Organizations usually seek growth in sales, profits, market share, or some other measure as a primary objective.
Growth Strategies
Organizations usually seek growth in sales,
profits, market share, or some other measure as a primary objective. The
different grand strategies in this category are:
1. Concentration
2. Integration
3. Diversification
4. Mergers
and acquisitions
5. Joint
Ventures
Concentration
The most common grand strategy is concentration on
the current business. A concentration strategy is one in which an organization
focuses on a single line of business The firm directs its resources to the
profitable growth of a single product, in a single market, and with a single
technology. Some of America’s largest and most successful companies have
traditionally adopted the concentration approach. For example, Mc Donald’s
concentrates on the fast food industry and Holiday Inns. Other examples include
W.K. Kellogg and Gerber Foods, which are known for their product; Shaklee,
which concentrates on geographic expansion; and Lincoln Electric, which bases
its growth on technological advances.
Concentration strategies succeed for so many
businesses – including the vast majority of smaller firms – because of the
advantages of business – level specialization. By concentrating on one product,
in one market, and with one technology, a firm can gain competitive advantages
over its more diversified competitors in production skill, marketing know-how,
customer sensitivity, and reputation in the marketplace. The reasons for
selecting a concentration grand strategy are easy to understand. Concentration
is typically lowest in risk and in additional resources required. It is also
based on the known competencies of the firm. On the negative side, for most
companies concentration tends to result
in steady but slow increases in growth and profitability and a narrow range of
investment options. Further, because of their narrow base of competition,
concentrated firms are especially susceptible to performance variations
resulting from industry trends.
Integration
Integration may take two forms: vertical and
horizontal integration.
Vertical Integration
Vertical integration strategy involves growth
through acquisition of other organizations in a channel of distribution. When
an organization purchases other companies that supply it, it engages in
backward integration. The organization that purchases other firms that are
closer to the end users of the product (such as wholesalers and retailers)
engages in forward integration. Vertical integration is used to obtain greater
control over a line of business and to increase profits through greater
efficiency or better selling efforts.
Horizontal Integration
This strategy involves growth through the
acquisition of competing firms in the same line of business. It is adopted in
an effort to increase the size, sales, profits, and potential market share of
an organization. This strategy is sometimes used by smaller firms in an
industry dominated by one or a few large competitors, such as the soft drink
and computer industries.
BHEL had undertaken the path of backward
integration for the manufacture of assorted equipments such as, switchgears and
transformers, to the full-fledged production of thermal, hydel, and nuclear
power generation equipment.
Diversification
This strategy involves growth through the
acquisition of firms in other industries or lines of business as explained
below.
1. Organizations in slow-growth industries may
purchase firms in faster-growing industries to increase their overall growth
rate.
2. Organizations with excess cash often find
investment in another industry (particularly a fast-growing one) a profitable
strategy.
3. Organizations may diversify in order to spread
their risks across several industries.
4. The acquiring organization may have management
talent, financial and technical resources, or marketing skills that it can
apply to a weak firm in another industry in the hope of making it highly profitable.
Diversification may be of different types
Related or concentric diversification When the
acquired firm has production technology, products, channels of distribution,
and /or markets similar to those of the firm purchasing it, the strategy is called
concentric diversification.. This strategy is useful when the organization can
acquire greater efficiency or market impact through the use of shared
resources. A case of related or concentric diversification is the tie-up of
McDonald with Coco-cola. McDONALD'S India Pvt Ltd (MIPL), the wholly-owned
subsidiary of the US-based fast-food giant McDonald's Corporation, along with
Coca-Cola, is developing a fruit-based beverage, to be retailed exclusively at
McDonald's outlets. The beverage will be made available under the Maaza brand
name, but will be different from the regular Maaza brand. McDonald's has an international tie-up with
Coca-Cola, which extends to the domestic market as well. Apart from Coca-Cola,
in India, McDonald's has an existing tie-up with Cadbury India, for McSwirl
ice-cream cones. McDonald's India is also running a promotion with foods major
Nestle, specific to the KitKat chocolate brand. The quick service chain,
meanwhile, is in talks with synergistic marketers for similar associations.
McDonald's currently operates through 48 outlets in the country, and has set a
target of 100 restaurants by 2005. The quick service chain is looking to set up larger
format restaurants for now, rather than exploring the option of setting up
smaller format convenience outlets. The company will consider the small
format stores option in the second stage of expansion. For the time being, the
focus is on setting up larger restaurants. In addition to setting up standalone
outlets in residential areas and entertainment complexes, they have set up
outlets on highways and railway stations Unrelated or conglomerate diversification When the
acquired firm is in a completely different line of business, the strategy is
called unrelated or conglomerate diversification An example of unrelated
conglomerate diversification is Marico’s venture into cooling oil segment. TAKING a cue from Dabur's recent entry into the
cooling oil segment with its Himsagar brand, the market leader in hair oils,
Marico Industries, has decided to venture into the same segment with its Shanti
brand. Under the sub brand of `Thanda Tel', the Shanti brand will soon see an
extension from its existing Amla hair oil. Pegged at Rs 38 for 100 ml, the
`value-added' oil will have ingredients such as neem and camphor to induce the
cooling effects. "Cooling oil is the fastest growing segment
under hair oils pegged at 16 per cent. It is a category that is growing even
faster than shampoos." Even the coconut oil market is pegged to grow at
0-2 per cent while the hair oil segment has been generally stagnant. The market
leader in hair oils with its leading brand of Parachute has thus decided to
venture into the category previously untapped except for a few players with
brands such as Himsagar, Himtej and Navratan. They intend spending heavily
behind this brand and the ad agency Triton is developing a new campaign for the
brand. Its existing Shanti Amla brand of hair oil enjoys a 13 per cent volume
and has a second position in the amla segment after Dabur Amla. Besides, in the
overall non-coconut oil segment, the company enjoys a 15 per cent share
together with its brands such as Mediker. In fact, in the recent past, Mediker
did stretch the franchise of its Mediker shampoo with an anti-lice oil,
including the same cooling ingredients such as neem and camphor. Marico claims
it has made a success of its Parachute Jasmine variant with a turnover of Rs 23
crore. It also withdrew Parachute anti-dandruff hair oil since it was not
generating the necessary volumes
Mergers and Acquisitions
In a merger, a company joins with another company
to form a new organization.
There are
several examples of mergers. Ponds, Lakme, Lipton, Brooke bond India, Milk food
ice creams etc have merged with Hindustan Lever Ltd. More examples are given in
the lesson on Mergers and Acquisitions in the same Unit.. Joint Ventures
In a joint venture, an organization works with
another company on a project too large to handle by itself, such as some
elements of the space program. Similarly, organizations in different countries
may work together to overcome trade barriers in the international market or to
share resources more efficiently. For example, GMF Robotics is a joint venture
between General Motors Corporation and Japan’s Fanuc Ltd. to produce industrial
robots. Tags : Strategic Management - Strategy Formulation
Last 30 days 1628 views