Week 2 Crunch

8/6/2019 Week 2 Crunch

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The Crunch Case &

Mythbusting Entrepreneurship

WEEK 2



What‟s Today about?…

• Analyse a real life case of how a new ventureevolves through phases of start-up andgrowth

• Bust some myths about entrepreneurship• Business plan assessment criteria



Crunch Case Group Exercise

• Form groups of 5• Do up a timeline of critical events in

Crunch’s evolution (what are the key things

that directly impacted upon and affectedCrunch’s success)

• Answer the questions on the next slide



Group Questions…

• Describe the personality of the CEO.

• What role did brand play in Crunch’s success?

• Who was Crunch’s target market?

• How did Crunch fund most of its growth?

• How did Crunch’s business model (the way they get

money into the firm) change over time? Why was itnecessary to change?

• How did the structure of the company change?• How sustainable is this venture? Would you have

invested? Provide reasons?



Crunch Case: Some Points for

Entrepreneurship…• Crunch was an entrepreneurial business – the ambition was for growth

• You need business ideas that can sustain growth – Levine’s original ideathat men would get into aerobics in a big way didn’t materialize. Shiftedfocus to men and women, pre-paid memberships. This gave upfrontcash flows to fund growth

• This means that things change and you can only predict so much in yourbusiness plan. You need to be able to adapt to change – adaptiveexecution

• Primary financing strategy for growth was bootstrapping – using internalfunds to finance growth. Levine didn’t want to be controlled by

outsiders. The more you can do yourself the better – it shows you cancreate something out of few resources – a key feature of entrepreneurship

• You need ideas that can sprout multiple revenue streams – gymmemberships, personal training and licensing fees from apparel. This

gives you a bigger base on which to cover costs and create profit (salesrevenue – ex enses



Crunch Case: Some Points for

Entrepreneurship…

• Think of business evolution in two phases: start-up andgrowth

• The key challenges are different (next two slides)

• Link your strategy and structure in each stage

• The importance of brand – differentiates you from others,makes people excited, has psychological power, createsopportunities for additional revenue. So, you are not justbuilding a business, you are building a brand

• The importance of people – you are only as good as the

talent of your people – recruitment, selection, training &development. Management skills and people skills are vital.Can you get the best out of other people? How would youcreate a culture that motivated people over the short andlong terms? Investors often invest in people rather than

businesses.



Priorities Start-up Growth

Financial

goal

Get cash flow positive Focus on profit andcompany value

Role of Planning

More emphasis on adaptive

execution than planning butdepends on rate of change inenvironment (boundedrationality)

Deliberate planning needed

for growth

Financing

strategy

Finance throughbootstrapping (using profitand other internal sources to

fund future initiatives)

May need external finance –

sell equity shares and/orbank loans. Bootstrapping

not enough



Strategy &

Structure

Flat structure (not too many management levels), keepoverheads down, learn fast.

Need this nimble structure tolearn what strategy should be

without spending too muchmoney .

Need a corporate structure tooversee the operating structure(individual stores for example).

Need standard operating procedures for standardising best practice in all outlets

Priorities Start-up Growth

Business

model

Work out the business model –

what products for whatmarkets, how it makes a profit, what are our core capabilities(what are we better thancompetition at)

Replicate winning business

model in other markets, withother products in othergeographic locations. Take whatyou are good at ( corecapabilities ) and multiply it



Is entrepreneurship all about offering something new?



Bhide’s Research

• Harvard Professor• Interviewed founders of 100 companies from the Inc.

500 list – a compilation of the fastest growing privately-held companies in the US

• Revenues of about $15 million, 135 employees, 5-yearsales growth of 1407%

• Inc. listing requires 5-year track record of rapid growth

• The sample represents the separation of winners fromalso-rans



Bhide’s Research…



Bhide’s Research…

• Most promising ventures in the Inc 500 donot start with a unique or proprietary product

• Only 12% of founders surveyed attributedthe success of their companies to “an unusual

or extraordinary idea”

• 88% reported their success was mainly due to

the “exceptional execution of

an ordinary idea”



Are the most profitable businesses also the most

popular?



Most Popular Start-ups



Bhide’s Research• Limited overlap between most popular businesses and

those that were most successful• Promising ventures occurred in a broad range of

industries like computer software, pizza chains, selling secondhand copiers

• Popular often means easy to get into (low capital andskill costs), easy to get into often means more intensecompetition and more intense competition means thinprofit margins

• The most promising ventures occurred in industries characterized by

high product-market uncertainty. This means that you take a bit of a risk to enter these industries but with that risk comes the possibility of a lucrative upside…the potential for growth is large

• Industries have structures (Porter, 1990) and some will

allow you to make more profit than others.



Is the main competition entrepreneurial firms

face at start-up from big established players?



Bhide‟s Research: Typical Competition Profile

for Promising Start-ups



When starting out, where do entrepreneurs

mainly get their money from – banks or

investors?



Sources of Initial Funding for Start-ups



Do you need to do a business plan or is it better

to get on with it and learn as you go?



Examples of the contents of a businessplan…





EXHIBIT 8.2 (Timmons, 2010) - BUSINESS PLAN TABLE OF CONTENTSI. EXECUTIVE SUMMARY

• Description of the Business Concept and the Business Opportunity and Strategy.

• Target Market and Projections.

• Competitive Advantages.

• The Team.

• The Offering.

II. THE INDUSTRY AND THE COMPANY AND ITS PRODUCT(S) OR SERVICE(S)

• The Industry.

• The Company and the Concept.

• The Product(s) or Service(s).

• Entry and Growth Strategy.III. MARKET RESEARCH AND ANALYSIS

• Customers.

• Market Size and Trends.

• Competition and Competitive Edges.

• Estimated Market Share and Sales.

• Ongoing Market Evaluation.IV. THE ECONOMICS OF THE BUSINESS

• Gross and Operating Margins.

• Profit Potential and Durability.

• Fixed, Variable and Semivariable Costs.

• Months to Breakeven.

• Months to Reach Positive Cash Flow.

EXHIBIT 8 2 (Timmons 2010) Cont



EXHIBIT 8.2 (Timmons, 2010) Cont…….

V. MARKETING PLAN

• Overall Marketing Strategy.

• Pricing.

• Sales Tactics.

• Service and Warranty Policies.

• Advertising and Promotion.

• Distribution.

VI. DESIGN AND DEVELOPMENT PLANS

• Development Status and Tasks.

• Difficulties and Risks.

• Product Improvement and New Products.

• Costs.• Proprietary Issues.

VII. MANUFACTURING AND OPERATIONS PLAN

• Operating Cycle.

• Geographical Location.

• Facilities and Improvements.

• Strategy and Plans.• Regulatory and Legal Issues.

VIII. MANAGEMENT TEAM

• Organisation.

• Key Management Personnel.

• Management Compensation and Ownership.

• Other Investors.

• Employment and Other Agreements and Stock Option and Bonus Plans.



EXHIBIT 8.2 (Timmons, 2010) Cont…….

• Board of Directors.

• Other Shareholders, Rights and Restrictions.

• Supporting Professional Advisors and Services.

IX. SUSTAINABILITY AND IMPACT

• Issues of Sustainability of the Venture.• Impact on the Environment.

• Impact on the Community and Nation.

X. OVERALL SCHEDULE

XI. CRITICAL RISKS, PROBLEMS AND ASSUMPTIONS

XII. THE FINANCIAL PLAN

• Actual Income Statements and Balance Sheets.• Pro Forma Income Statements.

• Pro Forma Balance Sheets.

• Pro Forma Cash Flow Analysis.

• Break-Even Chart and Calculation.

• Cost Control.

• Highlights.

XIII. PROPOSED COMPANY OFFERING

• Desired Financing.

• Offering.

• Capitalisation.

• Use of Funds.

• Investor’s Return.

XIV. APPENDIXES



NOTE:

You do not need to follow theprevious examples (Tables of

Contents) for your Business Planassessment.

A more general approach is provided

by Sahlman, 2000, outlined next....



How to Write a Great Business Plan(Sahlman, 2000)

• Four interdependent critical factors:

– The People

• The jockeys

– The Opportunity • Nature of the market & Industry structure

• Balance sheet and cash flow

• Competition

– The Context

– Risk and Reward, Harvest or Exit Strategies



Some Facts from Bhide…

• Course Reader: Reading 1 of Week 1(Insert of p. 152 - Does Planning Pay?)

– 41% of the entrepreneurs had no business

plan at all – 26% had a rudimentary plan (rough sketch)

– Only 28% wrote up a full-blown business

plan

Th C A i t Th B i Pl f S



The Case Against The Business Plan for SomeStart-Ups

• Capital constraints – can’t afford extensive analysis

• Small opportunity cost – don’t have much to lose fromforecasting errors. Entrepreneurs of promising start-ups entersmall niches requiring limited capital investment. They oftencome from lower paid employment meaning they don’t havemuch to lose from failed planning.

• Most copy ideas that have proven their market viability thus notrequiring extensive further research

• Expected profits in niche markets don’t justify large planning outlays

• Learning-by-doing yields more accurate data because hard toforecast some specifics

• Uncertainty means that, in highly volatile conditions, by thetime the entrepreneur has finished researching a market spacethe basis of competition has changed rendering void the prioranalysis



The Case for Business Plans• Helps discipline the entrepreneur’s thinking about venture design

and the merits of value-creating potential• Is an important communication tool with stakeholders such as

investors

• Offers solutions to problems in a less costly and time-consuming manner than afforded by trial and error learning

• Helps the entrepreneur to organize and prioritize actions atdifferent stages of venture creation thereby minimizing thelikelihood that the venture will be delayed by undertaking activities in an ineffective sequence

• Communicates goals to those who must execute them(milestones)

• Managing growth requires skillful planning . Learn early how toplan.



The Verdict?

It’s often not an either/or choice.Investors/banks will demand a plan.

How much planning is needed varies according to the type of business.

It is best to think of planning as an ongoing exercise that should be constantly revisedthrough adaptive execution…

H E C f



How Entrepreneurs Craft

Strategies That Work Bhide: Course Reader: Reading 1 of Week 1

Three critical elements for consideration:

1. Opportunity screening:

Where do entrepreneurs get their ideas? P.151

– Screen out losers quickly

• Consider: “Objectives of the venture”, “Leverage

provided by external change” and “Basis of competition:

Proprietary Assets vs. Hustle”.

– Gauge relative attractiveness (risk vs. rewards)

• Consider: Capital requirements, shut-down costs,entrepreneurial values and goal.s

Three Critical elements for consideration (Cont ):



Three Critical elements for consideration (Cont.):

2. Parsimonious Planning and Analysis

– Some critical uncertainties cannot be resolved throughmore research.

– No one-size fits-all approach; analytical priorities vary foreach venture.

– Entrepreneur has to live with critical uncertainties whichare not easy to analyse.

3. Integrate Action and Analysis

- Often cannot separate action from analysis.- Action show commitment.

- Characteristics: Handle tasks in stages, Look forsolutions as the arise, Simultaneous research and selling,& Smart arro ance.



This Course:

• Deliberate Planning: Weeks 1-10

• Adaptive Execution: Weeks 11+12



Deliberate Planning

• A business plan is a written document outlining thebusiness model for achieving desired goals.

Business plans are often a compulsory communication tool required by investors andlenders as they protect against risk.

• A business model is the entrepreneur’s businessdesign for determining how to make a profit? –

what product? what market? what strategy?



Adaptive Execution

• Going about the start-up and roll-out of yourbusiness in a way that minimizes risk and

maximises learning about your businessmodel – does it need changing? How? Whatassumptions did you make in your business

plan that have turned out to be wrong? Areyou recognizing and seizing betteropportunities to improve cash flow?



Your Business Plans…

• Look at the assessment criteria (follow thiscriteria strictly)

• Decide on group members (3-5)

• At this stage, just have some ideas for a new venture. The next lecture’s material will help

you make a more firm decision.



Next Week „s Lecture is

important…we start your business plan journey…I bet you

can‟t wait!!!

Remember to refer to your reader

(Timmons Ch13, 15 & 19)

Documents

Week 2 Crunch