This Document Contains Cases 4 to 10 Intelligent Leisure Solutions Case Questions 1. How should Phillips go about solidifying the relationships Intelligent Leisure Solutions has with other international companies? How can these relationships benefit ILS? ILS is built around relationships and the network of contacts both in Brazil and internationally. The best way to solidify these relationships is through the personal attention shown to each client and to continue connecting people through this network, in addition to doing excellent work and winning awards in the industry. These relationships are the foundation of ILS and have helped the company to carve out a niche in the industry by winning loyalty and exclusive representation of key companies. 2. How should Phillips identify a leader to grow the real estate solutions business? Because finding qualified employees for such a niche business was one of Phillips’ biggest obstacles when starting the business, what are the pros and cons of hiring from within? From outside? All of the company’s travel consultants are native speakers of English and most have master’s degrees, making incentives an issue. Therefore, hiring from within ensures that qualified employees with loyalty to the company benefit. Because the company operates from within Brazil, finding highly educated native English speakers can be difficult and Phillips has found that Thunderbirds exhibit the traits desired by the group of companies. “Compared to all the other awards, this one [2009 Thunderbird Entrepreneur of the Year Award] has given me what I’ve always wanted, more T-birds on my team.” 3. Is documentary and film dubbing too far outside Intelligent Leisure Solutions’ core line of products? How could this affect the group’s focus? As an outsourcing service, ILS’ focus on the client can be viewed as its key product. The retention of clients and contacts is essential and if a client needs an additional service that ILS is able offer; the client would more likely use ILS’ services than another company’s. This provides ILS with the opportunity to expand its range of services in order to more efficiently benefit its clients. Documentary and film dubbing is necessary for large international companies and by adding this to the service portfolio, ILS provides companies with yet another reason to choose and stay with it. 4. Does Intelligent Leisure Solutions need to develop a presence off-line? Will its online presence be enough to capitalize on the 2014 World Cup and 2016 Olympics? “What we need to begin selling is consulting” (Phillips). According to Phillips, a company can lose business if it is tagged as a purely Internet marketing company because of the newness of the industry. While most traditional advertising/marketing companies are now seeing the importance of online marketing, not many have been able to implement it effectively as this would mean changing their entire structure and thought process. ILS has already secured its place in the 2014 World Cup and 2016 Olympics in the real estate arena off-line through its network of contacts and therefore does not exist only online. Also, ILS’ association with the 2016 Olympics and 2014 World Cup is highly publicized online. 5. Does Phillips demonstrate a clear vision for Intelligent Leisure Solutions? How does this impact the group’s ability to grow sustainably? With two large international projects (2014 World Cup and 2016 Olympics) already secured, ILS is on track to grow very quickly. Because travel to Brazil after these two events may decline, Phillips has shown foresight in his planning strategy by looking at regional projects such as the Salvador Music Festival and projects in other countries such as the Panama metro. This allows the group to see market opportunities outside of Brazil, contributing to sustainable growth. 6. Which of the following traits of a fast-growing firm (clear vision, retention of small company traits, market-driven behaviors, belief in customer service, shared focus, and increasing flexibility) does Intelligent Leisure Solutions exhibit that may lead it to quick growth? ILS is focused on customer retention and client relationships, demonstrating a clear belief in customer service. Its focus on Internet marketing is market-driven, as well as its ability to capitalize on new opportunities that arise such as the 2014 World Cup and 2016 Olympics. While as a group ILS does not seem to have a clear vision, each individual company does, leading to quick growth. Also, ILS continues to be a small company exhibiting small company traits such as its focus on client relationships. And as a company dedicated to Internet marketing and relationships, flexibility is a must. 7. Phillips seems to be focusing on all four growth strategies: penetration strategies (existing market, existing product), product development strategies (existing market, new product), market development strategies (new market, existing product), and diversification strategies (new market, new product). Is there one that he should focus on first? ILS is already highly successful in Brazil, winning two of the most coveted projects in the country—the 2014 World Cup and 2016 Olympics, along with other notable projects such as the Salvador Music Festival and exclusive representation of Gehry Technologies within the country. This guarantees the Group a national reputation, thereby moving from a penetration strategy to a market development strategy, allowing ILS to focus on the still somewhat new international market. From there, ILS can focus on a product development strategy and unveil its new products to its market base in Brazil before finally taking the new products to the newer international market—a diversification strategy. Logisys 1. Describe threats and opportunities in the market that Logisys has entered (from both the local and international perspective). Logisys has entered into a market niche where information technology solutions for logistics processes already exist. The entrepreneurs noticed a gap in the market while working on informational technology projects at their previous company, leading them to believe their invention would fill this gap by improving the process, and lowering overall costs. It was very logical to believe that such a tool for improving company productivity would be worth implementing and most companies would recognize this value and adopt the product, but in reality it was not as easy. The average customer, the final user of information technology logistics solutions, did not understand the whole logistical process; to them, the main objective was to make sure a job got done, regardless of the process it underwent to get completed. There were specific groups of enterprises that understood the way the process worked: those who offered the auto-ID devices and those who implemented the main information technology systems, as ERP/MRP. It was only these two groups that understood the need for Logisys’ product. Most Polish companies, as well as companies in other developing economies, do not understand the value of quality information technology services. Since high-quality and low-price products appear to be available, managers often decide to choose the low-priced product, failing to recognize the long term costs that will be incurred as a result of such a selection. This is why the Logisys product, Agilero, faced an education barrier in the market and was not fully understood by their prospective customers. Another barrier is attributed to the entrepreneurs’ mentality of following the Blue Ocean Strategy. On one hand, Agilero is a great solution since it is capable of improving the logistics process, which companies should greatly appreciate. This statement was confirmed by the prizes awarded to Agilero not only in Poland (the PIF’s Gold Medal), and also on a European level (the Euro-ID Award 2006), at Germany’s Fair. This success was just the beginning of Logisys’ activity, and their awards should convince all those who doubt the necessity of their product. But just as Luke says, “Logic is not an argument good enough to make a thing exist;” his thoughts were a reflection of Agilero’s lack of sales. Today, marketing is about convincing the customer that he or she needs what you sell. The main threats to Logisys and Agilero are: • End customers are not being made aware of the benefits the product will bring. • Need to cooperate with the intermediate companies (partners) in order to sell the product. • Immature niche in the market that needs to be built from the bottom up, which requires major funding due to: ○ The significant amount of time needed to educate and convince not only the partners, but also the final customers. ○ The possibility of competitors entering the niche. ○ On an international scale, the Polish origin of the product could be a threat: developed countries may have the mentality that Poland may not be innovative in the field of information technology, thus instilling low confidence in the product. On the other hand, the market opportunities for Logisys are: • No such current products in the market could give Logisys the opportunity to be considered and thought of as the best information technology logistic solution. • No direct competition, thus the market could be created by Logisys. • No similar solutions from existing companies in Europe (which seems to be confirmed by the awarded European prizes), possibly giving Logisys a significant competitive advantage. 2. Analyze the Logisys situation over the past 3 years of its existence (its strengths and weaknesses, its behavior and strategy). Logisys developed in a way that is characteristic to most small start-up companies: it is based on intellectual capital. Two young entrepreneurs were united on the idea of a product and their sense of the product’s realization, but were lacking a clearly defined market and identifying traits. Although the goal still needs some determination, Logisys has a chance to become a part of the circle of typical pioneering enterprises that achieve success. Successful enterprises stand out from the others because their founders had clearly described the vision of the company’s development. However, Bart and Luke made some mistakes: • Investing a large sum of money into a technology that does not yet have a market was risky from the start. The unproved product, even if a very logical invention, did not stand a chance to be a bestseller since potential clients did not even know they needed it. • Sales and know-how in this field were introduced late and with poor results (especially since the tradesman appeared inefficient in his work, which was discovered by Bart and Luke fairly late, after one year). A company’s main task is to sell its product, and Logisys was lacking these critical skills from the beginning: Bart was a development manager, Luke was a product manager, and they were unable to find someone who was good, trustworthy, or responsible enough to assume this vital role during the business’ first stage of life. • The company entered into several undesirable commitments in their beginning stages because early on it was difficult to determine whether or not Logysis’ cooperation with another company would be profitable. For example, the RFID Konsortium originally brought many hopes and opportunities on the international scene and appeared to be worth fighting for. However, after two years its ineffectiveness became apparent, but a change in commitment on Logisys’ part could potentially ruin the small company. In other words, the commitment to the group was a mistake, but it was initially hard to predict. Several other unprofitable projects existed which most likely reshaped the company’s finances, but in business, experience is as great a teacher as is failure, as long as the entrepreneur is willing to learn. The question presented here is whether or not these mistakes could have been avoided, and if so, why weren’t they? • The initial startup of the company is questioned. The entrepreneurs put serious thought into the different parts of the business activities involved, but a few of these activities, though necessary, were costly and time consuming during the initial stages. For instance, the case mentions that Bart took care of the internal marketing issues, creating documents for the employees, etc. Typically, such company functions are handled after a certain period of being in business, and instead focus all beginning efforts on selling. Because sales is the most critical aspect for startups, Bart and Luke’s decision to learn to sell, even if not until the third year of business, was the best decision they could have made. Considering their commitment to their business, they are likely to win a lot on that decision, though time is now not working in their favor. It is critical they learn as much as possible as quickly as possible. Looking at Bart and Luke from an entrepreneurial standpoint, it is evident that they have achieved significant success considering the struggles they underwent. They are crucial assets of Logisys: they are both determined to succeed. High standards and high quality of their work is important and this has remained unchanged from the beginning of their venture. During the 3 years of being in business, Logisys has realized many successful projects and created very good references. Though Bart and Luke were not experienced managers in risk management, they were very good in the field of consulting and the Agilero platform. It seems as though the mistakes mentioned above were not due to Logisys; many of the mistakes (such as the FRID Konsortium) came about from the client side. Thus, a higher awareness of whom to engage into relationships with is needed, and the company must make some client segmentation; not every client is a good one, and the quality of a client must be proven before engaging into a commitment. Logisys’ strengths are: • The commitment, character, and determination of its founders, Bart and Luke. • A good niche product in Agilero. • Strengthening of the company image through its activity in the market in several aspects; through other companies and the cooperation with significant educational institutions. • Strong branding and a positive reputation. • High-quality references from clients in several different classes (M&M, Hogart, Wyborowa S.A., and others) • Its financial situation in terms of the involved sources of capital; the lender was Bart’s wife, thus the conversion of her loan to shares doesn’t subordinate the company to external management 3. Try to estimate the chances for Logisys success in the future? • Logisys’ future success depends not only on the company’s efforts, but also on market opportunities and avoiding past mistakes. • This case shows us that numerous efforts have been made and some of these efforts were rewarded. We can assume the entrepreneurs learned a lesson during the reorganization of the company’s business model, which led them to concentrate more on consulting than on technology. This new focus appears to be a great point to begin anew from a financial point of view, and as a way to gain client’s trust through long-term commitments which may lead to further technology implementation. • Logisys’ financial situation is hard to predict. A concentration on consulting will require an equal amount of work and commitment, like the technology implementation did, but will result in different scale of costs. Work that engages human intellect and does not require physical costs of goods appears to be profitable. Just as Bart and Luke predict, consulting may lead the company to higher earnings and possible profits, which could potentially finance the technology aspect of the business. In fact, had the entrepreneurs focused on selling and consulting during the first stage, it is likely the life of Logisys would not be questioned at the moment. Such estimations are, however, hard to confirm. • The company is reorienting itself toward a networking model of partnership, which seems to be a good and less costly move toward future growth. This model could provide the company not only with many contacts, but also the ability to prove their skills, knowledge, and teamwork ability. Any move toward increasing income and profits while lowering their costs is worth trying. • An encouraging aspect of Logisys concerns its positive income in 2008 which was the year the company was able to fully cover the operational costs. However, a negative feature involves the irregularity of it cash flows. Three years is not enough time to fully develop a startup especially in the field of technology, which requires a longer period to achieve a break-even position. • At this point it is difficult to determine Logisys’ future. However, there seems to be an opportunity for this 3-year-old startup which lies in the capabilities of the founders of the company: Bart and Luke. Mayu LLC Case Questions 1. Assuming demand continued to grow, how would Kate scale operations in Peru? She had already accepted a full-time job in Chicago and would be working on Mayu on a part-time basis. • Understand and document what makes a good Mayu knitter—the key characteristics, abilities and requirements. Create a job description for the position so as the company scales, they know whom to hire as additional artisans. • Define the organizational design of the on-the-ground operations—make sure communication flow is identified from the knitters to the team leaders to Kate in the United States. • Once the above two tasks are complete, hire a part-time person to work in Peru. It will be culturally difficult to bring in an “outsider” to the group that was not someone Kate knew from her time in the Peace Corps—trust and honesty is a big issue so Kate would most definitely need to be in Peru to do the interviewing and hiring. • Before she goes to Peru, she should have a shortlist of potential candidates based on a job description she creates for the position. • Once new people are incorporated, the part-time staff and Kate should divide the strong/competent team-members (the existing ones, who have been there from the start) into working groups. Each woman would be responsible for a group of 5-7 newcomers. It would be the responsibility of this team leader to communicate issues related to product design, quality and bookkeeping. She would report back to the overall leader, or part-time employee. • In addition, for ease of communication, Mayu should purchase all team leaders a certain amount of cell phone credit to easily call Kate if need be. • An incentive program should also be created to reward team performance based on quality and timeliness of output as well as ability to follow rules. 2. How would Kate take Mayu from an in-person, event-based company to a successful online store if people couldn’t see and feel the Alpaca fiber? She needed an online marketing strategy. • Create an Integrated Marketing Communications Plan!! ○ Decide on the type of media plan—use a seasonal/flighting budget that is focused on winter months and gift ideas. ○ Continue developing a consistent branding message across all mediums—digital and print. ○ Follow up with past customers using e-news blasts…these communications should facilitate purchase intent. ○ Create a referral program that convinces shoppers to tell their friends about Mayu as well as a loyal customer rewards program. • Continuously spread content around the Internet related to not only Mayu’s products but also other related topics and industry trends such as eco-fashion, fair trade, alpaca fiber, eco-fashion, ethical fashion, Peru, Peace Corps, entrepreneurship, women-owned business etc. ○ Build Links: Join as many social networks as possible. ○ Listen and respond to what people are saying about Mayu and the topics mentioned above. ○ Join groups/associations related to alpaca sales, Peace Corps, small business etc. to network and spread the Mayu word. ○ Investigate the use of search engine marketing such as Google Adwords (pay-per-click advertising). It is quite technical so hiring a skilled professional might be the best bet. • Work on SEO (search engine optimization) ○ Make sure on-page and behind-the-scenes keywords, meta tags etc. are updated and monitor them on a regular basis. • Use viral videos and photos to show the alpaca and quality of the products. ○ Have customer testimonials. ○ Show people talking about the products. • Narrow down the blogs and websites that could be used for paid advertising such as banners and/or coupons. • Look into targeting a certain geographic area of metropolitan areas to make Internet marketing much easier. • Find creative ways of promotion—specials, user-created design (have customers design the ideal product), etc. 3. Admitting that finance was not her strong suit, Kate worried that the pro-forma financial data she’d calculated was missing something. She was looking for feedback on what she’d done. • Kate should probably have included the costs she had already incurred to start the business such as the initial investment in capital and to create the website. • She should have factored in web design and fees—they would probably be more than she initially thought. • Kate should question whether the revenue growth rate she used was too high—she used 30% and the industry rate was about 7%. • She factored nothing in regards to exchange rate risk or other risks associated with an emerging market such as Peru. • She doesn’t mention transportation of products (though they are factored into the cost of goods sold). • Should Kate put a monetary value on the work her mom had been helping her with in terms of shipping and receiving? • Should Kate pay herself a little something? At what point? • Kate did not consider taxes. 4. What fraction of equity would Kate give up assuming she would soon be seeking capital to expand operations? • Kate should value Mayu based on past earnings (although the company was recently started) and/or comparable companies. • She also needs to decide how much control she wants to give up— does she want majority control? Yes. • Kate should also consider other alternatives such as a small business loan, financial support from family and friends, and/or partnering with one of the companies described below. 5. How would Kate be able to partner with the many Americans who had asked her to help them also import knitwear from Peru? She didn’t want to give away her “trade secret” of the artisans who she’d worked hard to train. • For those who are starting up, Kate could create a “consulting” arm of the business and offer advice and suggestions to those who are trying to start similar businesses—she does have some localized expertise. • Kate could also create an “outsourcing” arm of the business that facilitated the production of other designers’ products. This business would ensure quality and timely production at a certain price. • She could partner with these companies and share customers and marketing costs—they could do some sort of affiliate marketing to take advantage of shipping and distribution channels. • Mayu could use the Americans as designers and pay them a commission or royalties for the products she sells through Mayu. • Kate could incorporate new products to her site that were different brands or they could be placed under the Mayu label. Motrada Ltd Teaching Notes • This case is definitely not about the technology, even though the programming turned out to be quite challenging. The focus should be on Guillaume’s strong personality, the aspect of moving as fast as possible even if details aren’t properly taken care of, and element of going international as soon as possible as there are no major regional/national differences in demand and/or technology. • The problem with Motrada was always the strong dependence on proper timing, the lack of ways to secure the intellectual property (leaving the company open to the dangers of quick imitation), and the lack of building/handling the increasing team of people. • Number crunching is not the point of the case. Everybody can understand the market, the product, and the situation. The teaching should focus on vivid discussions of options and other ways to proceed as it’s easy to see that the project was after all quite shaky in all phases. • The lessons include: right timing; determination – never giving up; speed/knowing the necessity to always being one step ahead of the competition; learning from mistakes; fast R&D cycles parallel to market introduction. Case Questions 1. Name some crucial aspects of Guillaume’s personality that were relevant for the development of his entrepreneurial spirit. Flexible, international personality, not too focused on just one product/business idea, curious, driven and “on the move”, very knowledgeable in a particular market and in customer behaviour needs, work-hard-play-hard attitude. 2. Do you think Guillaume represents the “one in a million” entrepreneur? How common is such a person in your own country? How much do you think you have in common with Guillaume at this point in Motrada’s development? Guillaume did not come from a top notch business education with tons of money in his pocket for the venture or any other major third party support. In spite of being a “typical” French man, he is the kind of person you might find in any given country, who is able to do business in any country in the world. He is not exactly an “average Joe” but a student might find similarities between himself/herself and several aspects of his personality. 3. Is there a market need for Guillaume’s idea? Who would be willing to pay for a solution to the status quo? A well-defined need does not exactly exist, but rather an inefficient and problematic market situation and a technological way to improve it. Basically everybody involved is suffering. The old business model is not at all financially rewarding so everyone would gain from an improvement (in terms of time or of money). Thus the line between customers and users is vanishing which makes this case quite special. Remember: It’s a B2B market. 4. Who would be the product’s customers and users? The product's customers are individuals or organizations that purchase it, while users are the people who actively interact with or use the product. Customers may or may not be the same as users, depending on whether they are buying for personal use or for others. 5. Why does the B2B market seem to be more promising than the B2C market? Certainly, a B2C solution would target a larger customer base but all disadvantages of B2C business apply, and similar platforms (namely eBay) do exist which could easily expand into Guillaume’s market. Based on his own experience, Guillaume actually chose a small well-defined niche market with a few large customers with major continued demand. Marketing and logistics are easier, and the usual emotional aspects of selling/buying cars are missing. 6. Based on this situation—what are crucial criteria for designing the business model and entering the market? Guillaume did not really come up with a unique innovative business idea—there were prior attempts with a similar technology and a “proof of principle.” Guillaume’s advantage was the right timing (technology at hand and some discouraged early movers); however he had to act fast. 7. Describe opportunities and risks for this venture based on your knowledge of the market so far. Opportunities would be among others the general inclination to use auctions and the Internet for this kind of transaction. Risks were arising from the lack of patenting the business idea (both the business model and the software). 8. How innovation is this project: a “me too” project, a development and improvement upon existing technology, or a completely new idea? Being a sales manager and not a software engineer, Guillaume is basically putting together existing elements of mainstream technology and originally developing only specific software for the purpose of his platform. Still, it’s not me-too—he just came up with an idea any other person with a similar background could have had. 9. How would you define the sequence of customer importance and of market entry in this scenario? Guillaume chose a very smart mix of a small accessible home market (Austria) with two more adjacent markets using the same language (Germany and Switzerland), and simultaneously one more large target market easy to access for him personally (France), again with two more mass markets with strong similarities (Italy and Spain). Thus, the U.K. ended up being the sole major market in Europe not being covered in the first phase of market entry. 10. Are there more criteria for further segmenting this market? Among others, the age and turnover speed of used cars, the national structure of dealerships or client networks, any specifics of the cars, and particular preferences of the customers. 11. Do you recognize a systematic structure in the short-term development of these data? Even though there are many more countries in the EU, the “EU 5” are defining the market (80-20 rule). In general, the car market (i.e. the product) is stagnating while the e-commerce market (i.e. the transaction channel) is developing fast. Accordingly, in this market Guillaume is using a process innovation instead of a product innovation in order to earn money. 12. Do you regard these projections as “best case” or “worst case”? Even though Guillaume was working on his business plan with several scenarios, here we are dealing with a more pessimistic projection. 13. For each of the three phases, please answer the following two questions: a. What are the three most important things – good and bad – one can learn from Guillaume’s experience? Phase 1: ○ Good: Speed. Confidentiality. Asking other trustworthy professionals. Going for a fast test rather than wasting too much time on planning and contemplating. A step-by-step transition from employee to entrepreneur. ○ Bad: Right team structure/tasks but wrong people. Again, the step-by-step factor (discuss pro’s and con’s here). And, the value of gut feeling (again, this should spark an in-class discussion). Phase 2: ○ Good: Speed things up even more using “real life” deadlines. Including an entrepreneurship professional. Using a personal contact as a launching customer. Starting to out-source a major part of the value creation (i.e., programming). ○ Bad: Increasing dependence on the programming part. Very inexpensive marketing tools. Learning about the real system requirements quite late while working on the specifications. Phase 3: ○ Good: Using the support of an advanced business accelerator. Devoting more time to team building. Starting very fast to further develop the next software/platform generations (languages). ○ Bad: Not thinking hard enough about further financing. Team erosion due to low payments. Giving away shares to people who might not say on long time. b. What would you have done if you were in his position during each phase of the business? Phase 1: Anything but giving up is “right” (develop and discuss several alternative approaches). Phase 2: It’s worth pondering the alternatives of keeping the programming in-house, of pushing the marketing with a separate sales staff (i.e., other marketing tools), and of a more careful timing for in-coming and out-going cars (ability to deliver once the platform was on-line). Phase 3: Getting more top-management support. Accessing VC’s earlier based on varying exit options Parsek LLC Teaching Notes A parsek is a unit of length used in astronomy that stands for the ‘parallax of one second of arc.’ It is based on the method of trigonometric parallax, one of the most ancient and standard methods of determining stellar distances. The angle subtended at a star by the mean radius of the Earth's orbit around the Sun is called the parallax. The parsek is defined as the distance from the Earth to a star that has a parallax of 1 arc second. Alternatively, the parsek is the distance at which two objects, separated by one astronomical unit (AU), appear to be separated by an angle of 1 arc second. 1 parsek is approximately 3.26156378 light years. Pedagogical Overview and Suggested Teaching Approach The discussion of the case can be organized in three parts. The first part of the discussion should focus on the gestation of the entrepreneurial process. This can be done by use of a person-process-environment framework. The framework suggests that the closer the fit between the three elements, the greater the likelihood of a successful entrepreneurial event (Shane and Venkataraman, 2000). The second part of the case discussion should summarize organizational development after the founding team received external financing. Key strategic orientations of the company at that time are outlined. In addition, qualitative and quantitative data on information technology industry characteristics, factors that contributed to the emergence of internet industry, are presented. This is followed by the explanation of Parsek Group’s organizational structure and business model. The third section of the case analysis should include explanation of marketing strategies and prospects for international growth. This final part of the discussion should also draw from the previous growth questions about discuss future growth opportunities in general. Target Audience The case can be used to support class discussion for senior undergraduate students and graduate students. The discussion should focus on entrepreneurial processes and the development of both local and international growth strategies. Case Overview The first part of the case is a comprehensive illustration of a new venture creation process in an emerging market of a transition economy. It describes how the entrepreneurial team and their venture evolved, from the academic environment to the acquisition by a private investor. The second part of the Parsek case shows how private investment money can have significant impact on a start-up firm’s growth trajectory. This section is devoted to a discussion of the firm’s growth strategies: acquiring new markets and organizational development. The external environment of the internet industry and emerging market characteristics that enabled such development are also highlighted. In overview, the Parsek case represents the story of entrepreneurial fulfilment—a group of students sharing a dream and implementing their knowledge to create a start-up firm. The founding team consisted of students in their early twenties, who within 5 years developed a fast growth company. Receiving the private funds gave an additional impetus to the exploration and exploitation of opportunities that typically demand higher financial commitments than organic growth strategies. The company’s development was made possible by the capable team of founders and their entrepreneurial approach to scarce resource management. Learning Objectives • Teach students how to identify elements of entrepreneurial venture creation in an international start-up company. • Show creativity in obtaining resources needed to begin the entrepreneurship process. • Illustrate different types of innovation and creative corporate reorganization within a newly founded firm. • Describe the process of organizational evolution. • Discuss the unique features of marketing in technology-intensive markets. • Illustrate the range of strategic marketing approaches that a start-up firm can implement in an international environment. • Discuss international opportunities brought on by changes in technologically and market expansions. Case Questions 1. What factors contributed to the entrepreneurial event? What was the entrepreneurial opportunity? The entrepreneurial event can be analyzed in the person – process – environment framework. a) Person: The founders’ entrepreneurial spirit, common motivations, and passion for technology were the impetus for this venture. The founders’ motivations are illustrated in several ways: their choice of the industry, their description of their vision (“world domination”), and their values, which include a strong focus on their employees, creation of state-of-the-art technology, hard work, and perfection. b) Process: In order to start the firm, the founders leveraged most of their needed resources from others. They secured the minimal financial resources to register the firm. Other resources were acquired in the form of intangible resources from their supporters. c) Environment: Exposure to the entrepreneurial process during their academic years in their entrepreneurial research lab course was extremely influential for the founders. Having early exposure to entrepreneurial potential, as undergraduate students, triggered the initial start-up, rather than any market need or opening. In addition, the timing of the new venture’s creation coincided with the advent of the internet in Slovenia. It was at this time that the technology was beginning to be used for business purposes and the Slovenian IT industry began to emerge. 2. What tangible and intangible assets did the founders invest in Parsek when starting their company? How did they meet their resource needs? The initial tangible assets invested in the company consisted of a minimal monetary investment to register the firm. These funds came from the profits earned from the founder’s successful yearbook publishing project. The intangible assets they founders invested included: ‘sweat capital’ (persistence and sustained effort in realizing their vision) and social capital (the network of relations they had established during previous project experiences). The founders needed to fill their additional resource requirements by obtaining office equipment and space as well as gain human capital to sustain and eventually grow their venture. Their material resources, such as office space and equipment, were acquired from an existing IT company in a barter transaction for Parsek’s services. The team enhanced their human capital by hiring engineers and administrative personnel who shared their vision and passion for technology. Because most of these new hires were from their personal networks, the hires were willing to forgo wages for the first half of the company’s operations. 3. What were the risks the founders faced in the first year of operation? How did they control and overcome them? The founder’s first year risks were both general and specific. The general risks can be classified under the heading “liability of newness” (Stinchcombe, 1965). This liability of newness assumes higher risks of failure for young organizations compared to more mature organizations. There are three reasons why this assumption is made. (1) New organizations have learning curves that are more difficult for their employees. Their employees are placed in new roles and the time spent learning these new roles causes economic inefficiencies. (2) In new organizations, rapport has not yet been built among members, which leads to inefficiencies in communication and other areas due to the lack of trust. (3) Finally, new organizations generally lack a large and reliable client base. The founders controlled their risks by maintaining close relationships with mentors (professors and familiar CEOs) who could provide business advice and client networks. The specific risks the founders faced are summarized by the “liability of smallness,” since small firms are limited by the range of expertise and human capital they are able to acquire because of their size. Small firms have limited budgets and limited networks, making it more difficult to employ specialists due their lack of recognition in the industry. Small firms also suffer from a lack of influence over their customers because they generally control only a small portion of their market. The founders of the Parsek Group LLC controlled these risks by focusing on establishing a reliable network of partners within their industry (i.e. advisors and competitors), related industries (i.e. marketing agencies), and the media industry (i.e. one of the founders kept his part-time job with a business magazine). From the very beginning, their vision was growth oriented. Accordingly, the founders targeted customers among the best ‘blue-chip’ Slovenian companies so that they could grow along with them. 4. Should the founding team have taken the money offered by the private investor? How should the company orient itself for future growth? The company’s founders decided to accept the offer of the strategic investor. EON invested US$1.5 million for a 76% stake in Parsek. The owner of this portfolio investment was a UK-based investment fund, EMP, whose cumulative investment in Slovenia totalled US$10 million. As the framework for their future strategy, the founders decided to have a two-tiered strategy. First, they sought out opportunities in the marketing sphere where they could leverage their state-of-the-art technological solutions. To reach this goal they built on the advances brought about by the internet. To allow for further growth they created a spin-off venture, Httpool, by purchasing DoubleClick Technology. Second, the Parsek Group focused on strengthening business opportunities that would enable them to continue to develop their own products rather than depending on their client customized solutions. The business development strategies are the focus of the Case B materials. The founding team’s decision can be evaluated by the decision matrix below. Influence on Company Growth Influence on Company Financials Influence on Entrepreneur Lifestyle Pros Cons Pros Cons Pros Cons Take the Offer - Open avenues for growth - Opportunity to expand internationally - Access to broader networks - Firm may fail due to rapid expansion and lack of stable infrastructure - New capital - Entrepreneurial harvest - Loss of founders' independence and autonomy Decline the Offer - Stable, predictable growth - Generic growth - Lack of capital to fund growth - Maintain lifestyle - No financial returns for the near future 5. What differences exist in the marketing of high-tech products versus the marketing of other goods? Can you identify specific challenges in marketing high-tech products internationally? The high-tech market is dynamic and innovation-driven rather than customer driven. This can lead to specific challenges when marketing high-tech goods. These challenges are both external (related to market characteristics) and internal (aligned with the business strategies of a firm). High-tech markets are complex and volatile, making market predictions difficult to ascertain. Firms competing in high-tech markets, such as Parsek, face tough competition. Their products and services target a niche market where only 2-3 companies can profitably offer a whole product line—satisfying the core customer need and provide maintenance and customer support. 6. Which marketing strategies has Parsek employed so far? Do you believe these strategies will be reasonable in the future, given the industry trends? What international marketing strategies would you suggest Parsek use in the future? Parsek pursued varying marketing strategies. Initially, Parsek sought market penetration because the company needed to increase its market share within the local Slovenian economy. They did so by steadily winning new accounts and increasing the expenditures within their clients’ annual contracts. Parsek then launched a new business, the Httpool Internet-advertising network, to provide its existing clients with full support and services in online marketing. Then Parsek further developed its market by expanding Httpool internationally. The group then replicated its business model in the other former Yugoslav markets and developed strategic partnerships with both Western European and Central European internet advertising networks. The second opportunity for market development was in the local market, with a slight modification of its interactive business (transforming it from a customized product to a subscription-based service). They addressed a niche market of small and medium-sized businesses that have on-line needs. The Parsek group also diversified their product line by entering a new market segment with their Professional IT Services division. Based on industry analysis data, the following opportunities for future growth are viable: (1) The Interactive Division should pursue market consolidation and improve long-term agreements with new and existing clients. (2) In terms of developing new businesses, there are several opportunities to enter into partnerships with the leading European search portals and to establish joint ventures by leveraging common synergies. (3) Parsek should look into developing traditional advertising agency services. (4) More new markets can be developed in the region. The Interactive Division can open local branches in Croatia, Bosnia-Herzegovina, and Serbia where the Httpool Division has already laid the groundwork. Further discussion: An Ansoff matrix can be developed based upon the above discussion. Compare the matrix developed for the future growth opportunities to the matrix that is presented in the case. Where are the key differences? Sedo.com Teacher Notes Sedo (Search Engine for Domain Offers) is a German start-up company operating in the domain name aftermarket. After seven years of continuous growth, Sedo became the world’s leading online marketplace for buying and selling domain names. It was at this point that the four founders needed to decide upon their future with Sedo. They concluded that they would exit their business by selling half of their shares – equal to 24% of all company shares – to a current investor. Case Questions 1. How did Sedo’s market value develop from 2000 to 2006? Because Sedo does not list its shares on the stock exchange, the company’s market value must be observed from ownership transactions over the period of its existence. With this in mind, Sedo’s market value is determined from the following data: Year 2000 2002 2005 2006 Vendor Sedo Sedo United Internet Sedo Vendee United Internet United Internet AdLink AdLink Shares sold 41 % 10% 52% 24% Share’s Price € 400 000 € 575 000 € 14.3 million € 35 million Market Value* € 975 610 € 5.75 million € 27.5 million € 145.8 million * Use the following equation: Calculating the Compound Annual Growth Rate (CAGR) shows that the company has enjoyed substantial growth: . 2. To what extent was the 2006 exit strategic for the founders and the investor AdLink? In this context ‘strategic’ means that a particular action—in this case the selling and respectively buying of Sedo’s shares—is designed to achieve a certain goal. United Internet—the first vendee of Sedo’s shares—is a leading company for high-quality Internet and technical services for home users and SMEs. United Internet was the major domain name registrar in Germany in 2000. Domain name registrars are companies authorized by the ICANN and/or national ccTLD authorities to register and manage domain names on behalf of the Internet end-users, individuals as well as companies. United Internet offered services dedicated to the primary domain name market while Sedo’s services are geared to the aftermarket. From United Internet’s perspective, this move was strategic: • Access to innovation: Corporations are constantly seeking product and process innovations to enhance their competitive position in the market. A prevalent strategic approach, especially for larger corporations, is to invest in young high-tech start-up ventures to identify innovations and development trends at an early stage. This enables them to develop their business strategy alongside the changing trends. Corporate venturing is a form of innovation management. Corporations often provide more than venture capital to these investments. The acquired start-ups usually obtain additional nonmonetary support like access to the corporation’s distributive channels, assistance in technical or management respect, or cooperation agreements are made. • Supplement to existing services: United Internet offered domain name services in the primary domain market, while Sedo offers services related to the aftermarket. The investment in Sedo allowed United Internet to offer a broader range of services to their target market. • Profit realization: Another goal of acquisition is increasing profit. Profits may be earned from future resale of the acquired shares and/or by future dividends paid by the acquired company. Within the domain market, most of the income creation is generated from the domain name aftermarket. Primary market transaction revenues are fairly limited to a registration fee and an annual management fee for the domain name, both usually only a few dollars. In contrast, domain name aftermarket sale prices are four-digit dollar amounts on average and average domain parking revenues are even higher. Sedo’s management also had strategic motivations for partnering with United Internet. • Money: While entry into the domain market does not present high fixed costs, initial and subsequent investments are necessary to provide the basis for growth. These investments are predominantly for technical facilities, employee wages, and materials. Sedo’s founders were students without regular employment when they founded their company and their capital resources were limited. The contribution of equity capital and the additional shareholder’s loan from United Internet permitted Sedo’s founding team to finance the required investments with only minor capital costs and few other capital suppliers. • Management and technical skills: Management experience as well as technical skills are vital to achieving fast, yet sustainable, growth in a high-tech venture. Sedo’s founding team was young and inexperienced in the area of corporate management. Only one founder, Tim Schumacher, had exposure to relevant business skills during his studies at the University of Cologne. United Internet actively mentored Sedo’s founders by providing knowledge of corporate structure, public relations, internet business, and technical solutions. • Access to customers: Growth is determined by customer acquisition. Developing a customer base is a difficult task for any start-up venture, let alone an Internet start-up entering the market during the dot.com crisis. Working with United Internet allowed Sedo to avoid this problem by using the company’s already existing customer base. By embedding Sedo’s service into their own Web site, and advertising the additional services to their existing customers, United Internet gave Sedo access to their 10-year-old customer base. 3. Was the 2006 exit a bargain, fair valued, or overpriced? Take into account that Sedo’s estimated EBIT was EUR 16 million and average EBIT multiples range between 5.5 and 8.1 for companies in the information technology industry. Using multiples is a simple valuation method employed by investment banks and equity analysts. The standard formula for the calculation of a multiple is: . Common reference figures are earning variables, e.g. EBIT or EBITDA, as well as revenue figures. AdLink paid EUR 35 million for a 24% stake of Sedo. The enterprise value of Sedo in 2006 was therefore EUR 145.8 million (see also question 1). Combining this information with the estimated EBIT of EUR 16 million leads to the following multiple: This result shows that the deal might be somewhat pricy for AdLink since the EBIT multiple is higher than the cap of the given average EBIT multiples for companies of the information technology industry (9.1 vs. 8.1). However, Sedo is not comparable to most information technology firms so, the EBIT multiple is only a point of reference. The assessment of the 2006 exit should be done using further methods of company evaluation, namely, the DCF method. In addition, qualitative factors of each deal should be considered: intentions of vendee, synergetic effects, bargaining power, and market development. 4. How can Sedo’s management team sustain the company’s current market position in the future? Sedo’s past success and current position and industry leader do not guarantee future success. In fact, Sedo will encounter major challenges in the near future: • Unavailable protection: Domain name services are rarely sheltered against imitators due to the bureaucracy involved with patenting Web site source code. • Increasing competition: The undeniable success of domain service companies, the domain aftermarket’s rebound in recent years and the low market entry barriers (i.e. low sunk costs) continue to attract many new competitors. • Sedo’s revenue model: Sedo’s revenue is heavily dependent on one service product, the domain name parking service. To assure future success, they may need to diversify. Despite the challenges that the future will present, Sedo’s business model has significant strengths that, if cultivated, will enable them to succeed. Among them are: • Customer-centric service: Sedo consistently listens and responds to their customers and develops services that meet and/or exceed their customers’ needs. • Technical advantage: Sedo’s engineering department developed the world’s largest domain name database (containing more than 8 million domain names). They also created a unique meta-search engine that automatically searches the Internet for unused domain names. • Internationalization: Sedo is still the only domain name service with offices located in Europe and the U.S. Their service is multilingual and hosts local Web sites around the globe. Their employees represent more than 20 nations, and equally as many languages. • Broad network of partner companies: Sedo collaborates with major registrars, domain name financiers, and advertising agencies around the world to offer a full service platform for domain name services. A combined analysis of Sedo’s future challenges and the business model’s strengths suggests that Sedo’s future growth and market position hinge on: • Continued international expansion: Although the domain name aftermarket is largest in the U.S. and Europe, future growth will occur in today’s emerging markets: China, India, and Eastern Europe. • Consolidation of the domain buying process: Sedo must create a tighter connections between the domain name primary and aftermarket to create a network of exclusive agreements under their umbrella. • Expansion and improvement of Sedo’s key products. Sedo must differentiate from competitors more clearly and reduce their revenue dependency on the domain parking business segment. TRIMO Teaching Notes • Motivate students to analyze the EU and regional economic situation and trends. • Motivate students to analyze the global situation and trends in construction industry. • Motivate students to analyze the global and European situation and trends of panel market industry. • Discover TRIMO's Web site www.trimo.si/client/index_en.php. Update on TRIMO TRIMO remains one of the most successful companies in Slovenia. TRIMO received the most prestigious European Award for Business Excellence in 2007 in Athens. TRIMO was the first Slovene company to receive the Award for Leadership. Case Questions 1. Describe the nature of European panel industry in terms of size and characteristics. The entire European panel market is estimated at 140 million m2, of which 15-20% are mineral wool panels. TRIMO is the leading European manufacturer of mineral wool panels. However, the predominant European manufacturers of PU panels, and TRIMO’s major competitors, come from Italy, Great Britain, Germany and France. The strongest markets of insulation panels in Europe are France, Great Britain, Germany, and Spain, whereas Italy is considered the largest exporter of insulation panels to the European markets. By providing comprehensive solutions in the field of pre-fabricated steel constructions, TRIMO creates the highly necessary competitive edge in relation to our competitors. In the construction sector in Europe the top five construction companies are Vinci, Skanska, Bouygues, Hochtief, and Ferrovial. However, these major players are not TRIMO’s direct competitors since in some projects it also performs as their supplier. Therefore, TRIMO considers the following manufacturers of insulation sandwich panels as its main competitors: - RUUKKI is in the process of establishing its position through acquisitions of local manufacturers in the markets of Central Europe, Eastern Europe, and Russia. To strengthen its position the company acquired the largest local manufacturer in Poland, Metalplast. - KINGSPAN is the leading panel manufacturer in Great Britain and Ireland. The company has been pursuing its internationalization strategy through opening new manufacturing facilities in the markets of Eastern Europe (Hungary and the Czech Republic). - PAROC was the leading manufacturer of fire-resistant mineral wool panels until 2004 but is currently in decline due to its changed strategy to become a manufacturer of mineral and stone wool. - METECNO has the most extensive marketing network among the competitors. The company has its own manufacturing facilities and selling companies not only in Europe but also in the United States, Latin America, and Asia. 2. Explain the trends in the European construction industry. Predicting growth in the building sector is largely dependent on economic trends and investments in the private and public sector in a particular market. In the West European market, the growth of the construction sector is expected to continue at the relatively slow rate, which will, according to projections, even decrease. Interest rates are expected to grow and thus negatively impact credit and loan operations, as well as consumption, which will be consequently reflected in a reduced volume of investments in construction. The fastest growth in the Western Europe is expected in the field of building renovation. Compared to Western Europe, the booming markets of Central and Southeastern Europe represent a great business opportunity. All development prospects and expectations are oriented toward these markets, which will generate the largest profits in the European construction business until 2010: a. In the markets of new EU members (the Czech Republic, Poland, Hungary, and the Baltic countries), which together comprise a mere 4.5 % of the European market share in construction in 2004, growth rates will be much faster than in the Western Europe (5 %- 6 % a year on the average). The growth is expected to slowly level off, resulting in 2008 and 2009 showing lower growth rates than 2006 and 2007. b. In the markets of Southeastern Europe (Bulgaria, Romania, Croatia, Bosnia and Herzegovina, Serbia and Montenegro, Macedonia), which together are only 1.3 % of the European market share in construction, a fast growth rate will be maintained through the focus on programs to move towards EU membership. The growth in construction will be marked by double-digit numbers. c. The Russian states attained only 3.5 % of the European market share in construction. However, this market’s building boom is substantially contributed to by the Russian economic might from its oil and gas. Russia has become a magnet for foreign investors. The construction growth rate is expected to go beyond 20 % a year on average. Apart from Russia, Belarus and Ukraine are also considered very attractive markets. 3. What are the critical factors for success in this industry? Factors of success are first and foremost strongly dependent on the general economic situation in a particular market. Key factors of success in an industry branch are considered to be the following: - fast economic growth - substantial amount of direct foreign investments - development programmes supported by EU, EBRD, EIB, the World Bank, etc. - ensuring comprehensive solutions in the field of construction - strong R&D and technical support - launching new products (new construction materials, new types of construction, speed and ease of assembly, etc.) - systematic implementation of CRM in particular target segments (architects, investors, etc.) 4. Why is a business network so important for TRIMO? Establishing strategic partnerships with customers, investors, suppliers, architects, designers, specialists, and other partners is made possible by segmenting target public groups, offering relationships adjusted to their requirements, and organizing work procedures tailored to their needs. Assessment of target groups’ satisfaction provides an overview of their perception towards the company’s offer and serves as the basis for further activities taken in the light of improving products, services and processes. 5. How did TRIMO develop and maintain its competitive advantages? TRIMO’s main advantages are a clear vision and strategy, capital strength, a company with the life-long learning concept, ambitious and innovative employees, and an extensive marketing network. TRIMO’s key competences include: - advanced construction technologies - complex solution of the client’s problem - quality products and services - profound individual and organizational competences Special focus is given to the individual competences of employees, where they develop communication skills, innovation capabilities, teamwork, self-management and other skills. This is how new technical, technological, specific, process, and organizational knowledge is developed. In this process learning motivation, creativity, responsibility, and ethics are of utmost importance. Continuous development of competences, both of individuals and of the company, results in the added value for TRIMO’s customers. 6. What are the main characteristics of TRIMO’s marketing strategy in Southeastern Europe? TRIMO’s marketing strategy in Southeastern Europe strives to achieve a vision of becoming the leading European company to provide comprehensive solutions in the area of pre-fabricated steel buildings. TRIMO is gaining recognition in the Southeastern Europe market by providing innovative and high-quality comprehensive solutions for fireproof roofs and facades and buildings for non-housing construction. The company is jointly engaged in assuring quality solutions, fulfilling any wishes and needs of the clients, performing its duties in a timely and high quality manner, constantly improving its support and care for clients and other target groups of the company. The strategy of internationalization in the Southeastern Europe markets is divided into three main parts, as follows: a. Marketing: - Approaching clients - Acquiring new clients - Following up with strategic clients - Following up with foreign investors - Setting trends in the field of facades (higher price range - Raster) - Expanding the market network - Entering new markets - Increasing market share - Regional sale distribution b. Research & Development - Increasing innovation - Joint development together with suppliers and clients - Transfer of technology and technological knowledge - Developing products that are adjusted to the market / target groups - Marketing new products with a higher added value c. Production & Purchase - Marketing of comprehensive solutions - Use of local sources: purchase of raw materials - Cheaper work force - Lower transport costs - Local manufacturer Due to the size of the Southeastern Europe market, the expansion and development of the TRIMO sales network is carried out by establishing sales companies and representatives in that region. In doing so, the marketing of products and services is adjusted to the local market, which ensures a more effective execution of marketing communication. 7. Describe the TRIMO marketing strategy for the Croatian market. The TRIMO market network is based on a unified organizational culture and values which are summarized in the TRIMO standards and the definition of the true TRIMO—employee and represent the operational guidelines for all employees in all markets. The marketing strategy as a part of TRIMO’s business model in Croatia is based on the unified work system which is properly upgraded, i.e. adjusted according to the local marketing situation, buyer characteristics, and branch development. 8. Why did TRIMO establish TRIMO Građenje in Croatia? To increase its share in this market by performing marketing, commercial, and networking activities locally. 9. What is the role of the TRIMO Građenje in the TRIMO Corporation? TRIMO Građenje Ltd. is a subsidiary of the TRIMO Corporation. Their main responsibility is to perform marketing and commercial activities on the Croatian market and to support value creation processes for all stakeholders who are involved in this business. Solution Manual for International Entrepreneurship: Starting, Developing, and Managing a Global Venture Robert D. (Dale) Hisrich 9781452217390, 9781483344393
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