4 E 7 – ENTERPRISE AND BUSINESS DEVELOPMENT Session 3 2004 External Pressures and E xit Resources on: http: //www. eng. cam. ac. uk/teaching/c ourses/y 4/lecnotes/4 E 7 -Index. html Dr E. Garnsey ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Aims Last week • Internal dimensions of technology enterprise growth Today • External dimensions of the growth challenges facing technology-based enterprises : – sustaining growth in a fast changing environment – how product, market and technology evolution create threats and opportunities • Apply understanding of industry dynamics and business models to specific cases ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
AGENDA 2 - 3. 30 Dynamic environment for high tech products Pointcast Acorn Computers ARM Why acquisition? (if time; if not, see notes on website) 3. 40 Rick Mitchell on Domino Printing Sciences: Expansion in a Dynamic Environment and Implementing a technology-based acquisition ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Introductory review ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Entrepreneurial project - start up. Secure and create resources for start-up reinvest distribute Business Idea Early resource mobilization Set up new activity Secure returns exit Early revenue generation Create value ELIZABETH GARNSEY Centre for Technology Management Easily short circuited Institute for Manufacturing
SWOT analysis Strengths Opportunities Weaknesses Threats ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
In a new company, a resource base can be deve - a cumulative Productive/ commercial process base New cycle 1. Reinvest over recurrent production & return cycles 2. Distribute returns Output sold Asset Base Returns recovered 3. Exit ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Do a SWOT analysis on Bio. Robotics in 2000 Strengths (front rows) Opportunities (next row) Weaknesses (next row) hreats (back row) T ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
SWOT analysis on Bio. Robotics in 2000 Scarce skills Commitment Specialist equipment, good suppliers Premises Excellent customer relations with labs Limited development capital Inexperience Marketing limitations Few economies of scale & scope Cannot protect IP ELIZABETH GARNSEY Biotech lab market expanding Further applications possible Large competitors may move in Market saturation may be near Company is founders’ main asset - much to lose Centre for Technology Management Institute for Manufacturing
Bio. Robotics business model (business basics) Productive/ commercial base Inputs Productive activity creates economic value Output sold reinvest distribute exit ELIZABETH GARNSEY Asset Base returns recovere d Model may change Soft to hard, etc Centre for Technology Management Institute for Manufacturing
Business Model Assessed What resources are needed? How mobilised? What kind of productive activity? How organized? In-house/out-source? reinvest Can it be scaled up? How does it/ will it/ deliver value to users/ attract more custom? exit How will returns be secured? Scaled up? Productive/ commercial base Output sold Asset Base Returns recovered Protection from competition? Scope to exit and realize investment? ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Bio. Robotics: business model and activity Designs, prototypes tested on user Resources: University workshop Student project Design skills Small personal funds Reinvest retained earnings No VC Productive base developed for output of lab automation equipment Outsourcing to specialist suppliers Flow of output sold (uneven: NPs required) Value delivered to lab customers Asset Base High profit margin No registered IP Skill barriers to entry Exit High valuation of company - trade sale ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Internal & external influences on growing company? • Distinction for purposes of analysis • In practice internal and external influences closely connected – Interplay between the firm’s internal resources and its market opportunities – Strategic and organizational issues are interwoven • Choice of high tech activity – High level tech skills, business inexperience likely Centre for Technology – Emergent industry, taken off? Fast moving? Management Institute for Manufacturing ELIZABETH GARNSEY
Survival affected by activity and environment Cambridge high tech survival rates by sector ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
‘High Tech’ activity and environment 1. Firm 2. Industry / sector 3. Technology 1. Firm can be classed as high tech by its inputs R&D intensive: e. g. , R&D spend = >15% of sales, Sci. Eng. Tech. staff = >10% of all staff 2. Sectors currently include: advanced electronics, computing, instrumentation, R&D, advanced materials, advanced renewable technologies, biotech. 3. Technology: immature and knowledge intensive (railways once high tech) Centre for Technology Institute for Manufacturing ELIZABETH GARNSEY Management
Selecting a high tech activity • Potential to create value in new ways • High level of uncertainty • Market unpredictable ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Online Information Services: Pointcast • Pointcast - founded in the early 1990 s developed "push technology” for the Internet. Users could specify areas of special interest on subscribing. Pointcast supplied information of that type to the user. Necessary software was provided to users by Pointcast. • In partnership with Reuters News Service • Praised by Schapiro and Varian in 1999 - how to add value to information by personalizing it and the accompanying ads (Information Rules 1999 p. 32) Centre for Technology Management • News International interested in buying ELIZABETH GARNSEY Institute for Manufacturing
Why was Pointcast a failure? $84 m Yahoo! Inc. ( founded 1995) We placed a bet. In hindsight, it was a poor be because the Web allowed people to innovate more quickly than we could. - A Pointcast found $24 m Sales ($) $18 m Pointcast Inc. ( founded 199 $5 m $2 m $8 m Hugo 2000 92 96 97 98 99 00 Year Institute for Manufacturing
External pressures - there are some regularities: • Can apply understanding of underlying dynamics – Business cycle – Industry evolution - structure, competition – Technology evolution: Rick Mitchell, Domino ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Start by understanding wider business ecosystem evolving fast Political and Macro-economic Environment Regulators Knowledge, Suppliers Technical Of all inputs Environment FIRM Customers Social and Environment Consumers Complementary Firms (may be Competitors) Natural Environment ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
New company in transaction with others Suppliers Complementary producers Sub-contractors Funders Competitors Intermediate output Firm’s activities Inter-mediate customers Research base Sources of labour ELIZABETH GARNSEY Distrib- Final utors customers Regulators Competitors Centre for Technology Management Institute for Manufacturing
New business: input-output system in sector value chain Impact of supply and demand conditions exerted via firm’s transaction environment Suppliers Competitors Sub-contractors Funders Distributors New Business Intermediate Customers Research base Labour Sources ELIZABETH GARNSEY Final customers Regulators Complementary producers Centre for Technology Management Institute for Manufacturing
Information technology - supply/demand conditions • Supply: – Expensive to produce initially • High fixed cost, low marginal cost – Low reproduction cost • Cheap for originators - high profit margin? • But also cheap for competitive imitators • Demand: – Strong network effects - value of product affected by how many use it ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Biopharm venture in transaction with other parties Suppliers Competitors Foundations Dedicated VC Intermediaries BIO-PHARM VENTURE Complement -ary producers Research base Scientists Regulators Final customers are not users (NHS, insurance, HMOs) Large Pharmaceutical s Impact of supply and demand conditions comes via transaction e ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Who could be partners - to grow the company? Productive/ commercial base Resource providers, e. g knowledge base Co-producers (suppliers etc) Output sold reinvest Investors Customers Financi alassets Returns recovered exit ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Example - Acorn Computers • A new enterprise has been performing well, though only five years old. Growth record is impressive (sales and revenues employee numbers). Early success makes it possible to expand further through retained earnings and externally obtained funds. Investors view its prospects favourably. Morale is high among its members their prospects are excellent in the expanding enterprise. • One of its members is taken ill. After 6 months hospital and recovery he returns to work. He finds: • Sales are down and unsold stocks have built up. The banks have withdrawn loan facilities. Creditors are demanding payment. There have been lay-offs and more are expected. The enterprise faces an enforced sell-out or bankruptcy. • How could this happen? ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Internal problems at Acorn, Cambridge PC pioneer • Rapid growth: “victim of success syndrome” – Acorn overcame early problems, but: • • • ELIZABETH GARNSEY Bottlenecks, shortages Communications problems Jobs no longer suit early recruits Entrepreneurs inexperienced managers Time pressures impair decision making Centre for Technology Management Institute for Manufacturing
Rapid growth ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Growth Reversal at Acorn ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Acorn saved from bankruptcy by sale to Olivetti in 1984 • Olivetti buys 49% of Acorn’s shares in Spring 1985 – and 79% by September l 985 – for £ 14. 4 million. Acorn had been valued at £ 100 m in 1983 • Acorn - becomes business unit of Olivetti • European partner of AT&T ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Acorn did not regain position under Olivetti Sales Pre-tax profit ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Acorn as part of Olivetti missed further opportunities to innovate in PC sector Visualizing Innovation in HBR Sept-Oct 99, p. 16 ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
External Pressures on Acorn from: • Business cycle • Industry evolution: structure, competition • Technology evolution - network effects • Market evolution ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Business Cycle: Change in the UK market for electronic consumer goods 1980 -1984(£m at 1985 price s) Year 1980 1981 1982 1983 1984 __________________________ Sales 860 1216 1473 1734 1515 %change 100 141 171 201 176 (base =1980) %change on +41 +21 +17 -13 previ us year o __________________________ Sou : NED Repo on Electronics sector (1985) 36. rce C rt ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
As new industry matures, competition increases; number of competing producers may decline Number of Competitors (illustrative data) 30 20 10 0 0 5 10 15 20 Time ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Increasing competition threw out sales forecasts DEMAND ACORN'S 1984 SALES FORECAST ACTUAL SALES ENTRY OF IBM AND COMMODORE LIQUIDATION OF SMALL COMPANIES BBC CONTRACT 1978 ELIZABETH GARNSEY 1981 1982 1983 1984 1987 Centre for Technology Management TIME Institute for Manufacturing
External Pressures: Competitive Conditions Porter 1980 ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Competitive forces bearing on Acorn Funders Suppliers Retailers Competitors ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Market evolution affected Acorn Markets segmented, segments grow unevenly time Time to adoption of innovation by adopter group Rogers E, Diffusion of Innovations Centre for Technology ELIZABETH GARNSEY Management Institute for Manufacturing
Market segments are discontinuous; market evolves: chasm to cross to reach mainstream market Mind the Gap Innovator- Early Enthusiasts Adopters ELIZABETH GARNSEY Early Majorit y Late Majority Centre for Technology Management Laggards Institute for Manufacturing
Industry and technology evolution - impact on Acorn • Acorn: non-standard operating system Did not foresee dominance of MS-DOS, rising standard • In industries where users and producers interact - connectivity is a critical product attribute ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
PC market tipped in favour of IBM PC and MS-DOS OS 1 Probability the next consumer chooses to buy A 0 0 A’s share of installed base 1 R Henderson seminar 2003 Institute for Manufacturing
Comparing business models Hard Model Exposure Create infrastructure In house High Acorn’s Product Mass manufacture Market Manufacturing sub. OEM's contracted Niche Market License IP Contract R&D Low Technical services Design studies Consultancy Testing reports Analytical reports Soft Model Resource commitment ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
When assessing business model, take into account the nature of the firm’s innovation • Production process innovation • Marketing innovation • Business process innovation ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Assessing Acorn • Identify strengths and weaknesses of Acorn’s business model ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
SWOT analysis on Acorn in 1984 (before crisis) Scarce skills Commitment 80% share UK educational market Limited development capital Inexperience Marketing limitations Few economies of scale & scope underway Cannot protect IP ELIZABETH GARNSEY Market expanding Further applications of their competenc possible Large competitors have entered market Acorn’s technology is proprietary, not standa Price war and industry shakeout imminent Company is founders’ main asset - much to lose Centre for Technology Management Institute for Manufacturing
Hindsight on Acorn "We should have really analysed how we compared to competing computers around the world. … we had a real lead in terms of speed, price, operating system and expansion slots compared to our nearest rivals. . The BBC Micro was twice as fast as the Apple II … it had built-in networking which no other computer had at the time. . . We should have gone around the world persuading people to adopt Acorn's products as the industry standard. Then we should have licensed our hardware and software to anyone that wanted them. ” Hermann Hauser, The Guardian 2001 ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
ARM, A SPIN OUT from ACORN Acorn RISC Chip designed for Acorn’s product to reduce reliance on suppliers Acorn in alliance with Acorn Apple to produce hand held compute ARM 12 Acorn engineers led by Robin Saxby - Motorola experience ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
ARM origins • ARM created by 12 Acorn engineers to specialize in RISC chips • Joint venture with Apple and others: provide chips for Apple’s Newton Hand Held Computer • Newton failed. ARM lost main customer ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
ARM business model Target Markets: Mobile devices, but also Automotive controllers Multi-media License technology and provide extensive customer support. ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
ARM: distinctive type of market (OEMs) ARM licenses power-efficient RISC micro-proce Licensing partners sell ARM processors into markets they know well ARM began with innovative managers who are Early Adopters Now sells industry standard to Early Majority ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
ARM’s Business Model Expansion through Networks Mobile devices Automotive products Multi-media ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
ARM Partnerships Source: Warren East, ARM ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
ARM : continuous steady growth of inputs & outputs ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Exposure of Business Hard Model Degree. Models of Risk Create infrastructure In house High Product Mass Market OEM's Niche Market manufacture Manufacturing subcontracted License IP + services Contract R&D Low Technical services Design studies Consultancy Testing reports Analytical reports Soft Model Resource commitment ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Partnerships can be hard to manage Productive/ commercial base Resource providers, e. g knowledge base Co-producers (suppliers etc) Output sold reinvest Investors Customers Financi alassets Returns recovered exit ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Who could be partners? ARM solution Productive/ commercial base Resource Providers Included Acorn, Olivetti Co-producers (manufacturing partners etc) Output sold reinvest Investors: Joint Venture ‘ 91 IPO in ‘ 98 Customers - innovat Financi alassets Returns recovered exit ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Bio. Robotics: science base, grants Acorn: educational spending on IT Ionica: deregulation in telecommunications ARM: mobile phone expansion in Europe (EU) Domino: product packaging regulations (sell by) Market forces, structured by institutions and policy, create selection environment for new ventures. ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Part Two 4 E 7 – ENTERPRISE AND BUSINESS DEVELOPMENT Session 3 2004 See notes on acquisition in http: //www. eng. cam. ac. uk/teaching/cours es/y 4/lecnotes/4 E 7 -Index. html ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Problems of growth for new business • Hard to fund growth from retained earnings Development capital often needed – for new product stream – to extend markets • Delays before expansion brings in revenues; - • Risks in growth: strain on capacity resource shortages Enlarge capacity: market downturn? • Risks in non-growth • Delay capacity: competitor squeeze ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
merger Supply chains rapidly reconfiguring, mergers occur, mainly through acquisition merger ELIZABETH GARNSEY Centre for Technology Management merger Institute for Manufacturing
Acquisition http: //www. eng. cam. ac. uk/teaching/cour ses/y 4/lecnotes/4 E 7 -Index. html • May be no alternative to selling the enterprise • May be a strategic choice • Success depends on strategic fit and on sensitive implementation - alertness to people issues in merging two organizations. • ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
For the economy, acquisition is viewed as – a phase in business life cycle – a process of innovation diffusion – keeping business competitive ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Acquisition types Autonomous: acquired unit becomes separate business unit in the corporate group Assimilated: acquired unit is drawn into the corporate group and reshaped to fit corporate structures and procedures Combined: new organisational form is created which combines features of both organisations Centre for Technology Need good match and appropriate acquisition type ELIZABETH GARNSEY Management Institute for Manufacturing
Advantages to the acquired group • The acquired enterprise should have access to: – Managerial experience – Resources for investment – More extensive reserves – Market in parent co. + marketing capacity • Making possible – IP protection – Volume production as product matures ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Benefits to founders • Financial incentives • Relief of responsibility • Career prospects in large group • Funds and freedom to start up again ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Potential disadvantages for Acquired • Loss of independence and entrepreneurial culture • Procedural controls may be oppressive • Control over strategy lost • Effects on innovation ? • Acquirer may not understand potential of acquired unit • Continuing threat of divestment • Loss of closeness to market • Relational assets may be destroyed. ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Advantages to the Acquiring firm • Acquire technology • Acquire competence • Improve innovative capability • Expansion, e. g. vertical integration, market entry or geographic positioning ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
Disadvantages to Acquiring firm • Costs of merger • Costs of turnaround • Post integration problems • Culture clash • Distraction from in-house R & D ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
The clash of cultures • Culture (Schein): "Values, underlying assumptions and social practices" • Cultural clash may prevent assimilation of innovative capability of acquired unit • Clashes may include strains and conflict around: • technology • organisation • nationality ELIZABETH GARNSEY Centre for Technology Management Institute for Manufacturing
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