The entrepreneurial spirit is alive and well in America. One of the reasons it is so fascinating to watch entrepreneurs is that they are always thinking of and testing different strategies to build larger and more successful businesses. Though there are occasional setbacks in what is often a process of trial and error, the winners tend to lead the charge to new approaches to business expansion and development.
One of the areas where we are seeing this dynamic is with existing business owners who are adding new franchise businesses to their current operations. Traditionally, the two main approaches to growing a business are "horizontal" or "vertical" expansion. In this new dynamic, what we are seeing is called "synergistic" expansion, and franchising is a leading force in this trend.
The differences between these three approaches to expansion are:
- Horizontal Expansion. This most traditional of growth strategies simply means you increases your business by doing more of exactly the same thing you have been doing. This is normally accomplished by adding more units to your existing operations or trying to increase the average volumes of the units you already have.
- Vertical Expansion. This growth strategy involves growing your business by expanding the operation to include functions directly related to current business that you are not currently engaged in. Examples of this might include upstream expansion via the purchase of one or more of the supplier companies that currently sell to the business. Or it could also mean downstream expansion via something like a strategy of selling directly to the end user of the business products rather than using a rack jobber or other middleman to handle distribution.
- Synergistic Expansion. The new trend of synergistic expansion is a different strategy than the two traditional models. This is where you attempt to leverage the existing infrastructure components you have already created to support growth that, though not directly related to the current business you have, has some synergies you can take advantage of.
The infrastructure component that you're leveraging in this approach is typically one or more of the following assets from your existing business:
- Current Customers. Your existing business has customers and in many cases, your motivation is to get a new franchise business that can result in additional sales to these current customers.
- Current Staff. Your existing business has employees and your motivation is to try to take advantage of or leverage extra time and capacity of these current employees to create additional revenue and profits for the business.
- Current Physical Location. Your existing business has a location and you want to utilize some portion of this real estate asset through another franchise business operation as a way of producing higher results.
As just one significant example of this trend, in the past decade, Radio Shack has opened hundreds of franchised units in small communities by selling existing business owners on the idea of synergistic expansion. They go into a small community and identify one of the strongest existing retailers in the area. It doesn't really matter whether the existing retail operation is selling appliances or furniture or anything else-they are just looking for experienced, successful operators who have the potential to leverage some portion of their current physical space to create a small Radio Shack operation inside their existing business.
Radio Shack has successfully developed a program for these retailers to put a branded franchise operation within their existing business and create a significant additional profit source on favorable terms for the current entrepreneur. The existing owner allocates a relatively small number of square feet of the current operation to house a limited but very carefully selected set of Radio Shack sku's in order to maximize the return and create the greatest leverage for the new franchise operation.
Other examples of this dynamic include:
- Moving companies that have acquired real estate franchises in order to leverage existing customers by selling them relocation housing services.
- Gas stations and convenience markets that have added reduced-menu fast-food outlets into their existing location.
- Furniture retail outlets that have added floor or window covering franchise operations to sell additional products and services to existing furniture customers.
- Damage repair and restoration companies that have added franchises providing mold removal, vent and dryer cleaning and other services to their offerings to customers.
- Food franchise companies that have created co-branding opportunities to put multiple brands into a common location to leverage existing staff and physical sites.
The advantages of this type of expansion are numerous for both sides of the equation. As an existing entrepreneur, you get another profit center with far less risk and work than what would normally be involved in starting a new business. Often, the franchise companies already have a strong brand presence in the market and a turnkey operation set up for new franchisees. The franchisor gets a proven successful operator with a solid existing business to support the new franchise business while it's getting off the ground.
This strategy is often a true win-win scenario for both parties and a wonderful example of the adaptive nature of the American entrepreneurial spirit!
Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.