Intensive growth strategy aim at achieving further growth for existing products and/or in existing markets. There are three important intensive growth strategies , viz., market penetration, market development and product development.
Backward Integration involves starting the preceding stage of the current business.
For Ex- manufacturer of a finished product may start the manufacture of the raw material required for the finished product.
A company which currently only markets a products, taking up the manufacturing of it is another example of backward integration. For example, Brooke Bond resorted to backward integration by acquiring two tea plants.
It ensures smooth supply of materials for production of goods for marketing. This is particularly important when there are supply bottlenecks.
It may enable the company to obtain the goods cheaply or to make some profits out of the manufacturing.
It may also helps the company to ensure quality of goods.
It may also facilitate tax savings.
The cost of making may be higher than the cost of buying.
Integration may make exit from a business more difficult.
Diversification means adding new lines of business. The new lines of business may be related to the current business or may be quite unrelated. If the new lines added, makes the use of the firm’s existing technology, production facilities or distribution channels or it amounts to backward and forward integration it may be regarded as related diversification. Ex. The diversification of Videocon.
Some companies expand the business in to unrelated industries. Ex. Wipro which is in the business of edible oils, soaps, computers, etc.
Expanding the market to geographical areas where the company has not had business is also regarded as diversification.
Diversification is also described as portfolio change.
Synergistic Diversification: Synergistic Diversification is diversification that results in the realization of synergistic effects. In business literature, synergy is often described as ‘2+2=5’ effect which implies that the result of the combined performances will be greater than if they were done separately and independently. In other words, synergy offers a firm the advantage of higher consolidated return on investment than can maximally be obtained from a conglomerate.
Following are important possible synergies:
Marketing Synergy: Marketing Synergy can occur when products use common distribution channels, sales promotion (including sales personnel) and sales administration.
Operating synergy: Operating Synergy is realized by better utilization of facilities and personnel, economies in purchasing etc.
Investment Synergy: this can result from the use of same production facilities, technology, materials, etc.
Management Synergy: Management Synergy exists if the existing managerial expertise of the company will be an advantage for the new business.
If a company adds new products that have technological and/or marketing synergies with existing product lines, even though they are meant for new class of customers, that is described as concentric diversification. For example, an audiocassette tape manufacturer may start computer-tape manufacturing using the know-how it possesses.
If a company introduces a new product which is technologically unrelated to the current product line but which has appeal to its current customers, it is describes as horizontal diversification. For example, Calmin has introduced several products that are not technologically related with each other but are meant for same customer class.
Although synergistic diversification has the advantages of synergy, over-emphasis on synergy could lead to neglect of several good business opportunities, which have no synergy with the current business. Thus, the overemphasis on synergy could confine an enterprise to a particular field of business with all its disadvantages.
Further, synergy by itself does not guarantee success.
Conglomerate diversification is quite unrelated diversification, i.e., the new business will have no relationship to the company’s current technology, products or markets. For example, the ITC’s diversification into hotels, edible oils, etc. is conglomerate diversification.
Many companies achieve conglomerate diversification by mergers and acquisition.
While some companies goes for conglomerate diversification with the same firm, some corporate establish separate companies for managing different types of products. A company belonging to a conglomerate (group of companies) itself may resort to conglomerate diversification.
While conglomerate diversification provides enormous scope for business expansion and growth and diversification of risks, diversification into quite unrelated and inexperienced field may sometimes create their own problems.
External growth strategy refers to growth by mergers and acquisitions and joint ventures/foreign collaboration.
Mergers & Acquisitions
Merger or Amalgamation refers to the merging of one company into another or two companies getting merged into one another to form a new corporate entity. In this method there is a change in the ownership.
Acquisition or takeover denotes a company acquiring controlling stake in another so that the acquirer can have management control over the other firm. In this case the companies continue as separate legal entity.
On the basis of the nature of relationship between the businesses of the companies involved in the M&A, broadly there are three types of M&As.
Horizontal M&As: This refers to M&As involving firms in the same type of business. (takeover of Raasi Cement by Indian cement). The trend toward focus and consolidation of business set in motion by the liberalization has made horizontal M&As a very significant element of the corporate strategy of many companies in India.
Vertical M&As: These are M&As involving firms at different levels in the value chain in the same industry. In other words, this refers to M&As resulting in backward integration. (takeover of some tea plantation by Brook Bond which was a tea processing and marketing company; and takeover of Polyolefins Rubber Chemicals from the Mafatlal group by Onkar S. Kanwar group, which controls Apollo Tyres), or forward integration (acquisition of Kolkata based Delta Industries, a jute yarn producing firm, of the Netherlands Jute Industries, a company processing yarn in to finished products and marketing jute products in Europe.
Conglomerate M&As: These are M&As involving companies whose businesses are different. In other words this is a part of the diversification strategy of the company. (takeover Trnselectra-Goodknight brands-by Godrej).
Indiscriminate acquisitions have landed several companies in financial and other problems. For example, six of Chhabria’s 10 Indian companies were reported to be in the deep red in 1992 with four of them already sick.
When a company is taken over, its problems are also often taken over.
If adequate homework was not done and the evaluation was not right, the acquisition decision could be wrong.
Some of the units acquired would have problems such as old plant, obsolete technology, surplus or demoralised labour etc.
The company may not have the experience and expertise to manage the unit taken over if it is in an entirely new field.
Foreign collaboration/joint ventures have become very popular world over for various reasons. It has been reported that in the 1990s joint ventures as a development vehicle for corporations has fast replaced mergers and acquisitions, the rage of 1980s.
It enables the Indian firm to upgrade the existing technology or to obtain new technology.
Acquisition of new technology enables the firm to enter new business.
Foreign equity participation enables the Indian company to take up projects with larger outlay than would be possible without such collaboration.
Foreign collaboration may make it easier for the Indian company to raise capital through public issue because the public, generally, has a more favourable attitude towards companies with foreign collaboration.
Foreign collaboration may help the Indian company to gain managerial expertise.
In some cases collaboration with the foreign firm would help to pre-empt competition.
Foreign collaborations in many cases helps the Indian company in its exports. The technological upgradation would improve the company’s competitiveness not only in the domestic market but also in the foreign market. Similarly, the new technology may also help the company in exports. When the collaboration involves foreign equity participation, the foreign collaboration may take an active interest in the exports of the joint venture. A number of Indian companies have been able to increase/start exports because of foreign collaborations.
Foreign collaboration may help improve quality, reduce wastage, improve productivity and reduce cost.
The foreign technology supplied may not be the latest, particularly when the foreign collaboration does not have the equity participation, the collaborator may be reluctant to transfer the latest technology.
There are chances of foreign collaborator overcharging. For example, if the foreign company’s contribution to the capital takes the form of supply of machinery, the chances of overcharging cannot be ruled out.
When there is a tie-up of foreign capital with technology, the Indian party cannot opt for technology of other firms even if that is better.
In some cases, the foreign technology may not be appropriate one for the local conditions.
When there is foreign equity participation, there would also be participation in the management by the foreign company. If the foreign company has majority share holding, control of management would be mostly in the hands of the foreign collaborator and the foreign company’s interests would influence the company’s policies and future development. It is to gain control over the management that several foreign companies have raised their equity holding in their joint ventures in India to 51% taking advantage of the policy liberalizations.