Is it the right time for your company?
is the key to well-timed growth
Small Business Primer (reprinted
By Donald Reimer, CMC
& Ravi Nayar, CMC
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.
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.
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.
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.
should be the result of an overall corporate strategy - not
a reactive move to solve a particular operating problem in 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
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
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.
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.
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.
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.
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
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.
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
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.
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.
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
examples illustrate the importance of carefully considering your
core business and overall corporate strategy before making the decision
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.
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.
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.
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.
must bring a high level of involvement and communication to
the expansion process."
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.
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.
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.
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.
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.
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
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.
YOU EXPAND NOW?
the following questions can help you determine if it’s a good time
for your company to expand:
Have you built a strong management team?
Have you developed a strategic plan, and does the proposed expansion
fit in with your overall strategic goals?
Have you or a consultant conducted a strategic audit or assessment
to evaluate your company’s strengths and weaknesses?
Have you discussed the expansion with your board of directors
and/or an outside consultant, and are they in accord with it?
Do you have the necessary resources - financial and human - to
handle an expansion?
Have you examined the external factors affecting your business
(i.e., industry trends, the economy)?
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?
you can answer yes to the above questions, then expansion is probably
a good move.