According to Igor Ansoff, a growth strategy is one that a company pursues its level of objectives upward in a significant increment than its past achievement level. A company implements growth strategy by redefining the business either-adding to the scope of activity or substantially increasing the efforts of the current business. Mostly, growth strategy refers to raise the market share, increase in sales, increase in return on investment etc. Ansoff argued that following three reasons are dominant in the pursuit of the growth strategy;
⦁ Growth is a necessity for survival in volatile industries.
⦁ Growth is equated with effective performance from managerial point of view.
⦁ Growth is most important as an objective
The growth strategy relates one or more of the following types;
⦁ Internal growth strategies
⦁ External growth strategies
⦁ Internal Growth Strategies
Internal growth of a company is achieved by expanding operations through diversification, increase of existing capacity, market growth etc. It is the company's strategy to raise the market share or grow in business by using its inherent capabilities. The Internal growth strategies are classified as;
⦁ Intensive growth strategies
⦁ Integrative growth strategies
⦁ Diversification growth strategies.
Intensive Growth strategies
It is simple and first level of growth strategy. It implies continuing to pursue the existing line in the existing markets but on an increased scale. A company concentrates all its resources and strengths to the profitable growth of a single product, in a single market, with a single dominant technology.
The company seeks intensive growth strategies to achieve additional growth in existing products or existing markets. Such strategies are also called organic growth strategies. It includes flowing strategic options;
⦁ Market penetration strategy
⦁ Market development strategy
⦁ Product development strategy
Above strategic options are explained in detail on the topic "Direction of strategy development".
Integrative Growth strategies
The integrative growth strategies are designed to achieve increase in sales, assets and profits, by combining activities related to the present activity of a firm or may be other too.
There are two variants/types in integrative growth strategy;
⦁ Horizontal Integration,
⦁ Vertical Integration
Horizontal integration reveals when the long term strategy of a company is based on growth through the acquisition of one or more similar business within the industry. It is also called merger and acquisition of same line of business to expand the capability than existing capacity. It is a strategy as the process of acquiring or merging with industry competitors to achieve the competitive advantages by broadening business scope.
One of the major purposes is to access new markets and eliminate the competitors. In Nepal, such strategies are more relevant at present, in bank and financial industry for the purpose of meeting capital adequacy and to attain synergy in their operations. Horizontal strategy is adopted to capitalize or reap the opportunities by building the strength after merger or acquisition of the companies.
Vertical integration refers to the integration with the firms that supplying inputs or selling outputs of the company. It is the integration of the company in successive stage in the same or other industry to strength supply chain management and marketing management. It enables a company to reap the just-in-time model of management.
Vertical integration is classified in to following two types;
⦁ Backward Integration: If a company acquires the business firm that supplying the raw materials or inputs, it is said to have backward integration adopted in the company. Its purpose is to extend the suppliers of raw materials or inputs supporting growth of the company. This allows for smooth flow of production, reduced inventory, reduction in operation cost etc.
⦁ Forward Integration: If a company acquires the business firm that supporting to serve target customers by selling outputs, is said to have forward integration adopted in the company. It purposes is to gain more control over distributors or retailers. This allows attaining lower distribution costs, assured supplies to market, barriers to entry of competitors etc.
Diversification growth strategies
Diversification consists of going in to an operation which is totally or partially unrelated to the present operations. When a company gets in to new product and new market configuration, it is said to have diversification strategy adopted.
Diversification strategies are formulated to expand the company's operation capacity by adding markets, products, services etc to existing operations. So, before formulating and adopting such strategies, one must have a clear knowledge and study of the new products, technologies and markets.
The following may be the important riles of diversification;
⦁ Search for synergy
⦁ Search for portfolio effect
⦁ Search for stability
⦁ Search for security
⦁ Product life cycle consideration
Issues to be raised while diversification
Whether it brings a positive synergy, to the company?
Whether the market wants the new product or service which we offer?
Whether the product or service has good growth potential?
There are two types of diversification
⦁ Concentric Diversification- It occurs, when the existing firm creates another business unit in the same industry. In this type of diversification, new product line or new line of business will be created with the existing one. It is also called as related diversification.
According to M E Porter, related diversification is favored in order to build up synergy in the business by;
⦁ Transferring competitively valuable expertise, technologies and other capabilities from one business line to another.
⦁ Combining the related activities of separate business into a single operation to achieve lower cost.
⦁ Exploiting common use of a well known brand value.
⦁ Cross business collaboration to create competitively valuable resource strengths and capabilities.
Example of Concentric diversification
Concentric diversification involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets, or products. With this growth strategy, the selected new businesses possess a high degree of compatibility with the firm’s current businesses. The ideal concentric diversification occurs when the combined company profits increase the strengths and opportunities and decrease the weaknesses and exposure to risk.
Six guidelines for when related diversification may be an effective strategy.
⦁ When an organization competes in a no growth or slow growth industry.
⦁ When adding new, but related, products would significantly enhance the sales of current products.
⦁ When new, but related products could be offered at highly competitive prices.
⦁ When new, but related products have seasonal sales levels that counterbalance an organization's existing peaks and valleys.
⦁ When an organization's products are currently in the declining stage of the product's life cycle.
⦁ When an organization has a strong management team.
Source: ME Porter, Competitive Strategy (1980)
⦁ Conglomerate Diversification- It occurs when the existing firm creates another business unit in distinct industry. The firm entirely involves in a different set of business activities. It deals with totally unrelated line of business. So this diversification is also called as un-related diversification. The concept of "not to keep all the eggs in one basket" is one of the most push factors of conglomerate diversification.
In conglomerate diversification, a company possesses multi-business like CG group in Nepal. It successfully is pursuing unrelated diversification by investing in multi business such as food and electronic products, insurance, vehicles, education etc. However, an obvious challenge of unrelated diversification is that the parent company must have an excellent top management team that plans, organizes, motivates, delegates, and controls effectively.
Ten guidelines for when unrelated diversification may be an especially effective strategy;
⦁ When revenues derived from an organization's current products or services would increase significantly by adding new, but unrelated products.
⦁ When an organization competes in a highly competitive and/ or a non growth industry, as indicated by low growth industry profit margins and returns.
⦁ When an organization's present channels of distribution can be used to market the new products to current customers.
⦁ When the new products have countercyclical sales patterns compared to an organization's present product.
⦁ When an organization's basic industry is experiencing declining annual sales and profits.
⦁ When an organization has capital and managerial talent needed to compete successfully in a new industry.
⦁ When an organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity.
⦁ When there exists financial synergy between the acquired and acquiring firm.
⦁ When existing markets for an organization's present products are saturated.
⦁ When antitrust action could be charged against an organization that historically has concentrated on a single industry.
Source; Fred R. David Strategic Management 2014 page 145
⦁ External Growth Strategies
Sometimes, a company intends to grow in its business scope by partnering with others in existing business line. The external growth strategies believe on cooperation and collaboration among competitors to succeed the business. It includes mainly following strategies;
⦁ Joint Venture/Partnering
⦁ Strategic Alliance
Merger/acquisition: A merger occurs when two organizations of about equal size unite to form one enterprise. An acquisition occurs when a large organization purchases a smaller firm or vice versa. When a merger or acquisition is not desired by both parties, it can be called a takeover. If acquisition is desired by both parties, it is termed as friendly merger.
Today, some of the bank and financial institutions are in merger and acquisition process in our country. In such condition, it is assumed that two companies agree to integrate their operation on a relatively coequal basis for business growth. In world-wide scenario, mergers, acquisitions and takeover is occurring especially in banking, insurance, defense, airlines, publishing, health care, pharmaceuticals etc.
Key Reasons Why Many Merger and Acquisitions Fail
⦁ Integration difficulties
⦁ Inadequate evaluation of target
⦁ Large or extraordinary debt
⦁ Inability to achieve synergy
⦁ Too much diversification
⦁ Managers overly focused on acquisitions
⦁ Too large an acquisition
⦁ Difficult to integrate different organizational cultures
⦁ Reduced employee moral due to layoffs and relocations
Following are the potential benefits / benefits of merging with or acquiring another firm;
⦁ To provide improved capacity utilization
⦁ To make better use of the existing sales force
⦁ To reduce managerial staff
⦁ To gain economies of scale
⦁ To smooth out seasonal trends in sales
⦁ To gain access to new suppliers, distributers, customers, products and creditors
⦁ To gain new technology
⦁ To reduce tax obligations.
Joint Venture/Partnering: Joint venture is a form of business combination in which two unaffiliated business firms come in business contract contributing financial and physical assets and employees, to start and operate new company for economic advantages.
Strategic Alliance: It is a partnership between two or more companies to achieve strategically significant objective and mutually beneficial business mission. It is a cooperative strategy under which firms combine some of their resource and capabilities to create competitive advantages. Following may be the aims of strategic alliance;
⦁ Increase technological or manufacturing capabilities
⦁ Provide access to specific markets
⦁ Reduce financial risk
⦁ Ensure competitive advantage