There are many ways to guide a business through a period of expansion.
There are many ways to guide a business through a period of expansion.
Turning a small business into a big one is never easy. The statistics are grim. Research suggests that only one-tenth of 1 percent of companies will ever reach $250 million in annual revenue. An even more microscopic group, just 0.036 percent, will reach $1 billion in annual sales.
In other words, most businesses start small and stay there.
But if that's not good enough for you—or if you recognize that staying small doesn't necessarily guarantee your business's survival— there are examples of companies out there that have successfully made the transition from start-up to small business to fully-thriving large business.
That's the premise behind the search Keith McFarland, an entrepreneur and former Inc. 500 CEO, undertook in writing his book, The Breakthrough Company. "There has always been lots of books out there on how to run a big company," says McFarland, who now runs his own consulting business, McFarland Partners based in Salt Lake City. "But I couldn't find one about how to maintain fast-growth over the long-term. So I studied the companies who had done it to learn their lessons."
What follows are some of the lessons McFarland learned from his study of the breakthrough companies and how they can help you create a growth strategy of your own.
Developing a Growth Strategy: Intensive Growth
Part of getting from A to B, then, is to put together a growth strategy that, McFarland says, "brings you the most results from the least amount of risk and effort." Growth strategies resemble a kind of ladder, where lower-level rungs present less risk but maybe less quick-growth impact. The bottom line for small businesses, especially start-ups, is to focus on those strategies that are at the lowest rungs of the ladder and then gradually move your way up as needed. As you go about developing your growth strategy, you should first consider the lower rungs of what are known as Intensive Growth Strategies. Each new rung brings more opportunities for fast growth, but also more risk. They are:
1. Market Penetration. The least risky growth strategy for any business is to simply sell more of its current product to its current customers—a strategy perfected by large consumer goods companies, says McFarland. Think of how you might buy a six-pack of beverages, then a 12-pack, and then a case. "You can't even buy toilet paper in anything less that a 24-roll pack these days," McFarland jokes. Finding new ways for your customers to use your product—like turning baking soda into a deodorizer for your refrigerator—is another form of market penetration.
2. Market Development. The next rung up the ladder is to devise a way to sell more of your current product to an adjacent market—offering your product or service to customers in another city or state, for example. McFarland points out that many of the great fast-growing companies of the past few decades relied on Market Development as their main growth strategy. For example, Express Personnel (now called Express Employment Professionals), a staffing business that began in Oklahoma City quickly opened offices around the country via a franchising model. Eventually, the company offered employment staffing services in some 588 different locations, and the company became the fifth-largest staffing business in the U.S.
3. Alternative Channels. This growth strategy involves pursuing customers in a different way such as, for example, selling your products online. When Apple added its retail division, it was also adopting an Alternative Channel strategy. Using the Internet as a means for your customers to access your products or services in a new way, such as by adopting a rental model or software as a service, is another Alternative Channel strategy.
4. Product Development. A classic strategy, it involves developing new products to sell to your existing customers as well as to new ones. If you have a choice, you would ideally like to sell your new products to existing customers. That's because selling products to your existing customers is far less risky than "having to learn a new product and market at the same time," McFarland says.
5. New Products for New Customers. Sometimes, market conditions dictate that you must create new products for new customers, as Polaris, the recreational vehicle manufacturer in Minneapolis found out. For years, the company produced only snowmobiles. Then, after several mild winters, the company was in dire straits. Fortunately, it developed a wildly-successful series of four-wheel all-terrain vehicles, opening up an entirely new market. Similarly, Apple pulled off this strategy when it introduced the iPod. What made the iPod such a breakthrough product was that it could be sold alone, independent of an Apple computer, but, at the same time, it also helped expose more new customers to the computers Apple offered. McFarland says the iPhone has had a similar impact; once customers began to enjoy the look and feel of the product's interface, they opened themselves up to buying other Apple products.
If you choose to follow one of the Intensive Growth Strategies, you should ideally take only one step up the ladder at a time, since each step brings risk, uncertainty, and effort. The rub is that sometimes, the market forces you to take action as a means of self-preservation, as it did with Polaris. Sometimes, you have no choice but to take more risk, says McFarland.
Developing a Growth Strategy: Integrative Growth Strategies
If you've exhausted all steps along the Intensive Growth Strategy path, you can then consider growth through acquisition or Integrative Growth Strategies. The problem is that some 75 percent of all acquisitions fail to deliver on the value or efficiencies that were predicted for them. In some cases, a merger can end in total disaster, as in the case of the AOL-Time Warner deal. Nevertheless, there are three viable alternatives when it comes to an implementing an Integrative Growth Strategy. They are:
1. Horizontal. This growth strategy would involve buying a competing business or businesses. Employing such a strategy not only adds to your company's growth, it also eliminates another barrier standing in your way of future growth—namely, a real or potential competitor. McFarland says that many of breakthrough companies such as Paychex, the payroll processing company, and Intuit, the maker of personal and small business tax and accounting software, acquired key competitors over the years as both a shortcut to product development and as a way to increase their share of the market.
2. Backward. A backward integrative growth strategy would involve buying one of your suppliers as a way to better control your supply chain. Doing so could help you to develop new products faster and potentially more cheaply. For instance, Fastenal, a company based in Winona, Minnesota that sells nuts and bolts (among other things), made the decision to acquire several tool and die makers as a way to introduce custom-part manufacturing capabilities to its larger clients.
3. Forward. Acquisitions can also be focused on buying component companies that are part of your distribution chain. For instance, if you were a garment manufacturer like Chicos, which is based in Fort Myers, Florida, you could begin buying up retail stores as a means to pushing your product at the expense of your competition.
Developing a Growth Strategy: Diversification
Another category of growth strategies that was popular in the 1950s and 1960s and is used far less often today is something called diversification where you grow your company by buying another company that is completely unrelated to your business. Massive conglomerates such as General Electric are essentially holding companies for a diverse range of businesses based solely on their financial performance. That's how GE could have a nuclear power division, a railcar manufacturing division and a financial services division all under the letterhead of a single company. This kind of growth strategy tends to be fraught with risk and problems, says McFarland, and is rarely considered viable these days.
Developing a Growth Strategy: How Will You Grow?
Growth strategies are never pursued in a vacuum, and being willing to change course in response to feedback from the market is as important as implementing a strategy in a single-minded way. Too often, companies take a year to develop a strategy and, by the time they're ready to implement it, the market has changed on them, says McFarland. That's why, when putting together a growth strategy, he advises companies to think in just 90 chunks, a process he calls Rapid Enterprise Design. Sometimes the best approach is to take it one rung at a time.
DARREN DAHL is a contributing editor at Inc. Magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, NC.