UNIT 6:BUSINESS GROWTH AND DEVELOPMENT
Key Unit Competency: To be able to analyze the factors that lead to business growth and development.
Hirwa lives in one of the Southern province districts where he started a small boutique in his village with capital as little as 100,000Frws but with a big number of customers. In his absence he is assisted by his wife and sometimes his children during school holidays. Hirwa works so hard to provide good customer care to his customers. After four years, he has many customers and his capital has doubled.
Hirwa's capital continues to grow and his profit has increased tremendously. He has opened two more shops selling various items in different Districts within the country employing five skilled workers and has got enough market for his products. Hirwa is also planning to start a wholesale shop in Kigali but he is uncertain if he will succeed.
Questions
Referring to the above case study, answer the following questions:
a) Differentiate between a growing business from a declining business
b) Describe different strategies Hirwa used to grow his business
c) What factors have favored the growth of his business?
d) As a student of entrepreneurship, what advice would you give to Hirwa to continue expanding his business?
6.1. Meaning of business growth and business development
Questions
1. Analyze the picture below and comment in relation to different stages of plant growth.
a) Assume you plan to start a business after school, do you think it is possible to grow as it is illustrated in this picture? Justify your answer.
b) Referring to the picture below, is this plant growing or developing?
Business growth refers to the process by which business enterprises increase their production, profitability and size. It is the expansion of the business enterprise. Business growth can also be defined as a stage where the business reaches the point of expansion and seeks additional options to generate more profit.
Business development is an ever-evolving concept that can be approached from different perspectives. As its basic level, business development is defined as a growing business that is more competitive, expanding products or services, and /or focusing on specific markets.
It can also be defined as a qualitative and quantitative increase in the level of output, profits, sales, and other variables of any business.
There are three main components that business experts generally agree form the base of business development: markets, customers, and relationships. To expand a business beyond its current state, it is important to focus on one or more of these areas. The type of business and the direction of growth determines where the focus is placed.
There is a relationship between business growth and business development since all involve growth in terms of revenues, business expansion, increasing market and profitability.A roadmap to Business Development
Figure 6.3:
This figure above shows the process from the business start-up to business development i.e starting business with goals (know what you want ), Vision (know where you are going), Strategy (techniques to be used to get there), Research (know who is/are your customers, what they want, knowing your suppliers, competitors,…), Innovation (improving things/doing things differently from others) and team work (working together with others either employees, suppliers, contractors, community, other businesses and government) all of this process leads to business development (multi-sectoral), business development impacts not only on growth but also on the increase in new branches, many employees, market expansion, new technology, more business infrastructures etc. Business development is achieved in long term compared to business growth which only impacts on the production level.
As a student of entrepreneurship and with vast knowledge obtained from O’level, advise a friend on the indicators of a growing business and a declining business.6.2. Indicators of business growth
Mukamana started a business of selling women shoes in town with little capital. After one month she would sell an average of five shoes per day. Five months later, the number of customers had increased to an extent that she could sell an average of twenty shoes per day. She used the business profits and a small loan from the bank to increase the stock and after a short time the shelves were full of shoes. One year later, Mukamana had thought of expanding her business by opening another shop in Kigali city.
Strategically, Mukamana used advertisement on different radios and televisions to inform people about her new branch in Kigali and prices of the shoes, as a result, there was an increase in customers and sales respectively. She is now a successful businesswoman who sells shoes in large quantities and has a license to export shoes to African countries. This, coupled with other factors mentioned above enabled her to accumulate a lot of profit.
Questions:
Referring to Mukamana’s business, what are the indicators of her business growth?
Suggest other indicators not mentioned above responsible for business growth.
There are many indicators of business growth. They include the following:
▪Increased capital: If capital of a business is increasing, then it is an indicator that the business is growing.
▪Increase in assets: Another indicator of business growth is the increase in assets like buildings, vehicles, bank deposits, etc. The total value of business assets can be revealed by the balance sheet of the business for a particular period of time.
▪Increase in business profit: When the business profits keep on increasing, then it is an indicator of business growth.
▪Opening more branches: This is also an indicator of business growth to serve more customers.
▪Increased market share: When the market share of the enterprise is growing, the enterprise is growing because it is serving more customers.
▪ Increased sales revenue: increase in the number of customers and stock reflects that the business is growing.
▪Increased number of employees: When the business grows, it normally increases the number of departments and employees. For example, a restaurant that started with four workers and expands into a hotel, it will need to recruit more employees than previously.
▪Use of advanced/improved technology: Most businesses start with simple technology but as the business expands, they use more advanced technology.
Figure 6.5: An entrepreneur in a company using a computer in recording
Increased stock of goods: When the enterprise grows, it produces and sells more products. For example, in a shop there are more and wider variety of goods and services.
Better salaries and wages paid to workers: When a business is growing, it is able to give better wages and salaries to its workers due to increased profits.
1) Case study: Peter the maize farmer
Peter is a farmer of maize in eastern province. He started growing maize on a small piece of land using traditional techniques like hand hoes and did not use fertilizers to increase production. He employed two men on his small farm. One day Peter got the chance of being selected by the Ministry of Agriculture in the two days training that had the following theme "Doing agriculture oriented to the market".
When Peter went back home, he tried to improve on the methods he used to grow maize production and decided to take a small loan from Umurenge Sacco with the purpose of buying another land to grow maize and acquiring enough capital to buy fertilizers that he mixed with manure.
Since that time, the production increased considerably. In the season that followed, he increased the number of workers from 2 to 50 workers. After one year, he thought of using irrigation system to cope with climate changes. He also used tractors in farming instead of manpower. Now he harvests
more maize and sells it to maize processing industries in Kigali and in other provinces across Rwanda.
Questions
a) From the above Case study, what are the indicators of his business growth?b) What strategies can you use to grow if you have a small business?
6.3. Business growth strategies
Basing on your knowledge of entrepreneurship subject, answer the following questions:
a) What do you understand by the term growth strategy?
b) Describe any 5 internal growth strategies which you think entrepreneurs in your community should use to grow their businesses.
c) Propose any external growth strategies used by entrepreneurs in your community.
d) Discuss the importance of using the above growth strategies in business?
For a business enterprise to survive and expand, it needs to have specific growth strategies. There are two separate types of business growth strategies which are internal and external. Therefore, integration of both internal and external growth strategies is crucial to the overall development of a business and continuous increase of revenues.
These growth strategies are implemented using various resources such as financial, human and material resources.
6.3.1. Internal business growth strategies
Internal business growth strategy refers to the expansion of a business enterprise using internal resources and capabilities. This means that all business growth is established without using external resources or external parties. It also refers to the growth within the organization by using its own internal resources to increase their size, scale of operations, resources (financial and non-financial) and market penetration.
The internal growth strategies which can be used by companies include the following:
▪Improving customer care: This involves offering good customer care to the customers as a way of attracting others and retain old ones.
▪Delivering quality products and services: This strategy involves providing quality products and services. This helps the company to grow.
▪Offering discounts to customers: A discount is a deduction on the price. As a growth strategy, discounts attract customers and increase sales revenue.
▪Carry out sales promotion: This growth strategy involves all activities done to inform and attract customers to buy more of the business products. For example, giving discounts, advertising on Radio, Television, Newspapers, etc.
▪Human resources development: A business may seek to grow by improving the quality and efficiency of its workers through trainings and workshops. Better quality workers increase the productivity and efficiency of a business leading to higher profits.
▪Creating new distribution channels and locations: This involves opening new branches and making products available in new outlets. This increases sales and generates extra profits for the business.
▪Bundling products: This involves selling a bundle of products as one kit. For example, Mobile phone and SIM Card, Toothpaste and Toothbrush bread and butter, etc. Even services can be bundled where two separate services are packaged into one product and sold together. For example, for computer software. Software is often sold in "suites" bundle that contains multiple applications. If you buy Microsoft office, you pay a single price and get Word, Excel, Power point, Publisher and Access, etc.
Another example for service bundle is where some colleges and universities may say that if you pay for a diploma or a degree course, you will receive free computer training. This means that the degree/diploma has been bundled with the computer training. Bundling helps the company to sell two products at the same time, attract more customers and earn more revenue.
▪Market penetration and development. This involves selling more of the company's products or services to the existing as well as to the new markets. This strategy is about reaching new customer segments by targeting new both internal and external markets.
6.3.2. External business growth strategies
External growth strategies refer to the expansion of a business enterprise by using external resources. These growth strategies focus on increasing output using resources and capabilities that are not internally developed by the company itself. The external business growth strategies include the following:
1. Merging with other firms or Mergers
Merging of firms refers to the combination of one or more corporations, or other business entities into a single business entity; the joining of two or more companies to achieve greater efficiencies of scale and productivity. In most cases, this is done by the companies producing and selling related goods or services as a way of reducing competition among themselves, increasing profits, etc. examples of companies that have merged include Soras and Saham insurance company, Airtel and Tigo companies.
Types of mergers
The following are the types of mergers:
a) Horizontal merging (integration): Horizontal merging occurs when two or more firms which are in the same industry of production join/merge into one e.g., two hair dressing salons join together to form one bigger hair dressing salon.
b) Vertical merging: This is merging of two or more firms which are at different stages of production in the same industry. In this merging, a business merges with another that is at the next or previous stage of production process e.g., coffee farm combining with a coffee factory.
c) Conglomerate merging: This is merging of two or more firms which produce unrelated products which do not compete with each other e.g., if a book shop merges with a restaurant. Another example if a shoe manufacturing firm merges with a restaurant. The idea behind this merger is to get a bigger market e.g., shoe clients going to the restaurant and vice versa.
d) Concentric/ congeneric Mergers: Concentric mergers take place between firms that serve the same customers in a particular industry, but they don‘t offers the same products and services. Their products may be complements, products which go together, but technically not the same products. For example, if a company that produces DVDs merges with a company that produces DVD players, this would be termed as concentric merger since DVD players and DVDs are complement products, which are usually purchased together. These are usually undertaken to facilitate consumers, since it would be easier to sell these products together. Also, this would help the company diversify, hence higher profits. Selling one of the products will also encourage the sale of the other, hence more revenues for the company if it manages to increase the sales of one of its products
2.Franchising
A franchise is an arrangement where one party gives another the right to use its trademark or trade name to produce and market a good or service e.g., telecommunication companies like Mtn, soft drinks industry like Coca-Cola etc. In Rwanda, Bwalirwa holds the coca cola franchise.
Companies can use franchising as a business growth strategy in two ways:
a) By buying a franchise from well-known and reputable companies. This helps it to sell more in the markets it would have found harder to penetrate.
b) By selling the franchise. By selling its name and logo, to be used by other companies, a business can spread further than it could have done alone.
The following are the advantages of franchising
▪It helps to reduce stiff competition.
▪It helps to increase sales and profits.
▪Banks can easily lend you money to buy a franchise that has a very good reputation.
▪The business is based on a proven idea and so chances of business success are higher.
▪It helps to attract customers who are already familiar with the name and logo.
▪The franchisee can get ideas from other entrepreneur who operate similar franchises.
▪The owner of the franchise normally provides support, trainings, and advice to the franchisee.
▪A franchise gives you exclusive rights to sell the product or service in your region.
▪It is easier for a franchisee to perform better than a start-up business whose name is not known and which has no reputation.
The following are the disadvantages of franchising:
▪The costs of a franchise may be high.
▪Profits are shared with the franchiser whose name, logo, and business model you are using.
▪The franchise includes strict guidelines and restrictions on how to run the business.
▪In case you want to leave the business, it may be difficult to sell the franchise to someone else because the buyer must be approved by the franchisor first.
▪If the franchisor runs out of the business or the reputation declines, it affects the entire business.
▪The process of buying a franchise involves a long legal process which is costly.
3. Joint-ventures
A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance.
Companies typically pursue joint ventures for a number of reasons: to access a new market, particularly emerging markets; to gain scale efficiencies by combining assets and operations; to share risk for major investments or projects; or to access skills and capabilities. Companies that form joint ventures share the profits and losses while simultaneously pooling their resources to complete the specific objective.
1.With examples in your community/village, describe at least 2 people or entrepreneurs whose businesses have grown up. If you know or heard how they started, what strategies did they use to grow?
2.Referring to business activities of entrepreneurs in Rwanda, what do you think are the benefits from establishing clear growth strategies?
3.What do you think would happen to business enterprises, if their owners do not apply growth strategies?
4.Assume you have a small business with a small capital and there are more competitors where your business is located. Do you think it will be possible to compete successfully with your competitors? What will you do to continue operating and out compete your business rivals?
1) Given a form of business growth strategy as
▪Bundling
▪Promotion and discount
▪Developing new product
▪Franchising
▪New distribution channels,
2) Discuss the following questions and there after present your findings.
a) Where does the given growth strategy fall? (Internal or external growth strategy) explain your answer
b) Explain the activities that can be done to apply the above strategies in the business club activities or in the business you want to start back at home.
3) Basing on the school’s business club, identify areas that need growth, set realistic growth targets and discuss strategies of how the business club will grow and develop.
Fill in the following gaps:
1. Assume your business is attaining the following:
a) Increase in production, profitability, and size.
Is known as ………………………………………….
b) A prolonged period of little or no growth for companies.
Is known as ………………………………………...
2. Assume that you have a mini supermarket selling fresh milk, juices, bread and cakes in one center of Kigali city.
a) How would you know that your business is growing?
b) What are the factors which you think can favor the growth of your business?
c) How would you know that your business is declining?
d) What can you do to minimize such a decline?