Growing a business is the process of of improving some measure of a comany’s success.

A
business can grow in terms of employees, customer base, international coverage, profits, but
growth is most often determined in terms of revenues. There are different ways of growing a
business. Igor Ansoff identfied four strategies for growth and summarized them in the so called
Ansoff Matrix. The Ansoff Matrix (also known as the Product/Market Expansion Grid) allows
managers to quickly summarize these potential growth strategies and compare them to the risk
associated with each one. The idea is that each time you move into a new quadrant
(horizontally or vertically), risk increases. The four strategies are:

Market Penetration: selling more of the company’s existing products to existing markets. To
penetrate and grow the customer base in the existing market, a company may cut prices,
improve its distribution network, invest more in marketing and increase existing production
capacity
Market Development: selling more of the company’s existing products to new markets. This
strategy is about reaching new customer segments or expanding internationally by targeting
new geographic areas.
Product Development: developing and selling new products to existing markets Product
development means making some modifications in the existing products to give increased value
to the customers for their purchase or developing and launcing new products alongside a
company’s existing offering.
Diversification: entering new markets with new products that are either related or completely
unrelated to a company’s existing offering. Diversification in turn can be classified into three
types of diversification strategies:
Concentric/Horizontal diversification (or related diversification): entering a new market with a
new product that is somewhat related to a company’s existing product offering
Conglomerate diversification (or unrelated diversifcation): entering a new market with a new
product that is completely unrelated to a company’s existing offering
Vertical diversification (or vertical integration): moving backward or forward in the value chain by
taking control over activities that used to be outsourced to third parties like suppliers, OEMs or
distributors

Figure 1: Ansoff Matrix

Generally speaking, business growth can be classified into internal growth and external growth.
This article will discuss the various growth strategies and explain the differences between them.

Internal Growth
Internal growth (or organic growth) is when a business expands its own operations by relying on
developing its own internal resources and capabilities. This can for example be done by
assessing a company’s core competencies and by determining and exploiting the strenght of its
current resources with the aid of the VRIO framework. Moreover, companies can decide to grow
organically by expanding current operations and businesses or by starting new businesses from
scratch (e.g. greenfield investment). Important to note here is that all growth is established
without the aid of external resources or external parties. Internal growth has a few advantages
compared to external growth strategies (such as alliances, mergers and acquisitions):

Knowledge improvement: organic growth strategies improve the company’s knowledge through
direct involvement in a new market or technology, thus providing deeper first-hand knowledge
that is likely to be internalized in the company
Investment spread: gradually growing internally helps to spread investment over time, which
allows a reduction of upfront costs and commitments, making it easier to reverse or adjust a
strategy if conditions in the market change
No availability constraints: the company is not dependent on the availability of suitable
acquisition targets or potential alliance partners. Organic developers also do not have to wait for
a perfectly matched acquisition target to come on to the market
Strategic independence: this means that a company does not need to make the same
compromises as might be necessary in an alliance, for example, which is likely to involve
constraints on certain activities and may limit future strategic choices
Culture management: organic growth allows new activities to be created in the existing cultural
environment, which reduces the risk of culture clash—a common difficulty with mergers,
acquisitions, and alliances
Internal growth strategies have a few disadvantages. For instance, developing internal
capabilities can be slow and time-consuming, expensive, and risky if not managed well.

External Growth
External growth (or inorganic growth) strategies are about increasing output or business reach
with the aid of resources and capabilities that are not internally developed by the company itself.
Rather, these resources are obtained through the merger with/acquisition of or partnership with
other companies. External growth strategies can therefore be divided between M&A (Mergers
and Acquisitions) strategies and Strategic Alliance strategies (e.g. joint ventures).

Mergers and Acquisitions

M&A offers a number of advantages as a growth strategy that improves the competitive strength
of the acquirer. They include:

Business extension: M&A can be used to extend the reach of a firm in terms of geography,
products or market coverage.
Consolidation: M&A can be used to bring together two competitors to increase market power by
reducing competition; to increase efficiency by reducing surplus capacity or sharing resources,
for instance head-office facilities or distribution channels; and to increase production efficiency
or increase bargaining power with suppliers, forcing them to reduce their prices.
Building capabilities: M&A may increase a company’s capabilities. Instead of researching a new
technology from scratch, for instance, acquirers may wait for entrepreneurs to prove an idea
and then take them over to incorporate the technological capability within their own portfolio.
Speed: M&A allows acquirers to act fast—and this may be an advantage in itself, wrong-footing
competition and changing the industry landscape faster than competitors can evolve in
response.
Financial efficiency: This may allow a company with a strong balance sheet to combine with
another company with a weak balance sheet, enabling the latter to save on interest payments
by using the stronger company’s assets to pay off its debt. The acquired firm could also access
investment funds from the stronger company that were otherwise unavailable.
Tax efficiency: For example, profits or tax losses may be transferable within the combined
company in order to benefit from different tax regimes between industries or countries, subject
to legal restrictions.
Asset stripping or unbundling: Some companies are effective at spotting other companies
whose underlying assets are worth more than the price of the company as a whole. This makes
it possible to buy such companies and then rapidly sell off (unbundle) different business units to
various buyers for a total price that is substantially in excess of what was originally paid for the
whole. Although this is often dismissed as merely opportunistic profiteering (asset stripping), if
the business units find better corporate parents through this unbundling process, there can be a
real gain in economic effectiveness.
Strategic Alliances
Mergers and acquisitions bring together companies through complete changes in ownership.
However, companies can also share resources and activities to pursue a common strategy
without sharing in the ownership of the parent companies. There are two main kinds of strategic
alliance: equity and non-equity alliances.

Equity alliances involve the creation of a new entity that is owned separately by the partners
involved. The most common form of equity alliance is the joint venture, where two companies
remain independent but set up a new company that is jointly owned by the parents. Alliances
can also be formed with several partners, and these are termed a consortium alliance.
Non-equity alliances are typically looser, and do not involve the commitment implied by
ownership. Non-equity alliances are often based on contracts. One common form of contractual
alliance is franchising, where one company (the franchisor) gives another company (the
franchisee) the right to sell the franchisor’s products or services in a particular location in return
for a fee or royalty. McDonald’s restaurants and Subway are examples of franchising. Licensing
is a similar kind of contractual alliance, allowing partners to use intellectual property, such as
patents or brands, in return for a fee. Long-term subcontracting agreements are another form of
loose non-equity alliance, common in automobile supply.
Types of Strategic Alliances
Strategic alliances allow a company to rapidly extend its strategic advantage and generally
require less commitment than other forms of expansion. A key motivator is sharing resources or
activities, although there may be less obvious reasons as well. There are four types of alliance:
scale, access, complementary, and collusive.

Scale alliances involve companies combining to achieve necessary scale. The capabilities of
each partner may be quite similar, but together they can achieve advantages that they could not
easily achieve on their own. Thus, combining together can provide economies of scale in the
production of outputs (products or services). Combining might also provide economies of scale
in terms of inputs—for example by reducing purchasing costs of raw materials or services.
Access alliances involve a company allying in order to access the capabilities of another
company that are required to produce or sell its own products and services. For example, in
countries such as Mexico a Western company might need to partner with a local distributor to
access effectively the national market for its products and services. The local company is critical
to the international company’s ability to sell. Access alliances can also work in the opposite
direction, with a local company seeking a licensing alliance to access inputs from an
international company—for example technologies or brands.
Complementary alliances involve companies at similar points in the value network combining
their distinctive but complementary resources so that each partner is bolstered where it has
particular gaps or weaknesses. The Renault-Nissan Alliance is a great example of two
companies combining their strenghts to overcome their individual weaknesses.
Collusive alliances involve companies colluding secretly to increase their market power. By
combining into cartels, they reduce competition in the marketplace, enabling them to extract
higher prices from customers or lower prices from suppliers. Such collusive cartels among
for-profit businesses are discouraged by regulators. For instance, mobile phone and energy
companies are often accused of collusive behavior.
There are many potential advantages of external growth through acquisitions and alliances.
Down below there is a list of some of these advantages compared to internal growth depeding
on the nature of the acquisition/alliance. For a more systematic way of choosing between
acquisitions and alliances themselves, you may want to read more about the
Acquisition-Alliance Framework.

Faster speed of access to new product or market areas

Instant market share / increased market power
Economies of scale (perhaps by combining production capacity)
Secure better distribution channels
Increased control of supplies
Decreased competition (by taking them over or partnering with them)
Acquire intangible assets (brands, patents, trademarks)
Overcome barriers to entry to target new markets
To take advantage of deregulation in an industry / market

Acquisition or Alliance Framework

Figure 2: External Growth Framework from the article ‘Acquisitions or Alliances?‘

In sum, growing a company can be done in many different ways. The most used ways are
internal growth or external growth through acquisitions and alliances. The Ansoff Matrix is a
great tool to map out a company’s options and to use as starting point to compare growth
strategies based on criteria such as speed, uncertainty and strategic importance.
Further reading:
Ansoff, I. (1957). Strategies for Diversification. Harvard Business Review.
Dyer, J.H., Kale, P. and Singh, H. (2004). When to ally and when to acquire. Harvard Business
Review.