Micro Expansion Vs Macro Expansion in Business
Introduction: -My keen interest to view business as science has inspired me to write about unusual thinking in business, Mostly we hear a phrase in our offices “that is usual practice of the organization”. The word diversification & expansion usually used to represents anything that they do different from current business. The article is aimed to give inspiration for students as well as professionals for looking into ignored factors which may turn around the business to doubling their profitability & turn over.
However scope of the article restricted to the study of expansion in single segment organization in manufacturing market & multiple product line trading firms in trading market
The contents:
o Factors Motivating Expansion ( Financial & Non Financial)
o Planned expansion v/s Emerged expansion
o Managing expansion
o Impact of the decision in operating performance, net worth & long term benefits
o Risk factors
Factors Motivating Expansion (Financial & Non Financial)
o Factors Motivating Expansion (Financial):- The major financial factors that motivate an organization are high liquidity, reduced return on liquid investment, lower leveraged capital, and higher operating profit margin.
o Factors Motivating Expansion ( Non Financial):- The non financial factors may be re-engineering of organization to new economic scales, Reducing cost of production through vertical integration, the quality of processed raw material effecting the finished goods, the completion of product line offering, total solution to the customer, Risk of existing product line, balancing the non variable over head cost, High human resource carrying cost, under utilized resources, competitive market advantage, Technological changes in the business segment & new market opportunities
Planned expansion v/s Emerged expansion
The most of the macro expansion are well planned, accounted & continuously performance monitored, the planned expansion is triggered by financial factors rather than the operational or market factors. The management normally adopts a TOP to BOTTOM approach in planning. Where scale of economy of the plan influence the decision. However the lost opportunity cost in micro expansions is ignored.
The micro expansion in within the segment is rather compulsion than planned investment in most of the organization. The expansion is normally motivated by non financial factors. The sequential nature of micro expansion normally adapts a bottom to top approach in planning which has comparatively lower financial risk. Hence the micro expansion can be called as an emerged expansion. Since it is an emerged expansion & sequential in nature & the costs hence the returns are not calculated in detail for a performance analysis. Normally the same reflects as an increment in turn over of operation & expenses are not significant to define a funding policy.
The major mind block in the trading markets is that, budgets are always focused on profit maximization through concentrating in the current business & reducing cost of operation. Most of the trading management ignores the necessity to have budget for product segment expansion for the representing manufacturer which results in losing valuable partnerships. The transaction based profit maximization forces to loose their segmental leadership position & some times the identity itself in the due course of operation.
Once an organization quantify micro expansions which are planned or unplanned, the lost opportunity cost will become significant.
Managing expansion
Organization can define available expansion option for comparison, First we should look into the organization for an inside opportunity (micro business strategy) or we can look outside for related opportunity (macro business strategy) & compare. However to emerge micro expansions, it need to be initiated from top & mentored to the bottom. The key factor lays in the organizational culture developed in the past. In this case change management concept itself can be an opportunity of investment for growth. “A well prepared agriculture land can only receive new seeds”. The concept is not an exception for business organizations.
The classical example of such style is 3M. The bottom to top approach has resulted in introducing ‘N’ number of innovative products in each segment they operate. However the segmental focus is not hindered their massive growth in non related fields for the organization.
The organization has to list out the opportunities available internally as well as externally for expansion, internal domain knowledge for the listed options and correlation between the existing lines of business to be defined in detail.
Manufacturing markets:- The downward integration by opening joint ventures in the distribution & retailing may be of high returns with lower risk than upward integration of manufacturing line or starting up a new business segment. This need a well planned micro expansion strategy for the organization. The financing and leasing operations by manufacturer are emerged in Indian industry due to the low returns one short time investments is an example.
Trading markets: Planning of expansion in trading is mostly managed through sequential approach of expanding product range & integrating retailing. The macro level expansions are driven by increasing market demand for the business segment or the premium margins enjoyed by the current operator. It is important to mention that normally in a trading market micro level expansion are not planned & it happens due to mere coincidence with manufacturer strategy of expansion worldwide.
The sequential micro level expansion plans can double the current turn over levels with lower impact on profitability ratio to turn over. However up to 5 to 10 % impact on operating profit ratio is widely accepted in the industry for an expansion plan.
It is apparent that the choice of Micro expansion over macro expansion is only possible if the organization has an internal capability to define the micro expansion in terms of capital utilization & goals attained through the plan. The micro expansion plans in organization are emerged through a continuous process and it needs high level of two way organizational communication & motivated human resource. This is why the leadership position for segmental business is expressed as mentored rather than managed.
Example in Manufacturing:- M&M was market leaders in multi utility vehicles in India in the late 80’s and early 90’s. However entry of international manufacturer’s has changed the concept of MUV in the consumer minds, which has forced M&M to try various options of technical collaboration & diversification to different segments of automobile industry which was not taken off well. Of late M&M has recognized their internal strengths of image & invested in R&D to satisfy the customer need in changed environment, which has helping them to retain their position in MUV manufacturers. The same should have been managed by micro expansion strategies through sequential approach well before the entry of international competitors. (Investing in R&D department, continuous redesigning strategy to improve comfort levels)
Trading markets: – One major expansion pressure in trading organization is the accumulated profit & fast inventory turn over push the organization to high liquidity status & exorbitant accumulation of non profit making liquid assets. One of such companies in Oman has chosen to expand in the most successful product line of them by accusation of two world renowned brand agencies in the country over the manpower expansion of their division in infrastructure projects. However the country is opening up for driving fast growth in infrastructure, free hold properties and natural resource processing industry. The cost of lost opportunity due to constrains resulted from the diversification has to be calculated for comparing such projects
Impact of the decision in operating performance, net worth & long term benefits
Macro Expansion: – The operating performance has not directly affected since the macro expansion plans will normally increase the capital outlay. The capital for such expansion is always planned through different funding options. That results in highly leveraged capital. Macro expansion has a direct impact on the net worth of the organization. In the long term the benefit of successful diversification changes the size of the organization, importance in market place & increased profits. The profitability ratio may change positive, negative or unchanged depending on the market trends in new segment business.
Micro Expansion:- The direct impact of micro expansions are reflected on the operating turn over and sales values or volumes. The induction and establishment cost of such expansions are normally treated as routine expenses which will give a negative impact on the operating profits. Impact on net worth may not be phenomenal. The long term benefits are, identity of the organization in the operating segments are improved. The dependability of products & services offered are increased. The expansion leads the organization to improve market share & gain leadership position in the segment. Threats of vulnerability by competitors will be reduced in operating business. The micro expansion will results in increased turn over. The profitability in consecutive financial years will drastically improve.
Risk Factors
Macro Expansions: – The major risk factor is failure of such expansion is it can jeopardize the existing business itself. Another risk factor is the learning curve of the new business can extend than expected in such case the existing business may have to ignore opportunities at the door step to support the new business during this period. Due to increased pressure on operating profits it can tamper the motivational levels of employees and stake holders.
Micro Expansion: – The micro expansion has considered to have lower risk. However negative factor is the lost opportunity in increasing the size organization to the higher economic scales. Due to sequential expansions nature the management can loose interest in the half way or can come to stand still due to re-scheduling of operating priorities.
Conclusion
It is necessary for organization to compare Micro expansion strategy with macro expansions plans. For the same the organization has to quantify the hidden opportunity of micro expansion, plan such actions & analyze expected results.
The micro expansion can emerge regularly in a well mentored organization. The motivation levels of such organization will turn a failure into success. The need of structured continuous initiating of micro expansion, separate budgeting and recovery plan will help the organization to have competitive edge.
