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Executive Summary
Achieving a sustained market growth is a major challenge that requires understanding of various factors that affect a firms operation. In this business plan, the focus was on a hobby store that seeks to achieve growth beyond the current market. The report discusses how this firm should prepare for growth, common reasons that justifies the growth, the importance of managing stages of growth, and challenges that this firm may face in its effort to achieve growth. The report also explains core internal growth strategies, internal product-growth strategies, international expansion as a growth strategy, and different types of external growth strategies. The report shows that although there are numerous challenges that a firm can face in its effort to achieve growth, employing the right strategy and having a team of skilled and dedicated employees can enable this hobby store to achieve its goal.
Introduction
The hobby and toy industry in North America, especially in the United States and Canada, has been growing rapidly. In Canada, there are numerous companies offering a wide range of products to meet the needs of their clients. As the competition gets stiff, it becomes essential for existing players to find ways of meeting the needs of their clients in the best way possible (Pepe, 2020). Achieving growth in such a highly competitive market may be a challenge, especially for small and medium-sized companies. A firm must conduct a comprehensive analysis of the market forces to understand opportunities and threats. It must then develop a unique plan of overcoming the challenges while at the same time taking advantage of the opportunities that the market presents.
In this business plan, the discussion focuses on how this hobby company can prepare for and achieve growth in the market. Gupta (2021) warns that without a carful plan for growth, a company may end up using a significant amount of resources without achieving the intended goal. In such a case, the company would face a major loss and it may even lose its market share if appropriate measures are not taken to address the challenge. The company should not only consider expanding to new markets but also penetrating the existing one further in its growth strategy. In this report, the researcher looks at the unique strategies that this firm can embrace to achieve the desired growth while at the same time ensuring that it meets the needs of its current customers in the best way possible.
Preparing and for Market Growth
Preparing for Growth
It is critical for this company to have a clearly defined plan on how to achieve growth in the current competitive business environment. Most entrepreneurial firms want to grow. Especially in the short term, growth in sales revenue is an important indicator of an entrepreneurial ventures potential to survive today and be successful tomorrow. Growth is exciting and, for most businesses, is an indication of success. Many entrepreneurial firms have grown quickly, producing impressive results for their employees and owners as a result of doing so; consider firms examined in this book such as Soul Cycle, Rent the Runway, and Casper, among others, as examples of this.
Although there is some trial and error involved in starting and growing any business, the degree to which a firm prepares for its future growth has a direct bearing on its level of success. This section focuses on three important things a business can do to prepare for growth.
Appreciating the Nature of Business Growth
The first thing that a business can do to prepare for growth is to appreciate the nature of business growth. Growing a business successfully requires preparation, good management, and an appreciation of the issues involved. The following are issues about business growth that entrepreneurs should appreciate.
Not All Businesses Have the Potential to Be Aggressive Growth Firms
The businesses that have the potential to grow the fastest over a sustained period of time are ones that solve a significant problem or have a major impact on their customers productivity or lives. This is why the lists of fast-growing firms are often dominated by health care, technology, social media, and entertainment companies. These companies can potentially have the most significant impact on their customers businesses or lives. This point is affirmed by contrasting the womens clothing store industry with the biotechnology industry. From 2012 to 2017, the average growth rate for womens clothing stores in the United States was negative (- 1.3 percent) while the average growth rate for medical supplies companies was 2.8 percent. While there is nothing wrong with starting and owning a womens clothing store, it is important to have a realistic outlook of how fast the business will likely grow. Even though an individual womens clothing store might get off to a fast start, as it gets larger, its annual growth will normally start to reflect its industry norm.
A Business Can Grow Too Fast
Many businesses start fast and never let up, which stresses a business financially and can leave its owners emotionally drained. Sometimes businesses grow at a measured pace and then experience a sudden upswing in orders and have difficulty keeping up. This scenario can transform a business with satisfied customers and employees into a chaotic workplace with people scrambling to push the business products out the door as quickly as possible. The way to prevent this from happening is to recognize when to put the brakes on and have the courage to do it. This set of circumstances played out early in the life of The Pampered Chef, a company, which sells kitchen utensils through home parties. Just about the time the company was gaining serious momentum, it realized that it didnt have a sufficient quantity of products in its inventory to serve the busy Christmas season. This reality posed a serious dilemma.
The Pampered Chef couldnt instantly increase its inventory (its vendors were all low in their own inventories and the company was small, so it couldnt make extraordinary demands on its vendors), yet it didnt want to discourage its home consultants from making sales or signing up new consultants. One option was to institute a recruiting freeze (on new home consultants), which would slow the rate of sales. Doris Christopher, the companys founder, remembers asking others for advice. Most advised against instituting a recruiting freeze, arguing that the lifeblood of any direct sales organization is to sign up new recruits. In the end, the company decided to institute the freeze and slowed its sales enough to fill all orders on time during the holiday season. The freeze was lifted the following January, and the number of The Pampered Chef recruits soared. Reflecting on the decision, Doris Christopher later wrote:
Looking back, the recruiting freeze augmented our reputation with our sales force, customers, and vendors. People saw us as an honest company that was trying to do the right thing and not overestimating our capabilities.
Other businesses have faced similar dilemmas and have sometimes made the right call, and other times havent. The overarching point is that growth must be handled carefully. As we emphasize throughout this chapter, a business can only grow as fast as its infrastructure allows. Table 13.1 provides a list of 10 warning signs that a business is growing too fast.
Table 13.1 10 Warning Signs That a Business Is Growing Too Fast
Business Success Doesnt Always Scale
Unfortunately, the very thing that makes a business successful might suffer as the result of growth. This is what business experts often mean when they say growth is a two-edged sword. Businesses that are based on providing high levels of individualized service often do not grow or scale well. For example, an investment brokerage service that initially provided high levels of personalized attention can quickly evolve into providing standard or even substandard service as it adds customers and starts automating its services. Its initial customers might find it harder to get individualized service than it once was and start viewing the company as just another ordinary business.
There is also a category of businesses that sell high-end or specialty products that earn high margins. These businesses typically sell their products through venues where customers prioritize quality over price. These businesses can grow, but only at a measured pace. If they grow too quickly, they can lose the exclusivity they are trying to project, or can damage their special appeal. Fashion clothing boutiques often limit the number of garments they sell in a certain size or color for a similar reason. Even though they know they could sell more of a particular blouse or dress, they deliberately limit their sales so their customers dont see each other wearing identical items.
Reasons for Growth
It is necessary to discuss the most important reasons for growth that should motivate the management of this hobby company to explore new markets. Although sustained, profitable growth is almost always the result of deliberate intentions and careful planning, firms cannot always choose their pace of growth. A firms pace of growth is the rate at which it is growing on an annual basis. Sometimes firms are forced into a high growth mode sooner than they would like. For example, when a firm develops a product or service that satisfies a need for many customers and orders roll in very quickly, it must adjust quickly or risk faltering. In other instances, a firm experiences unexpected competition and must grow to maintain its market share. This section examines six primary reasons firms try to grow to increase their profitability and valuation, as depicted in Figure 13.1
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Capturing economies of scale. Economies of scale are generated when increasing production lowers the average cost of each unit produced. Economies of scale can be created in service firms as well as traditional manufacturing companies. This phenomenon occurs for two reasons. First, if a company can get a discount by buying component parts in bulk, it can lower its variable costs per unit as it grows larger. Variable costs are the costs a company incurs as it generates sales. Second, by increasing production, a company can spread its fixed costs over a larger number of units. Fixed costs are costs that a company incurs whether it sells something or not. For example, in a manufacturing setting, it may cost a company $10,000 per month to air-condition its factory. The air conditioning cost is fixed; cooling the factory will cost the same whether the company produces 10 or 10,000 units per month. In a service setting, a hotels registration areas, restaurants, and other areas must be air conditioned regardless of the number of rooms that have been filled for a particular evening.
A related reason firms grow is to make use of unused resources such as labor capacity and a host of others. For example, a firm may need exactly 2.5 full-time salespeople to fully cover its trade area. Because a firm obviously cant hire 2.5 full-time salespeople, it may hire 3 salespeople and expand its trade area.
Managing Growth
The management of this hobby store should understand the importance of being able to manage stages of growth. Many businesses are caught off guard by the challenges involved with growing their companies. One would think that if a business got off to a good start, steadily increased its sales, and started making money, it would get progressively easier to manage the growth of a firm. In many instances, just the opposite happens. As a business increases its sales, its pace of activity quickens, its resource needs increase, and the founders often find that theyre busier than ever. Major challenges can also occur. For example, a business might project its next years sales and realize it will need more people and additional equipment to handle the increased workload. The new equipment might need to be purchased and the new people hired and trained before the increased business generates additional income. Its easy to imagine serious discussions among the members of a new ventures management team trying to figure out how that will all work out.
The reality is that a company must actively and carefully manage its growth for it to expand in a healthy and profitable manner. As a business grows and becomes better known, there are normally more opportunities that present themselves, but there are more things that can go wrong, too. Many potential problems and heartaches can be avoided by prudently managing the growth process. This section focuses on knowing and managing the stages of growth. The final section in this chapter focuses on a related topic- the challenges of growth.
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Knowing and managing the stages of growth. The majority of businesses go through a discernable set of stages referred to as the organizational life cycle. The stages, pictured in Figure 13.2 include introduction, early growth, continuous growth, maturity, and decline. Each stage must be managed differently. Its important for an entrepreneur to be familiar with these stages, along with the unique opportunities and challenges that each stage entails.
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Introduction stage. This is the start-up phase where a business determines what its strengths and core capabilities are and starts selling its initial product or service. Its a very hands-on phase for the founder or founders, who are normally involved in every aspect of the day-to-day life of the business. The business is typically very non-bureaucratic with no (or few) written rules or procedures. The main goal of the business is to get off to a good start and to try to gain momentum in the marketplace.
The main challenges for a business in the introduction stage are to make sure the initial product or service is right and to start laying the groundwork for building a larger organization. It is important to not rush things. This sentiment is affirmed by the growth pattern of Nest Labs, the subject of Case 11.1. Nest sold a single product, the Nest Learning Thermostat, for two years before its second product, the Nest Protect, which is a smoke and carbon monoxide detector, was introduced. The company needed two years to scale its operations and management team before it was ready to add a second product and accelerate its growth. In regard to laying the groundwork to build a larger organization, many businesses use the introduction stage to try different concepts to see what works and what doesnt, recognizing that trial and error gets harder as a business grows. Its important to document what works and start thinking about how the companys success can be replicated when the owner isnt present or when the business expands beyond its original location.
This young entrepreneur sells womens clothing online. She started by hand tailoring many of the garments she sold. Her ability to grow her business will depend in part on her willingness to step back from hand-tailoring clothes and move into a more managerial role.
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Early growth stage. A businesss early growth stage is generally characterized by increasing sales and heightened complexity. The business is normally still focused on its initial product or service but is trying to increase its market share and might have related products in the works. The initial formation of policies and procedures takes place, and the process of running the business will start to consume more of the founders or founders time and attention.
For a business to be successful in this stage, two important things must take place. First, the founder or owner of the business must start transitioning from his or her role as the hands-on supervisor of every aspect of the business to a more managerial role. As articulated by Michael E. Gerber in his excellent book The E-Myth Revisited, the owner must start working on the business rather than in the business. The basic idea is that early in the life of a business, the owner typically is directly involved in building the product or delivering the service that the business provides. As the business moves into the early growth stage, the owner must let go of that role and spend more time learning how to manage and build the business. If the owner isnt willing to make this transition or doesnt know it needs to be made, the business will never grow beyond the owners ability to directly supervise everything that takes place, and the business growth will eventually stall.
The second thing that must take place for a business to be successful in the early growth stage is that increased formalization must take place. The business has to start developing policies and procedures that tell employees how to run it when the founders or other top managers arent present. This is how franchise restaurants run so well when theyre staffed by what appears to be a group of teenagers. The employees are simply following well-documented policies and procedures. This task was clearly on the mind of Emily Levy, the founder of EBL Coaching, a tutoring service for children who are struggling in school or trying to overcome disabilities, when she was asked by Ladies Who Launch (a support network for female entrepreneurs) early in the life of her business about her growth plans:
My future goals include continuing to spread EBL Coachings programs nationally, using our proprietary materials and self-contained multisensory methods. I have already developed a series of workbooks, called Strategies for Success, addressing specific study skills strategies, that are being used in a number of schools across the country. The real challenge will be figuring out how to replicate our programs while maintaining our high quality of teaching and personalized approach.
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Continuous growth stage. The need for structure and more formal relationships increases as a business moves beyond its early growth stage and its pace of growth accelerates. The resource requirements of the business are usually a major concern, along with the ability of the owner and manager to take the firm to the next level. Often the business will start developing new products and services and will expand to new markets. Smaller firms may be acquired, and the business might start more aggressively partnering with other firms. When handled correctly, the businesss expansion will be in areas that are related to its strengths and core capabilities, or it will develop new strengths and capabilities to complement its activities.
The toughest decisions are typically made in the continuous growth stage. One tough decision is whether the owner of the business and the current management team have the experience and ability to take the firm any further. This scenario played out for Rachel Ashwell, the founder of Shabby Chic, a home furnishing business. Ashwell expanded her company to five separate locations, inked a licensing deal with Target, wrote five how-to books related to her business, and hosted her own television show on the Style Network before concluding that her business had stalled. Her choice was to continue running the business or find more experienced management to grow it further. She opted for the latter, which reignited the companys growth.
The importance of developing policies and procedures increases during the continuous growth stage. Its also important for a business to develop a formal organizational structure and determine clear lines of delegation throughout the business. Well-developed policies and procedures lead to order, which typically makes the process of growing a business more organized and successful.
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Maturity stage. A business enters the maturity stage when its growth slows. At this point, the firm typically focuses more intently on efficiently managing the products and services it has rather than expanding in new areas. Innovation slows. Formal policies and procedures, although important, can become an impediment if they are too rigid and strict. Its important that the firm continues to adapt and that the founders, managers, and employees remain passionate about the products and services that are being sold. If this doesnt happen, a firm can easily slip into a no-growth situation.
A well-managed firm that finds its products and services are mature often looks for partnering or acquisition opportunities to breathe new life into the firm. For example, Coca-Cola, a firm in the maturity stage of its life cycle, has a long history of acquisitions. Among other purchases, it acquired Minute Maid in 1960, the Indian cola brand Thums Up in 1993, the Odwalla brand of fruit juices, smoothies, and bars in 2001, Fuze Beverages and Glaceau in 2007, Honest Tea in 2008 and 2011, a minority interest in Monster Beverage in 2014, and Unilevers Soy Beverage Brand in 2016. If a company does grow organically while in the maturity stage, it normally focuses on the next generation of products it already sells rather than investing in new or related products or services.
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Decline stage. It is not inevitable that a business enter the decline stage and either deteriorate or die. Many American businesses have long histories and have thrived by adapting to environmental change and by selling products that remain important to customers. Eventually all businesses products or services will be threatened by more relevant and innovative products. When this happens, a business ability to avoid decline depends on the strength of its leadership and its ability to appropriately respond. A firm can also enter the decline stage if it loses its sense of purpose or spreads itself so thin that it no longer has a competitive advantage in any of its markets. A firms management team should be aware of these potential pitfalls and guard against allowing them to happen.
A framework that is similar to the organizational life cycle is the technology adoption life cycle, which is suited primarily for technology firms that are introducing disruptive innovations to the market. The technology life cycle is associated with the concept of crossing the chasm, which explains why some technology products reach mainstream markets while others dont. An explanation of the technology life cycle, the concept of crossing the chasm, and an example of a start-up that successfully crossed the chasm and reached mainstream markets is provided in the nearby Savvy Entrepreneurial Firm feature.
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Savvy entrepreneurial firm. In 1991, Geoffrey A. Moore, a lecturer and management consultant, wrote an influential book titled Crossing the Chasm. The book became an instant must-read for managers, entrepreneurs, and investors. The book was updated in 2009 and again in 2014. It has been described as the bible for understanding why some technology-oriented start-ups grow into large firms while others stall or languish in terms of adoption and firm growth.
The books premise is that there is a chasm between the early adopters of a product (the technology enthusiasts and visionaries) and the early majority (the pragmatists). The key insight is that to cross the chasm, firms must first dominate a niche of early adopters and expand from a position of strength. The concept is related to the technology adoption life cycle. The stages in the technology adoption life cycle are innovators, early adopters, early majority, late majority, and laggards. Start-up products initially appeal to innovators, who are people who like to try new things but are seldom willing to spend much. Then come the early adopters, or visionaries, who are willing to take a chance on a new product if it solves a burning problem. After the early adopters come the early majority, which is the largest segment. The early majority will only buy if a product is complete and is heavily recommended by others. If its not recommended, they wont buy, regardless of how well a product suits their needs. Next is the late majority, which buys only after a product has become the standard. The laggards, who bring up the rear, rarely buy.
The chasm is hard to cross. Ironically, it is not the early adopters who convince the early majority to buy. In fact, the early majority typically mistrusts the enthusiasm of visionaries. They start buying when credibility is established and momentum within their own group starts to build. In his book, Moore suggests techniques to successfully appeal to the early majority, and cross the chasm, including issues pertaining to a firms target market, its positioning strategy, its marketing strategy, and a number of other important factors. Its well worth the time to read the book to learn the techniques and capture the subtleties.
Salesforce.com is an example of a company that has crossed the chasm. Prior to Salesforce.com, software was a product that was sold on discs that clients would install on their computers. The software would then need to be integrated into the clients system, which typically cost more than the software itself. By the time the software was installed, there were often updates available. Many clients would forgo installing the updates, at least for a period of time, to simply avoid the additional hassle and expense of installing them.
Salesforce.com introduced a better way. Its better way was software-as-a-service, later abbreviated as SaaS. The idea was that instead of selling software on discs to be installed on a clients computers, there would be only one copy of the software, running on Salesforce.com computers, which multiple users could access simultaneously via the Internet. The sales pitch was compelling. By adopting Salesforce.coms solution, a client would no longer incur the costs and headaches involved with installing, updating, and maintaining software.
Whats interesting is the way Salesforce.com managed the rollout of the product and how the firm eventually crossed the chasm. In regard to the rollout, the company picked a single market to go after, salespeople, and no one else. There was nothing in the product for marketing, customer service, or any other division in a company. Salesforce.com focused exclusively on the United States as its target market, partly to stay close to its customer. The firm also chose to initially target tech-savvy industries. The result was a product designed to achieve a singular objectivehelping salespeople make their quota. As a result, salespeople loved it. And because they loved it, they told other salespeople about it, and adoption grew virally. The number of early adopters grew. Credibility was built as the product was displayed at tradeshows and was talked about in mainstream media. Eventually, companies such as Merrill Lynch saw the merits of the service and signed on. Salesforce.com crossed the chasm and started appealing to the early majority and a wider number of users.
The irony of the Salesforce.com story, which is the essence of Moores insight, is that by picking a single niche market, and establishing sufficient credibility that the early majority noticed, Salesforce.com was able to cross the chasm faster than it would have if it had created a much more robust product initially and tried to appeal to a broader cross-section of markets.
Challenges of Growth
The hobby company needs to identify and address challenges that may affect its growth, particularly those of adverse selection and moral hazard. There is a consistent set of challenges that affect all stages of a firms growth. The challenges typically become more acute as a business grows, but a business founder or founders and managers also become more savvy and experienced with the passage of time. The challenges illustrate that no firm grows in a competitive vacuum. As a business grows and takes market share from rival firms, there will be a certain amount of retaliation that takes place. This is an aspect of competition that a business owner needs to be aware of and plan for. Competitive retaliation normally increases as a business grows and becomes a larger threat to its rivals. This section is divided into two parts. The first part focuses on the managerial capacity problem, which is a framework for thinking about the overall challenge of growing a firm. The second part focuses on the four most common day-to-day challenges of growing a business.
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Managerial capacity. In her thoughtful and seminal book The Theory of the Growth of the Firm, Edith T. Penrose argues that firms are collections of productive resources that are organized in an administrative framework. As an administrative framework, the primary purpose of a firm is to package its resources together with resources acquired outside the firm as a foundation for being able to produce products and services at a profit. As a firm goes about its routine activities, the management team becomes better acquainted with the firms resources and its markets. This knowledge leads to the expansion of a firms productive opportunity set, which is the set of opportunities the firm feels it is capable of pursuing. The opportunities might include the introduction of new products, geographic expansion, licensing products to other firms, exporting, and so on. The pursuit of these new opportunities causes a firm to grow.
Penrose points out, however, that there is a problem with the execution of this simple logic. The firms administrative framework consists of two kinds of services that are important to a firms growth-entrepreneurial services and managerial services. Entrepreneurial services generate new market, product, and service ideas, while managerial services administer the routine functions of the firm and facilitate the profitable execution of new opportunities. However, the introduction of new product and service ideas requires substantial managerial services (or managerial capacity ) to be properly implemented and supervised. This is a complex problem because if a firm has insufficient manage
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