Business Expansion

The economy is notoriously cyclical. It expanded forcefully in the 1990s reaching a peak growth of 7.3 percent in the fourth quarter (Q4) of 1999. Growth then dipped to 1 percent in the Q1 of 2000 and hit a negative growth rate of −0.5 percent by Q3 of that year. Growth remained anemic until late 2003 but has not, since, matched "irrational exuberance" as Alan Greenspan, the outgoing Chairman of the Federal Reserve, labeled market behavior late in 1996. Expansions and contractions are thus a normal part of economic life; most businesses expand in good times and contract somewhat in bad. Not surprisingly, a look at business literature for the late 1990s shows scores of articles dealing with the "problems of expansion" and how to deal with them. In 2005 and 2006, such articles were conspicuous by absence. Instead, here and there, an article appeared suggesting how a business might plan to trigger its own growth.

Business expansion thus has two aspects. One is planned and carefully managed expansion at the business owner's initiative. The other, which can be much more problematical, is sudden and involuntary expansion that simply happens for various reasons—among them economic expansion or simply because the business caught the market's eye with a novel product or service. Careful management of such good fortune may be even more vital than planned growth. Somewhat surprisingly for the layman, the Small Business Administration lists "unexpected growth" as one of 10 causes of business failure. Expansion carries risks, whether it is planned or involuntary.

PLANNED EXPANSION

Especially in small business, not all owners wish to expand—sometimes because they started their small business precisely to maintain what they wished to have in the first place: close contact with customers, employees, or the product/service itself, freedom from the burdens of administrative management, and the autonomy that sole-proprietorship often provides. Those who plan expansion tend to have a different vision of the business, one in which "smallness" is not in itself a goal but a necessary starting point. Others plan to expand because the very logic of the business indicates that a larger size is desirable to achieve the full potential of the enterprise. Every situation is unique, of course, but in broad strokes the methods will largely involve one or the other of the following categories of actions: 1) sell more of the same, 2) expand the range of products or services sold, 3) sell something very different, and/or 4) change the underlying business concept. These strategies are listed roughly in the order in which most small businesses consider them. As we move from 1 to 4, each step is more difficult and requires more comprehensive changes and larger investments.

Each strategy, of course, implies additional alternatives some of which may be quite risky. By way of an example, the first choice, to sell more of the same, may involve one or a combination of the following: a) regional expansion of outlets, b) significant expansion of production facilities, c) vertical integration whereby more of the product is made in-house, d) revamping the distribution system, and more.

In one of the few recent articles on planned expansion, Julie Monahan, writing in Entrepreneur, lists seven expansion strategies with very similar characteristics. These are 1) introduction of a new product, 2) taking existing product to a new market, 3) licensing the product for others to make, 4) starting a chain, 5) turning the business into a franchise, 6) growing through acquisition or merger, and 7) seeking foreign markets.

In essence, planned expansion—particularly one based on more complex strategies—is essentially the same as starting a business from scratch with the exception that a running business provides the owner with a minimum base from which to start. Important administrative structures are already in place—even if they have to be expanded. For these reasons the same financial, planning, and business skills are needed as were necessary to found the original business. On the whole business owners who stay closest to their experience will have the fewest regrets.

MANAGING UNEXPECTED GROWTH

Along with much positive reinforcement, unexpected growth also brings danger: it is exuberance. Unless kept in check, it may lead to careless decisions and a temporary relaxation of the very disciplines that made the business successful in the first place. For this reason, management experts counsel caution when sales suddenly surge. Furthermore, unexpected growth is a challenge that may be unavoidable: the business choosing deliberately not to respond to strong demand may, as a consequence, be left behind and find itself contracting. Growth must be managed. Paul Hawken in his popular book, Growing A Business [Simon and Schuster, 1986], says that problems are normal to business. "What's the difference between a good business and a bad one?" Hawken asks. "A good business has interesting problems," he answers, "a bad business has boring ones." Unexpected growth is a business problem, but it is an "interesting problem." Most business owners would rather face growth than empty stores or silent phones.

The chief challenge presented by surging growth tends to be financial. Capacity may have to be expanded and money must be spent to purchase inventory way above normal levels. Capital for either purpose may be difficult to find—or expensive to borrow. In service-providing businesses, new people must be hired rapidly and as rapidly trained. At the same time, the business may be able quite accurately to calculate its immediate financial needs but be less able to assess the sudden demand. Will it continue? Is this a flash? The business owner must retain a certain sobriety and look at the situation—which may involve talking to a lot of people—before deciding to invest.

Most business failures due to unexpected growth are triggered by cash-flow problems. The business will have great sales and high profits, but cash in hand may be inadequate because of the time lag between sales and cash collections from the customer. Customers will expect to purchase on credit; commercial customers may be slow in paying. In a rapid growth situation cash receipts tend to lag sales and deliveries in any case. If growth continues to expand, the business may find itself unable to pay bills even though it has more than adequate resources coming in—later. This can lead to bankruptcies.

Added to potential cash-flow problems are a host of other managerial problems that can occur simply because the business is operating now at greater speed, with more people (many not yet fully trained), and a stressed management less likely to find time to examine financial control systems which, in their turn, may be over-taxed. Some problems, caused by intense activity, may show up later to cause trouble. Thus customer service may be neglected and brand equity may be damaged as a consequence. Minor disagreements—perhaps even simply temperamental differences—may intensify into outright disagreements and divided loyalties within. The small business owner, accustomed to a hands-on-operation, may find himself or herself pushed into a much more distant and corporate role without adequate preparation or willingness to change.

Problems of this nature have no simple or single formulaic solution. Management experts universally counsel a "go it slow" approach to the situation, the maintenance of established disciplines, openness and flexibility in meeting problems, close work with employees, drawing in expert help and using its recommendations, and, if necessary, "leaving money on the table" today so that it can be safely picked up tomorrow.

CHOOSING NOT TO GROW

Given the dynamics of specific markets, choosing not to grow may sometimes be another way of deciding to close the business. Most often a rich variety of alternatives remains open—permitting the business to stay small, in fact, to increase its reputation and its profits in the process. Such adaptiveness, however, also requires action.

Unwelcome rapid growth is, in fact, just another business challenge similar to the sudden appearance of a formidable competitor. Many successful businesses adapt to stay small. Invariably, however, they will also change. For example, management may decide that, rather than trying to handle the new demand, it will cut back on its product line and retain a portion of it in a new niche. The adjustment of the business may take the form of concentrating on one kind of customer, for example the household market, whereas the company formerly also worked with corporations. It may mean staying in the high end of a market and repositioning the enterprise accordingly (through changed advertising, signage, sales strategy) while letting others serve the larger but lower-priced segments.

The analogy to competition is apt in this situation because the small business, unwilling to sell a suddenly popular product in much greater quantity will see competition. The new demand will create its own expanded supply. The new suppliers will then draw business from the reluctant laggard unless the company adapts by differentiation along the lines outlined above.

BIBLIOGRAPHY

Koppel, Nathan. "Churn: the Dark Downside of Expansion." New Jersey Law Journal. 14 March 2005.

McCoy-Pinderhughes, Paula. "Capital Expansion." Black Enterprise. December 2000.

Monahan, Julie. "All Systems Grow." Entrepreneur. March 2005.

Morrow, Aubrey. "What steps to take to finance expansion." San Diego Business Journal. 25 August 2003.

U.S. Small Business Administration. "Firm Size Data." Available from http://www.sba.gov/advo/research/data.html. Retrieved 19 January 2006.

Weinzimmer, Laurence G. Fast Growth: How to Attain It, How to Sustain It. Dearborn, 2001.

                              Hillstrom, Northern Lights

                                updated by Magee, ECDI

BUSINESS CYCLE

Business cycle is the name given to the tendency of all economies to go through periods of economic weakness followed by periods of economic growth. When employment, income, trade, and the production of goods and services declines the economy is said to be in a "recession" or a "contraction." If this downturn is particularly harsh, this part of the business cycle is known as a "depression." Conversely, when employment, income, trade, and the production of goods and services grows over a sustained period of time, the economy is said to be enjoying an "expansion." Thus, the term business cycle describes the full process of economic growth and shrinkage—of "boom" followed by "bust"—that every economy experiences. The causes for changes in the business cycle are as complex as the economy itself, but important factors are over investment, under consumption of goods and services, and the amount of money circulating in the economy. Business cycles can differ greatly in their length, in the number of industries they affect, and in their harshness. Today economists use dozens of statistical measures to try to identify when a business cycle has ended or begun. These include, among others, new factory orders, number of business bankruptcies, stock market performance, new home building, and length of average work week.

Between 1790 and 1990 the United States experienced 44 complete business cycles, each of which lasted about four and a half years (i.e., including both a recessionary period and an expansionary period). In the nineteenth century the recessionary period of the business cycle was usually accompanied by a financial panic in which stock prices fell and banks and businesses went bankrupt. The longest recession in U.S. history during the nineteenth century was between 1873 and 1879. The most severe recession was the Great Depression, which lasted from 1929 to 1939. To understand how disastrous the Great Depression was one should consider that during the recession of 1973–1975 the gross national product fell six percent, while during the Great Depression it fell a staggering 50 percent. Since World War II (1939–1945), however, the business cycle has become much more mild because economists and government leaders know much more about the role the money supply and government fiscal policy can play in affecting the business cycle. When the economy begins to contract, for example, the Federal Reserve can quickly lower interest rates to encourage lending, which stimulates economic growth.

See also: Federal Reserve System, Financial Panic, Recession