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LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS
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LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS

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  1. LESSON–10 ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS Sonia Sabharwal STRUCTURE 10.0 Introduction 10.1 Objectives 10.2 Meaning of Business growth 10.3 Need for growth 10.4 Advantages of growth 10.5 Limitations of growth 10.6 Forms of growth 10.6.1 Organic growth 10.6.2 Inorganic growth 10.7 Meaning of growth strategy 10.8 Types of growth strategies 10.8.1 Intensive Growth strategy 10.8.2 Diversification 10.8.3 Modernization 10.8.4 Merger 10.8.5 Joint Venture 10.9 Crisis in Business Growth 10.10 Summary 10.11 Glossary 10.12 Self Assessment Questions 10.13 Further Readings 10.0 INTRODUCTION In earlier units we discussed the processes involved in the setting up of commercially viable and technically feasible small scale enterprises (SSE). We also examined the processes of finding an ideal location and layout for a SSE. In this lesson we will take a view of different alternatives available for the growth of a small scale enterprise. Business growth is a natural process of adaptation and development that occurs under favorable conditions. The growth of a business firm is similar to that of a human being who passes through the stages of infancy, childhood, adulthood and maturity. Many business firms started small and have become big through continuous growth. However, business growth is not a 137
  2. homogenous process. The rate and pattern of growth varies from firm to firm. Some firms grow at a fast rate while others grow slowly. Also, not all enterprises survive to grow big. This may be due either to the nature of the firm or the entrepreneur. Some entrepreneurs do not want to grow their ventures, choosing instead to pursue other interest, spend more time with family or develop other business activities. 10.1 OBJECTIVES After going through the lesson you should be able to: • Explain the meaning and need for growth • Discuss the benefits and limitations of growth • Explain the meaning of growth strategy • Identify the alternative strategies available for growth • Discuss the pros and cons of different strategies • Identify the crisis of business growth 10.2 MEANING OF BUSINESS GROWTH Generally, the term ‘business growth’ is used to refer to various things such as increase in the total sales volume per annum, an increase in the production capacity, increase in employment, an increase in production volume , an increase in the use of raw material and power. These factors indicate growth but do not provide a specific meaning of growth. Simply stated, business growth means an increase in the size or scale of operations of a firm usually accompanied by increase in its resources and output. Check your progress Write five indicators of growth. ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- 10.3 NEED FOR GROWTH As we have already said that business enterprise is like a human being, growth is a necessary stimulant to most of the business firms. As a matter of fact, growth is precondition for the survival of a business firm. An enterprise that does not grow may, in course of time have to be closed down because of its obsolete products. The market is full of examples of very popular products 138
  3. disappearing from the scene for lack of growth plans. For example, pagers vanished from the market because better technology product i.e. cell phones were introduced. The reasons which drive business enterprises toward growth are described below: (I) Survival: In a competitive market no single enterprise can have monopoly. The competition can be direct or indirect. Direct competition comes from other firms manufacturing the same product. For example, there are many brands of shampoos available in the market. To survive the competition the manufacturer of each brand of shampoo has to continuously bring new versions of basic product to maintain an edge over his competitors. Indirect competition may come from availability of cheaper substitutes. For example, the khadi industry faced a problem when polyester emerged. Severe competition forces a firm to grow and gain competitive strength. Any business firm that fails to grow can’t survive for long. A growing concern will be an innovator and can easily face the risk of competition. Thus growth is means of survival in a competitive and challenging environment. (ii) Economies of Scale: Growth of a firm may provide several economies in production, purchasing, marketing, finance, management etc. A growing firm enjoys the advantages of bulk purchase of materials, increased bargaining power, spreading of overheads, expert management etc. This leads to low cost of production and higher margin of profit. This also ensures full utilization of plant capacity. (iii) Owners mandate: The owners of a company get the ultimate benefit of growth in the form of higher profits. They may direct the management to reinvest a substantial portion of the earnings in the business rather than paying them out. Capable management may on its own like to take carefully calculated risk and expand the size of the company. (iv) Expansion of the market – Increase in demand for goods and services leads business firms to increase the supply also. Population explosion and transportation led to increase in the size of markets which in turn resulted in mass production. Business firms grow to meet the increasing demand. Expanding markets provide opportunity for business growth. (v) Latest Technology – Some business firms invest in research and development activities to create new products and new techniques, while others try to acquire latest technology from the market. Rationalization and automation results in more efficient use of resources and a firm may grow to obtain them. (vi) Prestige and Power – The more the size of the business firm increase the more is the prestige and power of the firm. Businessmen satisfy their urge for power by increasing the size of their business firm. (vii) Government Policy – In a planned economy like India, business firms operate under a large number of rules and restrictions. A big firm is in a better position to carry out the various legal formalities required to obtain licenses and quotas. Business firms may plan for growth to make use of the incentives provided by the government. The government provides certain subsidies and 139
  4. tax concessions to the new industrial units in the backward areas and those producing goods for export only. (viii) Self-sufficiency – Some firms grow to become self sufficient in terms of marketing of raw material or marketing of products. Growth in either or both of these forms reduces the dependency of the firm over other firms. Check your progress Activity A List any three products that disappeared from the market for lack of growth plans. ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- 10.4 ADVANTAGES OF GROWTH Business firms try to achieve growth in order to obtain the following advantages: (i) For obtaining the economies of scale. (ii) For exploitation of business opportunities. (iii) For facing competition in the market by diversifying the product line. (iv) For providing protection against adverse business conditions eg. Depression. (v) For gaining economic and market power (vi) For raising profits and creating resources for further reinvestment into business. (vii) For making optimum utilization of resources. (viii) For securing subsidies, tax concessions and other incentives offered by the government 10.5 LIMITATIONS OF GROWTH Business firms cannot grow indefinitely. Growth has its own limitations which are: (i) Finance: Growth, especially external growth, requires additional capital investment which is sometimes difficult for a small firm to arrange. (ii) Market: Growth can be achieved to the extent that the size of market permits. If a firm grows faster than increase in the size of the market, it is likely to face failure. (iii) Human Relations Problems: In a big firm, management loses personal touch with employees and customers. Motivation and morale tend to be low resulting in inefficiency. 140
  5. (iv) Management: Growth increases the functions and complexities of operations. As the number of functions and departments increase, coordination and control become very difficult. If the organization and management structure is not capable of accommodating them, growth may be harmful. (v) Lack of knowledge: Under conglomerate growth, a firm enters new industries and new markets about which the managers know little. Managers find it difficult to find and develop managers who can quickly handle new units and improve their earning potential against heavy odds. Many growing firms could not succeed because their managers felt that they could manage anything anywhere. (vi) Social problems: From social point of view also big firms may be undesirable as they may lead to concentration of economic power and creation of monopolies which may exploit consumers. In their desire for growth firms indulge in combative advertising. The quickening growth creates a cultural gap when society finds it difficult to cope with technological change. 10.6 FORMS OF GROWTH Once an entrepreneur understands some of the factors that influence growth and development, he can choose a suitable way for achieving it. Business growth can take place in many ways. Broadly, various types of growth can be divided into two broad categories – organic and inorganic growth. Organic Growth – It can also be termed as internal growth. It is growth from within. It is planned and slow increase in the size and resources of the firm. A firm can grow internally by ploughing back of its profits into the business every year. This leads to the growth of production and sales turnover of the business. Internal growth may take place either through increase in the sales of existing products or by adding new products. Internal growth is slow and involves comparatively little change in the existing organization structure. It can be planned and managed easily as it is slow. The ways used by the management for internal growth include: (I) intensification; (ii) diversification and (iii) modernization. Inorganic Growth – it can also be termed as external growth. It involves a merger of two or more business firms. A firm may acquire another firm or firms may combine together to improve their competitive strength. External growth has been attempted by the business houses through the two strategies (a) mergers and acquisitions and (b) joint ventures. Merger again can be of two types: (i) a firm merges with other firm in the same industry having similar or related products. This type of merger leads to coordination problem between the two firms (ii) a firm merges with another firm in altogether different lines of business and have little common in their products or proceses such a merger is known as conglomerate merger. Inorganic growth is fast and allows immediate utlization of acquired assets. There is no risk of overproduction as the capacity of the industry as whole 141
  6. remains unchanged. Merger leads to combination of independent units to control competition, to gain economics of scale and also sometimes, to modernize production facilities. But merger also leads to social problem of monopoly, problem of coordination, strain on capital structure, etc. Thus, external growth involves problem of reorganization. 10.7 MEANING OF GROWTH STRATEGY The term strategy means a well planned, deliberate and overall course of action to achieve specific objectives. According to chandler, “strategy is the determination of the basic long term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary to carry out these objectives”. The concept of strategy has been derived from military administration wherein it implies ‘Grand’ military plan designed to defeat the enemy. As applied to business, strategy is a firm’s planned course of action to fight competition and to increase its market share. ‘Growth Strategy’ refers to a strategic plan formulated and implemented for expanding firm’s business. For smaller businesses, growth plans are especially important because these businesses get easily affected even by smallest changes in the marketplace. Changes in customers, new moves by competitors, or fluctuations in the overall business environment can negatively impact their cash flow in a very short time frame. Negative impact on cash flow, if not projected and adjusted for, can force them to shut down. That is why they need to plan for their future. Small entrepreneurs generally feel that strategic planning is for large business houses; but it is very necessary for small and medium enterprises. Strategic Planning gives a formal direction to the business. Strategic planning is necessary to take care of the additional efforts and resources required for faster growth. Different type of growth strategies are available each having advantage and disadvantage of its own. A firm can adopt different strategies at different points of time. Every firm has to develop its own growth strategy according to its own characteristics and environment. 10.8 TYPES OF GROWTH STRATEGIES The following are the main growth strategies available to firms: 1. Intensive Growth Strategy (Expansion) 2. Diversification 3. Modernization 4. External Growth Strategy (a) Mergers 142
  7. (b) Joint Ventures GROWTH STRATEGIES Organic / Internal Growth Strategy Inorganic / External Growth Strategy Intensive growth Merger Diversification Joint Ventures Modernization Figure 10.1: Types of Growth Strategies 10.8.1 INTENSIVE GROWTH STRATEGY Intensive growth strategy or expansion involves raising the market share, sales revenue and profit of the present product or services. The firm slowly increases its production and so it is called internal growth strategy. It is a good strategy for firms with a smaller share of the market. Three alternative strategies are available in this regard. These are: (a) Market Penetration – This strategy aims at increasing the sale of present product in the presented market through aggressive promotion. The firm penetrates deeper into the market to capture a larger share of the market. For example, promoting the idea of cold coffee during the summer season, also the idea of instant coffee, instant tea and tea bags. (b) Market Development – It implies increasing sales by selling present products in the new markets. For example selling electronic goods in rural areas or sale of chocolates to middle aged and old persons. Market development leads to increase in sale of existing products in unexplained markets. (c) Product Development: In this, the firm tries to grow by developing improved products for the present market. For example, A.C. with remote control, Refrigerator with automatic defreezing and flexible shelves. Advantages of Intensive Growth Strategy (1) Growth is slow and natural. Therefore, it can be handled easily. (2) Capital required for expansion can be taken from the firm's own funds. (3) Existing resources can be better utilized (4) The growing firm is in a better position to face competition in the market. (5) Only a few changes are required in the organisation and management systems of business. 143
  8. (6) Expansion provides economics of large-scale operations. Limitations of Intensive Growth Strategy (1) Growth is very slow and it takes a long time for growth to actually happen. (2) A business firm loses the possibility of exploiting many business opportunities by restricting its operations to the present products and markets. (3) It is not always possible to grow in the present product market. Practical Problems of Intensive Growth Strategy When small business firms try to expand many problems obstruct their way. Some of these problems are given below: (I) Scarcity of Funds: For expansion additional funds are required for investing in both fixed assets and current assets. Funds for fixed capital and working capital are not easily available. Many a times a small firm has to borrow funds at high rates of interest. (ii) Risk: Expansion means more risk. Many small-scale firms do not have the ability or will-power to assume these risks particularly where the competition is acute and raw materials have to be imported. Some small-scale owners continue to operate at a given scale due to the risks and difficulties involved in expansion. (iii) Technology: Expansion often requires upgradation of technology and replacement of plant and machinery. Upgradation of technology is a time-consuming and expensive process. It becomes essential to recruit new staff or retrain the existing staff in the use and operation of new technology (iv) Marketing. Expansion is profitable only when the increased output can be sold at good prices. Small-scale units face hurdles in selling and distribution of their products due to competition from large-scale units Check your progress Match the following 1. Expanding the sale of chocolate by Product Development including old persons to children. 2. Hindustan Lever expanding the sale Market Penetration of detergent powder in rural area 3. ‘Colgate’ expanding the sale by Market Development introducing ‘Colgate-salt active’ 10.8.2 DIVERSIFICATION Beyond a certain point, it is no longer possible for a firm to expand in the basic product market. So the firm seeks increased sales by developing new products for new markets. This strategy towards growth is called diversification. The diversification does not simply involve adding variety in a product but adding entirely different types of products. Products added may be 144
  9. complementary. Diversification is a much talked about and widely used strategy for growth. Many companies have opted for this. For example, LIC, an insurance concern initially, diversified into mutual funds. State Bank of India diversified into merchant banking and mutual funds. Similarly, Larsen and Toubro, an engineering company diversified into cement. Table 1. Product-Market Matrix and Growth Strategy Products Present New Markets Present Market Penetration Product development (Penetrate existing markets (Introduce new products in with existing products) existing markets) New Market Development (Enter Diversification new markets with existing (Introduce new products in Products) new markets) Source: H. Igor, Ansoff, Corporate Strategy, 1965, p.51 A firm may choose the strategy of diversification under the following situations: (a) When diversification promises greater profitability than expansion. (b) When the firm cannot attain its growth target by the strategy of expansion alone. (c) When the financial resources of the firm are much in excess of the requirements of expansion. The distinction between intensive growth strategy and diversification strategy must be carefully noted. In the case of intensive growth, the firm increases the production and sales of its existing products. But in case of diversification, there is addition of new products and new markets. Advantages of Diversification Companies have increasingly adopted diversification strategy due to the following reasons: (i) Better use of its resources. By adding up related products to its existing product portfolio, a company can more effectively utilize its managerial personnel, marketing network, research and development facilities, etc. (ii) Reduce the decline in sales. By developing new products the sales revenue and earnings can be maintained or even increased. For example, Bajaj Scooters India Ltd. entered in the field of mopeds. (iii) More competitive With greater resources, more products and higher profits, the diversified firm is more competitive than a single product firm. (iv) Minimize risk. When one line of business faces recession, another line may be in high growth stage. For example, a well-diversified engineering firm 145
  10. like Larsen and Toubro did well even when the engineering industry was facing recession. (v) Use of cash surplus of one business to finance another business having good potential for growth. (vi) Economies of scale Diversification adds to size of business which improves the competitiveness of a firm. It offers a lot of economy in operations because common facilities can be used for several products. Limitations of Diversification. The limitations of diversification are as given below: (I) Huge funds are required for diversification. The internal savings of the business may not be sufficient to finance growth. (ii) The functions and responsibilities of top executives increase because of need to handle new product, technology and markets. They may find problems in coordination which may lead to inefficient operations. (iii) Diversification may involve new technology and new markets and the present staff may face problems in adjusting to this growth pattern. (iv) Diversification may lead to unknown products and markets leading to more risk. Types of Diversification: 1. Horizontal Integration, 2. Vertical Integration, 3. Concentric, and 4. Conglomerate Horizontal Integration: It involves addition of parallel new products to the existing product line. This may happen internally or externally, internally, a company may decide to enter a parallel product market in addition to the existing product line. Externally, a company combines with a competing firm. For example, Sparta Ceramics India Ltd. took over Neyveli Ceramics and Refractories Ltd. (Neycer). Both the companies are in sanitary ware and tiles business. Two or more competing firms are brought together under single ownership and control. Seven small cement firms combined and formed Associated Cement Companies (ACC). Advantages. Horizontal integration has the following advantages: (i) Wasteful competition among the combining firms is removed. (ii) It provides economies of large-scale production and distribution. (iii) It provides better control over the market and increases the competitiveness of the company. 146
  11. (iv) The firm gets better control over supply and prices of the product. Disadvantages. Horizontal integration has the following limitations: (I) The firm is not confident of supply of raw materials. (ii) If many firms combine to form horizontal integration, there is a risk of over- capitalisation. (iii) The management of the firm may become bureaucratic and inflexible. (iv) The firm may acquire exploit consumers and labour by becoming a monopoly. Vertical Integration In vertical integration new products or services are added which are complementary to the present product line or service. New products fulfill the firm’s own requirements by either supplying inputs or by serving as a customer for its output. In vertical integration the firm moves backward or forward from the present product or service. Vertical integration may be of two types—backward and forward. Backward integration. It involves moving toward the input of the present product. It is aimed at moving lower on the production process so that the firm is able to supply its own raw materials or basic components. For example, a Car manufacturer may start producing tire tubes; Reliance Industries Ltd. has been able to grow largely through backward integration. It started business with textiles and went for backward integration to produce PFY and PSF critical raw materials for textiles, PTA and MEG raw materials for PFY and PSF, propylene raw materials for PTA and MEG, and finally naphtha for producing propylene. Advantages. Backward integration has the following advantages: (I) Regular supply It ensures regular supply of raw materials or components. (ii) High return on investment It facilitates higher return on investment for the company as a whole through better use of overhead facilities (iii) Competitiveness It improves the competitive power of the company. As it controls more elements of the production process, it has advantages over the uninterested firms in the form of lower costs, lower prices and lower risks. (iv) Quality control It improves quality control over imports for the final product. (v) Bargaining power It improves the company's power of negotiation with suppliers on the basis of known costs. (vi) Tax saving It saves indirect taxes payable on the purchase of inputs. Disadvantages. Backward integration has the following limitations: 147
  12. (a) If an existing input producing unit is taken over, it may involve large investment (b) By investing heavily in backward integration the developments of the final products nay get hampered. This in turn may lead to undue pressure on pricing and sales effort. (c) In the absence of backward integration the firm may purchase at a lower cost from technically more efficient suppliers. With backward integration, this opportunity gets lost. (d) Any adverse Changes in the economy affecting the present product market will also affect adversely the production of inputs. (e) When the divisions using the inputs do not have the freedom of comparing market conditions of supply, the problem of transfer pricing may become acute. Forward integration. Forward integration means the firm entering into the business of distributing or selling its present products. It refers to moving upwards in the production/distribution process towards the ultimate consumer. The firm sets up its own retail outlets for the sale of its own products. For example, many companies like Bata, DCM, Bombay Dyeing, Raymonds and Reliance have set up their own retail outlets to sell their fabrics. Advantages. Forward integration has the following advantages: (I) The firm can exercise greater control over sales and prices of its products. This is very useful in an oligopolistic market. (ii) The firm's own retail stores serve as better source of customer feedback. Thus the firm gets better control over quality (iii) The firm can improve its profits by reducing the costs of distribution and the costs of middlemen. (iv) The firm can secure the economies of integration. Handling and transportation costs can be reduced. Disadvantages. Forward integration suffers form the following drawbacks: (a) The proportion of fixed costs in the firm’s costs increases. As a result the firm is exposed to greater cyclical changes in earnings. Moreover, the fortunes of business are tied to the in-house distribution system. From this point of view, forward Integration increases business risk. (b) Since its processes are interdependent, a slight interruption in one process may dislocate the entire production system. (c) In the absence of proper balance between up-stream and down-stream units, the firm has to buy from or sell in the open market. The firm may be competing with its own customers. (d) It is very difficult to efficiently manage an integrated firm because every business has its own structure, technology and problems. 148
  13. Concentric Diversification When a firm diversifies into some business which is related with its present business in terms of marketing, technology, or both, it is called concentric diversification. When in concentric diversification new product or service is provided with the help of existing or similar technology it is called technology-related concentric diversification. For example, Mother dairy has added 'curd and Lassi’ to its range of milk products. In marketing-related concentric diversification, the new product or service is sold through the existing distribution system. For instance, a bank may start providing mutual fund services to its customers. Concentric diversification is suitable for the following purposes: (a) When cyclical fluctuations in the present products or services are to be counteracted; (b) When the cash flows generated by the existing product or service are in surplus; (c) When demand for present product or service has reached saturation point; (d) To gain managerial expertise in new field of business; and (e) When reputation of present product or service is high and can be used for new products or service. 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. Several Indian companies have adopted this strategy.Reliance, Sahara, DCM, Essar group, ITC, Godrej, HMT are examples of conglomerate diversification. Conglomerate diversification strategy is suitable for the following purposes: (I) To grow faster than the growth realized through expansion; (ii) To avail of potential opportunities for profitable investment; (iii) To achieve competitive edge and greater stability; (iv) To make better use of cash surplus of present products or service; (v) To allocate the risks. Check Your Progress Activity B 149
  14. Give three examples of companies (other than those given in the previous section) which have pursued Diversification and classify them with respect to the direction of their diversification. ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- 10.8.3 MODERNISATION A firm may use the strategy of modernization to achieve growth. Modernization basically involves upgradation of technology to increase production, to improve quality and to reduce wastages and cost of production. The worn-out and obsolete machines and equipment are replaced by the modern machines and equipment. Modernization plans can have the following implications: (I) A firm may go for modernization at a low pace to maintain its position in the market. Thus, it may be considered a stability strategy. (ii) Modernization may be used with full strength to achieve internal growth. Thus, it is used as an internal growth strategy. Advantages of Modernization. The modernization has following advantages: (I) Modernization improves the productivity and efficiency of the firm. (ii) The profitability of the firm goes up because of increased efficiency and reduced wastages. (iii) It makes available better quality products to the customers. (iv) The firm becomes more competitive in the long-run because of modernization. (v) The growth is systematic and does not affect the normal functioning of the firm. (vi) The workers acquire modern skills because of which their wages go zup. However, the strategy of modernization can be used only if the firm has adequate capital through accumulated savings or is able to raise capital from different sources for the acquisition of modern plant and machinery. Modernization will actually serve its purpose only if the workers are adequately trained in the new method of production. Limitations of Modernization. Modernization has following limitations: (i) The accumulated savings of the business may not be sufficient to Finance modernization of plant and machinery. 150
  15. (ii) The responsibilities of top executives would increase because of need to handle new product, technology and markets. (iii) The existing staff may face problems in adapting to the new technology. 10.8.4 MERGER Merger is an external growth strategy. When different companies combine together into new corporate organizations, such a process is known as mergers. Merger can occur in two ways: (a) Acquisition of takeover and (b) amalgamation. Takeover or acquisition takes place when a company offers cash or securities in exchange for the majority shares of another company. It involves one company taking over control of another. Amalgamation takes place when two or more companies of equal size or strength formally submerge their corporate identities into a single one in a friendly atmosphere. Advantages The mergers take place with a number of motivations. Some of the benefits of merger are: (i) A merger provides economies of large-scale operations. (ii) Better utilization of funds can be made to increase profits. (iii) There is possibility of diversification. (iv) More efficient use of resources can be made. (v) Sick firms can be rehabilitated by merging them with strong and efficient concerns. (vi) It is often cheaper to acquire an existing unit than to set up a new one. (vii) It is possible to gain quick entry into new lines of business. (viii) It can provide access to scarce raw materials and distribution network and managerial expertise. Disadvantages. Mergers are not always successful due to the following drawbacks: (a) The combined enterprise may be unwieldy. Effective co-ordination and control becomes difficult. As a result efficiency and profitability may decline. (b) Mergers give rise to monopoly and concentration of economic power which often operate against the interest of the society and the country. Guidelines for Successful Mergers 151
  16. Willard Rockwell1, based on his experience, has given the following guidelines to make the merger successful: (i) Identify the merger objectives, especially economic objectives. (ii) Specify gains for the shareholders of both the joining companies. (iii) Be convinced that the acquired company's management is or can be made competent. (iv) Report the existence of important dovetailing resources; but do not expect perfect compatibility. (v) Start the process of merger with active involvement of the top executives. (vi) Define clearly the business that the company is in. (vii) Analyze and identify the strengths, weaknesses and key performance factors for both the combining units, (viii) Foresee possible problems and discuss them at the initial stage with the other company so as to create a climate of trust. (ix) Don't threaten the management to be acquired. (x) Human considerations should be of prime importance in planning for merger and designing the organisation structure for the new set up. Check Your Progress Find three key words from the above section. Write their meaning in your own words. ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- 10.8.5 JOINT VENTURE When two or more firms mutually decide to establish a new enterprise by participating in equity capital and in business operations, it is known as joint venture. A joint venture is a business partnership between two or more companies for a specific business operation. Joint venture can be with a firm in the same country or a foreign country. For example, Birla Yamaha Ltd. is a joint venture of Birla and Yamaha Motor Co. of Japan, DCM and Daewoo Corporation of Korea established DCM Daewoo Motors Ltd. Hindustan Computers Ltd. and Hewlett - Packard of USA formed HCL-HP Ltd, a joint venture company. 1 Rockwell, Willard:”How to Acquire a Company” in Harvard Business Review, Vol.46, No.5 (Sep.-Oct.1968). 152
  17. Check Your Progress Activity - C Give five examples of the firms which have achieved joint venture in India. ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- Check Your Progress “External Growth Strategies”, “Amalgamation”, “Joint Venture”, “merger”, “Absorption”. Rewrite the above given key-words in their logical sequence. ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- 10.9 CRISIS OF BUSINESS GROWTH All organizations pass through various stages of growth and at each stage the organization is required to solve some specific problems. A very useful model of organizational growth has been developed by Greiner. He argues that each organisation moves through five phases of development as it grows. There are five phases in organizational growth – creativity, direction, delegation, coordination and collaboration followed by a particular crisis and management problems. 1. Creativity Stage. Growth through creativity is the first phase. This phase is dominated by the entrepreneurs of the organizations and the emphasis is on creating both a product and a market. However, as the organization grows in size and complexity, the need for greater efficiency cannot be achieved through informal channels of communication. Thus, many managerial problems occur which the entrepreneur may not solve effectively because they may not be suited for the kind of job or they may not be willing to handle such problems. Thus, a crisis of leadership emerges and the first revolutionary period begins. Such questions as ‘who is going to lead the organisation out of confusion and solve the management problems confronting the organisation; who is acceptable to the entrepreneurs and who can pull the organisation together arise. In order to solve the problems a new evolutionary phase – growth through direction – begins. 2. Direction Stage. When leadership crisis leads to the entrepreneurs relinquishing some of their power to a professional manager, organizational growth is achieved through direction. During this phase, the professional manager and key staff take most of the responsibility for instituting direction, while lower level supervisors are treated more as functional specialists than autonomous decision making managers. Thus, directive management techniques enable the organisation to grow, but they may become ineffective as the 153
  18. organisation becomes more complex and diverse. Since lower level supervisors are most knowledgeable and demand more autonomy in decision making, a next period of crisis – crisis for autonomy begins. In order to overcome this crisis, the third phase of growth – growth through delegation – emerges. 3. Delegation Stage. Resolution of crisis for autonomy may be through powerful top managers relinquishing some of their authority and a certain amount of power equalization. However, with decentralization of authority to managers, top executives may sense that they are losing control over a highly diversified operation. Field managers want to run their own show without coordinating plans, money, technology or manpower with the rest of the organisation and a crisis of control emerges. This crisis can be draft with the next evolutionary phase – the coordination stage. 4. Coordination Stage. Coordination becomes the effective method for overcoming crisis of control. The coordination phase is characterized by the use of formal systems for achieving grater coordination with top management as the watch dog. The new coordination system proves useful for achieving growth and more coordinated efforts by line managers, but result in a task of conflict between line and staff, between head quarters and field. Line becomes resentful to staff, staff complains about unco-operative line managers, and everyone gets bogged down in the bureaucratic paper system. Procedure takes precedence over problem solving; the organisation becomes too large and complex to be managed through formal programmes and rigid systems. Thus, crisis of red – tape begins. In order to overcome the crisis of red-tape, the organisation must move to the next evolutionary stage – the collaboration stage. 5. Collaboration Stage. The Collaboration stage involves more flexible and behavioral approaches to the problems of managing a large organisation. While the coordination stage was managed through formal systems and procedures, the collaboration stage emphasizes greater spontaneity in management action through teams and skilful confrontation of interpersonal differences. Social control and self – discipline take over from formal control. Though Greiner is not certain what will be the next crisis because of collaboration stage, he feels that some problems may emerge as it will centre round the psychological saturation of employees who grow emotionally and physically exhausted by the intensity of team work and of the heavy pressure for innovating solutions. 10.10 SUMMARY In the unit we have discussed what strategic alternatives a firm could consider for growth. 154
  19. Once a firm has identified the various strategic possibilities, it has to make a selection from among these alternatives. And this would depend upon its growth objectives, attitude towards risk, the present nature of business and the technology in use, resources at its command, its own internal strengths and weakness, Government policy etc. There are several managerial factors which moderate the ultimate choice of a strategy. For a firm desiring immediate growth and quick returns, mergers and take–over afford attractive opportunities as they obviate the necessity of starting from scratch. However, identifying the right candidate for merger or acquisition is an art at which only a few managements can really excel. Establishing joint venture, especially in the international arena, is a low risk alternative. Many firms prefer this approach. 10.11 GLOSSORY Red Tape - Too much attention to rules and regulations. Obsolete Technology - Technology which is no longer used as it is out of date. Automation - Use of methods and machines to save labour. Monopoly - Possession of the sole right to supply which is not or cannot be shared by others. Overheads - Those expenses which are needed for carrying on a business e.g., rent advertising, salaries, light, not manufacturing costs. Mass Production - Production in large quantities. Subsidy - Money granted by a govt. to an industry to keep prices at a low level. Unexplored sector - Those sectors of the economy which are hitherto not served. 10.12 SELF - ASSESSMENT QUESTIONS Q.1 What do you understand by ‘business growth’? State briefly its limitations. Q.2 Explain the term ‘growth strategy’. Why does a firm seek to grow? Q.3 Distinguish between horizontal integration and vertical integration. Q.4 What is modernization? Describe its advantages as a growth strategy. Q.5 Distinguish between backward and forward integration. Q.6 What is Merger? State the benefits and limitations of Merger. Q.7 Write a note on joint ventures as a business growth strategy. 155
  20. Q.8 ‘Growth is most frequently used corporate strategy’. Discuss the reasons why a firm must grow? Under what circumstances a firm may not consider growth a desirable strategy? Q.9 Do you know of any mergers or take-over which has taken place recently? What were the motivations behind such mergers or take- over? 10.13 FURTHER READINGS 1. Charles A. Scharf, “Acquisitions, Mergers, Sales and Takeovers’, Prentice Hall N.J. 1981. 2. Dollinger M.J., ‘Entrepreneurship strategies and Resources’, 3rd edition, Pearson Education, New Delhi 2006. 3. Ghosh B., ‘Entrepreneurship development in India’, National Publishing House, Jaipur & New Delhi 2000. 4. Gupta C.B., Modern Business Organisation’, Mayor Paperbacks, New Delhi 2001. 5. H. Igor Ansoff, ‘Corporation Strategy’, McGraw Hill, New York, 1965, p.51. 6. Harward Business Review, July – Aug 1972, pg. 37 – 45. 7. Raw. N.G., ‘Entrepreneurship and Growth of enterprise in Industrial Estates’, Deep and Deep, New Delhi 1986. 8. Saxena A., ‘Entrepreneurship – Motivation. Performance. Rewards’. Deep & Deep, New Delhi 2005. 9. Singh B.P. and Chhabra T.N., ‘Modern Business Organisation, Dhanpat Rai & Co., New Delhi. 10. Singh N.P., ‘Emerging Trends in Entrepreneurship Development – Theories and Practices, “IFDM, New Delhi, 1985. 11. William F.Glueck and Lawrence R. Jauch, ‘Business Policy and Strategic Management’, McGraw Hill, New Delhi, 1984, p.220 156

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