Location Strategy

After studying this chapter, you should be able to:

1. Describe the characteristics and value of a strong management team.
2. Explain the common legal forms of organization used by small businesses.
3. Identify factors to consider in choosing among the primary legal forms of organization.
4. Discuss the unique features and restrictions of five specialized organizational forms.
5. Understand the nature of strategic alliances and their uses in small businesses.
6. Describe the effective use of boards of directors and advisory councils.

• Management team – managers and other key persons who give a company its general direction.
• Management team can bring greater strength to a venture than an individual entrepreneur can.
• The competence required in a management team depends on the type of business and the nature of its operations.
• Achieving balance
  • to ensure balance, a management team should comprise of both competent insiders and outside specialists.
• Expanding social networks
  • Social network – an interconnected system of relationships with other people.
  • Sometimes it is not about what you know, but who you know that matters.
  • Social network helpful in getting the business and sales start.
  • Social capital – the advantage created by an individual's connections in a social network.
  • Reciprocation – a powerful social rule based on an obligation to repay in kind what another has done for or provided to us.

• Strategic alliance – an organizational relationship that links two or more independent business entities in a common endeavor.
• Strategic alliances are more important to small businesses today than ever before, and an increasing number of entrepreneurs are finding creative ways to use these cooperative strategies to their advantage.
• Strategic alliances with large companies
  • These alliances are formed to join the complementary skills and expertise of the partnered firms, in order to promote the competitive edge for both parties.
• Strategic alliances with small companies
  • Enhance mutual competitive strength.
  • Involve outside contractors, licensing, partners, import/export operations, marketing agreements, and shared manufacturing.
• Setting up and maintaining successful strategic alliances
  • Steps to improve chances for success:
  1. Establish a healthy network of contacts
  2. Identify and contact individuals within a firm who are likely to return your call
  3. Do your homework, and you will win points just for being prepared
  4. Learn to speak and understand the “language” of your partner
  5. Make sure any alliance offer is clear a win-win opportunity
  6. Continue to monitor the progress of the alliance to ensure that goals and expectations are being met, and make changes as they become necessary

• Board of Directors: the governing body of a corporation, elected by the stockholders.
• In concept, the stockholders elect the board, which in turn chooses the firm’s officers, who manage the enterprise.
• The directors set or approve management policies, consider reports on operating results from the officers, and declare dividends.
• Majority stockholder in a small corporation appoints a board of directors to fulfill a legal requirement.
• Entrepreneur who take a more constructive approach find an active board to be both practical and beneficial.
• In a family business, outsiders can play a unique role in helping evaluate family talent and mediate differences among family members.
• Contributions of directors: bring supplementary knowledge and broad experience to enterprise management.
• Selection of board members: owner needs to consider the value of an outside board, whose income not depend on the firm.
• Compensation of Directors: varies greatly, some firms no fees at all or modest compensation offered for the services of well qualified directors.
• An alternative: an advisory council – a group that serves as an alternative to a board of directors, acting only in an advisory capacity.

1. Why would investors tend to favor a new business led by a management team over one headed by a lone entrepreneur? Is this preference justified?
2. Evaluate the three most basic forms of organization in terms of management control by the owner and sharing of the firm's profits.

Case Questions:

1. How relevant are the individual personalities to the success of this entrepreneurial team? Do you think Green and Stroder have a chance to survive their "partnership"? Why or why not?
2. Do you consider it an advantage or disadvantage that the members of this team are the same age?
3. On balance, is it good or bad that the company will be started by two men who are very close friends? What are the potential benefits and drawbacks of mixing business and friendship in this case?

After studying this chapter, you should be able to:

1. Explain the importance of having a harvest, or exit, plan.
2. Describe the options available for harvesting.
3. Explain the issues in valuing a firm that is being harvested and deciding on the method of payment.
4. Provide advice on developing an effective harvest plan.

An entrepreneur who is developing a company strategy should think about more than just starting (founding or acquiring) and growing a business; the entrepreneurial process is not complete until the owners and any other investors have exited the venture and captured the value created by the business.

• Harvesting (exiting) – the process used by entrepreneurs and investors to reap the value of a business when they leave it.
• Many entrepreneurs successfully grow their businesses but fail to develop effective harvest plans. They are unable to capture the full value of the business they have worked so hard to create.
• Harvesting encompasses more than merely selling and leaving a business.
• It involves capturing value (cash flows), reducing risk, and creating future options — the reason we prefer the term harvest over exit.
• Harvest is important to a firm’s investors as well as to its founder.

• Involves the orderly withdrawal of the owners' investment in the form of the firm's cash flows.
• While immediate liquidation is an option, a firm earning high rates of return is worth more as a going concern than a dead one.
• The strategy often requires the firm to stop growing so it can increase the cash flows returned to investors.
• Risk: Reducing investment when the firm faces valuable growth opportunities could leave it unable to sustain its competitive advantage, unintentionally reducing business value.

The first sale of shares of a company’s stock to the public. Many entrepreneurs consider the prospect of an initial offering as the "holy grail" of their career, bringing increased prestige within business circles.

Selling equity to a private equity investor rather than the public market. This often involves a complex valuation and capital structure to meet the total enterprise value while allowing the original seller to cash out partially.

Entrepreneurs are, by nature, purpose-driven people. After a successful exit, many find themselves asking "What's next?". Because of their drive, post-exit entrepreneurs often choose to give back with both their time and their money.

1. Explain what is meant by the term harvesting. What is involved in harvesting an investment in a privately held firm?
2. Contrast a sale to a strategic buyer with one to a financial buyer.
3. What is the primary purpose of an initial public offering (IPO)? How does an IPO relate to a harvest?

Case Questions:

1. Do you agree that the entrepreneur’s company is not sellable?
2. Are there any other options for the entrepreneur besides selling his business?
3. What would you recommend the entrepreneur do? Why?