Definition of Growth of Enterprises

Introduction

An entrepreneur visualizes business opportunity and organizes various factors of production for seting up an enterprise. In the modern competitive world, enterprise needs to be strong enough to successfully face the challenges posed by changing business environment. This lesson highlights the need for growth of business enterprises. Business growth is a natural and ever going process. The growth of an enterprise is reflected in the increase in its sales, volume of output, assets and profits.

It further describes the emerging options of the business enterprises to ease the administration and enrich the business growth in the form of net working, dealership and franchising etc.

Need for Growth

Various motivating factors which fuel the need for growth of an enterprise are:

Need for Survival. In order to survive in the present environment firms need strength & stamina which can be generated only through growth.

Benefits of Economies of Scale: A growing firm can reap various advantages of economies of scale with respect to purchasing, production, marketing, financing and management of the enterprise also.

Increase in Demand: In order to cater to increasing demand for goods and services the firms have no choice but to expand or grow.

Modern Technology: It symbolises huge investment and mass production besides better quality products and lower cost.

Compliance with Govt. Policy will ease the enterprises to avail various facilities, concessions and incentives provided by the government.

Desire for recognition motivates the entrepreneurs to set up enterprises, ensure their efficient function and finally build business empires.

Strategies of Growth

Strategy is an intentional and well planned course of action evolved to achieve desired objective. Growth strategy means a properly designed plan to facilitate in the growth of business over period of time. Various strategies for growth are:

Expansion in the form of market penetration, market development and product development.

Diversification by entering new filed of business on various ways viz., horizontal, vertical, concentric and conglomerate diversification.

Mergers by combining two or more existing firms into one to gain economies of scale.

Joint ventures by pooling resources and promoting new ventures and managing jointly. And

Sub-contracting i.e., by engaging another firm to perform certain manufacturing process or produce a part of it and then assemble it as a finished product.

Dealership, Networking and Franchising

Dealership

A person who wants to become an entrepreneur can take up dealership in big companies and deal their products. Thereby he could learn the art of marketing, customer service and market competition etc., Dealers are merchant intermediaries who deal in the product lines of a manufacturer under exclusive franchise arrangement which usually incorporate restrictions regarding territories and markets served and product handled and lay conditions in respect of re-sale prices, inventory carrying and payments. Dealerships are widely adopted both consumable goods and durable goods.

Networking

Today’s entrepreneurs are deeply embedded in networks, partnerships, alliances, and collectives. Networking, the process of enlarging the entrepreneur’s circle of trust, is a negotiation process. How entrepreneurs access networks and how those help them succeed are the subjects of this section.

Benefits and Motivations for Networking

Entrepreneurs usually have a wide range of friends, acquaintances, and business associates. They are able to make use of these informal network relationships to obtain resources and opportunities for their firms. These networks provide them with information about their environment, and they enable entrepreneurs to build reputation and credibility for themselves and their firms.

The networks themselves can be sources of sustainable competitive advantage as well as a means of procuring other resources that can be a source of sustainable competitive advantage.

Types of Networks

One type of network is known as the personal network. This is an informal network that consists of all the direct, face-to-face-contacts the entrepreneur has. These include friends, family, close business associates, former teachers and professors, among others. The ongoing relationships in a personal network are based on three benefits: trust, predictability, and “voice”.

The second type of network is the extended network. Extended networks are formal, firm-to-firm relationships. The entrepreneur develops these by means of boundary-spanning activities with other owners and managers of enterprises, customers and vendors, and other constituents in the operating environment.

Extended networks contain more diversity than personal networks and, consequently, more information.

Alliance Behaviors

Entrepreneurs engage in four basic types of alliances:

confederations,

conjugate alliances,

agglomerations, and

organic networks.

These types are distinguished by two characteristics:

whether the relationship is direct or indirect (entrepreneur’s business to alliance partner) and

whether the relationship is with competing or non competing firms.

Confederate Alliances

Direct contact with competitors is called a confederate alliance, or simply a confederation. In concentrated industries, where a few firms have most of the market to themselves, confederate alliances are usually motivated by an attempt to avoid competition through techniques such as point pricing, uniform price lists, standard costing, and product standardization.

Conjugate Alliances

Direct contact with noncompeting firms is called a conjugate alliance. Examples include long-term purchasing contracts with suppliers and customers and joint research and development projects. Companies that keep their separate identities and engage in conjugate relationships are mimicking the vertical integration strategies of larger firms and attempting to obtain those benefits without incurring the inherent risks.

Agglomerate Networks

An agglomerate network, or an agglomeration, is a set of indirect relationships between firms that are competitors. It serves as an information network that enables the firms to secure information about the capabilities and competencies that are regarded as necessary but not sufficient for success.

Organic Networks

An organic network is an indirect relationship (indirect in terms of the business, not the individual entrepreneur who represents the firm) between non-competing organizations.

Franchise Deal

In the present economic scenario, more and more people dream of being an entrepreneur and some of them take a fast-track route by purchasing a franchise. A franchise enables you, a ‘franchisee’, to sell goods or services that have instant brand recognition in the market. By paying a franchise fee you get a fully developed business format, a right to use the ‘franchiser’s’ trademark and assistance including training.

The franchiser often helps in selecting the location, layout and interiors, provides a well-established operating system, advises on marketing, management and personnel, besides training the franchisee and his staff.

In franchising, by associating yourselves with a well-established chain, you can reduce your risk but at a cost. Besides paying a franchise fee, you may lose your independence and are subjected to control of the franchiser.

A franchiser normally charges the following fees from its franchisee:

Upfront Charges

These include non-refundable franchise fee and other initial expenses, and normally range from several thousand to several lakhs of rupees. These include cost of equipment, furnishing, rent and initial inventory.

Royalty Payments

You are often required to pay a fixed percent of our sales every month to the franchiser as a royalty for use of the name and trademark. Royalthy payments are due even when the business is not breaking even.

Advertising Fees

You are normally required to contribute to an advertising fund. Some part of this money will support the market development activities in your area, while a part of the same will be used in national advertising to solicit more franchisees.

You may be called to contribute to both local and national advertising funds. In addition, you will be required to bear the expenses of a grand opening ceremony and other initial business promotion expenses.

Other Costs

These include additional cost burden that may be imposed on you by the franchiser in forcing you to buy some non-proprietary items from the franchiser or his approved sources. License fee for operating certain business may constitute a major part of these expenses that are to be borne by the franchisee.

Franchise system maintains uniformity at all franchise outlets. This leads to loss of independence for the franchisee and restricts their ability to use business acumen and innovation.

Selecting a Franchise

Before an entrepreneur selects a franchise, he should ensure that he wants to be a franchisee rather than setting up his independent business from scratch. Three important considerations should be:

your ability

the product’s market, and

franchiser’s strengths

You should identify and define your skills and desires. You should ensure that these suit the requirements and role demands of a franchise. It is better to ascertain if you would be able to operate your outlet even if the franchiser goes out of business.

Check if you have access to the same or other suppliers; if you could conduct the business alone if you need to lay off personnel to cut cost. A few years ago, an apparel company ‘Stencil’ had to close shop.

Well over 100 franchisees found themselves out of business over-night. You should better have the abilities to guard yourself against such odds.

As a prospective franchisee, you should study the market in terms of the demand, competition, brand and growth potential of the franchiser’s products. You should ascertain the demand of the franchiser’s products or services in your area of operation.

Check if the demand is seasonal, likely to be temporary and ensure that the product or service generates repeat business. Study the level of competition, especially in your area of operation.

Check the number of franchiser operated and franchised outlets in your area and its neighbourhood. You should also factor in the competition from other companies selling the same or similar products or services and check if the competing companies are well established with wide name recognition in your area.

It is better to compare if the same foods and services are offered at the same or lower prices. Recently a Pizza Corner franchisee in Paschim Vihar, New Delhi had to shift its location when Domino Pizza opened shop next door.

Primary reason for buying in a franchise is to associate with the name of an established company. A well-established brand name is likely to draw more customers at the outlet. Therefore, before you purchase a franchise you should consider:

The popularity of the franchiser’s brand name and trademark

How long the franchiser has been in the business

If the company has a reputation for quality products or services

Number of complaints or cases pending in the consumer courts and other for a.

If the franchiser or any of its executive has been convicted of offences involving fraud, unfair or deceptive practices.

The next important criteria relates to the strengths of the franchiser and is gauged by the company’s experience in marketing the product or service and running a franchise network on one hand and the training and support services to be provided by the franchiser on the other.

There is no guarantee that an entrepreneur who is successful in selling its products for several years will definitely succeed in managing a franchise network.

You should prefer to deal with a company that has some experience in handling the franchise network. If the franchiser has little experience in managing a chain of franchises, its promises of guidance, training and other support may be unreliable. Many people opt for a franchise because of the support they expect from the franchiser. It is important to know the type of training and support the franchiser provides.

While buying a franchise it is a good idea to go in for comparison shopping. Discuss the prospects with them and try to get the answers to the following questions:

How long has the franchiser been in business?

How many franchised outlets currently exist?

Where are they located?

How much is the initial franchise fee and other startup costs?

Are there any continuing royalty payments? How much?

What control does the franchiser impose?

What type of training and other support services are to be provided by the franchiser?

What are the projected sales and income figures as per the franchiser? Ask for a written substantiation for any projections, and if the franchiser is unable or unwilling to provide such substantiation, then you should consider such projections as doubtful.

Last but not the least, you are required to know the conditions under which the franchiser may terminate your franchise and your obligations to the franchiser after termination. You should explicitly know what you may gain or lose if your are required to pull out of the franchise or the franchiser opts to cancel the contract.

Controls

To ensure uniformity, franchisors typically control how franchises conduct business. These controls may significantly restrict your ability to exercise your own business judgement. The following are typical examples of such controls.

Site Approval

Many franchisors pre-approve sites for outlets. This may increase the likelihood that your outlet will attract customers. The franchisor, however, may not approve the site you want.

Design or Appearance Standards

Franchisors may impose design or appearance standards to ensure customers receive the same quality of goods and services in each outlet. Some franchisors require periodic renovations or seasonal design changes. Complying with these standards may increase your costs.

Restrictions on Goods and Services Offered for Sale

Franchisors may restrict the goods and services offered for sale. For example, as a restaurant franchise owner, you may not be able to add to your menu popular items or delete items that are unpopular. Similarly, as an automobile transmission repair franchise owner, you might not be able to perform other types of automotive work, such as brake or electrical system repairs.

Restrictions on Method of Operation

Franchisors may require you to operate in a particular manner. The franchisor might require you to operate during certain hours, use only pre-approved signs, employee uniforms, and advertisements, or abide by certain accounting or bookkeeping procedures.

These restrictions may impede you from operating your outlet as you deem best. The franchisor also may require you to purchase supplies only from an approved supplier, even if you can buy similar goods elsewhere at a lower cost.

Restrictions of Sales Area

Franchisors may limit your business to a specific territory. While these territorial restrictions may ensure that other franchisees will not compete with you for the same customers, they could impede your ability to open additional outlets or move to a more profitable location.

Terminations and Renewal

You can lose the right to your franchisee if you breach the franchise contract. In addition, the franchisee contract is for a limit time; there is no guarantee that you will be able to renew it.

Franchise Terminations

A franchisor can end your franchise agreement if, for example, you fail to pay royalties or abide by performance standards and sales restrictions. If your franchise is terminated, you may lose your investment.

Renewals

Franchise agreements typically run for 15 to 20 years. After that time, the franchisor may renew your contract. Also be aware that renewals need not provide the original terms and conditions. The franchisor may raise the royalty payments, or impose new design standards and sales restrictions. Your previous territory may be reduced, possibly resulting in more competition from company-owned outlets or other franchesees.

Summary

Business growth is a natural and ever going process. There are various factors which motivate the growth of an enterprise viz., need for survival, benefits of economies of scale, increase in demand, modern technology, compliance with government policy and desire for recoginition. There are several intentional and well planned course of action evolved to achieve the desired objective of the enterprise in the recent past in the form of various corporate strategies. They are: Expansion, Diversification, Mergers, Joint ventures, sub contracting etc. Networking skills and alliance formation are vital to both new ventures and growing firms. Networking is actually a series of methods of securing resources without taking ownership. These include various forms of partnerships, alliances, and informal agreements. The ability to convince others of the desirability of an alliance and to negotiate favorable terms for the venture is a fundamental skill for today’s entrepreneur.

Franchising presents the entrepreneur with the opportunity to expand the boundaries of the organization and, potentially, to retain control of the strategic resources that provide the basis of SCA. The franchisor contributes the key resources of the business system and the product or service’s reputation. The franchisee contributes knowledge of the specific location, human resources, and a highly motivated owner/ manager to maintain quality. The combination has led to tremendous growth in franchising systems.

There is no doubt that buying a franchise can lead to a short cut in a successful career in entrepreneurship, yet it is important for you to thoroughly understand the franchising business and its limitations, and take due precautions in buying a suitable franchise.