Growth strategy by rohit

Growth Strategy

• The growth strategy amounts to redefining the business by adding new products/services or new markets or by substantially increasing the current business.

• In other words company pursues a growth strategy when:

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 or external growth strategies.

Reasons for Growth

1. Natural urge2. Survival3. Market share4. Leadership5. Competition6. Diversification of Risk7. Resources8. Opportunities9. Motivation10. Personal reasons11. Profits12. Miscellaneous

Indicators of Growth

• Increase in Net worth• Increase in Total assets.• Increase in total number of employees.• Increase in total number of volumes of business• Increase in the market share.• Increase in the number of products and markets.• Increase in profits.

Risks of Growth1. An increase in the productive capacity would have very adverse

effect if the demand falls.2. If new business fails, that could sometimes even affect the old

business.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 lead

to ineffective management.5. When a firm becomes large, it may loose several advantages like

tax concessions, subsidies, exemption from several laws causing an increase in costs and other problems.

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

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.

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.

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 Customer’s from the Competitor’s Products.

3.Convert Non-Users into Users.

Market Development Strategy

• The market development strategy involves broadening the market for a product. This may be achieved by the following strategies.

1. By adding new channels of distribution and thereby expanding the consumer reach of the product.

2. By entering new market segments.3. By entering new geographical markets.

Product Development strategy

• A company may be able to increase its current business by product improvement or introducing products with new features.

Integrative Growth Strategies

• One of the common growth strategies is the Integrative Growth Strategy that involves:

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

2. Integration of different levels/stages of business in the same industry. (vertical integration).

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) by Bloplast (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.

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.

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

business.• For Ex- manufacturer of a finished product may start the manufacture of the

raw material required for the finished product.• A company which currently only markets a products, taking up the

manufacturing of it is another example of backward integration. For example, Brooke Bond resorted to backward integration by acquiring two tea plants.

• Advantages:-(a) It ensures smooth supply of materials for production of goods for

marketing. This is particularly important when there are supply bottlenecks.(b) It may enable the company to obtain the goods cheaply or to make some

profits 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.

Forward Integration• Forward Integration means entering the subsequent stage of the

industry. For example:1. The manufacturer of a product who does not do the marketing of

its currently, may start the marketing of it.2. The manufacturer of the raw material may take up the

manufacture of the finished products. Textiles firms like Bombay Dyeing, mafatlal, J & K (Raymonds)

resorted to forward integration by entering the ready-made garments 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 guarantee that the new business will be success.

Diversification

• Diversification means adding new lines of business. The new lines of business may be related to the current business or may be quite unrelated. If the new lines added, makes the use of the firm’s existing technology, production facilities or distribution channels or it amounts to backward and forward integration it may be regarded as related diversification. Ex. The diversification of Videocon.

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

• Expanding the market to geographical areas where the company has not had business is also regarded as diversification.

• Diversification is also described as portfolio change.

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.

Risks of Diversification

1. There is no guarantee that the firm will succeed in the new business. In fact many diversifications of a number 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 to pay sufficient attention and resources to the old business.

4. Diversification may invite retaliatory moves by competitors that may adversely affect even the old business.

Types of Diversification• Synergistic Diversification: Synergistic Diversification is diversification

that results in the realization of synergistic effects. In business literature, synergy is often described as ‘2+2=5’ effect which implies that the result of the combined performances will be greater than if they were done separately and independently. In other words, synergy offers a firm the advantage 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 use

common 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 existing managerial expertise of the company will be an advantage for the new business.

• If a company adds new products that have technological and/or marketing synergies with existing product lines, even though they are meant for new class of customers, that is described as concentric diversification. For example, an audiocassette tape manufacturer may start computer-tape manufacturing using the know-how it possesses.

• If a company introduces a new product which is technologically unrelated to the current product line but which has appeal to its current customers, it is describes as horizontal diversification. For example, Calmin has introduced several products that are not technologically related with each other but are meant for same customer 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 an enterprise to a particular field of business with all its disadvantages.

• Further, synergy by itself does not guarantee success.

Conglomerate Diversification• Conglomerate diversification is quite unrelated diversification, i.e.,

the new business will have no relationship to the company’s current technology, products or markets. For example, the ITC’s diversification into hotels, edible oils, etc. is conglomerate diversification.

• 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 for managing different types of products. A company belonging to a conglomerate (group of companies) itself may resort to conglomerate diversification.

• While conglomerate diversification provides enormous scope for business expansion and growth and diversification of risks, diversification into quite unrelated and inexperienced field may sometimes create their own problems.

External Growth strategy

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

• Mergers & Acquisitions• Merger or Amalgamation refers to the merging of one

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

• Acquisition or takeover denotes a company acquiring controlling stake in another so that the acquirer can have management control over the other firm. In this case the companies continue as separate legal entity.

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 type of business. (takeover of Raasi Cement by Indian cement). The trend toward focus and consolidation of business set in motion by the liberalization has made horizontal M&As a very significant element of the corporate 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&As resulting in backward integration. (takeover of some tea plantation by Brook Bond which was a tea processing and marketing company; and takeover of Polyolefins Rubber Chemicals from the Mafatlal group by Onkar S. Kanwar group, which controls Apollo Tyres), or forward integration (acquisition of Kolkata based Delta Industries, a jute yarn producing firm, of the Netherlands Jute Industries, a company processing yarn in to finished products and marketing jute products in Europe.

• Conglomerate M&As: These are M&As involving companies whose businesses are different. In other words this is a part of the diversification strategy of the company. (takeover Trnselectra-Goodknight brands-by Godrej).

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 Promoter’s stake.15. Acquisition of Brands.

Disadvantages

1. Indiscriminate acquisitions have landed several companies in financial and other problems. For example, six of Chhabria’s 10 Indian companies were reported to be in the deep 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 old plant, 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.

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 a development vehicle for corporations has fast replaced mergers and acquisitions, the rage of 1980s.

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 up projects

with larger outlay than would be possible without such collaboration.4. Foreign collaboration may make it easier for the Indian company to raise

capital through public issue because the public, generally, has a more favourable attitude towards companies with foreign collaboration.

5. Foreign collaboration may help the Indian company to gain managerial expertise.

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

7. Foreign collaborations in many cases helps the Indian company in its exports. The technological upgradation would improve the company’s competitiveness not only in the domestic market but also in the foreign market. Similarly, the new technology may also help the company in exports. 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 to increase/start exports because of foreign collaborations.

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

Disadvantages 1. The foreign technology supplied may not be the latest, particularly when

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

2. There are chances of foreign collaborator overcharging. For example, if the foreign company’s contribution to the capital takes the form of supply of machinery, the chances of overcharging cannot be ruled out.

3. When there is a tie-up of foreign capital with technology, the Indian party 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 the local conditions.

5. When there is foreign equity participation, there would also be participation in the management by the foreign company. If the foreign company has majority share holding, control of management would be mostly in the hands of the foreign collaborator and the foreign company’s interests would influence the company’s policies and future development. It is to gain control over the management that several foreign companies have raised their equity holding in their joint ventures in India to 51% taking advantage of the policy liberalizations.