Scaling your Business

When is it time to expand and open new locations? What methods of increasing your business profitability exist? Let’s talk about the nuances of business scalability.

Oleksandr Lukianov, franchising consultant who took part in the development of over 50 franchises on the territory of 5 countries, told about the secrets of effective business scaling at “Business4Women” forum*.

When is it possible and needed?

Scaling is the actual and physical increase of business scale, its profitability. An increase in the company’s headcount and the hiring of new staff is not scaling.

According to Lukianov, a possible reason for expanding business is your wish to grow, earn more, become a famous brand. “Businessmen often rush to develop their businesses without having clear objectives, but any scaling must have its purpose”, Lukianov says. – “For some it is the growth in popularity of brand and sales. For others, it is the growth of business volume. Scaling always ensures the reduction of costs through wholesale procurement and the cutting of products and services cost”.

However, objective situations arise in the market when the business itself gives a hint that the company feels cramped within the existing boundaries and needs to expand.

Please pay attention to the following markers pointing that it is about time to scale your business:

1. You get requests from the market to open a branch or sell a franchise. You keep getting customer’s requests on the opening of new locations in their districts or cities.

2. Business profitability grows steadily – this points to the fact that it will soon operate to its actual full capacity.  

3. Business capacity is 80% full, which means a capability of your business model to serve a certain number of customers. If you notice that your customer service capacities are loaded 80% or more, this means it is about time you increased your business volumes to serve new customers.

4. You have an “edge” = something that makes you stand out. This can be a classical product in a unique package or with unique presentation, new business methods or technology, something special about the ambience of the facility – the reasons why people choose you rather than your competitors.

Business scaling options

Business scale can be increased by two possible ways.

One of them is expansion – conquering new niches and markets by your company, in particular:

1. Expanding the range of products or services, product line, product categories, new distribution channels. For example, a business that operated based on В2С («Business to consumer») model can shift to В2В («Business to business»).

2. Covering new, related niches – creating subsidiaries providing related services. E.g.: a nail salon added hairdresser’s services for its customers and repositioned itself as a beauty parlor.

3. Shaping the customer’s new need – which means an impact upon the target audience for the sale of new products that are not well-known to the consumer. Thus, for example, everyone knows about Teflon coating, but many people did not know about granite-coated frying pan before. So, the consumer got to know about the new product under the influence of a high-scale advertisement campaign. Commodity promotion and positioning costs are required for this method.

4. The mastering of new retail, warehouse and production areas involves their physical increase. You impose an obligation on the staff to be more efficient so that these areas are profitable.

5. The outsourcing of marketing and sales is the most interesting and up-to-date method. The entry to the marketplaces like Rozetka, Prom.ua enables the use of other company’s sales and advertising instruments. “If you hand over a part of tasks to them, you can redistribute your resources and build a new model of order fulfilment”, the expert notes.

The second method of business expansion is replication of business, which is cloning in its nature – creating business identical to yours, however, on a different territory.  This may be:

1. Opening your branches in other districts/cities/countries. The advantage is that customers keep all the profit with you. However, you also bear all costs and risks in such case. You are responsible for all permits and audits as well. Lukianov drives attention to another feature that few people think about. “Location factor is the risk, which is especially noticeable in the retail sales and restaurant business, where local consumer requests are quite different from the business model you are used to at your facility. This factor entails extra risks, up to the branch closing”.

2. Branch opening by partners. Your business partner will invest in business, however, will be the company’s co-owner in equal or unequal shares. The sales or production function is often handed over to the partner. “The advantages of business partnership are that you distribute a part of responsibility and obtain each other’s knowledge and experience, networking. The key disadvantages of such an approach: the partner may “veto” your decisions. If you think differently, it will be difficult for you to make joint decisions. And the key risk in the Ukrainian conditions is that the partner may ask you to leave business, that is, may take it over”.

3. The engagement of dealers is a good method of scaling because dealers already have a customer base and the technology of their servicing, sales, etc. You will have a rather professional partner who can promote the product better than you would do it. “The disadvantages are that the commission fee for dealers’ remuneration may be significant, and the dealer is not usually limited as to the number of suppliers it works with and can be more motivated to sell other manufacturers’ products”, Lukianov shares. “In order for the dealer to be willing to take your product, you will need to make it unique, with an “edge”, it must be more beneficial than the competitors’ similar products”.

4. License sale: you sell the rights to a technology, methods or even packaging, which you developed and patented. You are paid royalty. This method is low-efficient in our country, because legal protection of the owners’ intellectual property rights is at a rather low level.

5. Franchising means the sales of business model and experience to other entrepreners (more details are available in the following article).

Preparing your business for scaling

Before starting scaling, Oleksandr Lukianov offers holding your business diagnostics, in order to understand: is it time to expand or other methods of business improvement are needed. The key evaluation criteria are:

1) Evaluate your role in business. Small business often depends on its owner: employees wait until he comes to the office and starts giving directions. “Your business can only be scaled if you can really delegate managerial functions. Each employee must know what he should do, regardless of the founder’s presence”, Lukianov notes.

2) Financial and commercial indicators. “If business is profitable, almost not prone to seasonal fluctuations, with no cash gaps, income and profit is growing, it makes sense to think about scaling”, Lukianov says. If working capital is lacking, scaling will be of no help.

3) Investments in the opening of an object. Calculate all the money, which must be invested in the opening of a new branch/object, in order not to impede operating activities. It’s ideal to make an investment with the buy-back period of up 3 years.

4) The consumer, and not only you, must know about the product or service uniqueness and innovativeness.

5) The functionality of business processes means the autonomy and clarity of each employee’s work. “Each employee must know “without helpful directions given in the morning” what he will do today, what his systemic functionality is, what’s written in the documents and guidelines and how to execute it”. This is a fundamental factor contributing to the success of scaling.

6) Business process automation – enterprise-wide control and management. An ideal situation is when ERP-system is available. (This is not to be confused with CRM – customer relationship management system).

ERP system (eng. Enterprise Resource Planning System – the system of planning enterprise resources) – a single database synchronizing the work of all units, including the work with customer. When a sales manager automatically generates a chain of events upon displaying a customer card: the accountants see a generated agreement and can check whether the payment was made; the procurement experts see that the product must be shipped; the logistics specialists see when the shipment is to be made.

7) The key business partners are proven reliable suppliers and counterparties who can be with you in the process of scaling in different regions. Otherwise, you will have to look for new local contractors, which will make accounting and control more difficult for you.

8) Working algorithms of resale, sale, post-sales customer servicing are the key instruments, which will help you work with the new market well. If you can communicate with your customer, provide the best customer services and sell additional services, if there is customer queue – that’s good.

9) Target audience of the product. “It’s very important to understand the customer It’s very important to understand the customer profiles and communication channels to be used with him”, Lukianov emphasizes. Study the key audience, to which 80% of sales are attributed, study its habits and preferences, in order to build effective communications with it. You must be able to measure effectiveness of advertisement: how many consumers that saw a specific advertisement became your customers.

10) Reputation and history. The status of a reliable company must be voiced by your suppliers, rather than you, and must be confirmed by the customer market.

If you understood during the analysis of your activities that all the items mentioned above are fulfilled at your company, this is 80% guarantee of that you are already developing your business and will achieve success with scaling, the expert believes. Then you should not slow down, you should enter other regions, open branches. If not, then do not hurry, build the management and communication system within the business first.

Key mistakes of business scaling

“Some founders are inundated with creative ideas. However, it is important to know what the consequences of these will be, what specific actions will help with the achievement of your goals. Do not do everything at once, choose the area for scaling and focus on achieving the result there. Do not disperse your own and your team’s attention and investment resources”, Lukianov warns.

The following mistakes can be fatal for you:

• the lack of a system in business management;

• the lack of a profitable and sustainable business mode;

• no clear algorithm of actions;

• the product is not unique and innovative;

• the lack of control system;

• the lack of competent legal support. Entering new regions always means new counterparties, partners, therefore your should always have proper agreements.

Thus, business scaling is a long systemic process requiring constant focus. Determine the development strategy, do the planning. And choose the most cost-efficient expansion methods for yourself.

* “Business4Women” forum was arranged with the support of the European Bank for Reconstruction and Development (EBRD) as part of #EU4Business initiative of the European Union.