To Expand or Not to Expand? Ask the Right Questions

One of the more important aspects of running a company is keeping a steady focus on growing your business. Most would agree: If you aren’t striving to expand your business in some way, regardless of whether you are operating in a boom or down economy, your business will probably die. In past columns, we have discussed different approaches to growing your business within your existing marketplace. However, if you are committed to expanding your business, then you have probably considered the opportunities for growth in other locations. Consider the following steps as a logical process by which you can decide if taking your business to another location is the right step for you.

All things considered
Perhaps as a preamble to the various questions we will ask and the different decisions you must face, is the question, “Should I really expand to another market?” While the answers to the points we will identify below will assist in the decision here, ask yourself whether or not it makes sense to expand your business. Be careful not to just fall in love with the idea of expanding to another location simply because someone else did it. It must make sense for your business strategy. Indeed, your answer may very well depend upon the amount of risk to which you are willing to expose yourself and your company. A simpler question may be, “If I fail in a new location, will it jeopardize my entire business?” Once you become comfortable with the answers to these questions, you can then begin to analyze what your approach to expansion might be.

One critical decision you need to make is exactly how you will expand. You have a couple of options. You may decide the best entry into a new marketplace is through the acquisition of an existing business. If you decide to buy a business already located in your city of choice, you may choose to purchase a top competitor. The advantage here is that you immediately establish yourself as a major player in the market. The disadvantage is that it will always cost you more money—probably a lot more. And you may be thinking that the good companies won’t be for sale. Just remember: For the right price, every business is for sale.

An alternative to the above option is acquiring a company that may be a rather small player in the market—or one possibly struggling financially—that will be all too happy to sell. Keep in mind, though, that while you may save yourself a significant outlay of cash, you will likely begin with a small part of the market.

The third option is to just start your own business from scratch. Some call this “green fielding.” The advantage to this approach is that you get to start your business with the exact equipment you need, the location you desire, and the personnel you want. When you purchase another business, you may not get any of these. Of course, the disadvantage to green fielding an expansion is that you enter a new market with no customer base. Most companies that choose this route already have a strong reputation in other locations that help them penetrate the new marketplace and secure new customers. There is no right or wrong choice of options. It truly depends upon your business strategy as you enter the new market.

Another important aspect to consider when going into a different market is the market itself. From an overall standpoint, find out what the economy is like in that particular area. Is the economy in this location less resilient to a general decline in the national economy, or do they tend to get hit harder in the midst of a recession? On the other hand, when economic times are good, does this market experience a higher-than-average growth rate or does it lag behind? Having now operated in the most difficult business environment in several decades, we are all better positioned to answer some of these questions.

In addition to considering the general economic issues, ask yourself some specific questions relevant to the local business climate. How much business does the market offer? How good are the local competitors? Is there a place for a new supplier in the market? If there appears to be a limited number of competitors in a particular market, that can be a good thing. But perhaps there is a reason. Let me give you an example.

Several years ago we decided to investigate expanding our business into another city. As we looked at the amount of potential competitors, it seemed like there just weren’t very many there. Initially, this appeared to be a positive for us, but as we began to do an in-depth market analysis, we noticed something interesting: There were virtually no corporate headquarters in this city, which meant no purchasers of graphics on a national scale. Even though the city was of significant size, and there were, of course, a considerable amount of graphics being produced to support a good-sized economy, it pretty much ended at that. In the end, this was one of the reasons we decided against entering that market. The point is, make sure you identify the type of business and the amount of business that will be available to you upon entering a new market.
As mentioned above, you must evaluate the competition in your new location. If the existing competitors are strong companies doing a great job servicing the customer base, then you may have a significant challenge securing business. On the other hand, if you have a competitive advantage over your potential competitors in the form of product offerings, service, technology, price, or another area, the opportunity to enter the market and earn new business may be an attractive one. The best way to figure this out is to begin contacting the customers you will be going after, informing them of what you perceive to be your unique, competitive advantage. If enough of them agree, you probably have your answer.

The risk factor
When determining whether or not you should expand your business into another location, the decision process may seem like it involves a lot of complex factors. I believe it can actually be quite simple. Mostly it comes down to the amount of risk and sacrifice you are willing to make. Your risk assessment will involve the amount of financial resources and how much time you can devote to a new venture. Remember, time is a precious commodity in business that should not be overlooked. Once you figure out where your risk level lands, the steps outlined above will be much easier to deal with and you will end up making a much more informed decision with a significantly higher likelihood of success.