Enterprise Components, Operations, and Growth Strategies

Posted on Dec 19, 2024 in Economy

Components of the Enterprise

The enterprise is composed of several key elements:

  • Capital:
    • Instrumental Capital: Technical assets that remain in the company long-term and are necessary for its operations. This includes rights related to patent applications or trademarks.
    • Materials: Raw materials, finished goods, and work in progress needed to complete the production cycle.
    • Financial Capital: Liquid financial resources that make up the treasury of the company.
  • Human Element: People who contribute their work to the company, divided into three groups:
    • Workers or Employees: Workforce offering their knowledge in exchange for a salary.
    • The Businessman: Person or group responsible for decision-making and direction.
    • Owners: Person or group who holds ownership of the enterprise.
  • Organization: The combination of passive and active factors to achieve a set of goals. It involves relationships of authority, hierarchy, and communication. A common goal is essential, even though individuals may have different or opposing interests. The organization itself must have its own objective that satisfies the interests of its members. It is a mix of people and means to achieve objectives within a system of relationships. Division of functions or tasks among different people and coordination of activities are necessary.
  • Business Environment: The company does not exist in isolation. Some authors consider the environment a component of the organization, given the close relationship established.

Operation of the Company

The company undertakes a set of activities for the production and distribution of goods or services to generate a certain profit. To carry out production and distribution, the company must have production factors, both financial and human resources. The necessary materials must be acquired and available for use in the production process, which requires technology. The sale of finished products requires promotion and physical distribution.

Various activities are conducted through functional areas:

  • Production: Encompasses procurement and transformation functions.
  • Marketing: Brings together commercial and financing functions, including fundraising and investment.
  • Human Resources: Combines organization and personnel management functions.
  • Research and Development (R&D): Focuses on the development and evaluation of technology.

Organizational Structure

To increase productivity, there is a division of labor and specialization of individual workers in each functional area. These areas are organized into departments, and different activities need to be coordinated through an organizational structure. Through this structure, functions are organized, relationships between elements are established, and authority flows are formalized.

Role of Leadership

Coordination is achieved through leadership, represented by the upper echelons of the hierarchical chain. They are responsible for strategic decisions through planning, organization, management, and control of activities.

Information System

Companies need to design and establish an information system that facilitates management’s decision-making. The larger and more complex the organization, the greater the need for information preparation and circulation. In a small business, the owner can centralize and have direct access to much of the information. However, in a large enterprise, information must flow upward and downward so that top management can perform their duties. Society also demands information about the activities of organizations.

The Corporation

A corporation is a capitalistic entity whose capital is divided into freely transferable shares. The partners’ responsibility is limited to their contributions. The corporation is governed by the Consolidated Companies Law. The name cannot be identical to that of another company and must include the expression “S.A.” (Sociedad Anónima).

Constitution, Capital, and Shares

The constitution of the corporation must be recorded in a public deed executed before a notary and registered in the Mercantile Registry. The public deed includes statutes that govern the life of the company, including the name, negative certification, and documentation for cash and in-kind contributions.

The minimum capital is 60,101, with 25% to be paid at the time of creation. Shares represent an aliquot of the social capital and can be freely transmitted unless the statutes expressly limit it. According to the law, shares have the following rights:

  • Right to vote in the General Meeting
  • Right to dividends
  • Pre-emptive rights
  • Right to information

Bodies of the Company

  • General Meeting of Shareholders: A meeting of shareholders to deliberate and decide on the affairs of the company. It requires proper convocation and a quorum for attendance.
    • Ordinary General Meeting: Held within the first six months of each year to decide on any issue on the agenda and, necessarily, to review social management and approve the accounts of the previous year.
    • Extraordinary General Meeting: Any meeting that does not meet the characteristics of the Ordinary Meeting.
    • Universal Meeting: When all the share capital is present, and attendees unanimously agree to its conclusion and the matters to be discussed.
  • Administrators: Individuals who play the roles of management and representation.
    • Sole Administrator: A single administrator.
    • Two or more administrators: A Board of Directors.

    Administrators are elected by the General Meeting by majority vote.

Factors Influencing Company Size

  • Market Demand: The size of the company depends on the quantity of products or services it aims to put on the market and the production capacity needed within a specific time frame, determined by forecasted demand increases.
  • New Technologies: Productivity and competitiveness rely on the implementation and knowledge of the latest technologies.
  • Future Prospects: The set of all potential customers is crucial in deciding the company’s location and size.
  • Company Activity: Production capacity varies greatly depending on the sector. Petrochemical and automobile companies require large installations, while many service companies operate in smaller buildings.

Criteria for Measuring Company Size

  • Number of Workers:
    • Microenterprises: Fewer than 10 employees.
    • Small: 10 to 49 employees.
    • Medium: 50 to 250 employees and sales between 5 and 10 million euros.
    • Large: More than 250 employees and a turnover exceeding 10 million euros per economic period.
  • Sales Volume
  • Own Resources
  • Total Assets
  • Annual Net Benefits

Internal Growth Strategies

This strategy aims for specialization by improving current products or services and targeting other market areas through appropriate policies to achieve an increase in sales volume. It can be presented in the following ways:

  • Market Penetration: Increasing the company’s participation in the current market with its own improved products. This involves increasing purchases by existing customers and attracting new customers within the market.
  • Market Development: Introducing products into new markets. Marketing strategies generate new customers in other product markets.
  • Product Development: Growth based on offering new products in existing markets.
  • Diversification: Developing new products for new markets. Growth through diversification is possible by applying technological advances.
    • Horizontal Diversification: Growth through the creation and presentation of differentiated products.
    • Vertical Diversification: Broadening the supply of complementary products within the same sector. The company can become its own supplier or customer to reduce costs by eliminating intermediaries.
    • Concentric Diversification: The company produces new products, whether or not they are technologically related to previous ones.
    • Conglomerate Diversification: New products and markets have no real relationship.

External Growth Strategies

  • Merger: The dissolution of two or more companies that transfer their respective assets to a newly created company. The partners of the dissolved corporations join the newly created one.
  • Absorption: One company buys the assets of another or others and integrates them into its own. In Spain, banks have dominated major merger processes.
  • Participation in Companies: The acquisition of a set of shares to achieve control of the target company. One way to acquire control is through a Public Takeover Offer (PTO), a public offer made to the shareholders of the company one wants to control. There are two forms:
    • Via a prior agreement between the offering company and the target.
    • When there is no prior agreement, it is made against the wishes of the target company’s directors, known as a “hostile takeover.”
  • Cooperation and Business Alliances: Cooperation between enterprises aims to remove competition that would normally exist. Companies make arrangements to coordinate markets. Growth through cooperation occurs when formalized agreements are made between two or more independent companies that choose to combine some of their resources and capabilities without actually merging.
    • Franchise: Two main figures emerge: the franchisor and the franchisee. The franchisor owns the business idea or brand with recognized commercial prestige. The franchisee obtains the right to use the business idea or franchise in question and is required to pay rent or profits. The franchisor must provide technical and commercial support, as well as employee training, particularly at the start of the activity.
    • Subcontracting: An agreement between a company and a contractor where the contractor is responsible for obtaining part of the production or providing certain services.
    • Consortia: Cooperation between several companies under contract, intended for the development of joint activity by creating a new company. This cooperation is usually among companies in the same sector that develop complementary products.
    • Joint Venture: An agreement to undertake various economic activities, such as producing goods or services, finding new markets, and providing mutual support and training.

Business Concentration

Business concentration is a form of external growth. Advantages include:

  • Greater control and market power against competitors.
  • Growth to reduce overall costs.
  • Reduced average cost when output increases.
  • Better access to finance.
  • Increased bargaining power.

Types of Concentration

  • Horizontal Concentration: Occurs between companies belonging to the same sector or performing the same processing or manufacturing process.
  • Vertical Concentration: A group of companies with activities that complete all phases of production and increase the offer within the same sector through complementary products.
    • Backward: Concentrated sources of supply of both raw materials and intermediate products.
    • Forward: Directed towards the sale and distribution of finished products.
  • Conglomerate Concentration: Multisectoral, characterized by avoiding costs directly related to the learning and experience problems involved in internal growth.
  • Cartel: A marketing organization created by a group of companies to avoid competition among themselves. It is, therefore, a horizontal organization.
  • Trust: A concentration of companies with a share of power over production and market outcomes. It is a vertical concentration.
  • Holding: A parent company controls the activities of other companies, called subsidiaries. It is a group of companies in different sectors under common management. The parent company usually does not engage in productive activities but in administration and business management.

Industrial Location

Easy availability of supplies must be taken into account to reduce production costs. A good location seeks to minimize production and distribution costs and maximize access to markets.

Factors Influencing Industry Location

  • Availability and Price of Industrial Land: Factories should evaluate the cost of industrial land. Supermarkets are often located far from urban centers, where availability is higher and prices are lower.
  • Access to Raw Materials and Other Supplies: If raw materials are voluminous, companies often locate near sources of supply or transport to bring them.
  • Availability of Manpower: If a zone lacks manpower, companies must bring in people from outside, increasing costs.
  • Existence of Ancillary Industry: Proximity to repair companies, transport, and dealers is beneficial.

Location of Shopping and Local Services

  • Visibility: Greater visibility will have a greater impact on customers.
  • Ease of Communication: Having bus stops nearby increases foot traffic. The location should be on the side of the street with more pedestrian traffic in busy areas.
  • Location Near Complementary Businesses: People will not buy a single product; therefore, it is beneficial to locate the business in an area with additional offerings.
  • Well-Decorated Premises with Comfortable Stay and Transit: If the customer is not happy, they will not buy.