Everything you need to know about the types of growth strategies. A growth strategy is one that an enterprise pursues when it increases its level of objectives upward, much higher than an exploration of its past achievement level.
The most frequent increase indicating a growth strategy is to raise the market share and or sales objectives upward significantly.
Growth Strategy is pursued to reduce the cost of production per unit. Growth strategies involve a significant increase in performance objectives.
These strategies are adopted when firms remarkably broaden the scope of their customer groups, customer functions and alternative technologies either singly or in combination with each other.
Growth strategy can be adopted in the form of expansion, vertical integration, diversification, merger, acquisition and joint venture.
The basic objective in all these cases is growth but the basic problem in each case is significantly different which needs more elaborate discussion.
Some of the types of growth strategies are as follows:-
1. Internal Growth Strategy 2. External Growth Strategy 3. Concentration Expansion Strategy 4. Integration Expansion Strategy 5. Internationalization Expansion Strategy
6. Diversification Expansion Strategy 7. Cooperation Expansion Strategy 8. Intensive Growth Strategy 9. Integrative Growth Strategy 10. Diversification Growth Strategy.
Types of Growth Strategies: Concentration Expansion Strategy, Integration Expansion Strategy and Other Details
Types of Growth Strategies – Internal Growth Strategies and External Growth Strategies
Type # 1. Internal Growth Strategies:
The internal growth of an organization is possible by expanding operations through diversification, increase of existing capacity, market growth strategies etc.
These strategies are broadly classified as:
The firm pursues intensive growth strategies with an objective to achieve further growth of existing products and/or existing markets.
The basic classification of intensive growth strategies:
(a) Market penetration strategy
(b) Market development strategy
(c) Product development strategy
These strategies are also called ‘organic growth strategies’.
A firm pursuing market penetration strategy directs its resources to the profitable growth of a existing products in current markets. It is the most common form of intensive growth strategy.
The variants of these strategies are:
(a) Increase sales to current customers by habituating existing customers to use more.
(b) Pull customers from the competitors’ products to company’s products maintaining existing customers intact.
(c) Convert non-users of a product into users of the product and making potential opportunity for increasing sales.
The firm try to increase market share for present products in current markets through increase of marketing efforts like increase of sales promotion and advertising expenditure, appointment of skilled sales force, proper customer support and after sales service etc.
(b) Market Development Strategy:
This strategy involves introducing present products or services into new geographic areas. The marketing efforts are made on existing products, to customers in related market areas, by adding different channels of distribution or by changing the current content of the advertising and promotional efforts.
The market development can be achieved in any of the following ways:
(a) By adding new distribution channels to expand the consumer reach of the product.
(b) By entering new market segments.
(c) By entering new geographical markets.
In market development strategy, a firm seeks to increase the sales by taking its product into new markets.
(c) Product Development Strategy:
This strategy involves the growth of market through substantial modification of existing products or creation of new but related products that can be marketed to current customers through established channels.
The variants of this strategy are:
(a) Expand sales through developing new products.
(b) Create different quality versions of the product.
(c) Develop additional models and sizes of the product to suit the varied preference of the customers.
A company can increase its current business by product improvement or introduction of products with new features.
The integrative growth strategies are designed to achieve increase in sales, assets and profits.
There are basically two variants in integrative growth strategy which involves:
(a) Integration at the same level or stage of business in the same industry i.e. horizontal integration.
(b) Integration of different levels/stages of business in the same industry i.e. vertical integration with backward and forward linkages.
When two or more firms dealing in similar lines of activity combine together then horizontal integration takes place. Many companies expand by creating other firms in their same line of business. A firm is said to follow horizontal integration if it acquires or starts another firm that produce the same type of products with similar production process/marketing practices. When the combination of two or more business units (existing and created) results in greater effectiveness and efficiency than the total yielded by those businesses, when they were operated separately, the synergy has been attained.
The reasons for horizontal integration are as follows:
(a) Elimination or reduction in intensity of competition.
(b) Putting an end to practice of price cutting.
(c) Achieve economics of scale in production.
(d) Common pool of resources for research and development.
(e) Use of common distribution channels and uniform brand name.
(f) Fixation of common price.
(g) Effective management of capacity imbalances.
(h) Common advertising and sales promotion.
(i) Making common purchases at low prices.
(j) Reduction in overall cost of operations per unit.
(k) Greater leverage to deal with the customers and suppliers.
The horizontal integration will increase the monopolistic tendency in the market. Less number of players in the industry will lead to collusion to reap abnormal profits by setting price of finished products at higher level than the market determined price.
A vertical integration refers to the integration of firms in successive stages in the same industry. The integration of different levels/stages of the industry is known as vertical integration. Vertical integration may be either backward integration or forward integration.
I. Backward Integration:
In case of backward integration, it extends to the suppliers of raw materials. A vertical integration is one in which the company expands backwards by diversification into supplying raw materials. This allows for smooth flow of production, reduced inventory, reduction in operating costs, increase in economies of scale, elimination of bottlenecks, lower buying cost of materials etc.
It is a diversification engaged at different stages of production cycle within the same industry. Firms adopting this strategy can have a regular and uninterrupted supply of raw materials components and other inputs and the quality is also assured.
II. Forward Integration:
It is a case of down-stream integration extends to those businesses that sell eventually to the consumer. The purpose of such diversification is to attain lower distribution costs, assured supplies to the market, increasing or creating barriers to entry for potential competitors.
The firm expands forward in the direction of the ultimate consumer. For example- a cement manufacturing company undertakes the civil construction activity; it will be a case of diversification with forward linkage. With forward integration, firms can acquire greater control over sales, distribution channels, prices, and can improve its competitive position through differentiation and customer support.
Diversification means going into an operation which is either totally or partially unrelated to the present operations.
Before opting for diversification, the following basic questions must be seriously considered:
(a) Whether it brings a positive synergy, to the company?
(b) Whether the market wants the new product or service which we offer?
(c) Whether the product or service has a good growth potential?
Before selecting diversification strategy, one must have a clear understanding of the new product/service, the technology and the markets. Diversification strategies are used to expand firm’s operations by adding markets, products, services or stages of production to existing operations. The purpose of diversification is to allow the company to enter lines of business that are somewhat different from current operations.
Diversification makes addition to the portfolio of business the growth strategy is pursued when the firm’s growth objectives are very high and it could not be achieved with in the existing product/market scope. Spreading risks by operating in multiple areas decreases the threat of any one area causing the firm to fail.
However, diversification spreads resources over several areas, similarly decreasing the probability that the firm can be a strong force in any area. Diversification refers to the directions of development which take the organization away from both its present products and its present markets at the same time. Diversification strategies are becoming less popular as organizations are finding it more difficult to manage diverse business activities.
Type # 2. External Growth Strategies:
Sometimes, a firm intends to grow externally when it take over the operations of another firm. Such growth may be possible via mergers, takeovers, joint ventures, strategic alliances etc. Such growth is called ‘inorganic growth’. Firms generally prefer the external growth strategies for quick growth of market share, profits and cash flows.
A merger refers to a combination of two or more companies into a single company. This combination may be either through absorption or consolidation. Merger is said to occur when two or more companies combine into one company. Merger is defined as ‘a transaction involving two or more companies in the exchange of securities and only one company survives.’
When the shareholders of more than one company, usually two, decides to pool the resources of the companies under a common entity it is called ‘merger’. If as a result of a merger, a new company comes into existence it is called as ‘amalgamation’. As a result of a merger, one company survives and others lose their independent entity, it is called ‘absorption’.
The merger activities are as a result of following factors and strategies, which are classified under three heads:
(a) Strategic motives,
(b) Financial motives, and
(c) Organizational motives.
A takeover generally involves the acquisition of a certain block of equity capital of a company which enables the acquirer to exercise control over the affairs of the company. The main objective of takeover bid is to obtain legal control of the company. The company taken over remains in existence as a separate entity unless a merger takes place.
Thus, a takeover is different from merger in that under a takeover, the company taken over maintains its separate entity, while under a merger both the companies merge to form single corporate entity, and at least one of the companies loses its identity.
The element of willingness on the part of the buyer and seller distinguishes an acquisition from a takeover. If there exists willingness of the company being acquired, it is known as ‘acquisition’. If the willingness is absent, it is known as ‘takeover’.
Takeover may be defined as ‘a transaction or series of transactions whereby an individual or group of individuals or company acquires control over the management of the company by acquiring equity shares carrying majority voting power’. Takeover is an acquisition of shares carrying voting rights in a company with a view to gaining control over the assets and management of the company.
In theory, the acquirer must buy more than 50% of the paid-up equity of the acquired company to enjoy complete control. But in practice, however effective control maybe exercised with a smaller shareholding, because the remaining shareholders scattered and ill-organized are not likely to challenge the control of acquirer.
Sometimes the acquirer may have tacit support of the financial institutions, banks, mutual funds, having sizable holding in the company’s capital. The main objective of a takeover bid is to obtain legal control of the company.
In takeover, the seller management is an unwilling partner and the purchaser will generally resort to acquire controlling interest in shares with very little advance information to the company which is being bought. Where the company is closely held by small group of shareholders, the controlling interest is obtained by purchasing the shares of other shareholders.
Where the company is widely held i.e. in case of listed company, the shares are generally traded in the stock market, the purchaser will acquire shares in the open market. Takeover is a general phenomenon all over the globe and companies whose stock prices are quoted less and who are having latent potential for growth.
The takeovers are subject to the regulations contained in SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. Takeover is a business strategy of acquiring control over the management of Target Company – either directly or indirectly. The motive of acquirer is to gain control over the board of directors of the target company for synergy in decision-making. The eagle eyes of raiders are on the lookout for cash rich and high growth rate companies with low equity stake of promoters.
The ways in which controlling interest can be attained are discussed below:
i. Friendly Takeovers:
In a friendly takeover, the acquirer will purchase the controlling shares after thorough negotiations and agreement with the seller. The consideration is decided by having friendly negotiations. The takeover bid is finalized with the consent of majority shareholders of the target company.
This form of purchase is also called as ‘consent takeover’. In a friendly takeover, the acquirer first approaches the promoters/management of the target company for negotiating and acquiring shares. Friendly takeover is for mutual advantage of acquirer and acquired companies.
ii. Hostile Takeovers:
A person seeking control over a company, purchases the required number of shares from non-controlling shareholders in the open market. This method normally involves purchasing of small holding of small shareholders over a period of time at various places. As a strategy the purchaser keeps his identity a secret. These takeovers are also referred to as violent takeovers. The hostile takeover is against the wishes to the target company management. Acquirer makes a direct offer to the shareholders of the target company without the prior consent of the existing promoter/management.
iii. Bailout Takeovers:
These forms of takeover are resorted to bailout the sick companies, to allow the company for rehabilitation as per the schemes approved by the financial institutions. The lead financial institution will evaluate the bids received for acquisition, the financial position and track record of the acquirer.
iv. Tender Offer:
In a tender offer, one firm offers to buy the outstanding stock of the other firm at a specific price and communicates this offer in advertisements and mailings to stockholders. By doing so, it bypasses the incumbent management and board of directors of the target firm. Consequently, tender offers are used to carry out hostile takeovers.
The acquired firm will continue to exist as long as there are minority stockholders who refuse the tender. From a practical standpoint, however, most tender offers eventually become mergers, if the acquiring firm is successful in gaining control of the target firm.
v. Purchase of Assets:
In a purchase of assets, one firm acquires the assets of another, though a formal vote by the shareholders of the firm being acquired is still needed.
vi. Management Buyout:
In this form, a firm is acquired by its own management or by a group of investors, usually with a tender offer. After this transaction, the acquired firm can cease to exist as a publicly traded firm and become a private business. These acquisitions are called ‘management buyouts’, if managers are involved, and ‘leveraged buyout’, if the funds for the tender offer come predominantly from debt.
All joint ventures are typically characterized by two or more ventures being bound by a contractual arrangement which establishes joint control. Activities, which have no contractual arrangements to establish joint control, are not joint ventures. The contractual arrangements establish joint control over the joint venturers.
Such an arrangement ensures that no single venturer is in a position to unilaterally control the activity. Joint venture may give protective or participating rights to the parties to the venture. Protective rights merely allow a co-venturer to protect its interests in the venture in situation where its interests are likely to be adversely affected.
Joint venture is a form of business combination in which two unaffiliated business firms contribute financial and/or physical assets, as well as personnel, to a new company formed to engage in some economic activity, such as the production or marketing of a product. Joint venture can be formed between a domestic company and foreign enterprise in order to flow the skills and knowledge both the ways.
A joint venture by a domestic company with multinational company can allow the transfer of technology and reaching of global market. The partners in joint venture will provide risk capital, technology, patent, trade mark, brand names and allow both the partners to reap benefit to agreed share.
Joint ventures with multinational companies contribute to the expansion of production capacity, transfer of technology and capital and above all penetrating into global market. Entering into a Joint venture is a part of strategic business policy to diversity and enter into new markets, acquire finance, technology, patent and brand names.
Joint ventures take many forms and structures.
But it can be broadly categorized into three:
i. Jointly Controlled Operations:
The operation of some joint ventures involves the use of the assets and other resources of the venturers rather than the establishment of a corporation, partnership or other entity or a financial structure that is separate from the venturers themselves.
ii. Jointly Cent Rolled Assets:
Some joint ventures involve the joint control, and often the joint ownership, by the venturers of one or more assets contributed to, or acquired for the purpose of, the joint venture and dedicated to the purposes of the joint venture.
iii. Jointly Controlled Entities:
A jointly controlled entity is a joint venture, which involves the establishment of a corporation, partnership or other entity in which each venturer has an interest.
An ‘alliance’ is defined as associations to further the common interests of the members. Strategic alliance is an arrangement or agreement under which two or more firms cooperate in order to achieve certain commercial objectives. The motives behind strategic alliances are to reduce cost, technology sharing, product development, market access, availability of capital, risk sharing etc.
The concept of ‘alliance is gaining importance in infrastructure sectors, more particularly in the areas of power, oil and gas. The basic objective is to facilitate transfer of technology while implementing large objectives. The resultant benefits are shared in proportion to the contribution made by each party in achieving the targets. In strategic alliance, two or more firms that unite to pursue a set of agreed upon goals; remain independent subsequent to the formation of an alliance.
The strategic alliances are generally in the forms like joint venture, franchising, supply agreement, purchase agreement, distribution agreement, marketing agreement, management contract, technical service agreement, licensing of technology/patent/trade mark/design etc. The strategic alliance agreement contains the terms like capital contribution, infrastructure, decision making, sharing of risk and return etc.
A strategic alliance integrates the synergetic talents of alliance partners. Mutual understanding and trust are the basic tenets of strategic alliances. For smooth functioning of an alliance, partners are required to have preset priorities and expectations from each other. This strategy seeks to enhance the long-term competitive advantage of the firm by forming alliances with its competitors existing or potential in critical areas instead of competing with others.
Strategic alliances, which enable companies to increase resource productivity and profitability by avoiding unnecessary fragmentation of resources and duplication of investment and effort in R&D/technology. In a world of fast changing technologies, changing tastes and habits of consumers, escalating fixed costs and growing protectionism – strategic alliance is an essential tool for serving customers.
Franchising provides an immediate access to business operations and technology in profitable fields of operations. It is an important means of doing business in several countries and represents an effective combination of the advantages of large business with the motivation and adaptation capabilities of small or medium scale enterprises.
It also enables linkages of large and small businesses within a framework of vertical division of labour. The concept of franchising is quite comprehensive and covers an extensive range of marketing and distribution arrangements for goods and services. Franchises are becoming a key mechanism for technological, marketing and service linkages between enterprises within a country as well as globally.
A licensing agreement is a commercial contract whereby the licenser gives something of value to the licensee in exchange of certain performance and payments.
(a) The licenser may provide any of the following:
i. Rights to produce a potential product or use a potential production process
ii. Manufacturing know-how (unpatented)
iii. Technical advice and assistance
iv. Right to use a trademark, brand etc.
(c) The licensee may eventually become a competitor.
(d) Results in improved supply of essential materials, components, plants etc.
Licensing involves the transfer of some industrial property right from the originator. Most tend to be patents, trademarks, or technical know-how that are granted to the licensee for a specified time in return for a royalty. Another licensing strategy is to contract the manufacturing of its product line to a foreign company to exploit local comparative advantages in technology, materials or labour.
Types of Growth Strategies – Top 5 Types: Concentration Expansion Strategy, Integration Expansion Strategy, Diversification Expansion Strategy and a Few Others
Types of Growth/Expansion Strategies:
The expansion or growth strategies are further classified as:
1. Concentration Expansion Strategy
2. Integration Expansion Strategy
3. Internationalization Expansion Strategy
4. Diversification Expansion Strategy
5. Cooperation Expansion Strategy
Type # 1. Concentration Expansion Strategy:
Concentration involves expansion within the existing line of business. Concentration expansion strategy involves safeguarding the present position and expanding in the current product-market space to achieve growth targets. Such an approach is very useful for enterprises that have not fully exploited the opportunities existing in their current products-market domain.
A firm selecting an intensification strategy, concentrates on its primary line of business and looks for ways to meet its growth objectives by increasing its size of operations in its primary business.
Intensive expansion of a firm can be accomplished in three ways, namely, market penetration, market development and product development is first suggested in Ansoff’s model. Concentration strategy is followed when adequate growth opportunities exist in the firm’s current products-market space.
When firms use their existing base to expand in the direction of their raw materials or the ultimate consumers, or, alternatively they acquire complimentary or adjacent businesses, integration takes place. Integration basically means combining activities related to the present activity of a firm.
In contrast to the intensive growth, integration strategy involves expanding externally by combining with other firms. Combination involves association and integration among different firms and is essentially driven by need for survival and also for growth by building synergies.
Combination of firms may take the merger or consolidation route. Merger implies a combination of two or more concerns into one final entity. The merged concerns go out of existence and their assets and liabilities are taken over by the acquiring company. A consolidation is a combination of two or more business units to form an entirely new company.
All the original business entities cease to exist after the combination. Since mergers and consolidations involve the combination of two or more companies into a single company, the term merger is commonly used to refer to both forms of external growth. As is the case in all the strategies, acquisition is a choice a firm has made regarding how it intends to compete.
International strategy is a type of expansion strategy that requires firms to market their products or services beyond the domestic or national market. Firm would have to assess the international environment, evaluate its own capabilities, and devise appropriate international strategy. An organisation can “go international” by crossing domestic borders international expansion involves establishing significant market interests and operations outside a company’s home country.
Foreign markets provide additional sales opportunities for a firm that may be constrained by the relatively small size of its domestic market and also reduces the firm’s dependence on a single national market.
Firms expand globally to seek opportunity to earn a return on large investments such as plant and capital equipment or research and development, or enhance market share and achieve scale economies, and also to enjoy advantages of locations. Other motives for international expansion include extending the product life cycle, securing key resources and using low-cost labour.
However, to mould their firms into truly global companies, managers must develop global mind-sets. Traditional means of operating with little cultural diversity and without global competition are no longer effective firms.
International expansion is fraught with various risks such as, political risks (e.g., instability of host nations) and economic risks (e.g., fluctuations in the value of the country’s currency). International expansions increases coordination and distribution costs, and managing a global enterprise entails problems of overcoming trade barriers, logistics costs, cultural diversity, etc.
There are several methods for going international. Each method of entering an overseas market has its own advantages and disadvantages that must be carefully assessed. Different international entry modes involve a trade-offs between level of risk and the amount of foreign control the organisation’s managers are willing to allow.
It is common for a firm to begin with exporting, progress to licensing, then to franchising finally leading to direct investment. As the firm achieves success at each stage, it moves to the next. If it experiences problems at any of these stages, it may not progress further.
If adverse conditions prevail or if operations do not yield the desired returns in a reasonable time period, the firm may withdraw from the foreign market. The decision to enter a foreign market can have a significant impact on a firm.
Expansion into foreign markets can be achieved through- exporting, licensing, joint venture strategic alliance or direct investment.
Diversification is defined as the entry of a firm into new lines of activity, through internal or external modes. Diversification is the process of entry into a business which is new to an organisation either market-wise or technology-wise or both.
In diversification, firm acquires ownership or control over another firm against the wishes of the latter’s management. But in practice it can be both, hostile or friendly. The primary reasons a firm pursues increased diversification are value creation through economies of scale and scope, or market dominance.
In some cases firms choose diversification because of government policy, performance problems and uncertainty about future cash flow. In one sense, diversification is a risk management tool, in that it’s successful use reduces a firm’s vulnerability to the consequences of competing in a single market or industry.
Risk plays a very vital role in selecting a strategy and hence, continuous evaluation of risk is linked with a firm’s ability to achieve strategic advantage. Internal development can take the form of investments in new products, services, customer segments, or geographic markets including international expansion. Diversification is accomplished through external modes through acquisitions and joint ventures.
Firms choose expansion strategy when their perceptions of resource availability and past financial performance are both high. The most common growth strategies are diversification at the corporate level and concentration at the business level.
Reliance Industry, a vertically integrated company covering the complete textile value chain has been repositioning itself to be a diversified conglomerate by entering into a range of businesses such as power generation and distribution, insurance, telecommunication, and information and communication technology services.
Tata Tea’s takeover of Consolidated Coffee (a grower of coffee beans) and Asian Coffee (a processor) are the examples of related diversification.
A cooperative strategy is a strategy in which firms work together to achieve a shared objective. Cooperative strategies are used to gain competitive advantage by joining with one or two competitors against other competitors of the industry. Cooperative strategy is the third major alternative (internal growth and mergers and acquisitions are the other two) firms use to grow, develop value-creating competitive advantages, and create differences between them and competitors.
Thus, cooperating with other firms is another strategy that is used to create value for a customer that exceeds the cost of creating that value and to create a favourable position in the marketplace relative to the five forces of competition.
Increasingly, cooperative strategies are formed by firms competing against one another, as shown by the fact that more than half of the strategic alliances (a type of cooperative strategy) established within a recent two-year period were between competitors such as FedEx and the U.S. Postal Service.
Types of Growth Strategies – 3 Important Types: Intensive Growth Strategies, Integrative Growth Strategies and Diversification Growth Strategies (With Examples)
Type # 1. Intensive Growth Strategies:
Intensive growth strategies aim at achieving further growth for existing products and/ or in existing markets.
There are three important intensive growth strategies, viz.:
i. Market penetration,
ii. Market development and
i. Market Penetration Strategy:
Market penetration strategy strives to increase the sale of the current products in the current markets.
The market development strategy involves broadening the market for a product.
A company may be able to increase its current business by product improvement or introducing products with new features. Example – Colgate-Palmolive has been trying to maintain its share of the toothpaste market by introducing new brands. (Maintaining the market share in a growing market means, obviously, increasing sales).
Many companies endeavour to maintain/increase sales through continuous feature improvements/introduction of new products. This is very obvious in certain industries like electronics, white goods, passenger vehicles (including two-wheelers), etc.
Often, market development and product development strategies facilitate better market penetration.
One of the common growth strategies is the integrative growth strategy. A major contributor to the growth of Reliance Industries in the early stages was backward and forward integration. It is today the most fully integrated company in the world (from petroleum exploration to textiles retailing).
There are broadly two types of integrative growth:
i. Integration at the same level or stage of business in the same industry (horizontal integration), or
ii. Integration of different levels/stages of business in the same industry (vertical integration).
Integration at the same level of business, popularly known as horizontal integration, involves the acquisition of one or more competitors.
For example- a tyre company may grow by acquiring another tyre company. Examples of horizontal integration includes acquisition of Universal Luggage’s (Aristocrat) by Bioplast (V.I.P.) and Tata Oil Mills Company (TOMCO) by Hindustan Lever. The Indian cement industry has witnessed considerable horizontal integration. The FMCG sector has recently undergone several acquisitions resulting in horizontal integration.
Perhaps, the most important advantage of horizontal integration is that it eliminates or reduces competition.
Integration of the different levels/stages of the same industry is known as vertical integration.
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 make use of the firm’s existing technology, production facilities or distribution channels or it amounts to backward or forward integration, it may be regarded as related diversification. (Example – the diversification of Videocon).
Some companies expand the business into unrelated industries (Example – Wipro which is in the business of several FMCG, electrical and lighting, furniture and IT). Other examples- include the V-Guard, Reliance, LG, Samsung, Hyundai, General Electric, 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.
Large conglomerate (diversified) business houses dominate the industrial sector of many countries. While most of the top industrial houses of the US are focused, of the West European and Asian countries like Japan, South Korea and India are diversified.