Along with the rapid development of the economy, many business companies have started to emerge. One of the strategies for business companies to expand their reach and increase profits is to expand their business.
Then, what is a business expansion like? Let’s take a look at the complete discussion on business expansion and some of its important components below.
Explanation of business expansion
Business expansion is the stage when the business reaches a growth point and looks for additional options to generate more profit.
Various forms of business expansion include opening in other locations, adding employees, increasing sales, increasing marketing, adding franchisees, forming alliances, offering new products or services, entering new markets, merging or acquiring other businesses, expanding globally, and expanding via the internet.
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Two Important Aspects in Business Expansion
In general, business expansion actually has two aspects. The first aspect is business expansion which is carefully planned and managed at the initiative of the business owner.
Then, the next aspect is one that can be far more problematic, as it deals with sudden and unintentional business expansions that just happen for a variety of reasons, including economic growth.
1. Planned business expansion
Business expansion tends to have a different vision of business, where small business expansion itself is not a goal but a necessary starting point.
Other companies plan to expand reach because the business logic dictates that a larger size is desirable to reach the company’s full potential.
Broadly speaking, the company will carry out its planned expansion by:
- Selling more of the same
- Extending the reach for products or services
- Selling something very different
- Changing the underlying business concept
Every business strategy implies additional alternatives some of which may be quite risky. For example, a company that wants to expand can carry out several specific strategies:
- Regional expansion
- Improvement of production facilities
- Improvement of the distribution system, and much more.
In essence, a planned business expansion, especially one based on a more complex strategy, is essentially the same as starting a business from scratch with the exception that running a business gives the owner a minimum base to start with.
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Managing Unexpected Business Expansion
Along with many positive reinforcements, unexpected business growth can also bring risks. Unless growth is kept under control, it can lead to reckless decisions and temporary relaxations of the discipline that make businesses successful in their early stages.
Sudden growth can also bring its own set of challenges. This can happen to a business that is not ready to respond to high demand and, as a result, can fall behind and experience contraction. The challenges of business growth that have soared drastically are mostly financial. Capacity may have to be expanded and money has to be spent buying inventory well above normal levels.
Capital for either purpose can be difficult to find. Therefore, most business failures due to unexpected growth are triggered by cash flow statement problems . The business will have large sales and high profits, but cash on hand may be insufficient due to the time lag between sales and cash withdrawals from customers.
Business Expansion Methods
Small businesses can undertake business expansion by pursuing a number of strategies. The most common strategy used by small companies to increase their business is incremental.
This business expansion method is carried out by increasing the inventory of products or services provided without making major changes to facilities or other operational components.
Broadly speaking, the stages of expansion for a small business include:
- Growth through the acquisition of other existing businesses (almost always of a smaller size)
- Offer franchise ownership to other entrepreneurs
- Intellectual property licenses to third parties
- Validation of business agreements
- Pursuing new marketing routes (such as catalogs)
- Join industry cooperatives to achieve savings in certain areas of general operations, including advertising and purchasing public stock offerings
- Employee stock ownership plan
The business expansion process can be started with a thorough assessment of the strengths and weaknesses of the business being run by the company.
With these skills, the company then identifies the main markets or types of future market opportunities that the company is likely to capture.
This of course raises various questions about what are the best ways to develop structures and processes that will further enhance the company’s business performance.
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Adopting a Business Expansion Strategy for an Organization
Business expansion strategy is generally adopted by an organization when trying to achieve high growth compared to its past achievements.
When a company aims to grow significantly by expanding the scope of one of its business operations using certain strategies such as price adjustments, market surveys, and increased promotions.
This strategy is carried out so that the company can survive, get higher profits, increase prestige, economies of scale, larger market share, social benefits, and so on.
The following are business strategies that can be carried out by the company, including:
1. Business expansion through Concentration
Business expansion through concentration is the first level form of a grand business expansion strategy that involves investing resources in product lines, serving identified market needs with the help of proven and tested technologies.
In simple terms, a strategy of business expansion through concentration followed when an organization aligns its resources into one or more of its businesses in the context of customer needs, functionalities and technological alternatives, both individually and collectively.
2. Business expansion through concentration
- Market penetration strategy: The company focuses intensely on existing markets with its current products.
- Type of concentration Market Development: Attracting new customers for existing products.
- Type of Product Development Concentration: Introducing new products in existing markets.
3. Business expansion through diversification
Business expansion through Diversification is followed when an organization aims to change the definition of business, i.e. develop new products or expand into new markets, either individually or jointly. A company adopts business expansion through a diversification strategy, to prepare itself to overcome an economic downturn.
Generally, this diversification aims to offset the losses of one business by increasing profits on the other. In general, diversification actions can be divided into the following:
- Concentric Diversification: When an organization acquires or develops a new product or service that is closely related to the organization’s existing products and services it is referred to as concentric diversification.
- Conglomerate Diversification: This type of diversification is carried out when a company expands its reach into different areas, whether related or not related to its core business. Simply put, conglomerate diversification is when a company develops products and services that may or may not be related to the suite of products and services it has been marketed for.
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4. Business expansion through integration
Business expansion through Integration means combining one or more current business operations without changes in customer groups. This combination can be carried out through interrelated activities carried out by the company starting from the process of procuring raw materials to the marketing and distribution of finished goods.
Thus, the company can move up or down in the overall operation to focus more comprehensively on a particular component. Business expansion through integration broadens the scope of business and is thus considered a grand business expansion strategy.
There are two ways of integration that can be done in business expansion, namely:
- Vertical integration: Vertical integration is of two types, namely forward and backward vertical integration. When an organization moves closer to the final customer, namely facilitating the sale of finished goods, it is said to have engaged in forward integration.
- Horizontal Integration A company is said to have carried out horizontal integration when it takes over the same type of product with similar levels of marketing and production.
5. Business expansion through cooperation
Expansion through Cooperation is a strategy followed when an organization enters into joint agreements with competitors to carry out business operations and compete with each other at the same time, with the aim of expanding market potential.
Business expansion through cooperation can be done by following one of the strategies described below:
1. Merger
Merger is a combination of two or more companies in which one acquires the assets and liabilities of the other in exchange for cash or stock, or both organizations are dissolved, and a new organization is created.
In this case, if the company takes an acquisition, it will be said that the company made an acquisition. Meanwhile, if the two companies are put together, then this is known as a merger.
2. Take charge
In a takeover strategy, a company acquires another company in various ways. Therefore, the company making the automatic acquisition has responsibility for all the operations of the company being acquired. The takeover process can go well or with conflict.
The first thing, namely the takeover process that went well, the two companies agreed to carry out the takeover and felt that this would benefit both parties.
Conversely, in the case of a takeover by conflict, a company will try to take over the operations of another company by force whether known or unknown to the target company.
3. Joint Venture
Joint venture is a form of cooperation in which two companies agree to join forces and carry out business operations together.
Usually, joint ventures are formed to take advantage of the advantages of both companies. However, generally the joint venture is only temporary until the project is completed.
4. Strategic Alliance
Strategic alliance is a form of strategy in which several companies unite or join forces to carry out a series of business operations.
However, each company will carry out its functions independently and pursue individual goals. Usually this strategic alliance is carried out to take advantage of the technological advantages of the companies that are invited to work together.
5. Internationalization
Internationalization is a strategy carried out by companies to expand beyond the national market. Internationalization strategy is quite important, especially when a company has explored all the potential to expand in an area.
In this case the company must pay attention to several benchmarks such as price, quality, and timely distribution of goods and services.
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Tips for Running a Business Expansion
1. Set clear goals
The first step to undertaking a business expansion is identifying your company’s goals. This will give you a clear perspective and direction in the short and long term on how to run your business in a sustainable manner.
Setting your goals will help you identify areas of potential expansion and whether you can achieve them within a certain time frame.
2. Do Research
Once you’ve identified your goals, it’s time to do your due diligence and do market research. This can help you identify new opportunities and recognize bottlenecks before jumping into expansion.
Target market research will help you reduce risk, maximize profitability and learn if there is a high demand for your product or service in the market.
3. Choose Your Business Partner Carefully
When you expand your business, you will realize that new markets tend to be difficult to conquer. Some of the components in market demand will be different, so one of the best ways to adapt successfully is to partner up.
In many industries appropriate experience is required, so finding the right partner requires a lot of research as each country has different cultures, labor requirements and tax implications.
4. Reinvest
Reinvestment is essential if you want to increase your income and finance your expansion into new markets. Also, if your company is in its early stages of growth, you are more likely to reinvest and increase profits.
You can reinvest in new locations, expand product offerings, or increase the number of revenue streams. In this way, you can generate more profits and protect your business from the risk of having a single source of income.
5. Look for Funding Sources
When growing a business, it is very important to have a solid financial plan. This means securing adequate sources of financing to cover growth costs. There are many ways to finance business expansion, and the most appropriate options will vary depending on the size and stage of the company.
Some common sources of financing for businesses include:
- Bank loans or lines of credit
- Venture capital or private equity
- Angel investors
- Fundraising
Whichever option you choose, be sure to do some research and compare interest rates, fees, and other terms and conditions. You also have to make sure you get a good score on the credit scoring system used by the finance company.
This increases your chances of getting favorable interest rates. And always make sure to work with a financial consultant and accounting software to ensure you make the best decisions for your business.
6. Always have a backup plan
Companies will usually turn around quickly, although there is a risk that when things don’t turn out as expected. As businesses grow and become more complex, these quick adjustments become more difficult.
It is therefore important to have a plan for emergencies or contingencies so you can deal with the inevitable.
7. Take calculated risks
Small business expansion is not without risk. In order to make the right decision, sometimes it is necessary to get out of your comfort zone. In this case, you shouldn’t rely solely on luck.
By focusing on the end goal and proactively identifying potential obstacles, you’ll set yourself up for success, even when your next step feels like a risk.