Recent Advances in Business Management and Marketing

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1 Recent Advances n Busness anagement and aretng A Sales Growth odel for Small Enterrses ARTIN ACHE, ONDŘEJ ACHE Deartment of aretng, Deartment of Busness Economcs Unversty of Economcs, Prague W. Churchll Sq. 4, Prague 3 CZECH REPUBIC martn.mache@vse.cz htt://mg.vse.cz/ Abstract: - ost frms n the world belong to the small and medum enterrses, whch lay a substantal role n the world economy and ts develoment. The mortance of SEs reles n the generaton of new jobs, nnovaton and stmulaton of rvate ownersh and entrereneural slls. The growth s mortant for all forroft organzatons. In ths artcle, we resent a model of small enterrse sales growth, whch s based on the average bll and frequency of vsts. Consequently, we derved artal factors whch affect ths growth. The use of the model was demonstrated on the examle of hardressng salon, reresentng busnesses rovdng servces. ey-words: small frm growth; growth model; B2B2C; hardressng salons Introducton Small and medum enterrses (SEs) have become a subject of nterest of academcs, researchers, and racttoners. The vast majorty of busnesses around the world are small and medum-szed enterrses, and these enterrses lay a vtal role n the world economy and ts develoment. The mortance of SEs les n job creaton, nnovaton and stmulaton of rvate ownersh and entrereneural slls. Small busnesses are flexble and able to adat qucly to the changng envronment, whch s becomng mortant n tmes of economc crss. The defnton of small busness vares n dfferent countres, as well as n ndvdual sectors. In Euroe, a small busness s usually defned as a comany that has less than 50 emloyees, whle medum-szed enterrses are defned as frms wth less than 250 emloyees. In the U.S., a small enterrse s defned as an enterrse wth less than 250 emloyees and medum-szed enterrse as an enterrse wth less than 500 emloyees. Small busnesses are often characterzed, nter ala, by chaotc and smle management and the omnresence of the owner n all busness rocesses. For ths reason, the educaton of the owners sgnfcantly macts ther growth and comettveness. In ths aer we resent a model of sales growth, whch can be used n managng a small busness whch sell roducts, goods or servces and n educatng owners of small busnesses. 2 Busness Growth and ts easurement Some theorsts attemted to model the evoluton of busnesses usng cororate lfe cycles. The stage model or cororate lfe cycle theory orgnated from economc lterature ([4] or [6]). Ths model descrbes the rogresson of a frm through multle growth hases over tme. For nstance, ller and Fresen [2] descrbed fve common stages of frm develoment: brth, growth, maturty, revval, and declne. However, the number of stages n cororate lfe cycle models s not standardzed [0]. The mortant thng to ont out s that from the ersectve of cororate lfe cycle theores, the growth reresents only one of the stages n the busness lfe. uch attenton has been devoted to ths stage snce a ermanent growth s desrable and mortant for all for-roft organzatons. At ths ont, we can menton the wdely-cted concetual artcle of Grener [6], who resumed that busness growth conssts of fve hases: growth through creatvty, growth through drecton, growth through delegaton, growth through coordnaton, and growth through collaboraton. Sometmes, economc theorsts dstngush two modes of growth: organc growth and growth through mergers and acqustons (norganc growth). In the case of SEs, almost all growth s of organc nature [3]. In ths artcle, we wll concentrate on the growth stage of the cororate lfe cycle. Growth s a rocess functon whch haens over multle tme erods. A small frm growth can be reresented by the ISBN:

2 Recent Advances n Busness anagement and aretng change of some amount over tme. The most frequently used measures of growth are robably roft, hyscal outut n natural unts, sales n monetary unts and maret share (see e.g. [4] or [20]). It s resumable that these measures are mutually nterrelated. However, the nterdeendence between these varables s not clear and the emrcal results on ths toc are nconsstent and mxed. For examle, evolutonary models suose that roftablty s the man factor of frm growth [3]. Other authors found that the roftablty had a ostve mact on the growth rate, but growth rates had a negatve mact on the current year's roftablty [8]. Sometmes, roftablty s even consdered to be n a drect trade-off relatonsh wth frm growth []. We wll further consder that the sales growth of a frm s a measure of growth, because sales growth s a normal asect of the henomenal growth of the small enterrse [2]. 2. Factors of Busness Growth Emrcal evdence shows that most small frms do not manage to grow; nstead, they start and go out of the maret small, because they only serve local marets and therefore have no sgnfcant growth otental (see e.g. [5] or [7]). The growth may be nfluenced by external and nternal factors whch may or may not be affected by the frm tself. External factors of small frms growth often consdered n the lterature are dynamsm, hostlty and heterogenety [5]. For examle, frms oeratng n dynamc regons or ndustres are more lely to be growng (see e.g. []), but the growth s negatvely affected by envronmental hostlty and the overall rs [20]. We can also classfy the factors nfluencng growth n small frms followng [9] as factors related to the entrereneur (motvaton, educaton, famly, etc.), factors related to the frm (sector, legal form, locaton, etc.) and factors related to the strategy (worforce tranng, management recrutment, new roducts, etc.) However, these models are too general and many above-mentoned factors may not be nfluenced by the frm tself. A more secfc and recse model s needed n order to be used n the everyday management of small frms. 3 A odel of a Small Frm Sales Growth et us defne a comany as an agent transformng a set of nut factors nto three classes of oututs: roducts, goods and servces. In the followng text, three scalar values and sx vectors are used: denotes the number of roducts offered; dentes the number of goods offered; denotes the number of servces offered; =(, 2, ) denotes roduct quanttes; l=(l,l 2, l ) denotes quanttes of goods; m=(m,m 2, m ) denotes quanttes of servces; =(, 2, ) denotes rces of roducts; q=(q,q 2, q ) denotes rces of goods; r=(r,r 2, r ) denotes rces of servces. Then, the sales S n erod t can be secfed as Equaton 2 S t = lq mr = = l q = = The salon growth rate g can be reresented by the change n sales volume S, where reresents the amount of tme. Equaton 3 g = ds dt S = l q = = = mr The equaton can be further decomosed nto two terms. et C denote the number of customers vstng the hardressng salon. Then the sales growth can be secfed as Equaton 4 g = = = = = l q l q = = = = B f We wll call the frst term average bll (B) and the second term frequency of vsts (f). The average bll can be rewrtten as ISBN:

3 Recent Advances n Busness anagement and aretng Equaton 5 B = l q = = = The number of vstng customers C can be reresented by the sum of exstng customers E and new customers N. So the frequency of vsts can be further rewrtten as Equaton 6 f = = ( E N ) E N = and fnally, the whole sales growth can be secfed as Equaton 7 = = g lq mr = = E N Growth of sales may be ncreased by ncreasng the average bll or frequency of customer vsts. These factors vary by ndustry, some goods are characterzed by a low frequency of vsts, but a hgh average bll (e.g. car dealersh), whle other sectors are characterzed by a hgh frequency of vsts and a low average bll (e.g. statonery). 3. Increasng the average bll The average bll,.e. the amount of sales over the number of customers, can be ncreased by ncreasng unt rces of roducts, goods or servces (comonents of, q or r); ncreasng quanttes of exstng roducts, goods or servces (comonents of, l or m); sellng new roducts, goods or servces (ncreasng, or ); The frst way to ncrease the average bll s to ncrease unt rces of roducts, goods or servces. The ossblty of ncreasng the unt rces of roducts, goods and servces deends on ther ostonng. These otons are lmted wth regard to the demand curve and ts elastcty. Products, goods and servces wth remum ostonng (e.g. luxury goods such as sort or recreaton) wll have hgher rce levels and margns, but these wll be offset by a lower number of unts sold. In contrast, more affordable roducts, goods and servces wll have lower roft margns, but wll be bought by a consderably hgher number of consumers. The economc theory suggests that the quantty demanded,.e. the volume of roducts, goods or servces sold, s a functon of the rce. Ths fact has to be taen nto account when adjustng rces. The rce elastcty of demand determnes the effect of rce changes on the total revenue. If the demand s nelastc and the rce s ncreased, the total sales are growng (t s a case of necessary goods such as food or accommodaton). If the demand s elastc and the rce s rased, the total revenue declnes (e.g., the aforementoned luxury goods). It s also necessary to tae nto account the fact that the rce elastcty of demand s not constant, but t vares across dfferent ntervals of rce changes. The rce elastcty of demand also deends on brand loyalty; loyal customers are less senstve to rce changes [9]. The second way of ncreasng the average bll s to offer and sell more roducts, goods or servces er one customer. Ths may be acheved by sellng more exstng tyes of roducts, goods and servces, or by offerng and sellng new tyes of roducts, goods and servces. In addton, t s necessary to tae nto account the fact that small busnesses tycally have a lmted tme caacty. Tme caacty T of a small busness can be defned as Equaton 8 T = N h where N denotes the number of worers, h s the number of worng hours er worer and P denotes the average labor roductvty n the comany, whch can be calculated as a ercentage of useful worng tme (not all worers wor a full day, for examle, educaton, auses, etc. ) Ths caacty should be utlzed the most effectvely ossble. The decson-mang on the selecton of roducts, goods or servces, to whch the comany wll concentrate, should be based on manageral decson-mang tools such as cost-beneft analyss. For busnesses that are focused on servce rovson but are not able to offer more servces, a good way to ncrease the average bll s the sale of goods or roducts. In artcular, ths s advantageous because the sale of a roduct or good taes only a short tme, but the rovson of a servce usually taes longer. Smlarly, small manufacturng busnesses or commercal enterrses that are not able to ncrease P ISBN:

4 Recent Advances n Busness anagement and aretng ther sale of roducts or goods may ncrease the average bll by offerng addtonal servces, such as transort of goods, etc. 3.2 Increasng the frequency of vsts The second term n the eq.7, the frequency of vsts f, ncreases when: exstng customers buy more frequently; new customers are acqured. ang the exstng customers buy more frequently s assocated wth offerng a larger number of roducts, goods or servces or ntroducng new roducts, goods, or servces dscussed n the revous secton. Ths can be suorted by ncreasng the customer loyalty, whch s assocated wth the soundness of the roduct n all ts concets, not just the core roduct, but related servces le warranty etc. The frequency of vsts may be also suorted by tools of sales romoton and loyalty rograms. oyalty rograms drectly motvate the customer to vst the comany more frequently. Among other tools whch ostvely affect the frequency of vsts, we can cte the customer databases, CR systems and other IT tools. Acqurng new customers s lned to the maretng strategy of the comany. Small busnesses often focus on fragmented marets and have a very lmted budget. For ths reason, the maretng ossbltes are lmted both n terms of extent and actvty. As we already mentoned, small busnesses are characterzed by the omnresence of the owner n all rocesses, ncludng the maretng actvtes. The maretng of small busness s often smle, chaotc, and very deendent on the actons of comettors [2]. The maretng concet s manly focused on the roducton and rce. The most owerful, yet least exensve tool s unquestonably the word-of-mouth, snce t s the most relable source of otental clents. Small busness may also carry out sales romotons rograms such as dscounts for exstng customers that wll attract new customers, etc. Another ossblty s to traler random assersby the outer remses of the comany, by advertsng n the neghborhood, or, where arorate, by cooeratng wth other busnesses n the area that are focused on a smlar segment of clents (cross-maretng). 3.3 Two axes of clent segmentaton In lne wth the two axes of our model average bll and frequency of vsts we can roose a useful tool for customer segmentaton. An effectve segmentaton based on urchase behavor of consumers can hel to effectvely manage maretng and sales efforts and focus them on ey ssues of the salon growth. In order to manage our growth model, we wll dvde consumers nto nne dfferent categores based on ther average bll (low, medum, hgh) and ther frequency of vsts (low, medum, hgh). The ntervals of each category wll deend on every secfc case (based on sze of the frm, tye of clentele, etc.). Afterwards, we calculate the % of total clents that belong to each category and the % of total turnover generated by the comany. Ths tye of segmentaton wll allow us to dentfy ey ssues of the comany should t focus on ncreasng average bll or s the bgger roblem low frequency of vsts? Both axes requre dfferent maretng and sales tools and could be very costly. ore effectve way s to clearly understand where do clents belong and address them n order to ncrease roftablty of the salon. The most roftable grou of customers s located n the bottom-left corner of the matrx. The segmentaton s llustrated n Fg.. Fgure : Segmentaton accordng to B and f 4 The Use of the odel Examles The model we descrbed n the revous sectons can be used n seeng to ncrease sales of small busnesses. In ths secton, we llustrate the use of our model by the case of a hardressng salon. ost hardressng salons belong to the small comanes. The hardressng ndustry s drven by the lfestyle, fashon trends and new technologes. A hardressng salon s an ntegral art of a secfc dstrbuton channel, the ntermedary between rofessonal roducts manufacturers (e.g. Oréal, Schwarzof, or Procter&Gamble) and the customers. Hardressng salons offer servces (harcuts, colorng, stylng ), whch s very secfc and ISBN:

5 Recent Advances n Busness anagement and aretng conssts of the rofessonal roduct and the nowledge and slls of the hardresser. However, salons also offer goods rofessonal roducts for home use. In comarson wth goods offered n retal stores, the rces n hardressng salons are hgher, whch s justfed by a hgher technologcal level of the roducts and addtonal servces, n artcular consultng and care of the hardresser. In lne wth the roosed model, we wll now analyze the ossbltes of ncreasng sales growth of a luxurous hardressng salon. The llustraton s based on ntervews wth hardressng salons owners and tranng of hardressers carred out n the Czech reublc and Slovaa between Increasng the average bll When adjustng rces, t s necessary to tae nto account that the luxurous nature of hardressng servces, whch results n low rce elastcty of demand. However, we can assume that another feature of ths ndustry s the hgh ncome elastcty of demand [8], whch means that when the ncome of households ncreases, the demand for hardressng servces ncreases more qucly than the demand for necessary goods. Another mortant asect s the fact that the customers are characterzed by the loyalty to one artcular brand, whch means they are less senstve to rce changes. The customers wll arecate a stable level of rces, so the ossbltes of ncreasng rces are very lmted. However, we can roose several ways of offerng new servces, n artcular when the salon s focused on remum brands of rofessonal har care. One of them s to mae use of educatonal rograms for hardressers and to offer new fashonable servces such as fashonable colorng or harcut. Then, a salon may clearly communcate to ts clents that the best level of servces s guaranteed due to ongong educaton of ts hardressers and buld ts mage on ths fact. Further, the average bll may be ncreased by ncororatng more har care roducts (shamoos and condtoners) nto classcal servces. Another sutable way of ncreasng the average bll s to sell more goods (harcare roducts for home use). The margns of such sells are hgh and the tme requrements are generally low. There are four ey requrements that ncrease the robablty of successful sales. Frst one s vsblty of the offer n the salon, because clents would not buy what they cannot see. The second s the clarty of the offer, whch hels hardressers to communcate t to clents and clents wll easly understand. The thrd s tme ressure; when offer s only vald for certan amount of tme, t ncreases the robablty that clents wll buy the offerng. The fourth ey requrement s the motvaton of hardressers and engagement from the art of manager, whch s often the crucal art as hardressers consder themselves to be artsts rather than sellers. They can be motvated by offerng a share on rofts on goods sold, or varous tyes of contests. 4.2 Increasng the frequency of vsts A hgher frequency of vsts can be acheved by offerng more servces. Further, t s ossble to offer more addtonal servces, such as lght brghtenng, gloss ncreasng, etc. Other servces, such as har blowng, are very roftable and can be erformed reeatedly, even on a weely bass. New customers can be attracted n several ways. In the case of hardressng salons, whch are always located at a fxed locaton, t s ossble to use several communcaton channels. The most owerful tool s the classcal word-of-mouth, when the exstng clents become a "walng advertsement" for the hardressng salon. However, ths mles that t s necessary to rovde excellent servces. Salons may also use recommendatons through sales suort. Another way of romotng the salon s the use of wndows and exteror of the salon. It s mortant to ay attenton to the frst mresson uon enterng the salon, whch rases the need for educaton and develoment of communcaton and busness slls of hardressers and recetonsts. Hardressng salons may also nteract wth nearby stores, such as fashon stores. In ths case we are talng about cross-maretng, whch can be mlemented by varous methods, such as gft certfcates, couons, etc. Another oton s to romote the salon n commercal and admnstratve centers n the vcnty of the salon. 4 Concluson In ths aer, we suggested a model of sales growth whch can be used n the management of small busnesses. The frst art of the artcle was dedcated to the busness growth and ts measurement, and we also dscussed the factors nfluencng growth n small frms. In the second art, we formalzed our model n several equatons, whch resulted n the rooston that the sales growth of a small comany can be decomosed nto two terms: the average bll and the frequency of vsts. The average bll,.e. the amount of money er customer, can be rased by ncreasng unt rces of roducts, goods or servces, by ncreasng quanttes of exstng roducts, goods or servces, ISBN:

6 Recent Advances n Busness anagement and aretng and by sellng new roducts, goods or servces. On the other hand, the frequency of vsts can be ncreased by mang the exstng customers buy more frequently and by acqurng new customers. In the fnal art, we demonstrated the use of our model n the case of hardressng ndustry. The roosed methods are the result of ntervews and round tables wth hardressng salon owners from Czech Reublc and Slovaa between Acnowledgments Ths aer was wrtten wth fnancal suort from the Internal Grant Agency of the Unversty of Economcs n Prague under the research roject No. F/3/202 Busness Strategy on Globalzed arets. References: [] G.R. Carroll,.T. Hannan, The Demograhy of Cororatons and Industres. New Jersey: Prnceton Unversty Press, [2] D. Carson, S. Crome, aretng Plannng n Small Enterrses: A odel and Some Emrcal Evdence, Journal of aretng anagement, 989, Vol.5, No., [3] P. Davdsson, F. Delmar. Some Imortant Observatons Concernng Job Creaton by Frm Sze and Age. In: Rencontres St. Gall, Setember 998, Gallen, Swtzerland, 998. [4] F. Delmar, easurng growth: ethodologcal consderatons and emrcal results. In R. Doncels R., A. ettnen,(ed.): Entrereneursh and SE Research: On ts Way to the Next llennum. Aldershot a Broofeld: Ashgate, s , 997. [5] G. G. Dess, D. W. Beard, Dmensons of Organzatonal Tas Envronments, Admnstratve Scence Quarterly, 984, Vol.29, No, [6]. E. Grener, Evoluton and revoluton as organzatons grow, Harvard Busness Revew, 972, Vol.50, No.4, [7] R. C. Hggns, How uch Growth Can the Frm Afford?, Fnancal anagement, 977, Vol.6, No.3,.7-6. [8] D, eeble, J. Bryson, P. Wood, Small Frms, Busness Servces Growth and Regonal Develoment n the Unted ngdom: Some Emrcal Fndngs, Regonal Studes, 99, Vol.25, No.5, [9]. rshnamurth, S. P. Raj, An Emrcal Analyss of the Relatonsh between Brand oyalty and Consumer Prce Elastcty, aretng Scence, 99,Vol.0, No.2., [0] D.. ester, J. A. Parnell, W Crandall,.. enefee, Organzatonal lfecycle and erformance among SEs: generc strateges for hgh and low erformers, Internatonal Journal of Commerce and anagement, 2008, Vol.8, No.4, [] G. V. lano, Postmodern Cororate Fnance, Journal of Aled Cororate Fnance, 200, Vol.22, No.2, [2] D. ller, P.H. Fresen, A ongtudnal Study of the Cororate fe Cycle, anagement Scence, 984, Vol.30, No.0, [3] R. R. Nelson, S. G. Wnter, An Evolutonary Theory of Economc Change, Cambrdge: Belna Press of Harvard Unversty Press, 982. [4] E. T. Penrose, Bologcal analoges n the theory of the frm, Amercan Economc Revew, 952, Vol.42, No. 5, [5] P. D. Reynolds, S. B. Whte, The entrereneural rocess: Economc growth, men, women, and mnortes. Westort: Quorum Boos, 997. [6] W. W. Rostow, The Stages of Economc Growth. Cambrdge: Cambrdge Unversty Press, 960. [7]. Samuelsson, odelng the Nascent Venture Oortunty Exlotaton Process Across Tme. In W. D Bygrave et al. (ed.): Fronters of Entrereneursh Research, Wellesley: Babson College, , 200. [8] J. SooCheong, P. wangmn, Interrelatonsh between frm growth and roftablty, Internatonal Journal of Hostalty anagement, 20, Vol.30, No.4, [9] D. Storey, Understandng the small busness sector, ondon: Routledge, 994. [20] J. Wlund, Small Frm Growth and Performance: Entrereneursh and Beyond. Doctoral dssertaton thess. Jönöng: Jönöng Internatonal Busness School, 998 ISBN: