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
|Communication and planning||Informal
Rules and regulations
|Method of decision making||Individual judgement
|Make up of top management staff||Generalists||Specialists||Strategists
|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.
Controlling Profit Margins To Build Greater Organisational Wealth
To build organisational wealth, you need to have strong financial management and control. Are you getting the insights you need to properly control your profit margins?
Organisational wealth is a concept that is based on the premise that businesses can only achieve true wealth once all parts of the organisation are running optimally. It places an emphasis on business systems, internal processes, staff morale, job satisfaction and, of course, financial success.
Having proper control and management of your finances is essential for every growing business. Keeping up with, and staying ahead of, competitors requires more than just a simple accounting system to try control financials. Luckily, modern technology and innovative business management platforms offer practical solutions to give you and your team members up to date information about every part of your business.
This helps businesses better manage cash flow, stock holding, expenses and financial investments for increased control over profit margins as well as continued growth and long-term sustainability.
Here are a few ways in which a good business management system can help you achieve greater profit margins and contribute to building greater organisational wealth.
Comparing budgets vs actual costs
An integrated system allows different departments to quickly and easily share information on expenses budgeted for and actual payments made. This results in streamlined and seamless project planning and management through automatic distribution of information and project amendments based on accurate information.
Managers can get customised financial reports depending on their requirements and set cash flow alerts as well as expense approvals to ensure that budgets are not exceeded.
With the correct systems in place, your small or medium sized business can manage its entire procurement process systematically. Details of suppliers, requests and responses with cost estimates, purchase orders, returns and outstanding orders can all be recorded, centrally maintained and shared between departments. This will allow you to quickly compare suppliers, negotiate better deals and plan your purchases to maintain and improve profit margins.
Matching supply and demand
Optimising procurement to expertly match supply and demand can lead to an increase in your business’s profit margins. For many small to medium sized businesses, managing supply and demand cycles can be a time-consuming and complicated task. The good news is that an integrated business system, such as SAP Business One, allows you to get real-time inventory insights and updates.
It also allows you to manage and set up standard and special pricing to cater to seasonal trends, which are also readily available. Over and above that, an integrated system allows business owners to apply volume, cash, and customer discounts and run reports to track the impact these special offers had on overall profit margins.
Accurate insights to make strategic business decisions
The adage “knowledge is power” is certainly true for businesses – no matter their size. Even in a small business, there is a massive amount of information which can be gathered about your operations within the supply chain and company financials. Having access to accurate information can empower your team members to make more informed decisions.
Providing employees with comprehensive information facilitates strategic decision-making, which can lead to optimised stock holding and procurement, meaningful customer relationship management and more successful marketing campaigns. These benefits can contribute to a sustainable growth in profit margins.
An investment in technology may initially seem costly, but when you invest in the right tools and platforms, you will soon start the process of building your organisational wealth through increased profit margins and excellent financial control.
Should You Scale Or Should You Grow? (The 2 Strategies Are Not the Same)
Bigger is not always better.
For decades, the conventional wisdom in many sectors was that bigger was better. The larger you got, the argument went, the more likely you were to achieve market dominance, supply chain efficiencies and coherencies that you could then carry from developed markets into developing markets. That should lead to happy investors.
Except that, as PwC’s Strategy& discovered, in key sectors like consumer packaged goods there is no direct correlation that can be drawn between being big and achieving higher shareholder returns. That’s a startling conclusion.
There may be a number of reasons for that: Media fragmentation has made it harder and harder to get “big” messages out to a mass audience in the ways that companies could when channels were far more limited; the competitive advantage gap between large companies and smaller participants has closed because small companies have learned how to perform well; and, ironically, innovation has in many ways defeated the need for scale because global networks have changed how big individual companies need to be in order to achieve the presence that they would once have had to grow themselves.
So, how should companies decide whether they need to get bigger? Should they even bother? For many, the decision to remain artisan or to work within defined boundaries is an absolutely valid strategy; it enables them to define what matters to them, and to work within those parameters. But, for those companies that do decide to increase their presence, here are some key factors to consider.
Define your goal, and make decisions from there
The decision as to whether to grow or scale comes down to the definition of success that you have set for yourselves in your strategy.
As Jeremy Melis, UPS’s marketing director for small businesses, told The Balance, “The goal isn’t necessarily the speed of domestic or international growth.The goal is to best position your business to achieve what you’ve defined as success. That could be revenue growth, geographic expansion, a community of loyal customers or a better quality of life for yourself and your employees.”
As in all aspects of strategy, the key concern is why, not what or how. Growth or scaling should be the means, not the end. Your goal should be deciding what you are committed to achieving.
Growth and scaling are different things
A key issue is that growth and expansion are too easily confused. Business coach Mihir Thaker makes the excellent point in an article on the site Business Business Business that, “Growth is all about adding percentages here and there around the business …. Growth is normally a factor of turnover …. Scaling is different.
It’s a process driven approach to growth. No longer is the business concerned with growth for growth’s sake, but only with growth which can be managed.”
So, in seeking to scale a business for example, you are looking to change not just the pace and scope of growth but also the manner in which that acceleration takes place. Growth and scale demand different management styles and therefore different types of leadership, while the pace at which expansion takes place also requires careful judgment.
Expand too fast, and the business risks becoming over-extended; expand too slow and the company risks stalling as others react and/or the business cannot keep pace with demand.
And because scale demands a different set of actions than growth, it follows that it springs from a different mindset. One of the key questions that is asked too seldom is: “Does our company have that mindset?” If not, it may be better, and more profitable, to focus on growth.
To scale the business, first scale the culture
Companies that are serious about scaling their presence must understand that their ability to do so hinges on their ability to shift and coordinate new thinking internally at the same time as they look for opportunities and new customer relationships externally. The temptation is to focus only on the latter – to see a shift in scale as achieving a greater footprint through growth, acquisition and/or diversification.
In point of fact, in order to deliver on that, the business itself must change mindset. As McKinsey has noted, in order to achieve a change of scale at requisite speed, particularly in a digital setting, an organisation today needs to start by realigning its technology infrastructure to handle the new levels of customer interactions that will come.
It will also need to invite new people into the business to make the new scaled process work better, develop new ways to ship faster and more diversely and reset its success metrics so that it can accurately gauge performance against its highest strategic goal and act/react accordingly.
Should you scale?
What questions should you ask yourself to determine if you should scale or grow? We have developed a model that helps companies figure out what they should do in order to meet their objectives. This model, called The LASSO Model, addresses a brand’s optimal expandability.
Nearly all the businesses we spoke to in the course of developing our model commented that the decision to pursue scale was about much more than aspiration. It was a conscious decision to achieve critical weight in the markets that they were focused on because otherwise they risked being unable to achieve their goals.
That’s particularly true in sectors like consumer packaged goods, media and entertainment, where the pursuit of scale can become an end in itself.
Companies that are fueling their growth through venture capital, for example, will sometimes set their sights on being a particular size at which they are deemed to have succeeded in their quest to expand. In media, the goal for many is to make it to the R100-plus million revenue mark because that is deemed to be a benchmark for a scaled media presence.
If that’s the metric that is expected of you, then that will be the key measure you focus on. Many will get stuck at around R50 million or lower, unable to grow a unique audience, achieve consistent engagement, differentiate themselves against others and over multiple platforms, and improve their margins.
Size alone is probably not enough
That leads to the final factor. Strong businesses depend on more than one thing to protect themselves against competitors. We liken this to a Rubik’s Cube. What makes the Cube hard to solve is that the puzzle does not exist in one dimension, but rather in three.
Equally, businesses that have ambitious expansion plans need to look for ways to build in other aspects of competitiveness beyond just size itself. Indeed, wherever possible, they need to use scale to reinforce and strengthen those other elements that make up their value proposition, so that the bigger they become, the more competitive they are.
Many of the companies we spoke to in the course of our research found this the most difficult part of their expansion planning – thinking of scale as a competitive factor that wouldn’t just strengthen their market presence but also raise the barriers to entry for copycats and enable them to profitably leverage and capitalise on what really drew customers to them.
Growth and scaling are different approaches and neither one is “better” than the other. Each has its strengths and weaknesses. Each works better in some sectors than others. Each has its own dynamics and makes its own demands. What’s important for entrepreneurs with ambitious agendas is that they understand why they have chosen one approach over the other, how they have organized their infrastructure and culture to make it happen, and where they will integrate growth or scale with other competitive factors to make it harder for others to emulate their success.
How TomTom Telematics Can Keep Your Business Moving Forward
Successful businesses need to find ways to improve their margins while still delivering excellent and efficient customer service. VDM’s CEO, Deon van der Merwe, explains why this wouldn’t be possible in his business without TomTom Telematics’ solutions.
When TomTom Telematics entered the South African market in 2010, the local team took a deep dive into the different industry verticals they were servicing.
The more they got to know their customers, the more they realised a different solution was needed to address local conditions, and a subscription model was introduced whereby customers didn’t need to invest a large capital outlay into TomTom Telematics’ technology, but would receive the tech and software, including installation, at no extra cost, in exchange for a monthly subscription fee.
This model gives SMEs affordable access to TomTom Telematics’ solutions, but it’s had another benefit as well: As TomTom Telematics introduces new innovations, existing customers can benefit — without the costs associated with replacing all of their existing technology themselves.
An indispensable tool
For a transport and logistics business like VDM Group, which has more than 160 vehicles on the road, this means they have access to incredible new offerings, without needing to replace their TomTom units themselves.
“TomTom plays a critical role in our business,” says Deon van der Merwe, CEO of VDM Group. “It’s an indispensable tool in ensuring quality customer feedback and the management of KPIs for all supply chain stakeholders.
“Earlier this year, TomTom Telematics launched their New WEBFLEET product. We were very satisfied with what we had, and yet they still approached us and offered to replace all our existing units with new tablets, and they’re covering the installation costs,” explains Deon.
“New WEBFLEET is the result of TomTom innovating their product based on customer feedback from around the world, and the local team wanted to ensure we had access to the additional functionality and innovations that had been introduced.”
Seamless integration with your network
According to Deon, the new TomTom PRO 8275 units seamlessly integrate VDM’s fleet scheduling software with information they extract from TomTom, including individual vehicles’ standing time and arrival notifications.
“The software from TomTom is open API, which means that all our various applications can communicate and interact with each other,” he explains. “From a productivity perspective, we no longer need to manually capture any trip information.
In addition, we have every conceivable piece of data available that will assist us to run a leaner, more cost-effective fleet, enabling us to ensure that we are delivering on all our KPIs — particularly with regards to meeting our customers’ needs.”
VDM is a large transport business, but Deon believes the benefits for SMEs are as great, if not more so. “Many SMEs don’t have the back-office support that we do. The ability to capture and use this information without a team of admin specialists at your disposal is a huge competitive advantage for smaller businesses,” he says.
Offering you the competitive edge
VDM offers a specialised logistics service that creates custom-made options for clients. In order to ensure the most optimal and cost-effective solutions, while still ensuring top quality delivery, they need to consider special and complex individual customer requirements, from the point of origin to the point of destination, before finalising a customer-specific solution.
“We take into account a host of factors, including inventory carrying costs, volume requirements, product specific factors and route to market,” explains Deon.
“Road transport significantly impacts total supply chain costs, and if not managed properly, can have a severe impact on the sustainability of any particular channel. We try and manage this risk by continuously improving our service through innovative logistical solutions, the use of advanced technology, vertical integration and a team of passionate and talented experts.
TomTom assists in creating differentiators
“This focus has helped us to develop a market offering that includes dedicated and completely flexible inter-modal solutions, which is a big differentiator for us. TomTom Telematics plays a key role in our total productivity, helping us measure the performance of road transport across our supply chain.”
Deon believes that what you don’t measure you won’t know.
“TomTom provides updated fleet statistics that allow us to constantly benchmark our fleet against pre-defined route surveys and, in so doing, enables massive savings in fuel and total turnaround time.
Communicating via the WEBFLEET platform also helps us save time and creates a formal trail of correspondence with our drivers. I don’t believe it’s possible to successfully run a business like ours without a solution like this.”
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