Lessons Uchumi, KQ offer on perils of rapid expansion

Uchumi Supermarkets outlet on Jomo Kenyatta highway in Kisumu. PHOTO | FILE 

By MURORI KIUNGA

Recently, I read something in a blog that is worth reflecting on as we bid farewell to the year 2015 with big plans for our lives and business next year. It is about Southwest Airlines, the Texas-based world’s largest low-cost carrier.

“In 1996, Southwest Airlines was faced with an interesting problem. During the previous decade, the airline company had methodically expanded from being a small regional carrier to one with a more national presence. And now, more than 100 cities were calling for Southwest to expand service to their location.

At a time when many airline companies were losing money or going bankrupt, Southwest was overflowing with opportunity,” read part of the blog. So what did they do right?

Southwest turned down more than 95 per cent of the offers and began serving just four new locations in 1996. They left significant growth on the table.

As we move on to 2016, no doubt many firms have grand plans of expansion such as opening new branches, hiring more employees, increasing product range and reaching out to new markets.

All this is aimed at increasing market share, profitability and image of the company. However, expansion is the sort of thing that my teacher of English used to tell us to “think before you leap.”

Modestly speaking, expansion is as risky as starting a new business. You don’t have to go very far to see giants that have been brought to their knees because of expansion. Behold Uchumi Supermarkets and Kenya Airways. Not long ago they were market leaders in their own industries. Trouble began when they started expanding.

When things are good in your business and you are enjoying good margins and goodwill, it is easy to imagine that by expanding things will get even better.

However, experts advise that expansion should be carefully planned so that it is in tandem with key resources to avoid plunging your entire business into financial and management crisis, as has often been the case with many ventures.

Usually, common sense demands you expand using portion of your profit and homegrown resources. But contrary to this logic, most businesses borrow to expand, and when they overdo it or something goes awfully wrong, troubles begin.

My own interactions with ailing small businesses reveal that most of their miseries started with borrowing to expand or management issues precipitated by expansion.

Some even confess that things were going on very well before they took the loans or began dealing with bigger volumes and more staff.

Any kind of expansion brings pressure to business, especially if systems are not well developed to ensure efficient controls and timely delivery of services without disappointing customers.

For expansion to work well several things must be put right. Employees must be equipped with skills and competencies for increased production or services. Amount, payables and receivables may create financial strain.

Personalised services may be compromised leading customers to feel underserved. Business owners and management team may not have the right knowledge and skills to handle challenges that may come alongside increased production, staff, revenue and liabilities.

Before thinking of expanding your business, it is always good to consider ways of increasing efficiency in your current market such as improving the quality of your products, getting more customers at a cheaper cost, reducing the cost of production and finance as well as putting various systems and controls in place.

Growing your business organically is the narrow path that is missed my many. Yet it is less risky and less painful because mistakes are few and less costly.

The big question is, how many of us in business, like Southwest Airlines, are willing to turn down opportunities to grow and make more money?

Mr Kiunga is a business trainer and the author of ‘The Entrepreneurial Journey: From Employment to Business’. Murorikiunga@yahoo.com