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How to expand your business to 5 times its size in 5 years

25 June 2014   (0 Comments)
Posted by: Author: Greg Fischer
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Author: Greg Fischer (Entrepreneur Magazine)

At the beginning of a new year many business people will take time to anticipate what lies ahead. The start of a new year is a great opportunity to re-establish exactly where you wish to go with your venture. Any business that is still operational at the beginning of 2010 must be doing something right because in these tough economic times many have fallen by the wayside.

Assuming you are still in business, this may be a great time for you to set some exciting growth targets and map out the next phases of development that will enable you to achieve those targets. I’m going to map out a plan for an existing business owner to grow their business to five times its existing size in five years (5×5). I’m talking about people with an existing business of between R2 million and R20 million in revenue who wish to grow to between R10 million and R100 million in revenue in five years.

To understand the principles and practices for growing a business rapidly, I have examined multiple different ventures from different industries in the US and South Africa and unpacked what they did over a period of time to expand their operation and grow both revenues and profits.

The plan outlined here has three distinct phases. In phase one, the focus is on clearly defining and refining who you are and what you do. In phase two, the focus is on expanding the footprint of the business.

In phase three, the focus is on maximising profits and cash flow from the business base. Although there will always be individual businesses that may do things very differently from what I outline here, the series of growth steps described have worked effectively across a broad range of businesses in multiple industries; they should therefore serve as a useful roadmap to empower you to grow your business over the next five years.

Month 1 – Month 18

Define And Refine Who You Are & What You Do

The first phase is about creating a solid platform for growth. Growing a business without a strong foundation is like trying to build a mansion in a marshland. Without a solid foundation the house will become more and more unstable as you attempt to make it larger and larger. The first phase for business growth is therefore about focusing internally: getting the people, the offering and the processes right before replicating and expanding them into new markets. 

1. Build the right management team

People build businesses. Without good people in the management team the best business offering is unlikely to succeed and with good people in the management team even an ordinary business offering can be moulded into something of value. Jim Collins, in his book Good to Great, recognised that companies that made the jump from mediocrity to greatness first "got the right people on the bus” and then allowed those people to "figure out where the bus will go”. Therefore, if you wish to embark on an ambitious growth plan your first order of business should be to address the question: 

Do I have the right management team to grow my business to five times its current size in five years? Are there any serious weaknesses in the quality and competence of your management team? Priority number one is to get the best possible management team in place.

2. Establish goals and checkpoints

People are inspired by ambitious goals. There is a very solid stream of academic literature that shows emphatically that goals influence behaviour. If you want to get your strong management team to perform at their best, work with them to set some inspiring targets for the company. About three years back I took a bunch of MBA students to visit Raizcorp, a private business incubator in Johannesburg.As the founder, Allon Raiz, stood up to speak, he announced with conviction that Raizcorp would have 100 businesses in its incubator network within three years. At the time they only had 16businesses in the system and it appeared to be challenging just to look after those.

I was skeptical that they could scale as he described. A few days back, I met with Allon and he told me they now have 96 businesses in the Raizcorp network. I have no doubt that he would never have grown such a "high touch” business so quickly without the growth targets he had in place. To grow your business, you need to have a clear picture of where you want to go and what it will take to get there.

Priority number two is to develop a clear ambitious goal for the business and define the checkpoints that will keep you on track to achieving that goal.

3. Define and refine the value proposition

For a business to be successful it needs to provide value to the customer. The value proposition of a business is the sum total of benefits which a vendor promises a customer will receive in return for the customer’s associated payment. If the value of the benefits you offer does not significantly exceed the cost to the customer, you are never going to create a sustainable business. The value proposition of your business should be defined and refined from the customer’s perspective.

You should be absolutely clear on what you are selling to the customer – Avis sells service and convenience, Fedex sells peace of mind and Nike sells an athletic image. What do you sell? Is it very valuable specific groups of potential customers? To create a solid platform for growth your value proposition needs to be tested. You should survey customers to ensure that your product or service provides the value you aim to deliver. Priority number three is to define and refine your value proposition

You should be absolutely clear on what you are selling to the customer – Avis sells service and convenience, Fedex sells peace of mind and Nike sells an athletic image. What do you sell? Is it very valuable specific groups of potential customers? To create a solid platform for growth your value proposition needs to be tested. You should survey customers to ensure that your product or service provides the value you aim to deliver.Priority number three is to define and refine your value proposition.

4. Bake the business model

Once you are crystal clear on what you sell (your value proposition), you need to figure out how you will make money from it. A business model describes your sources of revenue and the costs associated with generating that revenue. The first step in understanding your business model is to define your unit of transaction.

The unit of transaction for an estate agent is the sale of a house; for a consultant it is an hour of consulting time; and for a cell-phone company it’s a minute of airtime. Each unit of transaction will generate income and incur cost. You need to determine and test what you can earn and what it will cost you to deliver on each unit of transaction.

The mistake many of the early dotcom businesses made was to sell a service at a price that was less than what it cost them to deliver that service. For example, when selling groceries online, the picking and delivery costs proved to be more than the premium one could charge for the service. As the online grocery retailers therefore expanded their services all across America, so they lost more and more money because each transaction created a drain on the bottom line. When Scott Griffiths was brought in to radically expand Zipcar, the car sharing service in the US, he applied this philosophy: "Get the box right first, then build more boxes”.

He first reduced the size of the operation from three cities to one, and focused on earning profits on each hour of car use in the Boston market before expanding the operation into 14 other American cities. Zipcar went from a $3 million operation in 2003 when Griffith took over to a $100 million operation today. He was able to embark on this ambitious growth trajectory because he was confident he could make profit in each new market Zipcar went into. Priority number four is to define, test and refine your business model.

5. Solidify systems and processes

Business processes are a critical building block for growth. One of the most extreme examples of this is MacDonald’s. The reason that the fast-food giant has been able to expand into119 countries on six continents is that its operations manual is very specific in describing how a MacDonald’s burger gets made (no matter where in the world you are).

Effective business processes enable the replication of a value proposition and customer experience in multiple locations. Therefore, to create a solid platform for business growth it is important to design and implement simple, effective operational processes and to capture those processes in a manual so that others can implement the same ones in a different location.

In the modern economy, many processes are dependent on technology. It is therefore important to consider whether technology could make your processes more efficient or more scalable. Priority number five is to make your business processes slick, efficient and simple on a small scale before you roll them out on a large scale.

Month 19 – Month 42

Expand Your Footprint

In phase two, the business focus shifts from internal to external. Phase one is about creating a winning business formula; in phase two the key question becomes "where else can we replicate our winning formula?” Phase two is about radically increasing the volume of transactions by moving into new territories or focusing on new customer segments. The practices outlined below are not in any particular order – all four should be seen as priorities for the duration of phase two.

6. Replicate the model

Seek out opportunities to replicate the value proposition, business model and business processes developed in phase one.

Look for new locations or regions in which you can operate and look for new customer segments that you can serve. Your priority at this stage must be (1) to identify new markets and (2) to develop a process to quickly replicate your model in the new markets you identify.

7. Empower individuals

Extending the idea that businesses are built by people (see priority one), it is critical in phase two to put people you trust in new locations and then to give them the space and freedom to excel. Managing people in this phase of growth is a paradox in that you want to control what they do to ensure that they effectively replicate the winning formula, but you also want to allow them the freedom to make decisions and respond to needs in the area of the market in which they are operating. In the Zipcar growth story the big breakthrough came when Griffiths put city managers in charge of their own profit and loss, and encouraged them to approach their cities as they saw fit. "We’ve been trying to create little entrepreneurs in each of the cities,” he says.

8. Market, market, market

During this phase of growth one of the key constraints is likely to be the market. Creating awareness of and desire for your product or service through promotion and advertising can help lift this constraint. 

Many entrepreneurs promote their product or service early in the development of a business before they are ready to deliver on the demand they create and as a result they end up disappointing customers. Save your advertising spend for phase two when you have the value proposition, business model and processes right.

Only then can you effectively deliver on the increased demand you create and ensure good return on your marketing investment.

9. Go where others won’t/don’t

To generate significant growth you need to be prepared to move into unexplored territory. Cellphone networks MTN and Vodacom were able to grow at a much higher rate than their counterparts in other countries because they figured out how to sell to those that did not have a credit history using "pay as you go”.Kulula.com focused on capturing customers that would not otherwise have flown. It was not overly concerned with stealing SAA customers but instead focused on those that would otherwise have chosen to use a car to reach their destination. This enabled Kulula.com to tap into a much larger customer base in growing its airline. Business growth is about having the guts and guile to go where others won’t.

10. Leverage learning across operations

When you have spread your operations across multiple markets, pockets of excellence are likely to emerge. Effective leaders are able to recognise brilliance and find ways to spread these valuable insights and practices across multiple locations.

Continuous learning and collaboration characterise the highly successful growth path of South African Breweries. The culture of the organisation dictates that it learns from what others in the company do well and, as a result, SAB has been on an ongoing path of continuous improvement for 25 years, reducing costs, increasing efficiencies and better serving its chosen markets.All business owners can learn from SAB’s willingness to learn and share across the organisation. 

Month 43 – Month 60

Maximise Profits & Cash Flows

Phase three of business growth is about extracting the benefit from your discipline and hard work in phases one and two. Once you have a winning business formula and you have replicated it in multiple markets for the relevant customer base, you need to ensure that you maximise profits in all your operations. This requires a focus on efficiency, collaboration and intelligent decision-making as you move forward. 

11. Focus on efficiency

Once you have an expanded business footprint, it can be very easy to let costs spiral out of control. The typical trap is to add layers of managers to the organisational chart and to increase head office costs in an effort to better manage the extended operation you have created. Those organisations that successfully maintain profitable growth appear to fight hard against this temptation. They guard against extra costs and keep fighting to maximise the efficiencies of existing operations, seeking always to bring costs down and stretch profit margins.

12. Stick to your guns, guard against arrogance and exuberance

Because of the success of the existing operation it can be very tempting to take on more than you can handle. At this stage of the growth cycle, many business owners risk losing sight of what they originally set out to do because they think they can do more.

In spite of not having achieved their original growth goal, they set new overly ambitious targets to make their empire even bigger and better. But in an effort to expand beyond what is reasonable they kill the goose that is laying the golden eggs.

They are enticed into making unrelated acquisitions, moving into unrelated product categories, or increasing the cost base of the company to a level that is unsustainable for the existing operation. 

The key to successful growth is having the discipline to see it through and to guard against the pride and enthusiasm that comes with success.



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