In business, growth must be approached strategically. Of course, you can expand your business without a plan, making changes piecemeal using trial and error. But this approach is fraught in danger.
Small business owners all too frequently abandon the practice of planning once they are through their start-up phase; forgetting to update their initial business plan, or ignoring the need to review business performance regularly and set new goals. Instead, they become pre-occupied with the daily demands of keeping their business afloat.
It is hard work. Yet, for your business to truly grow and thrive, you will need to workstrategically. What kind of growth is your business prepared for? What growth rate would allow your business to reach its optimal size?
Consider the following factors about your business:
Size and Efficiency
The greater the returns to a company’s scale, scope, or the size of its customer network, the stronger the case for pursuing growth. When scale causes profitability to increase considerably, growth soon pays for itself. And in industries in which economies of scale and scope limit the number of viable competitors, establishing a favourable economic position first can help deter rivals.
Rapid growth makes sense if consumers are inclined to stick with the companies with which they initially do business, either because of an aversion to change or because of the expense of switching to another company. Similarly, in retail, growing rapidly can allow a company to secure the most favourable locations or dominate a geographic area that can support only one large store, even if national economies of scale are limited.
If rivals are expanding quickly, a company may be forced to do the same. In markets in which one company generally sets the industry’s standard, growing quickly enough to stay ahead of the pack may be a young company’s only hope.
When a new venture is not able to attract investors or borrow at reasonable terms, its internal financing capability will determine the pace at which it can grow. Businesses that have high profit margins and low assets-to-sales ratios can fund high growth rates. A self-funded business cannot expand its revenues at a rate faster than its return on equity.
When a company is young and growing rapidly, its products and services often contain some flaws. In some markets, such as certain segments of the high-tech industry, customers are accustomed to imperfect offerings and may even derive some pleasure from complaining about them. Companies in such markets can expand quickly. But in markets where buyers will not stand for breakdowns and bugs, such as the market for luxury goods and mission-critical-control systems, growth should be much more cautious.
Some entrepreneurs thrive on rapid growth; others are uncomfortable with the crises and “fire-fighting” that usually accompany it. One of the limits on a new venture’s growth should be the entrepreneur’s tolerance for stress and discomfort.
Are you ready to take the plunge and explore a strategic plan for optimal business growth?