Business Growth – mind the gap
Following on from our recent post about Growth – the power of 4, we now look at the typical options for growth for businesses.
As organisations grow, there are two strategic issues to deal with. The first is the direction and the second is the means. If an organisation carries on with the status quo what will this look like with respect to growth – does this achieve the desired targets or is a gap starting to appear? This gap is simply the difference between the results can expect to achieve and the results the owner would ideally like to attain.
For growth we can look at the known model of Ansoff – see below
In this model there are four very broad possibilities for growing a business. The level of potential return and the level of risk is not the same for each alternative, and therefore the willingness to accept the implied risk will always be an element in the final decision as to which way the business grows.
The least risk alternative is to seek to manage present products and services more effectively, aiming to sell more of them and to reduce their costs in order to generate increased sales and profits. This is termed market penetration in the above diagram. It can be extended to strategies of market and product development which imply, respectively, either new customers or even new market segments for existing products.
The highest risk alternative is diversification because this involves both new products and new markets. Diversification might be broken down further into three distinct degrees of change:
- Replacement products and product line extensions which are based on existing technologies and skills and which represent improved products for existing customers.
- New products, based on new or unrelated technologies and skills, which constitute concentric diversification.
- Completely new and unrelated products or services for sale to new customers. This is regarded as the highest risk alternative.
Thinking about the gap between the present state of the business and the ideal future position enables the entrepreneur to consider how much change and how much risk would be involved to close the gap and achieve the target objectives. Some of the strategies considered might be neither feasible nor desirable, and consequently the gap might be too wide to close. Similarly, the degree of risk, especially if a number of changes are involved might be greater than the business owner is willing to accept.
Without going into the specific advantages and disadvantages of each one, the following strategic means can all be utilised to deliver growth:
- Organic growth through investing in new resources
- Acquisition, merger or take-over of another business
- A strategic alliance with another organisation – a joint venture.