Small Giants: How To Know Which Expansion Strategy Is Right For Your SME
When it comes to business expansion, there are many different ways to do so. The trick is knowing the expansion strategy best for your situation.
Your company’s survival depends on its ability to expand. That expansion, however, does not happen by chance. To reach your growth objectives, you’ll need a game plan.
And by game plan, we mean an expansion strategy.
With the right expansion strategy in place, it’s easier to grow your business in the right direction. But, before knowing which growth strategy is best for your business, it’s a good idea to understand the different stages of growth in SMEs.
Growth stages in SMEs
SMEs evolve through five stages, each with distinctive characteristics, including obstacles and milestones.
These stages of development include existence, survival, success, take-off, and maturity. They’re known as the five pillars of success. Here’s what to expect during each stage:
Stage one: Existence
The first stage is to open a business. To exist.
Obtaining clients and delivering the product or service contracted for are the primary concerns of your business at this time.
Your plan is simply to stay afloat.
Many businesses never obtain enough client acceptability or product capability to survive. So, when the start-up capital runs out, you may decide to close the business and, if you’re lucky, sell the company for its asset value. Or, in some circumstances, you may be unable to keep up with the demands placed on your time, money, and energy, and decide to call it quits.
But, if you decide to keep going, your business gets classified as a Stage II enterprise.
Stage two: Survival
Your company has proven that it’s a viable business entity by reaching this point. You have a sufficient number of customers and adequately satisfy them with your products or services to keep a regular stream of sales.
As a result, the main issue moves from bare existence to the revenue-to-expense relationship when growth strategies come into play.
Your business may expand in size and profitability during the survival stage and go to stage three.
Alternatively, it could stay in this stage for a while, producing minimal returns on invested time and capital.
Stage three: Success
At this point, you must decide whether to capitalize on your business’s achievements and grow as expansion strategies are implemented. And to keep your company stable and profitable as a foundation for further activities.
As a result, a crucial question is whether to use your company as a growth platform or as a support system for yourself and other owners as you entirely or partially disengage from the company. If this is the case, you’ll want to make sure that you’ve built a business that can carry on without you.
Stage four: Take-off
The main issues at this point are how to grow quickly, which business expansion strategies to add, and how to finance that expansion.
As a result, essential questions revolve around delegating responsibility to others and having enough cash to satisfy the growing demands.
Stage five: Resource maturity
The main priorities of your company at this stage are to consolidate and control the financial gains brought on by quick business expansion and maintain the advantages of small scale, such as flexibility of response and entrepreneurial spirit.
Your business must expand its management force quickly enough to eliminate inefficiencies caused by growth.
You’ll also need to professionalize the company by using tools such as budgets, strategic planning, management by objectives, and standard cost systems. All of these without suffocating entrepreneurial qualities.
Horizontal vs. vertical business expansion
When it comes to determining what form of expansion to use, it all boils down to personal choice, strategy, opportunity, market dynamics, and the availability of capital to fund the expansion.
A variety of tactics can aid profitable business expansion strategy. Horizontal and vertical expansion are two examples of these methods.
Although both methods are viable, they are entirely dependent on your objectives and resources.
Horizontal expansion happens when a company’s growth requires new facilities, tools, and other assets to increase its production.
In other words, it allows a corporation to produce more of a product while not diversifying its product line or positioning in the supply chain.
The acquisition of Instagram by Facebook in 2012 for an estimated $1 billion was one of the most definitive examples of horizontal integration.
Facebook and Instagram are both in the same sector, and both social media platforms have comparable production stages.
Vertical expansion is when a business moves to perform a service or create a product on a few distinct supply chain areas.
For example, they provide the raw materials to assemblers, who transform them into completed goods. They then sell the finished goods to clients directly or through distributors.
Zara, a Spanish clothes and accessory retailer with over a thousand locations worldwide, is a prime example of vertical expansion. They not only have their own retail outlets and distribution, but they also source the vast bulk of their clothing in-house. As a result, Zara has a vertically integrated supply chain that includes both the producers and the designers of its products.
Once you’ve decided which way to expand, either horizontally or vertically, it’s time to put together a growth strategy.
7 business expansion strategies
If you want to race ahead of your competitors, aside from determination and strong business practices, what’s needed is the application of business growth strategies.
Depending on various criteria and circumstances, small businesses have several growth options to consider.
We’ll look at seven different expansion strategies that you can use to expand your operations and capture a larger market share.
Market penetration works best when there are no new items to launch and no new markets to enter.
When faced with no other option, a small business will evaluate what it currently has in its current market. Meaning, the existing products or services in the current market are the focus.
Market penetration techniques are used within this strategy to reduce selling prices, increase promotions, expand distribution channels to broaden reach, implement enhancements, and zero in on your competition’s clients and distribution channels.
This is another popular growth strategy, particularly for those who have difficulty establishing a stable footing in their existing market.
With this strategy, your company should be able to earn more market share, more sales, and most importantly, more profits in a new market. In addition, you can extend the potential market by identifying new users or new applications for your product.
Businesses may now reach their clients and sell their products through new channels thanks to the internet.
You can use alternative online channels by selling online or through subscription programs and mobile apps. The new channels available have been advantageous to small businesses and entrepreneurs, as it has provided them with a platform on which they may compete against more prominent brands.
Product expansion means that there’s no new market, but there’s a new product, and that new product is launched to the existing market to capture a more significant proportion of the market.
For example, mobile phone manufacturers are prolific in releasing new and updated models of their goods to the market to keep up with the changes and advancements in technology.
When adopting the product expansion growth approach, you can increase your product line by developing and introducing new items, adding new features to existing products, or updating features of products as they become obsolete.
Diversification is another expansion strategy used by small companies to sell new items to new customers. This strategy is a high-risk, high-reward technique because it’s almost like starting over as if you’re brand new.
Conglomerate diversification is when a small business’s current line of business or product line has limited options. For example, it may seek to diversify into unrelated sectors or far removed from its current operations.
On the other hand, concentric diversification is when small businesses diversify by adding items connected to their current products or markets similar to their current market.
The acquisition is the process of one company purchasing another and consolidating or uniting the two businesses.
Its importance in corporate restructuring places it at the top of the list of business growth strategies.
A company can grow by acquiring other companies in a variety of ways.
Small businesses might benefit from acquisitions by gaining a larger market share and increasing revenue. In addition, because of market consolidation, the acquisition allows a small business to establish a dominant position in the market.
Smaller businesses can also use acquisitions to break down geographical and political barriers, expanding their operations globally.
Market segmentation is another big business expansion strategy that small businesses can use. Especially in an industry or market dominated by more giant corporations.
The small business would have to segment the market, which involves dividing it into distinct groups of customers, each with its own needs and preferences.
After you divide the pie, you determine which slice of the pie appears to be the most receptive to the company’s expansion strategies.
Segmentation uses the same criteria used when developing your marketing strategy: demography, geography, market and customer behavior, and even psychographic profiles of the target market.
How to know what growth strategy is right for you?
Business expansion is a two-edged sword. It can provide significant rewards when it is adequately regulated and managed. But, when expansion is unplanned and uncontrolled, it frequently results in financial hardship and failure.
Your desire to expand must be balanced against the requirement to recognize that real, long-term, profitable expansion is a by-product of good management and planning.
Choosing the right growth strategy depends on your context, growth stage, industry, and goals.
The context of your business
When it comes to expanding your business, it’s vital first to grasp the foundation that must be laid for a company to start developing.
You must first assess your company’s strengths and limitations before you can prepare it for expansion.
Searching for what works helps you focus your efforts where you have the best possibility of succeeding. When you look for strengths, you can also look for flaws. And while you’re at it, examine your costs and revenues, as well as your staff, operations, and mission.
When working on your growth strategies, you’ll need to see where you are in your current growth trajectory. Knowing this helps you better understand which techniques will work for your business and present circumstances.
Examine if there’s anything wrong with your business structure before you can apply the growth strategy you’ve chosen. Of course, it needs to be the right time for you to grow, so you would have had to put the proper foundation for growth in place.
You’ll need to identify if market conditions are ripe for growth opportunities. Look at the current market, competition, and economic climate.
Base your marketing approach on a thorough study rather than hunches and instinct.
You’ll also need to know who your competitors are and where they’re the most dangerous. Next, determine which aspects of your company are most and least vulnerable to competition. And stay on top of things so you can anticipate market changes and avoid being caught off guard by events that influence your business.
For any business expansion to be successful, you need to have clear goals and objectives. These can be short-term or long-term, but it is advisable to have a timeline for all of them.
Business goals are usually set once a year and should be in line with your long-term objectives. These objectives should be incorporated into your growth strategy and specific areas, such as sales estimates if needed.
You might hold weekly, monthly, or quarterly sessions throughout the year to review your progress toward the annual target. When you’re working toward a goal, reviewing the results is critical for remaining on target.
Some common goals for small business expansion include increasing the market share of your product or service, strengthening leadership skills, improving client service, and maintaining or increasing profits.
Don’t just jump into expansion without giving it some thought
As business owners, we all want to expand our businesses. But it can be tricky to know which route to take. Before jumping in, make sure to consider all options and weigh up which business expansion strategy is most suitable for you.