In this third article, we examine one of the key challenges to growth. We also discuss how successful owner-managers overcome these obstacles.

Over a 4-year period, we studied the accounts of 15,000 independent UK businesses with turnovers between £1 million and £50 million. Fewer than 2% consistently grew sales and profits by 25% and provided a decent return on capital employed. How do the high achievers manage to create a great business out of a good business?

Stick to the knitting. In the late 1990s, we asked several hundred smaller firms about their primary market and customer focus. We repeated the same survey last year, and we correlated their answers with their financial performance. Both times, the same pattern emerged: The highest performing smaller firms tended — overwhelmingly — to grow by offering more of the same kinds of products or services to their existing customers and others who were like them. In other words, your existing patient base as well as their friends and family are your best resource for helping to grow your practice.

Find a niche and develop it. A compelling strategy for the growth-oriented business is to find a market niche and build a commanding position. Some of our most successful businesses have done exactly that: Pacific Direct (Bedford, UK) in supplying toiletries to five-star hotels, Cobra Beer (London) with its beverages portfolio in the Indian restaurant sector and Hotel Chocolat (Royston, UK) with delivered chocolate gifts.

The niche strategy comes with two great benefits for the owner-managed business: (1) Bigger players frequently overlook niches as too small or unprofitable. This gives the fledgling business time and space in which to find its feet. (2) Niches enable the business to focus on meeting the needs of a well-defined target group. This, in turn, builds a deep knowledge and understanding of those customers, which becomes over time a competitive advantage.

Maintain and intensify the focus. Before attending Cranfield's Business Growth & Development Programme (BGP), the founders of Hotel Chocolat had twice sought to grow through diversifying into new market areas. Each time, they experienced setbacks. Following BGP, the business renewed its focus on the core, and the resultant growth has been exponential. A small business cannot fight on too many fronts. If it tries, the danger is that it will fail to serve both the diversified markets and its core customer base.

Look for incremental or step-by-step growth opportunities. The message here is to go deep, then broad. Pacific Direct built a strong position in hotels before moving to servicing airlines. Business and first-class airline customers stay in five-star hotels and appreciate the same sort of luxury brands. Pacific's credentials built in one niche bolstered its entry into the adjacent one; the company's infrastructure was robust enough to support the expansion. In the past 2 years, Hotel Chocolat has rolled out a hugely successful retail concept that appeals both to its mail-order customers and other chocolate lovers. There were opportunities to start this process earlier, but the founders decided to do so only when the business was fully ready and take one step at a time.

Are you saying never innovate or diversify? Absolutely not! The three businesses I have mentioned are all extremely innovative, and between them, they have won numerous awards for their quality and creativity. But, they all laid the foundations for growth by creating a robust core built on repeat and predictable businesses with a target group of customers. Unfortunately, too many ambitious businesses never make it past that first burst of growth because they start wandering too far, too fast, from what they really know how to do.

Beware of the me-too mentality that may influence so many to rush into developing a new service and spending capital on something that may not succeed. Before diversifying, it is important that you understand your current niche and target market well. In diversifying and introducing a new service, consider how this fits with your current practice, also consider all aspects operationally and financially and then develop a strategy for implementation.

In the next article, we will look at setting the right financial objectives as part of the recipe for successful growth.

For more information on BGP and Cranfield's other programs for owner-managers, visit www.som.cranfield.ac.uk/som/groups/enterprise/credo/index.asp.