Business Strategy

Business strategy is sometimes defined simply as a firm's high level plan for reaching specific business
objectives. Strategies succeed when they lead to business growth, a strong competitive position, and
strong financial performance. When the high level strategy fails, however, the firm must either change
strategy or prepare to go out of business.

The brief definition above is accurate but, for practical help, many businesspeople prefer instead a slightly
longer definition:

Business strategy is the firm's working plan for achieving its vision, prioritizing objectives, competing
successfully, and optimizing financial performance with its business model.

The choice of objectives is the heart of the strategy, but a complete strategy also describes
specifically how the firm plans to meet these objectives. As a result, the strategy explains in practical
terms how the firm differentiates itself from competitors, how it earns revenues, and where it earns
margins.

Strategies reflect the firm's strengths, vulnerabilities, resources, and opportunities. And, they
also reflect the firm's competitors and its market.

Many different strategies and business models are possible, even for companies in the same industry
selling similar products or services. Southwest Airlines (in the US) and Ryan Air (in Europe), for
instance, have strategies based on providing low cost transportation. The strategy for Singapore Airlines
focuses instead on brand image for luxury and quality service. In competitive industries, each firm
chooses a strategy it believes it can exploit.

Strategies are all about meeting objectives

In business, strategy begins with a focus on the highest level objective in private industry: Increasing
owner value. For most businesses, in fact, that is the firm's reason for being. In practical terms, however,
firms achieve this objective only by earning profits. For most firms, therefore, the highest objective can
be stated in terms of profits. The generic business strategy therefore aims first to earn, sustain, sustain,
and grow profits.

An abundance of strategies
Discussions on strategy are sometimes confusing because most firms in fact have many strategies, not just
a single "business strategy." Analysts sometimes say marketing strategy when they really mean the
firm's competitive strategy. And, a firm's financial strategy is something different from its pricing
strategy, or operational strategy. The firm's many strategies interact, but they have different objectives
and different action plans.

The strategic framework

The subject business strategy is easier to understand—to make coherent—by viewing each strategy as
one part of a strategic framework.

The strategic framework is a hierarchy. At the top sits the firm's top level (or generic) business strategy.
Here, the aim is the top level business objective: earn, sustain, and grow profits. Some may immediately
ask: Exactly how does the firm achieve its profit objectives?

Firms in competitive industries have strategies that answer the "how" question by explaining how the
firm competes. The firm's generic strategy, in other words, is it's competitive strategy. The strategy
explains in general terms how the firm differentiates itself from the competition, defines its market, and
creates customer demand.

However, detailed and concrete answers to the "how" question lie in lower level strategies, such as the
marketing strategy, operational strategy, or financial strategy, The marketing strategy for instance, might
aim to "Achieve leading market share." Or, "Establish leading brand awareness." Financial strategy
objectives might include: "Maintain sufficient working capital" or "Create a high-leverage capital
structure."

Understand strategies in terms of the framework

Certainly, most firms develop and use a rich and complex strategic framework. As a result, business
strategy discussions are clearer when they focus on these points:

 Specific business objectives for each strategy. And, which objectives in the framework have
priority over other objectives.

 Interrelationships between the various strategies. For example, which strategies support other
strategies.

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A strategy statement communicates your company’s strategy to everyone within your startup. The
statement consists of three components: objective, scope and competitive advantage. All three
components must be expressed as clearly as possible.

A well-written strategy statement will help employees and the organization to understand their roles when
executing the company’s strategy. Without this understanding, your startup may be pulled in different
directions and lose its focus. The purpose of the strategy statement is to ensure that employees have a
clear understanding of the company’s strategy.

Hierarchy of company statements

The strategy statement is the fourth level in the hierarchy of company statements. It is more concrete,
practical, and unique than the mission statement.
 Mission: Why we exist
 Values: What we believe in and how we will behave
 Vision: What we want to be
 Strategy: What our competitive game plan will be
 Balanced scorecard: How we will monitor and implement that plan

Elements of a strategy statement

There are three basic elements of a strategy statement:

 The objective defines the ends that the strategy is designed to achieve within a specific time
frame.
 The scope is the domain of the business—the part of the business landscape in which your
company will operate.
 The competitive advantage is the essence of your strategy. It determines what you will do
differently or better than the competition to achieve your objective.
Defining the objective, scope and competitive advantage requires trade-offs, which are fundamental to
strategy. For example, if a company decides to pursue growth, it must accept that profitability will not be
a priority. If it decides to serve institutional clients, it may ignore retail customers.

Defining the strategic objective

The strategic objective is the single, specific objective that will drive the business over the next few years.
It is based on the maxim, “If you don’t know where you are going, any road will get you there.” It is not
to be confused with the company’s mission, vision or values, which are not useful as strategic goals. The
objective must be specific, measurable and time bound. It must also be a single goal (that is, growth or
profitability), although subordinate goals may follow from the strategic objective.

Maximizing shareholder value is one strategic objective. However, many strategies are designed to
achieve this goal. When creating a strategy statement, you must answer the question: Which objective is
most likely to maximize shareholder value over the next few years?

For early-stage startups, the objectives relating to your market strategy depend on the type of market you
plan to enter.

ENTERING AN EXISTING MARKET

If you enter an existing market, your aim for the first year will be to maximize the market share that you
capture from the competition. To measure that objective, you need to:

 Determine the revenue associated with your desired market share

 Break it down by number of orders
 Then reverse engineer the rest of your sales funnel to calculate how many leads, prospects
and proposals would be associated with your revenue target
ENTERING A NEW MARKET
If you enter a new market, your first-year objectives will differ. They will not be revenue-oriented.
Instead your objectives will focus on:

 Educating potential customers about your vision (by demonstrating thought leadership about
their having a business problem and your solution to fix it)
 Turning these early adopters (“visionaries”) into reference customers
At the end of the year, ideally you will see evidence of traction around your vision:

 Invitations to speak at conferences

 Mentions by one or two key opinion leaders
 Increased website traffic
 Increased inquiries from potential customers.
The details will depend on the nature of your business, but in general, these types of measures will
indicate whether a market exists for you.

Defining the scope

The company’s scope encompasses three dimensions—the target customer or offering, geographic
location, and vertical integration (that is, whole product). Each dimension may vary in relevance (for
example, the customer may be more important than geographic location). Clearly defining the boundaries
in each area should make it obvious which activities to concentrate on (and which ones to avoid).
The company’s scope does not determine exactly what should be done within those boundaries, as there is
room for experimentation and initiative. However, it should specify where the company or business will
not go. This will prevent employees from wasting resources on projects that do not fit the corporate
strategy.

Defining the competitive advantage

The competitive advantage is the most important part of the strategy statement. It describes the logic of
why you will succeed, how you differ, or what you are doing better than the competition. To define the
competitive advantage:
 State the customer value proposition. Explain why customers should buy your product or
service. Map your value proposition against those of your competitors to identify what
makes yours distinctive.
 Outline the unique activities, or complex combination of activities, that allow your company
to deliver your customer value proposition. In their book The Discipline of Market
Leaders (1995), Michael Treacy and Fred Wiersma describe three generic value
disciplines: operational excellence, customer intimacy and product leadership, with each
value discipline reflecting the unique activities that provide a competitive edge. For more
information, see the article Competitive strategies: Value disciplines.
 Create a business model canvas which connects the activities that deliver your company’s
competitive advantage to your customer value proposition.


Developing a strategy statement

First, create a great product strategy based on careful evaluation of the industry landscape. Then,
develop a strategy statement that captures the strategy’s essence in a way that makes sense to everyone at
the company.
The process should involve employees in all parts of the company and at all levels. Work through the
wording of the strategy statement in as much detail as possible.

The end result is a brief statement that reflects the three elements of an effective strategy and makes
sense to everyone in the company. It may include explanatory notes to clarify issues and implications.

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 ‘Types of Growth Strategy’

‘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 organization 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
modernization.

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 utilization of the resources and to face the competition efficiently. Business
expansion provides economics of large-scale operations.
Merits of Expansion

New Customers

A primary benefit of business expansion is the ability to attract and retain new customers. When you add
new products to your portfolio or move into new markets, you can bring in previously untapped customer
markets. Reaching out to these new customers with expansion is one thing, but capturing them for long-
term relationship building is primary. Growing a loyal customer base is the best way to achieve stable and
growing profits over time.

Economies of Scale

When you expand your business, you often spread the risks of doing business and reduce the potential of
one product or one poor decision damaging your business. Operating in multiple markets or in many
product areas also allows companies to spread the costs of doing business across more markets or
customers. This makes the costs of doing business less on a per-customer basis, which improves the
potential to profit by adding new customers.

Capital Requirements

A drawback of business expansion is that when a company invests money and other resources to expand,
it has less capital available for other business transactions. This makes it especially important that you
carefully weigh the market potential of expansion before making the investment. Consider the potential
return on investment from each product or new market you could expand into before investing your
capital into a path of expansion.

Spread Too Thin

Another risk of business expansion is that you could spread your company's resources and expertise too
thin. Often, company leaders think they have to expand if things are going well. However, getting
involved in too many markets or products can cause the company to spread its abilities out to the point
that it does not perform well in any area. Business expansion only makes sense if your company has
adequate people and resources to cover the new area with expertise.
Demerits of Expansion

Compromised Quality

Rapid growth can lead to declining quality. One example is Toyota, whose executives aimed to own 15
percent of the global auto market by 2012, according to "The New York Times." In doing so, Toyota
would surpass General Motors as the largest automaker. However, two major recalls changed Toyota's
projections. The company responded by halting production of eight models that accounted for half its
domestic profits. To analysts, the results suggested that Toyota compromised its reputation for quality,
which had been central to its corporate identity.

Employee Turnover

Training and hiring becomes increasingly crucial as companies expand, because many employees' skills
do not grow with the organization, states University of Virginia business professor Edward D. Hess in an
August 2010 interview in "Bloomberg Businessweek." After studying 54 companies in 23 states, Hess
cited hiring errors as one likely outcome of rapid growth. For example, some companies needed two to
five tries before finding the right chief financial officer. Failure to evaluate new hires properly increases
employee turnover, while creating loyalty and morale issues.

Financial Challenges

Expansion requires major financial investments that can turn sour if a company cannot keep up with the
resulting obligations. One example is the Boston Market franchise, which grew from 20 to 900 stores by
1998, according to "Entrepreneur" magazine's December 2005 report. However, poor sales plagued many
individual stores, which struggled to repay their loans. In 1998, the company closed 200 stores, bought
back nearly all its franchises and sought Chapter 11 bankruptcy protection. These measures were not
enough to prevent McDonald's Corporation from absorbing Boston Market in 2000.

Loss of Control

Chief executives often do not survive the transition once the company outgrows their original
involvement. This scenario happened to Brian LeGette, co-founder and CEO of 180s, a Baltimore-based
sports apparel company, "Inc." magazine reported in November 2005. After several years of spectacular
growth, revenues stalled at $50 million in 2004. Needing short-term loans to shore up the company's
finances, LeGette sought help from Patriarch Partners, a private equity investment firm specializing in
distressed debt. In July 2005, Patriarch ousted LeGette, and installed its own CEO to run 180s.

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

b) Horizontal diversification

c) Concentric diversification

d) Conglomerate 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:

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 fibers.

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 greenflies’ retail stores, sales
staff and in store promoters.

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.
 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.

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:

Foreign Collaboration:
Collaboration means cooperation. It means coming together. Collaboration is the act of working jointly. It
is a process where two people or organization comes together for the achievement of common goal.

With the advent of globalization, 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 recognized as an important supplement for development of the country and for
securing scientific and technical know-how.

Definition: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”.
The Five Generic Types of Growth Strategy
You need a growth strategy to increase the value of your business. Examining generic growth strategies is
a good start because they apply to all types of businesses, focusing on one aspect of your operations and
specifying the actions you must take to achieve your goals. Once you understand the generic growth
strategies, you can customize the right plan for your company and your objectives.

New Markets
An effective idea for growth is entering new markets. If you have access to more customers, you can sell
more products. You can target new markets by opening additional retail locations, adding an online
presence, selling internationally or reaching new types of customers. In each case, you have to define the
segments of the new markets you intend to target, identify the needs of the potential customers as they
relate to what you are selling, promote your products to them and make it convenient for them to buy your
products.

New Products
Another way to increase business volume is to focus on your products. If you have many different
products for sale, you can increase total sales. Sales growth is based on a broadening of your product lines
and on product diversification. Broadening a line means you can offer related products to each customer.
Product diversification lets you offer different products to different customers, depending on customer
preferences and characteristics.

Acquisition
Sometimes the fastest way to gain new markets or diversify your product range is to buy a company that
competes with you or is active in a related field. Company acquisition is risky because it means making a
large investment; the benefits depend on how well you can integrate the new business into your own
operations. It can be an effective growth strategy if your acquisition target occupies the markets into
which you want to diversify.

Merger
An equally risky but less costly growth strategy is a merger with a related or competing business. Ideally,
the merger takes place between companies that bring equal value to the table and results in a larger, more
competitive business that has the potential for improved performance. The lower financial cost of a
merger comes with a corresponding loss of control: You share ownership with others after a merger.
Partnership

A growth strategy based on entering into partnerships with qualified companies brings with it the
advantages of a merger or acquisition without the high cost or loss of control. You might partner with a
foreign distributor to access the market where he is based or partner with a company making accessories
for your own products. The partnership agreement specifies the areas where you intend to cooperate, for
example, in a promotional campaign or shared sales channels. While the risks and costs are lower,
partnership also means you have to share the benefits.

Most small companies have plans to grow their business and increase sales and profits. However, there
are certain methods companies must use for implementing a growth strategy. The method a company uses
to expand its business is largely contingent upon its financial situation, the competition and even
government regulation. Some common growth strategies in business include market penetration, market
expansion, product expansion, diversification and acquisition.

Market Penetration

One growth strategy in business is market penetration. A small company uses a market penetration
strategy when it decides to market existing products within the same market it has been using. The only
way to grow using existing products and markets is to increase market share, according to the article
"Growth Strategies" at gaebler.com. Market share is the percent of unit and dollar sales a company holds
within a certain market vs. all other competitors. One way to increase market share is by lowering prices.
For example, in markets where there is little differentiation among products, a lower price may help a
company increase its share of the market.

Market Expansion

A market expansion growth strategy, often called market development, entails selling current products in
a new market. There several reasons why a company may consider a market expansion strategy. First, the
competition may be such that there is no room for growth within the current market. If a business does not
find new markets for its products, it cannot increase sales or profits. A small company may also use a
market expansion strategy if it finds new uses for its product. For example, a small soap distributor that
sells to retail stores may discover that factory workers also use its product.
Product Expansion

A small company may also expand its product line or add new features to increase its sales and profits.
When small companies employ a product expansion strategy, also known as product development, they
continue selling within the existing market. A product expansion growth strategy often works well when
technology starts to change. A small company may also be forced to add new products as older ones
become outmoded.

Diversification

Growth strategies in business also include diversification, where a small company will sell new products
to new markets. This type of strategy can be very risky, according to gaebler.com. A small company will
need to plan carefully when using a diversification growth strategy. Marketing research is essential
because a company will need to determine if consumers in the new market will potentially like the new
products.

Acquisition

Growth strategies in business can also includes an acquisition. In acquisition, a company purchases
another company to expand its operations. A small company may use this type of strategy to expand its
product line and enter new markets. An acquisition growth strategy can be risky, but not as risky as a
diversification strategy. One reason is that the products and market are already established. A company
must know exactly what it wants to achieve when using an acquisition strategy, mainly because of the
significant investment required to implement it.

DIVERSIFICATION STRATEGY

Diversification strategies are used to expand firms' operations by adding markets, products, services, or
stages of production to the existing business. The purpose of diversification is to allow the company to
enter lines of business that are different from current operations. When the new venture is strategically
related to the existing lines of business, it is called concentric diversification. Conglomerate
diversification occurs when there is no common thread of strategic fit or relationship between the new and
old lines of business; the new and old businesses are unrelated.
 DIVERSIFICATION IN THE CONTEXT OF GROWTH STRATEGIES

Diversification is a form of growth strategy. Growth strategies involve a significant increase in

performance objectives (usually sales or market share) beyond past levels of performance. Many
organizations pursue one or more types of growth strategies. One of the primary reasons is the view held
by many investors and executives that "bigger is better." Growth in sales is often used as a measure of
performance. Even if profits remain stable or decline, an increase in sales satisfies many people. The
assumption is often made that if sales increase, profits will eventually follow.

Rewards for managers are usually greater when a firm is pursuing a growth strategy. Managers are often
paid a commission based on sales. The higher the sales level, the larger the compensation received.
Recognition and power also accrue to managers of growing companies. They are more frequently invited
to speak to professional groups and are more often interviewed and written about by the press than are
managers of companies with greater rates of return but slower rates of growth. Thus, growth companies
also become better known and may be better able, to attract quality managers.

Growth may also improve the effectiveness of the organization. Larger companies have a number of
advantages over smaller firms operating in more limited markets.

1. Large size or large market share can lead to economies of scale. Marketing or production
synergies may result from more efficient use of sales calls, reduced travel time, reduced
changeover time, and longer production runs.
2. Learning and experience curve effects may produce lower costs as the firm gains experience in
producing and distributing its product or service. Experience and large size may also lead to
improved layout, gains in labor efficiency, redesign of products or production processes, or larger
and more qualified staff departments (e.g., marketing research or research and development).
3. Lower average unit costs may result from a firm's ability to spread administrative expenses and
other overhead costs over a larger unit volume. The more capital intensive a business is, the more
important its ability to spread costs across a large volume becomes.
4. Improved linkages with other stages of production can also result from large size. Better links
with suppliers may be attained through large orders, which may produce lower costs (quantity
discounts), improved delivery, or custom-made products that would be unaffordable for smaller
operations. Links with distribution channels may lower costs by better location of warehouses,
more efficient advertising, and shipping efficiencies. The size of the organization relative to its
 customers or suppliers influences its bargaining power and its ability to influence price and
services provided.
5. Sharing of information between units of a large firm allows knowledge gained in one business
unit to be applied to problems being experienced in another unit. Especially for companies
relying heavily on technology, the reduction of R&D costs and the time needed to develop new
technology may give larger firms an advantage over smaller, more specialized firms. The more
similar the activities are among units, the easier the transfer of information becomes.
6. Taking advantage of geographic differences is possible for large firms. Especially for
multinational firms, differences in wage rates, taxes, energy costs, shipping and freight charges,
and trade restrictions influence the costs of business. A large firm can sometimes lower its cost of
business by placing multiple plants in locations providing the lowest cost. Smaller firms with
only one location must operate within the strengths and weaknesses of its single location.

CONCENTRIC DIVERSIFICATION

Concentric diversification occurs when a firm adds related products or markets. The goal of such
diversification is to achieve strategic fit. Strategic fit allows an organization to achieve synergy. In
essence, synergy is the ability of two or more parts of an organization to achieve greater total
effectiveness together than would be experienced if the efforts of the independent parts were summed.
Synergy may be achieved by combining firms with complementary marketing, financial, operating, or
management efforts. Breweries have been able to achieve marketing synergy through national advertising
and distribution. By combining a number of regional breweries into a national network, beer producers
have been able to produce and sell more beer than had independent regional breweries.

Financial synergy may be obtained by combining a firm with strong financial resources but limited
growth opportunities with a company having great market potential but weak financial resources. For
example, debt-ridden companies may seek to acquire firms that are relatively debt-free to increase the
lever-aged firm's borrowing capacity. Similarly, firms sometimes attempt to stabilize earnings by
diversifying into businesses with different seasonal or cyclical sales patterns.

Strategic fit in operations could result in synergy by the combination of operating units to improve overall
efficiency. Combining two units so that duplicate equipment or research and development are eliminated
would improve overall efficiency. Quantity discounts through combined ordering would be another
possible way to achieve operating synergy. Yet another way to improve efficiency is to diversify into an
area that can use by-products from existing operations. For example, breweries have been able to convert
grain, a by-product of the fermentation process, into feed for livestock.

Management synergy can be achieved when management experience and expertise is applied to different
situations. Perhaps a manager's experience in working with unions in one company could be applied to
labor management problems in another company. Caution must be exercised, however, in assuming that
management experience is universally transferable. Situations that appear similar may require
significantly different management strategies. Personality clashes and other situational differences may
make management synergy difficult to achieve. Although managerial skills and experience can be
transferred, individual managers may not be able to make the transfer effectively.

CONGLOMERATE DIVERSIFICATION

Conglomerate diversification occurs when a firm diversifies into areas that are unrelated to its current line
of business. Synergy may result through the application of management expertise or financial resources,
but the primary purpose of conglomerate diversification is improved profitability of the acquiring firm.
Little, if any, concern is given to achieving marketing or production synergy with conglomerate
diversification.

One of the most common reasons for pursuing a conglomerate growth strategy is that opportunities in a
firm's current line of business are limited. Finding an attractive investment opportunity requires the firm
to consider alternatives in other types of business. Philip Morris's acquisition of Miller Brewing was a
conglomerate move. Products, markets, and production technologies of the brewery were quite different
from those required to produce cigarettes.

Firms may also pursue a conglomerate diversification strategy as a means of increasing the firm's growth
rate. As discussed earlier, growth in sales may make the company more attractive to investors. Growth
may also increase the power and prestige of the firm's executives. Conglomerate growth may be effective
if the new area has growth opportunities greater than those available in the existing line of business.

Probably the biggest disadvantage of a conglomerate diversification strategy is the increase in

administrative problems associated with operating unrelated businesses. Managers from different
divisions may have different backgrounds and may be unable to work together effectively. Competition
between strategic business units for resources may entail shifting resources away from one division to
another. Such a move may create rivalry and administrative problems between the units.
Caution must also be exercised in entering businesses with seemingly promising opportunities, especially
if the management team lacks experience or skill in the new line of business. Without some knowledge of
the new industry, a firm may be unable to accurately evaluate the industry's potential. Even if the new
business is initially successful, problems will eventually occur. Executives from the conglomerate will
have to become involved in the operations of the new enterprise at some point. Without adequate
experience or skills (Management Synergy) the new business may become a poor performer.

Without some form of strategic fit, the combined performance of the individual units will probably not
exceed the performance of the units operating independently. In fact, combined performance may
deteriorate because of controls placed on the individual units by the parent conglomerate. Decision-
making may become slower due to longer review periods and complicated reporting systems.

DIVERSIFICATION: GROW OR BUY?

Diversification efforts may be either internal or external. Internal diversification occurs when a firm
enters a different, but usually related, line of business by developing the new line of business itself.
Internal diversification frequently involves expanding a firm's product or market base. External
diversification may achieve the same result; however, the company enters a new area of business by
purchasing another company or business unit. Mergers and acquisitions are common forms of external
diversification.

INTERNAL DIVERSIFICATION.

One form of internal diversification is to market existing products in new markets. A firm may elect to
broaden its geographic base to include new customers, either within its home country or in international
markets. A business could also pursue an internal diversification strategy by finding new users for its
current product. For example, Arm & Hammer marketed its baking soda as a refrigerator deodorizer.
Finally, firms may attempt to change markets by increasing or decreasing the price of products to make
them appeal to consumers of different income levels.

Another form of internal diversification is to market new products in existing markets. Generally this
strategy involves using existing channels of distribution to market new products. Retailers often change
product lines to include new items that appear to have good market potential. Johnson & Johnson added a
line of baby toys to its existing line of items for infants. Packaged-food firms have added salt-free or low-
calorie options to existing product lines.

It is also possible to have conglomerate growth through internal diversification. This strategy would entail
marketing new and unrelated products to new markets. This strategy is the least used among the internal
diversification strategies, as it is the most risky. It requires the company to enter a new market where it is
not established. The firm is also developing and introducing a new product. Research and development
costs, as well as advertising costs, will likely be higher than if existing products were marketed. In effect,
the investment and the probability of failure are much greater when both the product and market are new.

EXTERNAL DIVERSIFICATION.

External diversification occurs when a firm looks outside of its current operations and buys access to new
products or markets. Mergers are one common form of external diversification. Mergers occur when two
or more firms combine operations to form one corporation, perhaps with a new name. These firms are
usually of similar size. One goal of a merger is to achieve management synergy by creating a stronger
management team. This can be achieved in a merger by combining the management teams from the
merged firms.

Acquisitions, a second form of external growth, occur when the purchased corporation loses its identity.
The acquiring company absorbs it. The acquired company and its assets may be absorbed into an existing
business unit or remain intact as an independent subsidiary within the parent company. Acquisitions
usually occur when a larger firm purchases a smaller company. Acquisitions are called friendly if the firm
being purchased is receptive to the acquisition. (Mergers are usually "friendly.") Unfriendly mergers or
hostile takeovers occur when the management of the firm targeted for acquisition resists being purchased.

DIVERSIFICATION: VERTICAL OR HORIZONTAL?

Diversification strategies can also be classified by the direction of the diversification. Vertical integration
occurs when firms undertake operations at different stages of production. Involvement in the different
stages of production can be developed inside the company (internal diversification) or by acquiring
another firm (external diversification). Horizontal integration or diversification involves the firm moving
into operations at the same stage of production. Vertical integration is usually related to existing
operations and would be considered concentric diversification. Horizontal integration can be either a
concentric or a conglomerate form of diversification.

VERTICAL INTEGRATION.

The steps that a product goes through in being transformed from raw materials to a finished product in the
possession of the customer constitute the various stages of production. When a firm diversifies closer to
the sources of raw materials in the stages of production, it is following a backward vertical integration
strategy. Avon's primary line of business has been the selling of cosmetics door-to-door. Avon pursued a
backward form of vertical integration by entering into the production of some of its cosmetics. Forward
diversification occurs when firms move closer to the consumer in terms of the production stages. Levi
Strauss & Co., traditionally a manufacturer of clothing, has diversified forward by opening retail stores to
market its textile products rather than producing them and selling them to another firm to retail.

Backward integration allows the diversifying firm to exercise more control over the quality of the
supplies being purchased. Backward integration also may be undertaken to provide a more dependable
source of needed raw materials. Forward integration allows a manufacturing company to assure itself of
an outlet for its products. Forward integration also allows a firm more control over how its products are
sold and serviced. Furthermore, a company may be better able to differentiate its products from those of
its competitors by forward integration. By opening its own retail outlets, a firm is often better able to
control and train the personnel selling and servicing its equipment.

Since servicing is an important part of many products, having an excellent service department may
provide an integrated firm a competitive advantage over firms that are strictly manufacturers.

Some firms employ vertical integration strategies to eliminate the "profits of the middleman." Firms are
sometimes able to efficiently execute the tasks being performed by the middleman (wholesalers, retailers)
and receive additional profits. However, middlemen receive their income by being competent at providing
a service. Unless a firm is equally efficient in providing that service, the firm will have a smaller profit
margin than the middleman. If a firm is too inefficient, customers may refuse to work with the firm,
resulting in lost sales.

Vertical integration strategies have one major disadvantage. A vertically integrated firm places "all of its
eggs in one basket." If demand for the product falls, essential supplies are not available, or a substitute
product displaces the product in the marketplace, the earnings of the entire organization may suffer.
 HORIZONTAL DIVERSIFICATION.

Horizontal integration occurs when a firm enters a new business (either related or unrelated) at the same
stage of production as its current operations. For example, Avon's move to market jewelry through its
door-to-door sales force involved marketing new products through existing channels of distribution. An
alternative form of horizontal integration that Avon has also undertaken is selling its products by mail
order (e.g., clothing, plastic products) and through retail stores (e.g., Tiffany's). In both cases, Avon is still
at the retail stage of the production process.

DIVERSIFICATION STRATEGY AND MANAGEMENT TEAMS

As documented in a study by Marlin, Lamont, and Geiger, ensuring a firm's diversification strategy is
well matched to the strengths of its top management team members factored into the success of that
strategy. For example, the success of a merger may depend not only on how integrated the joining firms
become, but also on how well suited top executives are to manage that effort. The study also suggests that
different diversification strategies (concentric vs. conglomerate) require different skills on the part of a
company's top managers, and that the factors should be taken into consideration before firms are joined.

There are many reasons for pursuing a diversification strategy, but most pertain to management's desire
for the organization to grow. Companies must decide whether they want to diversify by going into related
or unrelated businesses. They must then decide whether they want to expand by developing the new
business or by buying an ongoing business. Finally, management must decide at what stage in the
production process they wish to diversify.
Assignment of: Strategic Management

Assignment on: Types of Growth Strategies

Submitted to: Prof.Ali Akkas

Faculty of Business Studies

Dept of Tourism and Hospitality Management.

University of Dhaka.

Submitted By:

Sanjoy Chandra Nath ID:71516056

Md.Salauddin ID:71517064

Naim Mohammad Riad ID:71517070

Md Riaz Hossain ID:71413096

Abu Tanzim Monzirul Karim ID:71516116