Skillful organic and inorganic growth strategy opens door to increased opportunities | Daily News


 

From crisis to sustenance – Part 31:

Skillful organic and inorganic growth strategy opens door to increased opportunities

Organic growth of a business is what comes from a company’s existing businesses, as opposed to growth that comes from buying new businesses. It is marked by increased output, customer base expansion, or new product development, as opposed to mergers and acquisitions, which are known as inorganic growth.

Businesses are able to achieve organic growth through proper growth planning and by selecting the best strategies available to them. For example, by examining Ansoff’s matrix, businesses can select from market penetration, market development, product development and diversification to grow their revenue organically.

This type of growth is important because investors want to see that a company in which they are invested, or plan to invest in, is capable of earning more than it did the prior year - a feat that often reflects in a higher stock price or increased dividend payouts.

Inorganic growth can be desirable as long as it is being paid for with a company’s cash, rather than debt or equity financing. A combination of both organic and inorganic growth is ideal as it diversifies the revenue base without relying solely on current operations to grow market share.

The mega retailers report comparable data on a quarterly basis to give investors and analysts an idea of their organic growth. For e.g., Walmart grew its comparable sales by 2.6% in the fourth quarter of its fiscal year 2017/18. It was a clear example of organic growth that Walmart’s CEO attributed to accelerated sales (and increased demand) in the firm’s fresh meat, bakery and produce departments. In addition, the retailer said its eCommerce sales jumped 23% year over year.

However, with a large number of e-commerce-related acquisitions in the preceding years and quarters, this figure is not reflective of organic growth.

A risk analysis of organic vs. inorganic growth

 

If company A is growing at a rate of 5% and company B is growing at a rate of 25%, most investors opt for company B. The assumption is company A is growing at a slower rate than company B, and therefore has a lower rate of return. There is, however, another scenario to consider. What if company B grew revenues 25% because it bought out its competitor for $12 billion? In fact, the reason company B purchased its competitor is because company B’s sales were declining by 5%.

Company B might be growing, but there appears to be a lot of risk connected to its growth, while company A is growing by 5% without an acquisition or the need to take on more debt. Perhaps company A is the better investment even though it grew at a much slower pace than company B. Some investors may be willing to take on the additional risk, but others opt for the safer investment.

Strategies

There are 3 strategies for organic growth and expansion: Intensive Growth, Integrative Growth and Diversification Growth.

(1) Intensive Growth

Let us look at the major intensive growth strategies. Igor Ansoff s matrix provides four different intensive growth strategies:

Market Penetration - the firm seeks to achieve growth with existing products their current market segments, aiming to increase its market share.

Market Development - the firm seeks growth by targeting its existing products to new market segments.

Product Development - the firms develop new products targeted to its existing market segments.

Diversification - the firm grows by diversifying into new businesses by developing new products for new markets.

The first strategy - Market penetration seeks to achieve three main objectives:

1. Maintain or increase the market share of current products – this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to personal selling. Secure dominance of growth markets.

2. Restructure a mature market by driving out competitors; this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for competitors

3. Increase usage by existing customers – for example by introducing loyalty schemes.

Typically, this strategy is most effective when the overall market is growing,

The second strategy - Market development includes the pursuit of additional market segments or geographical regions. The development of new markets for the product may be a good strategy if the firm’s core competencies are related more to the specific product than to its experience with a specific market segment. Because the firm is expanding into a new market, a market development strategy typically has more risk than a market penetration strategy

The third strategy - product development may be appropriate if the company’s strengths are related to its specific customers rather than to the specific product itself. In this situation, it can leverage its strengths by developing a new product targeted to its existing customers. Similar to the case of new market development, new product development carries more risk than simply attempting to increase market share.

The fourth strategy - Diversification is the riskiest of all four since it requires both product and market development and may be outside the core competencies of the company. In fact, this quadrant of the matrix has been referred to by some as the “suicide cell.” However, diversification may be a reasonable choice if the high risk is compensated by the chance of a high rate of return. Other advantages of diversification include the potential to gain a foothold in an attractive industry and the reduction of overall business portfolio risk.

(2) Integrative growth

This is a growth strategy in which a company increases its sales and profits through backward, forward, or horizontal integration within its industry. A company may acquire one or more of its suppliers to gain more control or generate more profits (backward integration). It might acquire some wholesalers or retailers, especially if they are highly profitable (forward integration). Or finally, it might acquire one or more competitors through acquisition (horizontal integration).

Backward Integration: A company engaged in production of a product may integrate, backward up to the sources of raw materials. This would ensure continuous supply of raw materials for the production processes of the company. The acquisition of a textile mill by a ready-made garments manufacturer is a case of backward integration.

Forward Integration: A company may decide to grow through forward integration with the distribution channels of its products. It may acquire certain distribution channels to have a greater control over the distribution of its products. The manufacturer of ready-made garments may take over certain retail shops to ensure ready market for his products.

Horizontal Integration: It takes place by merging of units engaged in manufacturing similar products or rendering similar services. That means competing firms are brought together under single ownership and management. For instance, if two or more sugar mills are combined under the same ownership, it will be a case of horizontal integration. The benefits of its type of integration are economies of large scale operations and evasion of unnecessary competition.

Conglomerate Growth: A company is said to follow the conglomerate growth strategy if is acquires another firm which is engaged in altogether different line business and is using different trade channels. In other words, it seeks its future growth through entering lines of business unrelated to its present market channels or technology. For instance a textile company may take over units engaged in chemicals, fertilizers, sugar, electrical equipment, etc.

Integrative strategies are usually considered when the intensive growth strategies have been exhausted and consist of Mergers and acquisitions. They are high risk and costly undertakings whereby 100 per cent success cannot be guaranteed to deliver on the value or efficiencies that were expected. These are therefore activities that need to be thought through carefully.

(3) Diversification

These strategies involve widening a company’s scope across different products and market sectors. It is associated with higher risks as it requires the company to take on new experience and knowledge outside its existing markets and products. The company may come across issues that it has never faced before. It may need additional investment or skills.

On the other hand, however, it provides the opportunity to explore new avenues of business. This can spread the risk allowing the company to move into new and potentially profitable areas of operation

Typically, this strategy is utilized only after all other growth strategies within current markets have been exhausted as diversification can be very risky. The first three growth strategies can normally be pursued with existing core competencies. However, diversification requires organizations to acquire new skills, technologies and facilities.

The development or acquisition of new core competencies can be achieved through various methods, such as: strategic alliance or Joint venture, licensing or distributing or importing product or service lines produced by another company.

There are two major types of diversification: concentric and conglomerate.

Concentric diversification means the new venture is strategically related to the existing lines of business, while conglomerate diversification occurs when there is no strategic fit or relationship between the new and old lines of businesses.

If a company is considering diversification as a growth strategy it must be sure to utilize marketing research to minimize risk. Marketing research is essential because an organization needs to determine if customers in the new market(s) will potentially value and purchase the new products or services.

One must use creativity, experience and in-depth market understanding to evolve strategies that are logical and fact-based and which have the highest probability for success. And success is determined by the quality of strategic thinking and implementation capabilities.

By itself, the organic growth of a company does not mean much. Marketers must look beyond that to explore all integrative and diversification strategies to grow the business dramatically so as to achieve both bigger market presence and profitability.

(Lionel Wijesiri is a retired company director with over 30 years’ experience in senior business management. Presently he is a freelance newspaper feature writer.)


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