Growth is that universal aspiration for entrepreneurs. But business owners often find it a challenge to identify and execute profitable growth strategies. In researching our new book Roadside MBA, Paul Oyer, Scott Schaefer and I gained insights about growth from dozens of business owners we met with across the United States. While the right approach will be different for each company, some common themes emerged.
The best growth initiatives we observed relied on clear economies of scale by finding a way to wring additional sales from existing investments. Sometimes this is straightforward -- selling more of the same product. But considering new applications for a company’s key capabilities can also lead to exciting growth opportunities.
Spotting opportunities to scale. The fundamental economics of growth suggest that the most profitable opportunities will involve expanding the customer base without adding substantial infrastructure to the business. Software and media companies provide a useful benchmark for economies of scale, as once they’ve produced an attractive platform, the costs of replication are minimal.
Clyde Lear’s experience at Jefferson City, Mo.-based Learfield Communications is a classic illustration. He began by producing radio segments on agricultural news. He then took advantage of the fact that once production costs for programming had been paid, growing a network of radio station affiliates required little additional expenditures. Learfield’s farm reports were ultimately sold to hundreds of radio stations throughout the Midwest.
Economies of scale of some sort must form the backbone of any successful growth strategy. Using Lear’s example, company owners can think carefully about whether the key activities of their business can be scaled; in other words, what additional investments would they need to make in order to sell more?
A restaurant that opens an additional outlet may benefit from shared advertising, larger purchase orders and common menus. But if monitoring quality is important, a second location could cost even more than the first.It might instead be a better idea to add items for sale or otherwise expand at the existing restaurant. The best growth initiatives take advantage of scale economies in the key activities and avoid costly replication.
In identifying opportunities to scale up, business owners also must take care to select investments where projected demand is high. This was a strategic issue for Steele Rubber Products, of Hickory, N.C., a company that manufactures replacement rubber parts for classic automobiles. There are compelling scale economies in the business, as producing a mold for a particular part is very expensive but the materials cost of filling each order is minimal. The key question is which molds to build. Steele managers want to add a classic car to the company catalog only if there are enough collectors to recover the costs of making the molds (and then some). Without sufficient demand, the benefits of a scalable business model aren't worth the upfront costs.
Related: 5 Tips for Handling Rapid Expansion
Focus on existing skills and capabilities. Company owners often trip up when basing expansion strategies on selling more of the same thing to new customers or developing adjacent products by tweaking existing offerings. While this approach has the potential to generate economies of scale, it can be quite limiting, especially when markets are saturated or otherwise in decline. In such circumstances, owners can instead look for growth opportunities by finding new applications for the skills and capabilities that they already developed to serve their core markets.
We saw a great example of this at a company called TiLite in eastern Washington state. The “Ti” in TiLite stands for titanium, an element that was initially used to manufacture tubing and other parts for nuclear facilities. As the nuclear industry waned, TiLite's managers decided to investigate new products that could be made from titanium and exploit the company’s expertise in working with this unique metal. They settled on customized manual wheelchairs, for which the strength, weight and vibration-dampening properties of titanium were ideal.
TiLite workers could manufacture these customized wheelchairs efficiently using their skills in cutting and shaping the metal, skills that were developed for its initial market. Even though the new product was very different, by using existing titanium capabilities, TiLite found a creative way to grow.
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