Monday, December 29, 2008

Turning a Great Small Business into a Fortune

From some of my business readings, I'm starting to get some insight into how people have turned small businesses into very large successful businesses. In both cases, the businesses start from a great idea, and grow with good execution and excellent customer service. In my opinion, the element that differentiates entrepreneurs who have great small business and those that make a fortune is the ability to create expansion capabilities that quickly allow the successful elements of the business model to be transferred. Expansion through the use of replication and scale capabilities is the element that differentiates the successful small business from the very success large businesses.

One example I like is the success story of Ray Kroc, the founder of McDonald's. Mr. Kroc did not create the idea of McDonald's. It was developed by the McDonald brothers who had one restaurant in California, which was a great success. At the time, Mr. Kroc was a milkshake equipment salesman and was impressed at the significantly higher number of machine the McDonald brothers purchased. He partnered with the brothers on franchising the restaurant and then eventually bought the entire business outright.

The McDonald brothers did well. They sold the restaurant equity in 1961 so that each one would receive $1 million after taxes. They had a great small business.

However, Ray Kroc did even better. He expanded their successful concept by creating innovative expansion capabilities such as McDonald's college, which ensured the consistency and quality of the food, service, and customer experience across the entire chain. In addition, new sites were researched and vetted by headquarters. Thus, the successful elements of the first restaurant were replicated across every new restaurant, and creating what is now a $68 billion business.

Another example I like is the success story of Henry Ford. He is mostly credited with the creation of the assembly line to mass produce cars, which was a great expansion capability. This allowed Ford to make cars of the same consistency and quality, at a much lower cost cars produced individually. However, an equally important expansion capability was the creation of a dealer network, as an outlet to take all the cars that were produced and deliver them to drivers. Thus, dealers bore the cost of carrying inventory, freeing up funds for Ford to produce more cars, enabling the company to operate at a much larger scale.

At this stage of my life, I think I would be happy to have a successful small business. However, should I ever want to be bigger , I would start hiring people who could help create expansion capabilities needed.

For more on Strategies and Plans , check back every Monday for a new segment.

This is not financial or business advice. Please consult a professional advisor.

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