“You have to be stubborn and believe that things will turn out right, even if you haven’t succeeded after the 10th attempt”
This is the framed message prominently displayed in the office of Álvaro, the co-founder of the fashion retail company El Ganso.
Looking at Álvaro and Clemente Cebrián’s achievements, the founders of El Ganso, one of Spain’s fastest-growing fashion brands, is astonishing. In only six years, in the midst of the worst economic crisis ever and in one of the most competitive environments, the firm has grown from €0.4M to €34M in turnover, opening 32 stores in six countries: UK, France, Portugal, Chile, Mexico and Spain.
Great numbers compared to the average start-up statistics: 3 out of 4 start-ups fail and 70% of those failures come from a too early expansion (“The Venture Capital Secret”, Deborah Gage, Wall Street Journal, Sep 20, 2012; and “#1 Cause of Startup Death? Premature Scaling”, Nathan Fur, Forbes, Feb 9, 2011).
So detecting when, where and how to expand your startup is a crucial decision in your entrepreneurial journey . It looks like El Ganso has found the formula…
The Three Important Growth Dilemmas
- Everything begins when clients start consistently buying your product while you dynamically test your business model – which includes the economic model of your firm, the internal capabilities, channels you use to get to your clients, and so on. Once you have a model that is tested, then you scale it. This consists of growing your company in the market where you are. This first phase starts after we have validated our business model and finishes when we cannot grow further in our current market. The Cebrian’s successfully tested their business model first on their Madrid headquarters, in their first shop.
- When this is done well, you reap the benefits of economies of scale, and continue your growth in the second phase by replicating your current business model in other markets. El Ganso continued its successful expansion by copying the optimized model in different cities nationally and internationally.
- Finally, even before exhausting the replication capability of the firm, you may start segmenting current markets, and looking for growth in each segment. This was what El Ganso’s team decided to do: the main source of organic growth in the last years has came from combining their replication strategy together with a segmentation of their current market and increasing their profitability by product diversification.
The second question is to choose a concentric or eccentric model. On one hand, concentric means to gradually grow through a concentric circles approach, and focus on lead markets first – like a circle that is increasing its size proportionally. This can help us to be on top of our markets and empower volume advantages.
On the other hand, the eccentric approach involves choosing different locations with other selective criteria. This can contribute to growing an international brand faster and leveraging it in the global landscape – for example in terms of reducing cost by outsourcing to cheaper countries, or diversifying risk by increasing sales by entering new countries.
To decide which strategic approach is better for your case, I will give you a single recommendation: follow the data.
To do this, you will need to design mini-tests to help verify and measure the impact of each model before it is too late or too costly; it is very common to see founders that work really hard, but they don’t have a clear methodology to evaluate their decisions, or identify the key metrics. Errors in this path are minimized by tracking a few important variables discovered through these previous tests.
Experimenting first, analyzing and implementing a simple but effective tracking system is crucial for success. After a few trial and errors, El Ganso set up a control system that allowed store employees to closely monitor their customers’ geographical origin, average expenditure, etc. This information – together with other internal data – helped to inform the company’s geographical expansion.
The final question remains: how to implement it? Resources must be allocated and new firm capabilities must be built. Moreover, the team should also grow accordingly both in numbers and qualification. However, should you do it by yourself, with your internal resources and capabilities – what we define as organic growth? Or do it inorganically, that is, growing through other means such as acquisitions, joint ventures or partnerships?
The first option, organically, is slower and less risky. However, in some competitive environments this will not be possible.
The second approach requires new skills, and a degree of managerial complexity that sometimes is disregarded. Developing or acquiring these capabilities is crucial for sustaining the growth path at a competitive rate.
Once you have chosen your specific growth model, make sure that you systematize processes. Avoid the common mistake of reinventing the wheel each time. A good process is never inflexible; it allows for further learning and reduces mistakes.
El Ganso has been growing organically for many years. To accomplish this, they developed clear procedures on how to select the next store location, for instance. At first, they would sit on a chosen street for hours a day and for weeks on end, watching the pedestrian traffic, and, more importantly, counting the shopping bags! Later in their development, they were able to build on this experience and develop a more sophisticated procedure. However, to fuel growth, the firm is now exploring new concepts beyond the successful model that they have relied upon since inception.
To summarize, there are three key questions to help you envision your growth model. Depending on your initial business model, these questions may be answered differently. We have discussed a successful firm in the fashion retail business, but how would you apply them to other business? What would you recommend be the next steps for El Ganso?
This post is based in the case El Ganso Takes Flight, available at IESE Publishing