All Systems Grow
You don't have to be a rocket scientist to grow your biz. Blast off with these seven expansion strategies.
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After the 16-hour workdays, eleventh-hour decision making, emptyaspirin bottles and half-eaten sandwiches, your business is finallya success--with the revenue stream to prove it. So how do you stayahead of the pack? Riding the success of your introduction is notan option--you've got to reach new customers and new markets."There always has to be a next thing," says BruceLynskey, clinical professor of management at VanderbiltUniversity's Owen Graduate School of Management in Nashville,Tennessee.
The key to your next move is choosing the expansion method thatbest fits your company's product or service, your strengths andweaknesses as a business owner, and the limitations of cash, creditand existing resources. A business taking on a new growth strategyshould be walking on steady legs, not looking for ways to avoidunresolved problems. And while growth is the central tenet ofbusiness development, be willing to apply the brakes when theexpansion rate is too much to handle.
So what's the best way to develop your company? One or acombination of the seven strategies below should be enough to turnyour acorn into an oak.
1. Introduce a New Product
It takes imagination and a bit of luck to hit on a new productidea that doesn't distract buyers or make older products seemobsolete. But, as in the case of Greensboro, North Carolina-basedBatanga.com Inc., a product extension can also reinforce connectionto a brand and create a niche all its own. An internet radiostation, Batanga.com launched a companion print magazine calledBatanga Latin Music to offer advertisers more ways to reach itsyoung, Hispanic, tech-savvy audience. What began as a one-timemarketing piece quickly grew into a separate media property."We started getting calls from newsstand distributors askingif they could carry the magazine and [from] customers who wanted tosubscribe," says Troy McConnell, 42, president and CEO ofBatanga.com. In 2004, the magazine accounted for 10 percent of thecompany's $2.5 million in revenue, and McConnell predicts thatnumber will grow to at least 30 percent in a few years.
While you have to be careful when extending your originalproduct, adding products with little or no connection to yourproduct line can be equally dangerous. Exploiting a trend istempting, but acquiring new customers is less revenue-savvy thansqueezing more from existing customers. "The more you can putthrough the same sales channel, the more cost-effective itis," says Alan M. Davis, a principal with Revitalization Partners, a Seattle consulting firmspecializing in business turnarounds.
Use your existing customer base to vet a new product'spotential market value. A survey combined with a free gift canprompt customers to share a wealth of information. Fred Wainwright,executive director and adjunct assistant professor at the Centerfor Private Equity and Entrepreneurship at DartmouthUniversity's Tuck School of Business, says, "Thatpreliminary research is essential to getting the pricing right,choosing the right value proposition and developing a product thatmeets the needs of the market."
New Markets, Licensing and Creating a Chain
2. Take Your Product to a New Market
Dianne Daniel, president of Handle It LLC in Dublin, Ohio, first marketedGripTwist, an industrial-strength twist tie made of foam-coveredwire, to ski shops as a ski and pole binder. It soon became obviousthat what could hold unwieldy items like skis together could alsohold hoses, tools, ropes and other items--so the company beganselling GripTwists to hardware stores. Next, Handle It took theGripTwist into sporting goods stores. Daniel hopes the expansionwill boost GripTwist sales to $1 million this year.
New market development can help you reach new customers, butreaching too far can overtax staff, budgets and operationalsystems. Start small, and check progress as you go, says EdChapman, managing partner of VizQuest Ventures LLC, a sales performance andmarket development firm in Waltham, Massachusetts. "Manycompanies don't consider market segmentation and target theirproducts too broadly," he says. "Take your solution,sample it among a couple of microsegments, and see which onesstick."
3. License Your Product
Licensing shifts the financial risk from a product'soriginator to a company willing to take on the burden of marketingand advertising, production and distribution. The shift alsoincludes forfeiting most of the profits, but it may be a fair priceto pay for the chance to build a national reputation when cash flowis low.
For TaggiesInc. of Spencer, Massachusetts, the cachet of its licensingpartner more than made up for sharing its piece of the pie. In late2002, Scholastic Inc., the children's publishing behemoth,wanted to license Taggies, a line of blankets and toys with satinytags attached, for a book collaboration. "The relationshipbrought us into a market we weren't in before," saysDanielle Ayotte, 35, co-founder with Julie Dix, 38.
Ayotte and Dix, whose sales increased from $2 million in 2003 tonearly $3 million in 2004, were lucky to have Scholastic approachthem first. Most business owners aren't so fortunate. Beforeyou shop for a licensee, make sure your product is patented--or atleast patent pending--and have some research showing salespotential. Then, if you don't already know of a companyyou'd like to partner with, check out trade shows, onlinedatabases and local economic development agencies. A licensingagent can also help you find appropriate companies and broker adeal.
Licensees can be picky, and so should the licensor. Davis ofRevitalization Partners recommends choosing a partner who can offerpotentially high volumes of distribution. While contracting with alarge company might mean a smaller royalty percentage, thepotential customer reach will more than make up for it. A goodlicensing partner should also have an established reputation forquality and service and an aggressive plan to market and advertiseyour product. For a check on past performance, talk to otherlicensors contracting with your selected company.
4. Start a Chain
A restaurant, retail or service business that's easilyreproduced and can be run from a distance is great for launching achain. But entrepreneurs must know exactly what makes the originalstore 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, managingdirector of Ballenger Cleveland & Issa LLC in Newport Beach,California, a consulting firm specializing in financial andbusiness turnarounds. Defining operating procedures down to thelast detail, sharing staff between locations to establish thecompany's culture in the new location, and developing atraining program for new employees all help start things offright.
Launching multiple locations can present some surprises. WhenZoots Corp., aneco-friendly dry cleaning chain in Newton, Massachusetts, openedthe doors of its third unit, the company launched a marketingcampaign to herald the new arrival. "Suddenly, we had threestores doing three times the business of our first twostores," says Todd Krasnow, 47, chair and co-founder. Thecompany, which had about $50 million in sales in 2004, found itdifficult to meet its service standards. To avoid similar delugesin the future, Zoots cut back on big promotions, relying instead onword-of-mouth and periodic advertising.
Franchising, Merging and Going Global
5. Turn Your Business Into a Franchise
Who wouldn't love the idea of collecting fees and royaltieswhile fellow entrepreneurs expand your business? Once you get pastthe startup costs--on average, between $125,000 and $150,000 formoderate initial growth of five to 10 franchises peryear-franchising is an efficient way to expand brand awarenesswhile pooling the business acumen, financial resources and buyingpower of multiple owners.
Don't expect a motivated franchisee to make up for existingshortfalls, however. "Make sure there's a market for yourproduct, do your competitive analysis and be sufficientlycapitalized," says Andrew Loewinger, an internationalfranchise attorney with law firm Nixon Peabody LLPin Washington, DC. Otherwise, franchisees can be a prickly bunch todeal with. "You might have franchisees who don't want tofollow the program, who want to break out on their own or don'twant to pay their royalties because they think you're notdelivering value," Loewinger says. "It can be achallenge."
Joe Barbat, 29, founder and CEO of Wireless ToyzLtd., a cellular retailer in Farmington Hills, Michigan, keepsin touch with franchisees through store visits and a company-wideintranet detailing new cellular plans and promotions. Thesecontacts remind franchisees that the company is always there tohelp, says Barbat. It also helps the company, which brought in over$50 million in revenue last year, maintain sales and servicestandards.
For more on franchising your business, see the "FranchisingYour Business" section of Entrepreneur's FranchiseZone.
6. Join Forces
A merger or acquisition combines the best of two companies,expands your customer base, increases intellectual capital anddelivers operational efficiencies. The trick is finding the rightpartner. "You have to share the same vision of what it isyou're trying to build," says Davis.
Such a step is usually the domain of established companies, butacquisitions are how Thought Equity Inc. got off the ground. When ThoughtEquity's CEO, Kevin Schaff, started his Denver businessproviding stock footage and production-ready commercials to mediacompanies, he first acquired a nearly bankrupt company sellingsimilar ready-to-use commercials. "We wanted to [increase] thesize of our library and provide a critical mass for people whenthey came to search our libraries," Schaff, 30, says.
The next target, an advertising agency, supplied the expertiseof professionals steeped in TV advertising sales. With this"plug and play team," as Schaff calls the agency, Schaffestimates the company got up and running with its first customers18 months earlier than it could have had it tried to create theseresources in-house. Both acquisitions were completed in 2002, theyear Thought Equity was founded. Sales in 2004 reached $3million.
7. Go Global
Growing markets, rising consumer spending, improved businessclimate--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 youchoose, the same basic business rules of assessing customer demand,gaining legal and accounting assistance, protecting intellectualproperty and obeying regulations apply.
What don't come so easily are the nuances of culturaldifferences. In some countries, particularly those in Asia, a localpartner is virtually a requirement. Your first stop should be yourtarget country's economic development agency, which can helpmarshal local resources to get you on your way, possibly with asmall financial boost.
Melody Brenna, 48, co-founder and CEO of MilestoneArchitectural Ornamentation Inc. in Amarillo, Texas, emphasizesthe importance of the internet in growing an internationalbusiness. That's how overseas customers first found out abouther construction technology firm, which specializes in historicreproductions. Today, Milestone's international businessincludes exporting product machinery, materials and molds toThailand, and deals with other countries are in the works. Tostreamline service, the company creates a project-specific websitewith regularly updated project news, photos and schedulinginformation.
Online access also helps businesses overcome the delays of timezone differences. "If there's something I forgot to tell aclient," says Brenna, "I throw it on the web and it'sthere 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 growthstrategy? Will you need to hire new staff or provide additionaltraining?
- Can existing operations handle a sudden boost in demand? Howwill you maintain service levels while reaching for newbusiness?
- Are current operations, including order management, customerservice, record keeping and inventory control, running smoothly andready to take on more?
- Where's the money coming from? Will cash flow from sales beenough to support your expansion, or will you need lender orinvestor financing?
- What will you need the money for? Study historical cash-flowstatements as a guideline, then determine cash-flow needs on aweekly, monthly and annual basis to plan your fundingstrategies.
- Are you ready to delegate more tasks and give managers morecontrol?
- Does expansion rest on a reliable mix of intuition, solidcompetitive analysis and customer research?
- Do you have a time-defined exit strategy if expansion plansfail?
Source: Office of Women's Business Ownership, SBA
Julie Monahan is a writer in Seattle whose articles on smallbusiness and emerging technology have appeared in numerous consumerand trade magazines.