Business Growth

An aim is the long-term goal a business wants to achieve, such as to grow, to survive a difficult period or to be known for excellent service. An objective is a more specific target that helps the business reach an aim. Objectives are usually measurable and have a deadline, so they turn a broad aim into something the business can plan and check.

For example, a board game café might aim to become the best-known family venue in its town within three years. One objective could be to increase weekend bookings by 20% by next March. Hitting that target moves the café closer to its aim.

Aims and objectives are not the same thing: an aim is the destination and an objective is a measurable step towards it. They are also not fixed. A business reviews and changes them as it evolves, grows or faces new circumstances. A skateboard shop that aimed to open a second store might keep that aim but change its objective from saving £6,000 for new stock to cutting delivery costs by 10% by June. A dog grooming salon that once aimed to buy a second van might later aim to offer grooming classes instead. Reviewing aims and objectives keeps them realistic and useful as the business changes.

Aims and objectives are not fixed: as circumstances change, a business reviews what it is trying to achieve and often rewrites it.

Causes outside the business

Market conditions include competition, economic conditions such as income levels, consumer lifestyles and leisure choices, demand trends or fashion, and the availability or quality of supply. When a cheaper gym opens nearby, an independent gym's plan for a second site can suddenly look unrealistic, so it switches its objective to keeping its existing members; rising demand for a new class could just as easily create an opportunity to grow.

Technology affects what a business sells, how it makes it, its costs and how it communicates. A sign-making firm whose customers now send artwork by email may set an objective to offer a design service, using new software to win work its rivals cannot do.

Legislation can ban or restrict products or practices, or add costs. New rules on displaying allergen information might lead a café to drop some dishes and set objectives for accurate labelling, changing its product range. A business may also set green objectives alongside profit as environmental law and customer expectations grow.

Causes inside the business

Business performance matters too. Falling sales and tight cash push a business to focus on survival and cutting costs, perhaps by shrinking the workforce or leaving a market, because without that it may not compete or survive. Strong profits and cash do the opposite, giving managers confidence to aim for growth.

Internal reasons come from inside: a change of ownership, leadership, size, resources, culture or priorities. New owners of a bakery may set organic sourcing and fair pay as their main aim, while a manager brought in to lead the business may put long-term survival ahead of short-term profit.

The four ways they change

Whatever the cause, the change usually appears as one of four moves: focusing on survival or growth, entering or exiting a market, growing or reducing the workforce, or increasing or decreasing the product range.

Survival means continuing to trade is the business's main priority in the short term. The aim is to keep cash coming in and cover essential costs, rather than to expand. To do this, a business may cut costs, reduce staff numbers or staff hours, reduce its product range, or leave a market where it is losing money. These actions cut spending or free up resources, which helps protect cash flow when demand is weak.

For example, a small bakery selling celebration cakes and bread might find orders fall after Christmas. It could stop making expensive celebration cakes for a few months, cut a part-time baker's hours and concentrate on bread and rolls. Sales are lower, but costs fall too, so it can keep trading until demand recovers.

Growth means the business aims to expand. It might target higher sales, a larger market share (a bigger share of the sales in its market), more output or selling in more markets, such as a second town. Growth usually needs investment, for example in equipment, staff or marketing, so the business may accept lower short-term profit in return for higher sales later.

A mobile bike repair service with steady customers might buy a second van and train an extra mechanic. Fuel, wages and training costs rise, so profit is lower this year, but it can repair more bikes and gain a bigger share of the local market.

Businesses often switch between the two. A new business may focus on survival until it has regular customers, then set growth objectives. If demand falls or competition increases, it may return to survival to protect cash flow. A survival focus is not automatically a sign of failure; it can be a deliberate, temporary choice while conditions are difficult.

Entering a new market means starting to sell in a market you did not previously serve. A business may do this because it expects the market to grow. Higher sales can raise profits, and spreading risk by selling in more than one market is called diversification.

Entering a market is not risk-free. You may be unfamiliar with customers, suppliers and rules, and you may face competition from established businesses. You may need new resources, such as machinery or skilled staff, and new marketing to attract customers, which adds to costs. For example, a bowling alley chain might enter the children's party market because demand is rising, but it must learn about party planning, train staff and advertise to parents.

A business may exit a market, meaning it stops selling there, when sales are falling, the market is shrinking, competition is too strong, the market is saturated (most customers already have the product, so sales stop growing), or the market is unprofitable. Leaving lets it focus resources elsewhere. For example, the bowling chain might leave the arcade games market because mobile games have cut demand; it can then spend money on its party rooms.

Increased competition can push prices down. Lower prices reduce the amount earned on each sale, so with costs unchanged it is harder to make a profit, and a business may exit. Technological change can also reduce sales, for example when streaming replaces DVD rentals, making another market look more profitable and encouraging an exit.

Exiting can reduce losses and free up money, staff and space. But it may involve costs, such as closing a shop or making staff redundant, and you lose sales and customers. Exiting one market does not mean the whole business closes; it may simply stop operating in that one market.

The workforce is the group of people a business employs. Its size can change when a business changes its aims, because different objectives need different amounts of labour.

Growing the workforce

A business with a growth objective may need more employees to produce extra output or serve more customers. For example, a small chain of bike repair workshops that aims to open two new sites needs more mechanics and reception staff. A larger workforce can raise output, but it also increases recruitment costs, such as advertising and interviewing, and training costs, such as teaching new staff safe working practices. These costs may reduce short-term profit even when sales are rising.

Reducing the workforce

A business focusing on survival or cost-cutting may shrink its workforce to reduce wage costs. This can happen when demand falls or when technology replaces employees. If demand falls, cash flowing into the business drops, so paying every wage becomes harder. Reducing staff can protect cash and prevent failure.

A smaller workforce can raise productivity (output per worker) if the same output is produced by fewer staff, or if machines replace people and work faster. For instance, a booking company that installs an automated system may need fewer phone staff while still handling the same number of bookings.

However, cutting jobs can create redundancy costs (payments to staff who lose their jobs), lower morale among remaining employees and lose skills that took years to build. A business must weigh lower wage costs against these drawbacks before deciding whether to grow or reduce its workforce.

A product range is the set of different products a business sells. As a business evolves, its aims and objectives may change, and it may increase or decrease its range.

Increasing the product range

A business may widen its range to satisfy demand in a growing market, because customers already want something it does not sell. A new flavour, size or colour can attract more customers. Selling several products helps spread risk: if one sells badly, the others still bring in income. Every extra product is also a chance to increase sales, as existing customers may buy more than one item.

For example, a skateboard maker might add scooters, helmets and pads. Its riders buy pads as well as decks, and parents have more gift choices.

However, a wider range raises costs and complexity: more stock to buy and store, extra equipment and more training. It can also dilute the brand if cheap items sit alongside premium ones, so customers are unsure what the business stands for, and keeping quality high is harder.

Decreasing the product range

A business may shrink its range when products are selling poorly or underperforming. Dropping them saves money tied up in stock and packaging, and lets staff focus on core products that sell best.

For example, a stationery company might stop making printed diaries once most customers use phone calendars. Dropping them frees cash and space for notebooks that still sell well.

Cutting back can reduce costs and simplify operations, but a business may lose customers and sales if shoppers take their spending elsewhere. A smaller range is not always failure: it can be a deliberate way to focus on the most profitable products.

Business growth means increasing the size or scale of a business over time, for example by selling more, employing more staff or running more sites.

Internal (organic) growth

Internal growth, also called organic growth, happens when a business expands from within by increasing its own operations, rather than joining with another business. You can think of it as the business growing under its own steam.

For example, imagine a small chain of indoor climbing centres that uses its profits to open a third site, hire more instructors and buy extra equipment. It grows by doing more of what it already does, using its own resources and reputation instead of buying a rival.

Benefits and limits

Organic growth is often slower and steadier than external growth. That can be an advantage: the business can build on its existing strengths, brand and reputation, because customers already recognise and trust it and staff already understand how it works. Growing at a steady pace, in line with market growth, may also be lower risk than a sudden jump in size, because the business has time to train staff and adjust. Lower risk does not mean no risk, though — a new site can still fail.

However, organic growth can be limited by the size and growth rate of the market. In a small or shrinking market there may be few extra customers to win. It is also harder if the business already has a large market share, because most potential customers already buy from it. Finally, it usually needs sufficient profit to fund expansion, so a business earning little profit may only be able to grow slowly.

Organic growth means expanding from within, and one way to do this is by developing new products. As well as selling more of its existing products, the business creates something new to sell alongside them, so its sales can rise without joining with another business.

Where new products come from

Innovation means coming up with new ideas or better ways of doing things, and research and development (R&D) is the work of investigating those ideas and turning them into products that can be made and sold. For example, a firm making garden furniture might spend a year testing designs for an outdoor heater that runs on a rechargeable battery, then launch it once it is safe and reliable.

Why it can grow a business

A new product can attract customers who were not interested in what the business sold before, and it can increase sales because existing customers buy more. It can also help the business enter a new market segment: a smaller group of customers within a market who share similar needs that other customers do not have. The garden furniture maker could reach people who want to sit outside in autumn, rather than only those buying summer furniture.

The drawbacks

Development can be expensive and time-consuming: design, testing, machinery and marketing all cost money and take months. There is also no guarantee that customers will buy the product, so the money spent may never be earned back.

Entering new markets means selling to groups of customers a business does not already reach. It is a way of achieving organic growth, because the business expands using its own resources rather than joining with another business. A new market is not only a foreign country.

Two types of new market

• A new customer segment in an existing market: the business keeps selling in the same country but targets a different group of buyers. For example, Harbour & Co, a Bristol maker of reusable water bottles, launches a smaller, tougher bottle aimed at primary school children and sells it through schools. The customers are new even though the product and country are familiar.
• A market in another country: the business starts selling to customers overseas. For example, Peak Trail, a Manchester brand of walking boots, begins selling in Canada, where cold, wet weather creates similar demand.

Reaching these customers often means adapting the marketing mix, such as changing the price or the way the product is promoted, and using technology, such as a website that lets customers order online, including from abroad.

Why it can grow sales, and why it is risky

Expanding overseas can increase the number of potential customers, so sales may rise well beyond the sales possible in the home market, especially if demand at home is flat.

Entering a new market can be expensive and risky. For example, expanding overseas means research, translating packaging, meeting different laws and setting up distribution, all of which cost money before any sale is made, and the money may be lost if customers do not buy. A business may also misunderstand customer needs, because tastes, habits, incomes and religions differ between countries, so a product that sells well at home can fail abroad. Peak Trail might find Canadian buyers prefer a different style of boot, leaving stock unsold.

External growth (also called inorganic growth) happens when a business grows by joining with another business, rather than by expanding on its own. Instead of winning new customers one at a time, it gains them all at once by combining with a business that already has them.

Mergers and takeovers

A merger is an agreement between two businesses to unite as one new company. Both sets of owners agree to pool the businesses and share ownership of the new company. For example, two small garden centre chains might merge into one larger chain, with the original owners holding shares in the new business.

A takeover happens when one business gains control of another by buying enough of its shares. The buyer now controls the target business, even if it keeps its own name. A takeover is friendly when the target's owners and managers agree to it, and hostile when they do not, so the buyer has to persuade shareholders to sell anyway.

Advantages

• Speed — external growth can be far quicker than organic growth, because the customers, staff, factories and reputation already exist.
• Market share — buying a rival instantly adds its sales to yours, which can give a bigger share of the market and more influence over prices.
• Less competition — combining two rivals removes a competitor and can mean shared costs, such as one delivery fleet instead of two.

Drawbacks

• Expense — buying another business can cost a great deal, and a hostile takeover may mean offering more than the shares are really worth.
• Duplication — two head offices, two warehouses or two managers doing the same job waste money, and removing the extra roles often means job losses.
• Integration problems — staff may have different ways of working, pay, systems and cultures, which can lead to poor communication, low motivation and customers leaving.

External growth is fast and can boost market share, but it is expensive and risky to make work.