‘Growth Strategy’ refers to a strategic plan formulated and implemented for expanding a firm’s business. There are many types of growth strategies, and each strategy has its own advantages and disadvantages. A firm can adopt different strategies at different points in time. Every firm has to develop its own growth strategy according to its own characteristics and environment. The following are the main growth strategies available to firms: Intensive Growth Strategy; Diversification; Modernization; and External Growth Strategy including mergers, joint ventures, etc.
Intensive growth strategy or expansion involves raising the market share, sales revenue, and profit of the present product or services. The firm slowly increases its production, and so it is called internal growth strategy. It is a good strategy for firms with a smaller share of the market. Three alternative strategies are available in this regard. These are market penetration, market development, and product development. Market Penetration strategy aims at increasing sales through aggressive promotions. Market Development strategy aims at increasing sales by discovering new markets. Product Development strategy is when the firm tries to improvise its products for the existing market. The advantages of intensive growth strategy are:
- growth is slow and natural and hence, easy to handle;
- capital can be taken from the firm’s funds;
- involves better utilization of resources;
- gives a competitive edge;
and not much change needed at the organizational and management levels.
The limitations of Intensive Growth Strategy are:
- growth is very slow, and it takes a long time;
- limits the operations to present products and markets;
- moreover, there may be problems due to scarcity of funds, more risk, and more requirements for technology.
Diversification is when a firm seeks increased sales by developing new products for new markets. Diversification has the following advantages:
- better use of its resources;
- better sales figures;
- greater competitive edge;
- minimization of risk;
- utilization of surplus cash from one business to finance another;
- and creating economies of scale.
The limitations of diversification are:
- huge funds are required for diversification;
- increased responsibilities for top executives;
- may involve adjusting to new technology and new markets;
- and more risk.
Modernization is a growth strategy involving the up-gradation of technology to increase production, improve quality, and reduce wastages and cost of production. Modernization improves the productivity and efficiency of the firm, profitability of the firm, quality of the products, the competitiveness of the firm; systematic growth; and quality of work. However, the strategy of modernization can be used only if the firm has adequate financial resources. Modernization has the following limitations:
- funds may not be enough;
- additional responsibilities for top executives and problems due to new technology.
The merger is an external growth strategy. When two or more companies join to form new corporate organizations, such a process is known as mergers. A merger can occur in two ways: acquisition of takeover and amalgamation. 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 taking over control of another. Amalgamation takes place when two or more companies of equal size or strength formally submerge their corporate identities into a single one in a friendly atmosphere. Some advantages of mergers are
- economies of large-scale operations;
- better utilization of funds;
- increased possibility of diversification;
- more efficient use of resources;
- rehabilitation of sick firms;
- cheaper option compared to setting up a new unit;
- provides quick entry into new lines of business and increases access to scarce raw materials, distribution network and managerial expertise.
The disadvantages of mergers are:
- combined enterprise may be too big to control and co-ordinate;
- mergers give rise to monopoly and concentration of economic power that is harmful to the business environment.
Despite their popularity and importance among large and small firms alike, not all mergers are successful. An unintended consequence of mergers and acquisitions is reduced innovation, as firms engaged in multiple acquisitions over time are likely to introduce fewer new products to the market due to overemphasis on financial controls and being risk-averse. Another danger zone for mergers is the problem of integrating two large and complex firms that often have diverse cultures, structures, and operating systems. In the race for global competitiveness, some firms may choose the wrong target firm for acquisition.
In creating a successful merger, Galpin and Herndon suggest the following measures: “conduct due-diligence analyses in the financial and human-capital-related areas; determine the required or desired degree of integration; speed up decisions instead of focusing on precision; get support and commitment from senior managers; clearly define an approach to integration; select a highly respected and capable integration leader; select dedicated, capable people, for the integration core team and task forces; set measurable goals and objectives and provide continuous communication and feedback.” Due diligence is a key ingredient both of successful negotiation and of postdeal integration.