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Plan your course for expansion.

Nothing breeds success like success. If you are a small business owner who has built a healthy company, you are no doubt betting that you can build on your success by expanding. Before you race ahead, be sure you truly understand the nature of your business, your goals and the type of expansion that is best for you.

Boosting profitability is the most alluring reason for pursuing growth. But expansion can also help reduce risk. Geographical expansion -- moving into new markets across the province, the country or the world -- can be an effective way to diversify and distribute your corporate eggs among more than one basket. Expansion of the range of products or services you offer can have the same protective effect.

Expansion can also serve as a way to deal with competitors, as you gain market share, you block the growth of other players. You may wish to extend your influence, to ensure a source of supply and/or dominate a distribution channel, product line or market segment.

Regardless of your reasons for expanding, the ways in which you can grow are varied. You can increase domestic sales, increase your products or services, acquire or merge with another company, or develop export sales.

If yours is a business in which it is important to be close to customers, increasing domestic sales is the tried and true formula for growth. Successful retail or franchise operations expand by opening new outlets in different locations, while professionals and firms in the service industry build networks of regional offices. In such cases, companies enjoy instant recognition in the new market because they are building on an established reputation.

Another way to increase domestic sales is to simply increase the sales force in your immediate area or in a geographically expanded territory. Adding products or services to your present line, and giving customers more reasons to buy from you, may also help your company grow. But, don't forget that if a beefed-up sales force or product line means beefed-up sales, it also means you'll need more capacity to produce, store and deliver your goods or services.

As you scout around for new products, or during the general course of business, you'll undoubtedly hear about many potential opportunities to grow through acquisition. A company that's tempting to purchase could be in your own industry. Or, it could be in another sector, luring you with the opportunity to branch out.

While growth through acquisition may appeal to you, your first consideration should be your existing business. What effect would an acquisition have on your customers, suppliers, managers and employees? To ensure that the effects of an acquisition would not be destructive to what you've already built, you will have to develop a complete understanding of the marketing, manufacturing and financial aspects of the business that interests you. If you don't know exactly what you're buying, you are guaranteed to have problems down the road.

The same is true if you are contemplating expansion through a merger. The most common reason for failed mergers is the failure of the two interested parties to get to know each other well enough before tying the corporate knot.

If you are willing to do your homework, however, a merger can be a very appealing way to grow. It offers the potential advantages of gains in efficiency, economies of scale in production, rationalization of production, reduced financing costs, increased sales and market penetration, and higher profitability.

In this sense, a merger has all the benefits of an acquisition. But it also offers one key benefit that an acquisition doesn't--no large debt is incurred by joining the two companies. Acquiring another company usually means borrowing to pay for it and the effect of that debt can be staggering in today's economic climate. That's why the merger is an increasingly popular strategy for growth in the 1990s.

Developing export sales is also popular as a growth strategy for the competitive 1990s. Many small business owners now believe that they can't afford to lock themselves out of foreign markets, especially when those markets could compensate for bad times at home.

You don't have to go to the ends of the earth to successfully export. In fact, it's often best to stick close to home. The northern New York state market, for example, could be a bonanza for a company based in southern Ontario. Breaking into a neighbouring market, however, will take the same serious commitment of time, travel and research as breaking into a market that's more far-flung.

Also bear in mind that no matter how you choose to expand, it takes money. If you add a product to your line, you'll have to market it, store it, deliver it and track it through your accounting systems. If you offer a new service, you'll have to hire staff to provide it. If you make an acquisition, initiate a merger or begin exporting, you will need capital.

The key to successful growth is careful financial planning. Be sure that the new business can cover the increased debt you'll incur. And remember that growing too fast will put your business under faster than growing too slowly.

Moneycare is general financial advice by Canada's chartered accountants. Philip Orsino is president and chief executive officer of Premdor Inc.
COPYRIGHT 1992 Canadian Institute of Management
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Moneycare; expansion of business enterprise
Author:Orsino, Philip
Publication:Canadian Manager
Date:Sep 22, 1992
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