Expanding an Existing Business
As the anonymous philosopher once observed, “You’re either growing or your dying”. But growing smoothly and well is a business art form. All growth must come from a firm’s capacity to grow. This capacity can be viewed as talent and money. Over time, healthy firms gain critical knowledge and skills. Whether these are in the heads of a lone individual entrepreneur or the collective knowledge of a mega-corporation, matters not. What matters is the rate at which these skills can be applied to delivering products or services, and equally as important the rate at which these skills can be effectively transferred to others. New methods and new technology can improve the speed of meeting customer needs, and are great places to start if you are tying to increase growth capacity. Still, at some time you will probably reach a point where you have to hire more people. Now we enter the most difficult arena.
Hiring new people raises a host of issues. If we hire experienced people to deal with our customers, how will we be able to sustain our corporate philosophy (attitudes, beliefs, and convictions)? If we hire inexperienced folks, how long and hard will it be to impart “our way” and make it stick. And there are practical limits on growth depending on the size of your business. Obviously, if you are tiny and have only one customer, adding a second customer gives you a tremendous growth rate. But once a company reaches $500 million or so the maximum sustainable growth rate is something less than 25 percent. Those who try to push that number invariably fall, sometimes with disastrous consequences. Why? If you try to add more than 25 percent new people to your company in a given year you will chew up too much time training and working with the inexperienced folks or you will have hired experienced folks who will take your customer relationships in places you do not want to go. If you are in a service business this 25 percent successful growth rate limitation can apply to businesses as small as 50 customer facing employees.
Micro cap companies face other growth issues. Hiring the first employee brings payroll taxes, workers compensation, and certain labor laws in to play. Pass the 25 employee threshold, and you are going to come under Title VII of the civil rights act, which will certainly impact your employment practices (how you hire, fire, promote, and reward your employees). Then get your first contract with the Federal government and you are subject to many additional reporting requirements. All of this adds a necessary but invisible drag on your ability to grow your business.
Then geography places certain limitations on growth. Open a second location and you have to have two managers since you can’t personally be in two places at once. Set up or buy an operation in another city and you are looking at slightly different codes and regulations to learn. Move into a new state and you’ve got a whole new set of taxes and laws to deal with. Open a branch in a foreign country and you can throw in cultural issues, as well as new laws and customs. Some find it easier to simply buy related businesses in other markets, but buying a business has its own unique set of activities and may prove equally as tough to deal with.
Most of the above assumes that the company is expanding its existing business product or service sales. But some to choose to expand by moving into other areas along their supply chain. For example, if you own a repair operation you might choose to open a parts department, or maybe sell the new equipment as well. Others might feel that they can pick up and unrelated business, particularly if the price is right, merge back office functions and make both businesses more profitable. Sometimes the best growth path is right under your nose and you’ve been ignoring it. One of my customers relates the following story: For months she was getting calls asking if she sold a product line that was in a related business. For months she cheerfully sent these customers up the street to another firm who handled the line. Then it dawned on her that she was giving business away. So she took on a supply of product and launched a second successful business. So this brings us to the most important growth principle of all: listen to your customers and they will show you the direction you need to grow.
As the anonymous philosopher once observed, “You’re either growing or your dying”. But growing smoothly and well is a business art form. All growth must come from a firm’s capacity to grow. This capacity can be viewed as talent and money. Over time, healthy firms gain critical knowledge and skills. Whether these are in the heads of a lone individual entrepreneur or the collective knowledge of a mega-corporation, matters not. What matters is the rate at which these skills can be applied to delivering products or services, and equally as important the rate at which these skills can be effectively transferred to others. New methods and new technology can improve the speed of meeting customer needs, and are great places to start if you are tying to increase growth capacity. Still, at some time you will probably reach a point where you have to hire more people. Now we enter the most difficult arena.
Hiring new people raises a host of issues. If we hire experienced people to deal with our customers, how will we be able to sustain our corporate philosophy (attitudes, beliefs, and convictions)? If we hire inexperienced folks, how long and hard will it be to impart “our way” and make it stick. And there are practical limits on growth depending on the size of your business. Obviously, if you are tiny and have only one customer, adding a second customer gives you a tremendous growth rate. But once a company reaches $500 million or so the maximum sustainable growth rate is something less than 25 percent. Those who try to push that number invariably fall, sometimes with disastrous consequences. Why? If you try to add more than 25 percent new people to your company in a given year you will chew up too much time training and working with the inexperienced folks or you will have hired experienced folks who will take your customer relationships in places you do not want to go. If you are in a service business this 25 percent successful growth rate limitation can apply to businesses as small as 50 customer facing employees.
Micro cap companies face other growth issues. Hiring the first employee brings payroll taxes, workers compensation, and certain labor laws in to play. Pass the 25 employee threshold, and you are going to come under Title VII of the civil rights act, which will certainly impact your employment practices (how you hire, fire, promote, and reward your employees). Then get your first contract with the Federal government and you are subject to many additional reporting requirements. All of this adds a necessary but invisible drag on your ability to grow your business.
Then geography places certain limitations on growth. Open a second location and you have to have two managers since you can’t personally be in two places at once. Set up or buy an operation in another city and you are looking at slightly different codes and regulations to learn. Move into a new state and you’ve got a whole new set of taxes and laws to deal with. Open a branch in a foreign country and you can throw in cultural issues, as well as new laws and customs. Some find it easier to simply buy related businesses in other markets, but buying a business has its own unique set of activities and may prove equally as tough to deal with.
Most of the above assumes that the company is expanding its existing business product or service sales. But some to choose to expand by moving into other areas along their supply chain. For example, if you own a repair operation you might choose to open a parts department, or maybe sell the new equipment as well. Others might feel that they can pick up and unrelated business, particularly if the price is right, merge back office functions and make both businesses more profitable. Sometimes the best growth path is right under your nose and you’ve been ignoring it. One of my customers relates the following story: For months she was getting calls asking if she sold a product line that was in a related business. For months she cheerfully sent these customers up the street to another firm who handled the line. Then it dawned on her that she was giving business away. So she took on a supply of product and launched a second successful business. So this brings us to the most important growth principle of all: listen to your customers and they will show you the direction you need to grow.
Last modified: შაბათი, 5 იანვარი 2013, 10:52 AM