7 Business Growth Strategies for Small Businesses
Take a look at some of the largest businesses today, and you are likely to be blown away by the numbers they boast in terms of capitalization, revenue and profitability. Walmart, the world’s largest retailer according to Forbes, reported USD 482.13 billion in revenue and USD 14.7 billion net income as of February 2016.
There is Subway, the fastest growing franchise in the world with close to 45,000 restaurants as of September 2016, making it the largest single-brand restaurant chain and the largest restaurant operator in the world. British company The Body Shop currently operates franchises in close to 3,000 locations worldwide, and remains to be one of the most recognizable brands in specialty skin care, even after its acquisition by L’Oreal in 2006.
Very impressive, aren’t they? These are the companies that are making the big bucks and controlling pretty much a large portion of the market. They wield so much influence and power, it is hard to picture them being less than the business behemoths that they are today.
Sam Walton started Walmart in 1945 by purchasing a modest Ben Franklin store where he sold products that he purchased at a low cost from suppliers, and subsequently resold to customers at low prices. It was in 1965 when Fred DeLuca obtained a $1,000 loan from a friend and opened “Pete’s Super Submarines”, which later became known worldwide as “Subway”. The Body Shop founder Anita Roddick opened her first “The Body Shop” store by getting a $6,800 bank loan in 1977, and she started selling skincare products that she and her daughters made at home, using unique and healthy ingredients.
This is their reality: most of these big businesses started out small in the past. They weren’t always the juggernauts that they are at present. At one point, they also belonged to that relatively obscure but promising group referred to as “small businesses”. Unfortunately, it is also a reality that only a handful of an entire slew of small businesses will actually grow to join the ranks of Walmart, Subway and The Body Shop.
What eventually made them break out of that group and charge ahead of their contemporaries?
The likeliest answer, aside from determination and good business practices, is the application of business growth strategies.
Small businesses have several options to choose from, depending on various factors and circumstances. We will look into seven of the growth strategies that are applicable to small businesses hoping to expand their operations and occupy a larger share of the market.
Market penetration is probably the first – almost default – option of small businesses hoping to grow and expand their operations. This works best in a scenario where there are no new products, and there are no new markets to enter. Left with no choice, the small business will then look at what it currently has, right where it currently is. That means the focus will be on the current products or services, in the current market.
It is pretty straightforward: the small business will market its existing products or services in the same market it is in, with the aim of increasing its market share.
This is a competitive way of doing things, because the small business will be facing its competitors head on, implementing various strategies in order to increase its market share. Some of the market penetration strategies employed by small businesses are:
- Reducing the selling prices of the products or services, with the intention of attracting consumers with the lower price. This works best in a market with very little differentiation. Walton effectively used this strategy when it set up its first Walmart store. There were other retail stores at the time, but what made his market share go up is because he was able to offer the products at lower retail prices than the other retailers.
- Increasing promotions for products or services to improve their pull strategy. Aside from both conventional and non-conventional forms of advertising, small businesses can also employ other means to attract customers. Examples are special offers, special promotional events, offering trade and sales discounts, rebates and similar schemes. Not only will this appeal to your current customers, it will also catch the attention of the users in the market that were initially unaware of your product, brand or company.
- Expanding distribution channels to widen your reach. Usually, this is done by looking for more distributors, retailers and dealers, making the distribution channel wider. Small businesses should also consider entering into partnerships with these major channel players, and nurturing the relationship so they will want to continue working with you. A wider and more stable distribution channel means greater chances of reaching your customers, and staking a claim on a bigger market share.
- Effecting improvements on the product. You can encourage more people to buy your product if you are able to improve on its existing features, or find alternative uses for it. However, in many cases, there is usually no need to actually do any changes to the product. A change in packaging and an assertion in advertising about the “new and improved” product is often enough to attract the attention of customers.
- Zeroing in on the competition’s customers and distribution channels. Naturally, if small businesses can win over the customers of their competitors to their side, they will gain a larger market share, and make their rival’s smaller. It’s striking two birds with one stone. In this strategy, the efforts are focused specifically on the customers of the competitors. But it also extends to the dealers, retailers and distributors currently working with the competitor. If you can offer them a deal better than what they are currently getting from their partnership with the competitor, they may consider jumping ship.
It is important to note that, in market penetration, the size of the target market is fixed or unchanged. This is markedly different when the strategy used is Market Development.
Growth can be achieved even without a change in the size of the market, and that is demonstrated by the Market Penetration strategy. However, businesses can also grow when they seek to expand their market, and that is Market Development.
Market development, also referred to as “market expansion”, is another popular growth strategy that is applicable to small businesses, especially those that are having problems finding solid footing in the current market they are in. Faced with too many and too stiff competition, small businesses will be hard-pressed to look elsewhere for “greener pastures”.
There is also the possibility that a product reassessment reveals new usage for the product, which will take it beyond the current market. For example, a product initially developed for health and wellness purposes is discovered to be effective as a skin care product as well. This means that the producer of the product will no longer be limited to the health-conscious market, but it can also branch out into a new market, which is for beauty products.
In this scenario, there is no new product, but there is a new market, and it in this new market that the business will be able to gain more market share, more sales, and definitely more profits. The potential market is expanded either through identification of new users or new uses for the product.
This is often seen in how businesses undertake expansion to new geographical markets, such as other states, regions, countries or continents. Possibly, the most recognizable practice of this growth strategy is by adopting the franchise model, which was how Walmart, Subway and The Body Shop grew. The Body Shop, which was originally a UK brand, was able to enter other markets in more than 60 countries all over the world.
Small businesses have to be careful when using this as a growth strategy, however. Since this involves entry to an entirely new market, market research must be conducted properly, and the business should gain more than adequate understanding of the new market and the customer base within it. What worked in the current market may not have the same results in the other market due to inherent differences in culture and other factors.
USE ALTERNATIVE CHANNELS
The internet has opened up other channels for businesses to reach their customers and sell their products. In fact, this has been greatly beneficial for small businesses and entrepreneurs, since they were provided a platform where they can have a chance of competing against more established brands.
Today, small businesses have the option to find their customers and sell their products to them through the following:
- Selling online. Businesses can set up their own websites where they can sell directly to customers, or partner with retail websites that will serves as their online storefronts. Many businesses sell their products through sites such as eBay, Amazon, and Etsy, to name a few.
- Selling through subscription programs. Small businesses formulate subscription and membership programs to find their customers and introduce their product to them.
- Selling through the use of mobile apps. Mobile internet is also becoming a greatly accepted mode of transacting nowadays, and more and more businesses are looking for ways to integrate this in their marketing and growth strategies.
Product development, or product expansion, means exactly what the phrase implies. There is no new market, but there is a new product, and that new product will be introduced to the existing market to gain a bigger market share.
This is a strategy adopted in industries with fast-paced technological developments. The electronics or mobile industry is one. Manufacturers of mobile phones are prolific in churning out new and updated models of their products to the market in order to keep up with the changes and improvements in technology. Small businesses also see this strategy as a viable one in most of their circumstances.
What small businesses can do when using the product expansion growth strategy are:
- Expanding product line by developing and introducing new products
- Adding new features to existing products
- Updating features of products when the old ones become obsolete
In order to successfully implement this strategy, the small business must be capable of quick response to market changes that call for changes in the product. This will not work if the business is unable to think up of solutions fast because, by the time they are able to come up with a solution to cope with a change in the market, another change would have already cropped up.
Small businesses also use diversification, where they will sell new products to new markets.
This is a high risk, high return strategy, since it is basically akin to starting from scratch, as if the small business is starting anew. As a matter of fact, this poses the highest risk for businesses, big or small. This risk arises from the fact that diversification will require substantial investment of resources: time, money, manpower and other assets. After all, it involves going through the motions of starting a new business, in the sense that it has to conduct marketing research in that new market, with respect to the new product.
In the context of growth strategies, there are two types of diversification.
1. Conglomerate diversification
When the small business suffers from limited opportunities in its current line of business or product line, it may choose to diversify into areas that are not related, or are so far removed, from its current operations. For example, a manufacturer of children’s apparel may not be satisfied with the current results of operations. Therefore, it decided to diversify by acquiring a small catering business. These two are completely unrelated, but the diversification is able to increase the profitability of the company and, consequently, its growth rate.
2. Concentric diversification
This time, the small business diversifies by adding products related to its current products, or adding markets related to its current market. Since there is a certain degree of parallelism, this strategy is more synergistic than conglomerate diversification. Picking up from the previous example, the manufacturer of children’s apparel can use concentric diversification if it buys into another company that formulates healthy food for children aged 8 years and below. These have related markets, with parents and children as the target customer. If, instead of children’s food, the company goes into manufacture of footwear for children, then this is concentric diversification using related products.
Many identify diversification mostly as a marketing strategy, but from the point of view of management, it is a very effective business growth strategy when done right, despite the high risk involved.
ACQUISITIONS (AND MERGERS)
M&A, or “mergers and acquisitions”, deals with the purchase of one company by another, and/or the consolidation, combination or joining of two companies. The role it plays in corporate restructuring puts it high on the list of growth strategies for businesses.
Acquisition is primarily considered as a big-business growth strategy, since it is the big businesses that have the resources to acquire other companies. Generally, small businesses are seen to have a difficult time making acquisitions, considering the large amount that will be required to cover the purchase price. Even if the small business is able to raise the amount and cover the purchase price, the risk that it will eventually turn out to be a bad purchase decision is much too big for a small business to handle.
However, it would be wrong to completely rule out acquisition as a growth strategy just because you are a small company. If the acquisition turns out to be a very good decision, then you can profit greatly from it.
How can a business achieve growth through acquisitions? Let us count the ways.
- Acquisition helps the small business in securing a larger market share and more revenue.
- Acquisition enables a small business to establish a dominant position in the market, made possible by market consolidation.
- Acquisition empowers smaller companies to break geographical and even political boundaries, and bring their operations to the world.
The strategy of achieving growth through acquisitions and mergers is definitely not for everyone or, more precisely, not for all small businesses. Indeed, it is the cash-rich small businesses, or those with “extra” unutilized resources that are likely to use this growth strategy.
Small businesses may choose to exercise any of the three acquisition categories:
- Upstream acquisition: A small business will seek to have a merger with a bigger company in the same industry or field, and they will operate or function as one entity. The goal of this type of merger is to consolidate the market forces of the two companies and secure their employees. It is also seen as an excellent way to ensure higher investments. In a report by the Boston Consulting Group on acquisitive companies, they might not have recorded spectacular profits, but the acquisitions created value, and this was favorably looked at by investors, resulting to higher investments as well as shareholder dividends.
- Downstream acquisition: This applies if the small business acquires another business, usually in a straightforward purchase transaction of the smaller business or of its ownership shares. The acquisition will result in the acquiring company being the surviving company, and the one in control of the smaller business, which will now lose its identity once assimilated into the acquiring company. The goal of this acquisition type is the expansion of the business and its operations. The key here is to choose your acquisitions wisely. Prudence and common sense dictate that you should buy only the companies that you can afford.
- Lateral acquisition: This acquisition type can be seen between two businesses of roughly the same size joining together for the purpose of consolidating or pooling their resources. This will result in an entirely new business entity that is considerably bigger than either of them when they were still operating separately.
This is another big business growth strategy that may also be adapted by small businesses, especially those that find themselves in an industry and market dominated by larger companies.
Small businesses are bound to have a hard time going up against the big boys, even when they are on the same playing field. So how can the small business hope to grow? Why, by taking a look at that playing field and identify the corners where they can stake their claim. That will be their segment, and that is where they will focus all their business efforts and growth strategies.
In market segmentation, the small business would have to undergo the process of dividing the market into segments, with each segment characterized by distinct groups of customers with their own needs and preferences. Once the pie has been divvied up, it is time to identify which slice of the pie seems to be the most receptive to the strategies of the business.
Segmentation is performed using the usual bases that were utilized by the business when drawing up its marketing plan: demography, geography, market and customer behavior, and even the psychographic profiles of the market.
The major stumbling block that small businesses often encounter when applying market segmentation as a growth strategy is in conducting the necessary market research for segmentation purposes. These researches can be very costly, and should not be a problem for big businesses. Small businesses, however, do not have the same luxury.
Therefore, instead of investing in an expensive market research, small businesses can be more creative when it comes to gathering data for market segmentation. These sources came highly recommended:
- Informal cluster analysis conducted by the business
- Studying marketing programs of competitors
- Conducting informal research with targeted respondents/customers
- Communicating with key industry players, such as buyers, distributors and analysts
- Secondary researches and data resources
- Data from basic research publications
- Data from trade and association publications
- Data from industrial experts and authorities
- Data from independent and external measurement service providers and agencies
Once the segments have been identified, the small business should now look into each segment and find any unsatisfied wants or needs. It will then find ways to fill that gap that is not met by the competitors.
Have you heard of the Renault-Nissan Alliance, which was forged to increase economies of scale for both brands? This strategic partnership between France’s Renault and Japan’s Nissan had substantial terms and conditions. One of them involves how Nissan generated increased sales in its units sold in Europe, which were manufactured with engines built by Renault.
This is a prime example of how these big companies were able to leverage partnerships as a growth strategy.
In the more modest setting where the small business exists, leveraging partnerships is also a viable growth strategy. We have made mention earlier of how small businesses can enter into partnerships with its distributors and dealers. They can actually look further, into other partnership prospects.
If you are in the manufacturing business, consider entering into a partnership with the supplier of the raw materials you are using. If you have an excellent technology but you do not have a warehouse, look for someone with warehousing capabilities to share but are also in need of the benefits that your technology can provide.
Briefly, some of the possible strategic alliances that businesses can leverage for growth include:
- Shared distribution. Two businesses acts as distributors or dealers of the other in their respective markets.
- Technology transfer. Two businesses collaborate in development of new technologies.
- Cross-manufacturing. Two businesses make use of the same manufacturing line for their processes. An example is how Ford and Mazda use the same manufacturing and assembly line in their automobile manufacturing operations.
Small business can benefit greatly from these partnerships. Aside from the stability of knowing that there are parties or entities that will have your back, the partnership may also help you cut down on costs, increase efficiencies and, ultimately, help your business grow.
Of course, small businesses are not going to have it easy, unlike the big businesses who have more than enough resources to be able to pay for these partnerships immediately. Since small businesses are usually not as equipped, they’d have to rely on their negotiation skills to convince other companies to partner with them.