Growth and expansion require careful planning. You cannot simply wake up one
day and decide that you will open a second or third store, or increase your
product line outright.
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The decision to extend the scope of your business must be a result of
thoughtful consideration of various factors, including the financial, logistical,
even your emotional readiness. The rule of thumb is that you should only
expand when there are untapped opportunities that can benefit your business.
There may be a niche that you want to capture; or a location not serviced
even by your competitors.
Expanding operations does not always mean more
profit. You may be doing more volume by adding a second and third store and
working harder, but with the additional overhead, you may not make any more
money.
Janet Allon and the editors of Victoria Magazine, in their book "Turn
Your Passion into Profits: How to Start the Business of Your Dreams"
(New York: Hearst Books, 2001) suggested that entrepreneurs need to think of
the following points before embarking on an expansion of their small
businesses:
1. Are there
economies of scale that will benefit an expanded operation?
As your business increases in size, costs per unit fall, resulting in lower
prices or higher profit - or both. You should only expand if economies of
scale will allow your business either to sell your products or services at
lower prices or to take more profit per item.
How do you achieve economies of scale? By growing your business, you may
be able to buy more. Instead of buying for a single store, you are now
buying for two or three stores. Such high-volume purchases will allow you to
get lower prices for everything from raw materials to transportation, and
warehouse space - even cleaning services.
You may also be in a better position to defend your business against
price-cutting by your competitors. As you branch out to other markets, you
may be able to sell more and increase your sales. Larger sales volume will
allow you to offset lower per-unit profit.
Your business may also benefit from having more resources, in terms of
bigger and better premises, increased marketing resources and added product
features that provide more value for customers. Your administrative costs-per-unit
should also come down, as the costs like advertising, purchasing and other
functions are spread among all your locations and products.
2. Are your
competitors expanding?
Market intelligence should play a key part in your decision to expand your
business. You may be able to get important clues about the market, and some
indication about your competitor's situation. Getting information about your
competitors can give you the leading edge, as it can show you ways in which
your company benefit the customer and be unique.
If your competitors are increasing their operations, it may mean that
they have seen new, untapped opportunities in the market. Your competitors
may have stumbled upon a good idea. If this is the case, you can do two
things: wait and see how the competitor does, or follow the competitor's
lead.
By waiting for the results of a competitor's venture into a new area,
you can verify for yourself whether demand really exists and the benefits
outweigh the risks. Following your competitor's lead does not necessarily
mean that you have to duplicate exactly what they are doing. Instead, you
can use their ideas to stimulate your own thinking.
If your competitor's expansion proved to be a mistake, then you can thank
your lucky stars that it was not your business that was burned in a costly
misjudgment.
3. Can you
finance the expansion internally?
Before deciding, you need to study carefully the financial benefits of such
an expansion, and whether your cash flow can support the additional
investment. It is important to determine where and how you will get the
money to pay for the additional inventory, new facilities or equipment. The
ideal situation would be to expand only when you have already proven that
demand exists for your products or services, as proven by your fat bottom
line.
If you need additional capital, whether a loan from the bank or an equity
infusion, make sure that the new venture will be profitable enough to allow
you to earn money and repay the loans. Many small businesses met untimely
deaths with their aggressive growth strategy, only to find that they are
buried deep in debt with no other recourse than to file for Chapter 11
bankruptcy or liquidate assets. Like any other business decisions, expand
only when you think you have financial benefits to gain.
4. Will your
customers tolerate your growing pains?
Timing is crucial in making the decision to expand a business. A downturn in
the economy, a war, or an event so life-changing as September 11 can
drastically reduce consumer demand for your product. If people are not
spending like they used to, how sure are you that the limited range of their
consumption will include your products or services? Unless you have an
unlimited pocket that can support expansion even with reduced demand, make
sure that the business environment can support your expansion.
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5. Are you
willing to play a less hands-on role in an expanded operation?
Whether you are opening an additional store or combining a brick-and-mortar
operation with an e-commerce venture, you should expect a change in the role
that you play. From a one-person business, you may begin to hire new
personnel to cope with your new undertaking. If you are opening a second
store, you may need someone to manage that store, as it will be impossible
for you to be in two places at the same time. You may need to seek the help of
additional personnel to help you run your web site while you take care of
your physical store.
When you expand your business, you should be prepared to delegate
responsibilities to others and be open to new ways of doing things. If you
are previously working solo, you now have a new hat to wear: a personnel
manager.
If you are seeking expansion capital from investors and other
capitalists, you should be prepared to relinquish part, even total control,
of your enterprise. Some investors will demand equity or a say-so in the
day-to-day operation of your business. Some will even agree to fund you on
the condition that a person they recommend will run the expanded venture.
Given the new players in your business, you should be open to new ideas.
Your new store manager may have some suggestions on how to improve your
business. Your new set of investors may want to have inputs in the
decision-making process. These new participants in the decision-making
process may come pretty hard on you, particularly if
you are one of the thousands of entrepreneurs who think that they know their
business by heart and they (and only they) have the monopoly of ideas on how
best to run it. Some entrepreneurs even have the narrow vision that they can
run the business better than anyone can.
6. By
expanding, are you diluting beyond recognition the passion that originally
started the business?
Expansion that carries you far away from your original vision or even
passion may make you richer, but less happy. If you are primarily a creative
person, chances are that the business of taking care of business will take
you away from some of the creative work. Growth may force you to let go of
the total design control you enjoyed when the company was much smaller, and
that may not be an easy adjustment.
According to the authors, "growth and expansion are not always good
or desirable." In fact, many entrepreneurs saw their businesses crumble
as a result of uncontrolled growth. Slow, steady, and incremental growth is
much better.
About the Author:
Mayumi Mendoza-Bates is a
staff writer of Power Homebiz Guides.
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