A growth strategy is a set of actions and plans that a company proposes to increase its market share by creating a stable and unique advantage in a competitive environment.
Thus, a growth strategy expects a company to increase its level of growth by increasing its share of sales, its profit margin, its market share or by expanding the company.
Internal and external growth
The growth of a company can, of course, be achieved internally and externally.
Internal growth can be achieved by implementing growth strategies within the company. A company can grow by enlarging and expanding its manufacturing plants or representative branches, but it must always maintain control of its expansion.
In practice, internal growth is becoming a normal process in companies and is therefore considered natural.
Characteristics of internal growth
The main characteristics of this form of growth are:
- This is achieved through the acquisition and introduction of modern technology.
- Growth is gradual, which favors financing and the correct implementation of processes.
- Maximises the company’s marketing and localisation process.
Internal growth is one of the company’s growth strategies. It involves increasing its production capacity, which means investing in factors of production (new equipment, new workers, machinery, etc.) that increase this capacity.
Internal growth is also known as “vegetative”, “organic” or “natural” growth because the tendency to grow is inherent in the very nature of the company. The main reason for implementing internal growth strategies is to reduce costs. But they can also be progressive to eliminate competition, increase profits, guarantee supply, introduce new distribution channels, optimize management, etc.
In this case, the company grows by investing in its own structure, without the participation of other companies. At present, not many companies opt for this growth model, which tends to be more suitable for markets that are not very saturated.
In terms of internal growth, there are two main avenues: specialisation or expansion and diversification. Let us look at each of these.
Specialisation or expansion
In a specialisation strategy, the company continues to sell the same or similar products, but tries to increase demand. In this case, there is a natural continuity, but efforts are intensified for existing products, with an emphasis on improving sales in already conquered markets, but also on capturing new markets.
There are three types of specialisation strategies: market penetration, market development and product development.
One of the company’s internal growth strategies is market penetration. It consists of increasing the company’s share of the current market. In other words: sell more but without changing the products or services offered. The aim is to reach more customers (diverting them from competitors) or to increase the spending of existing customers.
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Typical ways of achieving this are through increased advertising and promotion, improved quality of products or services, and price reductions. Examples are communication service companies that periodically call their customers to offer new services or benefits, such as faster Internet, etc.
It is about opening up new markets for a company’s existing products. Sometimes this expansion is geographic and sometimes it targets segments that are not existing customers, but may be.
In this case, the aim is to sell the product or service in areas or to groups of people who have not bought it before. An example would be a food such as vegetable soup, which is traditionally eaten by adults and then marketed to children.
Occurs when a company develops new products that are related to or complement an existing product. In this case, the development is aimed at the same market that the company already has.
The company usually targets tastes or needs that are not sufficiently satisfied in the current market. Usually, more or less substantial modifications of the product are made to target specific niches. For example, a beverage company will launch a “light” version.
The second type of internal growth strategy is diversification. In this case, new products have developed that target existing markets or markets that have not yet been captured. The objective is to grow through new products and/or markets.
Diversification implies a certain departure from the company’s usual line of behavior. This type of strategy is applied when surpluses are available and are invested in supply or market expansion in order to avoid long-term risks and with the expectation of higher profits.
There are three diversification strategies: horizontal or related diversification, vertical diversification, and heterogeneous or unrelated diversification.
Horizontal or related diversification
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In this case, the new product or service is related to existing products or services. It is not an addition or modification of traditional products, but a new product that builds on what already exists. Thus, the company does not change the industry.
The aim is to broaden the offer and attract new customers by offering a more complete range of products or services. A classic example is the fashion house Chanel, which launched a range of perfumes that have become as prestigious, if not more so, than the clothes themselves.
This occurs when a company incorporates new stages into the production process so as not to be dependent on third parties. In this way, it starts to move on to production steps that occur before or after its original activities.
The objective of eliminating intermediaries is to reduce costs and/or risks and thus strengthen the strategic position of the company. This is a type of business growth strategy that increases the company’s control over the entire process.
There are two types of vertical diversification:
- Forward: when the subsequent stages of the production of a product or service are taken over. For example, when a factory decides to take care of the distribution and/or marketing of its products itself.
- Retrofitting: When the stages prior to the production of a product or service are taken over. For example, when a company producing canned tuna decides to take over the farming and fishing of this raw material.
Heterogeneous or unrelated diversification
Heterogeneous diversification is diversification in which there is no relationship between traditional and new products and/or markets. It is also known as “cluster diversification” because the company becomes a cluster in which the products are not closely related, except that they sometimes use the same production technology.
There is also no relationship between customers, either in their act of purchase or in their consumption patterns. This is one of the forms of business growth used by companies such as Mitsubishi, which manufactures cars but also air-conditioning equipment.
On the other hand, a company can grow externally through mergers, acquisitions, and strategic alliances and enjoy the benefits of these processes. Mainly because by leveraging the advantages of other companies, costs can be reduced, which enhances the company’s performance.
Thus, external growth is achieved through financial participation or the purchase of other companies. With increasing market competition and global competition, this strategy has become very common.
External growth characteristics
The most important characteristics of external growth are:
- It may be the only way to compete with very large and strong companies in the market.
- External growth is faster than internal growth because the advantages are already developed by other companies with which it partners.
- The investment is less risky because estimated results are usually obtained.
Within the methods of company growth, there are also external growth strategies. These are processes by which a company grows by investing in the acquisition, partnership, control, or participation in companies other than the original one.
In this case, the company grows not by investing in its own structure, but by investing in the structure of other companies that become part of its production capacity. In other words, growth is achieved by acquiring existing resources and capabilities.
This is one of the growth strategies for a company that is in a highly saturated market or wants to enter new markets quickly. It is increasingly used in more developed countries because it is cost-effective and facilitates access to strong market positions.
There are two main ways of realizing a company’s external growth: cooperation or specialization and concentration. Each involves specific strategies. This will be discussed below.
Cooperation or specialisation
This includes all the ways in which two companies join forces and act together. Organizations share information and resources to reduce costs and minimize risks.
Collaboration can be mainly technological, manufacturing or commercial. The most common forms of collaboration are a franchise, cartel, joint venture, joint venture, joint venture, EIG, and cluster.
Franchising is a widely used business growth strategy in today’s world. It is an agreement whereby one company grants another the right to use a brand or commercial formula in exchange for periodic payments. The company that grants the right is called the franchisor and the company that receives the right is called the franchisee.
The franchisor transfers its brand image and also bears the costs of advertising and promotion. It also provides information and advice. In turn, the franchisor assumes responsibility for the business. This method is widespread and is used practically all over the world.
A cartel is an agreement between two or more companies to fix the details of production and prices of products or services. It is an example of a company’s growth strategies that are prohibited in most countries because it is considered an anticompetitive pattern.
When companies agree on production and prices, they end up imposing their terms on consumers. Consumers will have no choice. Moreover, the agreement itself often leads to a lower quality of supply, because neither is better nor worse than the other.
A joint venture is a form of arrangement in which two or more companies team up to develop a new activity involving a certain degree of risk. In this case, all parties involved contribute capital or other resources.
Most often, this type of agreement is entered into between companies from different countries. The foreign company provides the capital and the domestic company provides the market knowledge.
Temporary Joint Venture
A joint venture, or UTE, is, as its name suggests, an agreement whereby two or more companies jointly undertake a project for a limited period of time. It is not a new company as such, but a form of temporary cooperation in which each company is jointly and severally liable for the debts incurred.
Generally, this type of cooperation takes place in the case of large or mega-projects that, due to their size or complexity, require the participation of several companies. However, they also arise between small companies when none of them is capable of taking on a given project alone.
Economic Interest Grouping
An Economic Interest Grouping (EIG) is an agreement between several companies to achieve a common benefit. It is a non-profit company whose objective is to improve the performance of its members or facilitate their development.
In this case, the partners are also jointly and severally liable for the debts, but they only cooperate in ancillary activities such as research, use of trademarks, etc., and not in substitute activities. They may carry out these activities jointly or separately.
A cluster is a geographic concentration of companies with a common interest. Although they compete with each other, they also cooperate or provide services to each other.
Their proximity is also advantageous because it facilitates access to common specialized services and the purchase and sale of each other’s products. They can also collaborate on specific projects, have a better opportunity to share accumulated know-how, etc.
Concentration is an external growth strategy that consists of the permanent merger of two or more companies. It occurs to expand capacity and market power. There are two basic types of mergers: participation and integration.
Participation occurs when one company acquires a share in the capital of another company without the latter losing its legal personality. This means that both companies are retained.
If a company acquires 80% or more of the shares, it obtains full control of the other company. If it acquires more than 50%, it acquires majority control. Less than 50% means partial control.
If a parent or parent company acquires a majority interest in several companies, called “subsidiaries”, it is called a holding company. A holding company usually allows for tax incentives, i.e. lower tax payments.
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Integration is a merger of two or more companies in which at least one of them loses its legal personality. In other words, it ceases to exist. There are two basic types of integration: horizontal and vertical. Let us see what each of them consists of.
This occurs when there is an integration between competing companies in the same sector.
This integration occurs mainly through two types of integration:
- Pure merger: when two or more companies, generally of similar size, merge to form a new company in which they put all their equity. The old companies are dissolved.
- Absorption: This occurs when one company absorbs another, whereby the latter ceases to exist and all its assets are absorbed by the acquiring company.
Vertical integration occurs when several companies merge and control several or all stages of the production process. When control is complete, a “trust” is created. Vertical integration also occurs when companies merge to expand their business into wholesale activities.
There are two basic forms of vertical integration:
Upward or downward: when companies seek to take control of suppliers. Also when a wholesale organization takes over manufacturing activities or when a retail company integrates wholesale activities.
Downward or forward: When companies seek to take control of distributors or when a wholesaler takes over retail activities.
This has been our little guide for you to know the type of growth strategies that you can apply to develop your company or your personal project. Remember that you do not need to be the owner of a company or have large amounts of capital to carry them out, remember that you can always find people who can be found in the same situation as you, and you can collaborate to help each other. I leave here a recommended reading, so you can expand your knowledge about this type of strategy, and you can expand your knowledge. During the article we have left you more books, so you can go deeper into any material, but our required reading to understand the concept is “The management of the growth of the company”.