Internal
Growth and External Growth Strategies
Growth and External Growth Strategies
Internal and external growth strategies are strategies that are employed
by business organisation to achieve the goals of a business organisation. 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.
by business organisation to achieve the goals of a business organisation. 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.
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.
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:
through:
a. Market penetration
strategy:
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.
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:
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.
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:
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.
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.
d. 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:
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
diversification
b) Horizontal
diversification
diversification
c) Concentric
diversification
diversification
d) Conglomerate
diversification
diversification
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:
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:
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.
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.
leaders in Textiles, to strengthen his position, Dhirubhai Ambani decided to
integrate backwards and produce fibres.
Forward integration
In forward integration,
the company expands its activities in such a way that it moves ahead of its
present line of business.
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.
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.
Horizontal
Diversification:
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.
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:
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.
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:
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.
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:
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.
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 is
an agreement or contract between companies or government of domestic country
and foreign country to achieve a common objective. Foreign collaboration is a
business structure formed by two or more parties for a specific purpose. It is collaboration where the domestic firm
and the foreign firm join hands together to achieve a common goal. Foreign
collaboration helps in removing financial, technological and managerial gap in
the developing countries. It is recognised as an important supplement for
development of the country and for securing scientific and technical know-how.
an agreement or contract between companies or government of domestic country
and foreign country to achieve a common objective. Foreign collaboration is a
business structure formed by two or more parties for a specific purpose. It is collaboration where the domestic firm
and the foreign firm join hands together to achieve a common goal. Foreign
collaboration helps in removing financial, technological and managerial gap in
the developing countries. It is recognised as an important supplement for
development of the country and for securing scientific and technical know-how.
Market Investment
A range of internal growth strategies revolve
around expanding market share. In a market penetration strategy, the company
tries to sell more to its existing markets by improving product quality or
lowering prices. Alternatively, the product development strategy involves
developing new products to sell in existing markets of the company. The other
strategy is market development, in which the company invests in marketing
efforts to sell existing products in new markets. Finally, a riskier strategy
is diversification that requires selling new product in new markets.
around expanding market share. In a market penetration strategy, the company
tries to sell more to its existing markets by improving product quality or
lowering prices. Alternatively, the product development strategy involves
developing new products to sell in existing markets of the company. The other
strategy is market development, in which the company invests in marketing
efforts to sell existing products in new markets. Finally, a riskier strategy
is diversification that requires selling new product in new markets.
Mergers
A merger is an external business growth strategy
that occurs in two ways: takeover and amalgamation. In a takeover or
acquisition, a company buys a majority stake in the other company and takes
over control. In amalgamation, two or more companies join forces to form a
single entity. Achieving economies of scale, entering new lines of business and
accessing scarce raw materials are some of the reasons why companies join
forces.
that occurs in two ways: takeover and amalgamation. In a takeover or
acquisition, a company buys a majority stake in the other company and takes
over control. In amalgamation, two or more companies join forces to form a
single entity. Achieving economies of scale, entering new lines of business and
accessing scarce raw materials are some of the reasons why companies join
forces.
Joint Ventures
A joint venture is an external business growth
strategy. In a joint venture, two or more companies decide to establish a new
business enterprise to exploit a specific business opportunity. A joint venture
is a quick and efficient way to exploit a business opportunity. A small
business may not be able to secure enough resources to enter a new market or
develop a new product or service. Additionally, a joint venture is a desirable
strategy to share the risks of starting a new enterprise to enter a new market.
strategy. In a joint venture, two or more companies decide to establish a new
business enterprise to exploit a specific business opportunity. A joint venture
is a quick and efficient way to exploit a business opportunity. A small
business may not be able to secure enough resources to enter a new market or
develop a new product or service. Additionally, a joint venture is a desirable
strategy to share the risks of starting a new enterprise to enter a new market.
Importance of Internal
Growth Strategy to Business Managers
1.) Internal growth strategy helps in
introduction of new products to existing customers in other to expand sales.
introduction of new products to existing customers in other to expand sales.
2.) Internal growth strategy expansion, leads to
better utilization of the resources and to face the competition efficiently.
better utilization of the resources and to face the competition efficiently.
3.) It provides economics of large-scale
operations.
operations.
4.) It allows the company to enter new line of
business that are different from current operation.
business that are different from current operation.
5.) Internal growth strategy helps in the development
of new products.
of new products.
6.) It helps them to take caution to avoid
product cannibalization and dissipation of effort among several products in the
portfolio.
product cannibalization and dissipation of effort among several products in the
portfolio.
Importance
of External Growth Strategy to Business Managers
1.) External growth strategy encourages the
volume of trade by advent of globalisation, foreign trade and foreign
investment.
volume of trade by advent of globalisation, foreign trade and foreign
investment.
2.) External growth strategy helps in removing
financial technology and managerial gap in the development.
financial technology and managerial gap in the development.
3.) It is an important supplement for development
of the country and organization.
of the country and organization.
4.) To improve productivity, economics and
marketing ability of the firm.
marketing ability of the firm.
5.) External growth strategy expand market area
and to cut down competition.
and to cut down competition.
6.) Organisation or firms virtually collaborated
helps in the enjoyment and benefit is synergy.
helps in the enjoyment and benefit is synergy.
7.) A company exhibits backward vertical
integration crate a state supply of inputs and ensure a consistent quantity in
their final product.
integration crate a state supply of inputs and ensure a consistent quantity in
their final product.
8.) It increase turn over by ensuring new
industries enjoying common techniques and other inputs.
industries enjoying common techniques and other inputs.
References
Davis, C. H., & Sun, E. (2006). Business development capabilities in information
technology SMEs in a regional economy: An exploratory study. The Journal of Technology Transfer, 31(1), 145-161.
technology SMEs in a regional economy: An exploratory study. The Journal of Technology Transfer, 31(1), 145-161.
Hans, E. (2012). Business Development: A
Market-Oriented Perspective. John Wiley & Sons
Market-Oriented Perspective. John Wiley & Sons
Lorenzi, V. (2014). Business Development
Capability: Insights from the Biotechnology Industry. Symphonya. Emerging
Issues in Management, (2), 1-16.
Capability: Insights from the Biotechnology Industry. Symphonya. Emerging
Issues in Management, (2), 1-16.
