RACO Investment founder Randall Castillo Ortega explains the pros and cons of business expansion

Throughout the life of a company, there takes place a continuous process of development that aims to take advantage of the business opportunities that arise in the market to obtain greater profits. Randall Castillo Ortega, the founder of Central American SME investor and financial advisory firm RACO Investment, details the various development possibilities or strategies that exist.

Business development involves expanding the company’s activities. This process can take place without modifying the type of products or the main activity, trying to improve production processes and increase sales (expansion) or expanding the field of activities (diversification). Explains Castillo, “Expansion is a sort of business growth that is based on strengthening the resolution in the current pursuit of the company.”

Depending on the maintenance or not of the current market and the improvement of the products offered, a distinction can be made between several expansion strategies. Market penetration is based on increasing sales using marketing techniques to find new customers. Market development is about looking for new markets for our product, even in other countries (multinational companies). Product development centers on those companies that decide to improve their traditional products, making them evolve, as can a tool manufacturer that designs special handles that adapt to the shape of the workers’ hand, to make their handling more comfortable.

Expansion strategies have in common the maintenance of the products and the main activity of the company. However, there is another possibility: for example, a company engaged in the distribution of office supplies could extend its field of activity to the distribution of furniture, both for companies and for individuals. In this case, that company would be diversifying its activity. Through the diversification of their activities, companies enter new markets, offering new products corresponding to different fields of action.

Thanks to diversification, companies make full use of their productive resources; for example, the distributor of office supplies can use his warehouse and staff for the distribution of furniture. This is because, after all, they are not so different activities. In addition, you can offer these products to your current customers, taking advantage of the fact that they are companies, and in the same way that they need office supplies, they may need to renew their furniture.

In this example, the company has diversified into an activity related to the one it carried out (homogeneous diversification). There are also cases of diversification in which companies enter sectors that have nothing to do with their main activity(heterogeneous diversification). For example, a hypermarket that offers its customers auto insurance.

“A widely used form of diversification is the so-called vertical integration,” explains Castillo, “which occurs when a company performs all the processes of the production chain, from obtaining the raw material, to the distribution of products to customers.”

Achieving healthy growth means increasing revenue and expanding the company’s performance without affecting the profit margin and profitability. In some cases, growing sustainably is complicated: it is necessary to measure the favorable and unfavorable aspects, calculate the risks and organize the finances.

The success of the venture depends, mainly, on the ability to manage the company as a whole and to perform a consistent market analysis. The first aspect to consider are the reasons why you intend to expand your company. It is necessary to define the objectives first of all. There are several reasons for seeking growth. The first is overcome problems: strong competition, low profits and fall in sales can be overcome with expansion. In addition, it can ensure success. Growing can mean achieving market leadership, increasing revenue and dominating a specific niche, enabling the success of the company

Preparing for the future is another advantage. If you have a family business, expansion can mean a financial encouragement and the future of the next generations. Reaching new customers can also be achieved. People who do not have access to your products and services can be reached with the growth of the company.

Create an economy of scale is a huge example. “With the expansion of the company, you will have a reduced cost per unit of production or service, which allows you to relocate resources,” asserts Castillo.

There are also some disadvantages; however, these can be mitigated with proper planning. For example, a lack of space. If you miscalculated, the space of your company could be small, limiting the performance of the team. Not preparing financially is another potential drawback. Several aspects need to be weighed up in order to ensure that there will be money for expansion and its inevitable financial consequences. Lastly, a lack of supply. Before expanding your company, guarantee that the supply of inputs will accompany growth

In some cases, it is advisable to turn to specialized professionals, such as business consulting or accounting firms. The support of specialists helps you achieve success, mainly through solid market analysis.

Recent Posts