Qualification - Higher National Diploma in Business (RQF)
Unit Name - Planning for Growth
Unit Number - Unit 42
Assignment Title: Investing in the future & Developing an exit plan
Learning Outcome 1: Analyse the key considerations SMEs should consider when evaluating growth opportunities.
Learning Outcome 2: Assess the various methods through which organisations access funding and when to use different types of funding.
Learning Outcome 3: Develop a business plan (including financials) and communicate how you intend scaling up a business.
Learning Outcome 4: Assess the various ways a small business owner can exit the business and the implications of each option.
Assignment Brief
You are to work on a simulated business or social enterprise of your choice. This need not be complex and could be a small business, such as a local service (e.g. a new coffee shop or an online product sales business). You should choose something that interests you personally or where you may have some existing knowledge or access to resources and skills through personal networks.
Introduction
Hazel &Harshey is the business that is working in the Hong Kong effectively, it is the coffee roaster that is highly liked by the customers. This paper consists on different strategies that can be adopted by the company in order to increase its competitive advantage over rivals along with the financial growth and opportunities. It is necessary for the roaster to adopt the effective strategies; these recommendations are mentioned in the paper; these must be followed by the management in order to convert their small business into the large enterprise (hazelnhershey.com, 2020). Due to these strategies, the future success of the roaster can be ensured, which is also mentioned in the paper.
You will prepare a business plan for the growth of your simulated small business or social enterprise and submit a written report. This will include:
• An explanation of the basis of competitive advantage for the business.
• An assessment of the opportunities available to the business.
• An assessment of the options for growth, applying Ansoff's growth vector matrix with an
assessment of the risk of each option.
• An assessment of the options for financing growth.
• A recommendation for the business.
Following on the above business plan, you are to write an appraisal of the exit or succession options for the business or social enterprise, explaining the benefits and drawbacks of each option and coming to a recommendation.
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Solution:
Competitive Advantage
Competitive advantage is referred towards the resources and capabilities in order to achieve the lower cost structure or the differentiated products. Anu business can place its position in the market by its choice of lower cost or differentiated products. This decision is directed towards their competitive advantage (U, et al., 2019). So, for any business, they must produce those goods and services that are better in terms of quality and cheaper from the products of the competitors. This will allow the business to generate more sales volume and profit margin as compared to other businesses in the market.
This coffee shop also needs to increase its competitive advantage, so for this purpose, they need to use different strategies so that they can enhance their growth level in the target market. There are three different types of competitive advantage which this coffee shop can use for their growth. These are niche strategies, differentiated products and a lower cost. The details of which are as follows:
Cost Competitive Advantage: this can be achieved by the coffee company when they will use the skilled labor from the market, the raw material must also be of lower cost, the operations must be customer-oriented so that values can be added for the customers etc. there are many other companies like Nissan is using this competitive advantage to raise their sales volume and growth (U, et al., 2019).
Product/ Service Differentiation: this is another way for companies to create a competitive advantage. Businesses can introduce unique and valuable products in the market to attain the attention of the target market. So, this coffee shop can also do that by innovating its products as compared to other coffee shops while it can be difficult for the companies to keep this competitive advantage because when the new product or technology is introduced, this can be disappeared.
Niche Strategies: this competitive advantage can be used by businesses when they have to reach out to the single target segment to raise their sales as coffee shops can only target those who are lovers of coffee (Harvie, 2013). This can be the best option for the smaller and the newly created companies so that they can earn from smaller segments and so not have to compete for the larger segments at the start of their company.
As coffee is the main product of the company which another local coffee shop is also providing so the company should use cost as their competitive advantage in order to get the growth. Although they can also use Niche strategies as well, it would not be best in their case because they can have the opportunity to target the larger segment. After all, coffee is the most usable product for everyone in Hong Kong and widely used in the daily routines of employees, students, professionals, households, etc.
Available Opportunities
Following are the factors that should be considered by the Hazel &Harshey for their growth.
Environmental Uncertainty
Unstable, uncertain and hostile business environments generally lead to difficulties for different sorts of businesses and companies. Nonetheless, for small and medium businesses, the margin for errors is especially thin while they look for opportunities for growth. So, it vis necessary for the management of roaster to make the strategies for the maintenance of environmental sustainability. Thus, in Hong Kong, where there is higher uncertainty in business, this can be an opportunity for the roaster.
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Internationalization
Every business, small or large, takes globalization as an advantage or opportunity for advancement. This phenomenon is empirically proved through several types of research. A research conducted on coffee roaster showed that internationalization has tremendous advantages for roaster. So, the management must need to make strategies to internationalize their business in order to expand its reputation and growth in future. It can innovate in processes and products when they enter foreign markets. Internationalization offers greater distribution, production volume and scale of distribution efficiency for firms (Mamai, 2017).
Innovation
To survive effectively in the competitive market, the roaster need to innovate. This is an opportunity for the growth of them in Hong Kong. This is because what medium and small businesses lack in resources can be compensated by agility, flexibility and innovation. This innovation can be in the form of product improvement or innovative processes. A researcher suggested that new technologies and research & development are efficient drivers of roaster advancement. Small companies need to be adaptive to innovations. This can be an opportunity to gain market leadership, improve profitability and growth. This can increase market share for roaster by appealing consumers from competitors (Wakkee, 2015).
Performance
The factors mentioned above related to environmental uncertainty and innovation are an opportunity for roaster because they help them to be flexible and agile in operations. Because small companies have fewer chances of survival, they seek opportunities to "bulk-up." Other than these factors, market intelligence and market orientation is an opportunity for roaster to perform in Hong Kong. Market understanding, information gathering, and environment comprehension are all the factors that collectively improve the chances of success for better performance (Wakkee, 2015).
Ansoff's Growth Vector Matrix
Ansoff matrix is a model through which the management of the Hazel &Harshey can extend its services and move beyond the current business practices. This analysis gives the insight to the management of the coffee roaster to find out the directions and strategies through which they can increase the successful growth of their business. The ansoff matrix analysis of the roaster is as follows:
Market Penetration
In accordance with the market penetration, the management of roaster must increase its market share in its existing market. For this purpose, they can adopt the different strategies and tactics to increase the effectiveness of their products(Sarah, 2019). In order to successfully implement this strategy, the management must need to stick to increase the quality of their existing products and make changes in it according to the satisfaction and demands of the customers. It is a beneficial and easiest way of increasing the effectiveness of the business along with the increasing sales, promotion and revenues.
Product Development
This is another way through which the management of roaster can increase its competitive advantage and growth. According to this strategy, the management must need to make innovation and development in the product so that they can gain the attention of the customers. By focusing on product development, they can enhance the demand for their product(Daniel, 2016). For example, they can add new products on their menu, and they are known best to provide the coffee so that they can add the other fast foods in their menu. It will be highly beneficial for the management as by making the strategies of the product development, they can increase their target market, sales and revenues, which is highly beneficial for their future growth.
Market Development
By making the strategies for market development, the management of the coffee roaster must need to expand their market. For this purpose, they can the new branches in the country, also expand the business at the international level. This strategy will be highly beneficial for them to increase the growth opportunities for their business. In this way, they will not only become able to approach the new customers but also increase the chances for their growth.
Diversification
Diversification is the strategy that can be adopted by the management, in accordance with this strategy, the management should adopt the diversifications in their products and business strategies, for example, except offering the food products, they can also offer some entertaining activities to the customers. They can open the bar or a small café too in which they will serve the customers in a huge range(Miltiadis, et al., 2020). For this purpose, R&D strategy will be highly beneficial, as by having insight from the competitor's strategies, the management can adopt better strategies than them.
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Financial Growth Options
Sources of Funding
Several researches have conducted related to the financing medium and small companies. The most common source of funding for the roaster in Hong Kong is equity and debt. There can be internal and external funding for small and medium companies, such as internally generated funds. There are ranges of funding options small and medium enterprises in Hong Kong can use to develop and succeed in the competitive business situation.
Small and medium companies' owners, Family and Friends
When some small and medium-sized companies owners face issues like lack of capital, the major source of finance is to invest by himself/ themselves from accessible resources and getting assistance from friends and family. However, funding from friends and family is a good alternative since there are fewer conflicts when monetary rewards are lower. The major drawback of this sort of funding is that resources are limited (Svatošová, 2017).
Angel Investors
Angel or business investors are the people who owe higher net worth, ready to invest in new companies, mostly small and medium companies. They do not have personal ties to have stocks in the roaster. Therefore, there is a direct contribution of business angels in the roaster. There are some drawbacks like it is difficult to find angel investors, a business angel can be dishonest, the owner needs to give some authority to the business angel, the company needs to offer a share in the stakes of the business and so on (Svatošová, 2017).
Trade Credit
Taking credit is the most commonly used way of financing small and medium companies in hongkong. It arises when a firm buys services and goods on deferred payment. It is a short term loan, and payment is due in a specific amount of time. In case SME is more vulnerable to risks, the supplier might be resistant to extend the period. Despite its drawbacks, trade credit is the most used source of financing (Harvie, 2013).
Invoice Discounting and Factoring
Factoring is a sort of financial service, and loan finance wherein roaster sell their account invoices to the or receivables third parties like factor at a discounted rate. The factor is responsible for gaining the receivables from the debtor's consumers on behalf of invoices gained from the company(Akin, et al., 2018). In invoice discounting, the lender offers the money to firms by keeping the account sales as security for the loan but does not have the authority to collect receivables. The drawback of both approaches is that they are expensive and for a limited period. Factoring affects seller-buyer relations negatively. The management of roaster can adopt this strategy for their future tasks.
Leasing
Leasing is financing based on assets. This enables small and medium companies to achieve short and medium-term finances. This is effective for small businesses while they face challenges to reach traditional bank loans due to a lack of resources. The disadvantages are that leasing can be expensive, limited, and so on (Abbasi, 2017).
Venture Capitalist
Venture capitalists are financial mediators and source of non-banking finances. A venture capitalist is an investor who invests by offering finances and support to small and medium companies for stretching of the business who don't have the reach to equities markets. As per the researches, venture capital is a sort of financing wherein funds are produced by investors and reused by investing in obscure firms that are open to risks or startup firms. The drawback is that there is higher uncertainty. SMEs need to present a strong idea to get this funding. The administration is required to run a business based on venture capitalist funds (Harvie, 2013).
Asset-based finances
In emerging economies like hongkong, asset-based financing is widely used by small and medium companies. This funding can be used to support international or domestic dealings. The disadvantage is that the borrower needs to know that asset-based debt is costly; there are high fees. Moreover, the lender can control cash or take back assurance in case there is a decline in the borrowing base.
Equity Financing
Equity financing is a kind of financing wherein companies increase capital by selling the stocks to investors to get the possession of rights in the firm. This is adequate for SMEs that have high returns and risk profiles, looking for long-term corporate investment for growth, ongoing value creation and innovation, and so on. This is better than debt financing. The drawbacks of equity financing are cost, formalities, and reporting requirements. There might be unwanted changes in ownership of companies (Svatošová, 2017).
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Debt Financing
This is a form of financing in which companies get the debt, do not lose ownership or profits and bond to repay the principles and interest at a specific time. There are restricted conditions and securities. Debt financing is preferred over equity financing. Debt financing is not good for rapid growth and innovative companies with a higher risk profile. Companies can face bankruptcy if there is unnecessary reliance on debt financing (OECD, New Approaches to SME and Entrepreneurship Financing, 2015).
Crowd Funding
Crowdfunding is an external way of financing through a large number of persons by offering a minor amount of financing needed. There is an open call through any source like the internet for the provision of finances in the form of donations with no rewards. Crowdfunding does not affect the control and ownership of roaster. There are drawbacks like misuse of funds, loss of capital in case project fails and inexperienced investors.
Bank Financing
Banks are the main source of funding for small and medium enterprises. This is expensive as compared to other financing sources. Nonetheless, the roaster can perform better when monitored by banks. There are many drawbacks of bank financing, such as strict conditions on credit, credit sanctioning, higher cost, and so on. Moreover, banks need an ongoing personal guarantee from SMEs (Abbasi, 2017).
Role of Government
Government policies have a profound impact on the operations and growth of roaster. The government must take the initiative to help SMEs to flourish. The government can support innovative projects and roaster that need finances. The government should play a major role in creating and producing facilities for roaster so they can work in effective ways and support the economy of Hong Kong (Abbasi, 2017).
Exit Plan
Typical business plans show the course of action to start a project and venture to keep it running. There is a comprehensive business plan for an exit strategy as well the proper exit strategy places the business in the best possible position to get maximum return on business. The act of a viable exit strategy in a business plan is to advance the worth of the business. This is to convert the ownership and investment into cash. A number of persons start a business to get acquisition. The purpose of an exit strategy is how business owners and investors have invested a huge amount of money in the startup transfer of the business to a third party. This is the way investors get profit on the finance they invested in the venture (Khan, 2016).
Common strategies of exit comprise being purchased or acquired by the other company, sale of equity or an employee or management buyout. For those seeking angel investment and venture capital funding, it is important to have a strategy. For small enterprises and businesses, it is important to have a clear exit strategy. Most of the time, medium and small enterprises do not need exit plans. It is important to is the goal of the small business founder is to have a foreseeable future. For a coffee shop or any other small and medium business, the common exit is the acquisition, initial public offering, IPO initial public offering, management buyout, liquidation, family succession and so on (Khan, 2016).
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Acquisition
This is called merger and acquisition, that the management must need to make with the existing effective companies to get the growth in future. This is possible when the management determines to sell itself to others. There can be merging of services or products with other companies. This is like the purchase of YouTube by Google. This is like a coffee chain that decides to buy a bakery. This is appropriate for businesses of all sizes (Detienne, 2013).
Initial Public Offering
The exit strategy is appropriate for small and medium enterprises. It is a good way to earn money from a business. This is as handling of selling stocks ager lock period is passed.
Management Buyout
If there is a business legacy, there can be turning to workers. It is a good idea that workers or managers buy a business particularly a food chain or hotel business.
Family Succession
If there is an intimate knowledge of a business in a family, then it can be transferred to family members or friends. This is a strategic decision to exit a business. Strategic planning can make the passing of business to family members easily.
Liquidation
Liquidation is a common exit strategy for small and medium enterprises. This is the fastest way to exit a business and may, at times, be the last options in cases where the business relies on one person only, while bankruptcy is close (Detienne, 2013).
Conclusion
The current report presented opportunities for the growth and development of small and medium company name Hazel &Harshely coffee roaster in hongkong. The report offers different sorts of strategies for the future growth of business. There is an analysis of funding types that are appropriate for roaster.There is a detailed business plan that shows the application of principles. The exit strategy for small and medium companies is presented as part of a suitable business plan through which the future succession or exist can be analyzed and strategies can be made accordingly. The current report shows that there is a margin for roaster because of tremendous opportunities like business expansion or innovation.
Recommendations
According to the above-mentioned business plan, there is a high chance for the coffee company to succeed in the growth margin while there are lower chances of the exit of the business. So it would be best option for Hazel and Hershey Company to have succession of their business preferable to their family members. Although the business can face some challenges in doing so, like the lack of finances, unusual risk in terms of operations. In order to avoid such challenges and ensure the success of the business it is highly recommended for the coffee shop to introduce some strategies regarding the succession of Hazel and Hershey Company, the details of which are as follows:
Direct Succession: in any new start-up, Hazel and Hershey Company can find difficulty in replacing an integral part of the business with another, so this might be a challenge for the coffee shop as well. While if the owner of the coffee shop can plan regarding the exit and succession, then they need to create the leadership and development plan for the employees first so that their performance cannot be suffered from the new leader and his/her strategies (Sarah, 2019). So, for the excellent planning of succession Hazel and Hershey Company can inherit their operations to one of the family members like the owner can pass on the business to his daughter or son so that they can take up the business as per the leadership strategies of their father so that business cannot be impacted from the change in leadership qualities and the business strategies.
Selling the Business: While there is another chance that grown-up businesses want to exit the market due to some reasons like there is no succession, afterword's or the business is not generating the profit as it should be. So, for this purpose, the business can sell its operation to another person who is interested in running the coffee shop. The owner of the Hazel and Hershey Company can sell this business to other partners, a third party that is interested in the business, or to family members who are capable enough to take up the business. There is another possibility for Hazel and Hershey Company that is to sell their business to competitors who are interested in taking over, merger or acquisition etc. The main things that need to be considered by the coffee shop are, if they are deciding to sell their company, their business must be desirable by outsiders (third party, competitors, family members etc.)
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Just Shut it down: this is also considered as the exit strategy for Hazel and Hershey Company because, in some circumstances, it would be best for Hazel and Hershey Company to rap-up their business, especially in the case of cash run-out, liquidation of the assets, etc. It is the best strategy for the owners or entrepreneurs to move on. In order to do the businesses or the entrepreneurs needs to take out the money from the business like any kind of reserved profit or generating of extra cost through sales etc. must be taken by the owner before shutting down it completely so that this money can become a profitable margin for them (Mahn, et al., 2020).