 Topics  Activities 2

 Videos 0

1: THE ENTERPRISING ENVIRONMENT Welcome to Business

2: OPERATIONS MANAGEMENT
Enterprise Skills
3: THE ENTERPRISE FORMULATION AND GROWTH

4: THE ENTERPRISING ENVIRONMENT

5: BUSINESS PLANNING

6: THE ENTERPRISE FORMULATION AND GROWTH

Search Search
7: PEOPLE IN BUSINESS ENTERPRISES

8: BUSINESS PLANNING

9: OPERATIONS MANAGEMENT

10: PEOPLE IN BUSINESS ENTERPRISES

11: ENTERPRISE FINANCE AND ACCOUNTING

12: OPERATIONS MANAGEMENT

13: MARKETING AND MARKETING

14: ENTERPRISE FINANCE AND ACCOUNTING

15: MARKETS AND MARKETING

100%
 SMEs AND BUSINESS GROWTH

By the end of this sub-topic, learners should be able to:

1. Identify different measures of busine ss size

2. Analyse the role of small to me d ium e nte rpris e in the e conomy .
3. Identify enterprise surviva l and growth stra te gie s.
4. Explain strategies used to break into foreign marke ts.

Business size
Business operations vary in size.
A sole trader operates on a small scale compared to private or public companies.
Business size refers to the scale of operation.
Different stakeholders may compare the size of an organisation in different, for
example an investor would want to invest in a growing business or customers trust
large scale operators since they believe to be more efficient.
There are a number of factors used to measure business size as such as follows;

Number of employees

Number of workers employed determine the size of a business.

A small firm will only employ few workers whereas a large business will hire large
number of employees to perform different tasks, in marketing, production, accounting,
etc.
This factor is usually used to compare business that are in the same line of production.
However this method does not work when a company is highly automated, it can
employ few workers but still referred to as a large firm.

Capital employed

This is the total amount of capital invested in a business.

It shows the value of resources a company has in terms of stock or long term debt.
The higher the amount invested the larger the business is.

Sales turnover

Measures the total value of sales in a given period of time.

High volume of sales is usually associated with bigger firms while small firms may sale
less volume of output in a given time.
This method is mostly ideal when comparing companies within the same industry.

Market share

Represents the percentage of sales volume earned by a certain company within a

particular industry over a given period.
Having a high market share shows that a company sales high volume of output in the
market.
The higher the market share the larger the firm is.

Market capitalisation

This is the value of a company based on the current market value.

It is used by public companies that trade on the stock exchange.
It measures the value of a firm if it was to be sold.
The higher the value the bigger the business is, however this factor is only used by
companies that have shares listed on the stock exchange.

Level of technology

The level of technology employed by a business can also be used to determine the size 100%
of a business.
It focuses on level of intensity used in the production process, whether the firm is
 capital or labour intensive.
If the capital intensity is much higher than labour it means that the business is
operating on a large scale this is because there are high fixed costs involved.

Problems of measuring business size

There is no best way of measuring business size.
Different ways might be used depending on the factor which needs to be considered
at one point, for example, sales volume, level of output, business value, market, etc.
These factors can give a different comparative outcome, for example highly automated
firm can employ few workers but produce high volume of sales.

Small and medium enterprises (SMEs)

These are independent firms which are defined by their characteristics such as;
They are owned and controlled by the owner.
Employ only few workers
Characterised with relative low level of production.
Less start-up costs

Roles Small and medium enterprises

Create employment
Encourage independence- people are encourage to start their own businesses rather
than seeking for employment.
Source of revenue to the government.
Contribute to national output.
Bring in foreign currency.
Promote competition.
Promote innovation.
Prevent monopolies- the existence of small firms in a market protects customers

Fro m e x p l o i t a t i o n .

Meet special needs of customers- small enterprise can provide services that large firms
do not offer such as offering credit to general customers, locating near customers.

Challenges faced by small and medium enterprises

Lack of financial assistance due to lack of collateral security.

In most case investors would want to invest in growing companies, hence they rarely
invest in small business.
It is difficult for small firms to find ready markets for their products and it may fail to
market properly.
Poor management skills.
Face stiff competition in the market- fail to compete with bigger firms since large firms
are able to set low prices and still gain profit.

How small and medium enterprises survive

Close supervision- enterprisers closely monitor the production process so as to

minimise the cost of wastages and increase labour productivity as a result reducing
the cost of production.
Provide personal contact with customers
Open for long hours as compared to large firms.
Government assistance- government assist small firms by offering loans, training and
tax holidays so that they are able to make profit.
Locate near customers.
They are flexible they can easily shift their resources to produce another product to
meet changes in demand and new fashion trends.
Customisation- small firms offer tailor made products, hence they are able to retain
their customers.
They form joint ventures- join their resources to achieve a certain objective, for 100%
example, easy access to markets, share costs and risks and financial assistance.

i h
Business growth
Most enterprises aim for growth as one of their objectives.
Business growth is defined as the expansion of business operations in terms of size so
as to improve their performance.
Business growth can be shown by an increase in output, revenue, market share, profit,
etc.

Why enterprise aim for growth as an objective

To survive in the market enjoying low production costs.

To increase profitability by increasing output.
To enjoy economies of scale.
To reduce risk through diversification and having different product portfolio.
To avoid takeover- it can be difficult for large company to be taken over by a potential
predator frim.
Improve competitiveness- large companies have means to engage in research and
development so that they become competitive in the market.

Strategies for business growth

These are ways adopted by enterprises who wish to expand their operations.
Can be internal or external growth.

Internal growth
Achieved when a firm increases its level of output, workforce or sales revenue.
Internal growth focuses on product and the market.
A firm does not join forces with another company.
The firm can grow using existing resources more efficiently or use more resources

Strategies used for internal growth

Expansion- a firm increases its existing operations by:

Targeting new customers in existing market.
Developing new products.
Opening new markets or expanding line of production.
A firm can expand through;
Market penetration- finding new customers within the existing market.
Market development- a firm finds new market for the existing product.
Product development- can modify existing product or develop new product and
sell it to existing or new market.
Diversification- a firm enters into new line of business which is different from the
existing one.

Advantages of internal growth

Maintain maximum control of the business without outside influence.

It is less risky compared to takeovers and acquisitions.
Preserves the culture of the organisation, there is no dilution of values and norms from
another companies.
No dilution of owner \ship.
Can use internal funds to finance the expansion.

Disadvantages of internal growth

The rate of growth may be slow.

May be difficult to find new resources for expansion.
It is limited, it depends on the overall market.

External growth
This is when a firm increases its operational scale by buying other firms rather than
expanding from within. 100%

Arises when a firm merges with or takeover another business.

Takeover and acquisition
Takeover refers to when one enterprise purchase another for an agreed sum in cash or
number of shares.
Takeover is mostly a hostile and unfriendly action in which one enterprise acquires
enough share of another, hence the acquirer will take over the operations of the target
enterprise.
This occurs when one company becomes the major shareholder of another company
and gains control over that company.
Friend takeover occurs when the board of directors accept an offer made by the
company that wishes to take control.
Hostile takeover- acquisition of one firm whose board of directors are not willing to
agree to takeover. The buyer forces the target firm to agree to the sale.
The firm taken over loses its controlling powers and becomes part of the predator firm.
In most cases takeover is a result of cash flow problems, in which forces a firm to seek
financial assistance in exchange for control.
Usually affects public limited companies whose shares are listed on the stock market.
In acquisition the board of directors of an acquired enterprise agrees to allow another
company to control the firm for a certain price.

Advantages of takeover

Used to eliminate competition in the market.

A firm can access already existing technology without the need of purchasing new
equipment.
It takes advantage of distribution channel.
A firm has a ready market for their products.
The cost of acquiring the business can be lower compare to other methods.

Disadvantages of takeover

The predator firm assumes all risk and liabilities of another firm.
May raise integration issues — employees may dislike the takeover and this may
cause challenges in the operations.

Merger/integration
This is when two or more companies agree to join their businesses and form one
entity.
The companies combine their resources, products, production process so as to improve
efficiency.
A merger is different from takeover in that the parties involved voluntarily agree to
join their firms and create a new firm.
Mergers are there for economic growth, improve liquidity position, improve
management skills, etc.
Merger takes place when a firm
Purchases or exchange of assets with another firm.
Purchase or exchange of shares.

Types of mergers

Horizontal merger
Occurs when two firms which are the same stage of production combine their
businesses.
The companies will be selling the similar products or running similar businesses, for
example, retailer shops joining together.

Advantages of horizontal merger

Companies share resources to produce products.

Reduces number of competitors in the market.
Reduces production costs since the two companies will be sharing resources.
100%
Enjoy economies of scale through an increase in production output.

Disadvantages of horizontal mergers

 g g

This type of merger increase the chances of monopoly leading to consumer

exploitation.
Reducing competition may lead to a reduction in efficiency.
Firms may produce low quality.

Vertical merger
This is a merger between two firms which are at different stage of production but
within the same industry.
Companies that produce different products but for one specific end product join
together, for example, wheat producer and a baker.
This method is used to promote the relationship between supplier and the customer.
Vertical integration takes the form of backward or forward integration.

Vertical forward merger

This is when a company merges with another firm which is in the next stage of
production.
It can be a manufacturer acquiring a ready market for its output.
Reasons for vertical forward merger are as follows;
To control the price charged to their own product.
To secure a ready market for their product.
To control distributing channels for the product.

Vertical backward merger

This is when a firm gains control over its previous suppliers.
A firm merges with another firm which is at earlier stage of production, for example, a
furniture manufacturer can merge with its suppliers of timber.
Reasons for forward integration;
To cut production costs- the firm will be guaranteed of raw materials at a low price.
To secure continuous supplies of raw materials for the firm.
Can also ensure the quality raw materials to ensure
The firm can control the supply of inputs to other competing firms in terms of quantity
and price.

Drawbacks of vertical merger

A firm may lack knowledge on how to manage another company producing different
product, for example, a carpenter may know how to make furniture but lack
experience on how to prepare timber for production.
Can lead to higher cost if the firm fails to manage the new activities efficiently.
Limiting competitors in the market could lead to compromised quality and customers
may respond negatively.

Conglomerate merger
Occurs when two firms producing unrelated products merge.
The firms are not competing in the market but may use the same production processes
or distribution channels.
The firms are also in different industries or may be in different geographical location.
Conglomerate merger may be pure or mixed; pure conglomerate involves firms
producing unrelated goods or involved in unrelated business activities, for example, a
clothing retailer merging with a telecommunication enterprise.
Mixed conglomerate involves firms that seek to extend their product or the market.

Advantages of conglomerate merger

Able to share ideas on how to carry out business activities.

Leads to diversification helps to reduce risks thereby ensuring growth.
Enables a firm to reach a wide market base- a firm can sell its product in another
firms market leading to an increase in sale/ profits.
100%
Disadvantages of conglomerate merger

h h f fb d l k f
 High chances of mismanagement of business activities due to lack of experience.
Conflict of values, they may be conflict of cultural values between employees.
A firm can shift its main focus of production and this can lead to inefficiency.

Foreign marketing
One of the ways of business growth is to expand into foreign market.
Foreign market is defined as the marketing of a local product in other countries.
A firm identifies possible market outside the country to sell its products and aims at
satisfying their needs.
The firm designs the marketing mix and modifies them to suit the customer preferences
of different nations.

Reasons for foreign marketing

To open new markets for a product that has reached its decline stage in a local
market.
Increase sales resulting in an increase in profits.
To spread risks of any economic changes in local market, a firm may still gain revenue
from another country when there is economic recession in another.
To access resources like raw materials, technology that may not be available in a local
market.
To take advantage of favourable government policies that promote foreign
investments.
Increase economies of scale.

Strategies of foreign market entry

This is an organised method of producing goods and services to a targeted market
and distributing the goods to customers.
A firm deciding to enter foreign market must first;
Asses the needs of the target customers.
The scale of operation whether small or large.
The best time to enter the market.
The best method to use.

Methods of entry
Exporting

This is the traditional method of operating in a foreign market.

It is defined as the selling of locally produced products in another country.
The goods are produced in home country then sold international.
Can be direct or indirect export.
Direct export- the firm is directly involved in the exportation of its own product.
Direct export gives the firm total control of its own product and gains all profit.
Indirect export- the firm hire intermediator who will be responsible for exporting goods
and services on behalf of the firm.
An agent may have more knowledge about foreign market and contacts of potential
customers for easy marketing.

Advantages of exporting

Exporting is the simplest and cheaper way of entering foreign market as it does not
require high amount of operation in the host country.
It is less risky since goods are manufactured locally rather than international.
Allows a firm to acquire knowledge about foreign market before investing
permanently.

Disadvantages of exporting

Prone to trade restrictions such as embargo or customs duty.

Easily affected by exchange rate fluctuations resulting in an increase in costs if there is
an appreciation of local currency. 100%

Firms incur extra costs like transportation or warehouse for goods in transit.
Franchising and licencing
This is an arrangement between two firms where one firm gives another firm a licence
to use its trademark, production process or any other business system to produce
goods and services.
A firm in one country allows another firm in the host country (franchisee) to use its
name in return for a fee.
This agreement gives the franchisee liberty to produce and market its products.
Goods will not be transported abroad but they will be produced in a foreign market
under the franchiser's brand name.
In licencing the domestic firm has less control over the production of goods and
services compared to franchising.
Examples of franchise businesses include Holiday inn, Nando's, KFC, McDonalds, etc.

Advantages

Less costs of developing products' image since it is an already well-known brand.

The franchisee use proven trademark and product hence less risks of product failure.
The franchiser provides knowledge to the franchisee on how to market and run the
business.

Disadvantages

There is limited freedom on the scope of market, type of product to be produced by

the franchisee.
The franchisor controls the activities of the business hence there is little room for
innovation.
Profit is shared upon the franchiser and the franchisee.

Joint venture
This another method used in foreign marketing where firms from different countries
come together combining their resources and form one business entity.
It can be a local company approaching a foreign company or a foreign investor
interested in a local market.
Resources shared includes equipment, finance, intellectual property and any other
assets.
It is different form takeover or merger in that parties in joint venture share ownership,
risks and profits.

Benefits of joint venture

Each firm can access new markets and distribution channel of another firm.
Firms share investment risks and other costs.
Easily access to resources like finance, equipment without having to borrow funds from
external sources.
Parties share knowledge and enables them to run their business efficiently.

Drawbacks of joint ventures

Firms have different objectives this can lead to conflicts among parties.
Difference in culture and knowledge of expertise result in poor business operations.
There is no certainty for continuity as some members may lose interest in the business.

Foreign Direct investments

This is when a firm directly develops production and distribution facilities in a foreign
country.
A firm opens its own business in another country or invest in an existing firm buy
buying assets or shares.

Advantages

A firm can acquire cheap labour and low costs of raw materials in another country.
This method allows a firm to escape trade barriers.
100%
A firm can take advantage of government incentives used to promote economic
growth in a country.
 Improve standard of living for the host country.
Creates opportunities employment.

Disadvantages

There is high risk involved.

Can be affected by economic and political change within the host country.
High set up cost involved since there is need to purchase assets for business
operations.
The exploitation of raw materials and cheap labour result in an increase in rate of
depletion of resources in the host country.

100%