Key Things To Consider Before Investing In Business Expansion

Studies have shown that about 80% of all owners and managers of Small and Medium-scale Enterprises (SMEs) desire to expand their business mostly to introduce a new product or service and penetrate a new market. The remaining who do not expand usually do not want to miss out on some of the benefits that smallness affords them such as the ability to manage all business activities, maintain close contact with internal and external stakeholders like employees and customers, sole and quicker decision-making,  to mention a few.

According to Bloomberg, eight out of ten entrepreneurs who start businesses fail within the first 18 months. Also, in Nigeria, about 80% of start-ups do not survive beyond the first five years.

However, only less than 40% of the businesses that desire to expand eventually do so, and not all succeed. Ironically, as more businesses are established, the number of those desiring to expand continues to rise, while the number of those that successfully do so dwindles. This points to a major fact: business expansion is not a leap to be taken lightly.

According to Bloomberg, eight out of ten entrepreneurs who start businesses fail within the first 18 months. Also, in Nigeria, about 80% of start-ups do not survive beyond the first five years. Sadly, some of these businesses cease to exist just after an expansion. Like a new enterprise, a business about to be expanded seeks to harness a new market potential – mostly a new or extended product or service that the market needs or a location where business services are needed which currently are not serviced by competition.

Reaching a new market segment, for instance, will not inevitably result in increased profit...

Whatever the motivation for business expansion, there is a caveat:

Expansion does not automatically translate to profit: Reaching a new market segment, for instance, will not inevitably result in increased profit where the business has more overheads than it can handle or where the time lag between sales and remittances stretches for to long. Hence, it is essential to properly research and carry out the groundwork before taking the plunge.

Business expansion requires diligence: An expansion is a venture to be undertaken with utmost diligence and a deep understanding of the targeted markets, trends, finances, human resource management, emotional implications, and competition, among others. It requires asking and providing sincere answers to deep-seated questions that mostly border on the essence of the expansion. You’re better prepared for the new challenges after the proper research has been done.

Business expansion requires planning: While some aspects of business growth are planned, and can be managed by organisations that initiated it, some business expansions are unplanned, therefore, become the result of necessity and circumstance. An unplanned growth can be the result of a booming economy or a ground-breaking deal that swells profit margins in monumental proportions. By its sudden nature, this second kind of expansion—even though it looks exciting at the initial stages—has the tendency to spiral out of control if not properly managed, for instance if the organisational culture that brought the success is abandoned.

“It is sometimes better to sit back and let others fumble through consolidation.”

In their article titled “Seven Ways to Fail Big”, Paul Carroll and Chunka Mui caution businesses against the rush to consolidate (expand). Citing the example of how Ames Department Stores, a company that pioneered discount retailing in rural areas four years before Wal-Mart started, they advise that, “It is sometimes better to sit back and let others fumble through consolidation.” Before its demise, Ames—in an attempt to stamp out Wal-Mart’s competition—made a series of acquisitions, without looking inwards, carrying out the proper checks, and without building on their area of strength – merchandising. In the process, the firm aggravated its worst weaknesses – back-office systems. Upon its expansion, it became apparent also that Ames lacked a working system to manage inventory and greatly suffered for it.

As at 1987, Ames lost merchandise worth $20 million but was unable to link it to the cause – disgruntled staff who stole from the store.  While still integrating with a recently acquired discount chain that still gave it problems, Ames bought a bigger organisation for which it overpaid. It therefore did not come as a shock when the company filed for bankruptcy twice, in 1990 and 2000, and was eventually liquidated in 2002.

While considering whether or not expand, it cannot be over-emphasised that research is an indispensable factor that can help businesses make the right decisions.

However, a good example of business expansion would be the Nigerian transport business, God is Good Motors. Barely visible a few years ago, competing in the tight cross-country transportation space, the transportation company had few terminals across the country, especially in Lagos, and old beaten bus fleets – comparable with intercity yellow buses that ply routes in Lagos.

But in the last three years the company had seen a transformation, which has seen a surge in customers’ patronage. The company invested in technology to expand its network: an effective booking website that encourages customers to book well ahead in time by offering ticket discounts, and check in. In the process the company invested in modernising their terminals and bus fleets, and expanding to locations in strategic points in Lagos and across the country that are accessible. To deal with the surge, they improved on customer care services. The once moribund company re-invented itself through its adoption of technology, and expansion.

Where your capability can only take you some distance, consider taking on your expansion drive in stages. While you focus on your current market and expanding in stages, pay attention to only where there is increased business and take on the new market when your business is ready.

Business expansion requires research: While considering whether or not expand, it cannot be over-emphasised that research is an indispensable factor that can help businesses make the right decisions. It is compulsory for businesses to have comprehensive information about their business offering, potential marketplace, how best to consolidate, best individuals and organisations to partner with, impact on internal processes, as well as competition. As much as possible, it is crucial not to leave any stone unturned. 

Businesses must ensure they are thorough and sincere in their analysis. Find out about the health of your business – beyond what appears on the surface. The financial capability and readiness of businesses to manage an expansion should also be put into consideration. Where there is no internal competence to conduct feasibility studies, consider introducing external support. Where your business is not profitable or mature enough for an expansion, bid your time by improving your current position.

Where your capability can only take you some distance, consider taking on your expansion drive in stages. While you focus on your current market and expanding in stages, pay attention to only where there is increased business and take on the new market when your business is ready. However, while at it, it is essential to set targets and deadlines, lack of which might mean that set goals would remain in the pipeline and never see the light of day.

Above all, businesses with expansion goals must put in place systems on which all efforts will operate and serve as the bedrock of any business enhancement initiative. They will also serve as channels to check progress and correct mistakes made along the way.