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Business Strategies: Internal Growth and External Growth Strategies

This document discusses internal and external growth strategies for businesses. Internal growth strategies include expansion through market penetration, market development, and product development. They also include diversification through vertical, horizontal, concentric, and conglomerate diversification. External growth strategies involve mergers and acquisitions or strategic alliances to access new markets, increase market power, access new technologies or brands, and diversify offerings. Both internal and external growth have benefits but also challenges to consider.

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866 views5 pages

Business Strategies: Internal Growth and External Growth Strategies

This document discusses internal and external growth strategies for businesses. Internal growth strategies include expansion through market penetration, market development, and product development. They also include diversification through vertical, horizontal, concentric, and conglomerate diversification. External growth strategies involve mergers and acquisitions or strategic alliances to access new markets, increase market power, access new technologies or brands, and diversify offerings. Both internal and external growth have benefits but also challenges to consider.

Uploaded by

bharath
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© © All Rights Reserved
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S6 Strategic Management

Growth Strategies
Business Strategies: Internal Growth and External Growth Strategies
The term strategy means a well-planned, deliberate and overall course of action to
achieve specific objectives. ‘Growth Strategy’ refers to a strategic plan formulated and
implemented for expanding firm’s business. Every firm has to develop its own growth
strategy according to its own characteristics and environment.

Internal growth strategy refers to the growth within the organisation by using internal
resources. Internal growth strategy focus on developing new products, increasing efficiency,
hiring the right people, better marketing etc. Internal growth strategy can take place either by
expansion, diversification and modernisation.

I. Internal Growth Strategies


A. Expansion:
Business expansion refers to raising the market share, sales revenue and profit of the
present product or services. The business can be expanded through product development,
market development, expanding the line of product etc.Expansion leads to better utilisation of
the resources and to face the competition efficiently. Business expansion provides economics
of large-scale operations.
Business can be expanded through:-
a. Market penetration strategy:
This strategy involves selling existing products to existing markets. To penetrate and
capture the market, a firm may cut prices, improve distribution network, increase promotional
activities etc.
b. Market Development strategy:
This strategy involves extending existing products to new market. This strategy aims
at reaching new customer segments or expansion into new geographic areas. Market
development aims to increase sales by capturing new market area.
c. Product Development strategy:
This strategy involves developing new products for existing markets or for new
markets. Product development means making some modifications in the existing product to
give value to the customers for their purchase.
B. Diversification:
Diversification is another form of internal growth strategy. The purpose of
diversification is to allow the company to enter new lines of business that are different from
current operations. There are four types of diversification:
a) Vertical Diversification
Vertical diversification is also called as vertical integration. In vertical integration
new products or services are added which are complementary to the present product line or
service. The purpose of vertical diversification is to improve economic and marketing ability
of the firm. Vertical diversification includes:
i. Backward integration:
In backward integration, the company expands its business activities in such a way
that it moves backward of its present line of business.
Example:
Despite of being the leaders in Textiles, to strengthen his Position, Dhirubhai Ambani
decided to integrate backwards and produce fibres.
ii. Forward integration:
In forward integration, the company expands its activities in such a way that it moves
ahead of its present line of business.
Example:
New Zealand based Natural health care products company Comvita purchased its
Hong Kong distributor Green Life Ltd. And thus achieved forward integration by having
access to greenlife’s retail stores, sales staff and in store promoters.
b) Horizontal Diversification:
Horizontal diversification involves addition of parallel products to the existing product line.
For example: A company, manufacturing refrigerator may enter into manufacturing air
conditioners. The purpose of horizontal diversification is to expand market area and to cut
down competition.
c) Concentric Diversification:
When a firm diversifies into business, which is related with its present business it is called
concentric diversification. It is an extreme form of horizontal diversification. For example:
Car dealer may start a finance company to finance hire purchase of cars.
d) Conglomerate Diversification:
When a firm diversifies into business, which is not related to its existing business both in
terms of marketing and technology it is called conglomerate diversification.
It involves totally a new area of business. There is no relation between the new product and
the existing product.

II. External Growth Strategies:

External growth (also known as inorganic growth) refers to growth of a company that
results from using external resources and capabilities rather than from internal business
activities. External growth is an alternative to internal (organic) growth. However, internal
and external growth should not be considered opposites.

Companies may pursue external growth using two primary vehicles: mergers and
acquisitions (M&A) and strategic alliances. The main difference between the two is in
regard to change of ownership. M&A deals involve an exchange of ownership between the
companies in the transaction. Conversely, a strategic alliance enables businesses to pursue
their collective objectives while remaining independent entities.
1. Mergers and acquisitions (M&A)
Mergers and acquisitions refer to transactions between business entities that involve a
complete exchange of ownership. A merger is a financial transaction in which two companies
unite into one new company with the approval of the boards of directors of both companies.
In a merger, the involved companies may create a completely new entity (under a new brand
name) or the acquired company may become a part of the acquiring company.Conversely, an
acquisition is a financial transaction in which the acquiring company (bidder) purchases a
controlling stake in a target company. It can be done with the consent of the management and
shareholders of a target company (friendly takeover) or without it (hostile takeover).

Generally, M&A transactions can provide substantial benefits and growth


opportunities to the participating entities. Nevertheless, mergers and acquisitions are
commonly challenging in terms of the integration of the companies.

2. Strategic alliances
Unlike M&A transactions, strategic alliances do not involve a complete exchange of
ownership between the participating companies. Instead, companies combine their assets and
resources for a certain period of time to achieve predetermined goals while remaining
independent.A strategic alliance can take one of two forms: equity and non-equity alliances.
Equity alliances are created when independent companies become partners and establish a
new entity jointly owned by the participating partners. The most common form of an equity
alliance is a joint venture.

On the other hand, non-equity alliances are created through contracts. Examples of
non-equity alliances are franchising and licensing agreements, in which one company
provides products, services, or intellectual property to another company in exchange for a
fee.Unlike M&A transactions, strategic alliances are much easier to execute and do not
require an extreme commitment from the involved parties. However, the benefits and growth
opportunities of strategic alliances may be limited, as compared to the opportunities that an
acquisition may offer.
3. Foreign Collaboration:
Collaboration means cooperation. It means coming together. Collaboration is the act
of working jointly. It is a process where two people or organisation comes together for the
achievement of common goal.With the advent of globalisation, foreign trade and foreign
investments are encouraged to increase the volume of trade. This concept gave rise to foreign
collaboration to acquire expertise in the manufacturing process, gain technical know-how and
market or promote the products or services to the foreign countries.Foreign Collaboration
may be defined as “An agreement between two companies from two different countries for
mutual help, co-operation and also for sharing the benefits in common”.
Uses of External Growth Strategies
A company can use external growth strategies to achieve a number of different objectives,
such as the following:

 Obtain access to new markets


 Increase market power
 Access new technology/brand
 Diversify a product or service
 Increase the efficiency of business operations
The implementation of external growth strategies can be challenging for a number of
reasons. For example, a company that wants to acquire another entity may face resistance
from the target’s management or shareholders. In addition, the selection of a potential target
company (in case of a merger or acquisition) is a challenging process in and of itself, and one
that involves many risks. For example, merged companies may face a clash of corporate
culture, or the synergies created through the transaction may not be sufficient to produce the
gains that were anticipated to result from the merger.

…………………………………………………………………………………Dr.KL Ajay 

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