Business consultants observe that taking time to think critically about how to take advantage of existing clients’ base to offer other services can prove valuable.
In addition, they say success in business can be achieved by developing a new product or service, in line with an existing business. They also say that businesses can perform better by retaining more customers who will bring in a constant stream of income.
According to them, business managers should be able to envisage other related business needs and offer them to customers on a continuous basis.
A report by Mckinsey and Company observes that most companies are seeking growth outside their core business.
The report titled ‘Growing beyond the core business,’ says that most executives report a strong belief that expansion moves have created company value.
The survey suggests that over time, companies’ aspirations to grow through these activities have produced only modest results and that few companies have the right practices in place to support such growth.
It says nearly nine out of 10 respondents say that in the past five years, their companies have either pursued at least one activity in a new category or plan to do so in the next five years.
“Companies are most likely to pursue new activities through investments in organic growth and with long-term interests in mind. Executives at emerging-economy companies report greater paybacks than their peers at developed-economy firms—but few respondents overall say that over time, the activities have added much to company revenues,” the report adds.
According to the result of the survey, there is much room for improvement in the ways that many companies identify and evaluate new opportunities.
Reasons for expansion
About three-quarters of respondents say that over the past five years, their companies have pursued at least one business activity in a new category while another 14 per cent say their companies have either considered pursuing this growth or plan to do so in the next five years.
For many of these companies, growth beyond their core business is for long-term gains as against one out of ten who say their companies consider new activities for short-term returns.
Some of the respondents also say their companies are likely to consider such a move to access new profit pools and strengthen their core business.
Significant value with modest results
Few executives report significant top-line results over time from diversifying activities.
“Only one-third of all respondents say their companies’ moves beyond the core generate more than 10 per cent of their revenues today. The share of revenue increases with the number of activities that companies pursue. But even at firms that are active in more than ten products or service categories, 35 per cent of executives say these activities make up more than 10 per cent of revenue,” the report says.
The report adds that when asked about the biggest revenue-generating activity of the past five years, respondents most often say this move has created some financial value for their companies.
Expansion thrives in emerging economy
According to the report, executives report notable differences in the value that developed-economy and emerging-economy companies see from these growth activities beyond the core.
At companies based in emerging economies, respondents are about 1.4 times more likely than their developed-economy peers to say their biggest move in a new category has created significant value for their companies—likely due to structural advantages in their home markets, the report notes.
“When asked what gives their companies a distinctive advantage over those based in developed economies, emerging-economy respondents most often cite greater opportunities to reinvest retained earnings in new businesses—easier to do than in developed economies, where relative growth is much slower—and a greater ability to leverage their local knowledge and relationships,” the report adds.
To achieve successful expansion, the survey says that businesses in emerging-economy as well as developed-economy agree on the approaches their companies use to grow in new areas such as investments in organic growth as well as mergers and acquisitions.
It says, “Both groups are probably able to identify their executive teams and boards as the ones responsible for evaluating opportunities in new categories.
“There is also consensus between both groups that new activities shouldn’t stray too far from the core business. When assessing a move’s value potential, nearly two-thirds of all respondents say unique links between the activity and the existing business are the most important criteria their companies consider.”
Best practices of expansion
The survey highlights different steps in the process of pursuing growth in new categories, as identified by few executives.
According to executives, firms most often struggle to scan for new opportunities, evaluate those opportunities, and integrate new activities into the core business.
The report adds that respondents at companies that get the practices right are more likely than others—about twice as likely for each of these three steps—to report that their biggest move in the past five years has created significant company value.
It says, “More specifically, the responses in these three areas, which are scanning, evaluation and integration, suggest which individual practices link most closely to value creation.
“When executives say their companies have a clear strategy for expanding into new activities, for example, they are four times more likely than those whose companies have no such strategy to report significant value creation.”
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