Commercial Insights

Ready, Set, Grow

Expand organically or by acquisition? Move into global markets? Invest in employees? Here’s how to assess these growth strategies and more for your business.

It’s a business truism: If you’re not growing, you’re dying. Yet the larger your company becomes, the harder it is to achieve sustainable growth. Most midsize companies that want to grow without acquiring another business probably shouldn’t expect an annual growth rate of more than 10%, says Aneel Karnani, professor of strategy at University of Michigan’s Ross School of Business. “And even that’s not as easy as it sounds, in a U.S. economy that will expand only about 2% per year,” Karnani says. “That’s also the average growth rate for U.S. companies—about 2%.”

Your business may have loftier goals. And whatever level of growth you hope to achieve, there may be more than one way to get there. Consider these ideas.

Decide how to grow

Your company might aim to sell more of what it makes, expand geographically, branch into new products or services—or combine one or more of these strategies.

Recently, though, there has been a move away from building businesses that try to do it all, says Karnani, who notes that many large companies now outsource all of their manufacturing. Similarly, midsize companies today are most likely to stick to core businesses while expanding globally or to sell their primary products or services on a larger scale, he says.

There may also be opportunities closer to home, says Alan Register, Executive Vice President of the Commercial Banking Group at Regions Bank. “Look for ways to exploit untapped potential in your current business,” Register says. “What is the expertise that made your company successful in the first place? How can you get even better at doing that?”

One Regions client, a consumer products company, was able to increase market share and profitability simply by changing its packaging. “By making the package more attractive and environmentally friendly, retailers moved it to the front of stores, and that helped increase sales,” says Register.

Consider a global reach

Expanding beyond U.S. borders isn’t only for large companies. “Trade agreements have helped. Financial transactions abroad are much easier today—shipping costs have come way down and language isn’t usually a barrier,” says Karnani. Many more midsize companies are taking their businesses into foreign markets these days, but a company “should be reasonably successful at home before making the leap,” Karnani says.

Scale up—carefully

No growth strategy will succeed unless you can execute it, of course. “It takes more than hiring sales people to go out and sell more,” says Register. Instead, expansion-minded companies need to rethink their entire infrastructure, and ramp up everything—information technology, operations, finance, human resources, manufacturing.

You may also need to explore more than one path, says David Graham, Vice President and Relationship Manager for Regions Commercial Banking clients. He cites as an example the U.S. arm of a multinational corporation that wanted to expand sales in this country. One option was indeed to outsource manufacturing, an increasingly popular option. “But when we researched the cost of buying equipment and shipping it here from other affiliates, that turned out to be much less expensive,” Graham says. Regions provided an equipment loan, financed construction of a new facility and increased a line of credit. “Helping a company grow isn’t just about loans—it’s also about building relationships to understand the passion which drives goals, and finding creative ways to meet them,” he says. (For more on how to overcome hurdles to growth, see “Seeding Growth.”)

Choose the right customers

Managing cash flow doesn’t begin and end with meeting credit and liquidity requirements and having money on hand to pay suppliers and employees, says Register. Finding customers who can be relied on to pay their bills is also crucial. “If you’re booking quality receivables at decent margins, your revenues will catch up and sustain your growth,” he says. “But if your receivables aren’t profitable or collectible, you may have short-term sales growth, but ultimately your business will suffer and decline.”

Invest in your employees

Human capital, too, can spur a growing company’s long-term performance, says Theresa Welbourne, professor in entrepreneurship and executive director of the University of Alabama’s Entrepreneurship Institute. In a study of companies that sought growth by going public, Welbourne found that those placing a high value on employees and their business culture—as indicated in a required strategy statement that ranks a company’s emphasis and spending on technology, research and development, marketing and employees, in addition to other factors taken from the company’s prospectus—had lower stock prices at the time of their initial public offerings. “But five years later, the value a company placed on employees was the key factor that predicted stock price growth and survival,” Welbourne says. “Other aspects of a company are easily copied, but the talent and commitment of employees give you a long-term advantage.”

Grow by acquisition

Buying another company can turbocharge growth, and the best acquisitions often build on your company’s core expertise, says Robert Tyndall, Managing Director in the Corporate Finance Group at Regions Bank. Acquisitions that extend your reach into untapped markets, expand your product line or attract new customers while being integrated into your existing business are natural targets for growth, Tyndall says.

If you choose this route, evaluate how to make the target company worth more as part of your business than on its own. Could cross-selling produce greater revenue? Could back-office functions be consolidated? However, these expected “synergies” shouldn’t be factored into the purchase price, says Tyndall. “Future potential economic gains should accrue to you as the buyer taking the risk of the deal,” he says.

Once you identify an acquisition that is attractive from a business perspective, focus on how it may fit with your company’s culture and organization, Tyndall suggests. Make a post-acquisition integration plan prior to closing a deal.

Whatever your company’s path to growth, it helps to work with a partner that understands the hard work of running a business and generating new revenue. “As our clients look at growth opportunities, our Commercial Bankers are right there with them, helping them strategize and anticipate cash-flow issues and the need for capital,” says Register.

“Helping a company grow isn’t just about loans—it’s also about building relationships to understand the passion which drives goals, and finding creative ways to meet them.” David Graham, Vice President and Relationship Manager, Regions Commercial Bank

“Other aspects of a company are easily copied, but the talent and commitment of employees give you a long-term advantage.” Theresa Welbourne, Professor in Entrepreneurship and Executive Director of the University of Alabama’s Entrepreneurship Institute