Internal and external growth strategies.ppt

Market Factors That Affect Growth:
 Size and Characteristics
 Competition
 Intellectual-property rights
 Predictability

 Management factors that affect growth
 Ability to adapt and change business over time
even of the business is successful

 A growth strategy is one under which
management plans to advance further and
achieve growth of the enterprise, in fields of
manufacturing, marketing, financial
resources etc.
 As growth entails risk, especially in a
dynamic economy, a growth strategy might
be described as a safest policy of growth-
maximising gains and minimising risk and
untoward consequences.

 Problems with growth
 Inability to understand/respond to the
business’s environment
 Framework for growth
 Scan and assess the environment
 Plan the growth strategy
 Hire for growth
 Create a growth culture
 Build a strategy advisory board

 Intensive growth strategies
 Exploit opportunity in the current market
 Integrative growth strategies
 Exploit growth within the industry as a whole
 Diversification strategies
 Exploit opportunities outside
the current market/industry
 Global strategies
 Exploit opportunities in the
international arena

Internal and external growth strategies.ppt

 New concepts are not generally attractive to
established companies in the early stages
because
 It breaks the mold
 The early markets are generally small with low
margins
 Large companies typically wait to see how the
new model fares in the market and then they
either change their model or attempt to acquire
the entrepreneur’s company.

 Market Penetration
 Increase sales through effective marketing
strategies within the current target market
 Market Development
 Expand sales through expanding geographic
representation

 Market Development (continued)
 Franchising
 Licensing- steps for a successful transaction
 Decide exactly what will be licensed
 Understand/define the benefits the buyer will receive
from the transaction
 Conduct thorough market research
 Conduct due diligence on potential licensees
 Determine the value of the license agreement
 Create a license agreement

 Product Development
 Increase sales through new products/services

 Vertical Integration Strategies
 Growing forward/backward within the
distribution channel
 Horizontal Integration Strategies
 Buying up competitors/starting a competing
business within the current industry
 Modular or Network Strategies
 Focus on core competencies and outsource the
rest

 Investing in or acquiring products/businesses
which are outside the core competencies and
industries
 Use when all other growth strategies within
the current market/industry have been
exhausted
 Synergistic strategy
 Acquire products/services unrelated to the core
 Conglomerate diversification-acquiring
businesses that are unrelated to the company’s
current business

 Reasons to go global early in development
 Product lives are short due to rapid technology
changes
 R&D is expensive and must be spread across
many markets
 Competition and saturated markets

 Characteristics of successful globalization
 A global vision from the start
 Internationally experienced managers
 Strong international business networks
 Preemptive technology
 A unique intangible asset
 Closely linked product/service extensions
 A closely coordinated organization on a world-
wide basis

 Finding the best global market
 Information sources
 International Trade Statistics yearbook of
the United States
 International Trade Administration offices
in Washington, D.C. and at district levels
 Department of Commerce

 I) Internal growth strategies
 (II) External growth strategies.
 Internal growth strategies
 Internal growth strategies are those in which
a firm plans to grow on its own, without the
support of others. On the other hand,
external growth strategies are those in which
a firm plans to grow by combining with
others.

 (1) Market Penetration:
 Market penetration is a growth strategy, in which a
firm tries to seek a higher volume of sales of
present products by penetrating (or getting
deeper), into existing markets through devices like
the following:
 1. Aggressive advertising and other sales promotion
techniques.
 2. Encouraging new uses of the old product e.g. use
of coffee during summer season by way of cold coffee
or coffee-shake.
 3. Coming out with exchange offers e.g. exchange of
old scooters or TV for new ones at a discount etc.

 This growth strategy, as the name implies,
aims at increasing sales of existing products
through l market development, i.e. exploring
new markets for company’s products. For
example, many companies have achieved
remarkable growth by entering into foreign
markets; pushing their products I by changing
size, packaging, and brand name etc.
 Market development may be tried by a
company I within the same country also e.g.
sale of electronic goods like transistors etc.
in rural areas.

 Product development as a growth strategy
implies developing new and improved
products for sale in existing markets; so that
people who have otherwise become
indifferent to the old product with passage
of time get attracted to the new product
because of the charisma associated with the
phenomenon of newness.
 Examples: introduction of Babool and
Promise toothpastes by Balsara Hygiene
Products Ltd.; introduction of Colgate Super
Shakti by Colgate-Palmolive (India) Ltd. etc.

 :
 Diversification is quite an important growth
strategy. As growth entails risk,
diversification, as a growth strategy, implies
developing a wider range of products to
diffuse risk or to reduce risk associated with
growth. The fundamental philosophy of
diversification is presumably contained in an
old English proverb which suggests that one
should not keep all one’s eggs in one basket.

 (i) Diversification enables a company to
make better use of its resources like
managerial personnel, technology, marketing
network, research facilities etc. As such,
diversification may lead to cost reduction
and profit-maximization.
 (ii)Diversification helps to minimize risk
associated with growth. For example, loss in
one line may be made good through profits in
some other lines.

 (iii)Diversification adds to the competitive
strength of a company because of more
products, greater resources, wider
distribution network etc.
 (iv) Diversification acts as shock-absorber for
a company, in phases of business cycle. For
instance, if there is depression in one
product line; the firm may survive if there is
good business in other lines of production.
 (v) Diversification adds to the goodwill of a
firm; because of its brand name associated
with a variety of product items.

 (i) Huge funds are needed to cope with the
requirements of diversification strategy. As such only big
firms can think of diversification.
 (ii) Diversification creates problems of co-ordination
among lines of diversified production. Failure to ensure
effective co-ordination, may lead to substantial
reduction in the advantages planned for diversification
strategy.
 (iii) New products, new technologies etc. may become a
challenging task to handle for management and staff of
the organisation. The organisation may find problems in
adapting to the new growth pattern.

 Under this type of diversification, new
products – whether related or unrelated to
the present business line are developed by
the business enterprise on its own. For
example, Raymon Woolen Mills have added
new product, cement to their existing line of
woolen textiles. Similarly, Godrej added
refrigerators and later on detergents to their
original product lines of steel safes and
locks.

 Vertical diversification maybe backward or forward. In
backward vertical diversification, the aim of a firm is
to move backwards in the production process so that
it is able to produce its own raw-materials/basic
components. For example, a TV manufacturer may
start producing picture tubes, built-in-voltage
stabilizers and other similar components.
 In forward vertical diversification, the aim of a firm is
to move forward towards distribution process so as to
reach the final consumer. For example, many textile
mills like Mafatlal, Reliance, Raymond etc. have set
up their own retail distribution systems.

 In case of market related concentric
diversification, new product/service is sold
through existing distribution system. For
example, addition of lease-financing for
buying cars to the existing hire-purchase
business is market related concentric
diversification.
 In technology related concentric
diversification, new products are provided by
using technologies similar to the present
product line. For example, Food Specialties
Ltdh as added ‘Tomato Ketchup’ to the
existing ‘Maggi’ produced by them.

 This growths strategy involves addition of
dissimilar new products to the existing line
of business. DCM Ltd. is a good example of
conglomerate diversification. There has been
an addition of a wide range of products such
as fertilizers, sugar, chemicals, rayon, trucks
etc. to their basic line of textiles. ITC,
Godrej, Kirloskars etc. are other examples of
conglomerate diversification.

 Modernisation involves replacing worn-out and
obsolete machines etc. by modern machines and
equipment’s operated according to latest
technology; to achieve objectives like better
quality, cost reduction etc. Modernisation is a
growth strategy in the sense that it helps to achieve
more and qualitative production at lower costs;
thus helping to increase sales and profits for the
enterprise.
 Modernisation may be a pre-requisite to the
adoption of other growth strategies like product
development, diversification (of many dimensions)
etc. In fact, it is a background growth strategy.

–The Ansoff Growth matrix is a tool that helps businesses
decide their product and market growth strategy.

 External Growth strategies

 (1) Joint Ventures:
 Joint venture is a growth strategy in which two or more
companies, establish a new enterprise (or organisation)
by participating in the equity capital of the new
organisation and by agreeing to participate in its
management in an agreed manner.
 A firm or a company may have a joint venture with
another company of the same country or a foreign
country. Some examples of joint ventures: Tata Iron and
Steel Co. joined hands with IPICOL of Orissa to form
IPITATA Sponge Iron Ltd; Hindustan Computers Ltd. and
Hewlett Packard of USA formed a joint venture named
HCL-HP Ltd; Tungabhadra Industries Ltd. of India and
Yamaha Motor Company Ltd. of Japan formed a joint-
venture Birla Yamaha Ltd. etc.

 Advantages of Joint Ventures:
 As a growth strategy, joint-venture provides the following
advantages:
 (i) In case joint venture involves a foreign partner, the
problem of foreign exchange is solved to a great extent; if
the foreign partner brings latest machines etc. from the
other country.
 (ii) Through joint venture approach, risk of business is shared
among partners. In fact, high risk involved in a new project
can be reduced considerably by mutual sharing of such risk.
 (iii) The foreign partner in a joint venture can provide
advanced technology, not available within the country
 (iv) Joint venture of companies, within the same country,
helps to reduce competition.
 (v) Joint venture strategy provides opportunity to small firms
to become big through joining with others and add to their
prospects of survival.

 Limitations of Joint Ventures:
 (i) Problems arise in matter of agreement on equity
participation; as both partners to a joint venture may
desire to have majority of stake in joint venture.
 (ii)Differences in the culture of countries which co-
venturers belong to may create problems of achieving
mutual understanding; and may lead to conflicts.
 (iii)Lack of co-ordination among thinking and actions of
co-venturers may affect successful functioning of the
joint venture. For example, co-venturers may not agree
on common objectives of the joint venture or the
composition of the board of directors.

 Limitations of Joint Ventures:
 Some important limitations of joint ventures are as
follows:
 (i) Problems arise in matter of agreement on equity
participation; as both partners to a joint venture may
desire to have majority of stake in joint venture.
 (ii)Differences in the culture of countries which co-
venturers belong to may create problems of achieving
mutual understanding; and may lead to conflicts.
 (iii)Lack of co-ordination among thinking and actions of co-
venturers may affect successful functioning of the joint
venture. For example, co-venturers may not agree on
common objectives of the joint venture or the composition
of the board of directors.

 (2) Mergers:
 Merger, as a growth strategy, implies combination
(or integration) of two or more companies into one.
Merger may take place with a co-operative
approach or it may take place with a hostile
approach. In the latter case, a merger is known as
a takeover.
 Specially in the Indian conditions, industrialists
Vijaya Mallaya, R.P. Goenka and Manu Chabria are
described as “take-over kings.”

 Mergers are of the following four types:
 (a) Horizontal Mergers:
 In this type of merger, different business units
which have been competing with one another in
the same business line join together and form a
combination. The Indian Jute Mills Association, the
Indian Paper Mill Makers’ Association and
Associated Cement Companies (ACC) are some
popular examples of horizontal merger.

 Advantages of Horizontal Merger:
 (i) Horizontal merger eliminates cut-throat competition
among units, which are engaged in the same business line.
 (ii) It helps to secure economies of large scale operation;
and thereby, reduces cost per unit of output.
 (iii) It can avail of external economies in respect of
transport, insurance, banking services etc.
 (iv) It increases competitive power of the group and provides
synergistic effect.
 Limitations of Horizontal Merger:
 (i) This type of merger does not assure the supply of raw
materials.
 (ii) It has a tendency to acquire monopolistic power in the
market; and thereby, increasing prices and exploiting
consumers.
 (iii) It carries with itself, a danger of over-capitalisation.
 (iv) The merger may earn abnormal profits, tempting the
government to levy more taxes.

 (b) Vertical Mergers:
 Vertical merger arises as a result of integration of those units
which are engaged in different stages of production of product. It
is also known as sequence or process merger. Vertical merger may
be backward or forward. When manufacturers at successive stages
of production integrate backwards up to the source of raw
materials; it is known as backward merger.
 On the other hand, when manufacturing units combine with
business units which distribute their product; it is known as
forward integration or merger.
 Backward merger is adopted to have a control over sources of raw-
materials; while forward merger aims at attaining control over
channels of distribution eliminating middlemen’s profits.
 Examples:
 A textile unit takes over cotton ginning and yarn spinning units to
get smooth supply of raw materials. It is a case of backward
merger. A textile company manufacturing various kinds of cloth
takes over wholesalers and retailers engaged in marketing its
product. It is a case of forward merger.

 Advantages of vertical merger:
 (These advantages are common to both – backward and forward
mergers).
 (i) Various processes of production can be arranged in a continuous
sequence; as they are under common control.
 (ii) There is saving in management costs because of common
administrative control.
 (iii)Vertical merger facilitates research in production processes
because of integration of processes.
 Limitations of vertical merger:
 (These limitations are also common).
 (i)It is difficult to bring about effective co-ordination among
activities of dissimilar business units.
 (ii) Vertical merger, because of large size, may lead to inflexibility.
The merger or combination may find it difficult to adapt to
changes in production or marketing technologies.
 (iii)Even a slight dislocation at any stage of production may throw
the entire enterprise out of gear.

 (c) Concentric Merger:
 (Concentric means having the same centre)
Concentric merger takes place when companies
which are similar either in terms of technology or
marketing system, combine with each other i.e.
combining units do production with the same
technology or use the same distribution channels.

 (d) Conglomerate Merger:
 (Conglomerate means a larger company that
is formed by joining together different
firms). When two or more unrelated or
dissimilar firms combine together; it is
known as a conglomerate merger. It implies
dissimilar products or services under common
control. When e.g. a footwear company
combines with a cement company or a ready-
made garment manufacturer etc.; a
conglomerate merger comes into existence.

Internal and external growth strategies.ppt

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