It is important to evaluate whether you want to consolidate your business' position or find ways to grow.
If you decide that your priority is growth then you need to plan carefully if you are to succeed. Growth has its risks, but the right strategy can deliver stability, security and long-term profits. Once you've assessed the current strengths, weaknesses, opportunities and threats to your business and how well it's equipped to handle them, you can move on to the next stage - building a strategy for growth.
This guide shows you how to evaluate the right strategy for your business, when to launch it and what finance options suit which businesses. It looks at the pros and cons of diversifying and what other considerations you must think of to ensure development is smooth, on time and on target.
The importance of business growth
Your business' focus changes as it moves beyond the start-up phase. Identifying opportunities for growth becomes a priority to ensure the enterprise's sustainability. You can measure growth by looking at key statistics such as your:
- market share
- staff numbers
However, determining which measure delivers the most accurate picture of your business' performance depends on both your type of business and what stage it has reached.
For example, a retail business may have a high sales volume, but narrow margins on stock. These could mean low profits that undermine the business' viability.
In general, a combination of sales and profits is the balanced way of measuring growth.
Where to begin
Even if you're happy with your current performance, it's important to keep looking for ways to develop. If you don't, you risk allowing your competitors the room to grow and take market share from you, which could seriously weaken your position.
Going for growth may therefore begin with consolidation of your current markets. For more information, see the page in this guide on how to consolidate your existing performance.
To devise a successful growth strategy, you need to know exactly what shape your business is in now. See our guide on how to review your business performance. This will help you to ensure your business is properly structured and resourced to make the growth strategy you choose a viable option.
Consolidate your existing performance
Before you pursue any growth strategies, it's essential to make sure that your business is running efficiently.
While you may be spending more time and resources on developing the business, you need to be sure that the core of the business is still performing well. It's vital not to neglect your existing customer base as this will underpin your growth and, equally importantly, provide the cash flow you will need during this phase. See our guide on how to identify and sell more to your most valuable customers.
Timing is critical to the success of any growth strategy. Answers to the following key questions will help you judge if the time is right:
- Could your business cope with expansion, or is it working at full capacity?
- Do you have the resources and systems in place to carry on your existing business while targeting expansion elsewhere?
- If new initiatives are likely to disrupt existing performance, how will you ensure your customers don't lose out?
You may have to consider including additional staffing, refining production processes and equipment or outsourcing certain tasks in order to give you the flexibility to pursue a growth strategy.
It's essential that you comprehensively review the present position of your business to make sure that your consolidation efforts will be as effective as possible. See our guide on how to review your business performance.
Options for growth: increasing market share
To increase market share a business has to take customers from its competitors or attract new customers. Achieving this requires a thorough understanding of both your own customer base and that of rival businesses.
Having the answers to the following questions will help you build a comprehensive picture of your market and your competitors and put you in a stronger position to win a bigger market share.
- Who are your existing customers? Are there any other groups that may require your product or service and that you haven't targeted before? Can your product or service be used for purposes that you had not previously considered and that could make it appealing to a wider market?
- What are your competitors' strengths? Do you have these too? If not, why not - and should you have them?
- Why do customers buy from your competitors? What advantages do you have over your rivals that may attract their customers? How can you communicate with your competitors' customers to get them to switch and buy from you instead?
- What is your unique selling point?
- Apart from obvious rivals, are there any other businesses with customers your product or service may appeal to?
- Are there customers who have stopped buying from you? Do you know why? If not, you may want to ask them.
- Will you need to change pricing, marketing, distribution, service levels? Could those changes upset current customers? Will your employees remain motivated?
If you're looking to increase market share, it's important to make sure your business is in good shape first. See our guide on how to review your business performance.
Options for growth: diversification
Many small businesses grow by taking opportunities to diversify, although there are risks because of limited resources on all fronts. Businesses should weigh up the risks and costs of opting for growth carefully against the benefits.
Diversification can take several forms, including:
- new, related products or services to existing customers
- new markets for existing products
- new products for new markets
Deciding how and when to diversify depends on your having:
- thorough market and customer research for the new product or service
- a clear development strategy - including trying a new line or service for a short test period with prototypes and test marketing before totally committing to the new project
- sales, marketing and supply chain operations that can cope with the added demands
See our guide on how to create your marketing strategy.
You'll need to be clear about development costs and what your alternatives are if any delay occurs in development. Wherever possible, try to control risk by securing orders or commitments up front.
While diversification can pose some risks - such as costly delays and mistakes owing to a lack of knowledge or expertise in the new area you're looking to cover - it can also limit the impact of changes in the market. In simple terms, if you supply one product or service and it falls out of favour with customers, it leaves you very exposed. If you have two or more products or services and the sales of one of these drop, at least there will be revenue coming into the business through the other.
However, if you diversify too quickly, then you could lose track or dilute your core product or service.
Generally speaking, diversifying with similar products or services and selling them to a familiar customer base is less risky than creating a product for a completely new market.
Options for growth: partnerships, joint ventures, mergers and acquisitions
You can also expand your business by joining forces with another business. While this can create more shared decision-making and possible management and staff issues to resolve, there can be clear advantages.
Successful co-operation can deliver:
- more resources
- sharing of the managerial load
- larger skills and talent base
- bigger pool of contacts
- increase in markets
- diversification and organic growth using increased resources
- reduced commercial risk
Partnerships and joint ventures
Partnerships and joint ventures can offer both partners significant benefits, including sharing experience, skills, people, equipment and customer bases. Through a partnership or joint venture arrangement with a complementary, non-competitive business, you may be able to open new markets or improve your offer to existing ones.
It's important to be very careful who you link up with. An agreement defining the terms of the partnership or joint venture is essential and further legal protection is advisable.
Teaming up must be a win-win situation for both parties. Businesses involved with complementary activities or skills are usually the most appropriate candidates.
For example, a group of self-employed workers - a carpenter, a builder and an electrician - could form a company, increase their credibility in the construction trade and bid for larger contracts. A group like this also represents greater customer appeal, as it's a one-stop shop.
Mergers and acquisitions
This is when two companies formally merge or one takes over another. Mergers and acquisitions are more suited to established enterprises and transactions involve commercial lawyers and considerable legal work.
Assess which growth option best suits your business
To choose the best strategy for growth, you'll need to undertake an analysis of your business' current performance.
Once you've carried out the review, focus on the option that looks the most logical. The pages in this guide outline some of the most common choices.
Next, make sure this option is also the most practical. Check that the strategy reflects the things your business does well.
For more information on analysing your business, see our guide on how to review your business performance.
Playing to your strengths
A stationery supplier might identify the following growth options:
- increasing market share by starting a mail order operation
- diversifying by adding computer printer consumables to its range
- entering into a joint venture with an educational book publisher to sell books and stationery to schools
All of these options reinforce what the business already does - providing products that enable written communications. A strategy that doesn't fit so well - for instance, selling interactive DVDs - could be harder to implement and more likely to fail.
Check the strategy against any SWOT (strengths, weaknesses, opportunities, threats) analysis in your business review. How does it address the issues the analysis found?
For example, if the stationery business recognises a declining market for typewriters, would adding computer printer consumables address all the points raised by the SWOT analysis?
You'll need to assess whether you have resources and capacity to make the strategy work. See the page in this guide on the practicalities of growth.
You'll also need to be sure that the funding is available and that your strategy will generate a profit. See the pages in this guide on financing your growth strategy and getting a return on your investment for growth.
The practicalities of growth
Your business will need to count on more resources than simply finance when putting a growth plan into action.
You should also think about the following:
- Staffing - will you need to take on more people to make the strategy work? How many? What skills will be required? Are those readily available?
- Training -will further training of existing staff be necessary or helpful?
- Premises - are they big enough for extra stock and/or a new production line? Will there be sufficient space for staff and will you still meet health and safety regulations?
- Information Technology - will your systems cope? Would new software or equipment ease pressures?
- Customer service systems - would a more sophisticated system help the strategy to succeed and ease pressures in other areas?
- Outsourcing - will outsourcing allow you to concentrate your resources more effectively?
To find answers to these questions, you'll need to have assessed your business' current performance and capabilities. You can find out more about this essential process in our guide on how to review your business performance.
Marketing and sales are fundamental to the strategy. Is your existing marketing strategy appropriate to your new market and/or product? The right sales people can accelerate growth and profits. Remember it's the growth strategy that comes first - it should determine who you choose to recruit.
Planning your growth and measuring your progress are also important issues. You'll need to update your business plan and work with it as the business develops.
Getting a return on your investment for growth
If you've decided to grow your business, it's essential that you detail all the costs incurred in getting your growth option underway and compare them against the anticipated profits.
You must be realistic and practical when setting growth objectives. Will you have enough money to finance the development without impacting on funding your core activities? See the page in this guide on financing your growth strategy.
Return on investment
One of the most popular ways of calculating if your figures are on target is to test them using the Return on Investment (ROI) formula. This will tell you what percentage of return you will get over a specified time. Three years is a good rule of thumb used by many expanding businesses.
ROI is determined by taking the total investment sum, working out the increased sales it will generate each year and the net profit from that, then calculating that as a percentage of the investment.
For example, suppose a business wants to add a new product line that it predicts will cost an investment totalling $200,000 in development costs, plant, marketing and promotion. It estimates the new line will generate $400,000 in sales and $40,000 in net profit each year.
||Additional net profit in period
(net profit/investment x 100)
||40K/200K X 100
||120K/200K X 100
||200K/200K X 100
It's a good idea to test the ROI with a number of different sales figures. While you may think additional sales could reach $400,000 a year, a number of factors - such as development problems, delays or sales and marketing issues - may result in lower sales in the early stages. You may also wish to adjust your calculation to allow for annual inflation.
Financing your growth strategy
Sound financial planning is the foundation of any growth strategy. Firstly, you should establish:
- how much investment is required to fund the venture
- when it will be needed
- when it will be available
A detailed cash flow forecast is essential, not least because outgoings are almost certainly going to rise sooner and faster than revenues. Enough money must be in the pot to keep the core business running. It's a good idea to build in some surplus too, as most projects always take longer to bear fruit than originally predicted.
Detailed forecasts regarding sales, working capital and sources of seed funding, and even second round funding, need to be drawn up.
Businesses looking for capital investment, apart from bank loans, have three main sources - equity capital provided by the owner(s) or friends and family, venture capital and business angels. You can also see if any development or enterprise grants or loans are available in your area.
Equity finance is money invested in a business that is not directly repayable. It could be your own, most likely raised through re-mortgaging a property, or money from others taking a share in the ownership of the business.
Venture capital is investment by a fund in a business in the early stages of development. The deal will very often include a right to management involvement.
Business angels are private investors taking a minority or majority stake in a business, often contributing valuable business experience in the form of advice and contacts.
Original document, Assess your options for growth, © Crown copyright 2009
Source: Business Link UK (now GOV.UK/Business)
Adapted for Québec by Info entrepreneurs