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Expand Your Thinking And Your Markets

 

A business that stops growing is really going backwards; it makes an enterprise vulnerable to serious harm from an aggressive competitor or an event like the loss of a major customer. Growth is desirable, but knowing where to grow is often difficult to decide. Will it be cost effective to expand within your existing market; or are there better opportunities in entering a totally new market? Any move to expand your market needs a lot of thought and analysis before going ahead.

Grow where you are…or get moving

Carefully examine your present situation. Some businesses are overlooking the potential that’s literally knocking on their doors simply because their facilities are inadequate to generate additional trade. If you’re losing customers because your showroom is too small, you might be able to grow your business just by making it physically larger.

It might also be beneficial to move to a new location. Retail and service businesses are especially sensitive to changes in the composition of their customer base and traffic can gradually decline as population shifts occur. It will almost certainly cost more in rent for a location that gives you more passing trade, but it is often worth the extra expense.

Growing by the numbers

If you can replicate your business in another location without cannibalising your present revenues, expansion through opening new outlets could be the way to go. Use your present income and expense figures as the basis for your calculations and see how it looks on paper. Be aware that expansion can lead to market saturation. There may be enough customers in an area to support three outlets but a new outlet would just take business from the other three without gaining a worthwhile overall share.

If you’re confident your business model is a good one you might also consider franchising. Getting a new franchise underway can be expensive and take a lot of hard work, but it offers the potential of excellent returns from people you help into business. An interesting possibility for manufacturers with patents on their products or processes is to license other companies to use them in return for a royalty fee. Some manufacturers inject themselves into these arrangements by selling their licensees raw materials or management expertise as well. Just be sure you don’t give away your rights to someone who’s going to compete with you for customers.

Purchase the source of your products

A retailer or manufacturer often finds that the costs of goods and materials they purchase rises more quickly than the price at which they can sell their products. This means they have to either find alternative sources of supply or become their own supplier.

Fast food chains, for example, often find it cost effective to purchase and operate their own sources of fresh vegetables and meat products. This also gives them absolute control over the quality of their ingredients. This type of expansion is called ‘vertical integration’ and can often be the best kind of growth if you have the managerial talent to successfully operate the sources of supply you acquire.

Get rid of the middleman

Every extra level in the distribution channel takes away some of your profitability. If your business buys or sells products through agents it may be possible to get rid of the middleman and do your own buying or selling. Manufacturers can open their own retail outlets if their products suit the model of direct selling. Another option is to telemarket products; this does away with wholesalers and retailers but does require a significant investment in a telemarketing setup.

However you decide to expand, consider the competition carefully. What will their response be to your expansion? Are you getting into markets now served by businesses with which you’re unfamiliar and what are they likely to do to counteract your entry into their territory?

As much as possible, stay with what you know. Expanding can make good sense, and by using familiar products and processes you’ll find it easier to perform the calculations required that will help you decide how to grow your business.

Until next week,
Mike Reddy
www.syb.com.au