You can never be satisfied as an entrepreneur, and the basis of any successful, growing business is new clients.
—Robert Herjavec
Having gone through the initial start-up and after a certain time period of getting established, it is natural to start to think about expanding your business. Entrepreneurs know that to increase profits and reach new customers, expansion is needed. There are many different ways of doing this, and each approach represents differing levels of risk and challenges. You can follow any and all, depending on your type of business and what level of risk you are willing to take.
As covered in Chapter 3, there are a number of key areas to consider before deciding whether it is the right time or indeed the right decision to pursue expansion. Another useful tool to aid decision making is a SWOT analysis which is covered in Chapter 2.
The Ansoff Matrix is commonly used to identify business growth opportunities. According to the Ansoff Matrix, there are four different strategies to expand your business, each with a various level of risk attached:
• Market penetration: This tends to be the safest course to take as you already know the market and products you will be targeting. Finding new customers in an existing market, selling more products to an already established customer, or widening an existing product range can usually be done with little risk or research, but can achieve business growth. This strategy could be considered to be very much “business as usual.”
• Product development: This is a strategy that aims to introduce new products into existing markets and can be more risky as there is uncertainty to how a market may react. Successful innovation is important but so are insights into how customers will take to it. A strategy like this could be suitable for businesses where a product can be differentiated for the business to maintain competitiveness.
• Market development: The risk extends further here. Going global offers many opportunities. However, with so much choice, there is a risk or decreased focus. Chasing too many opportunities and currency fluctuations can increase risk and lead to pitfalls. This requires a lot of research as there are cultural differences to consider as well as how new customers in overseas markets will take to your product. It is also important to note here that market development does not have to mean globalization; it can mean working a shop 500 miles away in the same country, new product packing or dimensions, new distribution channels, or different pricing policies to create new market segments.
• Diversification: The riskiest of the four strategies. This entails going into a new market with new products, with limited chance of using any existing knowledge. Even businesses who have followed this strategy to grow previously can fail when repeating the process, due to the level of “unknowns.” For a business to successfully use this strategy, there must be a clear understanding of what it wants to achieve and a clear and honest appraisal of the risks. However, with the right balance of risk and reward, a diversification strategy can be rewarding.
As expected, for many businesses, growth is a signal for success, creating new opportunities, attracting new customers, and as a result increased profit. However, expanding a business is not without risks. Decisions like this should be subject to a SWOT analysis, and the pros and cons should be considered before deciding to pursue growth.
Advantages of Business Growth
One of the greatest competitive advantages of business growth is the ability to capitalize on the economies of scale. In microeconomics, this concept outlines the cost advantage obtained as production output increases. Costs can be both fixed and variable. This means a business can achieve savings in:
• Purchasing: By getting discounts for buying in bulk. This is one of the most well-known advantages of economies of scale.
• Marketing: By spreading the cost of marketing and promotions over a larger number of sales.
• Overheads: By spreading the administrative or staff costs across a greater level of output.
This is an important concept for any business, whatever the industry, and represents the cost advantages large businesses have over the smaller ones. A common question from consumers is why the prices charged in small business are higher than that of a similar item in a larger business. The size of a business is relevant when it comes to economies of scale. The larger the business, the larger the savings. Economies of scale can be both internal and external: Internal are based on decisions by management, while external are based on external factors.
Business growth can also enable you to:
• Increase stock and resources: As demand increases, that can put pressures on supply. If a business is in a period of expansion, they may be able to increase supplies of goods and be more prepared for a continually increasing demand and number of customers.
• Put more money back into your business: As more money comes in, this can open the door to opportunities to invest. This can be in new facilities, more up-to-date equipment, or staff and areas such as staff training.
• Influence market prices: Due to the bulk buying advantages of economies of scale, a larger business may choose to decide to pass those cost savings on to the customer.
• Increased profile: A larger or ever-expanding business will attract more attention, certainly locally and regionally and in some cases by the media. This in turn will organically spread the word and lead to an increased profile for your business. This can organically lead to a higher profile for you as the entrepreneur and potentially open doors to other opportunities outside of the day job.
• Reach new markets and customers and subsequently increase sales and profits: A larger business can be more equipped to deal with importing and exporting and reaching markets abroad. This can be a complex, and bureaucratic area, research, and hiring well is key.
• Reduce external risks: For example, from competitors or technology and market changes.
• Add new talent to your business: This can include hiring new members of staff on a permanent or temporary basis or consulting with outside expertise. One of the key decisions here is to consider whether permanent full-time staff are needed, part-time staff are needed, or whether it is better to take on contractors or outsource parts of your operation.
A decision like this will largely depend on the type of business and the type of operation, particularly if busy times come in peaks and troughs or if some elements (such as web design or accounting) need some external expertise. Each type or category of new employee will have certain pros and cons, but it is worth remembering that if you take on employee’s, they are your responsibility and it is important to treat them fairly—that means being familiar with areas such as annual leave allowances, absence, and a fair reward and retention strategy.
• Share responsibility: As you expand, there is likely to be more business areas or departments and people to manage. This may mean that management, leadership, and responsibility have to be shared out. When going through this process, experience in dealing with areas such as recruitment, payroll, and HR is likely to be needed at some stage. It is important to ensure that the advice you get in this area is of a high quality as there are legal and moral responsibilities here. While there will be some increased costs for “doing it properly,” the costs of not are potentially much greater, in terms of potential staff churn, low moral possibly leading to lower productivity, and the reputational damage if your business is highlighted as one that does not care about its employees.
With expansion and adding talent comes the need for teamwork and the need to a positive workplace culture. A “high-performance work team” could be defined as goal-focused individuals, bringing specialized skills and expertise, working together to deliver consistently superior outputs and results.
There are some key principles to consider and follow when it comes to building a high-performing team and characteristics of a high-performance culture. This will be a balancing act in some cases, but broadly speaking, it is a case of doing simple things, consistently well. High-performing teams:
• Communicate regularly, respectfully, and clearly
• Have clearly defined roles and responsibilities
• Respect and trust each other
• Practice ongoing learning and self-development
• Manage workload and deadlines based on priorities
• Recognize contributions and celebrate achievement and success together—always make time to do this
• Understand how their work fits into the overriding organizational mission
• Have clearly defined goals, which are closely tied to the team and organizational priorities
Company culture is also a crucial concept as it correlates to team performance and company revenues. Culture is not just values or engagement; it is about business goals, social impact, and driving change. Key components of company culture are clear vision and strategic direction, values, teamwork, buy in from all stakeholders, communication, social impact and diversity, and inclusion.
Potential Disadvantages of Business Growth
As a business expands, by definition the business model will become more complex. This is by no means insurmountable, and isn’t a reason not to pursue expansion, but it can increase the likelihood of potential pitfalls as you proceed. Being aware of how these apply to your business is critical, and as with many other aspects of entrepreneurship, awareness and preparation will undoubtedly help with mitigating problems that arise. Some common issues with business expansion include the following:
• Cash flow shortages: With the costs of expansion and the potential for unexpected costs, there may be a need to borrow cash to fund expansion. For example, paying for new premises or equipment. With added assets or premises, will come additional costs.
• Compromised quality: An increase in production output may lead to a decline in quality of goods produced due to increased margin for error. This can lead to a loss of sales and customers.
• Loss of control: As you expand your business, hire new staff, and put management teams in place, you may need to delegate duties or share workloads. This will organically lead to some loss of control, which can be unsettling in the short term—particularly, if you started the business as a one-person operation. Good recruitment and strong leadership skills are key areas to consider here. If this is in place and is of a good quality, then the risk of issues, such as poorly outsourced recruitment, poor staff retention, or not finding the best candidates for key positions, can be minimized.
• Increased capital requirements: A bigger business or a business that is increasingly expanding will at some point need more staff, more or larger premises, more equipment (or a mixture of all), and as a result, more investment of capital. Again, keeping a regular eye on your numbers is vital, investing for growth is okay, but losing oversight and control of your finances is not.
• Increased responsibility for new areas: With expansion comes new responsibility. This can potentially be areas that any entrepreneur may be unfamiliar with. This can be areas such as HR, staff absence, payroll, and more complex accounting procedures being needed.
• Staff turnover: As workloads increase, staff morale could drop, productivity could drop, and in some cases that can lead to staff deciding to leave. Another possibility is of having to dismiss staff, which is where knowledge of relevant legislation comes in. Staff leaving means having to spend time and money replacing them and ensuring you find the right fit for the roles you need to fill. Having a staff retention policy in place can be helpful here. Having a positive culture and reward and recognition for high performers is likely to increase the chances of staff loyalty.
It is important here to recognize that expansion can be disruptive. It can, and is likely to, affect every part of your business and can pressurize staff, finances, and resources. This is why expansion needs to be planned carefully in a measured and informed way.
Balance is really important here. However, if you make a well-researched, balanced choice, your business is given the best possible opportunity to continue to thrive.
Starting and growing a business is as much about the innovation, drive, and determination of the people behind it as the product they sell.
—Elon Musk