““Creating Regional Support Creating Regional Support Systems”Systems”

Thomas S. Lyons, Ph.D.

Fifth Third Bank Professor

of Community Development

University of Louisville

It is helpful to think of a region’s supply of entrepreneurs and enterprises as a “pipeline” consisting of variegated stocks and flows.

Seven major variables in a Seven major variables in a region’s enterprise development region’s enterprise development

pipeline: pipeline:

1. Skill level of the entrepreneur

2. Stages in the development of the business (i.e., lifecycle)

3. The market or industry in which business is operating

4. Types of business goals

5. Business performance

6. Types of change required to improve business performance

7. Stages in the change process

Three fundamental propositions Three fundamental propositions about about

entrepreneurial skills entrepreneurial skills

Entrepreneurs are successful to the extent that they have the necessary skills;

Entrepreneurs come to entrepreneurship at different levels of skill; and,

Entrepreneurial skills can be developed.

The four dimensions of entrepreneurial The four dimensions of entrepreneurial skill:skill:

Technical Skills – ability to perform key operations of the business

Managerial Skills – ability to organize and manage the operations

Entrepreneurial Skills – ability to identify market opportunities and create solutions

Personal Maturity Skills – self-awareness, accountability, emotional and creative

development

Entrepreneurial Levels by Degree of Entrepreneurial Levels by Degree of Skill:Skill:

Skills:

Level:

Technical Managerial Entrepre. Personal

Maturity

Majors Outstand./

Exceptional

Outstanding Outstanding Outstanding

AAA High High High High

AA High Medium Medium Medium

A High/

Medium

Low Low Low

Rookie Low/No Low/No Low/No Low/No

Crucial observation about Crucial observation about entrepreneurial skills entrepreneurial skills

Moving from one skill level to another requires a transformation on the part of the entrepreneur.

There are six stages in the There are six stages in the lifecycle of a business:lifecycle of a business:

Stage 0 – Pre-venture Stage 1 – Existence or Infancy Stage 2 – Early Growth Stage 3 – Expansion or Sustained Growth Stage 4 – Maturity Stage 5 – Decline

Observations about Lifecycle Observations about Lifecycle StagesStages

Lifecycle stages are independent of the entrepreneur’s skill level

Movement to the next stage of development of the business requires a transformation to a different operating structure

Stage of development in the lifecycle is not identical with the age of the firm

The real wealth creation stages are 3 (expansion) and 4 (maturity)

Market or Industry Market or Industry

Describes the customer segment in which the entrepreneur and the enterprise is operating.

Types of Business GoalsTypes of Business Goals

1. Survival (income or job) – e.g., traditional small business – constrained view of possibilities

2. Lifestyle – hobby, control over time (leisure), passive investment – similarly constrained view of business possibilities, but for different reasons

3. Growth or asset creation – classic entrepreneurship– Competitive: pursuing a gap in the marketplace – Productive: pursuing an opportunity for innovation

4. Missionary objectives (could be social, public or private – e.g., to put a computer in every home)

Business PerformanceBusiness Performance

The percentile ranking of firms on the basis of various performance measures – value-added, ROI, ROA, etc.

There are six stages in the change There are six stages in the change process:process:

1. Pre-contemplation

2. Contemplation

3. Preparation

4. Action

5. Maintenance

6. Termination

Moving from a “pool” to a “pipeline”Moving from a “pool” to a “pipeline”

We can use these seven variables to “map”We can use these seven variables to “map” the community’s pipeline the community’s pipeline

of entrepreneurs and enterprisesof entrepreneurs and enterprises

The Pipeline of Entrepreneurs and The Pipeline of Entrepreneurs and EnterprisesEnterprises

Lifecycle

Skill Level

Stage 0Pre-venture

Stage 1Existence

Stage 2Early

Growth

Stage 3Expansion

Stage 4Maturity

Stage 5Decline

AAA

AA

A

Rookie

Mapping the Community’s Pipeline of Mapping the Community’s Pipeline of Entrepreneurs and EnterprisesEntrepreneurs and Enterprises

Numbers of Entrepreneurs/Enterprises by Skill Level and Lifecycle StageNumbers of Entrepreneurs/Enterprises by Skill Level and Lifecycle Stage

Lifecycle

Skill Level

Stage 0Pre-venture

Stage 1Existence

Stage 2Early

Growth

Stage 3Expansion

Stage 4Maturity

Stage 5Decline

AAA 12 ent. 36 enterprises

45 27 60 12

AA 30 69 96 24 42 12

A 45 53 150 6 4 3

Rookie 12 45 30 0 0 7

Observations about the Pipeline:Observations about the Pipeline: Movement to any other segment of the pipeline (i.e., cell in the map) requires

a transformation. The ability of an enterprise company to move to the next stage in its lifecycle

depends on the skill of the entrepreneur and/or his or her “team.” There are a variety of possible outcomes in the pipeline: movement to

another section of the pipeline, stagnation/arrested development, exit or death.

Entrepreneurs and enterprises in each segment of the pipeline have different requirements in terms of their needs and the service infrastructure that is necessary to support them.

Movement within the pipeline is dynamic; companies do not necessarily stay in a particular segment for long.

“Peers” are entrepreneurs at the same skill level, no matter what stage in the lifecycle their business is operating.

“Role models” are entrepreneurs who are at a higher skill level and/or whose business is at a later stage in its development.

Map of the Community’s Pipeline of Map of the Community’s Pipeline of Entrepreneurs/Enterprises by Market Entrepreneurs/Enterprises by Market

SegmentSegment e.g., Plastics – SIC 30e.g., Plastics – SIC 30 Numbers of Entrepreneurs/Enterprises by Skill Level and Lifecycle Stage Numbers of Entrepreneurs/Enterprises by Skill Level and Lifecycle Stage

Lifecycle

Skill Level

Stage 0Pre-venture

Stage 1Existence

Stage 2Early

Growth

Stage 3Expansion

Stage 4Maturity

Stage 5Decline

AAA 6

ent.’s

12 enterprises

3 15 30 4

AA 10 23 32 8 14 4

A 15 15 50 2 1 1

Rookie 4 15 10 0 0 2

Observations about a Market-Observations about a Market-Segmented PipelineSegmented Pipeline

This offers a highly differentiated and targeted way to work with entrepreneurs and enterprises in a cluster (i.e., by skill level and stages of development of the business)

It focuses on the importance of entrepreneurs to the existence and success of a cluster

Map of Community’s Pipeline of Map of Community’s Pipeline of Entrepreneurs/Enterprises by Entrepreneurs/Enterprises by

Economic PerformanceEconomic Performance

Lifecycle

Skill Level

Stage 0Pre-venture

Stage 1Existence

Stage 2Early

Growth

Stage 3Expansion

Stage 4Maturity

Stage 5Decline

AAA 0 firms – 20%

2 firms - 40%

0 firms – 60%

7 firms – 80%

AA

A

Rookie

Observations on Business Observations on Business PerformancePerformance

There is a distribution of performance in every segment of the pipeline

The goal should be to shift the performance of the whole (the entire distribution curve) to the right

Three broad options for improving the Three broad options for improving the Performance of the Community’s Pipeline Performance of the Community’s Pipeline

of Entrepreneurs / Enterprises:of Entrepreneurs / Enterprises:

1. Performance enhancement approaches designed to improve the quality of the existing stock within each segment of the pipeline – to increase or accelerate “growth” and profitability

2. Transforming or incubating approaches designed to change the stock by improving the flow or movement between segments of the pipeline

3. Selective “attraction” approaches designed to strategically add new players to the stock or pipeline

Performance Improvement Strategies focus on Performance Improvement Strategies focus on improving business outcomes within an individual improving business outcomes within an individual

cell in the pipelinecell in the pipeline

Lifecycle

Skill Level

Stage 0

Pre-venture

Stage 1

Existence

Stage 2

Early Growth

Stage 3

Expansion

Stage 4

Maturity

Stage 5

Decline

AAA

AA

A

Rookie

10 firms change profitability

from 5% to 15%

The structure of the business and the skills of the entrepreneurare left unchanged.

Examples of performance enhancement Examples of performance enhancement strategies that improve the quality of the “stock” strategies that improve the quality of the “stock”

of entrepreneurs and enterprises in any of entrepreneurs and enterprises in any “segment” of the pipeline“segment” of the pipeline

Profitability improvement or cost reduction strategies Sales or market growth strategies Operational improvement efforts or refinements

– Adoption of best practices– New hires (e.g., exiting out the founder, changing management

player – but keeping the existing “structure” in place) – Workout programs– Turnaround consulting efforts (emergency or crisis effort)

Asset Sale (i.e., of the business or any component) – financial, not strategic

The strength and weakness of The strength and weakness of performance enhancement performance enhancement

strategiesstrategiesStrengths: Can produce results quickly (by focusing on low-

hanging fruit)Weaknesses: Long-term impact is limited in terms of the

number of firms it can reach (e.g., once the cream is gone, who is responsible for making more cream?)

Is transaction oriented, not transformational

Incubation strategies are designed to change the Incubation strategies are designed to change the stock by improving the flow or movement of stock by improving the flow or movement of

entrepreneurs and enterprises between entrepreneurs and enterprises between sections of the pipelinesections of the pipeline

Lifecycle

Skill Level

Stage 0Pre-venture

Stage 1Existence

Stage 2Early

Growth

Stage 3Expansion

Stage 4Maturity

Stage 5Decline

AAA

AA

A

Rookie

Examples of incubation Examples of incubation strategies:strategies:

Develop the skills of entrepreneurs Build, change or add to the management team – to bring in higher levels of

skills Change ownership or control – e.g., through the sale of the business (through

business brokering); succession planning; exiting out the entrepreneur or transferring them to a different opportunity better suited to their skill level

Recruit new talent, e.g., youth entrepreneurship, etc. Launch intra-preneurial ventures (corporate venturing) or develop new

products (not merely line extensions) within mature companies Spin out new, independent ventures from larger, mature firms Transition enterprises to the next stage of development in the business

lifecycle Reinvent stagnant firms

The strengths and weaknesses The strengths and weaknesses of incubation strategies:of incubation strategies:

Strengths:Is sustainable over the long-term – makes

more cream

Weaknesses:Requires skill to execute as well as an

investment of time and resources

Selective attraction strategies are Selective attraction strategies are designed to add new players (i.e., stock) designed to add new players (i.e., stock)

to the pipeline to the pipeline – e.g., plastics– e.g., plastics

Lifecycle

Skill Level

Stage 0Pre-venture

Stage 1Existence

Stage 2Early

Growth

Stage 3Expansion

Stage 4Maturity

Stage 5Decline

AAA x x, x

AA x, x, x

A x x, x

Rookie

“X” represents the addition (i.e. attraction) to the community of a plastics company with complementary capabilities that fits in this segment of the pipeline.

Examples of selective attraction Examples of selective attraction strategiesstrategies

Immigration of aspiring entrepreneurs or actual entrepreneurs and their businesses

M&A for mature companiesStrategic attraction or relocation Business satellites Franchising

The strengths and weaknesses of selective The strengths and weaknesses of selective attraction strategies in the management of attraction strategies in the management of

the pipeline:the pipeline:

Strengths Strategically adds to the community’s portfolio of

business assets; fills the deficit in capabilities quickly Community connection by new firm is rooted in the

relationships with other companies Weaknesses More challenging to execute – deep knowledge of local

business assets required

Five Elements of a Strategy for Five Elements of a Strategy for Maintaining the PipelineMaintaining the Pipeline

Take a systems approachCustomize the system for the communityFocus on developing entrepreneursDevelop new roles, skills, and toolsOperate as a “transformation business”

EXAMPLE:EXAMPLE:

The Entrepreneurial League System® in Advantage Valley,

West Virginia

The primary mission of the The primary mission of the Entrepreneurial League System Entrepreneurial League System

is…is…

To develop a supply of highly skilled entrepreneurs that are capable of building successful companies in sufficient numbers to transform the economy of that region.

Major Premises of the Major Premises of the Entrepreneurial League SystemEntrepreneurial League System®®

Skills are key to entrepreneurship success

Skills can be developedEntrepreneurs do not all come to

entrepreneurship at the same skill level

The Entrepreneurial Leagues:The Entrepreneurial Leagues:

Technical Managerial Entrepre. Personal

Maturity

Major

League:

Outstand./

Exceptional

Outstanding Outstanding Outstanding

AAA: High High High High

AA: High Medium Medium Medium

A: High/

Medium

Low Low Low

Rookie

League

Low/No Low/No Low/No Low/No

Development Level Targeted by Development Level Targeted by Service ProvidersService Providers

Entrepreneurial Development

Level

Type of Enterprise Development Assistance Providers

Majors Venture capitalists, professional consulting practices, investment bankers, etc.

AAA Angel investors, emerging business consulting practices, university tech transfer offices

AA Manufacturing extension programs, small business development centers, small specialized venture funds, high technology incubation programs,etc.

Development Level Targeted by Development Level Targeted by Service Providers Continued…..Service Providers Continued…..

Entrepreneurial Development Level

Type of Enterprise Development Assistance Providers

A Microenterprise programs, small business development centers, business incubation programs, etc.

Rookie Microenterprise programs, youth entrepreneurship programs, etc.

Unique Major Functions Unique Major Functions Within the ELSWithin the ELS

ScoutDiagnosticianPerformance CoachSuccess Team ManagerAlliance BrokerGeneral Manager

ConclusionConclusion

Think of the enterprise development process as a pipeline

Improving the performance of the pipeline can involve performance enhancement, incubating, and selective attraction approaches

Maintaining the pipeline requires the creation of a customized system that develops entrepreneurs and operates at a scale that achieves regional economic transformation