GROWTH STRATEGY

Indian Institute of Management

Nov. 2006
 Growth Imperatives
• Growth Is Defining Characteristic Of
Modern Age (Unlike Earlier Epochs)
• Capitalist Firm Is The Main Actor In This
Process
• The Laws Of Market Compel Firms To
Seek Continuous Growth Through (Re) -
Investment
 Growth Imperative
• Growth Is Essential To Meet Stakeholder
Expectations
• Survival Depends On How Flexible The
Firm Is To Cope With Changes In
Environment
• Flexibility And Growth Are Essential For
Survival
 KEY QUESTIONS
• SHOULD WE GROW IN OUR CURRENT
BUSINESS (existing Product-Market Scope) or
SHALL WE DIVERSIFY?

• EXPANSION

• Is My Current Industry Attractive and Provides

Scope for Expansion?
 KEY QUESTIONS

• DIVERSIFICATION
• How To Identify Businesses That Are
Attractive?
• What Skills Or Assets Will Make Entry
Profitable / Successful?
• What is the Risk?
 GROWTH OPTIONS
• Market Expansion
– Selling the Same Product into New Markets
• Product Expansion
– Adding New Products in the Same Industry
Thru Widening Product Scope
• Concentric Diversification
• Expansion into Related Product-Markets
– Adding Similar Products to Same Products to
Related markets.
• Conglomerate Diversification
 DIVERSIFICATION
• DEFINED AS "ENTRY INTO NEW
PRODUCT LINES INVOLVING
MARKETS AND PRODUCTS THAT
ARE NEW TO THE DIVERSIFYING
FIRM".
Diversification Alternatives
Product/ Similar New
Market Technlgy Technolgy
Same Horizontal Diversifn

Sell to Vertical Integration.

firm
New Tech. Unrelated
markets related
 Horizontal Diversification
• MOVES WITHIN THE ECONOMIC
ENVIRONMENT OF DIVERSIFYING
FIRM.

• LOW ON FLEXIBILITY & DOES NOT

ADD TO STABILITY OF EARNING

• COMMON THREAD - MARKETING

SYNERGY
 Vertical Diversification
• MEASURED BY VALUED
ADDED/SALES
• SENSITIVE TO INSTABILITY SINCE
INCREASES DEPENDENCE ON SAME
SEGMENT OF ECONOMIC DEMAND
• FLEXIBILITY LOW
• SYNERGY STRONG IF TECHNOLOGY
RELATED NEGATIVE IF
TECHNOLOGY IS UNRELATED.
 Vertical Diversification
• DANGER IF FIRM CANNOT ABSORB
ALL OUTPUT
• MUST LEARN TO SELL TO
COMPETITORS
• HORIZONTAL & VERTICAL
INTEGRATION FAVOURED IF
PRESENT P-M SCOPE IS HEALTHY &
GROWING
 Concentric Diversification
• COMMON THREAD OF MARKETING
OR TECHNOLOGY FAMILIARITY
• SOME SYNERGY
• FLEXIBILITY HIGH
• RISK MODERATE TO HIGH
DEPENDING ON EXTENT OF
SYSNERGY AND FAMILIARITY
 Conglomerate Diversification
• NO COMMON THREAD

• HIGH FLEXIBILITY

• VERY HIGH RISK AS NO SYNERGY

• ENSURES STABILITY BUT EXPOSES

FIRM TO HIGH RISK
 CHOICES
• Which Kind of Diversification will we
choose?

• What are the motivations for

diversification?

– Lack of Growth Opportunities in Existing P-M?

– Underutilized Capabilities Resources?

 Diversification and Growth
• HISTORICALLY, GROWTH OF LARGE
FIRMS DUE TO SUCCESSFUL
PRODUCT-MARKET DIVERSIFICATION
• DIVERSIFICATION ALSO LINKED TO
CRISIS AND COLLAPSE
• IS DIVERSIFICATION AN ATTRACTIVE
& VIABLE STRATEGY?
 GENERIC ENTRY
STRATEGIES
• INTERNAL DEVELOPMENT

• ACQUISITION

• JOINT VENTURE

• STRATEGIC ALLIANCE
 INTERNAL DEVELOPMENT
• CREATES A NEW BUSINESS UNIT IN
THE INDUSTRY
– Faces Structural Entry Barriers
• (Five Forces Model for Analysis)
– Reaction of Incumbent Firms
• (Retaliation -- Severe or Mild)
 INTERNAL DEVELOPMENT
• COST OF ENTRY
– Investment in Facilities (Capacity Creation)
– Cost of Distribution Network, Sales Force,
Brand, Advertising, Service
– Technology Costs
– Start up Costs
– Sourcing of Managers/Inputs
 COST OF RETALIATION
• Lower Prices (Cost Structure)
• Increase in Marketing Cost
• Warranty Extension
• Longer Credit
• Effect of Entry on the Industry Demand -
Supply Cost Structure
 EVALUATION OF ENTRY
DECISION
• Probability of Retaliation Higher if :
– Slow industry Growth
– Commodity Like Product
– High Fixed Costs
– High Industry Concentration
– Strategic Imp. Of Position to Incumbent
– Management Style & Ownership
 ATTRACTIVENESS TEST
• Industry in Dis-equilibrium
• Slow or Ineffective Retaliation
– Cost Benefit of Retaliation
– Paternal dominant firm
– Need to Protect Existing Business
• Firm Has Lower Entry Costs(than others
• Ability to Influence Industry Structure
GENERIC ENTRY CONCEPTS
• Reduce Product Cost
• Buy-In With Lower Price
• Differentiate your Offering
• Superior Product
• Discover a New Niche
• Marketing Innovation
 ENTRY THRU ACQUISITION
• Does Not Add a New Player
• Speed of Entry
• Synergy
• Evaluation :
– Projected Cash Flow & Cost of Acquisition
– Acquisition Price Determined by Market for
Firms
ENTRY THRU ACQUISITION
• Seller will Sell Only if Bid Above Present
Value
• Sale Only At Premium
• Will Acquisition Change Value
– Synergy ??
– Horizontal Intgn/Market Power
– Vertical Integration
– Strategic
 ACQUISTION PROFITABLE
• If Floor Price Low
• Market for Firms Imperfect
• Bidder Has Unique Resources / Ability to
Operate Business & Enhance value
 Strategic Alliances
• Joint Ventures
• Minority Equity Stake
• Management Contracts
• Legal Long Term Contracts
• Franchise
 Cross Border Alliances:
Motivation
• Access New Markets
• Gain Skills, Technology, Products,
• Share Fixed Costs
• Share Risk (Oil Exploration)
• Access Complementary Products
• Access Skills Not Available in the
Organisation
 Asian Firms : Motivation
• Access International Brands
• Access Global Markets
• Access International Financial Markets
• Access Proprietary Technology
 Issues in Managing Growth
• Growth Usually Means Starting New Business
• Probability of Failure is High (50-60% Fail)
• Organizational Culture as Barrier – Most Firms
Geared to Mature Businesses with Predictable
parameters; New Business Usually Exploratory
with No Clear Strategy
• Creating Separate Organisations Does Not Always
Help Due to Culture Clash
• Experimentation Key to Evolving Viable Strategy
• Distinct Stages of Business Development
 Risks
• Internal Development –
– Clash of Culture & System

• Acquisition –
– Price of Acquisition
– Understanding New Business
– Culture of Acquired Firm
– Integration with Existing Business for Synergy
 Risks
• Joint Ventures & Strategic Alliances
– Joint Control
– Complementarities or Overlap?
– Lack of Clarity on Strategic Goals of Two
Partners
 Global Experience With Cross
Border Alliances
• 50 % of Alliances Fail
• 75 % End With Acquisition by One Partner
• 75 % of Alliances Where Partners Have
Overlapping Product-market Positions Fail
 Causes of failure

• Differences in Strategic Intent and Vision

of Partners
• Alliances Unable to Evolve Beyond Initial
Expectations and Objectives
• Alliances Between Strong and Weak
Companies
 Causes of failure
• One Partner Brings More to the Table

• Gains From Alliance Are Unclear and

Changes in the Environment Negates Initial
Assumptions

• Gains Unequally Shared

 Preconditions for Successful
Alliances
• Clarity and Agreement on Strategy
• Equal, Proportional Sharing of Gains
• Partners of Equal Size and Capabilities That
Are Complimentary
• More Than Financial Stake Is Clear
Management Control
 Preconditions for Successful
Alliances
• Cross Border Alliances to Access Global
Markets Better Than Acquisition or New
Greenfield Unit.
• Cross Border Alliances Used to Expand
Core Business or Access New Geographical
Markets Highly Successful--core
Competence Is the Key Factor
 Criteria for success
• Both Partners Achieve Their Strategic
Objectives
– (Market Share, New Product Development,
Risk Sharing Etc)
• Both Recover Their Financial Costs
• Both Share in Gains Proportionately
 Choosing Partners
• Capitalise on the Distinct Competence of
Partner (Technology, Brand, Distribution
Network)
• Capitalise on His Geographical Position
• Clarity and Agreement on Strategic Goals
and Sharing of Benefits
• Look for Synergy/complementarities in
Competence or P-M Position
 Integrating JV
• Devise Appropriate Integration Policies So
That JV Remains Within the Umbrella
• Provide Adequate Operational Autonomy
• Ensure That Both Partners Get What They
Expected Out of Alliance
• Mutual Respect and Trust