In today’s highly competitive business environment, the decision to expand a closely held business should not be made without considerable thought and investigation. Too often, expansion fails to meet the company’s long-term strategic goals.
Expansion should be the result of an overall corporate strategy - not a reactive move to solve a particular operating problem in the company. Knowing the best strategy to use should be the task of the company’s board of directors and its strategic managers. If your company doesn’t have an active board that participates in the strategic management process, it should.
Outside directors and advisors bring fresh, new ideas to a company and can provide valuable insight about strategic matters. And, of course, the decision to grow the business is strategic in nature.
Many smaller companies aggressively pursue expansion when, in fact, they are not prepared to do so. Often, an entrepreneur becomes "stuck" in the entrepreneurial mode, a company’s first stage of growth, when it is time to move on to the planning mode. The planning mode involves the strategic management process and the creation of a strong management team.
“Expansion should be the result of an overall corporate strategy - not a reactive move to solve a particular operating problem in the company."
The owner/manager who is in the entrepreneurial mode tends to be consumed with the operational issues of the company and pays little attention to the external environment and the changes taking place within the industry. While the owner/manager has no control over the external factors affecting his or her business, they impact the business and, therefore, need to be considered before making the decision to expand.
Another important consideration when contemplating expansion is cost. Expansion often requires a significant commitment of corporate resources-financial and human. In the smaller company, the owner/manager’s personal finances may also be involved, so expansion can impact the family as well.
Because so much is at stake whenever the decision is made to expand, it’s critical to understanding the company’s current position and performance before committing resources to the expansion process. A good understanding of the company can be achieved through a process often referred to as a strategic audit or assessment.
THE STRATEGIC AUDIT
This assessment process can reconfirm or even inform management of the strengths within the company that management may have taken for granted. Assessment also brings out the weaknesses within the organization that management must act upon.
A properly conducted assessment should consider the company’s strengths, weaknesses, opportunities and threats (SWOT). While strengths and weaknesses are internal to an organization, opportunities and threats are external factors that must be considered.
The strategic audit as undertaken by a consultant generally begins with an initial client inter\iew with the owner/manager of the company and his or her key advisors, if appropriate. The interview covers the company’s history. a review of the organization and the products/services offered, sales/marketing systems and financial reports.
Detailed assessment sessions with key management members covering all the functional areas within the company then follow. The functions covered should include management of the organization, personnel, marketing and sales, operations and finance. SWOT determination and recommendations are developed at this point, reviewed with management personnel and finalized.
The assessment process can help vou identify the best strategic alternative for expansion: growth, pause or retrenchment. Should a growth strategy be selected, the company management must then select the type of corporate growth strategy that would be appropriate.
Companies that have expanded without consideration to overall strategic fit have paid a very high price for this decision. So, knowing when to pass on a specific growth opportunity is just as important as forging ahead.
As an example, one of our clients, a food wholesaler, was considering acquiring an unrelated wholesale business. The company was profitable and offered an excellent business opportunity. However, our client had little knowledge of the business and limited resources. After reviewing his company’s strategic plan and mission statement, he decided that a strategic fit did not exist and that the acquisition could do more harm than good.
Another client, a manufacturer, decided that an acquisition was, indeed, a strategic fit. His company had experienced limited growth and profitability due to a narrow market niche.
The business he was interested in had a similar customer base and would complement his core business and increase his growth and profit. He decided that, with the other company’s expanded services and capabilities, he could offer his customers much more as a total supplier.
These examples illustrate the importance of carefully considering your core business and overall corporate strategy before making the decision to expand.
THE BENCHMARKING PROCESS
Benchmarking is another way to gain a better understanding of your company’s position and performance. It is a process that permits you to evaluate your company’s performance in objective terms.
With benchmarking, you compare your company’s key performance indicators with other companies of the same size that make or sell similar products. Principal operating percentages such as net sales, cost of sales, operating profit and profit before taxes are closely examined.
Your key financial ratios are also analyzed. Two key ratios to look at would be the net sales versus total assets and profit before taxes versus total assets. Both measure management effectiveness in employing the company’s resources to drive sales and bottom line profits.
Once you have a better understanding of your current situation, it becomes much easier to plan your strategy. The owner/manager must prepare employees and the organizational infrastructure for growth and effectively communicate the company’s commitment to growth.
“Management must bring a high level of involvement and communication to the expansion process."
Expansion often requires changes within the company’s organizational structure that may be perceived by current employees as a threat. Management therefore must be careful to bring a high level of involvement and communication to the expansion process.
This involvement will assure a stronger level of commitment by all involved in the process because it will create an understanding of the expansion process and the challenges that lie ahead for the organization. Feedback regarding the expansion should be encouraged.
Knowing when to expand is not an easy task. However, it becomes less complicated if management begins the process by developing an overall strategic business plan. The process itself is almost more important than the plan itself because it forces the company and its management to identify those key strategic factors that will have a significant impact on the overall direction of the company and its future.
If you, the owner/manager, have done an effective job of evaluating your current siruation and believe that most of the key indicators in the benchmarking process are positive, then maybe you should consider a growth strategy that takes into consideration the opportunities and threats in the external environment.
Keep in mind that this will require you, the owner/manager to clearly make the transition from the entrepreneurial mode to the planning mode. This transition - giving up total control in favor of delegation - is perhaps the toughest challenge you face as you plan for expansion.
In developing a strategic plan, be sure to seek the advice and counsel of those who are experienced in this area. Take advantage of the expertise of your accountant, attorney, banker, insurance representative and professional consultant. This outside perspective will provide valuable insight.
The owner of a closely held business must recognize that he/she must prioritize those key areas that need attention. Do not adopt a growth strategy and seek to expand when your existing operation needs immediate attention. Because resources in smaller companies are scarce, it's especially important to conduct a careful evaluation before making a decision to expand and take on new challenges.
SHOULD YOU EXPAND NOW?
Answering the following questions can help you determine if it’s a good time for your company to expand:
1. Have you built a strong management team?
2. Have you developed a strategic plan, and does the proposed expansion fit in with your overall strategic goals?
3. Have you or a consultant conducted a strategic audit or assessment to evaluate your company’s strengths and weaknesses?
4. Have you discussed the expansion with your board of directors and/or an outside consultant, and are they in accord with it?
5. Do you have the necessary resources - financial and human - to handle an expansion?
6. Have you examined the external factors affecting your business (i.e., industry trends, the economy)?
7. Have you compared your company’s performance with other companies of similar size through the benchmarking process, and is your company performing well by comparison?
If you can answer yes to the above questions, then expansion is probably a good move. •