Business Expansion is a stage where the business reaches the point for growth and seeks out for additional options to generate more profit. Different forms of business expansion include opening in another location, adding sales employees, increased marketing, adding franchisees, forming an alliance, offering new products or services, entering new markets, merging with or acquiring another business, expanding globally and expanding through the internet.
Aspects of Business Expansion
The Two Aspects of Business Expansion
Business expansion thus has two aspects. One is planned and carefully managed expansion at the business owner's initiative. The other, which can be much more problematical, is sudden and involuntary expansion that simply happens for various reasons—among them economic expansion or simply because the business caught the market's eye with a novel product or service. Careful management of such good fortune may be even more vital than planned growth.
- Planned Expansion: Those who plan expansion tend to have a different vision of the business, one in which "smallness" is not in itself a goal but a necessary starting point. Others plan to expand because the very logic of the business indicates that a larger size is desirable to achieve the full potential of the enterprise. Every situation is unique, of course, but in broad strokes the methods will largely involve one or the other of the following categories of actions:
- sell more of the same
- expand the range of products or services sold
- sell something very different, and/or
- change the underlying business concept
Each strategy, of course, implies additional alternatives some of which may be quite risky. By way of an example, the first choice, to sell more of the same, may involve one or a combination of the following:
- regional expansion of outlets
- significant expansion of production facilities
- vertical integration whereby more of the product is made in-house
- revamping the distribution system, and more.
In essence, planned expansion—particularly one based on more complex strategies—is essentially the same as starting a business from scratch with the exception that a running business provides the owner with a minimum base from which to start
- Managing Unexpected Growth: Growth must be managed. Along with much positive reinforcement, unexpected growth also brings danger: it is exuberance. Unless kept in check, it may lead to careless decisions and a temporary relaxation of the very disciplines that made the business successful in the first place. For this reason, management experts counsel caution when sales suddenly surge. Furthermore, unexpected growth is a challenge that may be unavoidable: the business choosing deliberately not to respond to strong demand may, as a consequence, be left behind and find itself contracting. The chief challenge presented by surging growth tends to be financial. Capacity may have to be expanded and money must be spent to purchase inventory way above normal levels. Capital for either purpose may be difficult to find—or expensive to borrow. Most business failures due to unexpected growth are triggered by cash-flow problems. The business will have great sales and high profits, but cash in hand may be inadequate because of the time lag between sales and cash collections from the customer. In a rapid growth situation cash receipts tend to lag sales and deliveries in any case. If growth continues to expand, the business may find itself unable to pay bills even though it has more than adequate resources coming in—later. This can lead to bankruptcies.
Methods of Business Expansion
Methods of Business Growth
Small businesses can expand their operations by pursuing any number of avenues. The most commonplace methods by which small companies increase their business are incremental in character, i.e., increasing product inventory or services rendered without making wholesale changes to facilities or other operational components. But usually, after some period of time, businesses that have the capacity and desire to grow will find that other options should be studied. Common routes of small business expansion include:
- Growth through acquisition of another existing business (almost always smaller in size)
- Offering franchise ownership to other entrepreneurs
- Licensing of intellectual property to third parties
- Establishment of business agreements with distributorships and/or dealerships
- Pursuing new marketing routes (such as catalogs)
- Joining industry cooperatives to achieve savings in certain common areas of operation, including advertising and purchasing public stock offerings
- Employee stock ownership plans
Of course, none of the above options should be pursued until the business's ownership has laid the necessary groundwork. "The growth process begins with an honest assessment of strengths and weaknesses," wrote Erick Koshner in Human Resource Planning. "Given those skills, the organization then identifies the key markets or types of future market opportunities the company is likely to capture. This, of course, raises another set of issues about how to best develop the structures and processes that will further enhance the organization's core capabilities. Once these structures and processes are identified and the long range planning completed, the business has a view of where it will be in three to five years and agreement on key strategies for building future business."
Business Expansion Strategy
Adopting an Expansion Strategy for An Organization
The Expansion Strategy is adopted by an organization when it attempts to achieve a high growth as compared to its past achievements. In other words, when a firm aims to grow considerably by broadening the scope of one of its business operations in the perspective of customer groups, customer functions and technology alternatives, either individually or jointly, then it follows the Expansion Strategy. The reasons for the expansion could be survival, higher profits, increased prestige, economies of scale, larger market share, social benefits, etc. The expansion strategy is adopted by those firms who have managers with a high degree of achievement and recognition. Their aim is to grow, irrespective of the risk and the hurdles coming in the way. The firm can follow either of the five expansion strategies to accomplish its objectives:
source: Business Jargons
- Expansion through Concentration: is the first level form of Expansion Grand strategy that involves the investment of resources in the product line, catering to the needs of the identified market with the help of proven and tested technology. Simply, the strategy followed when an organization coincides its resources into one or more of its businesses in the context of customer needs, functions and technology alternatives, either individually or collectively, is called as expansion through concentration. The organization may follow any of the ways to practice Expansion through concentration:
- Market penetration strategy: The firm focusing intensely on the existing market with its present product.
- Market Development type of concentration: Attracting new customers for the existing product.
- Product Development type of Concentration: Introducing new products in the existing market.
- Expansion through Diversification: The Expansion through Diversification is followed when an organization aims at changing the business definition, i.e. either developing a new product or expanding into a new market, either individually or jointly. A firm adopts the expansion through diversification strategy, to prepare itself to overcome the economic downturns. Generally, the diversification is made to set off the losses of one business with the profits of the other; that may have got affected due to the adverse market conditions. There are mainly two types of diversification strategies undertaken by the organization:
- Concentric Diversification: When an organization acquires or develops a new product or service that are closely related to the organization’s existing range of products and services is called as a concentric diversification.
- Conglomerate Diversification: When an organization expands itself into different areas, whether related or unrelated to its core business is called as a conglomerate diversification. Simply, conglomerate diversification is when the firm acquires or develops the product and services that may or may not be related to the existing range of product and services.
- Expansion through Integration: The Expansion through Integration means combining one or more present operation of the business with no change in the customer groups. This combination can be done through a value chain. The value chain comprises of interlinked activities performed by an organization right from the procurement of raw materials to the marketing of finished goods. Thus, a firm may move up or down the value chain to focus more comprehensively on the needs of the existing customers. The expansion through integration widens the scope of the business and thus considered as the grand expansion strategy. There are two ways of integration:
- Vertical integration: The vertical integration is of two types: forward and backward. When an organization moves close to the ultimate customers, i.e. facilitate the sale of the finished goods is said to have made a forward integration.
- Horizontal Integration: A firm is said to have made a horizontal integration when it takes over the same kind of product with similar marketing and production levels.
- Expansion through Cooperation: The Expansion through Cooperation is a strategy followed when an organization enters into a mutual agreement with the competitor to carry out the business operations and compete with one another at the same time, with the objective to expand the market potential. The expansion through cooperation can be done by following any of the strategies as explained below:
- Merger: The merger is the combination of two or more firms wherein one acquires the assets and liabilities of the other in the exchange of cash or shares, or both the organizations get dissolved, and a new organization came into the existence. The firm that acquires another is said to have made an acquisition, whereas, for the other firm that gets acquired, it is a merger.
- Takeover: Takeover strategy is the other method of expansion through cooperation. In this, one firm acquires the other in such a way, that it becomes responsible for all the acquired firm’s operations. The takeovers can either be friendly or hostile. In the former, both the companies agree for a takeover and feels it is beneficial for both. However, in the case of a hostile takeover, a firm try to take on the operations of the other firm forcefully either known or unknown to the target firm.
- Joint Venture: Under the joint venture, both the firms agree to combine and carry out the business operations jointly. The joint venture is generally done, to capitalize the strengths of both the firms. The joint ventures are usually temporary; that lasts till the particular task is accomplished.
- Strategic Alliance: Under this strategy of expansion through cooperation, the firms unite or combine to perform a set of business operations, but function independently and pursue the individualized goals. Generally, the strategic alliance is formed to capitalize on the expertise in technology or manpower of either of the firm.
- Expansion through Internationalization: The Expansion through Internationalization is the strategy followed by an organization when it aims to expand beyond the national market. The need for the Expansion through Internationalization arises when an organization has explored all the potential to expand domestically and look for the expansion opportunities beyond the national boundaries. But however, going global is not an easy task, the organization has to comply with the stringent benchmarks of price, quality and timely delivery of goods and services, that may vary from country to country. The expansion through internationalization could be done by adopting either of the following strategies:
- Multidomestic Strategy: Under this strategy, the multi-domestic firms offer the customized products and services that match the local conditions operating in the foreign markets.
- The global firms rely on low-cost structure and offer those products and services to the selected foreign markets in which they have the expertise. Thus, a standardized product or service is offered to the selected countries around the world.
- Transnational Strategy: Under this strategy, the firms adopt the combined approach of multi-domestic and global strategy. The firms rely on both the low-cost structure and the local responsiveness i.e. according to the local conditions. Thus, a firm offers its standardized products and services and at the same time makes sure that it is in line with the local conditions prevailing in the country, where it is operating.