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Ep 10

  1. 1. LESSON–10ALTERNATIVE GROWTHSTRATEGIES FOR SMALLBUSINESS Sonia SabharwalSTRUCTURE10.0 Introduction10.1 Objectives10.2 Meaning of Business growth10.3 Need for growth10.4 Advantages of growth10.5 Limitations of growth10.6 Forms of growth 10.6.1 Organic growth 10.6.2 Inorganic growth10.7 Meaning of growth strategy10.8 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 Venture10.9 Crisis in Business Growth10.10 Summary10.11 Glossary10.12 Self Assessment Questions10.13 Further Readings10.0 INTRODUCTIONIn earlier units we discussed the processes involved in the setting up ofcommercially viable and technically feasible small scale enterprises (SSE).We also examined the processes of finding an ideal location and layout for aSSE. In this lesson we will take a view of different alternatives available forthe growth of a small scale enterprise.Business growth is a natural process of adaptation and development thatoccurs under favorable conditions. The growth of a business firm is similar tothat of a human being who passes through the stages of infancy, childhood,adulthood and maturity. Many business firms started small and have becomebig through continuous growth. However, business growth is not a 137
  2. 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 allenterprises survive to grow big. This may be due either to the nature of thefirm or the entrepreneur. Some entrepreneurs do not want to grow theirventures, choosing instead to pursue other interest, spend more time withfamily or develop other business activities.10.1 OBJECTIVESAfter 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 growth10.2 MEANING OF BUSINESS GROWTHGenerally, the term ‘business growth’ is used to refer to various things such asincrease in the total sales volume per annum, an increase in the productioncapacity, increase in employment, an increase in production volume , anincrease in the use of raw material and power. These factors indicate growthbut do not provide a specific meaning of growth. Simply stated, businessgrowth means an increase in the size or scale of operations of a firm usuallyaccompanied by increase in its resources and output.Check your progressWrite five indicators of growth.--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------10.3 NEED FOR GROWTHAs we have already said that business enterprise is like a human being, growthis 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 thatdoes not grow may, in course of time have to be closed down because of itsobsolete products. The market is full of examples of very popular products 138
  3. 3. disappearing from the scene for lack of growth plans. For example, pagersvanished from the market because better technology product i.e. cell phoneswere introduced. The reasons which drive business enterprises toward growthare described below:(I) Survival: In a competitive market no single enterprise can havemonopoly. The competition can be direct or indirect. Direct competitioncomes from other firms manufacturing the same product. For example, thereare many brands of shampoos available in the market. To survive thecompetition the manufacturer of each brand of shampoo has to continuouslybring new versions of basic product to maintain an edge over his competitors.Indirect competition may come from availability of cheaper substitutes. Forexample, the khadi industry faced a problem when polyester emerged. Severecompetition forces a firm to grow and gain competitive strength. Any businessfirm that fails to grow can’t survive for long. A growing concern will be aninnovator and can easily face the risk of competition. Thus growth is means ofsurvival in a competitive and challenging environment.(ii) Economies of Scale: Growth of a firm may provide several economiesin production, purchasing, marketing, finance, management etc. A growingfirm enjoys the advantages of bulk purchase of materials, increased bargainingpower, spreading of overheads, expert management etc. This leads to low costof production and higher margin of profit. This also ensures full utilization ofplant capacity.(iii) Owners mandate: The owners of a company get the ultimate benefitof growth in the form of higher profits. They may direct the management toreinvest a substantial portion of the earnings in the business rather than payingthem out. Capable management may on its own like to take carefullycalculated risk and expand the size of the company.(iv) Expansion of the market – Increase in demand for goods and servicesleads business firms to increase the supply also. Population explosion andtransportation led to increase in the size of markets which in turn resulted inmass 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 anddevelopment activities to create new products and new techniques, whileothers try to acquire latest technology from the market. Rationalization andautomation results in more efficient use of resources and a firm may grow toobtain them.(vi) Prestige and Power – The more the size of the business firm increasethe more is the prestige and power of the firm. Businessmen satisfy their urgefor power by increasing the size of their business firm.(vii) Government Policy – In a planned economy like India, business firmsoperate under a large number of rules and restrictions. A big firm is in a betterposition to carry out the various legal formalities required to obtain licensesand quotas. Business firms may plan for growth to make use of the incentivesprovided by the government. The government provides certain subsidies and 139
  4. 4. tax concessions to the new industrial units in the backward areas and thoseproducing goods for export only.(viii) Self-sufficiency – Some firms grow to become self sufficient in termsof marketing of raw material or marketing of products. Growth in either orboth of these forms reduces the dependency of the firm over other firms.Check your progressActivity AList any three products that disappeared from the market for lack of growthplans.------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------10.4 ADVANTAGES OF GROWTHBusiness firms try to achieve growth in order to obtain the followingadvantages:(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 government10.5 LIMITATIONS OF GROWTHBusiness firms cannot grow indefinitely. Growth has its own limitations whichare:(i) Finance: Growth, especially external growth, requires additionalcapital investment which is sometimes difficult for a small firm to arrange.(ii) Market: Growth can be achieved to the extent that the size of marketpermits. If a firm grows faster than increase in the size of the market, it islikely to face failure.(iii) Human Relations Problems: In a big firm, management losespersonal touch with employees and customers. Motivation and morale tend tobe low resulting in inefficiency. 140
  5. 5. (iv) Management: Growth increases the functions and complexities ofoperations. As the number of functions and departments increase, coordinationand control become very difficult. If the organization and managementstructure is not capable of accommodating them, growth may be harmful.(v) Lack of knowledge: Under conglomerate growth, a firm enters newindustries and new markets about which the managers know little. Managersfind it difficult to find and develop managers who can quickly handle newunits and improve their earning potential against heavy odds. Many growingfirms could not succeed because their managers felt that they could manageanything anywhere.(vi) Social problems: From social point of view also big firms may beundesirable as they may lead to concentration of economic power and creationof monopolies which may exploit consumers. In their desire for growth firmsindulge in combative advertising. The quickening growth creates a culturalgap when society finds it difficult to cope with technological change.10.6 FORMS OF GROWTHOnce an entrepreneur understands some of the factors that influence growthand development, he can choose a suitable way for achieving it. Businessgrowth can take place in many ways. Broadly, various types of growth can bedivided into two broad categories – organic and inorganic growth.Organic Growth – It can also be termed as internal growth. It is growth fromwithin. It is planned and slow increase in the size and resources of the firm. Afirm can grow internally by ploughing back of its profits into the businessevery year. This leads to the growth of production and sales turnover of thebusiness. Internal growth may take place either through increase in the sales ofexisting products or by adding new products. Internal growth is slow andinvolves comparatively little change in the existing organization structure. Itcan be planned and managed easily as it is slow. The ways used by themanagement for internal growth include: (I) intensification; (ii) diversificationand (iii) modernization.Inorganic Growth – it can also be termed as external growth. It involves amerger of two or more business firms. A firm may acquire another firm orfirms may combine together to improve their competitive strength. Externalgrowth has been attempted by the business houses through the two strategies(a) mergers and acquisitions and (b) joint ventures. Merger again can be oftwo types: (i) a firm merges with other firm in the same industry havingsimilar or related products. This type of merger leads to coordination problembetween the two firms (ii) a firm merges with another firm in altogetherdifferent lines of business and have little common in their products or procesessuch 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. 6. remains unchanged. Merger leads to combination of independent units tocontrol competition, to gain economics of scale and also sometimes, tomodernize production facilities. But merger also leads to social problem ofmonopoly, problem of coordination, strain on capital structure, etc. Thus,external growth involves problem of reorganization.10.7 MEANING OF GROWTH STRATEGYThe term strategy means a well planned, deliberate and overall course ofaction to achieve specific objectives. According to chandler, “strategy is thedetermination of the basic long term goals and objectives of an enterprise andthe adoption of courses of action and the allocation of resources necessary tocarry out these objectives”. The concept of strategy has been derived frommilitary administration wherein it implies ‘Grand’ military plan designed todefeat the enemy. As applied to business, strategy is a firm’s planned courseof action to fight competition and to increase its market share.‘Growth Strategy’ refers to a strategic plan formulated and implemented forexpanding firm’s business. For smaller businesses, growth plans are especiallyimportant because these businesses get easily affected even by smallestchanges in the marketplace. Changes in customers, new moves bycompetitors, or fluctuations in the overall business environment can negativelyimpact their cash flow in a very short time frame. Negative impact on cashflow, if not projected and adjusted for, can force them to shut down. That iswhy they need to plan for their future. Small entrepreneurs generally feel thatstrategic planning is for large business houses; but it is very necessary forsmall and medium enterprises. Strategic Planning gives a formal direction tothe business. Strategic planning is necessary to take care of the additionalefforts and resources required for faster growth.Different type of growth strategies are available each having advantage anddisadvantage of its own. A firm can adopt different strategies at differentpoints of time. Every firm has to develop its own growth strategy according toits own characteristics and environment.10.8 TYPES OF GROWTH STRATEGIESThe following are the main growth strategies available to firms:1. Intensive Growth Strategy (Expansion)2. Diversification3. Modernization4. External Growth Strategy (a) Mergers 142
  7. 7. (b) Joint Ventures GROWTH STRATEGIES Organic / Internal Growth Strategy Inorganic / External Growth Strategy Intensive growth Merger Diversification Joint Ventures ModernizationFigure 10.1: Types of Growth Strategies10.8.1 INTENSIVE GROWTH STRATEGYIntensive growth strategy or expansion involves raising the market share, salesrevenue and profit of the present product or services. The firm slowlyincreases its production and so it is called internal growth strategy. It is a goodstrategy for firms with a smaller share of the market. Three alternativestrategies 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 firms 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. 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 StrategyWhen 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 unitsCheck your progressMatch the following1. 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 area3. ‘Colgate’ expanding the sale by Market Development introducing ‘Colgate-salt active’10.8.2 DIVERSIFICATIONBeyond a certain point, it is no longer possible for a firm to expand in thebasic product market. So the firm seeks increased sales by developing newproducts for new markets. This strategy towards growth is calleddiversification. The diversification does not simply involve adding variety in aproduct but adding entirely different types of products. Products added may be 144
  9. 9. complementary. Diversification is a much talked about and widely usedstrategy for growth. Many companies have opted for this. For example, LIC,an insurance concern initially, diversified into mutual funds. State Bank ofIndia diversified into merchant banking and mutual funds. Similarly, Larsenand Toubro, an engineering company diversified into cement. Table 1. Product-Market Matrix and Growth Strategy Products Present NewMarketsPresent 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.51A firm may choose the strategy of diversification under the followingsituations:(a) When diversification promises greater profitability than expansion.(b) When the firm cannot attain its growth target by the strategy ofexpansion alone.(c) When the financial resources of the firm are much in excess of therequirements of expansion.The distinction between intensive growth strategy and diversification strategymust be carefully noted. In the case of intensive growth, the firm increases theproduction and sales of its existing products. But in case of diversification,there is addition of new products and new markets.Advantages of DiversificationCompanies have increasingly adopted diversification strategy due to thefollowing reasons:(i) Better use of its resources. By adding up related products to itsexisting product portfolio, a company can more effectively utilize itsmanagerial personnel, marketing network, research and development facilities,etc.(ii) Reduce the decline in sales. By developing new products the salesrevenue and earnings can be maintained or even increased. For example, BajajScooters India Ltd. entered in the field of mopeds.(iii) More competitive With greater resources, more products and higherprofits, the diversified firm is more competitive than a single product firm.(iv) Minimize risk. When one line of business faces recession, another linemay be in high growth stage. For example, a well-diversified engineering firm 145
  10. 10. like Larsen and Toubro did well even when the engineering industry wasfacing recession.(v) Use of cash surplus of one business to finance another businesshaving good potential for growth.(vi) Economies of scale Diversification adds to size of business whichimproves the competitiveness of a firm. It offers a lot of economy inoperations because common facilities can be used for several products.Limitations of Diversification. The limitations of diversification are as givenbelow:(I) Huge funds are required for diversification. The internal savings of thebusiness may not be sufficient to finance growth.(ii) The functions and responsibilities of top executives increase becauseof need to handle new product, technology and markets. They may findproblems in coordination which may lead to inefficient operations.(iii) Diversification may involve new technology and new markets and thepresent staff may face problems in adjusting to this growth pattern.(iv) Diversification may lead to unknown products and markets leading tomore risk.Types of Diversification:1. Horizontal Integration,2. Vertical Integration,3. Concentric, and4. ConglomerateHorizontal Integration: It involves addition of parallel new products to theexisting product line.This may happen internally or externally, internally, a company may decide toenter a parallel product market in addition to the existing product line.Externally, a company combines with a competing firm. For example, SpartaCeramics India Ltd. took over Neyveli Ceramics and Refractories Ltd.(Neycer). Both the companies are in sanitary ware and tiles business. Two ormore competing firms are brought together under single ownership andcontrol. Seven small cement firms combined and formed Associated CementCompanies (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 thecompetitiveness of the company. 146
  11. 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 ofover- capitalisation.(iii) The management of the firm may become bureaucratic and inflexible.(iv) The firm may acquire exploit consumers and labour by becoming amonopoly.Vertical IntegrationIn vertical integration new products or services are added which arecomplementary to the present product line or service. New products fulfill thefirm’s own requirements by either supplying inputs or by serving as acustomer for its output. In vertical integration the firm moves backward orforward from the present product or service. Vertical integration may be oftwo types—backward and forward.Backward integration. It involves moving toward the input of the presentproduct. It is aimed at moving lower on the production process so that the firmis able to supply its own raw materials or basic components. For example, aCar manufacturer may start producing tire tubes; Reliance Industries Ltd. hasbeen able to grow largely through backward integration. It started businesswith textiles and went for backward integration to produce PFY and PSFcritical raw materials for textiles, PTA and MEG raw materials for PFY andPSF, propylene raw materials for PTA and MEG, and finally naphtha forproducing propylene.Advantages. Backward integration has the following advantages:(I) Regular supply It ensures regular supply of raw materials orcomponents.(ii) High return on investment It facilitates higher return on investmentfor 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 overthe uninterested firms in the form of lower costs, lower prices and lower risks.(iv) Quality control It improves quality control over imports for the finalproduct.(v) Bargaining power It improves the companys power of negotiationwith 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. 12. (a) If an existing input producing unit is taken over, it may involve largeinvestment(b) By investing heavily in backward integration the developments of thefinal products nay get hampered. This in turn may lead to undue pressure onpricing and sales effort.(c) In the absence of backward integration the firm may purchase at alower cost from technically more efficient suppliers. With backwardintegration, this opportunity gets lost.(d) Any adverse Changes in the economy affecting the present productmarket will also affect adversely the production of inputs. (e) When the divisions using the inputs do not have the freedom ofcomparing market conditions of supply, the problem of transfer pricing maybecome acute.Forward integration. Forward integration means the firm entering into thebusiness of distributing or selling its present products. It refers to movingupwards in the production/distribution process towards the ultimate consumer.The firm sets up its own retail outlets for the sale of its own products. Forexample, many companies like Bata, DCM, Bombay Dyeing, Raymonds andReliance 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 itsproducts. This is very useful in an oligopolistic market.(ii) The firms own retail stores serve as better source of customerfeedback. Thus the firm gets better control over quality(iii) The firm can improve its profits by reducing the costs of distributionand the costs of middlemen.(iv) The firm can secure the economies of integration. Handling andtransportation 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 resultthe firm is exposed to greater cyclical changes in earnings. Moreover, thefortunes of business are tied to the in-house distribution system. From thispoint of view, forward Integration increases business risk.(b) Since its processes are interdependent, a slight interruption in oneprocess may dislocate the entire production system.(c) In the absence of proper balance between up-stream and down-streamunits, the firm has to buy from or sell in the open market. The firm may becompeting with its own customers.(d) It is very difficult to efficiently manage an integrated firm becauseevery business has its own structure, technology and problems. 148
  13. 13. Concentric DiversificationWhen a firm diversifies into some business which is related with its presentbusiness in terms of marketing, technology, or both, it is called concentricdiversification.When in concentric diversification new product or service is provided with thehelp of existing or similar technology it is called technology-related concentricdiversification. For example, Mother dairy has added curd and Lassi’ to itsrange of milk products. In marketing-related concentric diversification, thenew product or service is sold through the existing distribution system. Forinstance, 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 DiversificationWhen a firm diversifies into business which is not related to its existingbusiness both in terms of marketing and technology it is called conglomeratediversification. Several Indian companies have adopted this strategy.Reliance,Sahara, DCM, Essar group, ITC, Godrej, HMT are examples of conglomeratediversification.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 ProgressActivity B 149
  14. 14. Give three examples of companies (other than those given in the previoussection) which have pursued Diversification and classify them with respect tothe direction of their diversification.------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------10.8.3 MODERNISATIONA firm may use the strategy of modernization to achieve growth.Modernization basically involves upgradation of technology to increaseproduction, to improve quality and to reduce wastages and cost of production.The worn-out and obsolete machines and equipment are replaced by themodern machines and equipment. Modernization plans can have the followingimplications:(I) A firm may go for modernization at a low pace to maintain its positionin the market. Thus, it may be considered a stability strategy.(ii) Modernization may be used with full strength to achieve internalgrowth. 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 hasadequate capital through accumulated savings or is able to raise capital fromdifferent sources for the acquisition of modern plant and machinery.Modernization will actually serve its purpose only if the workers areadequately 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. 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 MERGERMerger is an external growth strategy. When different companies combinetogether into new corporate organizations, such a process is known asmergers. Merger can occur in two ways: (a) Acquisition of takeover and (b)amalgamation.Takeover or acquisition takes place when a company offers cash or securitiesin exchange for the majority shares of another company. It involves onecompany taking over control of another. Amalgamation takes place when twoor more companies of equal size or strength formally submerge their corporateidentities into a single one in a friendly atmosphere.AdvantagesThe mergers take place with a number of motivations. Some of the benefits ofmerger 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 followingdrawbacks:(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. 16. Willard Rockwell1, based on his experience, has given the followingguidelines 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 companys 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) Dont 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 ProgressFind three key words from the above section. Write their meaning in your ownwords.------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------10.8.5 JOINT VENTUREWhen two or more firms mutually decide to establish a new enterprise byparticipating in equity capital and in business operations, it is known as jointventure. A joint venture is a business partnership between two or morecompanies for a specific business operation.Joint venture can be with a firm in the same country or a foreign country. Forexample, Birla Yamaha Ltd. is a joint venture of Birla and Yamaha Motor Co.of Japan, DCM and Daewoo Corporation of Korea established DCM DaewooMotors Ltd. Hindustan Computers Ltd. and Hewlett - Packard of USA formedHCL-HP Ltd, a joint venture company.1 Rockwell, Willard:”How to Acquire a Company” in Harvard BusinessReview, Vol.46, No.5 (Sep.-Oct.1968). 152
  17. 17. Check Your ProgressActivity - CGive 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 GROWTHAll organizations pass through various stages of growth and at each stage theorganization 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 asit grows. There are five phases in organizational growth – creativity, direction,delegation, coordination and collaboration followed by a particular crisis andmanagement 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. 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 SUMMARYIn the unit we have discussed what strategic alternatives a firm could considerfor growth. 154
  19. 19. Once a firm has identified the various strategic possibilities, it has to make aselection from among these alternatives. And this would depend upon itsgrowth objectives, attitude towards risk, the present nature of business and thetechnology in use, resources at its command, its own internal strengths andweakness, Government policy etc. There are several managerial factors whichmoderate the ultimate choice of a strategy. For a firm desiring immediategrowth and quick returns, mergers and take–over afford attractiveopportunities as they obviate the necessity of starting from scratch. However,identifying the right candidate for merger or acquisition is an art at which onlya few managements can really excel. Establishing joint venture, especially inthe international arena, is a low risk alternative. Many firms prefer thisapproach.10.11 GLOSSORYRed 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 QUESTIONSQ.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. 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 READINGS1. 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