Saturday morning I finished reading the 2022 Annual Report for a large, publicly traded corporation. We do not own shares of this particular company, but it is on my list of wonderful businesses. Over the years, it strikes me that all wonderful companies have simple expansion plans. This particular company has maintained the basics of its plan for over 100 years. As you distill down the plans across companies, there are a handful of proven paths to follow. At the most simplified version, I think any established company must become systematic about going deeper with existing customers, or adding new customers. This is a fundamental decision that must be actively monitored. What are we trying to do as a group of people –at this time?
Prior to expansion, I think it is important for the business to know they are the absolute best solution for their customers. Within Little Engine Ventures we teach and practice across all companies, what I call the “bull’s eye customer persona.” For this particular type of customer we are the ideal solution. As a business, we usually derive some network effect and scale economics when these customers are located in a dense geographic region. Combined, these attributes keep us focused on driving up our units per labor hour while maintaining high-value to price-paid ratios for our customers. This fundamental discipline, when overlooked, allows the the business to rot from the inside out. If the core is guarded and maintained, one can consider expansion. Thus, a properly functioning core business line is a prerequisite to expansion.
As an entrepreneur I find new product and new service development particularly rewarding to introduce early in the expansion plan. If I have a well-defined customer persona –with known problems– I can anticipate their needs and bring them solutions before they ask. A friend recently renamed the common “minimum viable product” phrase popularized by startups worldwide to “minimum sellable product.” I like the clarity of this as it puts “sell-ability” out front in the company’s mind.
If I focus my attention on the largest and most profitable of my bull’s eye customers I can train my mind –and my team– on this method of problem-solving for a profit. As a capital allocator my distance from the customer impedes this method, and thus my involvement in innovation is reduced dramatically. It has taken me a few years to realize the significance of this gap –which is further exacerbated by the fact that I am no longer the direct supervisor of the team that might implement a new product or service offering. Thus, there is yet another choice regarding expansion to be made. Dial back innovation or allocate more time to it. We opted to systematically escalate innovation. There are two places we hunt for innovation. The first, and ideal, is from the front lines. Our General Managers must be in the front lines, with customers and technicians often. They must listen, capture and relay ideas systematically in order to change daily habits. This has worked well and is nearly unnoticed at our level. On the front lines, people feel empowered and make strides, solving customer problems in new ways that scale. Often times, we’ve seen some of these solutions translated to other companies. When a culture of documentation and training is instilled the rewards compound as new people join, learn and improve upon what prior teammates started. The second approach we use in new product and service development is grounded in crisis. We call it, “creativity is crisis.” The ol cliche of “never let a good crisis go to waste” When we’ve done -and seen it done well, there is always an owner-operator at the helm. This is expensive time and the opportunity must be large and/or the risk of loss high. We’ve had minority investments use this approach extremely successfully.
Geographic expansion permeates most companies –even in the information age. Reflect on how Facebook expanded. Ivy league universities first, then colleges, then surrounding demographics, then international. I’ve seen the geographic expansion play out successfully in tech companies we have invested in also. Usually, the niche starts out far too small to be of interest to anyone else. Dominate this narrow niche. Then, expand geographically. Then expand offering. Repeat.
Of course geographic expansion works even better where physical goods and in-person service are required. Solving a customer problem with excellence causes word of mouth to be high. People are more likely to talk to people that are physically near them more often. Don’t fight this trend. Systematically plan on using it to help you expand. Then, divide your methods between organic and inorganic. Organic expansion originates incrementally –albeit sometimes exponentially– from within the sales and marketing processes and responsibilities. The inorganic expansion occurs above the sales and marketing department leaders when a head of the organization buys a going-concern business.
The incremental additions of customers is a critical foundation in all businesses. Some businesses depend upon replacing every customer once their problem is solved. Other companies work with customers who regularly re-develop the same problem. In this company type, the sales and marketing processes are usually weaker. When their skills are stronger the business often grows faster than competitors. This can be attractive if the economics justify it. Within the acquisitive method of growth, customers are acquired in bulk. Staff, processes, and culture also come along with the exchange also. This can be good or bad. We’ve encountered both types. And, we have used acquisitions to expand our customer types within our geographic boundaries, and to expand our geographic footprint. For Little Engine Ventures we have found expansion of existing business lines’ geographic footprint through acquisition to be worthwhile. Adding customer personas within an existing geographic footprint works well if the staff are not in conflict. That is, two cultural ideals living under one roof won’t work. The core attacks itself. The culture clash tears the company apart from the inside.
Ultimately a decision must be made between developing new solutions for the current customers or expanding existing solutions to new customers. Fortunately, this is not a binary choice. Still, resources are limited and priority must be given to the one which drives more value, and the alternative approaches must align with the present choice. Ultimately, the customers and competitors adapt and so must you. Know where, when and how you win.