Entrepreneurship

Key Unit Competency: Evaluate the factors that lead to business growth.

Introduction:

The business environment is not static rather; it keeps on changing. Take an example of a small shop selling foodstuffs. After say three years, you may notice some changes that have taken place since it was started. Once those changes are positive, it will be an indication that the business is growing. Some indicators of business growth may include: increased profit, increase of assets, opening more branches, increased employees, etc. Many entrepreneurs normally begin with small business with the hope that they will grow up to bigger enterprises resulting to high profits. However, it is not automatic; entrepreneurs have to strive in order to achieve it.

Ideally, if you intend to start a business, you need to ask yourself questions such as:

•Why do some businesses start and grow while others fail?

•Do I have the required capital and other resources to make my business grow?

•What are the factors and strategies for business growth and development?

•What are the barriers/hindrances to business growth and development?

This unit is designed to equip you with knowledge, skills as well as attitudes and values that will enable you assess the factors and strategies for business growth and development and, identify indicators of business growth and development as well as its hindrances.

Introductory activity:

Gasana’s Case StudyGasana lives in Kamonyi District where he started a small boutique in his village with a small capital of 150,000Frw. During his absence he was helped by his wife and sometimes by his children during school holidays. Gasana worked so hard and provided good customer care to his customers. After four years, he got many customers and his capital doubled.

Since that time Gasana’s capital continued to grow and his profit increased tremendously from time to time. Now he has opened two more shops selling various items in Kamonyi District employing five skilled workers and has got enough market for his products. Gasana is also planning to start a wholesale shop in Kigali buthe isuncertain if he will succeed.

Questions

Referring to the above text, answer the following questions:

1. Differentiate between a growing business from a declining business

2. Describe the different strategies Gasana used to grow his business

3. Propose the possible solutions to the constraints (barriers/hindrances) for business growth and development.

5.1. Business growth and business development

Activity 5.1

a. Think about people in your community who have started small businesses. Have they succeeded or not?

   i. If yes, what do you think are factors that facilitated their growth?

   ii. If no, what do you think are factors that hindered their growth?

b. What do you think are strategies to business growth and development?

The meaning of business growth and business development

A Roadmap to Business Development

                               

Application Activity 5.1

Analyze the photograph below and answer questions that follow.

                             

Questions

1. Analyze the photograph above and make comments in relation to the different stages of a plant.

2. Assume you plan to start a business after school, do you think it is possible to grow in one or two months? Justify your answer.

3. Referring to the above photo, what advice would you give to entrepreneurs who wish to grow their businesses?

5.2. Indicators of business growth

Activity 5.2

Kayitesi started a business of selling women shoes in Muhanga town. She started the business with little money. 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, Kayitesi had thought of expanding her business by opening another shop in Kigali city.

Strategically, Kayitesi 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 increase in customers and sales respectively.She is now a successful business woman who sells shoes in large quantities and has a license to import shoes from Italy.

This, coupled with other factors mentioned above enabled her to accumulate a lot of profit.

Questions:

a. Referring to Kayitesi’s business, what are the indicators of business growth?

b. Suggest other indicators for a business that is growing.

The indicators of business growth

There are many indicators of business growth. They include the following:

1. Increased capital: If the capital of a business is increasing, then it is the indicator that the business is growing.

2. Increase of assets: Another indicator of business growth is the increase of 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.

3. Increase of business profit: When the business profits are growing, then it is an indicator of business growth.

4. Opening more branches: Opening more branches is an indicator that the business is covering more areas and is serving more customers. This is an indicator of business growth.

5. Increased market share: When the market share of the enterprise is growing, the enterprise is growing because it is serving more customers.

6. Increased sales revenue: Increased sales revenue for a business is an indicator of the business growth.

7. 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.

8. Use of advanced technology: Most businesses start with simple technology but as the business expands, they use more advanced technology.

      

9. 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 goods.

       

10. 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.

Application activity 5.2

Case study: Moses the maize farmer

Moses 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 used fertilizers to increase production. He employed two man powers in his small farm. One day Moses 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 Moses went back home, he tried to improve on the methods he used to grow maize 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 in order to cope with climate change. He also used tractors in farming instead of man powers. Now he harvests more maize and sells it to maize processing industries in Kigali and in other provinces across Rwanda.

Questions

Basing on the above passage answer the following questions:

a. From the above Case study, what are the indicators of his business growth?

b. Think about the barriers that might hinder Moses’s business.

c. Assume you are doing the same business as that of Moses, How can you overcome those barriers?

d. What strategies can you use to grow if you have a small business?

5.3. Growth strategies

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 growth. 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.

Activity 5.3

Basing on your knowledge of entrepreneurship subject and other knowledge related to business, answer the following questions:

a. What do you understand by a 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 5 external growth strategies used by business people in your community.

d. What the importance of using the above growth strategies in business?

5.3.1. 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 refers also to the growth within the organisation 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:

1. Improving customer care: This involves offering good customer care to the customers as a way of attracting them.

2. Delivering quality products and services: This strategy involves providing quality products and services. This helps the company to grow.

3. Offering discounts to customers:A discount is a deduction on the price. As a growth strategy, discounts attract customers and increase sales revenue.

4. 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.

5. 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.

6. 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.7. Bundling products: This involves selling a bundle of products as one kit. For example, Mobile phone and SIM Card, Toothpaste and Tooth brush 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.

8. 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.

5.3.2. 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. Rather, these resources are obtained through the merger, partnership with other companies, joint venture and franchising the business model. The larger the number of business partners and/or franchisees, the greater the net worth of the company and throughput of cash. The goals of external growth strategies are to provide larger opportunities to increase the worth of the company, and for this reason external growth strategies tend to produce immediate return on investment.

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, Limited Liability Companies (LLCs), 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 the related goods or services as a way of reducing competition among themselves, increasing profits, etc.

Types of mergers

The following are the types of mergers:

•Horizontal merging (integration): Horizontal merging occurs when two or more firms which are at the same industry of production join/merge into one e.g. two hair dressing salons join together to form one bigger hair dressing salon.

•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.

•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.

•Concentric Mergers: Concentric mergers take place between firms that serve the same customers in a particular industry, but they don’t offer the same products and services. Their products may be complements, product 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 complements 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 sale of one of its product.

The advantages for companies to merge

The following are the advantages of merging:

1. It increases profits of the mergers: After merger, the new company will have adequate financial resources/capital to invest in heavy investments; this increases profits for the merged company.

2. Growth and expansion: Mergers help companies to grow and expand their business activities.

3. Entry in global market: Global market means a huge world-level market in which any company can sell their goods and services. This market does not have any restrictions for entrances. Merger helps merged companies to get an entry in the global market which encompasses various regions.

4. Increase in market share: Merger helps the merged company to increase the market share. This rise in market share is achieved by:

•Providing an adequate supply of goods or services as needed by clients.

•Entering into agreements with clients for continuous supply of goods and services.

5. Increases goodwill: Merger helps the merged company to boost its goodwill in the market. It creates good will by:

•Increasing the confidence of shareholders of the merged company.

•Creating a good image of the merged company among the customers.

6. Leads to economies of scale: Mergers result in economies of scale for the company. Economies of scale are the costs benefits that a company obtains due to over expansion. The union of two or more firms leads to the costs reduction and the lower costs enable lower prices for consumers. This gives the merged firm a competitive advantage.

7. International competition: Mergers help the merged company to compete at both national and international markets. It helps also the merged company to deal with the threat of multinationals companies. This is increasingly important in an era of global markets. A unique large company will become competitive and it will retain or grow a competitive edge.

8. Tax benefits: The biggest advantage for merging firms is tax benefits. This means that under one ownership, the union of two or more firms pay a tax as a single firm. The merging firms also can get tax benefits when a company enjoys a subsidized rate of taxation.9. Mergers may undertake big investment: This is because the new firm will have more profit which can be used to finance risky investment. This can lead to a better quality of goods for consumers.

10. Greater efficiency: Under mergers ownership, workers are properly supervised and work efficiently. This increases the productivity and profitability of the firm.

11. Diversification: Because of increased financial capacity and using high technology in production, there is a possibility for mergers to introduce new products or services to sell on internal and external markets.

12. Mergers may allow greater investment in research and development: Merger enhances the research and development programs of the merged company. This is because the new firm will have more profit which can be used to finance extensive research and development programs aiming at improving production.

The disadvantages of merging include:

1. Limited degree of independence: After merging of firms, every company loses its independence because firms act as one single firm under one ownership.

2. Over expansion can lead to diseconomies of scales: The new larger firm may experience diseconomies of scale from the increased size. This is because as a firm increase in size the costs in terms of communication costs, salaries for workers, research and development costs, etc. may also increase, hence diseconomies of scale.

3. Reduced competition leading to monopoly and inefficiency: Monopoly is a market structure characterized by a single seller/company selling products with no close substitute in the market. A merger can reduce competition and give the new firm monopoly power.With less competition and greater market share, the new firm can usually increase prices for consumers, producing poor quality products, etc. because such a company faces no competition, this leads to inefficiency.

4. It leads to unemployment: If two or more firms/enterprises merge into one large company, some employees in those companies may lose their jobs. The new company also will have a single manager; this means that other managers who were in the previous firms lose their job positions but get new jobs in the new firm.

5. Over production and hence wastage: Sometimes the merging firms produce more output than that is needed on the market because of increased capacity and capital, this may lead to overproduction and wastage of resources.

6. Duplication: Merging of two or more firms that are doing similar activities may mean duplication and over capability within the company that may need retrenchments.

7. Over exploitation of resources: Merging can lead to over exploitation of resources due to the use of high technology and modern machines to exploit natural resources. For example, fisher’s cooperative in Rwanda merge to form one big cooperative, due to increased financial capacity and skills they can acquire modern fishing machines and therefore there could be a possibility to over exploit fishes in KIVU Lake and other water bodies in Rwanda.

2. Franchising

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, AirtelTigo etc.

A franchiser (or a franchisor) is the owner of the name, logo and business model who sells it for use by third parties.

A franchisee is the person or company who buys another company’s name, logo and business model for use in his own business.

Companies can use franchising as a business growth strategy in two ways:

•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.

•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 wasteful 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 business people 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.

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.

A joint venture can also be defined as a strategic alliance between two or more entities to engage in a specific project. It may take place between two or more entities, between an entity and the government or between two or more individuals to carry out a specific project or undertaking. Partnerships and joint ventures can be similar but in fact can have significantly different implications for those involved. A partnership usually involves a continuing, long-term business relationship, whereas a joint venture is based on a single business project.

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.

The advantages of using joint venture as a business growth strategy:

•Forming a joint venture can help your business to grow faster.

•It increases productivity and generate more profits.

•It increases the chances of business success.

•Leads to the access to new markets and distribution networks.

•It reduces competition among partners.

•It increases capacity in terms of capital.

•Forming a joint venture will give you access to better resources such as specialized staff and technology.

•Provide companies with the opportunity to gain new capacity and expertise

•It leads to economies of scale.

•Both parties share the risks and costs.

•It builds business relationship and networks between business partners.

•Allow companies to penetrate new markets quickly and expand the market size.

•Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business’ exposure.

The disadvantages of using joint venture as a business growth strategy:

•It takes time and efforts to form the right relationship.

•Lack of communication between the partners may affect the business.

•Disagreement between partners may arise over the operating policies.

•It can restrict the activities of your whole business.

•There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners.

•The partners don’t provide enough leadership and support in the early stages.

•Different cultures and management styles may result in poor integration and co-operation.

•There is a high cost associated with the formation and operation of a joint venture. •Competing against your joint venture partners on other projects. For example, your joint venture has an exclusive long-term arrangement to pursue water supply project in Rwanda. Eventually you will wind up competing against each other on non-water supply projects or you could wind up competing against each other non-water supply projects outside of Rwanda.

Application activity 5.3

1. Distinguish between organic and inorganic growth strategy.

2. 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?

3. Referring to business activities of entrepreneurs in Rwanda, what do you think are the benefit from establishing clear growth strategies?

4. What do you think would happen to business enterprises, if their owners do not apply growth strategies?

5. 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 over compete your business rivals?

5.4. Factors that lead to business growth

Activity 5.4

Answer the following questions:

1. Give any three examples of entrepreneurs in your community/village who have achieved businesses growth.

2. Think about any two main things that lead businesses to grow.

5.4.1. Factors that lead to business growth

Business growth can be achieved either by boosting the top line or revenue of the business with greater product sales or service income, or by increasing the bottom line or profitability of the operation by minimizing costs. There are many factors that determine business growth these include,

i. Availability of market: The market plays a big role in determining the success of a business. A big and reliable market helps a business to grow. More buyers will mean more sales and more revenue for the business.

ii. Enough capital: The amount of capital available to a business determines its growth.

iii. Competent business management: The quality and ability of the business management team determine the growth of a business. If the management is competent and hardworking, then the business will grow faster.

iv. Proper location of the business: A suitable location may determine the growth of a business. A business will grow if it is located near the customers. In addition, a business may succeed if it is located in a secured place without robbers.

v. Level of competition: Competition may force a business to be more efficient and as a result it grows.

vi. Technology used by the business: Technology as a method of production determines the quantity and quality of output. It is a factor that determines the growth of a business.

vii. Favourable government policies: Government policy may directly affect business growth. Favourable government policy like low taxes, tax holidays, subsidies, etc. determines the growth of a business.

viii.Political stability and security: The political environment affects business growth, a peaceful political environment enables a business to grow

ix. Quality of workers: The quality of workers in terms of skills, trainings, experience and commitment is factor of business growth.

x. Proper business planning: Business planning is also a factor which determines the growth of a business. Planning enables the business to set targets to be achieved and properly control its resources and time.

xi. Favourable economic environment: The economic environment in which the business operates in also determines its growth.

xii. Presence of business support services like banks, insurance companies, telecommunication companies, etc. This also determines the business growth.

xiii. Good entrepreneurial characteristics (traits) like self-confidence, risk taking, perseverance, creativity and innovation, etc. This also determines the growth of a business.

Application activity 5.4

Basing on your prior knowledge about business growth,

a. Evaluate the factors that lead to business growth.

b. Explain briefly the following statement ” try and fail, never fail to try”. How can this statement help you to make your business grow?

5.5. Factors that hinder business growth

To achieve a business growth is not an easy task. It requires an entrepreneur to make efforts and working hard towards achieving the set targets. This is because there are thorns and barriers that a company can meet during the implementation of the set targets. A number of firms particularly small firms wish to grow, but they are prevented from doing so by ‘barriers’. There are internal constraints of business growth that come from (within) the enterprise itself and external constraints of business growth which originate from (outside) the enterprise.

Activity 5.5.1

Visit a small scale business near your school or in your home village. Interview the business owner and ask the owner to explain reasons why his/her business has not grown to a large scale. Based on the explanations the owner has given to you, make a report summarizing the external and internal constraints to business growth in this area.

5.5.1. Internal factors that hinder business growth

Internal factors that hinder business growth can be:

i. Lack of enough capital or capital constraint: Some businesses lack sufficient capital to increase their stocks, buy modern machines and spares. This hinders them to expand their operations.

ii. Poor management of the business: Most businesses fail because of poor management.When the business is poorly managed, workers will be inefficient, business assets are misused and lost, workers will waste time because there is no supervision and the various departments are not properly coordinated.This will hinder the business growth.

iii. Lack of skilled workers: Most business relies on the skills of workers. Customers tend to come to the business because of such workers. When such skilled and reputable workers leave the business, some customers also leave. For example,some people go to certain salons because of certain skilled people whom they expect to give them a good service. When such skilled workers leave, customers also leave.

However, there are some entrepreneurs who employ unskilled labour without paying them such as their relatives, they tend do this in order to cut costs. These workers don’t take business seriously as they know they are owned by their relatives.

In the long run it is the business enterprise which suffers as it is constrained from growing. Labour is a factor of production and so without proper labor force productivity is low in terms of quality and quantity. This hinders the business to grow.

iv. Lack of proper record keeping: In business, improper record keeping comes as a result basically of inadequate education and training in business, because of this the business loses track of its cash flows and in turn leading to cost control and liquidity problems. If the records of the transactions a business undertakes are not kept properly, growth for such business cannot be achieved.

v. Lack of background and experience in the business: The experience automatically gives the entrepreneurs or managers adequate managerial capabilities to handle and overcome more easily the problems which are experienced in their businesses. The lack of background and experience by entrepreneurs and managers is a factor limiting the growth of their companies.

vi. Lack of business plan/vision for the business: For entrepreneurs who have no proper business plans at start, face the most challenges during the course of their lives. In a business, a business plan is needed in order for proper goals and objectives of the firm to be laid out in the open so that the team in the organization/firm works together for the same goals in their minds. If a business has no business plan/vision it will find it difficult to grow.

vii. Inadequate education and training: Education is a key constituent of the human capital needed for business success. This is because education and training provides the basis for intellectual development needed by entrepreneurs in business to be successful. Moreover, they provide the entrepreneurs with confidence to deal with clients. As seen for many companies, the educated entrepreneurs showed more promising results in terms of how their business is doing. For this, it has been seen that inadequate education and training may also be a barrier to the business growth.

viii. Embezzlement and misuse of business funds: Misuse of business funds is one of the most common causes of business failure. Some entrepreneurs, business managers and workers divert business funds to personal uses like buying clothes, cars and paying personal debts. As a result, the business fails to function properly and collapses. This stops the businesses from expanding.

ix. Low quality products:If products sold by a business are of low quality, many people will not buy the products and this may limit its growth.

x. Poor location of the business: The location of a business is very important for success of the business. If the business is located in a bad area where there are very few buyers, poor road network, no electricity, insecurity then the business cannot grow.

xi. Lack of motivation and drive: Some entrepreneurs start businesses with no clear visions and goals for their businesses meaning they are just about being in business to earn normal income to meet their basic human needs. Those entrepreneurs’ especially small business owners lack positive motivation in their mindset and waste a lot of time in thinking about negative motives. This hinders their businesses to grow. It is quite obvious that positive motivations of the entrepreneur(s) are more likely to establish a business that grows than those with negative motivations. Positive motives include such things as the perceptions of high demand for a product and market opportunities while negative motives may include expecting loss or giving up because of big and excessive competitors. The more positive motivation of the entrepreneur(s) the more likely the business will grow.

xii. Failure to manage stock: Businesses own stock of finished products, raw materials and goods purchased for resale. For a trading business like a shop, when the business person fails to manage stock properly, customers fail to get what they want from the shop and they stop coming to the business. Proper stock management includes making sure the products are not stolen and that only the right quantities are stocked or that there is no shortage. If proper stock management is not done, the business will not expand instead it will make losses.

xiii. Bad debtors: Most businesses allow some customers to take products without paying cash and promise to pay later. Bad debtors are customers who take goods on credit and fail to pay for a long period. This means that there is almost no hope that they will pay. When this happens, it means the business will lack the capital to continue operating since much of the money is with debtors. In the end, the business fails to continue running because of excessive debts.

xiv. Poor customer care: Customers are very important in any business. If there are no customers, there is no business. Customers are lifeblood and backbone of a business. When the customers are poorly handled, they will even tell other people about the poor service. The business will lack customers (market) and at the end it will not grow.

5.5.2. External factors that hinder business growth

Activity 5.5.2

Basing on your prior knowledge from entrepreneurship lesson in ordinary and advanced level, discuss the external factors that hinder business growth in your community and suggest the possible solutions to overcome those hindrances.

The external factors that hinder business growth include;

1. Corruption: Corruption prevents fairness to prevail and therefore it is to a large extent a cost/ expense to a business owner or individual, the community and the government as a whole. As corruption deprives people of their rights, this means businesses cannot be established by deserving individuals; customers and buyers of products are reaped off (prices become high) since businessmen want to compensate for the money paid out as bribery, productivity is lowered, customer loyalty and demand falls as a result and therefore growth of small firms is affected in a negative way. The problem of corruption is a barrier to growth in business.

2. High competition: At times some businesses do not expand because of stiff competition. This may happen if a new and bigger company or individual joins the business and is able to produce better quality products, provide better services, and charge lower prices. In industrial sector, there is also competition with imported products from industrialized countries like China, Japan and Germany. Local manufacturers find it very hard to produce high quality products at low prices to compete with products from highly industrialized countries. This hinders the business growth for both trading businesses and manufacturing businesses.

3. Change in government policies: When the government changes its policies, it affects businesses. For example, when the government decides to ban some products like polythene bags, people who manufacture such products and those who sell them both suffer losses of business.

4. Technological barrier: Small firms may fail to afford modern technological tools since they are expensive to buy and maintain

5. Unfavorable economic factors: Unfavorable economic factors like low demand of products due to inflation, poverty and unemployment are barriers to the business growth. Other unfavorable economic factors that hinder business growth include high interest rates, low purchasing power of customers, problems of currency exchange rates affecting the exports or imports of a particular product and the underestimation of the rise of costs of production due to scarcity of resources, etc.

6. Bureaucratic procedures: Small businesses find it difficult in terms of procedural processes in areas such as obtaining business license, registering a business, tax matters and soon.

7. Small local markets: Most businesses face the problem of small local markets and foreign markets are not easy to get. For example, industrial businesses can produce a lot of products if they have a large market but they produce below capacity due to lack of markets. This hinders them to grow.

8. Natural calamities: Natural calamities like floods, earthquakes, droughts,etc are also barriers to the business growth. This is because such calamities cause business to lose their property and stock. When the losses are very big, the business may collapse. This is even worse for the business if it has not insured itself against such risks.

9. Poor infrastructures: Poor infrastructures like roads do not ease the transportation of raw materials, finished products, workers by manufacturing businesses and even the transportation of goods for resale from town centers by trading businesses. This makes transport expensive and increases the costs of the business which in turn hinders the business to grow.

 

10. Political instability and insecurity: Political instabilities like civil wars, strikes and riots are serious barriers to the growth of businesses. When there is political instability, people destroy properties, burn buildings and vehicles. When a lot of the business’ property is destroyed, the business cannot expand, it will collapse.

11. Limited to finances/funding: Sometimes, it is difficult for some entrepreneurs mostly those who own small businesses to access proper financing from financial institutions due things like lack of collateral security, inadequate business plan, state of economy and bureaucratic procedures in applying for loans/finances. This is a constraint for that entrepreneur to grow their businesses.

Application Activity 5.5

Some entrepreneurial practices below hinder business growth, identify the hindrances resulting from those practices and propose the corresponding solutions to those barriers of business growth.

i. Not employing a professional accountant in a large enterprise.

ii. Not insuring business assets and stock in insurance companies.

iii. Use business money in private affairs.iv. Employing unincompetent manager in business.

v. Being impolite and using negative words when treating customers.

Skills Lab Activity 5.6

1. Given a form of business growth strategy as

    •Bundling

    •Promotion and discount

    •Developing new product

    •Franchising

    •New distribution channels,

Discuss the following questions.

i. Where does the given growth strategy fall? (internal or external growth strategy) explain your answer

ii. Explain the activities can be done in order to apply the above strategies in the business club activities or in the business you want to start back at home.

iii. Draw an action plan showing when the above activities will be done.

iv. What are the advantages and disadvantages of each of business growth strategies?

End of Unit 5 Assessment

1. Assume your business is attaining the following, fill in the blanks below:

a. Increase in production, profitability and size.

This is .................................................

b. A prolonged period of little or no growth for companies.

This is ................................................

2. Assume that you have a mini-supermarket selling fresh milk, juices, bread and cakes in Kicukiro District;

a. How would you know that your business is growing?

b. How would you know that your business is declining?

c. What can you do to minimize such a decline?