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Various Techniques to Identify Potential Opportunities for Growth

INTRODUCTION

Throwing light in relation with the Small and Medium Enterprise (SMEs), it is quite assorted group. They are generally found in a wide array of business activities that ranges from artisan producing agricultural products to coffee shop and small sophisticated engineering firm engage in selling automotive parts. These firms carry out their business in different markets such as rural, urban, regional, national and international. For successful operations, they require various levels of skills, growth orientation, capital and sophistication (Ha-Joon, 2001). Many recent empirical studies have significantly depicted that SMEs has a contribution of around 55 percent of GDP and over 65 percent of the total employment in the high-income nations. Pertaining to this, it becomes necessary to evaluate how these small and medium enterprises plans for growth. Concerning this, the main aim of the research report is to evaluate how SMEs develop and growth. It will focus on various techniques being adopted by these firms to identify potential opportunities for growth. In addition to this, comprehension in relation with the varied sources of investment finances and options available for SMEs in relation with exit and family business succession. The final part of the report will throw light on importance of making informed choices when selecting routes to growth and will understand the potential risks and rew

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P1 Key consideration for evaluating growth opportunities and justifying in the context of organization

It is quite vital to evaluate the growth opportunities and finding ways to achieve them. It is important on the part of SMEs to plan carefully about the growth so as to achieve success. Talking in references with growth, it involves risks, but if right strategy is adopted than it can deliver stability, long term profits and security (Daron, 2003). For this, it is necessary to assess the strength, weakness, opportunities and threats of the own company and various ways to handle them, the firm can move on to the next level i.e. developing a growth strategy. Each and every business changes their focus when they are mover ahead of the start-up phase. For ensuring sustainability, determining opportunities for growth becomes a priority for SMEs. The growth of the business concern can be measured by understanding the key statistics of the firm i.e. its turnover, market share, sales, number of staff and profits. However, which type of measure will deliver accurate picture of performance of the business is dependent on the type of business and its current stage. For illustration, SMEs in retail sector will be having high volume of sales with narrow margins on stock. Due to this, these firms might have lower amount of profits that undermine the viability of the business (Badrinath and et.al., 1997). Thus, in general it can be said that for measuring the growth of the concern, sales and profits is the balanced combination.

  • PESTEL analysis– It is being defined as a tool that helps in analyzing the business environment of the firms where they are operating their business. It involves various elements such as political, social, economic, technological, environmental and legal. With this tool in place, SMEs can determine the opportunities of growth in a particular nation or region.
  • Competitor analysis– This analysis is considered as an important tool for evaluating the potential competitors of the company in the market. With this, various strategies, policies and procedures of the rivalry firms are analyzed and through this, firms can devise their own strategies so as to achieve a competitive edge from other firms in the market.
  • BCG matrix– This matrix is being used to represent the investment portfolio of the company. Many organizations faces problem in allocating their products, unite and product lines and thus, to cope up with this problem, BCG matrix have been designed (Surbhi, 2017). It has two factors i.e. the growth rate of the product market and market share of the organization in that market as compared to their competitors. In addition to this, seeking help from this tool, SMEs can prioritize their products and can determine the problem of resource deployment between different business segments. Further, it can specify majorly four different kinds of business units i.e. stars, cash cows, question marks and dogs.
  • GE matrix– It is alternatively being known as General Electrical matrix, being inspired by the traffic lights. This matrix encompasses nine cells with two dimensions i.e. business strength and attractiveness. Throwing light in regards with the first dimension it is being impacted by brand image, loyalty of the customers, profit margin, market share, technological capability etc. On contrary to this, attractiveness is influenced by market growth rate, size of the market, pricing trends, distribution structure, economies of scale, market segmentation etc. At the time when different product lines are being drawn on the matrix, strategic decisions can be undertaken based upon their position in the matrix. Products which come under the category of green color are in good position and those who fall in the red category are quite dangerous and will take the company to the path of decay (Rafiq and Kennedy, 2002).
  • Diffusion of innovation –It is being defined as a process through which new products and services are being adopted or not by the target audiences is ascertained. It helps the designers as well as marketers to assess the reason behind the successfulness of the inferior products than the superior products. The process of diffusion of innovation takes into consideration five important stages. The very first is the knowledge; here marketer is required to spread awareness about the products in the target market. Second is persuasion, which depicts the point at which the customer is open to the idea of purchase and marketer can convey benefits of the products to them. The next stage is decision, in which the customer evaluates the pros and cons of the acceptance and rejection of the innovation being offered by the firm. The fourth stage is the implementation stage. At this level, the adopter takes the decision whether to buy or not to buy the products. And finally, the confirmation stage, where the users evaluates the decision and decides to make use of the products in future or not (The Diffusion of Innovation – Strategies for Adoption of Products, 2018).

P2 Opportunities for growth by applying Ansoff’s growth vector matrix

Before pursuing any type of growth strategies, it is quite vital to ensure that the current business is running in an effective manner. SMEs and other related firms engage themselves in developing the new business, but they are require to make sure that their core business is still performing well. It is essential that the firms should not ignore their existing base of customers, because this will underpin the growth of the firms. These customers will play an important role in offering cash flow during this phase. Other than this, timing is also considered as an important aspect in the success of any type of growth strategy. The best timing for adopting the growth options can be ascertained by asking several questions such as will the business will cope with the expansion, is there plenty of resources and systems available in place to carry out exiting business while targeting expansion somewhere else etc. it is also required to take into account additional staffing, equipments, refining of production processes and outsourcing tasks so as to give the flexibility to follow a growth strategy (Moore, 2013). Thus, from the above discussion it is quite clear that it becomes essential to review the current position of the existing business in order to ensure that the consolidation efforts of SMEs will be effective in the best possible manner. Some of the opportunities of growth being available for small and medium enterprise business are as follows:

  • Partnership and joint ventures– By adopting this type of growth strategies, small and medium enterprise can avail many sorts of benefits such as sharing of experience, large base of customers, skills and abilities of different people, large number of employees etc. Seeking help from partnership and joint ventures arrangement with a non-competitive and complementary business, SMEs will be in a position to open new market and can improve the existing one as well.
  • Mergers and acquisitions– This generally takes place, when one company merges with the other firm or take over another firm. It is more viable for the firms which are established in the market. The transactions take into consideration commercial lawyers and legal work (Assess your options for growth, 2018).
  • Vertical and horizontal integration– Horizontal integration is being defined as that strategy, where in company wishes to acquire similar firm in the same industry. The main aim of horizontal integration is to increase the share in the market, diversify products and services and to achieve economies of scale. On the other hand, vertical integration involves acquiring the firm that operates in the production process of the same industry. This is mainly done in order to strengthen the supply chain, accessing new distribution channel, reducing the operational costs and capturing upstream and downstream profits.
  • Market penetration –Talking in relation with the market penetration element of Ansoff growth matrix, it simply refers to the selling same products to the existing customers. Here, it is important for the small business to determine new ways of increasing loyalty from the customers and increase the lifetime values of the customers. Firms can improve their order process, extend business hours, making things available to the customers easily etc. can help in improving the long term appeal of the business (Blanchard, Oncken and Burrows, 2011).
  • Market development– Here in this strategy, new customers are being approaches for selling existing products and services. The new customers can be determined on the basis of geography or new nation, region or a new demographic etc. Small and medium business owners can make use of new campaign that utilizes various sales channels to target new base of customers (Burns, 2011).
  • Product development– The product development strategy states that new products and services are being offered to the existing or present base of customers. This type of strategy should be adopted by those businesses who want to have differentiated products in order to remain competitive in the market.
  • Diversification – This is the most risky strategy which involves selling of new products and services in the entirely new market. It will work well, if the business of the firms already has foundation in place. It is also vital to assess the risk being involved and steps must be taken prior to mitigate the same (Williams, 2015).

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P3 Assessing the potential source of funding available to business with its benefits and drawbacks

For any type or kind of growth strategy, sound financial planning is very essential and acts as a foundation. Firstly, it is quite important to establish three main things i.e. how much investment is being needed to fund the venture, at what time it will be required and when it will be made available. Other than this, it is also vital to forecast a detailed cash flow. This is essential, as outgoings are almost certainly going to rise sooner or faster in comparison with the revenues. Furthermore, there should be enough money available with the firm to run and operate their core business smoothly and effectively. It is good if the firm is building some surplus too, because many projects take long period of time to rap out fruits that it is predicted originally. In addition to this, detailed forecasts in relation with the sales, sources of seed funding, working capital and second round funding must be drawn up (Seven Types of Funding Sources for your Startup, 2013). There are many sources of funding available to the small and medium enterprise and the details are being explained underneath:

  • Bank loan– It is being considered as a popular source of funding for many SMEs and startups. Prior applying for the loan in bank, it is crucial to make sure that the person applying for the same is educated in regards with options being available as well as rate of interest that come along with different options. There are many benefits of taking loan from bank such as variety of funding options are available, funding process of quick and control of business is in the hands of the owner. On the other hand, there are some disadvantages as well. Lot number of documentation is required, money needs to be given back irrespective of the success or failure of the business and lastly, there is a need of education in regards with the various funding options available otherwise, one can involve in such type of deal that will hurt the business sooner or later.
  • Crowd funding– In this type of source of funding, business is funded by taking small amount of capital from a large number of people through means of internet. In crowd funding, vast networks of friends, family, peer group are being used through varied social platforms. This is being done to get the word out of business with a clear aim to attract new investors. The main advantage of crowd funding is that business can be expanded by raising fund from pool of investors (Burns, 2014). However, for the realization of results, lot of dedication as well as time is being required.
  • Venture capital– Under this type of funding, investors invest considerable amount of money in exchange for equity in the business. Returns are given to them when the business is being acquired by other company. Venture Capitalists invest their money in such as businesses which have the potentiality of offering good amount of return on their investment being made. Through venture capital, SMEs can source their funds and gets mentorship and expertise to develop their business as well. But, the business is compelled to give large chunk of business in lieu of the large amount of funding offered (Wall, Coday and Mitchell, 2014).
  • Angel investors –These investors are known as wealthy individuals, who offer funding to the business and in return they want share of equity in the business. Angel investors may work in group and screen deals together prior offering funds. On contrary, there are many who work on their own. The main benefit of this type of funding is that they can offer valuable advice and they also have flexible terms of business. However, the main disadvantage of angel investors is the business is forced to give up the control of business up to some extent (Moore, 2014).

After determining the sources of funding, it is essential to determine when these sources can be utilized. This can be done through investment decision making. It is a process which helps in evaluating the project or portfolio decisions and the value being generated by them. It involves various factors such as finance, environmental, social, cultural and legal; however, the most important is financial appraisal. Talking in relation with the financial appraisal, it is considered as the most quantifiable technique that is applicable to the benefits that produces financial returns. The appraisal can be done by various methods, but the simplest technique is the payback method. The payback period is the time it take for net cash inflow to equal the cash investment. It is generally used for the purpose of initial screening process. Other than this, in many options, discounted cash flow techniques are also used like net present value (NPV) or internal rate of return (IRR). These techniques are suitable for assessing the value of benefits and alternative ways of providing them (Menon and Malik, 2016). NPV helps in calculating the present value of cash flows in relation with an investment. Higher NPV depicts better returns. Under this calculation, discount rates are used to reflect how value of money decrease with a passage of time.

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P4 Designing a business plan for growth including financial information and strategic objectives for scaling up a business

Executive summary

Small and medium enterprise wants to grow their business and thus, they decided to expand their business by opening a coffee bar. The bar is determined to become a daily necessity for the locals who are addicted towards coffee and a place where one can escape the daily stresses and be comfortable. In the current scenarios, there is a growing demand of the gourmet coffee and great service, thus the coffee bar will focus on offering their best to their valuable customers. The firm will require around £150000 start-up funds (Barrow, Barrow and Brown, 2012)

Objective of the firm

  • The main objective of the firm is to become a best coffee bar in the area
  • To earn reasonable amount off profits
  • Maintaining a 60 percent gross margin

Mission of the firm

The main mission of the firm is to give their best efforts in creating a unique place where each and every customer can easily mingle with each other and feel comfortable. Further, the firm will be in a business of helping the clients in relieving their stress by offering piece of mind by friendly customer service, great ambience, good location and high quality food products. The profits of the firm will be invested to raise the satisfaction level of the employee by offering stable return to their shareholders.

Summary of the company

Small and medium enterprise wants to start a coffee bar which needs to be located in the Brick lane in London, UK. The company will sell coffee, other beverages and snacks. The major investors of the firm are Arthur Garfield and James Polk who own around 70 percent of the firm. The start-up loss of the coffee bar is assumed to be around £16000. Total funding requirement of the firm is around £150000, including all the start-up expenses and other equipments.

Sources of finance

There are two major sources from which the coffee bar has arranged their funds i.e. owner’s investment and bank loan. There are two major owners, Arthur Garfield and James Polk; both have contributed around £60000 and £20000 respectively. All other investment has contributed around £30000 that together brings the total investment of around £110000. The remaining £40000 needed to cover up the start-up expenses and assets was arranged from the bank loan for five years. The loan being taken is secured.

Market segmentation

The coffee bar will pay attention on its marketing activities in order to reach the people working in offices, university students and faculties and sophisticated teenagers. The marketing research being carried out the firm depicts that these are the group of customers who are likely to purchase gourmet coffee products. The consumption of gourmet coffee is common across varied income categories and thus, it is generally dependent on the level of higher education and the nearness to the University campus will offer access to the targeted group of customers.

Sales forecast

SALES FORECAST

YEAR 1

YEAR 2

YEAR 3

Sales

Coffee beverages

£250,400

£285,440

£323,984

Coffee beans

£77,600

£86,360

£95,996

Pastries, etc.

£145,000

£150,600

£156,660

TOTAL SALES

£473,000

£522,400

£576,640

Direct Cost of Sales

Year 1

Year 2

Year 3

Coffee beverages

£77,600

£86,360

£95,996

Coffee beans

£33,800

£38,180

£42,998

Pastries, etc.

£63,000

£70,300

£78,330

Subtotal Direct Cost of Sales

£174,400

£194,840

£217,324

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P5 Assessing the exit or succession options for SME with benefits and drawbacks

Focusing towards the exit strategy, it is something that each and every investor related to a small and medium enterprise looks for. When there comes the time to move on, for any investor in a business, the main questions are as the same i.e. how much money we will get and how money will be taken out from the business? There are various exit strategies available for the SMEs to choose from:

  • Liquidation – This is the strategy where owner decides to close the business. For small enterprise that runs their business individually, liquidation is the only option available to them (Christman, 2015). This method is quite simple and the business can be wound up easily but it depends on the sale of the assets. However, this exit strategy has the lowest return on investment to the owner. The only source of money from the liquidation is through the disposal of assets.
  • Initial public offering –Initial public offering or IPO is a type of public offering wherein the shares of the company are sold to institutional investors. The company gets popularity and the stock of the will be worth in tens or hundreds. But this type of options is available to only few numbers of SMEs. It is time consuming method and more transaction costs are being involved.
  • Selling to friendly buyer– Under this method, the ownership is being transferred to a family friend or neighboring business owner. This is simple than liquidation and the legacy of the previous owner is also maintained. The buyer can be a customer, friend, investor, and employee or family members (Hawkey, 2017). The main advantage of this strategy is that the seller knows the buyer and thus, there is no diligence required. On the other hand, it might tear the firm apart out of jealousy.
  • Acquisition– Acquisition is a method in which other companies buy the business. This is considered as the best exit strategy for small and medium enterprise. In this method, the seller can negotiate the price. The main advantage of this type of method is if the seller has a strategic value to the acquirer than they can pay you more than anyone else. However, acquisitions are generally messy and become very difficult when there is clash in the system and culture in the merged company (Halt, 2016).

There are many reasons for the failure of the business such as poor level of management, wrong reason of starting a business, insufficient capital, wrong location, lack of planning and over expansion. However, there might be chances that business owners want to exit even if there business is quite successful. Succession planning is important strategy for this. This process is generally being undertaken by the head of the family who selects and train the successor who will become the next leader of the family business. However, there might some challenges in succession planning such as lack of talent, cultural issues, generation gap, different way of observing and performing things etc. (Christman, 2015).

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CONCLUSION

Consequently, it can be concluded that for successful operation of small and medium enterprise, there is a need of various levels of skills, growth orientation, capital and sophistication. It is quite vital to evaluate the growth opportunities and finding ways to achieve them. The growth of the business concern can be measured by understanding the key statistics of the firm i.e. its turnover, market share, sales, number of staff and profits. Further, it was ascertained that for any type of growth strategy, sound financial planning is very essential and acts as a foundation for the business.

You may also like: Factors Which Has Force Business Entity to Implement Digital Technology

REFERENCES

  • Badrinath and et.al., 1997. The SME and the Global Market Place: An Analysis of Competitiveness Constraints. Geneva: UNCTAD/ WTO International Trade Center.
  • Barrow, C., Barrow, P. and Brown, R., 2012. The Business Plan Workbook. 7thed.Kogan Page Publishers.
  • Blanchard, K., Oncken, W. and Burrows, H., 2011. The One Minute Manager Meets the Monkey. London: Harper Collins.
  • Burns, P., 2011. Entrepreneurship and Small Business. 3rded. Basingstoke: Palgrave MacMillan.
  • Burns, P., 2014. New Venture Creation: A Framework for Entrepreneurial Startups. Basingstoke: Palgrave MacMillan.
  • Christman, P.G., 2015. The Master Plan Exit Strategy for Successful Business Owners: Discover a Strategic Planning Formula. BookBaby.
  • Daron, A., 2003. Root Causes: A historical approach to the role of institutions in economic development. Finance and Development, pp.27-30.
  • Ha-Joon, C., 2001. Institutional Development in Developing Countries in a Historical Perspective-Lessons from Developed Countries in Earlier Times. paper presented at the European Association of Evolutionary Political Economy.
  • Halt, G.B., Donch, J.C., Stiles, A.R. and Fesnak, R., 2016.Intellectual Property and Financing Strategies for Technology Startups.Springer.
  • Hawkey, J., 2017. Exit Strategy Planning: Grooming Your Business for Sale or Succession. Routledge.
  • Menon, K.S.V. and Malik, G., 2016.Funding Options for Startups: A Conceptual Framework and Practical Guide. Notion Press.
  • Moore, G., 2014. Crossing the Chasm, Marketing and Selling Disruptive Products to Mainstream Customers. 3rded.New York: HarperCollins.
  • Rafiq, D. and Kennedy, M.F., 2002. Providing Financing for Technology-based SMEs. UNCTAD
  • Wall, S., Coday, C. and Mitchell, C., 2014. Quantitative Methods for Business and Management: An Entrepreneurial Perspective. Harlow: Pearson Education.
  • Williams, S., 2015. Financial Times Guides: Business Start-up 2015. Harlow: Pearson.
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