Assess your options for business growth
Most businesses aspire to grow. However, there are many ways to grow a business so choosing the right strategy is key. To succeed, it's important to set defined goals and find new, practical ways to increase profits and reach new customers.
You may want to assess your current business performance before you invest time and money in growth. This may help pre-empt challenges later down the line and help you determine, for example, if expansion is too risky or if you may need to raise additional capital to scale up operations and finance your growth.
This guide highlights the importance of business growth and examines the different business growth strategies available. It weighs up the pros and cons of tactics such as market penetration and development, diversification and business partnerships.
It also covers key considerations around growth financing and planning, and offers five top tips to prepare your business for growth.
Importance of business growth
Understand why growth is good for business, the common reasons for growth and how to identify growth opportunities
Growth is crucial to the long-term survival of a business. It makes it easier to acquire assets, attract new talent and fund investments. It also drives business performance and profit.
Why is growth in business important?
Growth can be good for business for many different reasons. For example, it may allow you to:
- take advantage of new opportunities
- expand your products or services
- attract more customers
- increase sales
- employ more staff
It may also help you to respond to market demand, allowing you to increase your market share and capitalise on your growing brand. It often spurs innovation, helping you to differentiate in the market and stave off competition.
Growth can also boost your business' credibility, allow you to broaden your supply base and increase stability and profits. However, to be successful and sustainable, growth has to be strategic and has to happen for the right reasons. Before taking any action to grow your business, you may want to consider is your business ready to grow.
Reasons for business growth
Most businesses grow to become bigger, perhaps through increasing sales or market share, but size isn't the only driver. Many other benefits motivate businesses to grow. For example:
- greater sustainability or resilience in the market
- lower costs - due to economies of scale
- greater market dominance
- greater buying and bargaining power
- ability to mitigate commercial risks - eg through diversification
- ability to reduce the threat of competition
- ability to survive market fluctuations and downturns
- ability to attract the best talent and staff
Growth may not be feasible or practical for all businesses but, in most cases, stagnating is likely to lead to missed opportunities. Discover the advantages and disadvantages of growing your business.
Deciding how to grow
There is no one way to grow a business. You may want to expand your service area, form business partnerships, launch new products in existing markets, diversify your existing product line or explore other business growth strategies.
Identifying the right growth opportunities will require a full understanding of how your business is currently performing. Evaluation can help you to identify current weaknesses and expose challenges and obstacles arising from growth.
See more on planning for business growth (video).
Business growth strategies
Understand the different types of business growth strategies, and how to use tools (such as the Ansoff matrix) to assess the benefits and risks of each option
There are many ways to grow a business. Which way you choose to expand largely depends on your ambition, your reasons for growth, and the opportunities and resources available. However, two crucial factors for choosing a business growth strategy exist. They are:
- products - what you currently offer, and what you'd like to offer in the future
- markets - where you currently sell, and where you'd like to sell in the future
Based on these factors, strategic tools - such as the Ansoff matrix - suggest four main types of business growth strategies.
What are the four major growth strategies?
Four main strategies for growth, each with their own distinct benefits and risks, are:
- market penetration
- product development
- market development
With market penetration, you try to sell more of the same things to the same market. The risks are usually low as you focus on capturing a bigger share of your current market with the products you already have. Learn more about market penetration strategy.
With product development, you are introducing a new product into your existing market. You're effectively selling something different to the same customer, potentially encountering greater risks. See more on product development strategy.
Another option is market development, where you try to sell an existing product in a brand new market. For example, you may want to segment your existing market or reposition your product in it, or target an entirely different geographical area. See market development strategy.
Finally, with diversification, you are aiming to sell completely different goods or services to completely different customers. This is typically the riskiest of options - it requires both product and market development. Read more about business growth through diversification.
Other ways to grow your business
Every business is different. You may need to adapt some of the suggested strategies to suit your particular circumstances. For example, you may want to explore:
- strategic partnerships
- improving efficiency in your business
You may also want to construct your own unique combination of strategies.
The best approach will usually be the one that suits your overall strategic plan. Focus on finding an option that could yield most results from the least amount of risk and effort.
Keep in mind that, to succeed, your growth strategy has to be deliberate. Success will require a great deal of research and thorough planning for business growth.
Market penetration strategy
How to create a market penetration strategy and use tactics such as penetration pricing to increase your market share and stave off competition
Market penetration is one of the four main business growth strategies. It involves focusing on selling your existing products or services into your existing markets, with the aim of increasing your market share.
Most businesses will at some point consider this strategy since, according to the Ansoff matrix, it carries the lowest amount of risk. It can be especially helpful in the early stages of starting up.
Market penetration tactics
To devise a good market penetration strategy, you must have a successful product and a detailed knowledge of your market. You must also thoroughly understand your competitors.
You can usually achieve market penetration in four ways. You can:
- increase the market share of current products
- increase usage by existing customers
- dominate growth markets
- drive out competitors from a saturated market
Different tactics can help you to increase the market share of existing products, including:
- price adjustments
- sale promotions
- targeted advertising
- opening of new distribution channels, such as online sales
You can also segment your customers to identify a new demographic for your product, eg a different age group. Businesses often rely on advertising and marketing to attract and sell to specific demographic groups in their markets.
If your market is saturated, you may need to find another approach to drive out competitors. For example, raising or lowering your prices and heavily promoting your products can help make the market unattractive or inaccessible for smaller competitors.
If you can compete on price and offering, you may look at ways of increasing usage by existing customers. You can introduce, for example, loyalty schemes or add value to the existing product or service to encourage more frequent use, and retain and grow your customer base.
Market penetration strategy isn't going to work for all products and all types of businesses. You may need to use different strategies to achieve and sustain growth. Read about other business growth strategies, including:
How to measure market penetration
Understanding your market penetration can help you measure how your product is doing in the market, and how customers view it in comparison to a competing product or service.
As a metric, market penetration is expressed as a percentage. You can calculate it by multiplying the current sales volume by 100 and dividing that amount by the total sales volume of all similar products, including those sold by competitors.
See how to measure performance and set targets.
Product development strategy
How to create a product development strategy and use tactics such as brand expansion to increase your sales and market share
Product development strategy relies on developing new products or modifying existing products so they appear new, and offering those products to current or new markets. When executed successfully, this can help achieve growth in sales and market share.
Typically, businesses may look at product development if they've run out of opportunities for growth with their current product or within their current markets.
Growth through product development
With product development, a business usually has one of three choices. You can:
- create an entirely new product
- evolve your existing product for its existing market
- enhance your existing product to introduce it to new markets
Steps to create a new product or enhance an existing one are likely to include thorough research and development, a detailed assessment of customer needs, product design and analysis, design documentation, prototyping and production.
Find out more about the key stages in the new product development process.
Each company approaches its product development strategy differently. Some businesses outsource product development and buy in another product to sell it under their own brand. Others acquire the rights to sell someone else's product or work with another business to jointly develop new products.
The key to successful product development is continuous research, as well as the ongoing assessment of customer needs. See more on market research and market reports.
Brand extension strategies
Brand extension, or brand stretching, is a useful tactic in product development. It involves using your established brand name for a new product or new product category.
You can extend your brand in many ways, including:
- offering the original product in a new form
- combining two well-known products into one
- applying the existing brand to a different product category
- creating complementary products
Brand extension is a popular strategy within product development because it is usually easier to achieve than creating entirely new products.
It allows you to leverage your reputation and popularity of an existing product to launch a new one. The costs are also generally lower than they would be for introducing a new product without any brand identity.
However, to work, brand extension must provide a logical link between the original product and the new item. If there is a mismatch, or the new product creates a negative association, this can lead to brand dilution.
Keep in mind that product development is only one of four growth strategies in the Ansoff matrix. You should consider it alongside the other options, including:
Read more about business growth strategies.
Market development strategy
How to create a market development strategy and use pricing, distribution and promotional tactics to increase your sales and market share
Market development is a growth strategy that involves selling your existing products or services to a new group of customers. It begins with market research where you:
- carry out a segmentation analysis of your existing market
- shortlist those market segments which you feel you should pursue
A segment is simply a smaller sub-group of a larger population. To identify a target market segment, you should look at factors like:
- new geographical areas
- new demographic segments
- new customer needs
- customer preferences, interests and lifestyle
You may want to look at customers typically served by your competitors, or customers currently not served by anyone. Find out how to segment your customers.
Once you identify the target segment, you should create a promotional strategy and find ways to attract and sell to customers within it.
Common market development strategies
Key market development strategies you could consider focus on include:
- pricing - you could implement competitive price structures with offers and discounts or, to command a higher price, provide a product with more value than the competitor's
- distribution - you could develop new channels to reach target customers, eg sell online if you currently only have a brick and mortar shop
- branding - you could create a new brand for products aiming to reach a target market or a specific customer segment
- promotion - you could consider tailoring promotional messages to entice customers with offers, vouchers, loyalty schemes, etc
- sales - you could target a different demographic segment or type of customer to create new leads and opportunities
- product development - you can alter an existing product or develop a new one for the untapped market
See more on product development strategy.
As well as attracting new customers, market development also looks at expanding sales through new or alternative uses for your product. Think about how you can get your current customers to use your product in a new way. WD-40 is a classic example of a versatile product.
Market development vs market penetration
The key difference between market development and penetration is that market development strives to increase market potential. It does this by expanding into untapped market segments. With market penetration, the market size is fixed so the strategy focuses on maximising the potential of an already an existing marketplace.
Business growth through diversification
Understand the risks and rewards of diversification, the different strategies you can use, and how to diversify your business for growth
Diversification is a growth strategy that involves entering into a new market or industry - one that your business doesn't currently operate in - while also creating a new product for that new market.
Different types of diversification strategies
There are several different types of diversification:
- Horizontal diversification is when you acquire or develop new products or services that are complementary to your core business and appeal to your current customers. For example, an ice-cream business adds a new type of confectionary into its product line. You may require new technology, skills or marketing approach to diversify in this way.
- Concentric diversification involves adding new products that have technological or marketing synergies with existing product lines or industries, but appeal to new customers. For example, a PC manufacturer starts producing laptops. You may be able to leverage your existing technologies, equipment and marketing to diversify in this way.
- Conglomerate diversification occurs when you add new products or services that are entirely different from and unrelated to your core business. For example, a film studio opening up an entertainment park. The risks are high, as this approach requires you not only to enter a new market, but also to sell to a new consumer base.
- Vertical diversification or integration is when you expand in a backward or forward direction along the production chain of your product. In this approach, you may control more than one stage of the supply chain. For example, a film distributor produces its own content, or a technology manufacturer opens its own retail store.
Deciding how and when to diversify will require:
- detailed market research for the new product or service
- a thorough assessment of customer needs
- a clear product development strategy and market testing
- sales, marketing and supply chain operations able to cope with the added demands
See how to diversify your business.
Advantages and disadvantages of diversification
There are pros and cons to each of the different diversification strategies. A successful diversification can help you:
- increase sales and revenue
- grow market share
- find new revenue streams
- achieve higher margins compared to existing products
- limit the impact of changes in the market
On the other hand, diversification will incur development, sales and marketing costs. It will also require additional skills, management and operational resources. If these demands exceed the potential revenue and profit gains, diversification can put your business at risk. For example:
- diverting funds and resources into diversification may limit potential growth in core areas of your business
- lack of knowledge or expertise in the new industry or markets may lead to costly delays or mistakes
- diversifying too quickly may cause you to lose track or dilute your core products or services
- if you stretch your resources too widely, you may struggle to provide a consistent level of service, which can lead to dissatisfaction and customer losses
In general, diversifying with similar products or services and selling them to a familiar customer base is less risky than creating a product for a completely new market. It can be a great way to maintain business stability. It allows you to hedge your bets and, if one of your markets or products fails, you have another to back you up until you recover.
Business growth through acquisition, mergers and partnerships
Understand the power of partnerships in business and how to use acquisitions, joint ventures and mergers to grow your organisation
As well as growing your business organically, you can also expand by joining forces with another business. While this can create problems around decision-making and possible management and staff issues, there can be clear advantages.
Benefits of business co-operation
Successful business co-operation can deliver:
- more resources
- sharing of the managerial load
- larger skills and talent base
- bigger pool of contacts
- increase in markets
- diversification and organic growth using increased resources
- reduced commercial risk
The right partner should complement your core brand and business development goals, so consider carefully the type of partnership you plan to pursue to ensure best chances of success.
Partnerships and joint ventures
Joint ventures and partnerships can offer both partners significant benefits, including sharing experience, skills, people, equipment and customer bases. Through a partnership or joint venture arrangement with a complementary, non-competitive business, you may be able to open new markets or improve your offer to existing ones.
It's important to be very careful who you link up with. An agreement or contract defining the terms of the partnership or joint venture is essential and further legal protection is advisable. See how to create a joint venture agreement.
Teaming up must be a win-win situation for both parties. Businesses involved with complementary activities or skills are usually the most appropriate candidates. For example, a group of sole traders - a carpenter, builder and gas installer/electrician - could form a company to:
- increase their credibility in the construction trade
- allow them to bid for larger contracts
- appeal to customers looking for a 'one-stop-shop' service
Find out more about joint ventures and business partnerships.
Mergers and acquisitions
Growth through acquisition or merger is a common tactic used to achieve diversification and market positioning. It can help:
- increase market share
- expand the workforce
- widen the existing service or product offering
- grow revenues
- achieve economies of scale
- reduce costs through shared budgets and greater purchasing power
However, combining two businesses can pose challenges that did not exist before, such as:
- maintaining a presence in multiple markets
- managing a complex product and services portfolio
- retaining a larger and more diverse customer base
- managing more people and operational complexity
Find out more about mergers and acquisitions.
Acquisition and merger may not be suitable business growth strategies for all businesses. They are more suited to established enterprises, as transactions may involve commercial lawyers and considerable legal work.
You should thoroughly plan, research your options and strategically pursue the right type of growth for your business. If you decide that growth through partnerships isn't the right fit for your business, you may want to grow your business organically.
Planning for business growth (video)
Watch our short video tutorial to find out how to carry out a business review and prepare your business for growth
This short video (6 minutes 12 seconds) explains what you must consider as you prepare your business for growth. The tutorial tells you:
- How to carry out a business review - covering things like premises, location, equipment, staffing, current financial situation, staffing, customers, competitors, etc. For best practices on business reviews, see measure performance and set targets.
- How to know if you are ready to grow - discussing some common business growth implications and suggesting how to avoid problems during business growth.
- The different ways you can grow your business - eg through market penetration, market development or product development, or other business growth strategies.
- How you can put together some concrete goals - by planning strategically and preparing a business plan for growth.
For quick takeaways from this video, see top tips to prepare your business for growth.
Financing for business growth
Financial planning for growth including equity, venture capital and funding from business angels
Sound financial planning is the foundation of any business growth strategy. Firstly, you should establish:
- how much investment you will need to fund the venture
- when you will need it
- when it will be available
- how soon you will be able to repay the capital
It's important to detail all the costs incurred in getting your growth option underway and compare them against the anticipated profits. You must be realistic and practical when setting business growth objectives.
A detailed cashflow forecast is essential, not least because outgoings are almost certainly going to rise sooner and faster than revenues. You must have enough money in the pot to keep the core business running. It's a good idea to build in some surplus too, as most projects always take longer to bear fruit than originally predicted.
As well as cashflow, you may need to draw up detailed forecasts regarding sales, working capital and sources of seed funding, or any subsequent funding. See how to tailor your business plan to secure funding.
Businesses looking for capital investment, apart from bank finance, have three main sources:
- Equity finance is money invested in a business that is not directly repayable. It could be your own, most likely raised through remortgaging a property, or money from others taking a share in the ownership of the business. Find sources of equity finance.
- Venture capital is also known as private equity finance. Unlike business angels, venture capitalists look to invest large sums of money in return for equity in (ie a share in the ownership of) your business. Find out more about venture capital.
- Business angels are private investors taking a minority or majority stake in a business, often contributing valuable business experience in the form of advice and contacts. Find out about business angels and how they operate.
There may also be some development or enterprise grants or loans available in your area. Search the Northern Ireland business finance and support finder.
Return on investment for growth
One of the most common methods of measuring the profitability of a business is calculating the return on investment or ROI. This ratio tells you what percentage of return you can expect to get over a specified time. Many expanding businesses use three to five year timescales.
To determine your ROI, you should take the total investment figure, work out the increased sales for each year and the resulting net profit, and calculate that as a percentage of the investment.
For example, suppose a business wants to add a new product line. It will require an investment totalling £200,000 in development costs, plant, marketing and promotion. The new line should generate £400,000 in sales and £40,000 in net profit each year. The table below explains how to work out the growth ROI:
Additional net profit in period
ROI calculation (net profit/ investment x 100)
40k/200k x 100
120k/200k x 100
200k/200k x 100
It's a good idea to test the ROI with a number of different sales figures. While you may think additional sales could reach £400,000 a year, a number of factors - such as development problems, delays or sales and marketing issues - may result in lower sales in the early stages. You may also wish to adjust your calculation to allow for annual inflation.
See also how to measure your financial performance.
Top tips to prepare your business for growth
Top tips to help you plan ahead, assess different growth options and prepare your business for expansion
Planning your business growth strategy carefully brings many benefits and financial awards. Follow our top tips to help prepare your business for growth.
1. Establish your business' current performance
It is important to look at your current business performance to see if your business has a healthy foundation to launch a growth strategy. You can use KPIs to assess business performance, and consider key areas in your business including financial performance, profitability, facilities and people and skills.
2. Assess your options for growth
There are many ways in which to grow a business. Depending on your circumstances, you may consider:
- Market penetration - look at pursuing more sales through existing and potential customers or consider selling into new markets through exporting.
- Growth through diversification - eg creating new products or services outside of your core offering.
- Growth through strategic partnering - such as joint ventures, mergers and acquisitions.
- Strategic sourcing - ensure you are getting the best deal and make the most of your supplier relationship.
- Technology - invest in technology such as customer relationship management systems and consider techniques such as search engine optimisation. These technologies and methods can help you to sell more to new and existing customers.
3. Prepare a business plan for growth
Outline how you plan to grow your business and how your growth strategy will successfully deliver this. Your business growth plan should include:
- marketing aims and objectives
- operational information
- financial information - see financing for business growth
- business targets and completion dates
4. Use targets to implement your business growth plan
SMART objectives - specific, measurable, achievable, realistic, timely - can help you achieve the goals of your growth plan. See how to set business performance targets.
5. Measure business growth
You should measure the return on your investment in business growth. A popular way of doing this is by using the Return on Investment (ROI) formula. This will tell you what percentage of return you will get over a specified time. See how to measure your financial performance.
Improve the way your business operates (video)
Video explaining how to change the way your business operates to improve performance
This short video (8 minutes 55 seconds) explains how to change the way your business operates to improve performance by focusing on personnel, infrastructure and strategy.
For more information, see how to increase efficiency to maximise your profit.