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A business that is not growing after all, is dying."
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Jetzt kostenlos anmeldenA business that is not growing after all, is dying."
- Shawn Casemore
We all know that businesses want to grow. But did you know that companies can grow in more ways than one? And that some ways are faster than the other? Read along to find out about the different business strategies and how they differ from each other.
Business growth is the process of making a business bigger and more successful over time. This can be achieved in a number of ways, such as increasing sales, expanding into new markets, or developing new products or services.
Business growth refers to the increase in a company's size, revenue, market share, and profitability over time. This can be achieved through a variety of means, including expanding into new markets, developing new products or services, and increasing sales.
Imagine a small bakery that sells homemade cupcakes. The owner of the bakery decides to expand the business by opening a second location in a nearby town. This new location attracts new customers and helps to increase the bakery's overall revenue and profitability. As a result, the bakery is able to invest in new equipment, hire more employees, and expand its menu to include new items.
There are several ways of classifying business growth. The two main types of business growth include organic and inorganic growth. The type of business growth chosen by the company will determine its business growth strategy.
Other types of business growth include:
Organic business growth happens when expansion happens from within the company. It is the increase in the number of business units, expansion in the product range etc.
The organic growth strategy depends on the company’s resources and capabilities. The following are the most common organic business strategies:
New product offerings
Reallocation of resources
Investing in new technologies
Process optimization
Organic growth ensures owners of their company’s control. This is a much slower process compared to inorganic growth.
Internally financed
Lower risks (as compared to inorganic growth)
Company growth at a reasonable rate
Build according to the company’s strengths
Slow process
Growth depends on market growth
Difficult for companies with franchises to manage them.
Inorganic growth or external growth happens mainly through mergers and acquisitions and is a faster way for companies to grow.
Acquisitions increase market share and boost a company’s earnings. Opening new stores and branches are also part of inorganic growth.
Faster growth process
More market share and assets
More attractive for financial investors
More skilled management and their expertise
Loss of control from owners
Need for more coordination and control
Corporate cultural changes
Large up-front costs
Vertical integration is when a company acquires ownership of another company in its production line.
This saves money and time and increases efficiency. Figure 2 shows how vertical integration can be forward or backwards.
Backwards vertical integration - acquisition of ownership of companies up the supply chain. When a company expands to perform tasks previously performed by companies that supplied raw materials for production is called backwards vertical integration. This occurs when the company realises that it is better off in terms of time and money to source raw materials themselves rather than outsourcing the job. Companies can either merge or acquire their suppliers, or have their own subsidiary for the task.
Forward vertical integration - company strategy wherein the company owns and acquires operations of businesses ahead in the supply chain. In a forward vertical integration, the company distributes and sells its products to customers directly, rather than having a third party do it. Forward integration can also be done either by merging, acquiring or by having a subsidiary for the task.
Figure 2. Vertical Integration, StudySmarter
Horizontal integration is the acquisition or merging of companies operating at the same level in the same industry.
It creates economies of scale, increases product differentiation, increases revenue, and helps companies enter into new markets. Companies in horizontal integration benefit from synergies.
Synergy occurs when the combined value of two companies becomes greater than the value of the two separate companies operating individually.
Although horizontal integration is beneficial for the company, it can lead to joblessness, and changes in the business can have a negative impact on customers. Another drawback is that purchasing another company can be expensive. Figure 3 outlines how horizontal integration works.
Figure 3. Horizontal Integration, StudySmarter
The process of companies from different market sectors merging together is known as conglomerate integration.
An investment banking company such as HSBC merged with Vodafone, a telecommunications brand.
This strategy helps spread the risk across several markets and helps target new markets. The newly acquired market brings in more customers and revenue. The acquiring company can learn the know-how of the acquired company, and also acquire its customers. Take a look at Figure 4 for a visual reference.
If the acquiring company does not have enough knowledge to run the newly acquired business, this could hurt both companies' business activities. Another drawback is having to share expertise and resources while entering into new markets, which could hurt the core activities of the acquiring company.
Figure 4. Conglomerate Integration, StudySmarter
These are the different ways in which companies grow. Next time you hear about a business expansion, it might be interesting to analyse and understand what type of growth strategy the company has adopted.
A business growth goes through different stages and each stage has crises associated with it. Functions in a rapidly growing company may not be as smooth as it was before and managers may not be as efficient as they were before, as their span of control and responsibility increases. Greiner’s model helps in understanding the root cause of crises that an organisation may face during its growth phase. Understanding the model helps to foresee a problem before it occurs, helping organisations to take the required measures.
This model was proposed by Larry E. Greiner in 1972 with five phases of growth, which he then updated in 1998 with the sixth phase (see Figure 1 below). The six phases are:
Growth through creativity
Growth through direction
Growth through delegation
Growth through coordination
Growth through collaboration
Growth through alliances
Figure 1. Greiner's Growth Model, StudySmarter
In this phase, there aren’t many staff, and the founders are busy innovating new products and trying to enter new markets. Informal communication works just fine during this stage. As the company starts to grow, the number of staff increases, and the workload increases, there is a need for formal communication and a change in management style is required. This phase ends with a leadership crisis.
Now, there is more formal communication in the workplace. The activities become more intense and numerous, making it difficult for them to be managed by one person. This phase ends with an autonomy crisis, calling for new structures based on delegation.
The autonomy crisis is solved in this phase, and the company now has functional management. Having functional management means having the organisation grouped into areas of speciality to better manage each functional sector. This helps reduce chaos in the company, as each manager can take necessary and well-informed actions in their departments. The problem arises when the founder or the entrepreneur finds it hard to pass their control to the newly assigned managers. This leads to a control crisis.
Coordination is important for a company facing a control crisis. It helps bring together every functional area and ensures efficiency. This process adds many layers of hierarchy to the system, increasing bureaucracy and leading to a red-tape crisis.
Collaboration helps in simplifying and standardizing formal systems. Managers and employees are given more educational training programs. Collaboration helps with acquiring more resources such as different marketing channels, various products and services, etc. During the collaboration phase, companies experiment with new technologies and processes which cause changes within the company’s people and their practices. This phase results in an internal growth crisis.
This phase is the latest addition to Greiner’s growth model. This phase shows that companies facing an internal growth crisis can be saved by strong strategic alliances to form growth strategies. It also suggests the option of acquiring another company for expanding or growing the organisation. This is the last phase of the model.
While business growth types and strategies are very similar concepts and are sometimes used interchangeably, we will focus on four business growth strategies based on Ansoff's corporate strategy mix. There are four main business growth strategies (directions):
It is important to note that, large businesses usually integrate more than one growth strategy.
Market penetration strategy is focused on increasing the sales of existing products to current customers or the company's existing market segment.
This strategy is typically used when a company already has a significant market share in a particular market and wants to maintain its position while increasing its sales. The company may achieve this goal by offering special promotions, improving the product quality or features, or by lowering prices to attract more customers. By increasing its market share, a company can achieve economies of scale and improve its profitability.
One example of a company that has successfully implemented a market penetration strategy is McDonald's. McDonald's increased its market share by focusing on price. They introduced the value menu, which offered inexpensive meals to customers. It helped them get new customers as well as serve the current ones better.
Product and service development strategy is focused on creating new or improved products or services to sell to the company's current customer base or market segment.
This strategy is typically used to satisfy the changing needs and preferences of customers or to take advantage of new technological advancements. The company may achieve this goal by investing in research and development, improving product design, or adding new features to existing products.
One example of a company that has successfully implemented a product and service development strategy is Apple. Apple has consistently released new and improved versions of its products, such as the iPhone, iPad, and Macbook, to keep up with the changing needs and preferences of customers. By offering new features and improved designs, Apple has been able to attract new customers and retain existing ones, which has contributed to its success as one of the world's leading technology companies.
Market development strategy is focused on expanding the company's customer base by targeting new customer segments or entering new markets.
This strategy is typically used when a company has saturated its existing market and wants to explore new opportunities for growth. The company may achieve this goal by expanding geographically, targeting new customer segments, or by offering its existing products or services to new markets.
One example of a company that has successfully implemented a market development strategy is Airbnb. Airbnb has expanded its business model from simply offering lodging to also providing experiences, such as cooking classes and city tours. By offering new products to existing customers and targeting new customer segments, Airbnb has been able to grow its customer base and revenue significantly.
Diversification strategy, also called unrelated diversification, involves entering into new markets or offering new products or services that are not related to the company's existing business.
This strategy is typically used when a company wants to reduce its dependence on a single market or product, and spread its risks across different markets. The company may achieve this goal by acquiring other businesses or investing in new technologies or products. By diversifying its business, a company can achieve long-term growth and reduce its exposure to market risks.
One example of a company that has successfully implemented a diversification strategy is General Electric (GE). GE started as a company that primarily manufactured light bulbs and other electrical products. However, over time, GE diversified its business by acquiring other companies in different industries, such as finance, aviation, and healthcare. Today, GE is a conglomerate that operates in a wide range of industries and has a significant presence in the global market.
Examples of organic growth:
Examples of inorganic growth:
Vertical integration is when a company acquires ownership of another company in its production line.
Horizontal integration is the acquisition or merging of companies operating at the same level in the same industry.
The process of companies from different market sectors merging together are known as conglomerate integration.
Business growth strategies include:
Business growth is the process through which an organisation expands and makes profits.
It can be organic or inorganic and is one of the most common objectives in business, as it helps the business increase sales, widen the product offering, increase overall revenue, strengthen the market position and so on.
Business growth strategies include:
Business growth is brought about in a company by adopting different business strategies depending on the business’s aim.
Depending upon the strategies adopted, growth strategies help businesses increase their number of business units, expand the product range, merge with business, or acquire other business, and so on.
According to Greiner, there are six stages in business growth:
Growth through creativity
Growth through direction
Growth through delegation
Growth through coordination
Growth through collaboration
Growth through alliances
Common types of business growth include:
Other business terms for growth include expansion, scaling, development, upsizing, or enlargement.
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SIGNUP SIGNUPFlashcards in Business growth53
Start learningDefine diseconomies of scale.
Diseconomies of scale are defined as the increase in average cost per unit in a firm when the company output grows above a certain point.
Briefly explain the concept of economies of scale.
Economies of scale are the decrease in average cost per unit as the output volume increases. This can be observed when the production becomes efficient and is mainly seen in large companies, as they have a high output volume. A high output volume helps to distribute fixed costs among the produced units, thereby decreasing the average cost per unit. Learning, efficient capital, specialisation, and negotiation power are factors affecting economies of scale.
What are the different types of external diseconomies of scale?
There are mainly three types of external diseconomies of scale - diseconomies of pollution, limited natural resources, and infrastructure diseconomies.
What is the diseconomy of pollution?
When firms grow and set up factories, they impose costs on the local population in the form of pollution in the local surroundings, as this can lead to several health issues. Poor health is one of the main results of this type of diseconomy.
Poor health: Pollution caused by factories have long-lasting damaging effects on different human organs, causing innumerable health issues.
Explain the results of the diseconomy of scale caused by the limited natural resources.
High prices: Prices of the end product increase as the resources to produce the product becomes higher due to its scarcity.
Higher salaries: Labourers that possess a talent or skill not known to a lot of others can negotiate for a higher salary.
Briefly explain infrastructure diseconomies.
Infrastructure diseconomy is when a company grows to the point that it puts a strain on the local infrastructure. For example, if all the companies were to increase the number of trucks to decrease the delivery, this would lead to traffic blocks on roads, putting a strain on the local infrastructure. Moreover, this increases the delivery time due to traffic, leading to more costs, as costs increase as the delivery time increases.
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