Lecture 3: Business growth

A business that is not growing after all, is dying - Shawn Casemore.

Business Growth Definition

Business growth is the process of making a business bigger and more successful over time.
This can be achieved in several ways, such as increasing sales, expanding into new markets,
or developing new products or services and increasing sales. It also refers to the increase in a
company's size, revenue, market share and profitability over time.

Imagine a small bakery that sells homemade bread. The owner of the bakery decides to
expand the business by opening a second location in a nearby town. This new location attracts
new customers and helps to increase the bakery's overall revenue and profitability. As a
result, the bakery can invest in new equipment, hire more employees, and expand its menu
to include new items.

Types of business growth

There are several ways of classifying business growth. The two main classification of business
growth include organic and inorganic growth. The type of business growth chosen by the
company will determine its business growth strategy.

Other types of business growth include:

i. Horizontal Integration
ii. Vertical Integration
iii. Conglomerate Integration

Organic business growth

Organic business growth happens when expansion happens from within the company. It is
the increase in the number of business units, expansion in the product range etc. The organic
growth strategy depends on the company’s resources and capabilities. Organic growth
ensures owners of their company’s control. This is a much slower process compared to
inorganic growth. The following are the most common organic business strategies:
● New product offerings
● Reallocation of resources
● Investing in new technologies
● Process optimization

Advantages of organic business growth:

● Internally financed.
● Lower risks (as compared to inorganic growth).
● Company growth at a reasonable rate
● Build according to the company’s strengths.

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Disadvantages of organic business growth:
● Slow process
● Growth depends on market growth.
● Difficult for companies with franchises to manage them.

Inorganic business growth

Inorganic growth or external growth happens mainly through mergers and acquisitions and is
a faster way for companies to grow. Acquisitions increase market share and boost a
company’s earnings. Opening new stores and branches are also part of inorganic growth. One
of the most popular examples of inorganic growth is the acquisition of WhatsApp by
Facebook.

Advantages of inorganic business growth:

● Faster growth process
● More market share and assets
● More attractive for financial investors
● More skilled management and their expertise

Disadvantages of inorganic growth:

● Loss of control from owners
● Need for more coordination and control.
● Corporate cultural changes
● Large up-front costs

Vertical Integration
Vertical integration is when a company acquires ownership of another company in its
production line. This saves money and time and increases efficiency.

● Backwards vertical integration - acquisition of ownership of companies up the supply

chain. When a company expands to perform tasks previously performed by companies
that supplied raw materials for production is called backwards vertical integration.
This occurs when the company realises that it is better off in terms of time and money
to source raw materials themselves rather than outsourcing the job. Companies can
either merge or acquire their suppliers or have their own subsidiary for the task.

● Forward vertical integration - company strategy wherein the company owns and
acquires operations of businesses ahead in the supply chain. In a forward vertical
integration, the company distributes and sells its products to customers directly,
rather than having a third party do it. Forward integration can also be done either by
merging, acquiring or by having a subsidiary for the task.

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Horizontal Integration
Horizontal integration is the acquisition or merging of companies operating at the same level
in the same industry. It creates economies of scale, increases product differentiation,
increases revenue, and helps companies enter new markets. Companies in horizontal
integration benefit from synergies. Synergy occurs when the combined value of two
companies becomes greater than the value of the two separate companies operating
individually. Although horizontal integration is beneficial for the company, it can lead to
joblessness, and changes in the business can have a negative impact on customers. Another
drawback is that purchasing another company can be expensive.

Conglomerate Integration
The process of companies from different market sectors merging is known as conglomerate
integration. Example is an investment banking company such as HSBC merged with Vodafone,
a telecommunications brand. This strategy helps spread the risk across several markets and
helps target new markets. The newly acquired market brings in more customers and revenue.
The acquiring company can learn the know-how of the acquired company and also acquire its
customers. If the acquiring company does not have enough knowledge to run the newly
acquired business, this could hurt both companies' business activities. Another drawback is
having to share expertise and resources while entering into new markets, which could hurt
the core activities of the acquiring company.

Stages of Business Growth

A business growth goes through different stages and each stage has crises associated with it.
Functions in a rapidly growing company may not be as smooth as it was before and managers
may not be as efficient as they were before, as their span of control and responsibility
increases. Greiner’s model helps in understanding the root cause of crises that an
organisation may face during its growth phase. Understanding the model helps to foresee a
problem before it occurs, helping organisations to take the required measures.
This model was proposed by Larry E. Greiner in 1972 with five phases of growth, which he
then updated in 1998 with the sixth phase. The six phases are:

● Growth through creativity

● Growth through direction
● Growth through delegation
● Growth through coordination
● Growth through collaboration
● Growth through alliances

Growth through creativity

In this phase, there aren’t many staff, and the founders are busy innovating new products and
trying to enter new markets. Informal communication works just fine during this stage. As the

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company starts to grow, the number of staff increases, and the workload increases, there is
a need for formal communication and a change in management style is required. This phase
ends with a leadership crisis.

Growth through direction

Now, there is more formal communication in the workplace. The activities become more
intense and numerous, making it difficult for them to be managed by one person. This phase
ends with an autonomy crisis, calling for new structures based on delegation.

Growth through delegation

The autonomy crisis is solved in this phase, and the company now has functional
management. Having functional management means having the organisation grouped into
areas of speciality to better manage each functional sector. This helps reduce chaos in the
company, as each manager can take necessary and well-informed actions in their
departments. The problem arises when the founder or the entrepreneur finds it hard to pass
their control to the newly assigned managers. This leads to a control crisis.

Growth through coordination

Coordination is important for a company facing a control crisis. It helps bring together every
functional area and ensures efficiency. This process adds many layers of hierarchy to the
system, increasing bureaucracy and leading to a red-tape crisis.

Growth through collaboration

Collaboration helps in simplifying and standardizing formal systems. Managers and
employees are given more educational training programs. Collaboration helps with acquiring
more resources such as different marketing channels, various products and services, etc.
During the collaboration phase, companies experiment with new technologies and processes
which cause changes within the company’s people and their practices. This phase results in
an internal growth crisis.

Growth through alliances

This phase is the latest addition to Greiner’s growth model. This phase shows that companies
facing an internal growth crisis can be saved by strong strategic alliances to form growth
strategies. It also suggests the option of acquiring another company for expanding or growing
the organisation. This is the last phase of the model.

Business growth strategies

While business growth types and strategies are very similar concepts and are sometimes used
interchangeably, we will focus on four business growth strategies based on Ansoff's corporate
strategy mix. There are four main business growth strategies (directions). It is important to
note that, large businesses usually integrate more than one growth strategy.

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 ● Market penetration
● Product and service development
● Market development
● Diversification

Market penetration strategy

Market penetration strategy is focused on increasing the sales of existing products to current
customers or the company's existing market segment. This strategy is typically used when a
company already has a significant market share in a particular market and wants to maintain
its position while increasing its sales. The company may achieve this goal by offering special
promotions, improving the product quality or features, or by lowering prices to attract more
customers. By increasing its market share, a company can achieve economies of scale and
improve its profitability.
One example of a company that has successfully implemented a market penetration strategy
is McDonald's. McDonald's increased its market share by focusing on price. They introduced
the value menu, which offered inexpensive meals to customers. It helped them get new
customers as well as serve the current ones better.

Product and service development strategy

Product and service development strategy is focused on creating new or improved products
or services to sell to the company's current customer base or market segment.
This strategy is typically used to satisfy the changing needs and preferences of customers or
to take advantage of new technological advancements. The company may achieve this goal
by investing in research and development, improving product design, or adding new features
to existing products.
One example of a company that has successfully implemented a product and service
development strategy is Apple. Apple has consistently released new and improved versions
of its products, such as the iPhone, iPad, and MacBook and vison pro to keep up with the
changing needs and preferences of customers. By offering new features and improved
designs, Apple has been able to attract new customers and retain existing ones, which has
contributed to its success as one of the world's leading technology companies.

Market development strategy

Market development strategy is focused on expanding the company's customer base by
targeting new customer segments or entering new markets. This strategy is typically used
when a company has saturated its existing market and wants to explore new opportunities
for growth. The company may achieve this goal by expanding geographically, targeting new
customer segments, or by offering its existing products or services to new markets.
One example of a company that has successfully implemented a market development
strategy is Airbnb. Airbnb has expanded its business model from simply offering lodging to
also providing experiences, such as cooking classes and city tours. By offering new products

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to existing customers and targeting new customer segments, Airbnb has been able to grow
its customer base and revenue significantly.

Diversification strategy
Diversification strategy, also called unrelated diversification, involves entering new markets
or offering new products or services that are not related to the company's existing business.
This strategy is typically used when a company wants to reduce its dependence on a single
market or product and spread its risks across different markets. The company may achieve
this goal by acquiring other businesses or investing in new technologies or products. By
diversifying its business, a company can achieve long-term growth and reduce its exposure to
market risks.
One example of a company that has successfully implemented a diversification strategy is
General Electric (GE). GE started as a company that primarily manufactured light bulbs and
other electrical products. However, over time, GE diversified its business by acquiring other
companies in different industries, such as finance, aviation, and healthcare. Today, GE is a
conglomerate that operates in a wide range of industries and has a significant presence in the
global market.