Achieving Growth in Small and Medium Sized Enterprises (SMEs)

Growth is a strategic choice for most SME owner-managers.  In other words, you can have it if you can see it, want it, and believe you can do it. Seeing it, means knowing the main pathways to growth and understanding the nature of each one. I will deal with the main ones in turn, starting with growth by acquisition.

Growth by Acquisition. If quantum growth is the strategy, it can often take too long to build up privileged assets, competencies, and market share through the normal course of business trading.  Through a well managed acquisition strategy you can rapidly develop a successful larger enterprise by selectively picking up other businesses in your industry or profession. To do this well you must already be very good at what you do, use the right evaluation techniques for choosing targets, get the numbers right, and manage the people issues well. In any market there can be badly managed, distressed businesses.  They are an obvious target for you acquisition strategy.  Buy them at a heavily discounted price, install your superior management and operational systems, and strip cost out of them by centralising marketing and administration activities into your existing structure.  Although due diligence on the numbers is an important pre-purchase stage in making acquisitions, the real job in doing acquisitions starts after you have done the deal. Particular care and attention must be done to blending different company cultures together, retaining key people, and combining the different information systems into one integrated system.

The eight red flags to watch for in acquisition strategies are

  • The CEO ego drives the project
  • There is too much focus on revenue benefits rather than cost savings
  • There is a lack of due diligence on the ‘soft’ issues – mainly people issues
  • There is an inexperienced acquisition team
  • You keep shifting the price limits
  • There are too many bidders
  • Sunk costs escalate to a point where it gets hard to walk away
  • You develop an absolute determination to close the deal

Growth by Entering Export Markets. New Zealand’s record in export revenues as a percentage of our GDP is very poor. When asking business owners why they are struggling to grow I’m often told –“The New Zealand market is too small to grow a business of any significant size.” While that may be true, a three hour flight takes you to Melbourne, a city of 4.3 million people equal to the total population of New Zealand and Australia’s fastest growing city. Not only is it so close and so big, there is no Cook Straight running through the middle of it and no mountain ranges to interrupt your distribution.  How easy could it be to double your sales?

While Melbourne is a convenient example the same point can be made about many export markets around the Pacific Rim, (Los Angeles 13 mil, Manila 20 mil, Kuala Lumpur 7 mil, Hong Kong 7 mil, Beijing 8.5 mil, Shanghai 15 mil). The numbers make the current market size limitation argument a bit lame I think.

Of course there are uncertainties and new things to learn in dealing in foreign markets but none of them are insurmountable. The two fundamental pieces of advice learnt by many of our more successful export entrepreneurs are 1) operate IN the market – not AT it; and 2) follow the Kiwi – find an established Kiwi in the market and form an alliance. Also there are many cases of opening export markets by using digital marketing and social media sites.

Organic growth.  Although it may not give you the rapid growth available in acquisitions and export markets, with organic growth the risks are commensurate with the lower scale and slower pace of growth. A convenient way to think of organic growth is through a matrix of new versus existing products and markets shown below. The favored segments of the matrix are the market extension segment (finding new customers for your existing products) and the product extension segment (encompassing an innovative culture, R&D investment and strong new product development)

Aspiration Driven Growth. We are then left with whether you really want growth and if you have the self belief and confidence to go for it. In privately owned businesses this is the central and critical element of any discussion on business growth.  In the words of many commentators, the 3 ‘B’ disease is seriously limiting the growth of many New Zealand businesses. The 3 ‘B’s are – Boat, Batch and BMW! Maybe it’s too easy to get to a reasonably comfortable life style in New Zealand and we don’t try hard enough to grow once we satisfy or basic wealth aspirations.  Why is it that our athletes invariably aim to be the best in the world, whereas our SME owners just want to be the best in their local town?  What is needed is a good dose of sports psychology for business owners, to lift their aspirations to world class performance, and to help them visualize the successes and rewards that come from growing New Zealand businesses.