Business expansion and growth 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.
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 business expansion:
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.
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?
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 business 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.
Recommended Books on Business Expansion:
- The 7 Irrefutable Rules of Small Business Growth
- Grow to Greatness: Smart Growth for Entrepreneurial Businesses
- Smart Growth: Building an Enduring Business by Managing the Risks of Growth (Columbia Business School Publishing)
- Built for Growth: Expanding Your Business Around the Corner or Across the Globe (paperback)
- Building a Small Business that Warren Buffett Would Love