Organic Growth Strategy - Expanding your Competitive Advantage
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Expanding on a successful offering is often one of the least risky paths to profits and a valuable business. This makes organic growth a top growth strategy for small to mid-sized businesses. According to SunTrust Research, 57 percent of business executives are planning to grow their businesses organically. (This is made up of 54 percent of businesses with annual revenues of $2-9.99 million and 59 percent with annual revenues of $10-150 million.)
Building your Organic Growth Plan
“Organic growth is a means to convert a strong strategy that has met with some success into even greater business value,” says John Hluck, Senior Vice President at SunTrust Bank. “You typically need three elements for organic growth: a foundational competitive strategy, a tested business model that can drive growth and an organization that can adapt and add capabilities in line with your plan.”
A Six-Year Plan built around organic growth will ground you in the sources of your competitive advantage, whether based on being a low cost producer, offering a highly differentiated product or providing a targeted and tailored offering for a segment of the market.
Organic growth plans usually exhibit less risk, fewer gaps and moving at a slower pace. Plans based on organic growth presume processes, organization capabilities and management talent are ready to execute on your plan. “We like to see organic growth plans that explicitly leverage a company’s competitive advantages and should reflect an organization strong enough to fill any gaps in its plans,” says Mr. Hluck.
Finding Sources of Growth
As organic growth-focused companies start to build out their plans, they are usually building on something that has been working for them and has driven their success to date. They may be riding a growing economy, the expansion of their industry or the success of their business. According to SunTrust Research, 27 percent of business executives say they are taking advantage of the rising tide of the economy, their industry or their business. They are not searching for answers. They are not buying companies looking to fill gaps in their businesses. Rather, they are looking to exploit opportunities present in their current businesses.
Expanding on the success takes a number of different forms:
Develop a New Product or Service Offering
Companies pursuing organic growth leverage their market-recognized success or organizational strength to extend or build new products or services. Forty-one percent of companies planning for organic growth said they are building new products or services.
A natural place to grow is in meeting the unmet needs of existing customers. A company with an edge in a particular product or market is in a great position for an effective dialogue with its customers, often the spark to fuel innovation to fulfil unmet needs.
Rather than funding speculative research and development projects, a company growing organically can focus on building upon what they have, often recognizing ways to redefine and add value to existing offerings to meet the needs of a new market segment without the costs (and risks) of creating something from scratch. Classic ways to add value to existing offerings include:
Creating add-on services— add installation, set up, ongoing support or other customer services to your offerings. Offering technical training is a great way to increase revenue and add value.
Adding education—teaching clients how to use your products helps them use all the features, benefits and uses of your products. You might benefit from higher levels of activation of your products and improved customer satisfaction.
Faster service—customers pay for speed and convenience. Creating new offerings to deliver your products to customers faster and on their schedule can allow you to extract premium prices or gain a market edge.
Bundling products—cross selling is a great way to lower the cost of sale because you have more to sell to an existing customer. Adding products into your mix can increase your breadth of offerings. Plus, there’s the potential for increased receptivity selling to an existing customer, especially when you have a proven track record.
Address a New Business Segment
Taking your existing product or service to a new business segment is a common practice in organic growth. Thirty-two percent of companies pursing organic growth are looking to address a new business segment.
Rather than investing in product changes or development, the shift is instead towards investing in acquiring customers in new markets, leading to marketing and sales investments and talent development. You may also spend more of your time to prospecting for new clients.
One of the best ways to manage market development in a new business sector is to have a disciplined approach to measuring investments in your existing marketing sectors. That means knowing your “pockets of profitability”, specifically where you make money. You may then segment the market, understanding costs and relating them to marketing and sales activities
Expand to a New Domestic Market
Twenty-nine percent of companies pursuing organic growth are expanding geographically in the U.S. For this strategy, new locations and de novo growth are the primary focus.
Expanding geographically may be the most direct route to boosting volume and profit for a successful product or service. Begin with an understanding of which markets are growing, stable, shrinking or changing demographically in a way that will position you to capture opportunities now or in coming years. Create a competitive map arraying traditional and new competitors to guide you in targeting areas where your strategy gives you competitive advantage.
Good decisions on geographic expansion run much deeper than market dynamics and competitive landscape. A few of the other factors to look at are:
Regulatory environment/tax structure – Differences between states and municipalities in building permitting or environmental clearances can affect geographic expansion. Take into account tax differences (high income tax/low property tax states versus low/no income tax and high property or consumption tax states) in pursing expansion.
Talent and skill availability – Whether moving from metro to rural markets or from Georgia to California, labor costs, availability of skill sets and overall labor market tightness can shift the attractiveness of markets and your direction.
Cost structure – Beyond tax and labor cost differences, real estate, transportation, cost of goods and overhead can vary across geographies and within a market. You will want to pay attention to these economic elements in your modeling.
Pursue International Growth
The world continues to get smaller, technology makes trade easier and emerging markets continue to blossom, making international growth as a key strategy for businesses growing organically. Twenty-one percent of businesses are pursuing international plans, particularly focusing on European and Asian markets. "The top three reasons companies seek to enter the global marketplace are 1) expansion, 2) diversification of cash flow, and 3) the ability to tap into the growth opportunity presented by foreign markets with greater GDP growth than the U.S., or even Europe," says Susanne Keough, head of Global Trade Solutions at SunTrust Bank.
To make good decisions about where to go, you will need to explore your product’s fit with global markets, analyze local market conditions and look for resources to help you. Specifically, that involves three questions as detailed in Will my product work abroad?
Project region/country-specific demand for your product or service
Understand the ways your product or service will translate to the needs of foreign markets
Envision how product or service will be delivered in potential global markets
"While emerging markets can be highly opportunistic, ebbs and flows do still exist,” Keough explains. "And while there will always be a growth market out there to explore, once your company begins to consider selling internationally, it is critical that you understand these three factors."
While the majority of businesses are pursuing organic growth, a much smaller percentage are prepared or confident in their plans. SunTrust Research shows that 33 percent feel completely prepared for growth. Seventy-five percent feel some degree of stress around their growth plans.
“As I talk to business owners growing organically, I look for at four areas of their business to help understand their preparedness for success,” says Mr. Hluck.
Strength of management team
Funding for investments in product development and sales expansion
Technology and operational and financial processes in place to grow
Clear thinking and planning for the future after successfully executing their plans
Having the right advisors and partners in place to support organizational, process and financial demands of an organic growth plan is a critical step. Whether it’s networking to build your team, securing growth funding, leveraging partners to strengthen processes or understanding long -term strategic options, your SunTrust Relationship Manager is a great place to start. That individual can help you with advice from SunTrust research and access to our team who can support your every financial initiative. To find our more, call you SunTrust Relationship Manager or visit us online at suntrust.com.
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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