Enterprise development Chapter 3

I have often heard it said that big companies, the corporate giants, are the ones that need to think about
their business strategically. Smaller, more entrepreneurial companies, by contrast, do not need strategy;
they can pursue other routes to business success. In my view, that is exactly backward. Unlike the
giants, small businesses cannot rely on the inertia of the marketplace for their survival. Nor can they
succeed on brute force, throwing resources at problems. On the contrary, they have to see their
competitive environment with particular clarity and they have to stake out and protect a position they
can defend. That is what strategy is all about.”

Michael E Porter,

Harvard Business School

Factors and trends that Influence the growth of a business enterprise

• The growth of enterprises depends greatly on the environment where the firm is situated. It is
affected by a variety of factors within the political, legal, social-cultural and economic domain of
the country or region. For example small business success or the lack thereof in a continent like
Africa may be dependent on peace or conflict resolution like we have recently witnessed in
Sudan and Rwanda.

• Changes in the political arena like we witnessed in Kenya recently can have an impact on the
growth of enterprises due to an improved democratized environment. Improved legal
frameworks that protect private property and ensure respect for the rule of law can also enable
business to thrive. Patents and licensee agreement can be respected in such can of
environment. Finally, economic growth is key to the growth of any business. Whenever an
economy is on the fast track on a growth path entrepreneurs are able to easily increase their
market size and productivity and eventually profitability.

DEFINITIONS

• To grow a business means to take it to the next level, there are four key levels of micro,
small, medium and large, therefore moving from one level to the next will entail the
successful growth of the enterprise. However an enterprise can also be considered to be
growing based on parameters of market share and sales turnover.

• Expansion of an enterprise is in relation with the area of operation or size of the

enterprise. An enterprise can expand the floor space it occupies in readiness to deal with
a higher volume of anticipated business.

• Diversification on its part is related to the increasing of the product offering of the
enterprise to other products other than the current product offering. This increases the
chances of increased sales turnover since the company is spread over different sectors
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• Or product lines. For example Coca Cola Company manufactures and sells water through
the ‘Dasani brand’ this is diversification since all they did was not to add the formula for
soda on the water and created a different product.

• For the purposes of our presentation we will combine the strategies for growth and
expansion and segregate those for diversification for at the end of the day all this
strategies successfully implemented would lead to growth of the small enterprise.

Business Life cycle

If not well managed, the growth of a business can have serious repercussions. An entrepreneur
needs to assess his environment against the growth of his business and ensure that the growth
of the firm is also taking into account external factors, which may well be beyond his control.
Every entrepreneur wants to see his business grow. That is the short term and long term vision
for every firm. The growth rate will also give an impression of how the firm’s product or service
is meeting customers’ demands. A product’s life cycle from inception to eventual decline can tell
how a firm will fair both in the short term and the long term. A product’s life cycle is likely to
take the following stages in its life;

Introduction/ Inception

This is the stage whereby the new product is being launched. This stage is associated
with a lot of hype and high expectations. The product may do well if it’s something that
the market has been waiting for and it’s coming in to fill in a gap. It does even much
better if the industry is also new. However, if it is entering an established industry, it
may face stiff competition, in which case there may not be early rewards forthcoming.
The firm is likely to charge high prices to try and recover the investment associated with
the product development.

Whichever kind of introduction a product finds in the industry, the stability of the form
in this early stage may be affected by the success or failure of the product at this stage.
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Some of the challenges in this stage are

• Obtaining customers and cash

• Producing products and services
• Expanding the revenue base
• Cost awareness
• Quality consciousness
Growth

If a product has successfully passed through the inception phase of its cycle, an
indication as to the success of the product, hence the firm can be projected. A positive
response by the market may require that the entrepreneur find ways of increasing
distribution to reach a larger client base. He may also want to make his price
competitive as he anticipates the next move of his competitors

Some of the biggest challenges in this stage include

• Maintaining perspective
• Coordinating resources and surviving with the scarce resources
• Financing Growth
• Maintaining enthusiasm and commitment
• Balancing today and tomorrows needs
• Delegation of authority to professional management
• Extended geographic coverage

Maturity

This is the stage where all the players in the industry have all the information and there
is perfect competition. In this stage, many products exist that are similar to each other
and they all try to outdo each other in a level ground. Price becomes very sensitive as
firms start giving competitive rates to customers. A lot of money will be spent in
advertisement, promotions and discounts as every firm wants to maintain the client
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base and even increase it. The product that started so well is now finding its margins
falling and other similar products are eating up into its share of profits.

Challenges in this stage

• Global Penetration
• Expense control
• Change of organization structure i.e. from Centralized to decentralized
structure
• Redeployment of management style
• Adoption of management style such as management by objective etc

Decline

This is the last stage of a product’s life. A product may find it very hard competing with
the others in the industry and may give in if there is no stability. Customers here find
that their needs are being met by other products fulfilling the same needs but in a
better way or through better terms. The firm will find it uneconomical to keep allocating
resources to the sale of the product at this stage as it tries to re brand its product’s
name or diversify into something else. This becomes the biggest challenge in this stage

This model of product development can be applied to the growth or otherwise of a firm. The
entrepreneur thus needs to ensure that the business opportunity he has before him has a road
map charted in advance and based on due diligence. This does not mean that every firm will
follow the above model. The entrepreneur needs to be aware of the possible outcomes. What
he needs to do to ensure that the growth of the business is well managed by a clearly defined
strategy is what we shall be looking at in the next section;
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Some surprises in life are great, but in business, they can mean 'make or break'. Anticipating
what lies ahead is no easy task, and the best laid plans need to be flexible to reflect what is
happening in the real world. That's why clever companies treat planning as a 'work in progress'
keeping them on track while freeing them up to spot opportunities (or risks) around the corner.

The challenge for growing companies is to keep a step ahead of changing market conditions and
other important variables such as new technologies. How individual companies react to future
conditions often depends on which stage in the business life cycle they are in.

In today's technology driven world business lifecycles have accelerated, but good management
principles still – and always will - apply.

Growth Strategies that an entrepreneur can Adopt

Because growth makes a firm bigger it begins to benefit from the advantages of the size. For example,
higher volume increases production efficiency, makes the firm more attractive to suppliers, and
therefore increases its bargaining power. Size also enhances the legitimacy of the firm, because firms
that are larger are often perceived by customers, financiers, and other stakeholders as more stable and
prestigious. Therefore, the growing of a business can provide the entrepreneur more power to
influence firm performance. But as the firm grows, it changes.

These changes introduce a number of managerial challenges. These challenges arise from the
following pressures:

• Pressures on Existing Financial Resources

• Pressures on Human Resources

• Pressures on the Management of Employees

• Pressures on the Entrepreneur’s Time

PENETRATION STRAGTEGIES
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Mergers & Acquisitions.

Takeovers of majority stake competitor: An entrepreneur can buy out a competitor in order to increase
their market share. This can be achieved through targeting smaller firms growing in market share or
operating in lucrative market niches, where firms can add value.

Mergers: Two companies can come together and combine to form one single entity, which is more
efficient and bigger than the single two companies. For example two small trading shops situated next
to each other selling the sale product and sharing the same customers could easily agree to combine
resources by merging the two entities and creating a single entity serving the same customer base on a
lower cost base. Costs are slashed by reducing the employees, machinery and equipment used to deliver
the service by the two entities.

Alliances: Entrepreneurs in a competitive market can form complementary alliances in order to

strengthen their position in the market, for example small traders can come together and apply for a big
tender to supply the commodity the deal in, which they cannot do on their own. Some matatu routes
have formed Saccos to ensure orderly management and the individual owner’s matatus are run as a
fleet. This way they are able to negotiate for better terms from drivers, petrol stations, car maintenance
and spares.

Franchising: The system works like this. A business owner perfects a superior product or service and
makes a success in that field. Then, for a fee or other concession, the successful owner becomes a
franchiser, showing others how to succeed in the same way. Result? The franchisers own business
expands far faster than otherwise possible, the new franchisee gets an opportunity not otherwise
available, and the public usually benefits from the improved product or service. Franchising’
effectiveness is indicated by its explosive growth. Annual total sales made by all the various businesses
operated on a franchise basis already run into the billions in the United States; this system is one of the
most powerful marketing devices on the U.S. national economic scene. Franchising

Why is franchising growing in importance?

A business organization in which a franchisor supplies the product concept to the franchisee, who sells
the goods or services in a certain geographical area
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• Advantages
– increased ability for franchisor to expand
– recognized name, product and operating concept
– management training and assistance for franchisee
– financial assistance for franchisee
• Disadvantages
– loss of control for franchisor
– costs of franchising
– restricted operating freedom for franchisee

Financial Strategies

Sale of Shares: This is a popular route used by medium to large enterprises seeking to expand their
share capital. These companies offer their shares for sale through the Nairobi Stock Exchange or through
private placement with Investment Banks. Small enterprises may not be able to access this sophisticated
markets however they may still follow this route by selling shares to friends, relatives or approaching
other potential investors directly with a well researched proposal and a track record of performance in
the past years. In the early stages of growth where the business track record may not be very convincing
for formal investors, the character at ability of the entrepreneur may be his greatest asset within family
and social circles.

Capital Injection (Organic Growth): There are various ways to pursue this strategy. However for small
enterprises the surest source of capital injection is usually the re-investment of capital. Many Asian run
enterprises have been developed through the re-investment of most of the profits back into the
business. This way the business

Enjoys the power of the compounding effect as the re-invested profits generate even higher returns.
The challenge usually is with the entrepreneur’s ability to be self- disciplined enough not to allow his
own consumption needs to override the need for capital for the business. An entrepreneur can also
inject additional capital through a rights issues where present shareholders increase their equity capital
in the enterprise in order to expand it .An example is Equity Bank which is privately held by 2000
shareholders a few years ago requested their shareholders to inject more capital proportionately to
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their holding (rights issue) in order to facilitate the continued expansion of the bank from a small
Building Society into a Commercial Bank.

Debt capital: another route to follow would be source money from commercial banks and other
financial institutions in order to be able to increase the size of the business that you can handle. For
example there are banks that have introduced special schemes to finance small-scale businesses.
However in order to use this route a track record and credit history will be required alongside adequate
collateral.

Savings: Entrepreneurs can resort to investing their own savings into the business to further capitalize
the business and enable it to achieve greater expansion.

Distribution Strategies

Chain Outlets: This system is among the most popular expansion route used by most entrepreneurs.
This involves the opening of branches in different regions in the country or outside the country. An
example of local enterprises which have pursued such a route successfully include the Nakumatt retail
chain which has opened stores in almost all major towns in the country. In the banking industry Kenya
Commercial Bank Ltd has opened branches right across the region.

Supply Chain Management: is where an entrepreneur manages the flow of his/her enterprise right
from the initial product raw source to the final consumers hand in a way to enhance efficiencies,
minimize costs and maximize profitability. Creating linkages through horizontal and vertical integration
through alliances and partnerships with suppliers, competitors, and customers. For example fish trader
may view his business as only to buy fish from the fishermen and sell to the exporter or to the individual
consumer. However a trader who looks at the whole supply chain and seeks to remove inefficiencies
may be able to source fresher higher quality fish at a better price, negotiate transport and refrigeration
costs and deliver more fish to the at a higher profit.
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Diversification Startegies

• Product Line Extension: an entrepreneur can add a new product which closely resembles an
existing product minus or plus certain features to suit a target clientele. For example East
African Breweries introduced ‘White Cap Light’ for young upwardly mobile executives, as
opposed to the original” White Cap Lager’ which was associated with old well to do men.

• Co-branding: An entrepreneur can piggyback their brand on another successful brand in order
to expand their business. For example the ‘Steers’ chain of restaurants has located its branches
in Total petrol station, this way one brand feeds on the others goodwill as customers coming to
fill petrol may decide to have a bite or customers coming to eat at steers may decide to put
some petrol in their cars.

• New Product Development: Introduction of new products is another key to growth of small
enterprises. This can be achieved by leveraging core competence of these small enterprises into
new areas and new products.
An ideal target would be for the small enterprises to be ever seeking to introduce new products
into the market. A good rule of thumb would be to have at least 50% of revenues should be
from products introduced in the last 2 to 3 years. This will ensure a policy of continuous
improvement and the company’s products will not become obsolete. For example with the rapid
pace of technology it is apparent that the video cassette will soon become obsolete, therefore a
small enterprise in this business should be introducing new products such as DVDs in
preparation for this. However new products or product improvements should be developed
through R&D efforts and listening to the customer complaints and customer comments

• Using Client Database for new product offering: A small enterprise should develop a database
of all their existing customers and be able to develop a profile of each customer to extent of
knowing his needs, income bracket and potential products that are interest .An innovative
method of creating this profile is the Nakumatt loyalty card which the company uses not just for
promotional reasons but to keep a record of shopping habits and patterns of their customers,
which they can use to develop a better service or offer new products. For example with the
information Nakumatt develops they can offer their customers totally different products such as
cars, loans or insurance services.

Marketing & Sales Strategy.

There are various types of marketing interventions, which an entrepreneur can employ to push up the
level of demand for his product or service and therefore grow the business:
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Product: Packaging of his product or service into an attractive bundle to potential customers can
increase the level of sales of a product or service.

Price: Pricing of the product is vital, especially in today’s competitive business environment

Place: This involves the distribution network that an entrepreneur puts in place in order to get the
product out to the market.

Promotion: This may involve the advertising, public relations and merchandising of the products or
service to enable an increased number of potential customers to become familiar with the product or
service.

INCREASED INJECTION OF RESOURCES.

Human Resources
Human resources are the most important resource in any enterprise. In order to grow the business it is
vital to mobilize the right personnel into the company, with the necessary skills, expertise and
experience to carry the business over to the next level.

Material Resources

New sources of raw materials or new raw materials for developing the final product can expand a

company’s production potential by reducing costs or improving the quality of the final product. A cost

reduction may lead to an increase in demand if the business passes on the benefit to the final consumer.