THIS LAST CHAPTER WILL FOCUS on growth—essentially, turning your small business into a big one. In other words, world domination.
Disclaimer: We’re using that term loosely. We don’t necessarily mean your product or service needs to be all over the globe. That said, as the planet grows smaller, you may want to consider dipping your toe into international waters. (More on that later in the chapter.)
Instead, this chapter outlines common growth strategies to take your business to the next level.
“Turning a small business into a big one is never easy,” says Darren Dahl, a contributing editor at Inc. “The statistics are grim.” Research suggests that only one-tenth of 1 percent of companies will ever reach $250 million in annual revenue. An even more microscopic group, just 0.036 percent, will reach $1 billion in annual sales.
In other words, most businesses start small and stay there.
But if that’s not good enough for you—or if you recognize that staying small doesn’t necessarily guarantee your business’s survival—there are examples of companies out there that have successfully made the transition from startup to small business to fully thriving large business.
Keith McFarland, an entrepreneur and former Inc. 500 CEO, researched how small companies pushed past the entrepreneurial phase for his book, The Breakthrough Company. “There have always been lots of books out there on how to run a big company,” says Mc-Farland, who now runs his own consulting business, McFarland Partners, based in Salt Lake City. But he couldn’t find one about how to push a startup to major-player status. “So I studied the companies that had done it to learn their lessons,” he says.
What follows is what McFarland learned, which anyone seeking to grow his or her business can use.
Part of getting from A to B is to put together a growth strategy that McFarland says, “brings you the most results from the least amount of risk and effort.” Growth strategies resemble a kind of ladder, where lower-level rungs present less risk but maybe less quick-growth impact. The bottom line for small businesses, especially startups, is to focus on those strategies that are at the lowest rungs of the ladder and then gradually move your way up as needed. As you go about developing your growth strategy, you should first consider the lower rungs of what are known as “intensive growth strategies.” Each new rung brings more opportunities for fast growth, but also more risk. They are:
1.Market penetration. The least risky growth strategy for any business is to simply sell more of its current product to its current customers—a strategy perfected by large consumer goods companies, says McFarland. Think of how you might buy a six-pack of beverages, then a twelve-pack, and then a case. “You can’t even buy toilet paper in anything less than a twenty-four-roll pack these days,” McFarland jokes. Finding new ways for your customers to use your product—like turning baking soda into a deodorizer for your refrigerator—is another form of market penetration.
2.Market development. The next rung up the ladder is to devise a way to sell more of your current product to an adjacent market—offering your product or service to customers in another city or state, for example. McFarland points out that many of the great fast-growing companies of recent decades relied on market development as their main growth strategy. For example, Express Personnel (now called Express Employment Professionals), a staffing business that began in Oklahoma City, quickly opened offices around the country via a franchising model. Eventually, the company offered employment staffing services in more than 770 different locations, generating $3 billion in sales in 2016.
3.Alternative channels. This growth strategy involves pursuing customers in a different way. For example, selling your products online. When Apple added its retail division, it was also adopting an alternative channel strategy. Using the Internet as a means for your customers to access your products or services in a new way, such as by adopting a rental model or software as a service, is another alternative channel strategy.
4.Product development. A classic strategy, it involves developing new products to sell to your existing customers as well as to new ones. (For more on staying innovative, see Chapter 5.) If you have a choice, you would ideally like to sell your new products to existing customers. That’s because selling products to your existing customers is far less risky than “having to learn a new product and market at the same time,” McFarland says.
5.New products for new customers. Sometimes, market conditions dictate that you must create new products for new customers, as Polaris, the recreational vehicle manufacturer in Minneapolis, found out. For years, the company produced only snowmobiles. Then, after several mild winters, the company was in dire straits. Fortunately, it developed a wildly successful series of four-wheel all-terrain vehicles, opening up an entirely new market. Similarly, Apple pulled off this strategy when it introduced the iPod. What made the iPod such a breakthrough product was that it could be sold alone, independent of an Apple computer, but at the same time it helped expose more new customers to the computers Apple offered. McFarland says the iPhone has had a similar impact; once customers began to enjoy the look and feel of the product’s interface, they opened themselves up to buying other Apple products.
If you choose to follow one of the intensive growth strategies, you should ideally take only one step up the ladder at a time, since each step brings risk, uncertainty, and effort. The rub is that, sometimes, the market forces you to take action as a means of self-preservation, as it did with Polaris. Sometimes, you have no choice but to take more risk, says McFarland.
If you’ve exhausted all steps along the intensive growth strategy path, you can then consider growth through acquisition or integrative growth strategies. The problem is that some 75 percent of all acquisitions fail to deliver on the value or efficiencies predicted for them. In some cases, a merger can end in total disaster (let us not forget the AOL-Time Warner deal in 2000). Nevertheless, there are three viable choices when it comes to implementing an integrative growth strategy. They are:
1.Horizontal. This growth strategy would involve buying a competing business or businesses. Employing such a strategy not only adds to your company’s growth, it also eliminates another barrier standing in the way of future growth—namely, a real or potential competitor. Companies such as Paychex, the payroll services provider, and Intuit, the maker of personal and small business tax and accounting software, acquired key competitors over the years as both a shortcut to product development and as a way to increase their share of the market.
2.Backward. A backward integrative growth strategy would involve buying one of your suppliers as a way to better control your supply chain. Doing so could help you to develop new products faster and potentially more cheaply. For instance, Fastenal, a company based in Winona, Minnesota, that sells nuts and bolts (among other things), made the decision to acquire several tool and die makers as a way to introduce custom-part manufacturing capabilities to its larger clients.
3.Forward. Acquisitions can also be focused on buying component companies that are part of your distribution chain. For instance, if you were a garment manufacturer like Chicos, which is based in Fort Myers, Florida, you could begin buying up retail stores as a means to pushing your product at the expense of your competition.
Another category of growth strategies that was popular in the 1950s and 1960s and is used far less often today is something called diversification, where you grow your company by buying another company that is completely unrelated to your business. Massive conglomerates such as General Electric are essentially holding companies for a diverse range of businesses based solely on their financial performance. That’s how GE could have a nuclear power division, a railcar manufacturing division, and a financial services division all under the letterhead of a single company. This kind of growth strategy tends to be fraught with risk and problems, says McFarland, and is rarely considered viable these days.
Growth strategies are never pursued in a vacuum, and being willing to change course in response to feedback from the market is as important as implementing a strategy in a single-minded way. Too often, companies take a year to develop a strategy and, by the time they’re ready to implement it, the market has changed on them, says McFarland. That’s why, when putting together a growth strategy, he advises companies to think in just ninety-day chunks. Sometimes the best approach is to take it one rung at a time.
Whatever strategy you choose, growing a small company will entail some level of risk.
“As a smart entrepreneur, you don’t let this stop you from weighing the facts and making the best possible choices,” says Rhett Power, co-founder of the toy company Wild Creations. And if your expansion doesn’t go as planned? “You develop a new strategy from a wiser perspective,” he suggests.
“The biggest risk is not taking any risk. In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”
MARK ZUCKERBERG, founder of Facebook
When you have limited resources and narrow profit margins, learning how to manage risk should be a top priority. Here is how Power recommends doing it:
Track your cash flow. How much money do you have right now? Can you pay your bills? What if your biggest client went elsewhere? Ideally, you have three to six months of funds tucked away to cover expenses. Be conservative. Ask your vendors for sixty or ninety days to pay. You should always know your financial status, good or bad, and have a realistic contingency plan—especially before making big moves.
Listen to warnings. If you’ve hired well, or have close advisors, you can trust their doubts. Are they seeing something concerning in a contract, employee, vendor—or in your growth strategy itself? It’s easy to dismiss others’ opinions, but you need to listen. “They have your best interest at heart, even if you don’t want to hear it,” Power says. “Thank them and reward them.”
Get legal. You can’t grow and succeed without legal advice. Have an attorney review your contracts, the terms of your deals, and even the structure of your company. “Yes, it costs money, but you can’t afford not to protect yourself,” Power says. Hire an accountant to help you manage cash flow and get a handle on your company’s numbers. Chances are that, at some point, you will be glad you had the foresight to hire professionals.
Avoid commitment. It may feel secure to, say, sign a long-term office lease. Until you are firmly established, you need to be nimble and able to make quick adjustments. Clients change and projects go sideways. You may decide to narrow your focus . . . or expand it. Something like an expensive address can become a detriment. Whatever it is, be cautious about committing to anything that could be a drain on your finances.
Risk is necessary. In fact, “it can be exhilarating to take you to the next level,” Power says. “Remember, Mark Zuckerberg wouldn’t have succeeded without risk.” But always, even when you become an Inc. 500 company, manage that risk carefully.
Here are a few businesses that took risks to grow—and it paid off.
Microsoft. The story of Microsoft is long and varied and riddled with missteps, especially when it comes to mobile devices. But back in 2001, the tech giant pushed the envelope with its first gaming console: the Xbox. At a time when it seemed like there could be no rival to the Playstation, the company doubled down on their marketing budget for the device. Now, the Xbox isn’t just a way to play games, it’s also a major player when it comes to “Over the Top” television and video streaming.
Google. Once upon a time, there was no Google. Co-founders Larry Page and Sergey Brin created the company while Ph.D. students at Stanford University, and almost gave up on it all because it was taking way too much time. Page nearly sold the company in 1997 for just $1.5 million. Later on in 2006, when no one understood the potential of a little video service called YouTube, the tech company bought it up. The rest is history.
TOMS. When Blake Mycoskie founded TOMS, many investors laughed at the business model and the fashion. Mycoskie went all in, though, starting and running the business from the very beginning. Not only has TOMS launched multiple product lines, but the “buy one, give one” concept has defined an entire generation of millennial consumers and the sharing economy.
Whole Foods. Remember when buying organic and natural products seemed like a fancy idea? You can blame these four food lovers from Texas—John Mackey and Renee Lawson Hardy, owners of Safer Way Natural Foods, and Craig Weller and Mark Skiles, owners of Clarksville Natural Grocery—for the rise of the all-natural economy. They all left their popular shopping market gigs to bet on Whole Foods, which could have been a major flop. But by believing in the model, and starting out with just nineteen employees in 1980, they’ve changed the entire culture of grocery shopping and food preparation.
Intel. The foundational company of everything digital, Intel announced plans in 2016 to reinvent itself, ditching some of its chips and concentrating on server systems and the cloud. They’re betting it all on the Internet of Things. Whether the risk really will pay off in the end, still remains to be seen.