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1. LESSON–10
ALTERNATIVE GROWTH
STRATEGIES FOR SMALL
BUSINESS
Sonia Sabharwal
STRUCTURE
10.0 Introduction
10.1 Objectives
10.2 Meaning of Business growth
10.3 Need for growth
10.4 Advantages of growth
10.5 Limitations of growth
10.6 Forms of growth
10.6.1 Organic growth
10.6.2 Inorganic growth
10.7 Meaning of growth strategy
10.8 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 Venture
10.9 Crisis in Business Growth
10.10 Summary
10.11 Glossary
10.12 Self Assessment Questions
10.13 Further Readings
10.0 INTRODUCTION
In earlier units we discussed the processes involved in the setting up of
commercially viable and technically feasible small scale enterprises (SSE).
We also examined the processes of finding an ideal location and layout for a
SSE. In this lesson we will take a view of different alternatives available for
the growth of a small scale enterprise.
Business growth is a natural process of adaptation and development that
occurs under favorable conditions. The growth of a business firm is similar to
that of a human being who passes through the stages of infancy, childhood,
adulthood and maturity. Many business firms started small and have become
big through continuous growth. However, business growth is not a
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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 all
enterprises survive to grow big. This may be due either to the nature of the
firm or the entrepreneur. Some entrepreneurs do not want to grow their
ventures, choosing instead to pursue other interest, spend more time with
family or develop other business activities.
10.1 OBJECTIVES
After 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 growth
10.2 MEANING OF BUSINESS GROWTH
Generally, the term ‘business growth’ is used to refer to various things such as
increase in the total sales volume per annum, an increase in the production
capacity, increase in employment, an increase in production volume , an
increase in the use of raw material and power. These factors indicate growth
but do not provide a specific meaning of growth. Simply stated, business
growth means an increase in the size or scale of operations of a firm usually
accompanied by increase in its resources and output.
Check your progress
Write five indicators of growth.
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10.3 NEED FOR GROWTH
As we have already said that business enterprise is like a human being, growth
is 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 that
does not grow may, in course of time have to be closed down because of its
obsolete products. The market is full of examples of very popular products
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3. disappearing from the scene for lack of growth plans. For example, pagers
vanished from the market because better technology product i.e. cell phones
were introduced. The reasons which drive business enterprises toward growth
are described below:
(I) Survival: In a competitive market no single enterprise can have
monopoly. The competition can be direct or indirect. Direct competition
comes from other firms manufacturing the same product. For example, there
are many brands of shampoos available in the market. To survive the
competition the manufacturer of each brand of shampoo has to continuously
bring new versions of basic product to maintain an edge over his competitors.
Indirect competition may come from availability of cheaper substitutes. For
example, the khadi industry faced a problem when polyester emerged. Severe
competition forces a firm to grow and gain competitive strength. Any business
firm that fails to grow can’t survive for long. A growing concern will be an
innovator and can easily face the risk of competition. Thus growth is means of
survival in a competitive and challenging environment.
(ii) Economies of Scale: Growth of a firm may provide several economies
in production, purchasing, marketing, finance, management etc. A growing
firm enjoys the advantages of bulk purchase of materials, increased bargaining
power, spreading of overheads, expert management etc. This leads to low cost
of production and higher margin of profit. This also ensures full utilization of
plant capacity.
(iii) Owners mandate: The owners of a company get the ultimate benefit
of growth in the form of higher profits. They may direct the management to
reinvest a substantial portion of the earnings in the business rather than paying
them out. Capable management may on its own like to take carefully
calculated risk and expand the size of the company.
(iv) Expansion of the market – Increase in demand for goods and services
leads business firms to increase the supply also. Population explosion and
transportation led to increase in the size of markets which in turn resulted in
mass 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 and
development activities to create new products and new techniques, while
others try to acquire latest technology from the market. Rationalization and
automation results in more efficient use of resources and a firm may grow to
obtain them.
(vi) Prestige and Power – The more the size of the business firm increase
the more is the prestige and power of the firm. Businessmen satisfy their urge
for power by increasing the size of their business firm.
(vii) Government Policy – In a planned economy like India, business firms
operate under a large number of rules and restrictions. A big firm is in a better
position to carry out the various legal formalities required to obtain licenses
and quotas. Business firms may plan for growth to make use of the incentives
provided by the government. The government provides certain subsidies and
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4. tax concessions to the new industrial units in the backward areas and those
producing goods for export only.
(viii) Self-sufficiency – Some firms grow to become self sufficient in terms
of marketing of raw material or marketing of products. Growth in either or
both of these forms reduces the dependency of the firm over other firms.
Check your progress
Activity A
List any three products that disappeared from the market for lack of growth
plans.
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10.4 ADVANTAGES OF GROWTH
Business firms try to achieve growth in order to obtain the following
advantages:
(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 government
10.5 LIMITATIONS OF GROWTH
Business firms cannot grow indefinitely. Growth has its own limitations which
are:
(i) Finance: Growth, especially external growth, requires additional
capital investment which is sometimes difficult for a small firm to arrange.
(ii) Market: Growth can be achieved to the extent that the size of market
permits. If a firm grows faster than increase in the size of the market, it is
likely to face failure.
(iii) Human Relations Problems: In a big firm, management loses
personal touch with employees and customers. Motivation and morale tend to
be low resulting in inefficiency.
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5. (iv) Management: Growth increases the functions and complexities of
operations. As the number of functions and departments increase, coordination
and control become very difficult. If the organization and management
structure is not capable of accommodating them, growth may be harmful.
(v) Lack of knowledge: Under conglomerate growth, a firm enters new
industries and new markets about which the managers know little. Managers
find it difficult to find and develop managers who can quickly handle new
units and improve their earning potential against heavy odds. Many growing
firms could not succeed because their managers felt that they could manage
anything anywhere.
(vi) Social problems: From social point of view also big firms may be
undesirable as they may lead to concentration of economic power and creation
of monopolies which may exploit consumers. In their desire for growth firms
indulge in combative advertising. The quickening growth creates a cultural
gap when society finds it difficult to cope with technological change.
10.6 FORMS OF GROWTH
Once an entrepreneur understands some of the factors that influence growth
and development, he can choose a suitable way for achieving it. Business
growth can take place in many ways. Broadly, various types of growth can be
divided into two broad categories – organic and inorganic growth.
Organic Growth – It can also be termed as internal growth. It is growth from
within. It is planned and slow increase in the size and resources of the firm. A
firm can grow internally by ploughing back of its profits into the business
every year. This leads to the growth of production and sales turnover of the
business. Internal growth may take place either through increase in the sales of
existing products or by adding new products. Internal growth is slow and
involves comparatively little change in the existing organization structure. It
can be planned and managed easily as it is slow. The ways used by the
management for internal growth include: (I) intensification; (ii) diversification
and (iii) modernization.
Inorganic Growth – it can also be termed as external growth. It involves a
merger of two or more business firms. A firm may acquire another firm or
firms may combine together to improve their competitive strength. External
growth has been attempted by the business houses through the two strategies
(a) mergers and acquisitions and (b) joint ventures. Merger again can be of
two types: (i) a firm merges with other firm in the same industry having
similar or related products. This type of merger leads to coordination problem
between the two firms (ii) a firm merges with another firm in altogether
different lines of business and have little common in their products or proceses
such 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
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6. remains unchanged. Merger leads to combination of independent units to
control competition, to gain economics of scale and also sometimes, to
modernize production facilities. But merger also leads to social problem of
monopoly, problem of coordination, strain on capital structure, etc. Thus,
external growth involves problem of reorganization.
10.7 MEANING OF GROWTH STRATEGY
The term strategy means a well planned, deliberate and overall course of
action to achieve specific objectives. According to chandler, “strategy is the
determination of the basic long term goals and objectives of an enterprise and
the adoption of courses of action and the allocation of resources necessary to
carry out these objectives”. The concept of strategy has been derived from
military administration wherein it implies ‘Grand’ military plan designed to
defeat the enemy. As applied to business, strategy is a firm’s planned course
of action to fight competition and to increase its market share.
‘Growth Strategy’ refers to a strategic plan formulated and implemented for
expanding firm’s business. For smaller businesses, growth plans are especially
important because these businesses get easily affected even by smallest
changes in the marketplace. Changes in customers, new moves by
competitors, or fluctuations in the overall business environment can negatively
impact their cash flow in a very short time frame. Negative impact on cash
flow, if not projected and adjusted for, can force them to shut down. That is
why they need to plan for their future. Small entrepreneurs generally feel that
strategic planning is for large business houses; but it is very necessary for
small and medium enterprises. Strategic Planning gives a formal direction to
the business. Strategic planning is necessary to take care of the additional
efforts and resources required for faster growth.
Different type of growth strategies are available each having advantage and
disadvantage of its own. A firm can adopt different strategies at different
points of time. Every firm has to develop its own growth strategy according to
its own characteristics and environment.
10.8 TYPES OF GROWTH STRATEGIES
The following are the main growth strategies available to firms:
1. Intensive Growth Strategy (Expansion)
2. Diversification
3. Modernization
4. External Growth Strategy
(a) Mergers
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7. (b) Joint Ventures
GROWTH STRATEGIES
Organic / Internal Growth Strategy Inorganic / External Growth Strategy
Intensive growth Merger
Diversification Joint Ventures
Modernization
Figure 10.1: Types of Growth Strategies
10.8.1 INTENSIVE GROWTH STRATEGY
Intensive growth strategy or expansion involves raising the market share, sales
revenue and profit of the present product or services. The firm slowly
increases its production and so it is called internal growth strategy. It is a good
strategy for firms with a smaller share of the market. Three alternative
strategies 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 firm's 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.
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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 Strategy
When 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 units
Check your progress
Match the following
1. 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 area
3. ‘Colgate’ expanding the sale by Market Development
introducing ‘Colgate-salt active’
10.8.2 DIVERSIFICATION
Beyond a certain point, it is no longer possible for a firm to expand in the
basic product market. So the firm seeks increased sales by developing new
products for new markets. This strategy towards growth is called
diversification. The diversification does not simply involve adding variety in a
product but adding entirely different types of products. Products added may be
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9. complementary. Diversification is a much talked about and widely used
strategy for growth. Many companies have opted for this. For example, LIC,
an insurance concern initially, diversified into mutual funds. State Bank of
India diversified into merchant banking and mutual funds. Similarly, Larsen
and Toubro, an engineering company diversified into cement.
Table 1. Product-Market Matrix and Growth Strategy
Products Present New
Markets
Present 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.51
A firm may choose the strategy of diversification under the following
situations:
(a) When diversification promises greater profitability than expansion.
(b) When the firm cannot attain its growth target by the strategy of
expansion alone.
(c) When the financial resources of the firm are much in excess of the
requirements of expansion.
The distinction between intensive growth strategy and diversification strategy
must be carefully noted. In the case of intensive growth, the firm increases the
production and sales of its existing products. But in case of diversification,
there is addition of new products and new markets.
Advantages of Diversification
Companies have increasingly adopted diversification strategy due to the
following reasons:
(i) Better use of its resources. By adding up related products to its
existing product portfolio, a company can more effectively utilize its
managerial personnel, marketing network, research and development facilities,
etc.
(ii) Reduce the decline in sales. By developing new products the sales
revenue and earnings can be maintained or even increased. For example, Bajaj
Scooters India Ltd. entered in the field of mopeds.
(iii) More competitive With greater resources, more products and higher
profits, the diversified firm is more competitive than a single product firm.
(iv) Minimize risk. When one line of business faces recession, another line
may be in high growth stage. For example, a well-diversified engineering firm
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10. like Larsen and Toubro did well even when the engineering industry was
facing recession.
(v) Use of cash surplus of one business to finance another business
having good potential for growth.
(vi) Economies of scale Diversification adds to size of business which
improves the competitiveness of a firm. It offers a lot of economy in
operations because common facilities can be used for several products.
Limitations of Diversification. The limitations of diversification are as given
below:
(I) Huge funds are required for diversification. The internal savings of the
business may not be sufficient to finance growth.
(ii) The functions and responsibilities of top executives increase because
of need to handle new product, technology and markets. They may find
problems in coordination which may lead to inefficient operations.
(iii) Diversification may involve new technology and new markets and the
present staff may face problems in adjusting to this growth pattern.
(iv) Diversification may lead to unknown products and markets leading to
more risk.
Types of Diversification:
1. Horizontal Integration,
2. Vertical Integration,
3. Concentric, and
4. Conglomerate
Horizontal Integration: It involves addition of parallel new products to the
existing product line.
This may happen internally or externally, internally, a company may decide to
enter a parallel product market in addition to the existing product line.
Externally, a company combines with a competing firm. For example, Sparta
Ceramics India Ltd. took over Neyveli Ceramics and Refractories Ltd.
(Neycer). Both the companies are in sanitary ware and tiles business. Two or
more competing firms are brought together under single ownership and
control. Seven small cement firms combined and formed Associated Cement
Companies (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 the
competitiveness of the company.
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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 of
over- capitalisation.
(iii) The management of the firm may become bureaucratic and inflexible.
(iv) The firm may acquire exploit consumers and labour by becoming a
monopoly.
Vertical Integration
In vertical integration new products or services are added which are
complementary to the present product line or service. New products fulfill the
firm’s own requirements by either supplying inputs or by serving as a
customer for its output. In vertical integration the firm moves backward or
forward from the present product or service. Vertical integration may be of
two types—backward and forward.
Backward integration. It involves moving toward the input of the present
product. It is aimed at moving lower on the production process so that the firm
is able to supply its own raw materials or basic components. For example, a
Car manufacturer may start producing tire tubes; Reliance Industries Ltd. has
been able to grow largely through backward integration. It started business
with textiles and went for backward integration to produce PFY and PSF
critical raw materials for textiles, PTA and MEG raw materials for PFY and
PSF, propylene raw materials for PTA and MEG, and finally naphtha for
producing propylene.
Advantages. Backward integration has the following advantages:
(I) Regular supply It ensures regular supply of raw materials or
components.
(ii) High return on investment It facilitates higher return on investment
for 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 over
the uninterested firms in the form of lower costs, lower prices and lower risks.
(iv) Quality control It improves quality control over imports for the final
product.
(v) Bargaining power It improves the company's power of negotiation
with 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:
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12. (a) If an existing input producing unit is taken over, it may involve large
investment
(b) By investing heavily in backward integration the developments of the
final products nay get hampered. This in turn may lead to undue pressure on
pricing and sales effort.
(c) In the absence of backward integration the firm may purchase at a
lower cost from technically more efficient suppliers. With backward
integration, this opportunity gets lost.
(d) Any adverse Changes in the economy affecting the present product
market will also affect adversely the production of inputs.
(e) When the divisions using the inputs do not have the freedom of
comparing market conditions of supply, the problem of transfer pricing may
become acute.
Forward integration. Forward integration means the firm entering into the
business of distributing or selling its present products. It refers to moving
upwards in the production/distribution process towards the ultimate consumer.
The firm sets up its own retail outlets for the sale of its own products. For
example, many companies like Bata, DCM, Bombay Dyeing, Raymonds and
Reliance 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 its
products. This is very useful in an oligopolistic market.
(ii) The firm's own retail stores serve as better source of customer
feedback. Thus the firm gets better control over quality
(iii) The firm can improve its profits by reducing the costs of distribution
and the costs of middlemen.
(iv) The firm can secure the economies of integration. Handling and
transportation 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 result
the firm is exposed to greater cyclical changes in earnings. Moreover, the
fortunes of business are tied to the in-house distribution system. From this
point of view, forward Integration increases business risk.
(b) Since its processes are interdependent, a slight interruption in one
process may dislocate the entire production system.
(c) In the absence of proper balance between up-stream and down-stream
units, the firm has to buy from or sell in the open market. The firm may be
competing with its own customers.
(d) It is very difficult to efficiently manage an integrated firm because
every business has its own structure, technology and problems.
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13. Concentric Diversification
When a firm diversifies into some business which is related with its present
business in terms of marketing, technology, or both, it is called concentric
diversification.
When in concentric diversification new product or service is provided with the
help of existing or similar technology it is called technology-related concentric
diversification. For example, Mother dairy has added 'curd and Lassi’ to its
range of milk products. In marketing-related concentric diversification, the
new product or service is sold through the existing distribution system. For
instance, 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 Diversification
When a firm diversifies into business which is not related to its existing
business both in terms of marketing and technology it is called conglomerate
diversification. Several Indian companies have adopted this strategy.Reliance,
Sahara, DCM, Essar group, ITC, Godrej, HMT are examples of conglomerate
diversification.
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 Progress
Activity B
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14. Give three examples of companies (other than those given in the previous
section) which have pursued Diversification and classify them with respect to
the direction of their diversification.
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10.8.3 MODERNISATION
A firm may use the strategy of modernization to achieve growth.
Modernization basically involves upgradation of technology to increase
production, to improve quality and to reduce wastages and cost of production.
The worn-out and obsolete machines and equipment are replaced by the
modern machines and equipment. Modernization plans can have the following
implications:
(I) A firm may go for modernization at a low pace to maintain its position
in the market. Thus, it may be considered a stability strategy.
(ii) Modernization may be used with full strength to achieve internal
growth. 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 has
adequate capital through accumulated savings or is able to raise capital from
different sources for the acquisition of modern plant and machinery.
Modernization will actually serve its purpose only if the workers are
adequately 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.
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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 MERGER
Merger is an external growth strategy. When different companies combine
together into new corporate organizations, such a process is known as
mergers. Merger can occur in two ways: (a) Acquisition of takeover and (b)
amalgamation.
Takeover or acquisition takes place when a company offers cash or securities
in exchange for the majority shares of another company. It involves one
company taking over control of another. Amalgamation takes place when two
or more companies of equal size or strength formally submerge their corporate
identities into a single one in a friendly atmosphere.
Advantages
The mergers take place with a number of motivations. Some of the benefits of
merger 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 following
drawbacks:
(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
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16. Willard Rockwell1, based on his experience, has given the following
guidelines 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 company's 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) Don't 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 Progress
Find three key words from the above section. Write their meaning in your own
words.
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10.8.5 JOINT VENTURE
When two or more firms mutually decide to establish a new enterprise by
participating in equity capital and in business operations, it is known as joint
venture. A joint venture is a business partnership between two or more
companies for a specific business operation.
Joint venture can be with a firm in the same country or a foreign country. For
example, Birla Yamaha Ltd. is a joint venture of Birla and Yamaha Motor Co.
of Japan, DCM and Daewoo Corporation of Korea established DCM Daewoo
Motors Ltd. Hindustan Computers Ltd. and Hewlett - Packard of USA formed
HCL-HP Ltd, a joint venture company.
1
Rockwell, Willard:”How to Acquire a Company” in Harvard Business
Review, Vol.46, No.5 (Sep.-Oct.1968).
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17. Check Your Progress
Activity - C
Give five examples of the firms which have achieved joint venture in India.
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Check Your Progress
“External Growth Strategies”, “Amalgamation”, “Joint Venture”, “merger”,
“Absorption”. Rewrite the above given key-words in their logical sequence.
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10.9 CRISIS OF BUSINESS GROWTH
All organizations pass through various stages of growth and at each stage the
organization 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 as
it grows. There are five phases in organizational growth – creativity, direction,
delegation, coordination and collaboration followed by a particular crisis and
management 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
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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 SUMMARY
In the unit we have discussed what strategic alternatives a firm could consider
for growth.
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19. Once a firm has identified the various strategic possibilities, it has to make a
selection from among these alternatives. And this would depend upon its
growth objectives, attitude towards risk, the present nature of business and the
technology in use, resources at its command, its own internal strengths and
weakness, Government policy etc. There are several managerial factors which
moderate the ultimate choice of a strategy. For a firm desiring immediate
growth and quick returns, mergers and take–over afford attractive
opportunities as they obviate the necessity of starting from scratch. However,
identifying the right candidate for merger or acquisition is an art at which only
a few managements can really excel. Establishing joint venture, especially in
the international arena, is a low risk alternative. Many firms prefer this
approach.
10.11 GLOSSORY
Red 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 QUESTIONS
Q.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.
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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 READINGS
1. 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
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