1.8: Chapter 8 – Strategic Entrepreneurship
Learning Objectives
After completing this chapter you will be able to
- Describe the considerations associated with a variety of strategic approaches to entrepreneurship
However beautiful the strategy, you should occasionally look at the results. – Winston Churchill
Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different. – Michael Porter
All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved. – Sun Tzu
Overview
There are many strategic considerations for entrepreneurs, including a few big strategic issues like determining their exit strategies, planning for succession, and embracing ideas like sustainable entrepreneurship.
Exit Strategies
When entrepreneurs decide to exit their business, they follow one or more of the following exit strategies , sometimes called harvest methods . As any chosen exit strategy will have major implications for the decisions an entrepreneur makes regarding almost all other aspects of their business, it is important to determine the exit strategy early.
Private Sale
A private sale involves selling a business to another individual or group. They can be done quite informally, although it is prudent to seek legal, financial, and sales help to ensure the sale goes smoothly. Selling an ongoing business can be a fairly complex process that requires expertise that only experienced professionals, like a business broker, have. One challenge in selling any business is to determine its valuation.
Depending upon when an entrepreneur plans to sell their business, the exit strategy may mean that the business owner will want to take actions designed to increase the value of the enterprise prior to the sale. It might also impact the forms of financing the entrepreneur is willing to pursue. For example, an entrepreneur might want to borrow money to purchase machinery needed to expand the business and increase its value. This might be more appealing than raising the desired capital by selling ownership interests in the company because, if the entrepreneur is sharing ownership, they won’t get as much of the sale proceeds when the company is sold.
Public sale
During a public sale, the business is sold to anyone in the general public who can and wants to purchase an ownership interest in the company.
An initial public offering (IPO) transforms a private company into a public one when shares of stock in the company are created through a legal process and are sold to members of the general public through a securities exchange. IPOs are used to raise needed capital for a company. They can also be used to transfer the value that an entrepreneur has built up in a company into cash for the entrepreneur in exchange for ownership interests for the investors. In other words, an IPO can be used to sell all or part of a company. Using an IPO to transform a private company into a public company can also be done for other reasons, like to gain increased exposure.
An IPO process is time-consuming and expensive because of the legal requirements to produce and disclose all of the required information so that the public can make informed choices when they consider buying the shares. Working with an underwriter through an investment banking company is essential to try to set the best share price. If the initial share price is set too high, not all of the shares will be sold and the company won’t raise as much capital as it had planned. If the initial share price is set too low, the company will end up giving value away. This happens when the purchasers of the shares buy them at the low initial price and then immediately sell them in the market at the higher price the market is willing to pay. That profit made by the initial purchaser of the shares could have instead been realized by the company had the initial share price been set at the right level.
Like with a private sale strategy, a strategy to sell all or part of a business publicly might lead an entrepreneur to pursue other strategies to increase the value of the firm in the eyes of potential buyers. As public sales usually apply to companies that are larger in size, it might be possible to for owners to sell part of their company prior to when they want to sell all of it while retaining control—provided they keep at least 51% of the shares for themselves.
Hold
A hold situation might involve setting up systems so that the venture can operate without the day-to-day involvement of the entrepreneur. This often means that the owner must hire and train the right people to operate the business in their absence.
Unlike a private or public sale where the owner might sell the entire company in exchange for cash, a hold situation often means that the owner retains some or all of the ownership interest and continues to receive their share of the distributed profits along with complete or partial say in how the company runs. Sometimes hold situations are most appropriate for family businesses that intend to stay family businesses when new generations of family members take over the business operations.
Combination Sale and Hold
Sometimes it is prudent and advantageous for a business owner to sell some of the business and hold some of it. This might form part of a succession planning strategy.
Succession Planning
A good succession plan will help make the transfer of a business go smoothly, and allow the entrepreneur to maintain good relationships with employees and business partners. Succession planning helps
- Protect the legacy of your business
- Maintain a service to your community
- Build value for your business
- Provide financial security for your family and your stakeholders
- Deal with unexpected events (illness, accident or death)
- Prepare for the future (Canada Business Network, 2013)
Business owners should begin their succession planning as soon as they are able because the process takes time and the decisions made now can affect the opportunities for achieving succession and exit strategy goals later. The process for succession planning should include the following considerations (Canada Business Network, 2013):
- The owner should establish their goals for the business up to and post-retirement, including whether they wants to retain an ownership interest in the company after stepping aside from the day-to-day operations of the business.
- Decision-making processes should be established, especially for when or if the current owner decides to pass the business on to a successor.
- Any potential successors should be trained in the business operations.
- The owner should prepare a good estate plan so that all income tax and financial factors and implications are considered.
- The owner should have a contingency plan in place in case the original plans do not turn out as intended.
- The owner should plan how to transfer the business, should valuate it, and should determine their exit strategy.
Sustainable Entrepreneurship
The relatively recent focus by businesses on their corporate social responsibility initiatives began as a defensive reaction to societal pressures to become better corporate citizens, but has evolved to become a more proactive approach by managers. This evolution has given rise to the sustainable entrepreneurship management concept (Weidinger, Fischler, & Schmidpeter, 2014):
The term “Sustainable Entrepreneurship” recently emerged in the business world to describe this latest very entrepreneurial and business-driven view on business and society. Current definitions for Sustainable Entrepreneurship focus on new solutions or sustainable innovations that aim at the mass market and provide value to society. Entrepreneurs or individuals or companies that are sustainability-driven within their core business and contribute towards a sustainable development can be called sustainable entrepreneurs, according to Schaltegger and Wagner (2011). Others argue that sustainable entrepreneurship stands for a unique concept of sustainable business strategies that focuses on increasing social as well as business value – shared value (Porter and Kramer 2011) – at the same time (Weidinger et al., 2014, p. 1).