Growth Strategies, Expansion strategies, Strategic management

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    Growth Strategy

    The growth strategy amounts to redefining thebusiness by adding new products/services or newmarkets or by substantially increasing the currentbusiness.

    In other words company pursues a growth strategywhen:

    1. It enters new business (including functions) or market.

    2. Effects major increase in its current business.

    A company may pursue either or both internal orexternal growth strategies.

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    Reasons for Growth

    1. Natural urge

    2. Survival

    3. Market share

    4. Leadership

    5. Competition6. Diversification of Risk

    7. Resources

    8. Opportunities

    9. Motivation10. Personal reasons

    11. Profits

    12. Miscellaneous

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    Risks of Growth

    1. An increase in the productive capacity would have very adverseeffect if the demand falls.

    2. If new business fails, that could sometimes even affect the oldbusiness.

    3. There is tendency to concentrate more on the new business at the

    expense of old business.4. A rapid and substantial growth of business may sometimes leadto ineffective management.

    5. When a firm becomes large, it may loose several advantages liketax concessions, subsidies, exemption from several laws causingan increase in costs and other problems.

    6. As a firm grows significantly it is likely to receive more attention bycompetitors and the public.

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    Growth Strategies

    There are number of strategies for

    growth. Kotler has grouped these

    strategies under three heads, viz.,

    1. Intensive Growth strategy

    2. Integrative Growth Strategy

    3. Diversification Growth Strategy.

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    Intensive Growth Strategy

    Intensive growth strategy aim at

    achieving further growth for existing

    products and/or in existing markets.

    There are three important intensive

    growth strategies, viz., market

    penetration, market development and

    product development.

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    Market Penetration Strategy

    Market penetration strategy strives to

    increase the sale of the current products in

    the current markets. There are the following

    three major strategies to achieve this.

    1.Increase Sales to the Current Customers.

    2.Pull Customers from the Competitors

    Products.

    3.Convert Non-Users into Users.

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    Market Development Strategy

    The market development strategyinvolves broadening the market for aproduct. This may be achieved by the

    following strategies.1. By adding new channels of distribution

    and thereby expanding the consumerreach of the product.

    2. By entering new market segments.

    3. By entering new geographical markets.

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    Product Development strategy

    A company may be able to increase its

    current business by product improvement

    or introducing products with new features.

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    Integrative Growth Strategies

    One of the common growth strategies isthe Integrative Growth Strategy thatinvolves:

    1. Integration at the same level or stage ofbusiness in the same industry.(Horizontal Integration).

    2. Integration of different levels/stages ofbusiness in the same industry. (verticalintegration).

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    Horizontal integration

    Integration at the same level business, popularly

    known as horizontal integration, involves the

    acquisition of one or more competitors.

    Acquisition of Universal luggages (Aristocrat) byBloplast (V.I.P) or Tata Oil Mills Company

    (TOMCO) by Hindustan Lever.

    Perhaps the most important advantage of

    horizontal integration is that it eliminates or

    reduces competition.

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    Vertical Integration

    Integration of the different levels/stages

    of the same industry is known as vertical

    integration.

    Vertical Integration may be:

    1. Backward Integration.

    2. Forward Integration.

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    Backward Integration Backward Integration involves starting the preceding stage of the current

    business.

    For Ex- manufacturer of a finished product may start the manufacture ofthe raw material required for the finished product.

    A company which currently only markets a products, taking up themanufacturing of it is another example of backward integration. Forexample, Brooke Bond resorted to backward integration by acquiring twotea plants.

    Advantages:-

    (a) It ensures smooth supply of materials for production of goods formarketing. This is particularly important when there are supply

    bottlenecks.

    (b) It may enable the company to obtain the goods cheaply or to make someprofits out of the manufacturing.

    (c) It may also helps the company to ensure quality of goods.

    (d) It may also facilitate tax savings.

    Disadvantages:

    (a) The cost of making may be higher than the cost of buying.

    (b) Integration may make exit from a business more difficult.

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    Forward Integration

    Forward Integration means entering the subsequent stage of theindustry. For example:

    1. The manufacturer of a product who does not do the marketing ofits currently, may start the marketing of it.

    2. The manufacturer of the raw material may take up themanufacture of the finished products.

    Textiles firms like Bombay Dyeing, mafatlal, J & K (Raymonds)resorted to forward integration by entering the ready-madegarments business.

    Advantages:

    1. It creates captive demand for the product.

    2. It may generate additional profits.

    The major risk of forward integration is that there is no guaranteethat the new business will be success.

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    Diversification

    Diversification means adding new lines of business. The newlines of business may be related to the current business or may

    be quite unrelated. If the new lines added, makes the use of thefirms existing technology, production facilities or distributionchannels or it amounts to backward and forward integration it

    may be regarded as related diversification. Ex. Thediversification of Videocon.

    Some companies expand the business in to unrelatedindustries. Ex. Wipro which is in the business of edible oils,soaps, computers, etc.

    Expanding the market to geographical areas where thecompany has not had business is also regarded asdiversification.

    Diversification is also described as portfolio change.

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    Reasons for Diversification

    1. Saturation or Decline of the current business.

    2. Additional opportunities.

    3. Better opportunities.

    4. Risk minimization.5. Better utilization of resources and strengths.

    6. Benefits of Integration.

    7. Competitive Strategy.

    8. Need related diversification.9. Consolidation.

    10. Inspiration.

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    Risks of Diversification

    1. There is no guarantee that the firm will succeed in thenew business. In fact many diversifications of anumber of companies have been failures.

    2. If the new line of business result in huge losses, that

    may adversely affect the old business.3. Diversification may sometimes result in the neglect of

    the old business or the management not being able topay sufficient attention and resources to the oldbusiness.

    4. Diversification may invite retaliatory moves bycompetitors that may adversely affect even the oldbusiness.

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    Types of Diversification

    Synergistic Diversification:Synergistic Diversification is diversificationthat results in the realization of synergistic effects. In business literature,synergy is often described as 2+2=5 effect which implies that the resultof the combined performances will be greater than if they were doneseparately and independently. In other words, synergy offers a firm theadvantage of higher consolidated return on investment than can maximally

    be obtained from a conglomerate. Following are important possible synergies:

    1. Marketing Synergy: Marketing Synergy can occur when products usecommon distribution channels, sales promotion (including sales

    personnel) and sales administration.

    2. Operating synergy: Operating Synergy is realized by better utilization of

    facilities and