Strategic Management: Growth

Strategies

Exhibit 81 The Strategic Management Process 8

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Types of Organizational Strategies

Corporate Strategies
 Top managements overall plan for the entire organization and its strategic business units

Types of Corporate Strategies

 Growth: expansion into new products and markets  Stability: maintenance of the status quo  Renewal: redirection of the firm into new markets

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Exhibit 84 Levels of Organizational Strategy 8

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Growth Strategies
By far the most widely pursued corporate strategies of business firms are those designed to achieve growth in sales, assets, profit, or some combination of these. There are two basic corporate growth strategies: concentration within one product line or industry and diversification into other product and industries. These can be achieved either internally by investing in new product development or externally through mergers acquisitions or strategic alliances.

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Cont
A merger is a transaction involving to or more corporations in which stock is exchanged, but from which only one corporation survives. Mergers usually occur between firms of somewhat similar size and are usually friendly. The resulting firm is likely to have a name derived from its composite firms.

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Cont.
An acquisition is the purchase of company that is completely absorbed as an operating subsidiary or division of the acquiring corporation. Acquisitions usually occur between firms of different sizes and can be either friendly or hostile. Hostile acquisitions are often called as takeovers. A strategic alliance is a partnership of two or more corporations or business units to achieve strategically significant objectives that are mutually beneficial.
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Corporate Strategies
Growth Strategy
 Seeking to increase the organizations business by expansion into new products and markets.

Types of Growth Strategies

 Concentration  Vertical integration  Horizontal integration  Diversification

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Growth Strategies
Concentration
 Focusing on a primary line of business and increasing the number of products offered or markets served.

Vertical Integration
 Backward vertical integration: attempting to gain control of inputs (become a self-supplier). self Forward vertical integration: attempting to gain control of output through control of the distribution channel or provide customer service activities (eliminating intermediaries).

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Growth Strategies (contd)

Horizontal Integration
 Combining operations with another competitor in the same industry to increase competitive strengths and lower competition among industry rivals.

Related Diversification
 Expanding by combining with firms in different, but related industries that are strategic fits.

Unrelated Diversification
 Growing by combining with firms in unrelated industries where higher financial returns are possible.

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Growth Strategies (contd)

Stability Strategy
 A strategy that seeks to maintain the status quo to deal with the uncertainty of a dynamic environment, when the industry is experiencing slow- or no-growth slow- noconditions, or if the owners of the firm elect not to grow for personal reasons.

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Growth Strategies (contd)

Renewal Strategies
 Developing strategies to counter organization weaknesses that are leading to performance declines.


Retrenchment: focusing of eliminating non-critical nonweaknesses and restoring strengths to overcome current performance problems. Turnaround: addressing critical long-term performance longproblems through the use of strong cost elimination measures and large-scale organizational restructuring solutions. large-

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Practical Problems of Intensive Growth Strategy

When small business firms try to expand many problems obstruct their way. Some of these problems are given below: (I) Scarcity of Funds: For expansion additional funds are required for investing in both fixed assets and current assets. Funds for fixed capital and working capital are not easily available. Many a times a small firm has to borrow funds at high rates of interest. (ii) Risk: Expansion means more risk. Many small-scale firms do not have smallthe ability or will-power to assume these risks particularly where the willcompetition is acute and raw materials have to be imported. Some smallsmall-scale owners continue to operate at a given scale due to the risks and difficulties involved in expansion.

Cont
(iii) Technology: Expansion often requires upgradation of technology and replacement of plant and machinery. Upgradation of technology is a time-consuming and timeexpensive process. It becomes essential to recruit new staff or retrain the existing staff in the use and operation of new technology (iv) Marketing. Expansion is profitable only when the increased output can be sold at good prices. Small-scale Smallunits face hurdles in selling and distribution of their products due to competition from large-scale units large-

DIVERSIFICATION
Beyond a certain point, it is no longer possible for a firm to expand in the basic product market. So the firm seeks increased sales by developing new products for new markets. This strategy towards growth is called diversification. The diversification does not simply involve adding variety in a product but adding entirely different types of products. Products added may be complementary. Diversification is a much talked about and widely used strategy for growth. Many companies have opted for this. For example, LIC, an insurance concern initially, diversified into mutual funds. State Bank of India diversified into merchant banking and mutual funds. Similarly, Larsen and Toubro, an engineering company diversified into cement.

A firm may choose the strategy of diversification under the following situations: (a) When diversification promises greater profitability than expansion. (b) When the firm cannot attain its growth target by the strategy of expansion alone. (c) When the financial resources of the firm are much in excess of the requirements of expansion. The distinction between intensive growth strategy and diversification strategy must be carefully noted. In the case of intensive growth, the firm increases the production and sales of its existing products. But in case of diversification, there is addition of new products and new markets.

Advantages of Diversification
Companies have increasingly adopted diversification strategy due to the following reasons: (i) 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. (ii) Reduce the decline in sales. By developing new products the sales revenue and earnings can be maintained or even increased. For example, Bajaj Scooters India Ltd. entered in the field of mopeds. (iii) More competitive With greater resources, more products and higher profits, the diversified firm is more competitive than a single product firm. (iv) Minimize risk. When one line of business faces recession, another line may be in high growth stage. For example, a well-diversified wellengineering firm like Larsen and Toubro did well even when the engineering industry was facing recession.

Cont
(v) Use of cash surplus of one business to finance another business having good potential for growth. (vi) Economies of scale 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.

Limitations of Diversification
(I) Huge funds are required for diversification. The internal savings of the business may not be sufficient to finance growth. (ii) The functions and responsibilities of top executives increase because of need to handle new product, technology and markets. They may find problems in coordination which may lead to inefficient operations. (iii) Diversification may involve new technology and new markets and the present staff may face problems in adjusting to this growth pattern. (iv) Diversification may lead to unknown products and markets leading to more risk.

Types of Diversification:
1. 2. 3. 4. Horizontal Integration, Vertical Integration, Concentric, and Conglomerate