Macro Expansion V/s Micro expansion

Introduction: -My keen interest to view business as science has inspired me to write
about unusual thinking in business, Mostly we here word 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 amid 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 restricts to study of expansion in single segment

organization in manufacturing market & multiple product line trading firms in trading
market

The contents:-
• Factors Motivating Expansion ( Financial & Non Financial)
• Planned expansion v/s Emerged expansion
• Managing expansion
• Impact of the decision in operating performance, net worth & long
term benefits
• Risk factors

Factors Motivating Expansion (Financial & Non Financial)

• Factors Motivating Expansion (Financial):- The major financial factors that motivate
an organization are high liquidity, reduced return on liquid investment, low leveraged
capital, and higher operating profit margin.
• Factors Motivating Expansion ( Non Financial):- The non financial factors may be
resizing 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 is comparatively of 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 as well as the returns are not calculated in
detail for a performance analysis. Normally the same has been 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 loosing
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 of expansion option for comparison, first we look
into the organization for an 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 is emerged in Indian industry due to the low returns one
short time investments is an example.

Trading markets: The 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 planed 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
immediate 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 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 having 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.

Courtesy & thanks to all my previous Mentors namely

Mr. K M Cherian Vice president Accel software Technologies LTD

Mr. Satheesh Kumar Varma Regional Manager Accel software Technologies LTD
Mr. Naveen . V Managing Director Maintec Technologies Pvt LTD
Mr. Alex Jacob Vice president George Philips Eng Pvt. LTD
Dr. Vinita Murthy Executive Director George Philips Eng Pvt. LTD
Mr. Rahul Banarge Infar India LTD Training officer
Mr. Pradeep Chatergee Infar India LTD Product Manager
Dr. Ramaswamy Professor Department of management studies Madras University
Mr. Titty K Thomas Sr. Manager Ebin Rushed Pharmacy Co LLC Muscat
Mr. Bhaskar Battacharya General Manager Ebin Rushed Pharmacy Co LLC Muscat

With Due Regards & sincere thanks

Maju Jacob
Divisional manager- Medical Equipments
W J Towell Group. Muscat