A letter to an Entrepreneur - 8
It's great to hear from you that you have decided to 'Grow' your Organization by 'Expansion'. I am sure you might have taken this major decision after deep thinking. I must congratulate you for your decision but also caution you with some words of experience.
You might have heard about 'organic growth' and also might have learned about it's advantages and disadvantages. Expansion can be done by several ways. But I would love to discuss the expansion strategy which you will see in the Facebook Game FarmVille-2. You see, the game is really simple to play and looks simple at first instance. But just imagine that those coins are real Money and your farm, kitchen, Workshop etc. are real assets and then play the game. You will realize how effectively it teaches you the basics of strategic management. You can search in Google about 'FarmVille-2 & Management' or 'What FarmVille-2 teaches?' etc. keywords and you will get plenty of results and wise posts on some blogs. But here, I will tell you only about 'Expansion Strategy'.
In game you are a farmer and obviously your farm is your 'core business'. Whatever crops you grow on your plots can be sold in the Market stand to earn Money. You can 'plough in the profits' into the farm by buying more crops seeds and sowing them into the plots. When you level-up in the game, you can expand your farm by completing the task which you can see in the pop-up window in the nearby land. This way once you complete the tasks and you have sufficient money to buy the land, you can expand your farm. Understand the the basic things; the tasks are something like prove your kitchen skills/workshop skills etc. by preparing some recipes or Articles etc. Then collect some materials from friends and finally have the money in hand which is the 'buying cost' of the land. You know what?? Same applies in the business. You must grow only when you have acquired expertise (skills), you have all the resources (materials) and capital (money) to do the expansion. These three are crucial parameters on which decision of growth can be made. You can not decide merely on Demand-Supply whether it's a right time to grow or not?
You must have surplus money over the working capital of your existing business and at least the initial capital & working capital (which can suffice till your break-even of new unit). You should never be in a hurry to expand your business if you are not in a position to do so. If you will do so, you will suffer capital deficiency in the new unit/venture and lack of working capital in the existing business. Even if you will try to do Cost-cutting in the existing unit, it will affect the quality of work which in turn will reduce the profit margin of the same. In short, both your units/venture will suffer. Mind you, it's not only about Money. Same thing is applicable for your other resources. And in such case you will get buried under the loans as the new unit/venture will become black-hole which will keep asking you more and more investment and the old unit/venture will pile-up liabilities in front of you. I hope you have understood what I mean to say.
Secondly, Expansion in allied businesses is a good strategy to do the expansion. Kitchen and Workshop along with Poultry (Hen House), Yogurt Machinery, Honey Manufacturing, etc. in Farmville are allied businesses which helps you grow rapidly. A stage comes when the increase in the cost of expansion in expensive areas becomes easier due to such allied businesses.
Thirdly, as you can see that the value-added products (recipes & articles) which you craft (in kitchen & workshop) provides you good returns. You can thus add such products to your product-line if you really want to manage the new unit working capital without affecting the old unit's operation.
Irrespective of all these logical things I must also add here. Sometimes mere intuition, guts and risk taking capacity etc. are used by many for deciding the right time of expansion. But only few are the lucky ones who escape the disaster and come-out as winner in flying colors. But I advise you not to depend on 'luck factor'. Wish you all the best for your expansion.