I have taken Belbin test earlier on two occasions and my results show that I qualify somewhere between "Coordinator" and "Team Builder" which is how I see myself also for the most part. I am not afraid to take up challenges and affirmative action even though I do not feel too secure about the situation or the surroundings.
Considering the 3 Leadership Styles described in out textbook, the most suitable in my case would be Commitment/Action which is characterized by leading by example and personal involvement.
March 11, 2010
Having completed the lesson and having read Day (1997) on shakeouts, this exercise is about dynamic markets. Discuss an idea for a new product that will create a new industry niche. To convince others of your idea you need to set out the likely scenario for how the new niche will develop in terms of competition, numbers of firms and how firms compete over time.
Any new venture creation is dependent on how it will perform and survive over time in today's highly globalized and dynamic markets. Putting the great business idea into life will only get you far if you manage to navigate and survive over time in constantly changing business and market conditions.
Although the idea is not new the use and application of Hydrogen Generator kits is still largely unexploited and presents a big market opprotunity for the future. Hydrogen Generator technology is making new progress all the time, it is "green" ie environmentaly friendly since it is based on transformation of water into power. The application of hydrogen technology especially in motor vehicles will give better engine performance, no CO2 emissions, cost effective fuel and other environmentaly friendly features.
In teh future, the development of this technology will probably make us completely independent of fossil fuel. This is the opportunity that is worth investigating and investing in further. Thousands of people around the globe have tried and succeeded in running their vehicles through the combination of water with oxygen to form hydrogen gas. These kits are sold to regular internal combustion engines in order to improve their performance and increase their mileage. We can read below how it works:
Below, I will review potential threats and barriers for entering this market applied through Porter's Five Forces:
Threat of entry
Establishing a hydrogen generator venture would require substantial capital and no small players may enter this venture without major financial backing. There a few players in this market today and in most areas like the automotive it may be consideres as a "Blue Ocean" opportunity. There has been some substantial achievements in development of hydrogen technology but there is still not a clear cut business case that this technology is economically viable today.
Threat from substitutes
Concerning that hydrogen generators as a product and technology are fairly new and still need to prove themselves on the market will keep substitute product away. Eventually, when the technology becomes more common and cheaper to produce such a threat would be accountable, but most probably not in a long while.
Buyers bargaining power
Buyers of hydrogen technology will for instance in case of motor vehicles have to compare price and performance to gas, hybrid or electric vehicles. If the technology is able to produce a vehicle that is comparable in price to standard vehicles that may be a breakthrough point for this technology
Suppliers bargaining power
The financial side of the business model will have to consider suppliers of parts that will drive this technology. Many parts of this equipment are high-tech product such as high pressure hydrogen tank that needs to be fitted in a vehicle and that provides same security (for example in case of collision) as gas tanks in regular fossil fueled vehicles.
Intensity of rivalry
The intensity is low at the moment but the increasing number of big players are looking into this technology. Governments urge for more “green” technology may however create favorable conditions for application of this technology and intensification of rivalry.
Barriers to entry
There are some important obstacles that may stop other companies to enter this market today. Besides big players there are some small niche players that are investing in this technology. Economies of scale play an important role since the technology is new and R&D cost is still substantial. Government grants and tax policy may however help smaller players to enter this financially and know-how demanding market.
Threat of SHAKEOUTS
Browsing the internet one may encounter some companies that already offer hydrogen car converter kits. There are a few of them and the big players such as GM who invested heavily in this technology are now cutting back on R&D dollars due to financial difficulties. If hydrogen generator business initiative is successful it will attract more companies to the niche. There is a need to create barriers to entry in order to sustain the competitive advantage of being the first on the market. Consumers will consequently concentrate on market leaders that will take the increasingly higher market shares. This will in turn cause business shakeouts (Day 1997) of laggards not very unlike that we have seen in the 1920-ies and 1930-ies in the automobile business. Some smaller niche players will remain while the majority of the market will be divided between a few large companies.
Prevention of one's own firm ending in shakeout will according to Day (1997) be in the awareness of the economics of the industry, knowing the market and the market trends. Since in this case the best cost-efficient technology give most business advantage it will be wise to closely monitor competitors and their achievements in advancement of this technology. One should therefore strain not to overshoot and cash starve itself out of business. As in all other ventures timing is crucial. One may even wait until the competitors are making progress and utilize this of own purposes in order not to overshoot. If the threat of a shakeout gets too serious for one's own company one should try some of the harvest or exit strategies to either make profit by selling the company or try to merge it with one of the major players and avoiding shakeout in this sense.
Running cars and other engines on water is and will remain a fantastic business opportunity.
ENVC Exercise 2 Blog
There is a committee that considers strategic developments on the basis of business plans. It is concerned that it may be too risk averse and requires some new guidance on evaluating business plans. Having worked through the PORES how would you advise the committee?
This question is about risk and uncertainty and its relationship to planning i.e. where it is 'irreducible' then risk/ uncertainty can only be found out by experience. How does this affect decision making (see e.g. Mintzberg) and who is doing the planning?
In the 18th century, swiss scholar Daniel Bernouilli studied the occurence of random events and human interaction behind it. His aim was to create a mathematical tool that will help estimate success prospects for any risky undertakings in financial terms. Bernouilli also introduced the term "human capital". Neuman&Morgenstern developed in the 1940-ties "Game Theory" that deals with situations where people's decisions are influenced by other people that they interact with "live variables".
Today corporations use several modern techniques to estimate potential for profit opportunities and minimization of risk that financial undertakings bring.
Our texbooks recommend warmly the establishment of business plans before starting up new ventures. It is an important tool and a valuable help to assess the business environment and the conditions for our intended venture. It is also there to help us address risks and uncertainty regarding many aspects of business environment and market conditions and competition that we may face under way. Bygrave & Zacharakis (2004) see business plans as beneficial for entrepreneurs when assessing the strategy, preparations for start-up and management of the new venture.
PORES analysis (Profit Opportunity Recognition and Exploitation Strategy) will be helpful tool for assessment of our current position in the present market situation. It will allow us to explore possibilities for potential profit opportunities. PORES analysis is built under assumption that a market gap exists and that it should be exploited. However, one should differ between uncertainty and risk as in Helmer (2005) because even the best business plan cannot predict the future completely just give us some indication of possible outcomes.
The first recommendation to a business plan is to find out if the opportunity exists and if it can be profitably exploited. We must also find out if we have Unique Selling Points (USP's) that will differentiate us from possible competitors. We should try to find out about the market dynamics and choose the right strategy for presenting our product. Key personnel, technology, production site, correct pricing of our product are some of the points that will need closer examination. A thorough analysis of present and future competitors is also improtant for proper business planning.
Mintzberg (2001) suggests that different decision making models are used to different situations. Mintzberg describes 3 different decison making models described below:
In giving a recommendation to the management team regarding planning and managing the risk I would say that PORES does not give us a clear picture of our potential market situation in the future and how the potential growth of the venture is going to be handled. PORES is mainly static in nature and some more dynamic models should be used when appropriate such as "sensitivity analysis". The ultimate decision will be for the strategic committee to make based on the background and findings of the PORES analysis and other relevant frameworks such as business plan.
March 02, 2010
Question: Examine an industry that you are familiar with, and assess the nature of the start-ups in that industry. Give examples of no more than four of these start-up firms and allocate them to Bhide's categories. Why might this matter to an incumbent firm?
The automotive industry has for many years been characterized by petrol or diesel consuming engines that pollute the environment. These little environmentally friendly engines are based on fossile fuel that will get scarcer and more expensive to obtain in the coming years. The "Green planet" and the ever increasing pollution globally has opened for a new market for motor vehicles based on renewable sources of energy.
There are many start-up in this booming business besides many well-established car manufacturers that invest heavily in electic cars and electric engines and batteries.
Audretsch and Tourik (in Bourke 2006) argue that small firms tend to bee seen as second grade organisations. This is even more so true when speaking of small automobile producers that do not posess the economical muscles to spend on research and development and marketing.
Think is a small Norwegian company that produces electric 2 seater vehicles that has been saved from bankruptcy by investors and the norwegian government 3 times in the last 10 years. This demonstrates the capital intensive approach of selling a new product in a very well established and oligopolic automotive market.
Statistically, it is a marginal car manufacturer producing only a few thousand cars every year. It can travel up to 170 kilometers (106 miles) on a fully charged battery which limits its radius of operation to a great degree. Think comes with a high price and its battery pack is also very expensive to replace after some years in use. This limits its market to those that can afford a car like that or those who want to keep a "green image" while saving taxes, toll and petrol expenses (el-vehicles are duty free in many countries in Europe). Applying Bhide's (2000) terminology, we may argue that Think is a highly innovative and a "promising start-up" with low expected profits (actually operating with losses).
REVA Electric Car company (RECC) currently World leading electric Car manufacturer. Situated in Bangalore, India itsells its cars all over the world. It has a 30.000 cars per year production capacity and the benefit of assembly and production in a low-cost country compared to Think which is produced in Finland and will also be produced in the US. Both of these cars look quite similar at first glance. They are realtively small 2 (+2) seaters and have a limited range even with fully charged battery. The REVA IC (inter-City) model has a top speed of 104 km/h and a range of 160 km. (99mph)
According to Bhide (2000) an entrepreneur must be adaptive to change and learn from previous errors. Both REVA and Think were seeking partners in the larger well-established car manufacturers in order to promote and develop their products. Ford Motor Co. was a primary owner of Think until they announced that they were putting THINK on sale facing financial difficulties on their own. REVA announced in september 2009 that they are making a joint collaborative agreement with GM India to promote electric vehicles on the Indian market.
GM CHEVROLET VOLT
General Motor's Chevrolet Volt has a lot of similarities with the previous two examples. It has however some significant differences. Compared to Think and REVA this is a full-size saloon that has both range and capacity that evens the capacity of similar size cars powered by traditional petrol engines. It is a make-or-break presige project for GM with high hopes and a breakthrough that will help GM overcome its current financial difficulties. Using Bhide we may categorize Chevy Volt as a "corporate initiative" that has a financial, technological and know-how backing from the mother company.
Looking at the Bhide's chart below that categorises ventures by their growth potential we may conclude that both THINK and REVA are well within "promising start-ups" category that characterizes ventures with high risk and uncertainty. They are also close to revolutionary ventures category since they exploit new sources of fuel energy but they fail (for the time being) in realising high profit margins that are typical for these type of ventures. Chevy Volt is more of a "Corporate Initiative" that having a heavy financial backing for GM. It is still early to see the profit picture since the model is due for launch later in 2010. It is interesting to notice that competitor Chrysler's similar E200 Electric Car project has been abandoned earlier in 2009 without a proper explanation why.