Monetary Wisdom - May 2008
By Charlie Ragland
In the current business climate, driving top line revenue growth is on everyone’s mind. How do we grow our business, increase sales, and improve profitability? Does the potential for growth exist? Is growth always desirable?
Growth and expansion are the natural result of a successful business. Increasing revenue reinforces the business purpose and helps secure its competitive advantage as it establishes itself in the market.
Some business owners do not embrace growth as a strategy because they are concerned with losing control. Others decide to control the rate of growth even if excess demand is present. They may decide to have controlled growth rather than subject their business to the gyrations of triple digit growth.
Generally, business owners who pursue controlled growth are in their business for the long term and are not looking for a quick exit. They are generally cautious about taking on debt or equity to finance growth. They don’t advertise heavily or seek more business than they can efficiently handle.
Product diversification is important and offers a strategy to insulate the business from the gyration of single product market focuses.
Factors that impact growth potential
Many factors can affect the potential for growth:
• The characteristics of the target market—Global markets offer greater opportunities than small, local niche markets.
• The competitive environment—Large dominate brands often create opportunities for niche players.
• The pace of new product introductions—Leading with innovations can create new market opportunities in a stable market.
• The stability of the industry—Slow changing or short product life cycles will impact the business environment.
• The owner’s ability to delegate authority—As companies grow the skills that made the owner successful early on are not the same skills required to drive growth in the maturing firm.
• Retaining the entrepreneurial spirit—Maintain customer responsiveness in the face of emerging rigid management styles.
Growth has its own challenges
Growth can create many problems within the organization. The business owner will face increased pressure for capital to support expansion. Employees will experience a more frantic business pace. The business management team can become so consumed with growth that they lose focus on the business strategy. The business becomes reactive.
• Increased capital needs: Most companies finance their sales growth. The business owner must understand the implications of their cash flow cycle—the amount of time between the purchases of materials and receipt of final payment from the customer. Sources of financing include credit lines from financial institutions and supplier trade credit.
• Cash flow cycle: Sales growth increases the financing requirement. Many small businesses fail because they cannot finance their rapid sales growth. If money is tight, continuing to increase sales will increase the need for funds. It is not until sales begin to slow that the firm begins to reduce its need for growth capital.
• Hiring and training: Business owners must plan and hire for growth. They must continually assess the changing competitive environment, market trends, and changes in customer buying patterns. Growth is part of a forward looking culture and not just viewed as results from a great promotion or sales year.
• Proactive or reactive: During phases of rapid growth, the business owner may lose track of competitive strategies and changes in the market until his business stalls or plateaus. At this point the competition has modified strategies leaving the business owner at a competitive disadvantage. A disciplined and focused team is required to prevail during periods of rapid growth.
Intensive growth strategies—growing within the current market
Intensive growth strategies focus on maximizing the business opportunity within the current market. Three common approaches are market penetration, market development, and product development.
• Maximize existing sales: Market penetration strategy focuses on maximizing share in the existing market through more effective sales and marketing tactics. One approach is to consider adding sales representation to increase sales.
• Expand your business offering: Market development strategy focuses on taking your successful business model to a broader market. Geographical expansion is a common approach. Flooring retailers can consider adding additional stores.
• Add new products and services: Product development strategy seeks to develop new products and services for the existing market. Since most ideas for new products come from customers, this strategy is linked closely with knowing and understanding the changing needs of the customer and building on the business opportunity. An emerging trend sees flooring retailers visiting potential customers, utilizing a customized van to show flooring options on location. Flooring retailers are adding commercial flooring solutions and targeting small business.
Integrative growth strategies—growing within the industry
Integrative growth strategies allow for the business owner to increase the breadth of his business offering through acquisition or strategic alliances.
• Get closer to the customer: Flooring manufacturers have eliminated distribution and are selling retailers directly.
• Control your supplier: In the carpet industry many of the carpet manufacturers have increased backward integration to control their supply of raw materials. An example is Shaw’s acquisition of carpet backing and nylon fiber suppliers and commitment to recycling carpet.
• Buy your competitor: Businesses may seek to increase their leverage within an industry segment by combining competitive businesses and consolidating the business footprint. Shaw’s acquisition of Queen Carpet in 1998 is an example.
• Utilize your business network: Networking strategies allow smaller companies to compete with larger corporations by combining the strengths of similar companies, each with its own area of expertise, creating a value network of companies to deliver superior products and services to the market. Flooring retailers are joining buying groups such as CCA Global Partners, Carpet One and Flooring America to improve their buying leverage. Independent retailers may decide to align themselves with Shaw or Mohawk for increased business support.
Diversification growth strategies—growing outside the industry
Diversification growth strategies occur when business owners expand outside their core products and services or industry. Usually the business owner will exhaust all other growth strategies before diversifying into unrelated business activities.
• Add complementary products or services—A flooring retailer can add additional surfaces like wall covering.
• Acquire unrelated businesses—CCA Global Partners, parent of Carpet One and Flooring America, has extended its business model to include Lighting One and the Biking Solution.
International growth strategies—go global
With the value of the dollar versus major currencies, incorporating an international component to the business deserves evaluation. Taking your business strengths and expanding to other world markets offers many options for growth and different levels of risk.
• Exporting: Initially, many business owners respond to international inquiries for their products and services. This approach allows the business owner to leverage its core competencies and increase the returns on its business strategy. The downside is the potential loss of control in the local markets.
• Licensing: The business is granted a fee for the right to use intellectual property. Licensing offers the business owner the advantage of low development costs and risks. Its risks include the lack of global strategic coordination and the loss of control over the technology.
• Franchising: The franchisee pays the franchisor for the right to practice the business model. Generally, the franchisee gets support service and operat ion expertise from the franchisor in exchange for a royalty payment. The franchise approach has relatively low development costs and risks for the business owner. The business owner does lose control over global strategic coordination and quality.
• Joint Ventures: This business strategy combines the business knowledge and expertise of two or more business partners. The business development costs and risks are shared. The promise is to create a synergistic effect between the partners to increase business performance and profitability. The risks include combining different company cultures to implement and execute the business strategy.
Copyright 2008 Floor Focus
BUILDING A GROWTH STRATEGY
1. External Assessment Trends