Internal and External Growth Strategies

The process of increasing a company’s success in any way is known as growing a business. Although a company’s development can be measured in terms of personnel, clientele, revenue, and profit, revenues are most frequently used to gauge growth. There are several strategies for business expansion. Igor Ansoff identified four growth techniques and encapsulated them in the aforementioned Ansoff Matrix. The Product/Market Expansion Grid, another name for the Ansoff Matrix, enables managers to quickly summarize various prospective expansion plans and assess the risk involved with each one. The theory holds that danger increases every time you enter a new quadrant (horizontally or vertically). These are the four tactics:

  • Market Penetration: expanding the company’s existing product line’s market reach. A business may lower pricing, enhance its distribution network, invest more in marketing, and boost current production capacity to promote market penetration and client base growth.
  • Market Development: expanding the company’s existing product line’s market reach. By focusing on new geographic locations, this approach aims to develop globally or reach new client groups.
  • Product Development: creating new items to sell in current markets Product development refers to either creating and launching new items in addition to a company’s current offering or making certain improvements to the existing products to boost the value to the consumers for their purchase.
  • Diversification: accessing new markets with new goods that are either connected to or unconnected from the company’s current product line. Three different categories of diversification strategies may be used to categorize diversity:
  • Concentric/Horizontal diversification Entering a new market with a new product that is partly connected to a company’s current product offering (or related diversification)
  • Conglomerate diversification (or unconnected diversification): introducing a new product into a market that has no connection to the company’s current offerings.
  • Vertical diversification Moving backward or forward in the value chain by assuming control over operations that were previously delegated to other parties, such as suppliers, OEMs, or distributors.

Also Read: Frameworks

Vertical diversification

When a firm increases its own operations by depending on building its own internal resources and competencies, this is referred to as internal expansion (or organic growth). This may be accomplished, for instance, by evaluating a company’s key competences and, using the VRIO framework, identifying and maximizing the strength of its present resources. Additionally, organizations have the option of choosing to develop organically by growing their present operations and enterprises or by launching brand-new ventures (e.g., greenfield investment). It’s crucial to remember that no progress occurs with the help of outside resources or individuals. Compared to external development tactics (such partnerships, mergers, and acquisitions), internal growth provides a several advantages.

  • Knowledge improvement: Through direct participation in a new market or technology, organic growth methods enhance the firm’s understanding, resulting in richer first-hand information that is likely to be assimilated by the company.
  • Investment spread: Internally gradually expanding aids in spreading investment over time, which reduces upfront expenses and commitments and makes it simpler to reverse or adapt a plan if market conditions change.
  • No availability constraints: The company’s ability to find acceptable acquisition targets or possible alliance partners is not reliant on their availability. Additionally, organic developers are not required to wait for the appropriate acquisition target to enter the market.
  • Strategic independence: this implies that a business does not have to make the same concessions as could be required, for instance, in an alliance, which is likely to impose restrictions on some operations and may restrict potential future strategic options.
  • Culture management: Because new activities may be developed inside the current cultural context through organic development, there is less chance of a culture clash, which is a typical problem with mergers, acquisitions, and alliances.
  • Strategies for internal growth have a few drawbacks. For instance, if internal capability development is not properly managed, it can be expensive, dangerous, and sluggish.

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External Growth

Internally created resources and competencies are not used in external expansion (or inorganic growth) plans, which aim to expand production or commercial reach. Instead, these resources are acquired through partnerships, acquisitions, mergers, and other business relationships. Therefore, M&A (Mergers and Acquisitions) plans and strategic alliance strategies may be used to classify external growth methods (e.g., joint ventures).

Mergers and Acquisitions

As a growth strategy that strengthens the competitiveness of the acquirer, M&A has a variety of benefits. They consist of:

  • Business extension: M&A can be utilized to increase a company’s geographical, product, or market coverage reach.
  • Consolidation: M&A can be used to combine two rival companies in order to increase market power by stifling competition, to boost efficiency by reducing excess capacity or pooling resources, such as head office locations or distribution channels, to boost production effectiveness, or to boost bargaining power with suppliers in order to get them to lower their prices.
  • Building capabilities: Acquisitions might improve a company’s capabilities. For instance, acquirers could wait for entrepreneurs to validate a concept before taking them over to integrate the technological competence into their own portfolio rather than doing in-depth research into a new technology.
  • Speed: By acting quickly, which is made possible by M&A, acquirers can misdirect rivals and alter the industry environment before they can adapt in response.
  • Financial efficiency: This may enable a firm with a solid balance sheet to merge with one that has a poor one, allowing the latter to reduce interest costs by leveraging the assets of the stronger firm to pay off its debt. Additionally, the acquired firm had access to previously inaccessible investment capital from the more powerful enterprise.
  • Tax efficiency: For instance, according to regulatory limits, earnings or tax losses may be transferred inside the merged firm in order to take advantage of various tax structures within industries or nations.
  • Asset stripping or unbundling: Some businesses are good at identifying rival businesses whose core assets are worth more than their market value as a whole. Because of this, it is conceivable to purchase such businesses and then quickly sell off (unbundle) individual company pieces to different purchasers for an overall price that is far higher than what was initially paid for the entire. Although this is sometimes seen as purely opportunistic profiteering (asset stripping), there may actually be an increase in economic performance if the business units are able to find stronger corporate parents as a result of the unbundling process.

Strategic Alliances

Through total ownership transfers, mergers and acquisitions combine businesses. However, activities can work together to accomplish a shared goal even if they do not own any of the parent firms. Equity and non-equity partnerships are the two basic types of strategic alliances.

  • Equity alliances include the formation of a new company that the concerned partners each own independently. The most typical type of equity alliance is a joint venture, in which two businesses maintain their independence while establishing a new business that is jointly owned by the parents. Alliances that are created with many partners are known as consortia alliances.
  • Non-equity alliances are often looser and lack the commitment that comes with ownership. Contracts are frequently the basis of non-equity relationships. Franchise agreements are a typical type of contractual arrangement whereby one business (the franchisor) grants another business (the franchisee) the authority to market the franchisor’s goods or services in a certain area in exchange for a fee or royalty. Examples of franchising include Subway and McDonald’s restaurants. Similar to a contractual agreement, licensing permits parties to make use of intellectual property, such as patents or brands, in exchange for a fee. Another type of informal non-equity partnership that is popular in the automotive supply industry is long-term subcontracting arrangements.

Types of Strategic Alliances

Strategic partnerships enable a business to quickly increase the scope of its competitive advantage and typically need less dedication than other types of growth. Sharing resources or activities is a major drive, however there could be other, less visible motives as well. Scale, access, complimentary, and collusive alliances are the four different kinds of alliances.

  • Scale alliances entail businesses joining together to acquire the required size. Although the qualities of each partner may be relatively equal, working together allows them to benefit in ways that working separately would be difficult. The production of outputs can so benefit from economies of scale when two or more things are combined (products or services). In terms of inputs, combining may also offer economies of scale, for instance by lowering the price of acquiring goods or services.
  • Access alliances include a firm joining up with another to have access to the resources needed to create or market its own goods and services. For instance, a Western corporation would need to collaborate with a local distributor in nations like Mexico in order to efficiently reach the national market for its goods and services. The local business is essential to the capacity of the worldwide business to sell. Access alliances can also operate in the reverse direction, with a local business seeking a license partnership to get access to resources from a multinational business, such as brands or technology.
  • Complementary alliances include businesses that are located at comparable nodes in the value network using their unique but complementary capabilities to strengthen each partner where it has specific gaps or weaknesses. A fantastic example of two businesses utilizing their strengths to overcome their respective limitations is the Renault-Nissan Alliance.
  • Collusive alliances include businesses surreptitiously collaborating to gain more market influence. By banding together to form cartels, they are able to impose higher prices on consumers or lower prices on suppliers by lessening competition in the market. Regulators prevent for-profit companies from banding together in such cartels. For instance, collusive activity is frequently charged against energy and mobile phone firms.

The benefits of achieving external expansion through alliances and acquisitions are numerous. Depending on the type of acquisition or partnership, a list of some of these benefits over internal development may be seen below. You might wish to learn more about the Acquisition-Alliance Framework if you want a more methodical technique to decide between acquisitions and alliances.

  • Faster speed of access to new product or market areas
  • Instant market share / increased market power
  • Economies of scale (perhaps by combining production capacity)
  • Secure better distribution channels
  • Increased control of supplies
  • Decreased competition (by taking them over or partnering with them)
  • Acquire intangible assets (brands, patents, trademarks)
  • Overcome barriers to entry to target new markets
  • To take advantage of deregulation in an industry / market

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To summarize, there are numerous possible strategies for expanding a business. The two most popular strategies are expanding internally or externally through partnerships and acquisitions. When comparing growth plans based on factors like speed, unpredictability, and strategic relevance, the Ansoff Matrix is a fantastic tool to utilize as a starting point.

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