Growth Strategies, Expansion strategies, Strategic management

8/13/2019 Growth Strategies, Expansion strategies, Strategic management

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Growth Strategy

The growth strategy amounts to redefining thebusiness by adding new products/services or newmarkets or by substantially increasing the currentbusiness.

In other words company pursues a growth strategywhen:

1. It enters new business (including functions) or market.

2. Effects major increase in its current business.

A company may pursue either or both internal orexternal growth strategies.


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Reasons for Growth

1. Natural urge

2. Survival

3. Market share

4. Leadership

5. Competition6. Diversification of Risk

7. Resources

8. Opportunities

9. Motivation10. Personal reasons

11. Profits

12. Miscellaneous


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Risks of Growth

1. An increase in the productive capacity would have very adverseeffect if the demand falls.

2. If new business fails, that could sometimes even affect the oldbusiness.

3. There is tendency to concentrate more on the new business at the

expense of old business.4. A rapid and substantial growth of business may sometimes leadto ineffective management.

5. When a firm becomes large, it may loose several advantages liketax concessions, subsidies, exemption from several laws causingan increase in costs and other problems.

6. As a firm grows significantly it is likely to receive more attention bycompetitors and the public.


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Growth Strategies

There are number of strategies for

growth. Kotler has grouped these

strategies under three heads, viz.,

1. Intensive Growth strategy

2. Integrative Growth Strategy

3. Diversification Growth Strategy.


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Intensive Growth Strategy

Intensive growth strategy aim at

achieving further growth for existing

products and/or in existing markets.

There are three important intensive

growth strategies, viz., market

penetration, market development and

product development.


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Market Penetration Strategy

Market penetration strategy strives to

increase the sale of the current products in

the current markets. There are the following

three major strategies to achieve this.

1.Increase Sales to the Current Customers.

2.Pull Customers from the Competitors

Products.

3.Convert Non-Users into Users.


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Market Development Strategy

The market development strategyinvolves broadening the market for aproduct. This may be achieved by the

following strategies.1. By adding new channels of distribution

and thereby expanding the consumerreach of the product.

2. By entering new market segments.

3. By entering new geographical markets.


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Product Development strategy

A company may be able to increase its

current business by product improvement

or introducing products with new features.


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Integrative Growth Strategies

One of the common growth strategies isthe Integrative Growth Strategy thatinvolves:

1. Integration at the same level or stage ofbusiness in the same industry.(Horizontal Integration).

2. Integration of different levels/stages ofbusiness in the same industry. (verticalintegration).


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Horizontal integration

Integration at the same level business, popularly

known as horizontal integration, involves the

acquisition of one or more competitors.

Acquisition of Universal luggages (Aristocrat) byBloplast (V.I.P) or Tata Oil Mills Company

(TOMCO) by Hindustan Lever.

Perhaps the most important advantage of

horizontal integration is that it eliminates or

reduces competition.


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Vertical Integration

Integration of the different levels/stages

of the same industry is known as vertical

integration.

Vertical Integration may be:

1. Backward Integration.

2. Forward Integration.


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Backward Integration Backward Integration involves starting the preceding stage of the current

business.

For Ex- manufacturer of a finished product may start the manufacture ofthe raw material required for the finished product.

A company which currently only markets a products, taking up themanufacturing of it is another example of backward integration. Forexample, Brooke Bond resorted to backward integration by acquiring twotea plants.

Advantages:-

(a) It ensures smooth supply of materials for production of goods formarketing. This is particularly important when there are supply

bottlenecks.

(b) It may enable the company to obtain the goods cheaply or to make someprofits out of the manufacturing.

(c) It may also helps the company to ensure quality of goods.

(d) It may also facilitate tax savings.

Disadvantages:

(a) The cost of making may be higher than the cost of buying.

(b) Integration may make exit from a business more difficult.


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Forward Integration

Forward Integration means entering the subsequent stage of theindustry. For example:

1. The manufacturer of a product who does not do the marketing ofits currently, may start the marketing of it.

2. The manufacturer of the raw material may take up themanufacture of the finished products.

Textiles firms like Bombay Dyeing, mafatlal, J & K (Raymonds)resorted to forward integration by entering the ready-madegarments business.

Advantages:

1. It creates captive demand for the product.

2. It may generate additional profits.

The major risk of forward integration is that there is no guaranteethat the new business will be success.


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Diversification

Diversification means adding new lines of business. The newlines of business may be related to the current business or may

be quite unrelated. If the new lines added, makes the use of thefirms existing technology, production facilities or distributionchannels or it amounts to backward and forward integration it

may be regarded as related diversification. Ex. Thediversification of Videocon.

Some companies expand the business in to unrelatedindustries. Ex. Wipro which is in the business of edible oils,soaps, computers, etc.

Expanding the market to geographical areas where thecompany has not had business is also regarded asdiversification.

Diversification is also described as portfolio change.


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Reasons for Diversification

1. Saturation or Decline of the current business.

2. Additional opportunities.

3. Better opportunities.

4. Risk minimization.5. Better utilization of resources and strengths.

6. Benefits of Integration.

7. Competitive Strategy.

8. Need related diversification.9. Consolidation.

10. Inspiration.


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Risks of Diversification

1. There is no guarantee that the firm will succeed in thenew business. In fact many diversifications of anumber of companies have been failures.

2. If the new line of business result in huge losses, that

may adversely affect the old business.3. Diversification may sometimes result in the neglect of

the old business or the management not being able topay sufficient attention and resources to the oldbusiness.

4. Diversification may invite retaliatory moves bycompetitors that may adversely affect even the oldbusiness.


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Types of Diversification

Synergistic Diversification:Synergistic Diversification is diversificationthat results in the realization of synergistic effects. In business literature,synergy is often described as 2+2=5 effect which implies that the resultof the combined performances will be greater than if they were doneseparately and independently. In other words, synergy offers a firm theadvantage of higher consolidated return on investment than can maximally

be obtained from a conglomerate. Following are important possible synergies:

1. Marketing Synergy: Marketing Synergy can occur when products usecommon distribution channels, sales promotion (including sales

personnel) and sales administration.

2. Operating synergy: Operating Synergy is realized by better utilization of

facilities and personnel, economies in purchasing etc.3. Investment Synergy: this can result from the use of same production

facilities, technology, materials, etc.

4. Management Synergy: Management Synergy exists if the existingmanagerial expertise of the company will be an advantage for the new

business.


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If a company adds new products that have technological and/ormarketing synergies with existing product lines, even though theyare meant for new class of customers, that is described as concentricdiversification. For example, an audiocassette tape manufacturer

may start computer-tape manufacturing using the know-how itpossesses.

If a company introduces a new product which is technologicallyunrelated to the current product line but which has appeal to itscurrent customers, it is describes as horizontal diversification. For

example, Calmin has introduced several products that are nottechnologically related with each other but are meant for samecustomer class.

Although synergistic diversification has the advantages of synergy,over-emphasis on synergy could lead to neglect of several good

business opportunities, which have no synergy with the current

business. Thus, the overemphasis on synergy could confine anenterprise to a particular field of business with all its disadvantages.

Further, synergy by itself does not guarantee success.


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Conglomerate Diversification

Conglomerate diversification is quite unrelated diversification, i.e.,the new business will have no relationship to the companys currenttechnology, products or markets. For example, the ITCsdiversification into hotels, edible oils, etc. is conglomeratediversification.

Many companies achieve conglomerate diversification by mergers

and acquisition. While some companies goes for conglomerate diversification with

the same firm, some corporate establish separate companies formanaging different types of products. A company belonging to aconglomerate (group of companies) itself may resort toconglomerate diversification.

While conglomerate diversification provides enormous scope forbusiness expansion and growth and diversification of risks,diversification into quite unrelated and inexperienced field maysometimes create their own problems.


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External Growth strategy

External growth strategy refers to growth by mergers andacquisitions and joint ventures/foreign collaboration.

Mergers & Acquisitions

Merger or Amalgamation refers to the merging of one

company into another or two companies getting merged intoone another to form a new corporate entity. In this methodthere is a change in the ownership.

Acquisition or takeover denotes a company acquiringcontrolling stake in another so that the acquirer can havemanagement control over the other firm. In this case thecompanies continue as separate legal entity.


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On the basis of the nature of relationship between the

businesses of the companies involved in the M&A, broadly

there are three types of M&As.

Horizontal M&As: This refers to M&As involving firms in the same typeof business. (takeover of Raasi Cement by Indian cement). The trendtoward focus and consolidation of business set in motion by theliberalization has made horizontal M&As a very significant element of thecorporate strategy of many companies in India.

Vertical M&As: These are M&As involving firms at different levels in the

value chain in the same industry. In other words, this refers to M&Asresulting in backward integration. (takeover of some tea plantation byBrook Bond which was a tea processing and marketing company; andtakeover of Polyolefins Rubber Chemicals from the Mafatlal group byOnkar S. Kanwar group, which controls Apollo Tyres), or forwardintegration (acquisition of Kolkata based Delta Industries, a jute yarn

producing firm, of the Netherlands Jute Industries, a company processingyarn in to finished products and marketing jute products in Europe.

Conglomerate M&As: These are M&As involving companies whosebusinesses are different. In other words this is a part of the diversificationstrategy of the company. (takeover Trnselectra-Goodknight brands-byGodrej).


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Motives or Advantages of M&As1. Achieving Economies of Scale.

2. Increasing the Market power.

3. Diversification.4. Acquisition of Technology.

5. Market Entry.

6. Possession of Marketing Infrastructure.

7. Use of Surplus Funds.

8. Optimum Utilization of Resources and facilities.9. Product Mix Optimization.

10. Pre-Emptive Strategy.

11. Vertical Integration.

12. Tax Benefits.

13. Logistical Factors.

14. Increasing the Share of Promoters stake.

15. Acquisition of Brands.


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Disadvantages

1. Indiscriminate acquisitions have landed several companiesin financial and other problems. For example, six ofChhabrias 10 Indian companies were reported to be in thedeep red in 1992 with four of them already sick.

2. When a company is taken over, its problems are also often

taken over.3. If adequate homework was not done and the evaluation was

not right, the acquisition decision could be wrong.

4. Some of the units acquired would have problems such as oldplant, obsolete technology, surplus or demoralised labour

etc.5. The company may not have the experience and expertise to

manage the unit taken over if it is in an entirely new field.


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Foreign Collaborations/Joint

Ventures

Foreign collaboration/joint ventures have

become very popular world over for

various reasons. It has been reported that

in the 1990s joint ventures as adevelopment vehicle for corporations has

fast replaced mergers and acquisitions,

the rage of 1980s.


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Advantages1. It enables the Indian firm to upgrade the existing technology or to obtain

new technology.

2. Acquisition of new technology enables the firm to enter new business.

3. Foreign equity participation enables the Indian company to take upprojects with larger outlay than would be possible without suchcollaboration.

4. Foreign collaboration may make it easier for the Indian company to raisecapital through public issue because the public, generally, has a morefavourable attitude towards companies with foreign collaboration.

5. Foreign collaboration may help the Indian company to gain managerialexpertise.

6. In some cases collaboration with the foreign firm would help to pre-emptcompetition.

7. Foreign collaborations in many cases helps the Indian company in itsexports. The technological upgradation would improve the companys

competitiveness not only in the domestic market but also in the foreignmarket. Similarly, the new technology may also help the company inexports. When the collaboration involves foreign equity participation,the foreign collaboration may take an active interest in the exports of the

joint venture. A number of Indian companies have been able toincrease/start exports because of foreign collaborations.

8. Foreign collaboration may help improve quality, reduce wastage,improve productivity and reduce cost.


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Disadvantages1. The foreign technology supplied may not be the latest, particularly when

the foreign collaboration does not have the equity participation, thecollaborator may be reluctant to transfer the latest technology.

2. There are chances of foreign collaborator overcharging. For example, ifthe foreign companys contribution to the capital takes the form ofsupply of machinery, the chances of overcharging cannot be ruled out.

3. When there is a tie-up of foreign capital with technology, the Indianparty cannot opt for technology of other firms even if that is better.

4. In some cases, the foreign technology may not be appropriate one for thelocal conditions.

5. When there is foreign equity participation, there would also beparticipation in the management by the foreign company. If the foreigncompany has majority share holding, control of management would bemostly in the hands of the foreign collaborator and the foreigncompanys interests would influence the companys policies and futuredevelopment. It is to gain control over the management that severalforeign companies have raised their equity holding in their joint venturesin India to 51% taking advantage of the policy liberalizations.

Growth Strategies, Expansion strategies, Strategic management

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