The Business Expansion model
If you are going to achieve great financial success in your business, you are going to need to set up a growth model for your business.
Therefore if your business is doing well and you decide to grow it further, there is one critical question that needs to be answered. What form of business growth are you aiming to achieve?
This is because there are essentially two main ways of growing a business. You could choose to grow your business vertically or horizontally. The answer entirely depends on your Vision for your business. Where do you want your business to go in the next few years?
Vertical Business growth
This is a fairly straight-forward business growth model. In fact, once you commence trading, the next thing you will want to do is grow your business vertically.
This is where you choose to increase your amount of trade without making any structural changes to your business capacity. In other words, the only thing that changes in your business is your trading volume.
This means that your current business structures can handle any increases in business volume within certain limits. Now I don’t want to sound like a moving text-book here.
Let me say this in another way. Suppose you set up your business selling laptops and can increase your Sales up to a maximum of 5000 units a year with your current systems.
If at the end of the year you have sold 3000 laptops, it means that you can grow your business the following year by a maximum of 2000 laptops, to reach your operational capacity maximum of 5000, without needing to change anything about how your business operates.
Horizontal growth may mean opening a new branch of the business at a different location or simply adding new business services or products for your customers.
It occurs where a business has to make changes to its structures in order to accommodate new business volumes. We will go into this in more detail a little later on.
An example of the horizontal growth model is this; a hair salon that serves women only may choose to expand services to also cater to men. Similarly, a T-shirt selling vendor may decide to also branch into the sunglasses market.
There are a few things you will need to consider if you are going to expand your operations. Horizontal expansion of business operations requires meticulous planning and a lot of detailed considerations to be made.
The first and most important factor that you will need to consider is whether or not you really want to expand your business.
I know this may seem obvious but it is a serious consideration. You will have to make sure you understand what horizontal expansion will mean to your business. Understanding this will help you prepare for the expansion better.
You will need to introduce a lot more resources into the business in order to make the growth possible. You, therefore, need to know if you have the capability to make those resources available otherwise the expansion effort will not succeed.
I have my own favored model of expansion. It may be possible that you have heard it described differently to what I will discuss with you here. Nevertheless, I strongly believe my model is much more objective oriented and a lot easier to implement.
In my expansion model, you need to focus on two fundamental factors, that is, Sales and Capacity.
The objective of your expansion model must be to increase sales for your business. Let me be extremely frank with you, any expansion model that is not based on increasing sales volume is fundamentally flawed.
That expansion drive will ultimately fail. The expansion should always be about selling more. Building new office blocks, buying new cars, or even acquiring additional machinery, if not supported with corresponding sales increases, is not expansion.
Therefore the first thing you need to do is set up the sales objective for the expansion model. By objective, I simply mean the sales target that you need the new expansion to attain.
You must have a real, specific, sales volume that is entirely based on your expansion drive. Let me give you a little example to illustrate this point. Suppose your current business has a proven annual turnover of say $50,000.
If you decide you want to expand your operation, you then need to set a sales objective for that expansion drive. Assuming that you decide you want your new efforts to generate an additional $25,000, then that is your sales objective for that particular expansion model.
|Expansions Sales Objective||$25,000|
|Total Projected turnover||$75,000|
Therefore your projected sales after the expansion would be $75,000.
A little Warning;
Never embark on an expansion effort without first determining what sales you want that new business to generate. Everything else you will do in your expansion drive will depend on your sales objective so it is crucial that you set that up right from the start.
When setting your sales objective there are a few things you may want to consider. First, you will need to decide on the structure of that sales objective.
Basically, you need to outline what that new sales volume will be composed of. Possible sales compositions that you could consider for your expansion could be as follows;
First, you could simply increase the sales volumes of your current product lines being sold to your existing customers.
Secondly, your sales objective could be based on selling your current products to a new market or from a different location.
Thirdly, your sales objective could be composed entirely of new product lines being added to your current sales catalogs, for your existing customers.
Finally, you could set your sales objective based on adding new product lines to your business for new customers or a new market.
Or you could have a combination of one or more of these sales models within your sales objective.
It is extremely crucial that you always determine your target customers for your expansion sales objective. If you do not have a target market for your expanded operation, you will not grow your sales. Consequently, you will not succeed in your expansion endeavors.
Expansion only occurs when you make structural changes to your business capacity to manage increased sales. Therefore it is essential that I make an important clarification here.
Simply increasing your sales is not expansion. It is vertical business growth but certainly cannot be considered expansion. Expansion only occurs when you make structural changes to your operational framework in order to enable you to facilitate and accommodate the additional sales increases.
Therefore, when you expand a business, you are simply saying;
I want to achieve this new sales volume by selling such additional products, to such customers. Therefore what additional operational capacity will I need to be able to get and manage those added sales?
In our expansion model, capacity simply represents the maximum amount of sales that your current operating systems can handle.
Therefore if you are going to increase your sales, you are going to need to make structural adjustments to your business operating systems in order for you to be able to gain those sales and then be able to manage those sales once you gain them.
Depending on the nature of your business, some of the operating structural elements you may want to adjust in order for your expansion drive to be successful are discussed here.
As I said, increased business capacity means different things to different businesses. It may mean that you will need;
Additional cash resources to enable you to purchase additional inventory
Bigger premises to accommodate additional customers comfortably,
More inventory storage space,
Additional staff and managers,
Better qualified individuals,
Your own skills and ability to manage a bigger business,
Additional computer systems,
Additional sales teams,
Adjustment to your advertising and promotion budget,
Increase in Back Office operational systems such as packaging, delivery, returns management as well as customer service management.
All these factors represent the capacity framework. The things you could adjust are not limited to these elements that I mention here. I just mention these to kick-start your mind into thinking along a certain path.