business growth - asst prof jonlen desa
TRANSCRIPT
BUSINESS GROWTHBUSINESS GROWTH
ASST. PROF JONLEN DESA
GROWTH
The term growth refers to a positive change in size, over a period of time.
Growth is the process of increasing in size.
An expansion vertically or horizontally, can be termed as growth.
BUSINESS GROWTH
Business growth is the process of improving some measure of a firm’s success.
Business growth can be achieved either through boosting of profits as a result of increase in sales or cutting down on costs.
Business growth can be measured through increase in sales, profits, earnings, market share, investments, products or services, departments, employees, assets and branches.
BUSINESS GROWTH
A business may grow by increasing its existing lines of business in the existing market or by adding new lines of business or products in new markets.
Business expansion means adding new lines or entering new markets.
Business expansion is an important strategy of business growth.
When a firm’s product or markets have reached the saturation point, further growth can come only from expansion.
Domestic markets limit growth prospects, hence companies decide to go global because of ample of growth opportubities.
GROWTH COMPANY
A company whose business generates positive cash flow or earnings, which increase at a faster rate as compared to the overall rate of the economy is termed as growth rate.
A growth company tends to have profitable investment opportunities.
Growth companies pay little or no dividend to its shareholders, they try to retain all their earnings and plough most of its profits back to its own business either for expansion or investment purposes.
REASONS FOR GROWTH
Natural Urge
Survival
Market Share
Leadership
Competition
Diversification of Risks
Profits
Personal Reasons
Opportunities
INDICATORS OF GROWTH
Increase in net worth
Increase in total assets
Increase in the number of employees
Increase in the total volume of business
Increase in the market share
Increase in sales
Increase in profits
Increase in the number of products and markets
RISKS OF GROWTH
Increase in the productive capacity would have an adverse effect if the demand falls.
If new business fails, it could affect the old business.
More concentration on the new business at the expense of the old business.
Rapid growth of business may lead to ineffective management.
More attention received from competitors and public as a result of growth.
When a firm becomes large, it looses several advantages like tax concessions and subsidies.
GROWTH STRATEGIES
• Growth strategies are those strategies adopted by a firm, when it wishes to grow or expand its business operations.
• These strategies help a firm in increasing its products, customers and business operations.
• Organizations select growth strategies to increase their profits, sales and market share and also to reduce its costs.
• Growth strategies can be internal or external growth strategies.
A. INTERNAL GROWTH STRATEGIES
• Internal growth is achieved through increasing the firm’s production capacity, products, employees and sales.
• In internal growth strategy, a firm does not collaborate with any other company.
• It focuses on increasing its product base as well as customer base.
• Internal growth strategies focus on products and markets.
• Internal growth strategies include intensive strategies, integration strategies and diversification strategies.
A. INTERNAL GROWTH STRATEGIES
I.INTENSIVE GROWTH STRATEGIES
• Intensive growth strategies of a firm aim at achieving further growth for existing products, in existing markets.
• A firm aims at going deeper or more intensely into an existing market by targeting new customers with its existing products.
• Intensive growth strategies include market penetration, market development and product development.
1. INTENSIVE GROWTH STRATEGIES
ANSOFF MATRIX
MARKET PENETRATION• Market penetration involves selling more of a firm’s existing products/services
to existing customers or by finding new customers within existing markets.
• Market penetration strives to increase the sale of the current products in the current markets.
• It involves selling more of its existing products, to its current market. It tries to penetrate deeper within the existing market, by targeting new customers with its existing products.
• The firm tries through increase its market share through this strategy.
• The firm may try to attract competitor’s customers to its own business.
• There are 3 main strategies to achieve market penetration:
1. Increase sales to current customers
2. Pull customers from the competitor's products
3. Convert non-users into users.
MARKET DEVELOPMENT
• This strategy entails finding new markets for existing products.
• The firm seeks to grow by introducing or selling existing products in new markets.
• The firm tries to target new customers, enter new markets, or tries to find new users for its existing products.
• Product differentiation can play a major role if a firm wants to target a new market segment.
• Eg: Voltas Co. for A/C’s.
• HLL products
PRODUCT DEVELOPMENT
• This strategy involves developing new products for existing markets.
• The firm grows by introducing new products to its existing customers in its existing market.
• A firm may not introduce a completely new product, but it may bring about new features or product improvement to its existing product. The firms aim at improving the quality and features of its products.
• Eg: New car style, revised edition of books, new features for television etc.
II. INTEGRATIVE GROWTH STRATEGYII. INTEGRATIVE GROWTH STRATEGY
• Integration means combining various related activities of a firm.
• Such combination is done on the basis of value chain.
• Value chain is a set of interlinked activities performed by an organization, right from procurement of raw materials from suppliers to production, to marketing and sales of the final product to the customers.
• Integration is a growth strategy, that widens the scope of a firm.
• Two common integrative growth strategies involve:
Integration at the same level or stage of business (Horizontal).
Integration of different levels or stages of business (Vertical).
II. INTEGRATIVE GROWTH STRATEGY
HORIZONTAL INTEGRATION
• Integration at the same level of business, is termed as horizontal integration.
• When an organization takes up the same type of business at the same level of business, it is known as horizontal integration.
• The combines its activities with another similar firm in the same business and at the same level.
• Horizontal integration is very much similar to a merger or an acquisition.
• Horizontal integration increases the scope of a business, its operations, market share and there is advantage of economies of scale and synergy effect.
HORIZONTAL INTEGRATION
• Companies may expand horizontally by creating other firms in the same line of business.
• Eg: Tata Group established Tata Financial Services, Tata AIG Insurance, Tata Venture Capital Firms and Tata Investment Corporation in the same line of business.
• Horizontal integration helps increase market share, reduce costs, reduce competition, increase efficiency, benefits of synergy, better marketing and promotion.
VERTICAL INTEGRATION
• Integration at the different levels or stages of business in the same industry is known as vertical integration.
• Any new activity, undertaken with the purpose of supplying inputs or raw materials or serving as a customer for outputs (marketing of its own products) is vertical integration.
• Vertical integration are of two types: Backward Integration and Forward Integration.
BACKWARD INTEGRATION
• Backward integration occurs when the firm acquire or create a company that supplies the firm with raw materials and other inputs.
• Backward integration means retreating to the source of raw materials.
• In backward integration, a manufacturing company starts producing raw materials and inputs which it will later on use in the production process.
BACKWARD INTEGRATION
ADVANTAGES
• It ensures smooth supply of raw materials for production. They can have regular and uninterrupted supply of raw materials.
• The company need not depend on external suppliers.
• Company can manufacture good quality materials.
• Company gets full control over its supplies.
• Saves tax
• Economies of large scale operation.
DISADVANTAGES
• Buying may be cheaper than manufacturing.
• Huge investments required.
• Backward integration may make exit of a business firm more difficult.
FORWARD INTEGRATION
• Forward integration moves the organization ahead, taking the product closer to the customer.
• Forward integration occurs when a firm acquires or creates a company that purchases its products.
• It means entering the subsequent stage of the business.
• In forward integration, a firm may start up its own distribution outlets, or it may establish its own marketing and sales outlets for better distribution of its products.
FORWARD INTEGRATION
ADVANTAGES• Reduces overall costs.
• Generation of additional profit.
• Firm gets greater control over marketing and selling activities.
• Firms can develop their own facilities for providing pre-sales and post-sales services.
DISADVANTAGES
• Huge investments required.
• Time consuming and costly process.
• Does not guarantee success about the sales of the product.
III. DIVERSIFICATION GROWTH STRATEGY
• Diversification growth strategies fall under the third category of internal growth strategies of a firm
• In this strategy, a firm seeks to grow by selling new products in new markets.
• Through this growth strategy, a firm enters into related as well unrelated business areas.
• Diversification involves a lot of risk, but if properly managed, it can produce positive results.
• There are 5 types of diversification strategies that a firm can follow.
DIVERSIFICATIONDIVERSIFICATION
• Diversification is a corporate strategy to enter into a new market or industry which the business is not currently in, whilst also creating a new product for that new market.
• Diversification strategies allow a firm to expand its product lines and operate in several different economic markets.
2 FORMS OF DIVERSIFICATION2 FORMS OF DIVERSIFICATION
RELATED DIVERSIFICATIONRELATED DIVERSIFICATION
• It occurs when a company develops beyond its present product and market whilst remaining in the same area. For example a newspaper company expanding by acquiring a TV station remains with media sector.
• This form of diversification can further be broken down
• Backward diversification: when activities related to the inputs in the business are developed. For example a newspaper company acquiring a printing or publishing company.
• Forward diversification: when development into activities which are concerned with a company’s output. For example a newspaper company acquiring a distribution outlet.
UNRELATED DIVERSIFICATIONUNRELATED DIVERSIFICATION
• It is used to describe a company moving its present interests into unrelated markets or products.
• For example a company whose core business is media services may diversify into provision of financial services
REASONS FOR DIVERSIFICATIONREASONS FOR DIVERSIFICATION
• Saturation or Decline of the Current Business
• Additional Opportunities
• Better Opportunities
• Risk Minimization
• Benefits of integration
• Better Utilization of resources & strengths
• Need related diversification
• Consolidation
ADVANTAGESADVANTAGES
• Control of inputs, leading to continuity and improved quality.
• Control markets by guaranteeing sales and distribution.
• Take advantage of existing expertise, knowledge and resources in the company when expanding into new activities.
• No longer being reliant on a single market
• Provide movement away from declining activities
• Opportunity to serve more customers in new markets with new products.
• Increase in sales, profits, growth rate & market share.
• Synergy
DISADVANTAGESDISADVANTAGES
• No Guarantee that the firm will succeed in the new business. Many diversifications of a number of companies have failed.
• If new lines of business result in huge losses, it may affect the old business.
• Neglecting of the old business or lack of sufficient attention given to the old business.
• Competition for the old as well as new businesses.
• May result in slowing growth in its core business
• Adding management costs
• Adding bureaucratic complexity
• Highest amount of risk involved.
• Complicated rules & regulations incase of foreign markets.
TYPES OF DIVERSIFICATIONTYPES OF DIVERSIFICATION
1. SIMPLE DIVERSIFICATION1. SIMPLE DIVERSIFICATION
• It refers to a normal and simple diversification.
• The company enters into a new business line by introducing a new product or entering a new market.
• It is the easiest and most simple type of diversification.
2. HORIZONTAL DIVERSIFICATION2. HORIZONTAL DIVERSIFICATION
• The company adds new products or services that are often technologically or commercially unrelated to current products but that may appeal to its current customers.
When is Horizontal diversification desirable?
• Horizontal diversification is desirable if the present customers are loyal to the current products and if the new products have a good quality and are well promoted and priced.
3. SYNERGISTIC DIVERSIFICATION3. SYNERGISTIC DIVERSIFICATION
• Synergistic diversification is diversification which results in the realization of synergistic effects.
• Synergy is described as “1+1=3 or 2+2=5” effect which implies that the result of the combined performances will be greater than if they were gone separately and independently.
• Synergy offers a firm the advantage of higher consolidated return on investment that can be maximally obtained from a single separate firm.
• Eg: Product A(Existing Product) Sold by Salesman X.
Product B( New Product) Can be sold by the same salesman X instead of employing a new one. This saves cost and acts as a synergy.
4. CONGLOMERATE DIVERSIFICATION4. CONGLOMERATE DIVERSIFICATION
• Conglomerate Diversification is quite unrelated diversification. The new business will have no relationship to the company’s current technology, products or markets.
• Some companies go in for diversification with the same firm, while some will establish separate companies for managing different types of products. (TATA)(TATA)
• The company markets new products or services that have no technological or commercial synergies with current products but that may appeal to new groups of customers.
• When companies engage in conglomerate diversification strategies, they are often looking to enter a previously untapped market. Companies can do this by purchasing or merging purchasing or merging with another company in the desired industry.
• Conglomerate Diversification provides enormous scope for business expansion & growth.
• Moving into a totally unrelated industry is often highly dangerous, as the company’s current management is unfamiliar with the new industry
• Though this strategy is very risky, it could also, if successful, provide increased growth and profitability.
5. CONCENTRIC DIVERSIFICATION5. CONCENTRIC DIVERSIFICATION
• A concentric diversification strategy allows a company to add similar products to an already successful line of business.
• For example, a computer manufacturer that produces personal computers begins to produce laptop computers.
• In Concentric Diversification, there is a technological similarity between the industries, which means that the firm is able to leverage its technical know-how to gain some advantage. The technology would be the same but the marketing effort would need to change.
• The technical knowledge necessary to accomplish the new task comes from its current field of skilled employees. Concentric diversification strategies also exist in other industries, such as the food production industry.
• Eg: Specialty Foods- Maggi, Sauces, Pasta & other related products.
B.EXTERNAL GROWTH STRATEGY
• External growth strategies refers to growth by mergers, acquisitions and joint ventures.
• In these strategies, a firm takes the help of another external company to grow or diversify its operations and hence the term external growth strategy.
B.EXTERNAL GROWTH STRATEGY
A. MERGERSA. MERGERS
• When two or more organizations combine to become one through exchange of stock or cash or both, it is termed as Merger.
• A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.
• A merger is a legal consolidation of two companies into one entity
LIST OF MERGERS AND ACQUISITIONS IN LIST OF MERGERS AND ACQUISITIONS IN GOA,INDIA & INTERNATIONALGOA,INDIA & INTERNATIONAL
Sesa Goa & Sterlite Am Nissan & Datsun Indian Airline & Air India Vodafone purchased Hutch Ranbaxy & Daichii Sankyo Fortis Health Care India & Fortis Health Care International Nokia & Microsoft Max Life Insurance & Mitsui Sumitomo
LIST OF DEMERGERSLIST OF DEMERGERS Hero & Honda Tata & Fiat Max Life Insurance & New York life Insurance
EXAMPLESEXAMPLES
SUCCESSFUL MERGERS UNSUCCESFUL MERGERS
ADVANTAGES/REASONS FOR M & AADVANTAGES/REASONS FOR M & A
• It helps the firm acquire new technology.
• It enables company to start a new business.
• Provides the company with marketing infrastructure.
• It avoids the gestation period of setting up a new unit.
• Helps in eliminating or reducing competition.
• Cost of acquisition is less than the cost of starting up a new business.
• Helps a firm boost sales, grow & gain a large market share.
• Benefit from Synergies
1. HORIZONTAL MERGERS1. HORIZONTAL MERGERS
• A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms.
• The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs.
• A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature.
2. VERTICAL MERGERS2. VERTICAL MERGERS
• A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one.
• A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain.
• An automobile company joining with a parts supplier would be an example of a vertical merger. Such a deal would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process.
3. CONGLOMERATE MERGERS3. CONGLOMERATE MERGERS
• A merger between firms that are involved in totally unrelated business activities.
• There are two types of conglomerate mergers: pure and mixed.
• Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.
• The example of conglomerate M&A with relevance to above scenario would be if health care system buys a restaurant chain.
4. MARKET EXTENSION MERGERS4. MARKET EXTENSION MERGERS
• A market extension merger takes place between two companies that deal in the same products but in separate markets. The main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger market and that ensures a bigger client base.
• Eg: RBC Bank Eagle Bancshaes Merger.
5. PRODUCT EXTENSION MERGERS5. PRODUCT EXTENSION MERGERS
• A product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.
• Eg: Broadcom-Mobilink Merger.
B. ACQUSITIONB. ACQUSITION
• An Acquisition or Takeover is the purchase of one business or company by another company or other business entity. Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity.
• "Acquisition" usually refers to a purchase of a smaller firm by a larger one.
• Types-Friendly & Hostile Takeovers
EXAMPLES OF AQUISITIONSEXAMPLES OF AQUISITIONS
MERGERS VS ACQUISITIONMERGERS VS ACQUISITION
MERGERS VS ACQUISITIONMERGERS VS ACQUISITION
MERGERSMERGERS ACQUISITIONSACQUISITIONS
• When 2 or more firms combine to form a single firm.
• Types- Horizontal, Vertical, Conglomerate, Product Extension & Market Extension.
• 2 firms of same sizes merge together to conduct business.
• Both companies benefit from the merger.
• There is genuine pooling of assets & liabilities of the merging companies.
• New company is formed
• When one firm purchases or acquires another firm.
• Types- Friendly & Hostile Takeovers.
• A larger firm acquires a smaller firm.
• Usually only the acquirer or the purchasing company benefits from an acquisition
• There is no genuine pooling assets . liabilities in acquisition.
• No new company is formed.
C. JOINT VENTURES(JVs)C. JOINT VENTURES(JVs)
• Two or more partners joining together to create a new business entity that is legally separate and distinct from its parents.
• JVs are established as corporations and are owned by the funding partners in the predetermined proportions.
• JVs are common in international business.
• JVs provide the required strength in terms of capital, technology, human resource and enables the companies to share the risks.
FEATURES OF JOINT VENTURESFEATURES OF JOINT VENTURES
• JVs are established, separate, legal entities
• These are partnerships between legally incorporated entities such as companies, chartered organizations, or governments, and not between individuals
• The purpose is to execute a particular venture or project
• The partners share profit and loss in the agreed ratio.
• During the tenure of joint venture, the co-venturers are free to continue with their own business unless agreed otherwise.
ADVANTAGES OF JOINT VENTURESADVANTAGES OF JOINT VENTURES
• Smaller investment
• Local marketing and production/ procurement of expertise from local partner
• More resources
• Larger Capital Funds
• Spread of risk among the partners
• Diversification
• Synergy
DISADVANTAGES OF JOINT VENTURESDISADVANTAGES OF JOINT VENTURES
• Shared ownership arrangement can lead to conflicts and battles of control between the investing firms.
• Slow decision making process.
• It takes time and efforts to form the right relationship.
• The objectives of each partner may differ. The objectives needs to be clearly defined and communicated to everyone involved.
• Lack of communication between the partners may affect the business.