BUSINESS INCUBATOR

DEFINITION BUSINESS INCUBATOR. DESCRIPTION.   A Business Incubator is an innovative, supporting organization designed to accelerate the growth and success of typically Start-up Companies or entrepreneurial firms at the beginning of their existence. They can be seen as a special form of Outsourcing, supporting a Virtual Business. They may be for-profit (private incubators) or non-profit (public incubators) and may specialize in a particular industry or not. Normally a client company resides in the incubator facility. But most incubators also serve virtual clients such as home-based businesses or early-stage companies that have their own premises, but still want to benefit from certain incubator services. In most countries, incubation programs are funded or supported (infrastructure) by local, regional or national governments as part of their economic development strategy. COMMON BUSINESS INCUBATOR SERVICES Incubators can offer a broad spectrum of services to entrepreneurs with a feasible idea, including: Office space and facilities. Assistance in making a business plan. Legal services (regulatory compliance, Intellectual Property, etc.) Technical and IT support, Internet access. Advisory board, management support services, mentoring, coaching. Marketing support services. Financial assistance. Accounting. Administrative services. Access to angel investors and venture capital. Access to various bank loans, loan funds, etc.. Networking activities with various organizations and people. Strategic partners. Other incubators. Universities and research institutions. Consultancy firms. Seed capital, venture capital funds, business angels, banks. Government agencies. USING BUSINESS INCUBATION AS A STRATEGY FOR EXISTING FIRMS In order to stay competitive, existing organizations also need to respond to the challenges and changes of “the new economy”, the “network economy” and the “knowledge economy” so as to take advantage of new opportunities arising from them. Nevertheless, there are many companies that haven’t restructured their strategies and operations in reaction to these dynamic economic changes yet. According to Eshun (2009), companies need to radically change their organizational culture so as to be able to discover and take advantage of new opportunities that arise from the dynamic economic transformations: a so-called “business-incubation” strategy must be adopted. What exactly does such a strategy mean? A business incubation strategy refers to the processes, projects, actions and events that diagnose and analyzes new and emerging opportunities with the goal of restructuring and improving organizations existing product/services, technologies and operations and creating new ones. Eshun mentions three reasons why such a strategy is critical: The emergence of business incubators – organizations that aim to spur the growth and the success of starting entrepreneurial companies (start-ups) through business support resources and services, such as coaching and the provision of shared offices- have been indicative of the revolutionary changes in the economic structure since the 1970s. A business incubation strategy requires multidimensional resources, skills and technologies that help creating and maintaining useful networks both internally and externally. These networks are important to produce and share new ideas, knowledge and information, which are critical elements in the changed economic environment. Business incubators are organizational forms that have large potential. They can be adapted to different organizational conditions and are able to bring about useful interventions for governments for example (business incubators often require external, public support; therefore they play an important role in both fostering local economies as well as in channeling government resources). Furthermore, they can be both stand-alone facilities as well as being related to certain programs or researches. With these advantages it is not surprising that business incubators have been exploited and leveraged by multiple entities such as financial institutions, research institutions and governments.

BCG MATRIX

The BCG Matrix method is the most well-known portfolio management tool. It is based on product life cycle theory. It was developed in the early 70s by the Boston Consulting Group. The BCG Matrix can be used to determine what priorities should be given in the product portfolio of a business unit. To ensure long-term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generate a lot of cash. The Boston Consulting Group Matrix has 2 dimensions: market share and market growth. The basic idea behind it is: if a product has a bigger market share, or if the product's market grows faster, it is better for the company.

THE FOUR SEGMENTS OF THE BCG MATRIX

Placing products in the BCG matrix provides 4 categories in a portfolio of a company:

• Stars (high growth, high market share)
  • Stars are using large amounts of cash. Stars are leaders in the business. Therefore they should also generate large amounts of cash.
  • Stars are frequently roughly in balance on net cash flow. However if needed any attempt should be made to hold your market share in Stars, because the rewards will be Cash Cows if market share is kept.
• Cash Cows (low growth, high market share)
  • Profits and cash generation should be high. Because of the low growth, investments which are needed should be low.
  • Cash Cows are often the stars of yesterday and they are the foundation of a company.
• Dogs (low growth, low market share)
  • Avoid and minimize the number of Dogs in a company.
  • Watch out for expensive ‘rescue plans’.
  • Dogs must deliver cash, otherwise they must be liquidated.
• Question Marks (high growth, low market share)
  • Question Marks have the worst cash characteristics of all, because they have high cash demands and generate low returns, because of their low market share.
  • If the market share remains unchanged, Question Marks will simply absorb great amounts of cash.
  • Either invest heavily, or sell off, or invest nothing and generate any cash that you can.

THE BCG MATRIX AND ONE SIZE FITS ALL STRATEGIES

The BCG Matrix method can help to understand a frequently made strategy mistake: having a one size fits all strategy approach, such as a generic growth target (9 percent per year) or a generic return on capital of say 9,5% for an entire corporation.

In such a scenario:

• Cash Cows Business Units will reach their profit target easily. Their management have an easy job. The executives are often praised anyhow. Even worse, they are often allowed to reinvest substantial cash amounts in their mature businesses.
• Dogs Business Units are fighting an impossible battle and, even worse, now and then investments are made. These are hopeless attempts to "turn the business around".
• As a result all Question Marks and Stars receive only mediocre investment funds. In this way they can never become Cash Cows. These inadequate invested sums of money are a waste of money. Either these SBUs should receive enough investment funds to enable them to achieve a real market dominance and become Cash Cows (or Stars), or otherwise companies are advised to disinvest. They can then try to get any possible cash from the Question Marks that were not selected.

OTHER USES AND BENEFITS OF THE BCG MATRIX

• If a company is able to use the experience curve to its advantage, it should be able to manufacture and sell new products at a price that is low enough to get early market share leadership. Once it becomes a star, it is destined to be profitable.
• BCG model is helpful for managers to evaluate balance in the firm’s current portfolio of Stars, Cash Cows, Question Marks and Dogs.
• BCG method is applicable to large companies that seek volume and experience effects.
• The model is simple and easy to understand.
• It provides a base for management to decide and prepare for future actions.

LIMITATIONS OF THE BCG MATRIX

Some limitations of the Boston Consulting Group Matrix include:

• It neglects the effects of synergy between business units.
• High market share is not the only success factor.
• Market growth is not the only indicator for attractiveness of a market.
• Sometimes Dogs can earn even more cash as Cash Cows.
• The problems of getting data on the market share and market growth.
• There is no clear definition of what constitutes a "market".
• A high market share does not necessarily lead to profitability all the time.
• The model uses only two dimensions – market share and growth rate. This may tempt management to emphasize a particular product, or to divest prematurely.
• A business with a low market share can be profitable too.
• The model neglects small competitors that have fast growing market shares.
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