All Systems Grow
You don't have to be a rocket scientist to grow your biz. Blast off with these seven expansion strategies.
After the 16-hour workdays, eleventh-hour decision making, empty aspirin bottles and half-eaten sandwiches, your business is finally a success--with the revenue stream to prove it. So how do you stay ahead of the pack? Riding the success of your introduction is not an option--you've got to reach new customers and new markets. "There always has to be a next thing," says Bruce Lynskey, clinical professor of management at Vanderbilt University's Owen Graduate School of Management in Nashville, Tennessee.
The key to your next move is choosing the expansion method that best fits your company's product or service, your strengths and weaknesses as a business owner, and the limitations of cash, credit and existing resources. A business taking on a new growth strategy should be walking on steady legs, not looking for ways to avoid unresolved problems. And while growth is the central tenet of business development, be willing to apply the brakes when the expansion rate is too much to handle.
So what's the best way to develop your company? One or a combination of the seven strategies below should be enough to turn your acorn into an oak.
1. Introduce a New Product
It takes imagination and a bit of luck to hit on a new product idea that doesn't distract buyers or make older products seem obsolete. But, as in the case of Greensboro, North Carolina-based Batanga.com Inc., a product extension can also reinforce connection to a brand and create a niche all its own. An internet radio station, Batanga.com launched a companion print magazine called Batanga Latin Music to offer advertisers more ways to reach its young, Hispanic, tech-savvy audience. What began as a one-time marketing piece quickly grew into a separate media property. "We started getting calls from newsstand distributors asking if they could carry the magazine and [from] customers who wanted to subscribe," says Troy McConnell, 42, president and CEO of Batanga.com. In 2004, the magazine accounted for 10 percent of the company's $2.5 million in revenue, and McConnell predicts that number will grow to at least 30 percent in a few years.
While you have to be careful when extending your original product, adding products with little or no connection to your product line can be equally dangerous. Exploiting a trend is tempting, but acquiring new customers is less revenue-savvy than squeezing more from existing customers. "The more you can put through the same sales channel, the more cost-effective it is," says Alan M. Davis, a principal with Revitalization Partners, a Seattle consulting firm specializing in business turnarounds.
Use your existing customer base to vet a new product's potential market value. A survey combined with a free gift can prompt customers to share a wealth of information. Fred Wainwright, executive director and adjunct assistant professor at the Center for Private Equity and Entrepreneurship at Dartmouth University's Tuck School of Business, says, "That preliminary research is essential to getting the pricing right, choosing the right value proposition and developing a product that meets the needs of the market."
New Markets, Licensing and Creating a Chain
2. Take Your Product to a New Market
2. Take Your Product to a New Market
Dianne Daniel, president of Handle It LLC in Dublin, Ohio, first marketed GripTwist, an industrial-strength twist tie made of foam-covered wire, to ski shops as a ski and pole binder. It soon became obvious that what could hold unwieldy items like skis together could also hold hoses, tools, ropes and other items--so the company began selling GripTwists to hardware stores. Next, Handle It took the GripTwist into sporting goods stores. Daniel hopes the expansion will boost GripTwist sales to $1 million this year.
New market development can help you reach new customers, but reaching too far can overtax staff, budgets and operational systems. Start small, and check progress as you go, says Ed Chapman, managing partner of VizQuest Ventures LLC, a sales performance and market development firm in Waltham, Massachusetts. "Many companies don't consider market segmentation and target their products too broadly," he says. "Take your solution, sample it among a couple of microsegments, and see which ones stick."
3. License Your Product
Licensing shifts the financial risk from a product's originator to a company willing to take on the burden of marketing and advertising, production and distribution. The shift also includes forfeiting most of the profits, but it may be a fair price to pay for the chance to build a national reputation when cash flow is low.
For Taggies Inc. of Spencer, Massachusetts, the cachet of its licensing partner more than made up for sharing its piece of the pie. In late 2002, Scholastic Inc., the children's publishing behemoth, wanted to license Taggies, a line of blankets and toys with satiny tags attached, for a book collaboration. "The relationship brought us into a market we weren't in before," says Danielle Ayotte, 35, co-founder with Julie Dix, 38.
Ayotte and Dix, whose sales increased from $2 million in 2003 to nearly $3 million in 2004, were lucky to have Scholastic approach them first. Most business owners aren't so fortunate. Before you shop for a licensee, make sure your product is patented--or at least patent pending--and have some research showing sales potential. Then, if you don't already know of a company you'd like to partner with, check out trade shows, online databases and local economic development agencies. A licensing agent can also help you find appropriate companies and broker a deal.
Licensees can be picky, and so should the licensor. Davis of Revitalization Partners recommends choosing a partner who can offer potentially high volumes of distribution. While contracting with a large company might mean a smaller royalty percentage, the potential customer reach will more than make up for it. A good licensing partner should also have an established reputation for quality and service and an aggressive plan to market and advertise your product. For a check on past performance, talk to other licensors contracting with your selected company.
4. Start a Chain
A restaurant, retail or service business that's easily reproduced and can be run from a distance is great for launching a chain. But entrepreneurs must know exactly what makes the original store work and what won't easily transfer to a new site. "You have to ask, 'How much of this success is tied to me, my location or my staff?'" says Chris Wheeler, managing director of Ballenger Cleveland & Issa LLC in Newport Beach, California, a consulting firm specializing in financial and business turnarounds. Defining operating procedures down to the last detail, sharing staff between locations to establish the company's culture in the new location, and developing a training program for new employees all help start things off right.
Launching multiple locations can present some surprises. When Zoots Corp., an eco-friendly dry cleaning chain in Newton, Massachusetts, opened the doors of its third unit, the company launched a marketing campaign to herald the new arrival. "Suddenly, we had three stores doing three times the business of our first two stores," says Todd Krasnow, 47, chair and co-founder. The company, which had about $50 million in sales in 2004, found it difficult to meet its service standards. To avoid similar deluges in the future, Zoots cut back on big promotions, relying instead on word-of-mouth and periodic advertising.
Franchising, Merging and Going Global
5. Turn Your Business Into a Franchise
5. Turn Your Business Into a Franchise
Who wouldn't love the idea of collecting fees and royalties while fellow entrepreneurs expand your business? Once you get past the startup costs--on average, between $125,000 and $150,000 for moderate initial growth of five to 10 franchises per year-franchising is an efficient way to expand brand awareness while pooling the business acumen, financial resources and buying power of multiple owners.
Don't expect a motivated franchisee to make up for existing shortfalls, however. "Make sure there's a market for your product, do your competitive analysis and be sufficiently capitalized," says Andrew Loewinger, an international franchise attorney with law firm Nixon Peabody LLP in Washington, DC. Otherwise, franchisees can be a prickly bunch to deal with. "You might have franchisees who don't want to follow the program, who want to break out on their own or don't want to pay their royalties because they think you're not delivering value," Loewinger says. "It can be a challenge."
Joe Barbat, 29, founder and CEO of Wireless Toyz Ltd., a cellular retailer in Farmington Hills, Michigan, keeps in touch with franchisees through store visits and a company-wide intranet detailing new cellular plans and promotions. These contacts remind franchisees that the company is always there to help, says Barbat. It also helps the company, which brought in over $50 million in revenue last year, maintain sales and service standards.
For more on franchising your business, see the "Franchising Your Business" section of Entrepreneur's Franchise Zone.
6. Join Forces
A merger or acquisition combines the best of two companies, expands your customer base, increases intellectual capital and delivers operational efficiencies. The trick is finding the right partner. "You have to share the same vision of what it is you're trying to build," says Davis.
Such a step is usually the domain of established companies, but acquisitions are how Thought Equity Inc. got off the ground. When Thought Equity's CEO, Kevin Schaff, started his Denver business providing stock footage and production-ready commercials to media companies, he first acquired a nearly bankrupt company selling similar ready-to-use commercials. "We wanted to [increase] the size of our library and provide a critical mass for people when they came to search our libraries," Schaff, 30, says.
The next target, an advertising agency, supplied the expertise of professionals steeped in TV advertising sales. With this "plug and play team," as Schaff calls the agency, Schaff estimates the company got up and running with its first customers 18 months earlier than it could have had it tried to create these resources in-house. Both acquisitions were completed in 2002, the year Thought Equity was founded. Sales in 2004 reached $3 million.
7. Go Global
Growing markets, rising consumer spending, improved business climate--sometimes the only place to find these things is overseas. Doing business internationally can take the form of exporting, licensing, a joint venture or manufacturing, but whatever form you choose, the same basic business rules of assessing customer demand, gaining legal and accounting assistance, protecting intellectual property and obeying regulations apply.
What don't come so easily are the nuances of cultural differences. In some countries, particularly those in Asia, a local partner is virtually a requirement. Your first stop should be your target country's economic development agency, which can help marshal local resources to get you on your way, possibly with a small financial boost.
Melody Brenna, 48, co-founder and CEO of Milestone Architectural Ornamentation Inc. in Amarillo, Texas, emphasizes the importance of the internet in growing an international business. That's how overseas customers first found out about her construction technology firm, which specializes in historic reproductions. Today, Milestone's international business includes exporting product machinery, materials and molds to Thailand, and deals with other countries are in the works. To streamline service, the company creates a project-specific website with regularly updated project news, photos and scheduling information.
Online access also helps businesses overcome the delays of time zone differences. "If there's something I forgot to tell a client," says Brenna, "I throw it on the web and it's there when they get to work in the morning."
Answer these questions before you make your move.
- Do employees have the necessary skills to support your growth strategy? Will you need to hire new staff or provide additional training?
- Can existing operations handle a sudden boost in demand? How will you maintain service levels while reaching for new business?
- Are current operations, including order management, customer service, record keeping and inventory control, running smoothly and ready to take on more?
- Where's the money coming from? Will cash flow from sales be enough to support your expansion, or will you need lender or investor financing?
- What will you need the money for? Study historical cash-flow statements as a guideline, then determine cash-flow needs on a weekly, monthly and annual basis to plan your funding strategies.
- Are you ready to delegate more tasks and give managers more control?
- Does expansion rest on a reliable mix of intuition, solid competitive analysis and customer research?
- Do you have a time-defined exit strategy if expansion plans fail?
Source: Office of Women's Business Ownership, SBA
Julie Monahan is a writer in Seattle whose articles on small business and emerging technology have appeared in numerous consumer and trade magazines.