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Performance & Growth

Should I Stay Or Should I Grow?

Most businesses reach a stage in their lifecycles where important decisions have to be taken about how to maintain future growth. Learn from the experience of others to identify the right strategies for sustaining growth.

Greg Fisher

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Growth is the lifeblood of any business. A leader’s job is to take that business to bigger and better places. The dilemma lies in how to get there. You’re often faced with a simple choice: keep growing the existing products or services or expand into new arenas of business. This decision has been at the core of strategy for many years and continues to be a critical question for any serious business manager.

To make an effective decision about whether to keep growing your core or expand into new areas, it is useful to understand the phases of a business lifecycle and to appreciate the nature of the managerial challenges in each phase.

It is also important to be able to pinpoint the phase of the cycle your business is in and to know what your options are for growing it into the next phase.

The Phases of the Business Lifecycle

For many years academics and consultants have recognised that a business moves through different phases of development as it evolves and grows. The sequence and nature of each stage of development tends to be fairly predictable and each is characterised by specific organisational activities, structures and challenges. The movement through different phases of development is commonly referred to as a business lifecycle. As a person moves from infancy into childhood, then into adolescence and adulthood before approaching old age, so a business also moves through different phases of development as it starts up, grows and matures.

Stage 1 Stage 2 Stage 3
Initiation Growth (early and later growth) Maturity
Organisational age and size Young and small Growing larger Large and older
Type of structure No formal structure Centralised formal

Functional

Decentralised formal

Matrix

Reward system Personal

Subjective

Systematic

Impersonal

Impersonal

Formal

Objective

Communication and planning Informal

Face-to-face

Little planning

Becoming formalised

Budgets

Formal

Long-term plans

Rules and regulations

Method of decision making Individual judgement

Entrepreneurial

Professional

Analytical

Professional

Bargaining

Make up of top management staff Generalists Specialists Strategists

Planners

Organisational growth rate Inconsistent but improving Rapid positive growth Growth slowing or stagnant

Key management challenges in different phases of a business lifecycle

The key issues and challenges vary for managers leading businesses in different stages of the lifecycle. Managers in the initiation phase face the challenge of creating a new product or service, then getting that product or service to market and having people test that product or service so that consistent market demand is created.

They often operate under high levels of uncertainty and ambiguity and sometimes need to make snap decisions with inadequate information. During this phase of the lifecycle the business generates very little revenue and managers need to rely on external capital or bootstrapping to survive. Operating in a resource constrained environment means that people often need to take on multiple roles and fulfil a diverse set of functions within the business.

Managers of a business in the early growth phase of development face the challenge of establishing an infrastructure within the business to serve a growing customer base. As the product or service becomes more popular, the leader in the organisation needs to establish systems and processes to consistently deliver a high-quality offering. In this phase, managers need to manage cash carefully because a growing business tends to absorb more money than it generates.

Managers in the later growth phase of a business face the challenge of keeping the growth of the business going. It is difficult for a manager to know exactly how big a business can become (i.e. when will the market become saturated with the company’s product or service?). Managers therefore face the critical decision of whether to invest further in selling the current product or service to the existing market, expand into new markets with the existing product or service, or consider offering new products or services that leverage the skills and competencies developed in the business.

Managers of a business in the mature phase of the lifecycle face the challenge of reinvention. The phase that follows maturity is decline, during which the demand for a product or service drops off rapidly. In order to avoid falling prey to decline, a manager leading a business in the mature phase needs to look for new streams of revenue and new opportunities that will launch the business onto a new growth curve.

This creates a challenge of balance. Managers in mature operations cannot neglect the existing lines of business; they need to continue to deliver these offerings as they are a source of cash for a mature operation. But while they maximise returns on existing offerings they need to invest in new products or new markets that will create growth in the future.

Analysing where your business is in the lifecycle

This is key to using the business lifecycle concept as a strategic tool. By recognising which phase of the lifecycle your business falls into you will be able to make sense of your current challenges and predict some of the issues that are likely to be problematic as you keep striving for growth in the business. In addition to dealing with challenges, the business lifecycle can be used as a tool to assist a management team in making a decision about whether to keep growing their core or expand into new business.

There are a number of clues that can help you identify where your business is in its lifecycle. The most obvious set of clues relate to sales growth and time. If your business is relatively young and sales growth is slow, it is likely that you are in the early initiation stage. As you sense sales are beginning to pick up and new customers are emerging to buy your product or service, it is likely that you are moving into the later stages of the initiation. However, in the initiation phase growth may be irregular and sporadic, meaning that you might have a few months of decent growth followed by a month or two of flat or declining sales. As you move into the early growth phase of the business lifecycle, sales growth will become more consistent. You can generally expect ongoing increases of at least 5% month-on-month in this phase of the business lifecycle. During the early growth phase you are also likely to feel more and more removed from your customer.

As your customer base expands, it is increasingly difficult to feel close to the customer and the focus of the business tends to shift from external to internal as you struggle to deliver on the increased demand. There will come a time when sales growth is not achieved as easily as it once was. You are likely to invest in increased marketing and promotional activities and although these activities yield positive results, it will start to cost more to sustain the growth of the business. At this stage you will begin to get a sense that you are working harder and harder for the growth you are generating. You are moving into the later growth stage of the business.

When growth begins to slow it is a sure sign that the business lifecycle is reaching maturity. It is not always easy to recognise when the business is reaching a stage of true maturity as many other factors can cause growth to slow down temporarily. One of the critical issues for a manager is to assess when true maturity in a market is being reached versus a temporary slowdown caused by an external factor. The mature stage hits when, despite what you do in the existing market, sales don’t grow significantly.

Options for growth

The growth options and strategic focus for a management team will be different depending on the stage of the business lifecycle. In the initiation phase, the focus should be on the core activity of the enterprise and on looking for ways to adapt and tweak the business model and customer offering around that core. Many entrepreneurs are tempted by the multitude of opportunities that appear to cross their paths in this phase of the business. It is foolish to go after any of these opportunities unless they are core to what you set out to do. Being successful as an entrepreneur takes hard work, dedication and focus and it is tough to be dedicated and focused if you are attending to too many things at once. Therefore, the strategic focus in the initiation phase should be to attend to and adapt around the core.

In the early growth phase, the focus of the organisation tends to shift towards delivery. Because sales are growing significantly, it is challenging for the internal operations to keep up. Managers therefore need to focus on building and refining systems so that the growth can continue without service being compromised.

In the later growth phase, the leaders of the organisation should begin to explore options for taking the existing product or service to new markets or diversifying into new lines of business that can be sold to the existing market. Factors that should be considered in deciding whether to take existing products or services to new markets or to diversify include the following:

1. Regulatory or contractual factors. Regulation, legislation or contractual agreements may prevent you from taking your business into new markets. For example, you may have licensed a product for a particular region and be prohibited by the licence agreement from taking the product to new territories. Another practical example relates to many of South Africa’s most successful enterprises, such as SAB, Barloworld and Anglo American; they were restricted from moving into new overseas territories in the apartheid years due to sanctions. As a result, they had no choice but to diversify to grow their businesses.

2. Core competence. Core competence is an activity that a company can do really well. It is usually developed through years of experience in a particular area. If a business is able to clearly recognise its areas of core competence, it may use that as a basis for deciding whether to diversify in existing markets or to move its existing products or services into new markets. This is demonstrated in the South African banking sector. FirstRand Bank’s core competence is in growing and managing a diverse range of innovative organisations each with its own brand and unique culture. The bank has chosen to focus on diversifying into new services in the local market, for example, Outsurance, Momentum, Discovery, Futurefin and Standard Bank, on the other hand, recognise their core competence as managing risk in less stable emerging market economies. They have chosen to take their existing brands and businesses into new markets such as Turkey, Russia and Argentina.

3. Networks and relationships. Networks and relationships are a source of strategic opportunity. Therefore, it is often wise for a business to look for growth in areas where it has developed relationships or strong networks that could open doors and facilitate linkages. This could work in either direction. A business that has strong relationships with companies or people in the same industry in a new market may be better off growing its business in that market, whereas a business with a diverse set of good relationships across multiple industries in the existing market may be better off staying in the existing market and diversifying its business.

4. Market factors. Market gaps and market need could prove to be a key factor in deciding whether to expand into new markets or diversify in existing markets. If there is an unclear need or desire for the business’s product or service in potential new markets, managers may be better off taking a decision to diversify. Conversely, strong market need in new markets creates an incentive to expand into new markets. For example, MTN’s recognition of a deep need for wireless telephony in Africa created an incentive for the company to take its existing offering into new African markets.

Avoiding Errors In Driving Growth

If one understands the concept of a business lifecycle, it is possible to avoid some of the typical errors that entrepreneurs and business managers make in trying to grow a business.

Such errors include the following:

1. Being distracted in the initiation phase.

The initiation phase is a critical time for a venture. It requires focus and discipline to get a new product or service to market. Because entrepreneurs are endowed with freedom and choice they may get distracted by a multitude of opportunities around them in the initiation phase and therefore fail to deliver the core product or service they set out to create.

2. Expecting the growth phase to continue into perpetuity.

The growth phase is a happy time in a business. It is exciting and fun when the market buys your product or service in large quantities. Yet there is the risk of creating an illusion that the growth will last forever and failing to explore opportunities for market or product diversification in the later stages of the growth phase.

3. Not investing wisely in new opportunities as the existing business reaches maturity.

In the maturity phase of the business lifecycle, a business typically generates healthy amounts of cash. No further investments are required to keep the existing business running and the business has a high, but flat volume of sales. It is tempting just to keep generating cash in this phase and not worry about investing in the future.

Yet it is important to use much of that cash to develop new products or new markets so that the business has a growth curve in the future. The challenge for managers is to stay disciplined and focused in the early phases of a business’s lifecycle and to actively look for expansion opportunities in new markets or through developing new products or services in the later phases of the business lifecycle.

Greg Fisher, PhD, is an Assistant Professor in the Management & Entrepreneurship Department at the Kelley School of Business, Indiana University. He teaches courses on Strategy, Entrepreneurship, and Turnaround Management. He has a PhD in Strategy and Entrepreneurship from the Foster School of Business at the University of Washington in Seattle and an MBA from the Gordon Institute of Business Science (GIBS). He is also a visiting lecturer at GIBS.

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Performance & Growth

Alan Knott-Craig Answers: How To Build A Debt-Free Business

It’s tempting to go the debt route when building your business or asset base, but be careful — debt can kill your business just as quickly.

Alan Knott-Craig

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I’ve been offered debt secured against my shares. I can use the debt to buy a house or buy more shares in my company. I really believe in my company, it’s growing fast. What should I do? — Bob

There’s no such thing as free debt. It always has a catch. In this case, the catch is that if you don’t pay back the debt, then you lose all the shares in your company that you’ve worked so hard to build.

In other words, if your share value doesn’t go up, then you will lose the shares you have.

Maybe you don’t think that’s possible, and maybe you’re right. But you never know what black swan is swanning your way. The president could be assassinated. Russia could declare war on America. North Korea could send a nuclear missile to Japan. There could be another credit crisis.

All of these things would have massively negative impacts on the economy and sentiment.

The economy affects your profits (sales drop). Sentiment affects your ability to sell your shares (no confidence = no buyers).

Suddenly you find yourself staring down the barrel of a debt repayment deadline, and BOOM! You’ve lost your company and your wealth.

That’s not to say you should never take risks. When you’re young you have to gamble a bit. Roll the dice. Just beware of debt. Debt kills.

Related: Dealing With Debt As An Entrepreneur

The only legitimate reason for taking debt to buy shares is if your partner wants to exit the business. Maybe she’s met the love of her life and wants to move to Tahiti, and if you don’t buy her shares then someone else will and you’ll find yourself in bed with a stranger.

If you don’t have the cash then you need debt. Fair enough. But be very careful. Debt kills. I can’t emphasise this enough.

It’s best to live life imagining the shares in your company are worth nothing. That way you won’t live beyond your cashflow. And you won’t take debt against your shares.

If you’re still tempted to get debt, ask yourself, “Do I love what I do?” If the answer is “No,” then definitely do not take any debt. Debt will simply yoke you to something you don’t love. Debt will make you a slave.

Generally speaking, debt is driven by greed. Greed, greed, greed.

And greed always ends in tears.

I want to build a property empire, but every time I buy a new property I’m forced to sell my existing property because the bank refuses to give me two bonds. At the moment I’m struggling to cover my bond repayments with rental income. Advice? — Phumlani

First thing first, read Rich Dad Poor Dad by Robert Kiyosaki. This book will tell you everything you need to know.

In summary, it’s about using the bank’s money to make you rich. Borrow money, buy property, use rental income to pay off mortgage, you’re left with asset and income stream. Boom! What could possibly go wrong?

Here are some rules of thumb:

  • Buy commercial property. A tenant that relies on his premises to generate income will look after those premises more than a simple residential tenant. In other words, you’ll spend more money maintaining your residential property.
  • Location, location, location. Pick an area with low risk of property prices failing. It might be more expensive but your first priority is always “Don’t lose money.”
  • Yield is everything. Divide the annual rental income by the property value. If more than 7%, go for it. If less, don’t. You want the yield to be close to prime rate.
  • Don’t take more than 50% debt. You never know what will happen. If the tenant misses her rent for a few months you want to have a safety cushion so you don’t get caught short of cash when your monthly mortgage repayments are due.
  • Never sell. The transaction costs for buying and selling properties will eat away your profits. Buy to hold. Never sell.

Remember, there’s nothing wrong with growing without debt. Many property moguls never ever used debt to grow their empire. It’s slower, but safer.

Debt is a shortcut. Sometimes it works, but most times it ends in tears.

Related: 7 Ways To Be Debt Free For The Rest Of Your Life


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13-rules-for-being-an-entrepreneur-coverAlan Knott-Craig’s latest book, 13 Rules for being an Entrepreneur is now available.

What it’s about

It’s easy to be an entrepreneur. It’s also easy to fail. What’s hard is being a successful entrepreneur.

For an entrepreneur, there is only one important metric of success: Money. But life is not only about making money. It’s about being happy.

This book is a collection of tips and wisdom that will help you make money without forgoing happiness.

Get it now

To download the free eBook or purchase a hard copy, go to www.13rules.co.za.  To browse Alan’s other books, visit bigalmanack.com/books/ 

Ask  Al

Do you have a burning start-up question?

Email: alan@herotel.com

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Performance & Growth

South African Investors And Entrepreneurs, The World Needs You

With governments and corporations across the globe constantly on the lookout for innovators and entrepreneurs, time is most certainly against those who remain constricted by their limited citizenship portfolio.

Amanda Smit

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Citizenship-by-investment (CBI) was once seen as something only reserved for the ultra-wealthy, but it is now also becoming the new normal for business investors and entrepreneurs wanting to expand their reach. We live in a highly globalised world where the flow of goods, people, and ideas means that the freedom to move and do business internationally has never been more important. With governments and corporations across the globe constantly on the lookout for innovators and entrepreneurs, time is most certainly against those who remain constricted by their limited citizenship portfolio.

How can citizenship-by-investment benefit South African investors?

First of all, entrepreneurs with multiple passports or residence permits are able to take advantage of the benefits and best practices of all the countries to whose jurisdictions they belong, while also being less vulnerable to a single country’s risks, shortcomings, and unexpected changing fortunes. The more jurisdictions an investor can access, the more diversified their assets will be and the lower their exposure to both country-specific sovereign risk and global volatility. By acquiring a higher quality nationality, one obtains greater global access and is better prepared for an uncertain future.

Nations within the EU, for example, offer citizens and residents access to all 28 member states, as well as to a number of other countries associated with the EU’s freedom of movement charter. In addition to expanded global mobility and a reduction in sovereign risk, alternative residence and citizenship also offer individuals access to career, educational, and cultural opportunities on a global scale.

Related: Funny Thing Happened On The Way To Global Expansion: We Met Our Doppelgänger

The benefits to governments and citizens of host nations

st-kitts-and-nevis

It would, however, be misguided to think that the advantages presented by citizenship-by-investment are for investors alone: for the governments and citizens of host nations the benefits are substantial. For governments, the inflow of extra capital reduces pressure on the treasury and protects national sovereignty by helping to mitigate the need for loans. Indeed, the establishment of a transparent, well-managed CBI program is not dissimilar to discovering a sustainable source of oil within the confines of a country’s national borders. Both scenarios create an immediate injection of new funds into the national treasury, which ultimately leads to greater long-term prosperity for the country and its people.

Successful applicants also bring intangible benefits to receiving countries, such as scarce skills and rich global networks. They add diversity and they uplift host nations through their demands for improved and novel services, which can create new opportunities for local communities. In Malta, for example, the establishment of a CBI program was as much about attracting rare talent as it was about generating much-needed capital in the aftermath of the 2008 financial crisis. Four years after the launch of the Malta Individual Investor Program (MIIP), Malta has one of the highest GDP growth rates — and one of the lowest unemployment rates — of any EU member state. In 2017, the country also reported a record-high budget surplus, with 90% of the gains attributable to the MIIP.

For smaller economies that face increasing trade and industry competition on the global stage, such an outcome can be transformative. Take the Caribbean nation of St. Kitts and Nevis, for example. Three years after relaunching its CBI program in 2007, the program accounted for around 5% of the country’s GDP. A year later, this figure had doubled, and after the sixth year, the figure had doubled again to 20%. By 2014, the St. Kitts and Nevis CBI program was responsible for approximately 25% of the nation’s GDP.

Related: From Local To Global – How To Expand Your Business Internationally

Moreover, other projects made possible through Caribbean CBI programs have had the knock-on effect of boosting employment and contributing to the greening of their economies. For instance, in Antigua and Barbuda an award-winning 10 MW clean-energy project cluster was realised within two years of launching its program. In addition to large-scale installations, over 50 schools and other government-owned buildings have been equipped with sustainable solar-energy systems in order to benefit from the new clean-energy supply. Such innovations were only made possible through the funds conferred by the country’s CBI program.

Thus, the inflows of funds from citizenship programs can be considerable, and the macro-economic implications for most sectors can be extensive. Just as traditional foreign direct investment (FDI) increases the value of the receiving state, bringing in capital to both the public sector and the private sector, so the benefits proffered by CBI — a form of FDI — rapidly turn the fate of a country away from debt and dependency and towards independence and stability.

Conclusion

In short, citizenship-by-investment is a boon to both host nations and investors alike. For South African entrepreneurs and investors who find themselves burdened by visa restrictions and red tape, acquiring a second citizenship is a simple means of expanding global reach, getting ahead of competitors, and giving something back to host nations that are only too grateful to have these talented individuals as part of their community.

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Performance & Growth

First Rule Of Securing Growth Capital: It’s Not About The Product

Paragon CEO, Gary Palmer, discusses the pitfalls facing business owners searching for capital to fund expansion.

Gary Palmer

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A common mistake made by entrepreneurs looking for growth capital is fixating on which product they should choose. When looking to finance growth in your business, the decision process should be focused on longer-term strategic priorities and then finding a partner to help you access the right product to deliver on those goals.

Let’s get real

At the outset business owners need to look at their business realities and decide whether they should be looking for debt or equity financing. For example, if a business can only support debt of 2.5 times EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation), and they are already at that limit, then they will need to look for equity financing to achieve their growth goals. In many instances, a combination of both debt and equity financing will hold the key, allowing the organisation to benefit from cheaper debt funding, but ensuring that it is not overextended.

Related: Dragon’s Den Polo Leteka Gives Her Top Tips To Attract Growth Capital

Even if the growth project can be funded through debt alone, business owners face the challenge of dealing with a multitude of institutions, each of which puts emphasis on different aspects of the deal. No business owner can know the minutia of their requirements, and so working with a partner who can help you prepare your presentations is a must.

The challenge becomes all the greater when companies may be looking to finance a non-traditional project. We have a client who is looking for finance to build roads leading to his development. This is not something traditional lenders usually deal with, and so in this instance he will need to access more creative funding options not offered by the banks. Another example is when a founder is looking to buy out other partners, this too may need to go to a lending institution which is able to structure deals for out-of-the-box requirements.

Square pegs, round holes

A common frustration faced by business owners is that some lending institutions sell products rather than solutions. Too little time is spent understanding the needs of the client and designing an appropriate solution, tailored to the client’s unique requirements. These lenders are literally forcing the client’s needs into the limited number of financial products they offer.

It’s going to get more complex

Another challenge for business owners is the sheer number of institutions out there. New funds, new lenders and the plethora of fintech offerings are making it harder for growth companies to find the best offer available. In the US and Canada, more than half of the big property deals are now funded by non-banks. We believe South Africa is headed the same way. The added competition, is of course great for the market and will encourage better service and more creative options, but it does make it difficult for business leaders to keep track of everything available.

Don’t fall prey to borrower’s remorse

In so many cases, companies are in a rush to secure funding and often end up choosing a product which is not suited to their longer-term strategy. Getting out of a transaction can be exceptionally difficult. Far too often companies wake up to better options too far down the line. If more appropriate finance is found, companies will be left carrying the settlement fees attached to their previous funding, not to mention the administrative pain of changing lenders.

Related: Funding Growth

Paragon has over 150 lenders on its books and a network of angel investors which we can access to find the right deal. It’s our job to know exactly what is available and more importantly, to work with business owners to ensure they access lending which is not going to result in borrower’s remorse. The only way to ensure good results is to start the lending hunt with a partner who can help you first determine the right lending strategy, based on your business reality. The alternative could prove both expensive and painful.

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