Harvesting Strategies - Start up issues, Entrepreneurship & Small Businesses | Entrepreneurship & Small Businesses - B Com PDF Download

Small business owners invest capital, human resources including management skill and knowledge -- and time -- to grow their companies’ revenues and increase profits. Creating a successful company builds wealth for the owner because the value of the business grows along with revenues. Harvest strategies are used to turn this value into cash -- a return on investment for the owner.

Types

A harvest strategy can be used to extract the value from a product, a product line or a business segment. The most extreme form of harvest strategy is selling the entire company and exiting -- termed an exit strategy. Because executing a harvest strategy takes time and requires careful implementation, it is included in the company’s formal business plan.

Reasons for Harvesting a Product

A company owner may decide implement a harvest strategy for a product when a clear trend emerges that the product’s sales growth rate is slowing down. Products have life cycles, and at some point demand for them weakens because of factors such as changing consumer tastes or new technologies being introduced that better meet customer needs. The business owner determines that the company assets deployed to produce and market the product can be better used elsewhere. Successful companies are continually innovating and evolving -- developing new products or services and entering new markets. The business owner seeks to use his resources to pursue opportunities with the greatest revenue and profit potential. Harvesting one segment of his business and redeploying the assets where the return on these investments will be higher enables the company to increase its value.

Executing the Strategy

Harvesting a product involves cutting the product’s budget. Discretionary expenses such as advertising and promotion are reduced, and investments to expand production are curtailed because the owner anticipates that sales for the product will stop growing and eventually decline. Through these cost reductions, the owner hopes to maintain profitability on the product resulting in an ongoing cash stream. He devotes just enough marketing resources to the product to keep the sales decline from accelerating.

Alternatives

A harvest strategy takes time to unfold. If the new opportunity the owner wants to pursue is emerging rapidly, waiting to redeploy assets can result in the window of opportunity closing, perhaps because competitors got there first. The owner may decide to sell the entire business segment -- or the whole company -- which can typically be done more quickly than executing the harvest strategy. Sale of the company enables the owner to receive a large payoff and relieves him of the responsibilities of running the company and managing employees. Another issue in deciding which strategy to pursue is management focus. Entering a market that is much different from the current one can require all of the management team’s time and attention. Liquidating the investment in the current product frees up management time and creativity. If the product to be harvested involves a proprietary technology, the owner may decide to license the product to another company rather than continue to produce it himself. He earns a steady royalty stream on the license and can redeploy the assets formerly used to make and market the product.