Growth is a way of life. Almost all organizations plan to expand. This strategy is followed when an organization aims at higher growth by broadening its one or more of its business in terms of their respective customer groups, customers functions, and alternative technologies singly or jointly — in order to improve its overall performance.
There are four types of expansion (Growth) strategies
- Expansion through concentration
- Expansion through integration
- Expansion through diversification
- Expansion through cooperation
1. Expansion through concentration
It involves converging resources in one or more of firms businesses in terms of their respective customer needs, customer functions, or alternative technologies either singly or jointly, in such a manner that it results in expansions. A firm that is familiar with an industry would naturally like to invest more in known business rather than unknown business. Concentration can be done through
- Market Penetration: It involves selling more products to the same market by focusing intensely on existing markets with its present products, increasing usage by existing customers and increasing market share and restructures a mature market by driving out competitors E.g.: Low pricing strategies
- Market Development: It involves selling the same products to new markets by attracting new users to its existing products. Market development can be geographic wise and demographic wise. E.g.: XEROX Company educated small business entrepreneurs to create new markets.
- Product Development: It involves selling new products to the same markets by introducing newer products in existing markets. E.g.: the tourism industry in India has not been able to attract new customers in significant numbers. New products such as selling India as a golfing or ayuerveda-based medical treatment destination are some of the product development efforts in the tourism industry to attract more tourists.
Advantages of concentration strategies
- Involves minimal organizational changes and is less threatening.
- Enables the firm to specialize by gaining the in-depth knowledge of the businesses.
- Enables the firm to develop competitive advantage.
- Decision-making can be made easily as there is a high level of productivity.
- Systems and processes within the firm become familiar to the people in the organization.
Disadvantages of concentration strategies
- It is dependent on one industry if there is any worse condition in the industry the firm will be affected.
- Factors such as product obsolescence, fickleness of market, emergence of newer technologies are threat to concentrated firm
- Mangers may not be able to sustain interest and find the work less challenging.
- It may lead to cash flow problems.
2. Expansion through Integration
It is done where the company attempts to widen the scope of its business definition in such a manner that it results in serving the same set of customers. The alternative technology of the business undergoes a change. It is combing activities related to the present activity of a firm. Such a combination may be done through value chain. A value chain is a set of interrelated activity performed by an organization right from the procurement of basic raw materials down to the marketing of finished products to the ultimate customers. E.g.: Several process based industry such as petro chemicals, steel, textiles of hydrocarbons have integrate firm
A make or buy decision is then made when firms wish to negotiate with the suppliers or buyers. The cost of making the items used in the manufacture of ones owns products are to be evaluated against the cost of procuring them from suppliers. If the cost of making is less that the cost of procurement then the firm moves up the value chain to make the item itself. Like wise if the cost of selling the finished products is lesser than the price paid to the sellers to do the same thing then the firm would go for direct selling.
Among the integration strategies are of two type’s vertical and horizontal integration.
- Vertical Integration: when an organization starts making new products that serve its own needs vertical integration takes place. Vertical integration could be of two types Back ward and forward integration. Backward integration means moving back to the source of raw materials while forward integration moves the organization nearer to the ultimate customer. Generally when firms vertically integrate they do so in a complete manner that is they move backward or forward decisively resulting in a full integration but when a firm does not commit it fully it is possible to have partial vertical integration strategies too. Two such partial vertical integration strategies are ‘taper’ integration and ‘quasi’ integration. Taper integration requires firms to make a part of their own requirements and to buy the rest from outsiders. Through quasi integration strategies firm purchase most of their requirements from other firms in which they have an ownership stake. Ancillary industrial units and outsourcing through sub contracting are adapted forms of quasi integration.
- Horizontal Integration: when an organization takes up the same type of products at the same level of production or marketing process, it is said to follow a strategy of horizontal integration. When a luggage company takes over its rival luggage company, it is horizontal integration. Horizontal integration strategy may be frequently adopted with a view to expand geographically by buying a competitors business, to increase the market share or to benefit from economics of scale.
3. Expansion through Diversification
Diversification is a much used and much talked about set of strategies. It involves a substantial change in the business definition — singly or jointly- in terms of customer groups or alternative technologies of one or more of a firm’s businesses. . There are two categories, concentric and conglomerate diversification.
- Concentric Diversification: when an organization takes up an activity in such a manner that is related to the existing business definition of one or more of firms businesses, either in terms of customer groups, customer’s functions or alternative technologies, it is called concentric diversification. Concentric diversification may be of three types:
- Marketing related concentric diversification: when a similar type of product is offered with a help of unrelated technology for e.g., a company in the sewing machine business diversifies in to kitchen ware and household appliances, which are sold to house wives through a chain of retails stores.
- Technology- related concentric diversification: when a new type of product or service is provided with the help of related technology, for e.g., a leasing firm offering hire-purchase services to institutional customers also starts consumer financing for the purchase of durable sot individual customers.
- Marketing- technology related concentric diversification: when a similar type of product is provided with the help of related technology, for e.g., a rain coat manufacturer makes other rubber based items, such as water proof shoes and rubber gloves sold through the same retail outlets
- Conglomerate Diversification: when an organization adopts a strategy which requires taking of those activities which are unrelated to the existing businesses definition of one or more of its businesses either in terms of their respective customer groups, customer functions or alternative technologies. Example of Indian company which have adopted apart of growth and expansion through conglomerate diversification the classic examples is of ITC, a cigarette company diversifying into the hotel industry
4. Expansion through Cooperation
The term cooperation expresses the idea of simultaneous competition and cooperation among rival firms for mutual benefits. Cooperative strategies could be of the following types:
- Mergers
- Takeovers
- Joint ventures
- Strategic alliances
Mergers Strategies: A merger is a combination of two or more organizations in which one acquires the assets and liabilities of the other in exchange for shares or cash or both the organization are dissolved and the assets and liabilities are combined and new stock is issued. For the organization, which acquires another, it is an acquisition. For the organization, which is acquired, it is a merger. If both the organization dissolves their identity to create a new organization, it is consolidation. There are different types of mergers they are horizontal merger, vertical merger, concentric merger and conglomerate merger.
- Horizontal Mergers: it takes place when there is a combination of two or more organizations in the same business. E.g: A company making footwear combines with another footwear company, or a retailer of pharmaceutical combines with another retailer in the same businesses.
- Vertical Mergers: It takes place when there is a combination of two or more organizations, not necessarily in the same business, which create complementarities either in terms of supply of raw materials (input) or marketing of goods and services (outputs). E.g: A footwear company combines with a leather tannery or with a chain shoe retail stores
- Concentric Mergers: It takes place when there is a combination of two or more organizations related to each other either in terms of customer functions, customer groups, or the alternative technologies used. E.g: A footwear company combining with a hosiery firm making socks or another specialty footwear company, or with a leather goods company making purse, hand bags and so on
- Conglomerate Mergers: It takes place when there is a combination of two or more organizations unrelated to each other, either in terms of customer functions, customer groups, or alternative technologies used. E.g: A footwear company combining with a pharmaceutical firm.
Takeover Strategies: Takeover or acquisition is a popular strategic alternative adopted by Indian companies. Acquisitions usually are based on the strong motivation of the buyer firm to acquire. Takeovers are frequently classified as hostile takeovers (which are against the wishes of the acquired firm) and friendly takeovers (by mutual consent)
- Friendly takeovers are where a takeover is not resisted or opposed, by the existing management or professionals. E.g: Tata Tea’s takeover of Consolidated Coffee (a grower of coffee beans) and Asian Coffee (a processor) is an example of a friendly takeover.
- Hostile takeovers is where a takeover is resisted, or expected to be opposed, by the existing management or professionals.
Joint Venture Strategies: Joint ventures are a special case of consolidation where two or more companies from a temporary form a temporary partnership (also called a consortium) for a specified purpose. They occur when an independent firm is created by at least two other firms. Joint ventures may be useful to gain access to a new business mainly under these conditions
- When an activity is uneconomical for an organization to do alone.
- When the risk of business has to be shared.
- When the distinctive competence of two or more organization can be brought together.
- When the organization has to overcome the hurdles, such as import quotas, tariffs, nationalistic — political interests, and cultural roadblocks.
Strategic alliances: They are partnership between firms whereby their resources, capabilities and core competencies are combined to pursue mutual interest to develop, manufacture, or distribute goods or services. There are various advantages:
- Two or more firms unite to pursue a set of agreed upon goals but remain independent subsequent to the formation of the alliances. A pooling of resources, investment and risks occurs for mutual gain
- The partner firms contribute on a continuing basis in one or more key strategic areas, for example, technology, product and so forth.
- Strategic alliances offer a growth route in which merging one’s entity, acquiring or being acquired, or creating a joint venture may not be required
- Global partners can help local firms by developing global quality consciousness, creating adherence to international quality standards, providing access to state of the art technology, gaining entry to world wide mass markets, and making funds available for expansions.