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. 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. Theres no single formula for delivering organic growth. It is a case of backward merger. Integration Expansion Strategy  5. As the firm achieves success at each stage, it moves to the next. There has been an addition of a wide range of products such as fertilizers, sugar, chemicals, rayon, trucks etc. 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. From a practical standpoint, however, most tender offers eventually become mergers, if the acquiring firm is successful in gaining control of the target firm. The resultant benefits are shared in proportion to the contribution made by each party in achieving the targets. Common business growth strategies (c) Whether the product or service has a good growth potential? Joint venture may give protective or participating rights to the parties to the venture. External growth strategies can therefore be divided between M&A (Mergers and Acquisitions) strategies and Strategic Alliance strategies (e.g. 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. (These advantages are common to both – backward and forward mergers). Traditional means of operating with little cultural diversity and without global competition are no longer effective firms. For example, co-venturers may not agree on common objectives of the joint venture or the composition of the board of directors. It helps to increase sales of the company. 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. Spreading risks by operating in multiple areas decreases the threat of any one area causing the firm to fail. A textile unit takes over cotton ginning and yarn spinning units to get smooth supply of raw materials. Firms generally prefer the external growth strategies for quick growth of market share, profits and cash flows. 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. Example – Colgate-Palmolive has been trying to maintain its share of the toothpaste market by introducing new brands. The concept of franchising is quite comprehensive and covers an extensive range of marketing and distribution arrangements for goods and services. Diversification Expansion Strategy  7. The motive of acquirer is to gain control over the board of directors of the target company for synergy in decision-making. It is the most common form of intensive growth strategy. In the fast expanding economies of today, adoption of growth strategies by business enterprises is a must for the survival, in the long-run; lest they should be swept away by environmental influences, especially competition, technology and governmental regulations. vertical integration with backward and forward linkages. But it can be broadly categorized into three: 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. Vertical merger may be backward or forward. (v) Joint venture strategy provides opportunity to small firms to become big through joining with others and add to their prospects of survival. 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. Parenting—, resource allocation and centralized management of business units. Integration of different levels/stages of business in the same industry (vertical integration). Rights to produce a potential product or use a potential production process. Market Penetration Growth through market penetration does not involve moving into new markets or creating new products; it's an attempt to increase market share using your current products or services. It is a diversification engaged at different stages of production cycle within the same industry. 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. The merger activities are as a result of following factors and strategies, which are classified under three heads: 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. 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. Privacy Policy3. A strategic alliance integrates the synergetic talents of alliance partners. 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. (d) Common pool of resources for research and development. Activities, which have no contractual arrangements to establish joint control, are not joint ventures. A firm or a company may have a joint venture with another company of the same country or a foreign country. The basic objective in all these cases is growth but the basic problem in each case is significantly different which needs more elaborate discussion. 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. (iii)Diversification adds to the competitive strength of a company because of more products, greater resources, wider distribution network etc. As a result of a merger, one company survives and others lose their independent entity, it is called ‘absorption’. Strategy. This works best in a scenario where there are no new products, and there are no new markets to enter. ITC, Godrej, Kirloskars etc. For ensuring success of a joint venture, the co-venturers must agree in advance on: 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. (iv) The merger may earn abnormal profits, tempting the government to levy more taxes. The most frequent increase indicating a growth strategy is to raise the market share and or sales objectives upward significantly. Following are important advantages of modernisation, as a growth strategy: (i) Modernisation results in lesser cost of production and consequently higher profits for the company. 3. For a more enjoyable learning experience, we recommend that you study the mobile-friendly republished version of this course. Identify the objectives of your organization. Strategic Management - Growth Strategies; 5. This combination may be either through absorption or consolidation. For example, Food Specialties Ltdh as added ‘Tomato Ketchup’ to the existing ‘Maggi’ produced by them. 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. Modernisation may be a pre-requisite to the adoption of other growth strategies like product development, diversification (of many dimensions) etc. 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. (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. One of the common growth strategies is the integrative growth strategy. (b) Integration of different levels/stages of business in the same industry i.e. Joint ventures with multinational companies contribute to the expansion of production capacity, transfer of technology and capital and above all penetrating into global market. The merged concerns go out of existence and their assets and liabilities are taken over by the acquiring company. Equity investment in each other�s company is not any focus.Merger: In merger two firms agree to move ahead and exist as a single new company. A merger refers to a combination of two or more companies into a single company.

• Strategy helps in pursuing activities which move an organization to move from the current position to desired future state. Diversification is accomplished through external modes through acquisitions and joint ventures. 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. This will require additional information, such as an executive summary and elevator pitch. Integration at the same level or stage of business in the same industry (horizontal integration), or. 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. The primary reasons for adopting a non-growth strategymay include, 1. Disclaimer Copyright, Share Your Knowledge Directional strategies of growth, stability, and retrenchment Three levels of directional strategies are Growth, Stability and Retrenchment. Diversification means adding new lines of business. Other examples- include the V-Guard, Reliance, LG, Samsung, Hyundai, General Electric, etc. It is common for a firm to begin with exporting, progress to licensing, then to franchising finally leading to direct investment. The element of willingness on the part of the buyer and seller distinguishes an acquisition from a takeover. Product Development. A firm pursuing market penetration strategy directs its resources to the profitable growth of a existing products in current markets. Read the latest. Share Your PDF File (iii)Organisational restructuring might be a major problem to introduce and successfully implement new technology. Similarly, Godrej added refrigerators and later on detergents to their original product lines of steel safes and locks. A company may be able to increase its current business by product improvement or introducing products with new features. Plagiarism Prevention 4. But in practice it can be both, hostile or friendly. Coming out with exchange offers e.g. 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. Consequently, tender offers are used to carry out hostile takeovers. (ii)Existing management and staff may not be competent to understand, introduce and implement new technology. Advantages of Diversification Growth Strategy: Following are some advantages of diversification, as an internal growth strategy: (i) Diversification enables a company to make better use of its resources like managerial personnel, technology, marketing network, research facilities etc. (b) Whether the market wants the new product or service which we offer? 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. Types of Growth Strategies: Concentration Expansion Strategy, Integration Expansion Strategy and Other Details, Types of Growth Strategies – Internal Growth Strategies and External Growth Strategies, When the shareholders of more than one company, usually two, decides to pool the resources of the. Interviews and conversations with our partners on how senior management thinks about strategy and how they confront their most pressing challenges. There are several methods for going international. Market development and. Therefore growth strategies need to be revised. In its second part the paper suggests alternative growth strategy paths for service firms. Market penetration, ii. 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. (Conglomerate means a larger company that is formed by joining together different firms). The concept of ‘alliance is gaining importance in infrastructure sectors, more particularly in the areas of power, oil and gas. The organisation may find problems in adapting to the new growth pattern. 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. Concept of Strategy Friendly takeover is for mutual advantage of acquirer and acquired companies. An ‘alliance’ is defined as associations to further the common interests of the members. The basic classification of intensive growth strategies: These strategies are also called ‘organic growth strategies’. Some companies expand the business into unrelated industries (Example – Wipro which is in the business of several FMCG, electrical and lighting, furniture and IT). Merger implies a combination of two or more concerns into one final entity. companies under a common entity it is called ‘merger’. This is the first type of strategy for growth that you need to know about. The motives behind strategic alliances are to reduce cost, technology sharing, product development, market access, availability of capital, risk sharing etc. (c) Develop additional models and sizes of the product to suit the varied preference of the customers. The strategic alliance agreement contains the terms like capital contribution, infrastructure, decision making, sharing of risk and return etc. 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. These acquisitions are called ‘management buyouts’, if managers are involved, and ‘leveraged buyout’, if the funds for the tender offer come predominantly from debt. Growth strategies involve a significant increase in performance objectives. Free essay sample on Strategic Management and Growth Strategies. 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. Diversification strategies are becoming less popular as organizations are finding it more difficult to manage diverse business activities. 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. When schools began teaching virtually because of the coronavirus pandemic, communities were challenged to provide broadband access to all children, no matter where they lived. Other motives for international expansion include extending the product life cycle, securing key resources and using low-cost labour. 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. The merger or combination may find it difficult to adapt to changes in production or marketing technologies. A licensing agreement is a commercial contract whereby the licenser gives something of value to the licensee in exchange of certain performance and payments. 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. An organisation can “go international” by crossing domestic borders international expansion involves establishing significant market interests and operations outside a company’s home country. In market development strategy, a firm seeks to increase the sales by taking its product into new markets. When two or more unrelated or dissimilar firms combine together; it is known as a conglomerate merger. Perhaps, the most important advantage of horizontal integration is that it eliminates or reduces competition. For example, addition of lease-financing for buying cars to the existing hire-purchase business is market related concentric diversification. It is today the most fully integrated company in the world (from petroleum exploration to textiles retailing). For example- a cement manufacturing company undertakes the civil construction activity; it will be a case of diversification with forward linkage. Niraj Dawar is Professor of … Strategic Management - Growth Strategies; 5. ii. Before we dive into specific examples of growth strategies, let’s take a moment to establish a proper growth strategy definition:A growth strategy is If the willingness is absent, it is known as ‘takeover’. TOS4. The takeover bid is finalized with the consent of majority shareholders of the target company. (c) The licensee may eventually become a competitor. 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. This includes such popular measures as more revenues, more employees, and more of the market share. For example- a tyre company may grow by acquiring another tyre company. (iii) The foreign partner in a joint venture can provide advanced technology, not available within the country. combining units do production with the same technology or use the same distribution channels. Growth Management Strategies provides outsourced, "as-needed" expertise in strategic planning, finance, accounting, and other diverse management projects to emerging, growth-stage and established companies. 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. The main objective of a takeover bid is to obtain legal control of the company. Global Strategy. Strategic management (ii)Diversification helps to minimize risk associated with growth. exchange of old scooters or TV for new ones at a discount etc. (iii)Modernisation helps to improve long-run competitive position of the enterprise. Lesson Summary; Previous Topic Next Topic. Growth Strategy is pursued to reduce the cost of production per unit. Merger is defined as ‘a transaction involving two or more companies in the exchange of securities and only one company survives.’. Strategic Management - The Mission Statement; 4. Strategic Management, Strategy Formulation, Growth Strategies. Prominent thinkers in the field include the Peter Drucker, sometimes referred to as the founding father of management studies. A textile company manufacturing various kinds of cloth takes over wholesalers and retailers engaged in marketing its product. In contrast to the intensive growth, integration strategy involves expanding externally by combining with other firms. A vertical integration refers to the integration of firms in successive stages in the same industry. 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. External Growth Strategy 3. This is very obvious in certain industries like electronics, white goods, passenger vehicles (including two-wheelers), etc. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. For instance, if there is depression in one product line; the firm may survive if there is good business in other lines of production. In this strategy, a company will be able to grow ... 2. Internationalization Expansion Strategy. Global strategy, as defined in business terms, is an organization’s strategic guide to … Internationalization Expansion Strategy. 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. (vi) In joint-venture, the managerial competence of co-venturers is integrated towards better managerial efficiency. 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). 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. The reasons for horizontal integration are as follows: (a) Elimination or reduction in intensity of competition. The integration of different levels/stages of the industry is known as vertical integration. The integrative growth strategies are designed to achieve increase in sales, assets and profits. The basic objective is to facilitate transfer of technology while implementing large objectives. (iii)Vertical merger facilitates research in production processes because of integration of processes. This growth strategy, as the name implies, aims at increasing sales of existing products through l market development, i.e. Product development. (c) Convert non-users of a product into users of the product and making potential opportunity for increasing sales. In fact, the results from a new McKinsey Global Survey on the topic suggest that the companies that see the most growth follow diverse paths.1 Concentration expansion strategy involves safeguarding the present position and expanding in the current product-market space to achieve growth targets. As such, diversification may lead to cost reduction and profit-maximization. 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. All the original business entities cease to exist after the combination. This form of purchase is also called as ‘consent takeover’. (a) The licenser may provide any of the following: i. Despite what many people believe, a comprehensive growth strategy is not only about getting more clients and selling more stuff. (iii)Even a slight dislocation at any stage of production may throw the entire enterprise out of gear. 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 first step in the process of creating a viable concept … 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. A consolidation is a combination of two or more business units to form an entirely new company. At The Coca-Cola Company, we see M&A as an enabler of our growth strategy rather than a strategy in and of itself. Who is … 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. With forward integration, firms can acquire greater control over sales, distribution channels, prices, and can improve its competitive position through differentiation and customer support. The main objective of takeover bid is to obtain legal control of the company. Vertical diversification maybe backward or forward. 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. 3. Following is an account of important growth strategies, comprised in both categories as stated above: Some popular internal growth strategies are described below: 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. Share Your Word File In strategic alliances, the focus is on �sharing� of resources rather than seeking change in control. For smooth functioning of an alliance, partners are required to have preset priorities and expectations from each other. exploring new markets for company’s products. Expanding the market to geographical areas where the company has not had business is also regarded as diversification. Disclaimer 9. The company taken over remains in existence as a separate entity unless a merger takes place. (j) Reduction in overall cost of operations per unit. As a result of a merger, one company survives and others lose their independent entity, it is called ‘absorption’. Firms adopting this strategy can have a regular and uninterrupted supply of raw materials components and other inputs and the quality is also assured. The contractual arrangements establish joint control over the joint venturers. This method normally involves purchasing of small holding of small shareholders over a period of time at various places. 4. It may help the enterprise in developing strategies of product differentiation and beating powerful forces of competition. Combination of firms may take the merger or consolidation route. 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. A person seeking control over a company, purchases the required number of shares from non-controlling shareholders in the open market. This growths strategy involves addition of dissimilar new products to the existing line of business. Following are some limitations of modernisation, as a growth strategy: (i) Modernisation requires huge capital investment; which is a serious problem for enterprises facing financial crunch. Previous Topic Previous slide Next slide Next Topic. For example, loss in one line may be made good through profits in some other lines. Modernisation involves replacing worn-out and obsolete machines etc. By doing so, it bypasses the incumbent management and board of directors of the target firm. • To formulate and efficiently implement corporate level strategies to enhance the hotels’ business growth. The ways in which controlling interest can be attained are discussed below: 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. 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. 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. Strategy Formulation: Process and Modes | Business Management. The horizontal integration will increase the monopolistic tendency in the market. Diversification is also described as portfolio change. In a friendly takeover, the acquirer first approaches the promoters/management of the target company for negotiating and acquiring shares. (ii) It helps to secure economies of large scale operation; and thereby, reduces cost per unit of output. Strategic Planning. Strategic alliances:A strategic alliance is a form of affiliation that involves a mutual sharing of resources or �partnering� to improve efficiency. TOS 7. The new lines of business may be related to the current business or may be quite unrelated. joint ventures). The purpose of diversification is to allow the company to enter lines of business that are somewhat different from current operations. The most common growth strategies are diversification at the corporate level and concentration at the business level. 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. When manufacturers at successive stages of production integrate backwards up to the source of raw materials; it is known as backward merger. Content Filtrations 6. Pressure from public opinion; 2. For example, Raymon Woolen Mills have added new product, cement to their existing line of woolen textiles. Franchises are becoming a key mechanism for technological, marketing and service linkages between enterprises within a country as well as globally. (ii) Vertical merger, because of large size, may lead to inflexibility. The Indian Jute Mills Association, the Indian Paper Mill Makers’ Association and Associated Cement Companies (ACC) are some popular examples of horizontal merger. 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