Growth Strategy

Name: Ravi Chevli

Batch: ITBM 2009-11
PRN: 9030241026
Topic: Growth Strategy

Growth Strategy - An investment strategy that pursues capital appreciation over the long term by
diversification of the business.

Mckinsey Growth Pyramid

The McKinsey model argues that businesses should develop their growth strategies based on:

• Operational skills are the “core competences” that a business has which can provide the foundation
for a growth strategy. For example, the business may have strong competencies in customer service;
distribution, technology.

• Privileged assets are those assets held by the business that are hard to replicate by competitors. For
example, in a direct marketing-based business these assets might include a particularly large customer
database, or a well-established brand.

• Growth skills are the skills that businesses need if they are to successfully “manage” a growth
strategy. These include the skills of new product development, or negotiating and integrating
acquisitions.

• Special relationships are those that can open up new options. For example, the business may have
specially string relationships with trade bodies in the industry that can make the process of growing in
export markets easier than for the competition.

Growth can be achieved by looking at business opportunities along several dimensions which can be
summarised in the diagram below:

Figure 1: Generic options & investment for a growth strategy

1
 Growth Strategy

The model outlines seven ways of achieving growth, which are summarised below:

Existing products to existing customers: The lowest-risk option; try to increase sales to the existing
customer base; this is about increasing the frequency of purchase and maintaining customer loyalty.

Existing products to new customers: Taking the existing product base, the objective is to find entirely
new segment of the customers that might buy.

New products and services: market development & diversification strategy – taking a risk by developing
and marketing new products. Some of these can be sold to existing customers or to entirely new
customers.

New delivery approaches: This option focuses on the use of distribution channels as a possible source
of growth.

New geographies: With this method, businesses are encouraged to consider new geographic areas into
which to sell their products. Geographical expansion is one of the most powerful options for growth –
but also one of the most difficult.

New industry structure: This option considers the possibility of acquiring troubled competitors or
consolidating the industry through a general acquisition programme

New competitive arenas: This option requires a business to think about opportunities to integrate
horizontally or consider whether the skills of the business could be used in other industries.

How Software Arts Lost Market share to Lotus

Software Arts invented the concept of PC spread sheet analysis with its VisiCalc program. VisiCalc may well
have been the better mousetrap that the market sought out. Unfortunately, the company continued to
compete as though it was the best (and only) mousetrap. When Lotus introduced its integrated software 123
to the market, VisiCalc was left by the wayside. Software Arts never modified the fundamentals of their
marketing strategy and continued to compete as though the product they offered was unique and market
leading. Sales declined until 1985 when they were acquired by Lotus.

Lotus 123 was a brilliant technological success. In fact, the product's success quickly drove it out of the high
tech strategic cell and into a penetration strategy. Lotus was responsive and flexible enough to adapt to the
penetration strategy. Aggressive retail merchandising established high market visibility. Aggressive pricing and
site licensing programs helped the company retain competitive position.

Growth Strategy

Through Concentration
Organization concentrates on its primary lines of business and looks for ways to meet its growth objectives
through increasing its level of capability in this primary business.

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

2
 Growth Strategy

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. Thus, growth
companies also become better known and may be better able, to attract quality managers.

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.

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/Organic Growth

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. E.g.
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. E.g. 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/ Inorganic Growth

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.

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.

Diversification: vertical or horizontal?

Diversification strategies can also be classified by the direction of the diversification. 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.

3
 Growth Strategy

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. 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. E.g.  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.
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. E.g. 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.

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.

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.

Concentric diversification

When the new venture is strategically related to the existing lines of business, it is called 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.

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. Yet another way to improve efficiency is to diversify into an area that can use
by-products from existing operations.

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. E.g. Avon's move to market jewellery 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.

4
 Growth Strategy

Conglomerate 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. The primary purpose of
conglomerate diversification is improved profitability of the acquiring firm. 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. E.g. 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.
Growth in sales may make the company more attractive to investors. 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.

The 7 Keys to Growth are:

1. Right People in the Right Seats – Identifying the strategic ‘seats’ in your business and developing the
key people to fill them.
2. Effective Strategic Planning – having a documented strategic plan and a process to review and adjust
it.
3. Advanced Customer Management – providing customized solutions to segmented customer groups
through unique delivery channels.
4. Robust Process – defining and developing effective and efficient core business processes.
5. Differentiated Product and Services – providing superior, innovative and differentiated products and
services.
6. Strong Core Values – developing accepted fundamental principles, standards or beliefs that bond and
motivate the organization.
7. The Ability to Execute – Having the ability to implement your company’s strategies and tactics
effectively and efficiently.

Successful implementation of Growth Strategy Tools requires managers to:

 Communicate the importance of growth;

 Strengthen the creation and circulation of new ideas;
 Screen and nurture profitable ventures effectively;
 Create capabilities that will differentiate the company in the marketplace of the future.

Managers employ Growth Strategy Tools to improve both the strategic and financial performance of a
business. By strengthening and expanding the company's market position, Growth Strategy Tools improve
both top-line and bottom-line results. Growth Strategy Tools also may be used to counteract (or avoid) the
adverse effects of repeated downsizing and cost cutting programs.

5
 Growth Strategy

Example for Growth Strategy

Hindustan Unilever Limited

In the summer of 1888, visitors to the Kolkata harbour noticed crates full of Sunlight soap bars, embossed with
the words "Made in England by Lever Brothers". With it began an era of marketing branded Fast Moving
Consumer Goods (FMCG). Soon after followed Lifebuoy in 1895 and other famous brands like Pears, Lux and
Vim, Vanaspati was launched in 1918 and the famous Dalda brand came to the market in 1937.

HUL was formed in 1933 as Lever Brothers India Limited and came into being in 1956 as Hindustan Lever
Limited through a merger of Lever Brothers, Hindustan Vanaspati Mfg. Co. Ltd. and United Traders Ltd. The
company was renamed in June 2007 to “Hindustan Unilever Limited”.
The erstwhile Brooke Bond's presence in India dates back to 1900. By 1903, the company had launched Red
Label tea in the country. In 1912, Brooke Bond & Co. India Limited was formed. Brooke Bond joined the
Unilever fold in 1984 through an international acquisition. The erstwhile Lipton's links with India were forged
in 1898. Unilever acquired Lipton in 1972, and in 1977 Lipton Tea (India) Limited was incorporated.

Pond's (India) Limited had been present in India since 1947. It joined the Unilever fold through an international
acquisition of Chesebrough Pond's USA in 1986.

Tata Oil Mills Company (TOMCO) merged with HUL, HUL and yet another Tata company ‘Lakme Limited’,
formed a 50:50 joint venture, Lakme Unilever Limited. HUL formed a 50:50 joint venture with the US-based
Kimberly Clark Corporation in 1994, Kimberly-Clark Lever Ltd, which markets Huggies Diapers and Kotex
Sanitary Pads.

As a measure of backward integration, Tea Estates and Doom Dooma, two plantation companies of Unilever,
were merged with Brooke Bond. Then in 1994, Brooke Bond India and Lipton India merged to form Brooke
Bond Lipton India Limited (BBLIL). 1994 witnessed BBLIL launching the Wall's range of Frozen Desserts. By the
end of the year, the company entered into a strategic alliance with the Kwality Icecream Group families and in
1995 the Milkfood 100% Icecream marketing and distribution rights too were acquired. Finally, BBLIL merged
with HUL.

In 2003, HUL acquired the Cooked Shrimp and Pasteurised Crabmeat business of the Amalgam Group of
Companies, a leader in value added Marine Products exports.

HUL launched a slew of new business initiatives in the early part of 2000’s. On 17th October 2008 , HUL
completed 75 years of corporate existence in India.

References
1. Growth Strategy available at http://www.investorwords.com/5597/growth_strategy.html, Retrieved
September 13, 2010
2. Diversification Strategy available at http://www.enotes.com/management-
encyclopedia/diversification-strategy, Retrieved September 13, 2010
3. Integrative Growth Strategy available at http://www.interviewqueries.com/marketing-sales/6451-
what-integrative-growth-strategy.html, Retrieved September 13, 2010
4. HUL history available at http://www.hul.co.in/aboutus/ourhistory/ retrieved September 14, 2010
5. Types of Growth available at
http://www.thewhetstonegroup.com/Our_Approach_To_Growth_2007.htm, Retrieved September
13, 2010