This article is brought to you by Mercantile Bank
The South African economy has taken a few hard knocks in recent months and the business environment is more competitive than ever. Many entrepreneurs have to change the way they do business to stay afloat – one of the tactics is to consider possible growth strategies. But how do business owners know if it is the right time to expand and how do they go about it?
In a low economic growth environment, business growth can really only be facilitated by gaining market share, expanding your market by entering new geographic areas, or diversifying and managing efficiencies. There are various growth strategies that entrepreneurs can consider, depending on their appetite for risk and the maturity of their business.
What some business owners might not realise is that growth doesn’t only depend on an entrepreneur’s ability to access finance. Many small and medium enterprises (SMEs) think business expansion means that they have to apply for a loan. However, a loan for the wrong purpose and at the wrong time can in fact add financial strain to a business. That’s why it is important to know that this is but one avenue to follow.
Ways to grow a business
The first step is to assess a company critically before deciding on a growth strategy. Business owners have to be clear about what he/she wants to achieve.
Ensure that you have a loyal workforce that will buy into your strategy and support you on your growth journey. This will enable you to continue delivering a superior product and offer good service consistently. Manage your margins and expenses while maintaining a healthy cash flow. Remember, more is not always better and an increase in turnover does not necessarily mean that a business is on a sustained growth curve.
Entrepreneurs should drive innovation and remain agile to ensure that they are able to responsibly respond to market conditions. Stay close to your key stakeholders such as your customers and suppliers and check in regularly with your bank to ensure that they understand your business and growth aspirations.
Organic growth
Organic growth is the expansion of a company’s operations from internally-generated resources, without necessarily resorting to borrowing or acquiring other businesses. This type of growth tends to be slow, but it is more sustained and poses less risk to the business owner.
Look at what your business currently offers clients – perhaps an existing product might appeal to a new market in a different geographical area in South Africa or elsewhere on the continent. If you have a product that is needed in another African country – now is a good time to look into that. These markets are experiencing better economic growth and there is a great need for products and services.
This is a good time for entrepreneurs to innovate and identify new revenue streams by diversifying their businesses, particularly if this can be done without large capital outlay. Difficult economic conditions force business owners to look for new markets and customers.
Rapid growth
Some businesses might be in a position to consider a more aggressive growth strategy which could include activities such as mergers and acquisitions. Ideally such actions should be complimentary to a company’s existing line of business. For example, if a company manufactures bolts, buy a business that can package such products. This can strengthen a company’s value chain and introduce a competitive advantage.
A low growth environment can also create opportunities for entrepreneurs to buy businesses in distress or negotiate deals to buy plant and equipment at good prices.
The good and the bad
The ability to expand operations has obvious benefits such as economics of scale, increased bargaining power with suppliers and the general perception of bigger is better. These factors combined could potentially help to drive business and increase profits.
But keep in mind that growth also comes with certain risks.
Managing your business could become more complex and may require a more corporate approach. This could result in a larger overhead structure caused by the need for more staff, increased management and larger premises. Growth can also cause the business to become less agile, which means that the business loses its ability to respond to customer needs timeously. If that “personal touch” is a company’s key differentiator, there is a risk that rapid expansion could cause it to lose its competitive advantage.
Keep in mind that growth also means that a company’s cash flow requirements will increase. Large capital outlay without the appropriate funding structures could also place the business under severe financial strain.
Interestingly, smaller businesses often succeed in achieving growth in times of adversity as they are agile and able to adapt quickly to a changing market, leverage new supplier networks, develop new products or launch a new service. The current electricity crisis is a good example. It could potentially create a whole new sector around the supply and maintenance of alternative energy such as generators or solar energy.
