Types of growth strategies

TYPES OF GROWTH
STRATEGIES
By: Arushi Gupta

MEANING OF GROWTH STRATEGIES
• ‘Growth Strategy’ refers to a strategic plan formulated and implemented for
expanding firm’s business.
• Strategy is the determination of the basic long term goals and objectives of an
enterprise and the adoption of courses of action and the allocation of resources
necessary to carry out these objectives”.
Growth strategies By: Arushi Gupta
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GOALS OF GROWTH STRATEGIES
(i) Strategy which involves holding the relative position of the firm in a high-growth product market
areas.
(ii) Increase market share in market.
(iii) Hold strong relative position in market: use excess cash flow, funds capability and other resources
• to support penetration of multi-national markets with existing product line.
• to support penetration of new product market areas domestically.
• to diversify markets
• to diversify products
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TYPES OF GROWTH STRATEGIES
Given below is a list of the main growth strategies available to firms:
1. Intensive Growth Strategy (Expansion)
2. Diversification
3. Modernization
4. External Growth Strategy
(a) Mergers
(b) Joint Ventures
We will cover all of these in the slides ahead
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PRODUCT-MARKET MATRIX AND
GROWTH STRATEGY
Products
Markets
Present New
Present Market Penetration
(Penetrate existing
markets with existing
products)
Product development
(Introduce new
products in existing
markets)
New Market Development
(Enter new markets
with existing Products)
Diversification
(Introduce new
products in new
markets)
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Product-Market Matrix and Growth Strategy

INTENSIVE GROWTH STRATEGY
• Intensive growth strategy or expansion involves increasing the sales revenue, profit
and market share of the existing product line, services or market. The firm slowly
but regularly expands its production and so it is called internal growth strategy.
• Three alternative strategies are available for expansion. These are:
(a) Market Penetration
(b) Market Development
(c) Product Development
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MARKET PENETRATION
Under this strategy the firm aims at increasing the sale of present
product in the existing market through aggressive promotion. The
firm penetrates deeper into the market to capture a larger share
of the market. These steps enable the company to increase its
following 3 steps:
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2) Including customers through mass media to buy its products more
frequently and in larger quantities- Nescafe using TV commercials promoting
the idea of cold coffee during the summer season, the idea of instant coffee,
instant tea and tea bags.
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1) Attracting existing customers by providing better service and improving
brand image of the product – Loyalty cards and points at various clothing
stores, including westide, pantaloons etc.
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3) Initiating price reduction and offensive advertising programmes to convert
potential customers into real customers. - Reliance Jio cutting providing free
internet as a aggressive marketing strategy and providing services at a lower
rate compared to its competitors and increasing market share through price
competition.
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MARKET DEVELOPMENT
It implies increasing sales by selling present products in the new and unexplored
markets. Generally, it is possible through the appointment of sales agents and
dealers, development of new channels of distribution, franchising etc. Thus, in
market development process, the firm tries to move into new geographical areas
with its existing products. However, the firm should try to incorporate some minor
modifications if any in existing products the local conditions of that particular
geographical area.
For example
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Selling coca cola in rural areas or
Sale of chocolates to middle aged and old persons.
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Kellogg's trying to capture Indian market by introduction of breakfast cereals in
Indian market
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• McDonald’s modified their menu for indian consumer before trying to launch in
Indian markets, this can be called a combination of product and market
development
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PRODUCT DEVELOPMENT
In this, the firm tries to grow by developing improved products for the present
market. It incorporates improvements in the quality and standard of the existing
product as well as launching of new product in the market. Product development is
made possible through
(1) Launching of new product through research and development,
(2) Product innovation.
For example,
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In early 2000s Air conditioner with remote control,
Recently, Refrigerator with flexible changes in compartments
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• Constant changes in smart phones
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DIVERSIFICATION
• Beyond a certain point, it is no longer possible for a firm to expand in the basic
product market. So the firm seeks to increase sales by developing new products.
This strategy towards growth is called diversification. Diversification does not
simply involve adding variety in the existing product line but adding completely
different line of products. Products added may be complementary. Diversification
is a widely used strategy for growth. Many companies have opted for
diversification as a growth strategy.
• For example,
• LIC, an insurance corporation originally, 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.
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A firm may choose to grow by using diversification strategy 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 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 sale of its existing products or markets. But in case of diversification, new
products and new markets are added.
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Ansoff’s Diversification Matrix
New functions Related
Technology
New Products Unrelated
Technology
Firm is its own
customer
Vertical Integration
Same type of product Horizontal
Diversification
Similar type of product Marketing and
Technology related
concentric
diversification
Marketing related
concentric
diversification
New type of product Technology related
concentric
diversification
Congomerate
Diversification
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TYPES OF DIVERSIFICATION:
1. Vertical Diversification (Integration)
2. Horizontal Diversification:
(a) Concentric Diversification and
(b) Conglomerate Diversification
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VERTICAL DIVERSIFICATION
(INTEGRATION)
• In this type of growth strategy new products or services are added which are
complementary to the existing product or service line. New products serve the
firm's own needs by either supplying inputs or serve as a customer for its output.
It involves moving backward or forward from the present product or service. Thus
vertical integration may be of two types—backward and forward.
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BACKWARD INTEGRATION
It implies moving backward toward the source of raw materials. Firms integrate
backwards to produce their own inputs or raw materials. Rather than buying the
inputs from outside sources, firms manufacture their own inputs.
Example:
Reliance Industries Ltd. has achieved remarkable growth through backward
integration. It started business with textiles and went for backward integration to
produce PFY and PSF, critical raw materials for textiles, then started producing PTA
and MEG, raw materials for PFY and PSF, then paraxylene, raw material for PTA and
MEG, and finally naphtha for producing paraxylene.
Sugar mills having their own sugarcane farms are said to have diversified through
backward integration.
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Backwards Vertical Integration
 Acquiring suppliers
Tire
Company
Glass Company Metal
Company
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FORWARD INTEGRATION
Forward integration involves the entry of a firm into 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. It involves entry of
the firm into distribution outlets to maintain direct control with their customers. The
firm develops outlets for the use/sale of its own products. Rather than selling the
product through middlemen firms that diversify through forward integration
maintain their own sales outlets. For example, many textile companies like DCM,
Bombay Dyeing, Reliance and Raymonds have set up their own retail distribution
system to sell their fabrics.
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Forward Vertical Integration
 Acquiring distributors
Bottler
Coke Machines
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Balanced Vertical Integration
 Acquiring distributors & suppliers
Design Production
Retail Stores
Distribution
Advertising
Growth strategies By: Arushi Gupta 27

HORIZONTAL DIVERSIFICATION
It involves addition of parallel new products to the existing product line.
This may happen internally or externally.
(i) Internal Diversification:
Firms use their own resources to add new products to their existing line of products.
For example,
Reliance industries have diversified into areas like textiles, telecommunications, etc.
Godrej manufactures steel almirahs, refrigerators and locks through its own
resources. This is internal diversification.
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(ii) External Diversification: when new products and services are added through
mergers and acquisitions, it is known as external diversification.
Horizontal Diversification can be of two types i.e. concentric diversification and
conglomerate diversification
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CONCENTRIC DIVERSIFICATION
When a firm enters into some business which is related with its present business in terms of technology, marketing or
both, it is called concentric diversification. In technology-related concentric diversification new product or service is
provided with the help of existing or similar technology.
For example,
Nestle added 'Tomato Ketchup' and 'Maggi Noodles' to its range of baby food Cerelac. In marketing-related
concentric diversification, the new product or service is sold through the existing distribution system.
or instance, a hire-purchase firm may start providing lease finance for purchase of consumer durables.
Concentric diversification may be employed for the following purposes:
(a) To counteract cyclical fluctuations in the present products or services;
(b) To utilise the cash flows generated by the existing product or service;
(c) To face saturation of demand for present product or service;
(d) To gain managerial expertise in new field of business; and
(e) To capitalise on the reputation of present product or service.
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Concentric Diversification
 Coca-Cola’s acquisition of Minute Maid
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Concentrated Companies
 McDonalds, Wal-Mart and Starbucks
 All growing by concentrating on their
primary business areas and domestic
expansion
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VIACOM
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Showtime

AOL TIME WARNER
10 - 35
TNT
Road Runner
Time Magazine
Hanna - Barbera Cartoons Fortune
Compuserve

CONGLOMERATE DIVERSIFICATION
In this growth strategy a firm enters into business which is unrelated to its existing business
both in terms of technology and marketing. Several Indian companies have adopted this
strategy. DCM, Essar group, ITC, Godrej, Hyderabad Allwyn, HMT are examples of
conglomerate diversification.
Conglomerate diversification strategy may be adopted for the following reasons:
(i) To achieve a growth rate higher than what can be realised through expansion;
(ii) To make better use of financial resources with retained profits exceeding immediate
investment needs;
(iii) To avail of potential opportunities for profitable investment;
(iv) To achieve distinctive competitive advantage and greater stability;
(v) To spread the risks; and
(vi) To improve the price earning ratio and market price of the company’s shares
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MODERNIZATION
An existing business unit may plan to grow through Modernization of operations.
Modernization basically involves upgradation of technology to increase productivity,
efficiency and product quality and to reduce wastages and cost of production in the
long-run. The worn-out and obsolete machines and equipment are replaced by the
modern machines and equipment. Modernization plans can have the following
implications:
(i) A firm may resort to Modernization to maintain its position in the market. Thus,
the purpose of Modernization would be stability in operations in the coming years.
(ii) Modernization may be pursued with full vigour to stimulate internal growth.
Thus, it is used as an internal growth strategy.
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MERGER
Merger is an external growth strategy. When different companies combine together
into new corporate organizations, such a process is known as mergers. Merger can
occur in two ways:
(a) Acquisition or takeover- Takeover or acquisition takes place when a company
offers cash or securities in exchange for the majority shares of another company.
It involves one company acquiring control over another.
(b) Amalgamation - Amalgamation takes place when two or more companies
roughly of equal size or strength formally submerge their corporate identities
into a single one in a friendly atmosphere.
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JOINT VENTURE
When two or more firms mutually decide to establish a new enterprise by
participating in equity capital and in business operations, it is known as joint
venture. A joint venture is a business partnership between two or more companies
for a specific business operation. Joint venture can be with a firm in the same
country or a foreign country.
For example, Birla Yamaha Ltd. is a joint venture of Birla and Yamaha Motor Co. of
Japan, DCM and Daewoo Corporation of Korea established DCM Daewoo Motors
Ltd. Hindustan Computers Ltd. and Hewlett - Packard of USA formed HCL-HP Ltd,
a joint venture company.
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FIN.
Thank you!
Growth strategies By: Arushi Gupta 45

Types of growth strategies

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