Introduction
There is a notion that small firms always grow to become large enterprises. Most of the times, enterprises are usually built from the efforts of the entrepreneur who comes up with the idea and then seeks ways of making the idea work. For any enterprise to be able to achieve business growth and the desired success there are several factors that come to play and they include the following:
Factors Influencing the Growth and Success of an Enterprise
There exists several factors which contribute to the growth and success of an enterprise and among the leading factors is the age of the firm. To explain why smaller and younger firms are likely to grow faster than old and large enterprises is explained in economics by the use of the concavity of the production function.
Where at the start, the small capital invested has the capability of multiplying exponentially but as time moves on and new investments are injected in to the investment, the marginal rate of productivity of the invested capital declines and that explains the reason why young firms grow faster than old and already established enterprises (Jovanovic 1982).
Although many experts indicate that as the firm ages the likelihood of it learning form its mistakes and thus succeeding are high, the multiplier effect of large business is low and this is a major contributor to the success of an enterprise (Audretsch 2002)
How easily an enterprise is able to access extra sources of capital also affects the success of an enterprise: While the large firms have got vast assets which they can provide as their collaterals which small enterprises do not have and this in most of the times slows down the growth and success of small enterprises.
In most developed economies, small enterprises cannot access credit easily however; great use of credit by small firms is more prominent in countries where legal infrastructure is usually weak. As the legal infrastructure strengthens across a spectrum of countries the use of trade credit is reduced for all firm sizes as opposed to the large firms since collaterals become a major issue (Fransisco & Kumar 2005).
Individual’s entrepreneur characteristics also influence the growth and the success of an enterprise. As we have seen in the case of Wallia Sport, the leaders compensated each other with the different types of knowledge they were well versed with. However, in contrast to the expectations of many that the level of education influences the success of small enterprises, this notion has found not to apply in the case of less developed economies (Sleuwaegen & Micheline 2002).
In these regions, most of the entrepreneurs are less educated and engages in business due to lack of alternatives and given the relatively low levels of education within the Micro and Small Enterprise sector in developing countries but their enterprises are succeeding since they have learnt the art of perfection by studying what the market demands and then supplying to it the needed goods and services (Kantis, Angellini & Koenig 2004).
The legal form or the formality of an enterprise also determines how successful an enterprise becomes. How formal or informal an enterprise is determines its extent of growth.
Most small enterprises are not well established and due to lack of basic requirements such as collaterals, small enterprises tend to face bigger financial constraints than big enterprises thus hindering extra investments than the entrepreneur may be in thought of investing in to increase the growth rate. thus, most of the small entrepreneurs out there use their own savings to start up their enterprises due to the difficulties they face when looking for.
While most of the Micro and Small Enterprises owners claim that lack of credit is a major cause of slow growth for small and young enterprises, studies shows that access to finance may be a necessity but not a sufficient condition for growth (Schiffer and Weder 2001).
Assessing the state of newly formed enterprises and to be able to predict their fate so as to initiate the necessary action on time and increase their survival probabilities is not an easy task. This is due to the fact that there is no known individual factor that can be said to be the major determinant and that’s presents why models for assessing and assisting the development of firms are a key interest for business practice.
It becomes thus very important for business to use models such as the Klofsten’s Business Platform to assess the performance and the profitability of the enterprise. The platform is usually used as a framework for organizing enquiry into the capabilities of the small enterprise. The platform aids the entrepreneur in ensuring that his idea is feasible and the fact that the firm utilizes current resources effectively and efficiently by analyzing the current situation (Davidsson & Klofsten, 2003).
The eight pillars which need to be analyzed by the plan are:
Idea: formulating and clarifying the idea behind the firm is an important point which helps in setting the goals and objectives of the firm. The product development and how the finished products will be accepted by the customers is another issues analyzed by the plan. The size of the market niche and how profitable it will be for the firm is another issue which needs to be analyzed.
Organization development is also another pillar within the plan and its analysis gives the firm a clear view of who the close actors within the firm are and their responsibilities thus in case of any problem, it is easier to know whom to be questioned. The core group expertise deals with the market knowledge sales and other technical expertise that the firm is in possession or may require.
The Klofsten plan also analyzes what the prime movers and commitment drivers are by assessing what really motivates the players to ensure they are committed to the firm’s goals and finally the relationship between the firm and other firms in the industry. It is important to know which firms can offer you assistance financially and even knowledge wise.
Stages of Industrial Growth
In order to ensure that an enterprise grows successfully there are several phases which the firm goes through from the onset till maturity. The stages are most of the time divided into four phases:
The developmental stage is the first phase which an enterprise goes through. During this phase, there is usually high innovative ideas form the entrepreneur since the business is just young and beginning. At this stage, the business is also just trying to establish itself in the market.
The expected sales and profits are usually low since the business is still penetrating the market and the response by the customers is still low. The risks involved during this stage are usually very high due to the environment of the new market and the indifference among the targeted customers which can play to the disadvantage of the enterprise (Goldmark and Nitcher 2005)
The expansion or the growth phase marks the beginning of the second stage of industrial cycle. After the business has established itself and the customers appreciates the goods and services the entrepreneur is offering, the market condition is established and continues to grow.
During this phase, the sales and the profits are at an increasing rate due to the increasing number of customers. If the goods or services on offer are of high quality compared to what the other rivals are supplying, there are also high chances of creating loyal customers at this juncture. At this juncture, the entrepreneur can inject extra capital to enhance the fast growth rate at which the business is growing at thereby increasing the returns from the enterprise.
It is in the third stage of the industry cycle that maturity is usually achieved. It is usually the longest and the most extended stage in the industrial life cycle. It is during this stage that the market is fully established. The growth rate is not as rapid as it was observed in the expansion stage thus profits and revenues are not expected to grow that fast. Due to the increased competition and the declining profit margins, capital ploughed back to business becomes smaller and smaller.
It is also at this stage that that most companies or enterprises diversify by investing into extra market roles in order to preserve their market share.
As the growth rate declines, the need to increase the production means reduces thus reducing the expenses also in the long run due to the low returns being received, it would be uneconomical to inject more money into the business while the expected returns are in a declining phase. The extra revenue which was earlier being ploughed back to business is usually used to repay the company of the firm debts.
The declining phase marks the last stage of industrial cycle. During this stage, the growth of the enterprise is in a declining phase due to the advancing in technologies and introduction of newer products in the market, goods produced by the firm tend to be viewed as outdated and thus as an entrepreneur, it is usually advisable to ensure that the costs remain down in order to slowdown the decline pace at which the enterprise is falling at and to preserve some profits.
For the firm to continue in operation, it is therefore important for the firm to remain dynamic and be introducing new products to the market regularly so as to ensure it moves along with the changing tastes and preferences of their customers.
Reference List
Audretsch, B, D. 2002. The Dynamic Role of Small Firms: Evidence from the U.S. Small Business Economics, 18: 13–40.
Davidsson, P., and Klofsten, M.2003. The Business Platform: Developing an Instrument to Gauge and to Assist the Development of Young Firms. Journal of Small Business Management, Vol. 41.
Fransisco, M., and Kumar A. 2005. Enterprise Size, Financing Patterns, And Credit Constraints in Brazil: Analysis of Data from the Investment Climate Assessment Survey. Issue 49 of World Bank working paper World Bank e-Library. World Bank Publications.
Goldman, L., and Nitcher S. 2005. Understanding Micro and Small Enterprise Growth. Micro Report #36. United States Agency for International Development.
Jovanovic, B. 1982. Selection and the Evolution of Industry. Econometrica, Vol. 50, No. 3: 649–670.
Kantis, H., Masahiko I., and Masahiko K. 2002. “Entrepreneurship in Emerging Economies: The Creation and Development of New Firms in Latin America and East Asia.” Inter-American Development Bank. Web.
Schiffer, M, and Weder, B. 2001. Firm Size and the Business Environment: Worldwide Survey Results (No. 43). International Finance Corporation.
Sleuwaegen, L., and Micheline, G. 2002. Growth of Firms in Developing Countries, Evidence from Côte d’Ivoire. Journal of Development Economics, Vol. 68: 117–135.