Entrepreneurship and Business Venturing - Challenges Faced by New Ventures in Growth Process - Essay Example

June 19, 2016

Challenges Faced by New Ventures in Growth Process

Introduction

Starting a business has never been an easy task for entrepreneurs. It requires risks that not many are ready to take. Investing in business you have never tried before is a means of endangering because you expect the business to either do well or make losses. For a new business to show growth, then it means that the amount of capital employed should lead to more output or revenue at the end of the stipulated period. This means that the entrepreneur should add resources at the same rate as income is realized (Heffernan 2013:45). Many new businesses need to grow so that they enhance their survival in the competitive market. Growth is critical in attracting new employees in the firm. This work covers some of the problems that new ventures face in managing the growth process.

The day-to-day challenges of managing a growing firm

One of the main problems that these businesses face is managing their day to day activities. There are day-to-day challenges that are faced by new ventures in managing their firms. Without some essential daily requirements, it won’t be easy to run the business.

Cash flow management

Cash flow management is vital in any growing business. A company needs cash in every aspect of its activities for the running of the enterprise to be smooth. Cash flow management deals with planning of future cash requirements to avoid issues with liquidity later (Kroes&Manikas 2013:37). It is not possible to serve customers without effective cash flow forecasting. As a business progressively grows, the challenges of cash flow management also increase since more money is flowing into the firm.

Price stability

Another primary challenge facing new ventures under day-to-day challenges is price stability. Price stability is a situation whereby the general price of a commodity does not keep on changing over time. This implies prices neither go up nor do they go down. It is not easy to have a business that does not have any competitors. Competitors may limit the growth of a new business especially when the competitor has been in the firm for a long time and hence has acquired most customers in the market. For a new business to grow, it requires the business owner to reduce the price of commodities to attract as many customers as possible. This gradual change of price from time to time leads to a retarded growth of a business.

Quality control

Furthermore, it is not easy for a new venture to control the quality of products and services. Reason being, as the firm grows, quality control becomes more and more complicated. As a business entity grows, more customers start flowing into the firm. This means that more requests and orders are expected from the customers. Therefore, it becomes hard for a business to handle all these demands and deliver services as per the client requests (Sadler 2016:201). For this reason, the company may provide poor quality services.

Capital constrains

Moreover, many businesses have major problems with the capital. Many businesses need a lot of capital to start. This has been a great challenge to many entrepreneurs who have great ideas in mind but lack capital to implement their great plans. It requires a lot of time to raise money for the investment of a business. In addition, it takes a lot of time to raise the capital that was invested in an individual business. Moreover, it needs a lot of attention by management to raise the required capital. There businesses that cannot grow without capital whatsoever. For this reason, the management has to be very cautious on how activities involving capital are carried out.

In a case study carried out by Benjamin on Thomas Cook Group; a UK travel services company on August 2014, it was proved that the company went through a lot of problems setting up the business as well as managing its finances. Benjamin emphasized that the company lost £600 million for the last three-quarters (Benjamin 2014: 12). In the year 2014, Thomas Cook Group recorded a loss of £20 million. According to Benjamin, one of the major reasons for this loss was due to mismanagement of funds. Some of the senior managers were found to have embezzled a lot of cash from the company and hence there was very little cash to carry out the normal operations of the organization. Their shares also dropped by 70 percent and the European operator said that the company needed more cash from its banks. Another problem that led to the financial deficit was due to the many business trips that were being conducted annually hence consuming so much of the organization’s money. The company also had problems with managing their charges. The charges were rising progressively and hence they lost too many customers in 2014. The company also reported some capital constrains that rendered it incapable of offering best quality services to their customers’ satisfaction.

Use of an exhausted productive opportunity set

The productive opportunity set of any business is the set of opportunities for growth that managers think is the best. Managers in business should be very qualified so that with the same set of resources, they can produce many different services from the same resources. Managers are always alert on any opportunities that may arise to assist the firm in growing towards a positive manner. These are opportunities like any funding organizations that may come up to help the business grow.

In any new business, growth will be very limited if the firm does not see any opportunities for expansion other than the ones set by managers to enable a venture business to grow. It will be hard to see some of the opportunities for expansion when exhausted productive opportunity sets are still in practice. A business should be updated according to the current market trends and should, therefore, be able to see any opportunities for expansion (Mahoney 2016:76).

Growth may also limit the expansion of business. When a certain venture business grows slowly, it is always not easy for the business to invest in expansion. This is because the business invests most of its efforts in growing first and not in expansion. A firm may also become constrained by its past growth. If a firm has been so slow in its growth, then it will be very hard for it to set opportunities for expansion. For a business to enhance its expendability, managers should be equipped with managerial skills that enhance growth and expendability of the firm as a whole.

According to a case study conducted by Christensen on Hewlett Packard company; one of the major computer manufacturers in the world, the company had a few challenges regarding their use of exhausted opportunity set. According to this case study, the company was found being unable to effectively collaborate across 4,000 sales managers and 380+ sales plans. These sales managers were too many for the company to handle. This implies that the company was already spending too much to pay these managers rather than using the money on expansion strategies. The sales plans that the company had put in line were also too many and the company was spending a lot of resources on them. These resources could have been used on expansion as well (Christensen 2013).

The study also showed that the company had limited visibility into worldwide quota deployment. This was another reason why growth was delayed. According to Sue Barsamian, who was the Senior Vice President, Worldwide Indirect Sales, HP Enterprise Group, Hewlett-Packard, the company was taking long to figure out the deployment issue and this delayed expansion for the company. He added that the company would make major advancements if the managers would work on any opportunities available for the expansion of the company. One of their main aims was making the biggest sale by being the best computer services provider in the world.

Managerial capacity

Moreover, new business ventures encounter problems with managerial capacity. This is usually named as the Penrose Growth Constraint. According to Edith Penrose's Theory of the Growth of the Firm (1959), limited managerial capacity is one of the main hindrances of growth of many firms. Edith emphasizes that most of the firms are normally not able to grow if managerial capacity is poor. Managerial capacity is usually made of managerial services as well as entrepreneurial services (Cerulli&Potì:14).

Entrepreneurial Services

Entrepreneurial services assist in finding new markets, products, as well as services. It means that the main aim of entrepreneurs is to look for opportunities and developing ways on how to exploit them. Most entrepreneurs use some entrepreneurial techniques so as to enhance the best means of exploiting resources. One of the techniques that most of them make use of is entrepreneurial versatility which involves a lot of imagination and vision through creativity and experimentation.

Managerial services

On the other hand, managerial services are also equally essential in any business. Managerial services are crucial since they are the one that aid in the real exploitation of opportunities. It is also referred to as opportunity exploitation. For a firm to grow, it requires substantial managerial services for new service ideas as well as product ideas to be fully implemented (Brandon & Lewis:22). However, it is not advisable for firms to increase their managerial services so as to take advantage of new product or service ideas.

Adverse Selection

Adverse selection and moral hazard are other challenges that a growing firm faces in conducting business. Adverse selection is a problem that many firms face during the selection process. Adverse selection occurs when an organization is growing significantly and hence needs a lot of employees to carry out the normal activities of the organization (Nambisan 2013). Many growing firms are usually faced with the challenge of the best employees that they should hire, the positions which they should place them, as well as how to give them adequate supervision for better performance.

Moral Hazard

Moral hazard is where a firm grows and adds new employees and other personnel. This means that the new personnel have entirely different incentives from the original founders of the firm. For this reason, the new team in place may not be as motivated the same way the founders were and hence the firm may suffer great loss at a later stage (Forkuoh 2016:188).

According to a case study conducted by Darren Golds on management in a global multi-media organization based in the United Kingdom, it was established that the Information Technology Infrastructure Technology(ITIL) has problems with replacement of managerial personnel leading to poor services since the new personnel lacks information on what should be done (Darren 2016: 14). According to Golds, most of the new employees in the company lack effective training on communication skills and are hence not serving the customers to their full satisfaction. When the company started, only a few employees had been employed then. After a period of 5 years the number of employees was noticed to rise by 28 percent. It made it hard to manage employees and give them adequate training on how to serve their customers the best way. The company also had problems selecting the best employees and as a result ended up selecting wrong people in various positions.

Conclusion

It has not been easy at all to start new venture businesses and in most cases, entrepreneurs face a lot of challenges in setting up new ventures. For a business to grow, managers and business owners should put efforts to ensure that there is good management of cash flow in the business. More so, managers should work against price instability through making sure that prices do not change over a short period. Besides, the managers should also ensure that they work towards productive opportunities for expansion so that the business is expanded as possible for more revenue realization.