What Is Business Expansion? Basics and What To Consider

What Is Business Expansion? Basics and What To Consider

It’s a common theme in the business world: Organizations constantly strive to grow and look for ways to expand.

Business expansion can open doors to exciting opportunities, whether entering new markets, forming strategic partnerships, or going online. But the road to expansion isn’t without challenges. It requires careful planning, strategic decision-making, and a deep understanding of the risks and rewards.

This article explores the basics of business expansion and outlines what you should consider before embarking on a business expansion journey.

What is business expansion?

Business expansion refers to the growth of a business to a stage at which it seeks out additional options to generate more profit.

When a business reaches the point of market saturation, it could be time to consider business expansion. Looking for ways to tap into new sources of revenue by reaching more customers, diversifying income streams, and enhancing competitiveness in the marketplace are ways to expand your business.

Although many businesses and startups face the challenge of managing business expansion, not all will succeed. That’s why it’s important to approach business expansion with a well-thought-out strategy and appropriate infrastructure.

Types of business expansion

Business expansion can happen in multiple ways. Different business expansion strategies exist, from tapping into new geographic regions to forming joint ventures and franchising. Let’s look at these in more depth.

Mergers and acquisitions

As business leaders seek to increase revenue and drive business success, pursuing a merger or acquisition (M&A) can be a crucial expansion strategy for repositioning businesses and achieving sustained business growth over the long term.

M&A involves one company purchasing another business and merging it with its existing business operations. This method of business expansion allows a company to access new technologies, acquire new customers, and expand its range of products.

Additionally, M&A may lead to cost savings through economies of scale, allowing businesses to achieve greater profitability and increased revenue.

The merger of H.J. Heinz Co and The Kraft Foods Group in 2015 is an example of a notable merger and acquisition. The two companies combined to form the Kraft Heinz Company, which became one of the largest food and beverage companies in the world.

Market expansion

Market expansion is about expanding a product or service to new geographic regions or tapping into new customer segments within existing markets.

By expanding into new territories, businesses put themselves in front of more potential customers, which means increased market penetration and brand-building opportunities.

This type of business expansion often requires significant planning and research to understand the new market, including cultural and language differences, competition, and regulatory requirements.

Although challenging, market expansion can pave the way for increased revenue streams and a surge in company growth.

An example of market expansion is Starbucks' entry into the Chinese market in 1999. Today,  the company expects to operate 9,000 stores by 2025—this means opening a new store nearly every nine hours for the next three years.

Joint ventures

When two companies create a new one, they engage in a joint venture. This type of expansion is a great way to tap into different skill sets, networks, resources, and technologies, which can help a company improve its efficiency and competitiveness.

By pooling resources and knowledge, joint ventures open the door to new business opportunities, such as developing new products, diversifying service offerings, and expanding to new geographical areas.

For example, Fiat Chrysler Automobiles (FCA) and Google joined forces in 2016 to develop a fleet of self-driving cars using Google's technology and FCA's vehicle manufacturing expertise.

However, joint ventures come with potential challenges—differing company cultures, conflicting goals, partnership imbalances, and communication issues, just to name a few.

With that in mind, assessing the risks involved and communicating goals and expectations before entering such an agreement is essential.

Franchising

As recently as 2022, the estimated number of franchise establishments in the U.S. was 792,000, with a total revenue of roughly $827 billion.

In a franchise establishment, a brand permits another individual or entity to use its name and established business model to open an independent establishment.

The franchisee pays a royalty for the right to do business under the franchisor’s name and system. The franchisor then provides the franchisee with adequate support and training, including marketing efforts, pricing structure, and ongoing operational guidance.

By leveraging the franchise model, businesses can expand their reach, rapidly scale their operations, and increase revenue streams.

McDonald's is a well-known example of a franchise model with over 38,000 locations in over 100 countries. According to McDonald’s, approximately 93% of their restaurants are owned and operated by independent local business owners.

Strategic partnerships

Allies and helpers can go a long way in assisting your business to grow, expand, and transform—and that’s where strategic partnerships come into play.

Strategic partnerships are collaborative relationships between two or more like-minded organizations that work in synergy to achieve common objectives. These partnerships are usually formed to use each other’s resources, expertise, and knowledge to create new opportunities and achieve goals neither could accomplish alone.

As a result, they can access new locations, reduce operational costs, enhance competitiveness, and increase revenue.

The partnership between Spotify and Uber is an example of a strategic partnership. The two companies combined their resources and expertise to integrate music streaming into the Uber rider experience. The result was a better rider experience and a new channel for Spotify.

Online expansion

Customer expectations, advancements in digital technology, and marketplace demand have made online expansion increasingly important to stay ahead of the competition.

By going online, businesses can address one of the biggest growth bottlenecks—Total Addressable Market (TAM)—and break free from geographical boundaries.

Considering 76% of online shoppers have made a purchase on a site outside their home countries, online expansion can be a key strategy for increasing reach and driving international sales.

Thanks to the power of technology, even small businesses can create a global presence and access a vast pool of potential customers.

There are many examples of a successful online expansio —Amazon, Netflix, and Zara, just to name a few.

Importance of business expansion

Whether expanding to new markets, forming alliances, or tapping into the online world, business expansion is an exciting milestone for decision-makers, business owners, and entrepreneurs.

Business expansion is vital for businesses that want to maintain continuity and stay competitive. Without expansion, companies risk stagnation and potential decline caused by low market demand, inflexibility, or competition.

By having a well-thought-out expansion plan, businesses can tap into new sources of revenue, enhance their brand recognition worldwide, and increase their market share.

Factors to consider when expanding a business

Successful leaders know their businesses need to grow to stay competitive in the market and increase revenue.

But with growth come new challenges and risks. Before embarking on business expansion, decision-makers should conduct market research and map out a growth strategy considering financials, infrastructure, and management.

Let’s take a deeper look at each factor.  

Market research

The most important element of expansion success is doing your homework, which means conducting comprehensive market research on the new target market or segment. What is the demand for your product in the new market? What is the current market offering? How will your business positively impact the marketplace?

By answering these questions and understanding your target market’s dynamics and specifics, you’ll be better positioned to customize your offer based on the “language” your new target audience is familiar with.

Analyzing the competition can also help you gain insights into their strengths, weaknesses, and marketing strategies, helping you position yourself effectively in the market.

Financial analysis

Revenue is the lifeblood of a business, and incorporating financial analysis into your business expansion strategy is crucial for success. The financial analysis is often the basis for a go or no-go decision on a specific expansion opportunity.

Since each new market has unique characteristics, businesses need to conduct a thorough financial analysis of the new market and create a detailed budget and forecast for the expansion.

This analysis should consider market size, customer demographics, buying behaviors, and competitors’ pricing strategies. In addition to evaluating revenue and costs, businesses should consider the cost of financing the expansion, including cash flow, loans, or other funding sources.

Management capabilities

A business needs more than just financial resources to expand—it also needs people to lead the change.

From setting a vision and creating a strategy to managing day-to-day operations and leading the team through challenges, effective leadership is a key element for safeguarding the smooth execution of your business expansion plan.

This means investing in talent acquisition and development to ensure the business has the right people in the right roles. This might involve reskilling and upskilling current employees or hiring independent professionals with the required expertise.

Challenges and risks of business expansion

Expanding a business comes with inherent risks—such as financial, legal, and reputational risks. Without a strong risk management plan, business expansion may do more harm than good.

  • Financial risks. Unexpected costs associated with the expansion, a decline in revenue due to low demand, or stock shortages due to inaccurate demand forecasts are only some of the financial risks businesses might face when expanding to a new market.
  • Legal risks. Legal risks can threaten businesses expanding to new markets, from intellectual property disputes to compliance issues and other legal challenges.
  • Reputational risks. When businesses fail to understand a new market’s unique needs, reputational risks can happen. These include brand image damage due to cultural misunderstanding, quality control issues, and other factors.

So, how can you mitigate these risks? Research, research, research. The more you understand the financial, legal, and cultural implications of expanding into a new market, the better equipped you’ll be to make informed decisions and mitigate risks.

Legal and regulatory requirements

When working beyond your original borders, ensuring your business complies with all local and federal regulations is important.

Legal requirements vary depending on the location, industry, and type of business. However, an experienced legal consultant can make things simpler and easier—guiding you every step of the way.

We explore some things to consider regarding legal and regulatory requirements.

  • Understand your tax obligations.
  • Consider environmental policies like China’s air pollution framework.
  • Understand marketing and advertising limitations. For example, the EU Pledge requires companies in the EU not to advertise food and beverages to children under 12 years (except for products that fulfill the EU Pledge’s common nutritional criteria).
  • Establish the business as an LLC, corporation, or appropriate business structure for the specific market.
  • Ensure you’re following the right payment rules.
  • Put financial agreements in writing.

Managing a larger organization

Working in expanded geographic locations can be daunting, as the management of teams becomes more challenging due to differences in time zones, cultural norms, and language barriers.

To overcome these challenges, create a culture of collaboration by promoting open communication, encouraging knowledge sharing, and setting clear objectives. Additionally, leverage the power of technology to facilitate communication, including regular team meetings, training and development programs, project management tools, cloud-based storage, and asynchronous communication and project tools.

Ultimately, stepping into new markets requires a willingness to be open to learning and growth. This can involve experimenting with new approaches, taking calculated risks, and pivoting or adjusting course when needed.

How to expand your business

Business expansion is a worthy endeavor that takes time, effort, and willingness to adapt. Find out more about how to scale a business.

In a nutshell:

  1. Conduct market research to assess the feasibility of expansion.
  2. Develop a detailed business expansion plan that takes into account target-specific implications.
  3. Secure financing or funding to cover the costs of expansion.
  4. Leverage technology and digital means, including social media.
  5. Hire external talent and build a team to support rapid growth.
  6. Track performance metrics to ensure the expansion is progressing according to plan and positively impacts your bottom line.
  7. Stay adaptable and flexible in response to changes in the market.

Find talented professionals on Upwork to help expand your business

Considering only 22% of startup businesses launched in recent years have successfully scaled, business expansion requires more than drive and passion. No matter the size of your business, business expansion requires careful research, strategic planning, and effective implementation.

If you’ve decided to embark on a business expansion strategy, join Upwork today to find independent professionals who can help with different needs as you tap into new waters. Alternatively, browse Project CatalogTM to find projects planned for you.

Upwork does not provide legal advice, and each reader and company should take the time needed to adequately analyze the laws that apply to their business endeavor.

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What Is Business Expansion? Basics and What To Consider
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