What Is Business Expansion
Business expansion is an important part of growing a business, as it can expose your company to a broader audience, therefore increasing your customer base.
Business expansion definition: business expansion is a stage of business growth, where a business focuses on expanding its operations in the hopes of generating more profit.
In layman terms, it’s a process that allows businesses to grow in new markets and become more successful.
Through business expansion, companies are able to offer their products and services to a larger audience of potential customers. Acquiring new customers is one of the most effective ways to increase sales, which in turn increases a company’s profit margins.
Take for example a company that sells handcrafted goods. They likely sell their products locally, but if they’re based in a small town, the buying power available can be limited—there’s only so much a company can grow in a small market. If, they decide to expand their business to a bigger city or town, not only will they acquire new customers, but their sales are also likely to increase as a result.
All of this to say, business expansion is an important part of growing a business.
The Importance of Business Expansion
Without business expansion, companies risk stagnation. While this is OK for some company founders, most CEOs are always looking for ways to grow a business in order to improve the level of success of a company.
Business expansion is an important step in business development; without it, a company may never reach its full potential, making it complacent.
While not growing your business can make your products or services irrelevant or outdated, this doesn’t mean that you should be constantly trying to expand and grow your business. There is a time for everything, and there is such a thing as growing too much too soon.
When it comes to make a decision about business growth, you need to carefully evaluate your business needs, goals, and current performance. While growing your business allows you to explore new opportunities that may be incredibly profitable, you also need to make sure that you’re growing in the right direction.
This means that when planning your business expansion, you need to ensure that your business is staying relevant to the changing world—and most importantly, staying relevant to its target audience. The best business expansion plans are ones that are based on data and accurate projections.
Types of Business Expansion
There are a variety of methods of business expansion. Some of the forms of business expansion are:
Acquiring another business
With acquisitions, typically the acquired company continues to operate under its name and brand. Ownership simply changes hands.
There are 4 main types of business acquisitions:
- Horizontal – when a company acquires a rival company in the same industry.
- Vertical – when a company acquires a supplier or distributor of its own products.
- Conglomerate – when a company acquires a company in a different industry or sector.
- Congeneric – when a company acquires another company that has some similarities with it.
You can read more about the types of business acquisitions here.
Franchising is a popular business expansion strategy in the restaurant and hospitality industry. Franchising is a great way to expand service-based businesses. The main advantage of using franchises as a way to expand is that your company won’t have to invest as much capital to grow given that franchisees pay for the associated costs.
Franchising is a great way to rapidly expand a business without having to request additional financing, therefore it minimizes risk.
Licensing Your Intellectual Property
This is quite often an overlooked business expansion plan, yet it is quite effective as companies are willing to pay substantial amounts of money to use another company’s intellectual property.
Licensing your intellectual property basically allows others to use your products, processes, techniques, business practices, and trade secrets. This can help your company launch new products or services, as well as expand into new markets.
Partnerships and Other Types of Agreements
You can form a partnership with a competitor, a distributor, or a dealer. The nature of a partnership will largely depend on your needs and your potential partner’s needs. You can also use less formal arrangements for distribution or promotional purposes.
Partnerships allow companies to:
- Leverage each other’s brands
- Access new audiences
- Fill competency and market gaps
- Increase competitiveness
- Explore marketing options that had been unexplored
- Public stock offerings.
Ansoff Matrix Methods for Business Expansion
The Ansoff Matrix, a tool that businesses use to evaluate and plan their growth strategies, proposes four methods for business expansion:
- Organic Business Growth and Market Penetration
- Strategic Business Growth through Market Development
- Partnerships and M&As to develop new products and services
- Internal Business Growth through diversification.
For example, if you want to expand your business into new cities, you will be dealing with strategic business growth. This process involves taking advantage of untapped markets in order to find new customers.
What Is the Best Business Expansion Strategy When Moving into New Cities?
The best business expansion strategy for your company will depend on your company’s specific needs and goals.
As with any business decision, it’s always important to start with in-depth research to ensure that you make an informed decision, based on relevant data and information. Some things you’ll want to research include:
- The demographics of your target city
- Identify potential competitors and establish a benchmark
- Any challenges that may arise as a result of a new location (e.g., licenses or business permits that may be required in a new city but not in your current one)
- Determine if your current business strategies can be used in a new location (this is particularly important when entering a new international market).
Employ New Staff
If you’re looking to expand your business, you will likely need to employ new staff in your new business location.
Hiring the right talent is key to business success, this is especially true when growing a company in new markets. You’ll want to hire individuals that are proactive and that don’t need too much hand-holding, especially if you’re opening in a city or country that’s relatively far away, as you likely won’t be able to go back and forth as much.
A word of advice:
Don’t fall into the trap of hiring anyone just to get your business settled in a new city sooner. To ensure business success in a new market, it’s crucial that you take the time to hire and onboard the right people.
While it may be tempting to start growing as soon as possible, with the staff you already have, it’s important to make sure that you have the required team members to handle the increased workload associated with growing a business.
Establish New Locations
Depending on your line of business, you will likely need to establish a new location:
- A workplace or headquarters
- A warehouse
- A factory or manufacturing center
- A retail store.
Even if you have small workplace requirements, you can establish a physical presence in a new visit with a managed office space. Basically, this means that you will outsource your workspace solution to a third-party.
Rather than signing a lease and coordinating utilities, maintenance, and ongoing costs, you pay a set fee to your managed space provider and they take care of everything.
Take for example Instant Offices’ Managed Space; here is what Instant Offices does for clients that are interested in managed space:
- Provide comprehensive market research
- Filter available spaces
- Arrange viewings
- Lease negotiation
- Workspace design, build and fit-out
- Procure furniture, IT, and utilities
- Workspace management
- Exit strategies.
Managed office space is an attractive solution for businesses that are expanding into a new country or state for the first time. Basically, it enables your business to grow faster without having to worry about the nitty gritty that is associated with searching, finding, and fitting out office space.
It is also a great solution for businesses that will only be in a given market temporarily.
Some of the benefits of managed office space for growing businesses are:
- Global availability
- Faster setup and delivery of space
- Hub-and-spoke model that adapts to your culture and brand
- Low costs, especially since managed space requires lower capital investment than traditional office space.
- Cost certainty—since you pay a set fee to your managed space provider, there are no hidden or variable costs that you need to budget for.
You can learn more about managed office space services here.
Review Your Finances
Whether you’re interested in managed office space or setting up a traditional workplace location, you will need to review your finances before you make any financial decisions and commitments.
The best business expansion plan must include a careful understanding of the business’ finances and financial factors at play.
Most important is for you to ensure that you have the necessary cash-flow to handle the increased burden of business activities in another city; including the initial investment that will have to be made in order to establish a presence in a new market.
When reviewing your financials, you should:
- Build forecasts with accurate estimated costs.
- Estimate projected sales.
- Calculate potential revenue from the new market(s).
- Seek funding, if necessary.
- Calculate return of investment (ROI) and when you will break even.
- Analyze how a new location will play into your taxes.
Pro tip: make sure that you can afford expanding your business before starting out the process.
Review Legal Aspects
When doing business in a new market, it’s important that you look into and understand local laws. Laws and regulations vary between cities, counties, states, and countries; so before you make any type of move, you need to make sure that you understand what’s at stake and that you are compliant in all aspects.
Of special importance is to make sure that you have the necessary permits and licenses to conduct business legally in any new location. For example, if you run a beauty business, you need to make sure that you comply with the local health regulations of states and cities. For instance, in Florida, Texas, and California, a cosmetologist or esthetician cannot perform treatments like dermaplaning and facials; on the other hand, a cosmetologist or esthetician can perform that treatment in Colorado and New Orleans.
Speaking of legal issues, make sure that you factor in any tax implications of expanding your business—regardless of whether you’re expanding nationally or internationally. Some tax considerations include:
- Your business structure—different structures are taxed differently in different states or countries
- Statute of limitations
- Taxable presence in a foreign country
- Sales tax
- Value added tax (VAT)
- Tax exemptions.
Common Mistakes Associated with Business Expansion
Growing too Fast, too Soon
There is such a thing as growing too fast, too soon. This can lead to high cash burn rates, employee burnout, and decreased quality control.
When growing a business, you need to make sure that you will be able to continue delivering on your value proposition. If you grow without having the necessary resources in place (money, people, technology), then you risk compromising your business quality and service.
You also need to factor in any potential challenges, especially if you’re entering a market in a new country. For example, marketing efforts that are effective in one market may not be as effective in a new one. Similarly, if a different language is spoken in your target city, this may pose some challenges, especially as you navigate any legal, compliance, and regulatory issues.
When it comes to growing a business, slow and steady is the mantra to follow. Take your time doing research, growing your team, and planning your entry and exit strategies to ensure business success and minimize and potential disruptions.
Lack of Infrastructure
You need to have a robust business infrastructure in place before you set out to grow your business. At any point, you want to avoid placing any additional strain on your infrastructure that may cause it to fail or create tension between your staff or clients.
Some key things to keep in mind when evaluating your business infrastructure:
- That it can handle a significant increase in clients
- Invoicing capabilities
- Tracking capabilities
- Delivery capabilities
- Human resource demand
- Security capabilities.
Neglecting Customer Service
Customer service can help make or break your business.
If your customer service experience begins to suffer during the expansion process, then you’re doing something wrong. You want to make sure that the customer service experience is as good as, or better than it was before growing your business.
If you feel that queries are taking longer to resolve and that customers appear angrier, then you might want to consider hiring additional customer service representatives to avoid losing any clients or potential leads, as well as a competitive edge in a new market.
Internal disputes are a common woe of growing businesses. It’s only natural, given that there is more money at stake and many business leaders find that they have more responsibilities they need to deal with.
Internal disputes are especially common in partnerships; some partners may feel like they are working and contributing more than others, even if the stakes are the same for all partners.
Below are some tips to avoid internal disputes or to ensure they are resolved quickly:
- Make clear, effective communication a priority.
- Make sure all stakeholders are involved in the business expansion decision making process.
- Lay out a clear plan for business growth.
- Make sure all parties understand their responsibilities.
- Hold each other accountable.
Neglecting Company Culture
As you grow your business and hire more people, it’s not uncommon for business leaders to notice a shift in a company’s identity. However, to prevent your company culture from taking a hit and becoming toxic, you need to:
- Establish a clear set of values and principles.
- Ensure that all staff members are clear on the company’s mission and vision.
- Ensure that all staff members know how their role contributes to company success.
- Have a branding strategy in place to help your company retain its identity, even amid the chaos of growth.
- Have strategies in place to prevent employee burnout.