Business Growth strategies: Market penetration, integrative growth strategy and diversification
Important Business Growth Strategies: Market penetration, integrative growth strategy and diversification
Companies have various growth strategies available before them if they want to grow their business. Some of the most common growth strategies utilized by companies are penetration, diversification and integration. Of these three growth strategies the one that is considered least risky is the market penetration strategy. It involves selling existing products in existing markets. Companies can penetrate their existing markets more thoroughly. However, this strategy is to be followed in cases where one of the following conditions exists:
- Market is still unsaturated
- Growth rate of the industry is rising but competitive market share is falling
- If the existing customers are likely to buy the existing products in higher quantity.
- Economies of scale provide a competitive advantage.
In case one of the given conditions exists, this strategy can be used to create further growth. Generally as a part of market penetration, companies increase their investment and focus on distribution and promotion. They spend more on marketing and advertising. Other promotional methods like discount coupons and seasonal sales are also utilized for this purpose and the size of the sales force is increased as a part of this strategy.
Another notable strategy used for business growth is diversification. Companies use this strategy to grow business as well fully utilize its resources and excess cashflow. Diversification is not about existing products like penetration. It involves addition of similar but new products to the company’s core business. To do this a company can develop new products internally or acquire a competing business that already deals in related products. The aim is to realize higher profits and extend the brand’s presence into related areas.
There are a few important concerns related to diversification. Before diversifying, firms must check if the industry they are trying to enter is really profitable. They must check if they would be able to generate a competitive advantage in the business they are entering and if there is a synergy between their new and existing businesses. Firms can obtain this synergy in case of acquisition using following methods:
- Exploit economies of scale: Increase production and unit costs will fall
- Exploit economies of scope: Utilize the same resources better for different tasks
- Allocate capital efficiently
However, compared to market penetration, diversification can be a riskier strategy. Several firms have failed in their attempts to diversify in the history of the business world. The reasons vary from one business to another. There are other examples where firms have seen considerable success after diversifying. So, the difference lies in how well they planned and executed their strategies.
Another important strategy frequently utilized by businesses to find growth is the integration strategy. It differs from both penetration and diversification. Two firms in similar businesses can integrate to become a large business. If two combine, it is known as amalgamation whereas if the larger one absorbs the smaller one it is absorption or merger. There can be following various forms of integration:
- Backward integration: It can be understood as backward expansion. If a firm integrates parts of its supply chain or acquires a supplier’s business to ensure smooth and continue supply of raw material, it is called backward integration. Firms can ensure business growth and higher profits by using this strategy.
- Forward integration: This can be understood as forward expansion. A company integrates parts of its distribution channel into its core business to eliminate the intermediaries and to get closer to its customers. It provides them with higher control over the distribution and sales of their products and increases profits.
- Horizontal integration: It occurs when two firms that are competing in the same business field are brought together. It eliminates competition and increases market share and profits.
- Conglomerative growth: It is the strategy of acquiring a firm engaged in a business altogether different from the acquiring firm’s core business.
However, a growth strategy is also full of risks and companies need to evaluate several actors before embarking on a growth plan. First important factor to be checked is the availability of economies of scale. If economies of scale allow to sell products at lower prices or to derive higher profits per unit, companies must embark on a growth plan. Apart from it companies must check what the response of the customers is going to be to the expansion.
If companies are uncertain whether customers will spend on new products and services or not a growth strategy might be dangerous and could fail. If demand is falling, the business environment will not support expansion and again the growth plan will be a failure. Companies must check if the right conditions including customer demand exist.
Firms must also see if internal financing of the expansion is possible or if there is enough cash to support the expansion plan. Another thing to be ensured is that if the business one is trying to enter will be more profitable than the existing one. If planning to diversify then firms must not try to diversify very far from their core business without properly evaluating the risks. These are only three growth strategies. Companies also use other growth strategies like Market development or product development to grow their businesses.