It is a popular belief that businesses, including small businesses, must grow to thrive. While many of our beliefs about business have been challenged over the past four years and only a few businesses have been able to sustain growth during the Great Recession, growth is a major objective for many if not most businesses. There are multiple reasons for the “growth imperative”:
- Growth is often a factor in creating long-term value for the owners of the business.
- Sustained and projected growth is a major factor in creating a sellable business as part of an exit strategy.
- Growth can be necessary to create opportunities for the team and allow the business to recruit and retain top talent.
- Pursuing a growth strategy encourages innovation and helps keep the business ahead of the evolving competitive landscape.
There are a number of ways to pursue growth. The “growth strategy matrix” which follows is one way to analyze the possibilities for pursuing business growth:
The growth strategy matrix breaks down growth opportunities into two broad categories, market expansion and service (or product) expansion.
Market expansion is further broken down into increasing market share within existing markets and entering new markets. Service expansion can also be further broken down into adding services or products within existing markets and adding services or products in new markets.
Arithmetically, that about does it for strategies to increase revenues.
We often talk about growth in another way –dividing growth opportunities into organic growth and growth by acquisition. Organic growth can be defined as business growth that results from growing the overall customer base, increasing revenues per customer, new sales or some combination of those sources, as opposed to growth that results from mergers and acquisitions, which are considered inorganic growth. In other words, organic growth can be thought of as growth that comes from a company’s existing businesses as opposed to growth that comes from buying new businesses.
There is a tendency for some people to think of organic growth to be “good growth” and growth from mergers and acquisitions to be less desirable. This isn’t necessarily the case.
The main disadvantage of relying on organic growth is that is usually (although not always) inherently unpredictable and risky. To stimulate organic growth through increased market share, businesses may devote additional resources to marketing activities. To generate organic growth through either an expansion of services or an expanded market territory, a business makes investments in people, facilities and related costs in advance of knowing with any precision how successful those efforts may be. Therefore, relying on organic growth can be inherently risky and also involve a lag time between when the investments are made and the growth in revenues begins to generate meaningful revenues.
Few would argue that planning on growth through acquisitions was not a risky strategy too. The risk however varies a great deal with what the acquiring company is attempting to accomplish.
Growing market share through acquisition can be especially risky, unless the acquisition target brings recurring revenues that can be easily assimilate into the acquiring company’s operations.
Let’s take a closer look at that within the context of the green industry. In one hypothetical transaction, one landscape maintenance business acquires another in the same market. The goal of the acquiring company is to retain as many of the target company’s customers as possible. When the acquisition is announced, the two companies will often approach the contracted customers and advise them of the acquisition, usually describing it as a merger and ensuring the acquired customers that they will continue to receive the same or better service than they have received as before and with the added resources of a larger, stronger company serving them. While some customer attrition is common, in this circumstance, it can often be managed.
In another hypothetical situation, one design-build company acquires another one in the same market. The goal is maintain the sales momentum of each organization in the new one. That is often a decidedly harder task. If one company gets absorbed into another, the marketing budget will often come down. If much of the business comes from a formal or informal competitive bidding process, the number of opportunities is not likely to increase as much as the relative size of the two organizations might suggest, especially if the two organizations had often bid on the same projects.
In a possibly extreme example, suppose both the acquirer and the target each had 20% of the market. Three other competitors also had 20% of the market each. If the acquirer was able to retain 100% of the business of the target, you might expect them to have a 40% market share. Another possibility is that the total market might be spread among the four remaining competitors, with each now commanding a 25% share of the market. In any given deal, the reality might come in somewhere between these two extremes, but it is pretty easy to see how the value of this acquisition is driven down for the acquiring company.
Let’s look at the other strategies that are not based on growing market share through acquisition. One of those strategies is service expansion. Suppose a landscape services company acquires a complementary business in the same market, perhaps an irrigation company. The outlook for customer retention may change pretty dramatically. In addition, there may be a real opportunity to generate even more revenues through the synergy of the two companies. The acquiring company will have access to the target company’s irrigation customers and may attempt to sell other landscape services to them. They can also attempt to sell irrigation services to their existing landscape services customers. This same phenomenon can easily occur if a landscape services company acquires a design-build company or vice versa.
Another growth strategy is market expansion (as opposed to market share expansion). This can be described as selling services to an expanded market, either geographically or defined some other way, such as residential versus commercial. If a landscape services company acquires a business in an adjacent market, there is a greater opportunity to retain customers, since essentially the same business will continue under new ownership. The main difference is likely to be that the combined company will likely be able to realize some cost synergies as duplicated services are eliminated. The combined company may also be able to bring a stronger service line to the combined business.
There is a role for growth through acquisitions in addition to organic growth. A plan to grow through acquisitions requires some strategic thinking, but the opportunities are great. Within the landscape industry, there are opportunities for all kinds of businesses to grow through acquisitions. The key is developing a strategy based on an understanding of exactly what you are trying to accomplish.
Editor’s Note: The Growth Strategy Matrix illustrated in this article is adapted from the Ansoff Matrix, developed by Igor Ansoff, which first appeared in print in the Harvard Business Review in June 1957.