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Home > Business Strategy Best Practice > Assessing Opportunities for Growth in Small and Medium Enterprises

Business Strategy Best Practice

Assessing Opportunities for Growth in Small and Medium Enterprises

by Frank Hoy

Executive Summary

  • The growth stage of a small or medium-size enterprise (SME) typically requires more resources than the company commands.

  • In order to grow in their competitive environments, SMEs should proactively engage in identifying opportunities.

  • The management team should have criteria and procedures for assessing opportunities, as only the most promising and suitable should be pursued.

  • Exploiting opportunities includes obtaining resources to implement the business’s growth strategy.

  • The long-term health and survival of SMEs depends on their ability to recognize, evaluate, and pursue growth opportunities in competitive environments.

Introduction

Many companies experience rapid growth at some stage of their life cycle. For some, this may happen soon after they are launched. Others have multiple spurts, followed by a leveling-off period or even a decline. A consistent characteristic of the growth stage is that demands exceed existing resources. Consequently, business owners must be creative in acquiring and managing the resources needed to seize growth opportunities.

Successful entrepreneurs are astute at, first, identifying opportunities and, second, taking action to pursue those opportunities. The idea behind starting a business may have been spontaneous. It may come from prior experience or personal preference. It may have resulted from loss of employment. Although bankers, investors, and educators often emphasize the need for planning in advance of opening an enterprise, the evidence is that most venture creators did not prepare a business plan before they started. For a small or medium-size enterprise (SME) that has been operating for some time, however, a planning process is essential to any assessment of whether to take up a growth opportunity.

Identification of Opportunities

Opportunity recognition is at the core of an entrepreneurial venture. The founder of a company with growth potential will identify and seek to satisfy unmet customer needs. Creativity, new technologies, and new marketing approaches are all characteristics of growing enterprises. A key word in this stage is flexibility. The leaders of the company are finding new markets, sometimes on the international scene. Growth may come not only from sales of products and services, but also through acquisition. The growing firm gains recognition for its brand name and builds customer loyalty.

Robert Ronstadt coined the term “corridor principle” to explain how small and medium business owners identify opportunities that a prospective entrepreneur does not recognize.1 At the time an individual opens his or her first enterprise, it is as if the budding entrepreneur is inside a room consisting of his or her life experiences and observations. Starting the business is the equivalent of opening a door, stepping out, and discovering a corridor. Up and down the corridor are other doors, each representing a new opportunity. If the first door—i.e., starting the business—is not opened, none of the other doors will be seen. Launching the business allows the owner to enter new networks, obtain access to information, and otherwise make discoveries that would never have happened without going into business.

From the strategic management literature, we learn about “environmental scanning” as a technique for being alert to new events, trends, and changes that may result from legislation and regulation, competitor initiatives and reactions, customer tastes, technological developments, and many other occurrences. Some business executives look at environmental disruptions as threats, but those disruptions are invariably viewed as opportunities for entrepreneurial small and medium business owners. Rita McGrath and Ian MacMillan proposed formalizing the scanning procedure by devising a register in which opportunities could be categorized as one or other of the following:2

  • redesign of products or services

  • redifferentiation of products or services

  • resegmenting of the market

  • reconfiguring of the market

  • development of breakthrough competencies

Assessment of Opportunities

Enterprises that have been functioning for a period of time have strategies that were either formulated or which emerged. The first test of whether to seize an opportunity is to evaluate whether it is consistent with the firm’s strategy, as the risk and cost of failure can be high if there is a mismatch. On the other hand, if the business is in decline, an opportunity that requires a change in strategy may be the key to renewal and growth.

Before pursuing the opportunity, firm managers should ascertain the conditions that produced it. Will they persist? Is there a market of sufficient size to make the opportunity attractive? And what resources are required to succeed in exploiting the opportunity?

Failure to consider this last question can lead to disaster. Many small and medium enterprises do not have the resource base to embark on high-growth trajectories. Such growth may demand significant capital infusions. Smaller firms may not have access to traditional sources of capital. They may not have collateral or credit lines for borrowing and are not likely to be publicly traded, so they can’t seek equity investment. Financing at this stage requires creativity. It is not unusual for business owners in the early growth stages to rely first on their own resources—personal savings, home mortgages, pension funds, etc.—followed by funding from family and friends. A family member with a steady income and solid credit record may be the cosigner on a bank loan. For some companies, financing may not be available at all. In such situations, “bootstrapping” may be the appropriate course of action. This term is derived from the notion of pulling oneself up by the bootstraps, i.e., being self-reliant. It involves finding ways of achieving goals when capital is limited, minimizing the need for outside financing, maximizing the impact of the entrepreneur’s investment, and/or optimizing cash flow.3

Some additional criteria that SMEs use to screen opportunities include:

  • the competitive environment and profit potential of the industry;

  • general and local economic conditions;

  • the ability of the firm to achieve a sustainable competitive advantage;

  • the competence of the management team;

  • the prospects for wealth creation and the feasibility of harvesting that wealth.

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Further reading

Books:

  • Bhidé, Amar V. The Origin and Evolution of New Businesses. New York: Oxford University Press, 2000.
  • Harvard Business Review on Entrepreneurship. Boston, MA: Harvard Business School Press, 1999.
  • Hitt, Michael A., et al. (eds). Strategic Entrepreneurship: Creating a New Mindset. Oxford: Blackwell, 2002.

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