“I wish I’d gone into the business of hand sanitiser,” said the owner of the paint shop recently to me.
I slow-nodded, acknowledging the fast money companies made selling products that met demand fueled by covid. But entrepreneurs, don’t be wooed by risky, quick-profit expansion opportunities.
Those who made money in the hand sanitiser exponential growth market accomplished this because they already operated in an adjacent area. The winners in producing hand sanitiser were Perstopr Group, PKN Orlen and Sebak and they are chemicals companies. They were fast-moving, extremely focused, razor-decisive and well connected. The winners in selling hand sanitiser were supermarkets and pharmacies, the places where consumers expected hand sanitiser to be sold. It was a temporary boom driven by short-term extreme demand and a shortage of supply, with a correspondingly short-lived window to make super-profits. Now wholesale prices are low and competitive and it’s provided free to consumers, simply wave for a globule as you enter the shop. Yes, the paint-shop owner made a flippant, lighthearted comment, but he did touch on a truism: many entrepreneurs get distracted from their strategic focus by the allure of exciting but risky bets in unknown markets.
Expansion feels opposite to focus and yet successful businesses need to do both. To successfully expand your business, prioritise moving into adjacent markets (defined as markets near to that your business already does) such as updating your product design or going into new geographies but with the same target customer. Moving up or down your supply chain can also strategically fit with your existing lines. Better yet, aim for an expansion formula you can replicate time and again, like Nike who started by developing shoes for running then expanded to shoes for volleyball, tennis, basketball and golf. Don’t do a Colgate who back in 1982 moved from toothpaste into frozen dinners. This strategy not only bombed but damaged the core sales of toothpaste too.
The new market must also have the potential to create value for the company in the long term. It must be a material opportunity. This requires analysis of the market – its opportunities and risks – including market size and growth, competition and sustainability.
Scrutinise growth opportunities in your core market. An astute player could have predicted demand for paint and Do-It-Yourself would boom during lock-down and moved to take advantage of this. Moving ahead of an opportunity is a high-risk strategy, but knowing and understanding your customer behaviour at a detailed level reduces this risk – you play a calculated bet. Waiting until trends become established reduces the risk further but also lessens the value of the opportunity, but still, there is often money to be made. As he experienced the upward demand trend, the paint shop owner could have increased his product range or added a delivery service perhaps to gain local market share.
Entrepreneurs need to harness the skill of successful expansion beyond their initial products and markets, and this isn’t done by grabbing at flashy new opportunities. It is done by exploiting detailed understandings of core (and directly adjacent) markets combined with the wherewithal to move quickly and the ability to manage risk.