CHAPTER SEVEN

7. GROWTH STRATEGIES FOR SMALL BUSINESS

The growth of a business firm is similar to that of a human being who passes through the stages of infancy, childhood,
adulthood, and old age. An enterprise may be considered growing when there is a permanent increase in its sales turnover,
assets, volume of output etc. business growth is a natural and on-going process. Many business firms started small and have
become big through continuous growth. But growth may be restricted by constraints of market demand, finance, technology,
management skills.
How is growth measured? A number of variables have been used in measuring organizational growth. The most common
measures are financial including
- Increases in sales or revenue
- Increase in capital
- Increases in profitability
- Increase in other financial measures
Growth has also been measured by
- The number of customers –number of customers served
- The number of products- types of products offered.
- The number of locations- number of outlets opened
- The number of employees
The best growth strategy is well-planned one. Rapid growth without planning can be disastrous. Your plan should be flexible
enough to exploit unexpected opportunities that arise.
7.1 Need for growth
In modern business, very few firms remain static for long. Most of the firms are in stat of continued flux, either expanding or
contracting but always changing like time.
Business firms grow on account of several factors. The important motives which drive business firms towards growth are the
advantages of growth which are described below.
i. Survival: Sever competition forces a firm to grow and gain competitive strength. Any business firm that fails to grow
can not survive for long. With increasing competition and shrinking profit margins, firms have to grow in order to
maintain their existence.
ii. Economies of scale: large scale operations provide several economies in production, marketing, finance, and
management. A large firm enjoys the advantages of bulk purchase of materials, strong bargaining power, spreading of
overheads, well organized promotion campaigns, cheaper finance, automation, expert management, etc. these
economies result in reduction in per unit cost of operations and increase in profits.
iii. Expansion of market: increase in demand for goods and service has led business firms to expand in size.
iv. Owner’s mandate: the owner of a company gets the ultimate benefit of growth in the form of higher dividends and
rise in the market value of shareholding. Therefore, they may direct the management to ensure growth of the
company.
v. Technology: business firms also grow in order to reap the benefits of modern technology. Many firms invest in
research and development to develop new products and new techniques.
vi. Prestige and power: some business men have a lust for economic and social power. Big business commands power
and respect.
vii. Government policy: generally, business firms operate under a plethora of government controls. Government may
provide several incentives in the form of subsidies and tax concessions to industrial units in backward areas and those
producing goods for export purpose.
viii. Self-sufficiency: some firms grow to become independent in terms of marketing or raw materials or marketing of
products.
7.2 Types of growth strategies

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Strategy means a deliberate and well planned course of action to achieve specific objectives. Growth strategy may be defined
as a strategic plan formulated and implemented to expand the operation of a business firm. It contains the growth objectives in
terms of sales volume, market share, etc. and the scheme of action to be employed to realize these objectives. Different firms
may adopt different strategies in order to grow. The main strategies for growth are as follows:

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 1. Expansion
2. Diversification
3. Merger, and
4. Sub-contracting
7.2.1Expansion
Expansion and diversification are forms of internal growth. Internal growth implies increase in scale of operations without
joining hands with other firms. A firm expands its product market scope. Expansion may take place in the following forms:
i. Market penetration: it implies increase the scale of existing products in the existing markets. For example, India,
LML launched a scheme of exchanging old scooters for new to increase its sales.
ii. Market development: it involves exploring new markets for existing products. Some firms grow through exports.
Manufacturers of transistors and TV sets increased their sales by exploring rural areas.
iii. Product development: it implies developing new or modified products for sale in the existing markets. For example,
Pepsi Corporation has developed and launched Lehar namkeen in addition to their cold drinks in India.
Advantages of expansion
1. Growth is natural and gradual. It can, therefore, be handled easily
2. Expansion can be financed from the firm’s own funds
3. No major changes are required in the organization structure and management systems of business.
4. Better utilization of existing resource becomes possible.
5. Expansion provides economies of large scale operations.
6. The expanding firm can better face competition in the market.
Disadvantages of expansion
1. Growth is slow and takes time
2. It is not always possible to grow in the present product market
3. A business firm may not be able to exploit many business opportunities by confining its operations to the existing
products and markets.
7.2.1 Diversification
Beyond a certain point, it is no longer possible for a firm to expand in the basic product market. It is not able to grow any
more through market penetration. Therefore, the form must add new products or markets to its existing business line. This
approach towards growth is called diversification. Diversifications the process of entry in a field of business which is new to
an enterprise either in terms of the market or the technology or both. It is a strategy in which the growth objective is sought to
be achieved by adding new products or service to the existing ones.
Diversification is a much talked about and widely sued strategy for growth. Several companies and business houses both in
the private and public sectors have adopted it.
Advantages of diversification
Companies have increasingly adopted diversification strategy due to the following reasons:
I. Diversification enables and enterprise to make better use of its resources. By adding up related products to its existing
product portfolio, a company can more effectively utilize its managerial personnel, marketing network, research and
development facilities, etc. diversification in related areas of technology or marketing provides synergistic advantage.
II. Many multinational firms India have diversified in the filed in which their parent companies posses’ technological
advantage.
III. A company can use diversification strategy to mitigate the decline in sales of its present product. By developing new
product, the sales revenue and earning can be maintained or even increased.
IV. Diversification provides opportunity for a company to adapt it self rapidly changing environment and increasing
competition.
V. Diversification helps to minimize risk a company can spread its risks by developing a balanced portfolio of business
through diversification.

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 VI. A well diversified company can use cash surplus of one business to finance an other business having good potential
for growth.
VII. Diversification adds to size of business, which improves the competitiveness of a firm. It offers a lot of economy in
operations because common facilities can be used for several products.
Disadvantages of diversification
1. Reorganization necessary
2. Difficulty in coordinating diverse business.
Diversification is suitable under the following conditions:
(a) When the firm cannot attain its growth target by expansion alone.
(b) When diversification promises greater profitability than expansion.

(c) When the financial resources of the firms are much in excess of the requirements of expansion.
Type of diversification
Diversification is of four types: -
1. Horizontal integration
2. Vertical integration
3. Concentric, and
4. Conglomerate
1. Horizontal integration: - in this type of diversification, a company adds same type of products at the same level of
production or marketing process. That may happen internally or externally. Internally, a company may decide to enter a
parallel product market in addition to the existing product line.
Advantages
Horizontal integration offers the following benefits:
i. Wasteful competition among the combining firms is eliminated.
ii. It provides economies of large-scale operations.
iii. It provides greater control over the market and increases the competitiveness of the company.
iv. It permits the firm to influence supply and prices of the product.
Disadvantages
Horizontal integration suffers from the roll owing limitations:
i. The firm is not assured of supply or raw materials.
ii. When several firms combine to form horizontal integration, there is a danger of over-capitalization.
iii. The management of the firm may become bureaucratic and inflexible.
2. Vertical integration: - in this type of growth strategy new products or services are added which are complementary to
existing product or service line. Vertical integration may be of two types-backward and forward.
i. Backward integration: it implies moving towards the source of raw materials. It is aimed at moving lower on the
production process so that the firm is able to supply own materials or basic components. Also called upstream
development.
ii. Forward integration: it involves the entry of a firm in to the business of finishing, distributing, or selling its existing
products. It refers to moving higher up in the production/ distribution process towards the ultimate consumer. The
firm develops outlets for the use/sale of its own products. It is also known as downstream expansion.

7.2.2 Concentric diversification

When a firm enters into some business, which is related with its present in terms of technology, marketing or both, it called
concentric diversification.
 In technology-related concentric diversification new product or service is provided with the help of existing or similar
technology.

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  In marketing-related concentric diversification, the new product or service is sold through the existing distribution
system.
 In technology and market-related concentric diversification, both existing technology and existing distribution system
are used for the new product or service.
Concentric diversification may be employed for the following purposes:
(a) To counteract cyclical fluctuations in the present products or services.
(b) To utilize the cash flows generated by the existing products or service.
(c) To face saturation of demand for present product or service.
(d) To gain material expertise in new field of business, and
(e) To capitalize on the reputation of present product or service.
7.2.3 Conglomerated diversification
In this growth strategy a firm enters into business, which is unrelated to its existing business both in terms of technology and
marketing.
This strategy may be adopted for the following reasons:
(a) To achieve a growth rate higher than what can be realized through expansion.
(b) To make better use of financial resources with retained profits exceeding immediate investment needs.
(c) To avail of potential opportunities for profitable investment.
(d) To achieve distinctive competitive advantage and greater stability.
(e) To spread the risk, and

(f) To improve the price the price earning ration and market price of the company’s shares.
7.3 External growth strategies
External growth occurs when two or more firms combine together in one firm. It is called integrative growth strategy.
Advantage
Integrative growth strategy has the following advantages:
1. Growth very fast or quick
2. The firm gets running business units.
3. The strategy offers economies of scale and control over the market.
4. Wasteful competition can be eliminated.
Disadvantage
Integrative growth strategy suffers form the following limitations.
1. Large amounts of financial resources are required to take over running units.
2. Drastic changes are required in the organization structure and management of the firm.
3. Co-ordination and control of integrated units become very difficult.
4. Frequent takeovers may create uncertainty and instability in the economy.
Integrative growth strategy may take the form of joint-venture, merger, or takeover.
i. Joint venture
When two or more independent firms together establish a new enterprise, contribute to the total equity capital and enterprise
in its business operations, it is known as a joint venture. A joint venture is a temporary partnership or consortium between
two or more companies for a specified purpose. Firms with in a country as well as firms in different countries may participate
in joint venture.
Strategic issues in joint ventures: the major decisions that should be carefully taken in a joint venture are given bellow: -
I. Objective of joint venture: first of all the basic objectives of joint venture should be spelled out clearly. The interest of
two parties may not be identical and compatible. Therefore, basic differences in their objective should be stated in
advance.
II. Choice of partner: several criteria may be used to select a partner for the venture. These are: technical capacity,
financial capacity, management competence, intention and sincerity of the partners should be considered.
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 III. Pattern of shareholding: key consideration in dividing foreign equity participation is the inflow of foreign technology
of continuous basis and discharge of export obligation and the government policy.
IV. Management pattern: the joint venture should be autonomous. The composition of the board of directors may be
decided in the light of choice of partners.
ii. Merger
Merger is an external growth strategy. A merger means a combination of two or more firms in to one. It may occur in two
ways: (a) takeover or acquisition of one company by another, and (b) creation of new company by complete consolidation of
two or more units. The former is called absorption where as the latter is known as amalgamation.
 Subcontracting
Subcontracting implies hiring another firm to perform some process of the business. Large business firms assign some of the
jobs to small businesses. These jobs may involve some manufacturing or office work.

7.4. Challenges for Growth

The key challenges for an entrepreneur for growth include:
 Finding capital: you have to decide how much capital is necessary and where the capital is going to come from.
 Finding people: it is important to plan, as much as possible, the umbers and types of employees you are going to
need to support the increasing workload as your business grows. And provide additional training and support to
handle the growth.
 Reinforcing organizational control: it is particularly important to reinforce financial controls over cash flow,
inventory, sales orders, receivables, payables, and costs when the business is expanding.
 Strengthening the organizational culture: when a business is growing, it is important to create a positive growth-
oriented culture that enhances the opportunities to achieve success.
Suggestions for achieving a supportive growth-oriented culture
- Keep the line of communication open.
- Establish trust by being honest.
- Be a good listener.
- Be willing to delegated duties.

- Be flexible.
- Provide consistent and regular feedback
- Reinforce the contribution of each person to business’s ultimate success.
- Continually train employees.
- Establish and reinforce a “we” spirit.
VII.2.3 Managing Downturns
Downturns can be successfully managed by:
 Recognizing performance declines
 Dealing with downturns
 Recognizing performance declines
Signals of potential performance declines
 Inadequate or negative cash flow.
 Excessive number of employees.
 Unnecessary administrative procedures. Procedures and processes are supposed to help the flow of works go more
smoothly, not to make them more difficult.
 Fear of conflict and taking risks. When employees become too cautious in trying new and different things, it can be a
signal that performance if soon deteriorated.
 Tolerance of work incompetence. It is absolutely foolish to allow incompetent employees to remain in an
organization. They are not contributing to. If they tolerated, organizational performance will soon suffer.

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  Lack of clear vision, mission, or goals. Organizational performance will also suffer if there is no clear direction.
 Ineffective communication. When employees are not sharing information, their attempt to coordinate work efforts will
suffer because no one knows what anyone else is doing and no one is trying to learn from co-workers experience.

Boiled Frog Phenomenon

Another perspective in recognizing performance declines revolves around what is known as the “boiled frog” phenomenon.
In one case, a live frog that is dropped into a boiling pan of water reacts instantaneously and jumps out of the pan.
But in the second case, a live from that is dropped into a boiling pan of water that is gradually heated to the boiling point fails
to react and dies.
So what does the boiled frog phenomenon teach us? Don’t wait until the water has reached the boiling point. We need to be
alert to signals that our business may be worsening.
Possible causes of organizational declines
Factors that may be contributing to declining performance are
- In adequate financial control
- Uncontrollable to too high costs
- New competitors.
- Unpredicted shift in customers demand
- Slow or no response to significant internal and external changes.
- Over expansion.
- Culture clash.
There is no excuse for not anticipating new competitors, shift in customers demand, or for not to be aware of what is
happening in the external environment.
Entrepreneurs who are slow to respond or who never respond to significant changes are doing a poor job of managing the
business.
 Dealing with the Downturns
After all, nobody likes to think about things going bad or taking for the worse. But what you should do- think about it before
it happens. You want to be prepared before an emergency hits.
You can deal with the downturns to return the business to more positive performance by
 Having a plan for controlling the critical inflow and outflow of cash, accounts receivable, debt, and expenses.
 Using retrenchment and turnaround strategies.
Retrenchment strategy
It is a common short term strategy designed to address organizational weaknesses that are leading to performance declines.
Retrenchment is a military term that describes situations in which a military units “goes back to trenches” in order to stabilize,
revitalize, and prepare for entering battle again. That is pretty descriptive of what organization must do in retrenching.

In retrenchment situation the business may not necessarily have negative returns. This is not a typical sing that the business
needs to retrench. Instead the business hasn’t able to meet its goals in whatever performances are being measured.
Revenue and profit may be declining but aren’t necessarily negative. However, the owner must take an action to reverse the
slide.
The organization’s decision makers must stabilize operations and replenish organizational resources and capabilities, and
prepare to compete once again in the marketplace battlefield.
Turnaround Strategy
Turnaround strategy is a strategy designed for situations in which the organization’s performance problems are much more
serious, as reflected by its performance measures. In this situation, financial results are negative and other measures of
performance are seriously declining as well. The organization also faces severe internal and external pressures.
The implementation of both retrenchment and turnaround strategies is depends one two actions: cutting cost and restructuring.
1. Cutting cost

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Cutting cost is an action to bring the financial performance results back in line with expectations. But you should avoid
cutting costs of critical areas.
To cut the cost an entrepreneur can either implement across-the board cuts (all areas of the business) or selective cuts (selected
areas of the business).
The retrenchment strategy may require only selected cost cutting to get organizational performance back on track. In the turn
around situation, the cost needs to be more extensive and comprehensive.
What are ways to cut costs?
- Look closely at work tasks and activities to see if there are any wastes, redundancies, or inefficiencies that could be
eliminated.
- Determine if there are resources that could be eliminated or used more efficiently.
2. Restructuring
Restructuring- a radical redesign of the organization’s business process.
Downsizing- a restructuring action that involves laying off employees from their jobs. It is a serious decision. Simply cutting
the number of employees is dangerous.
Bankruptcy- is a restructuring action that involves dissolving or reorganizing a business under the protection of bankruptcy
legislation. It is the result of significant performance declines for which other restructuring and cost cutting actions have had
little effect.

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