Many people believe that for a business to be successful it must continuously grow. However, growth can be risky and if your current business is not operating efficiently, you could be asking for trouble. The truth is that many businesses achieve growth at the expense of profitability and cashflow. Here are two examples that I have come across in the past year:
A business in the construction industry that over a three year period tripled its sales yet did not make any additional profit. What it did achieve however was a significant increase in overheads, a massive increase in staffing, increased logistical complexity, decreased cashflow and increased stress for the owners and managers.
A business in the transport industry that doubled its sales over a year but eliminated almost all of its profit. What it achieved was a significantly increased asset base, high levels of debt and associated interest costs, a bunch of customers that were not actually profitable and, of course, decreased cashflow and increased stress for the owners and managers.
The truth is that growth generally increases business complexity and risk. In my experience many business owners understand this but insist that growth is the answer to a profit problem. Very often however the absence of profit is a reflection of poor existing systems and processes. Pushing even more work through these already broken systems will merely stress them further and, if you’re the business owner, it will likely stress you too while potentially hastening the demise of your business.
In my previous blog I discussed a useful approach to increasing profitability. Assuming you have done this, and you are in a position to grow, you really only have the following four options:
1 Sell more of your existing products or services to your existing customers.
This is called market penetration and is often the easiest and the least costly way to grow. Many people fail to consider this opportunity because they think their current market is saturated. This however is often not the case and what they may have failed to do is identify their competitive advantage. If you can’t articulate why customers should buy from you, your customers probably can’t either. In addition, if you don’t know your competitive advantage in your current market, ask yourself why you think you could identify it as a new entrant in a different market. Unless you can answer this question you probably shouldn’t consider any of the other three growth options. If you wish to pursue a market penetration strategy here are some things you can do to achieve it:
Make some modest product/service refinements
Develop a new marketing strategy to attract more business
Increase your sales activities
Introduce a loyalty scheme.
Launch price or other special offer promotions (but don’t start a price war).
2 Develop new products and services and sell to existing customers.
This is called a product development strategy and may be more risky than market penetration. It can work well if you have good relationships with existing customers because you can build from a foundation of trust. Here are some things you can do to implement a product development strategy but remember, it may involve additional investment in new equipment, licences, materials and skills.
Incrementally improve existing products and services (different variants, repackaging etc)
Invest in research and development to introduce genuinely “new” products and services.
Acquire the rights to produce/sell someone else’s product;
Shorten your time to market, or improve customer service or quality.
3 Sell existing products and services to new customers.
The new customers could be new types of businesses or new segments of the population or the same type of customers in a different geographical area. A market development strategy can work well if you have a major share of your existing market or if your existing market really is saturated or if you have a unique product not available in the new market. It is most likely to be successful if you have an established reputation or brand to give you a head start. Make sure however that you are not replicating existing challenges in a new market:
Use different sales channels, such as online or direct sales if you are a wholesaler or using agents and intermediaries.
Use Market Segmentation to target different groups of people, e.g. different age, gender or demographic profiles from your usual customers.
Identify industrial/commercial buyers for products previously sold to domestic customers or vice verca.
4 Sell new products or service into a new market.
This is called diversification and is the most risky strategy since it involves two unknowns: new products with unknown development problems and new markets with unknown characteristics. It is likely to be the most costly strategy because, in addition to investing in new equipment, materials and skills, you may also have to invest in additional infrastructure, travel and marketing expenditure. The risk of failure can be high and if you do fail the financial cost can be higher than any of the other options. If you wish to follow a diversification strategy use a combination of product and market development tactics.
In summary, growth and profit strategies are not mutually exclusive but as a general principle it makes sense to adopt a growth strategy only after you have achieved good efficiencies and profitability from your current operations. If you want to grow and you believe your current operations are working efficiently, draw up a matrix like the one below and jot down the opportunities and associated costs and risks relevant to each. Use the matrix to help you decide which option is best for you.
Finally, if you want to take the emotion out of this important decision and gain an independent perspective on your ideas, why not ask someone to help you?