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Growth-Strategy2.ppt

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Growth-Strategy2.ppt

  1. 1. GROWTH STRATEGY Indian Institute of Management Nov. 2006
  2. 2. Growth Imperatives • Growth Is Defining Characteristic Of Modern Age (Unlike Earlier Epochs) • Capitalist Firm Is The Main Actor In This Process • The Laws Of Market Compel Firms To Seek Continuous Growth Through (Re) - Investment
  3. 3. Growth Imperative • Growth Is Essential To Meet Stakeholder Expectations • Survival Depends On How Flexible The Firm Is To Cope With Changes In Environment • Flexibility And Growth Are Essential For Survival
  4. 4. KEY QUESTIONS • SHOULD WE GROW IN OUR CURRENT BUSINESS (existing Product-Market Scope) or SHALL WE DIVERSIFY? • EXPANSION • Is My Current Industry Attractive and Provides Scope for Expansion?
  5. 5. KEY QUESTIONS • DIVERSIFICATION • How To Identify Businesses That Are Attractive? • What Skills Or Assets Will Make Entry Profitable / Successful? • What is the Risk?
  6. 6. GROWTH OPTIONS • Market Expansion – Selling the Same Product into New Markets • Product Expansion – Adding New Products in the Same Industry Thru Widening Product Scope • Concentric Diversification • Expansion into Related Product-Markets – Adding Similar Products to Same Products to Related markets. • Conglomerate Diversification
  7. 7. DIVERSIFICATION • DEFINED AS "ENTRY INTO NEW PRODUCT LINES INVOLVING MARKETS AND PRODUCTS THAT ARE NEW TO THE DIVERSIFYING FIRM".
  8. 8. Diversification Alternatives Product/ Market Similar Technlgy New Technolgy Same Sell to firm Horizontal Diversifn Vertical Integration. New markets Tech. related Unrelated
  9. 9. Horizontal Diversification • MOVES WITHIN THE ECONOMIC ENVIRONMENT OF DIVERSIFYING FIRM. • LOW ON FLEXIBILITY & DOES NOT ADD TO STABILITY OF EARNING • COMMON THREAD - MARKETING SYNERGY
  10. 10. Vertical Diversification • MEASURED BY VALUED ADDED/SALES • SENSITIVE TO INSTABILITY SINCE INCREASES DEPENDENCE ON SAME SEGMENT OF ECONOMIC DEMAND • FLEXIBILITY LOW • SYNERGY STRONG IF TECHNOLOGY RELATED NEGATIVE IF TECHNOLOGY IS UNRELATED.
  11. 11. Vertical Diversification • DANGER IF FIRM CANNOT ABSORB ALL OUTPUT • MUST LEARN TO SELL TO COMPETITORS • HORIZONTAL & VERTICAL INTEGRATION FAVOURED IF PRESENT P-M SCOPE IS HEALTHY & GROWING
  12. 12. Concentric Diversification • COMMON THREAD OF MARKETING OR TECHNOLOGY FAMILIARITY • SOME SYNERGY • FLEXIBILITY HIGH • RISK MODERATE TO HIGH DEPENDING ON EXTENT OF SYSNERGYAND FAMILIARITY
  13. 13. Conglomerate Diversification • NO COMMON THREAD • HIGH FLEXIBILITY • VERY HIGH RISK AS NO SYNERGY • ENSURES STABILITY BUT EXPOSES FIRM TO HIGH RISK
  14. 14. CHOICES • Which Kind of Diversification will we choose? • What are the motivations for diversification? – Lack of Growth Opportunities in Existing P-M? – Underutilized Capabilities Resources?
  15. 15. Diversification and Growth • HISTORICALLY, GROWTH OF LARGE FIRMS DUE TO SUCCESSFUL PRODUCT-MARKET DIVERSIFICATION • DIVERSIFICATION ALSO LINKED TO CRISIS AND COLLAPSE • IS DIVERSIFICATION AN ATTRACTIVE & VIABLE STRATEGY?
  16. 16. GENERIC ENTRY STRATEGIES • INTERNAL DEVELOPMENT • ACQUISITION • JOINT VENTURE • STRATEGIC ALLIANCE
  17. 17. INTERNAL DEVELOPMENT • CREATES A NEW BUSINESS UNIT IN THE INDUSTRY – Faces Structural Entry Barriers • (Five Forces Model for Analysis) – Reaction of Incumbent Firms • (Retaliation -- Severe or Mild)
  18. 18. INTERNAL DEVELOPMENT • COST OF ENTRY – Investment in Facilities (Capacity Creation) – Cost of Distribution Network, Sales Force, Brand, Advertising, Service – Technology Costs – Start up Costs – Sourcing of Managers/Inputs
  19. 19. COST OF RETALIATION • Lower Prices (Cost Structure) • Increase in Marketing Cost • Warranty Extension • Longer Credit • Effect of Entry on the Industry Demand - Supply Cost Structure
  20. 20. EVALUATION OF ENTRY DECISION • Probability of Retaliation Higher if : – Slow industry Growth – Commodity Like Product – High Fixed Costs – High Industry Concentration – Strategic Imp. Of Position to Incumbent – Management Style & Ownership
  21. 21. ATTRACTIVENESS TEST • Industry in Dis-equilibrium • Slow or Ineffective Retaliation – Cost Benefit of Retaliation – Paternal dominant firm – Need to Protect Existing Business • Firm Has Lower Entry Costs(than others • Ability to Influence Industry Structure
  22. 22. GENERIC ENTRY CONCEPTS • Reduce Product Cost • Buy-In With Lower Price • Differentiate your Offering • Superior Product • Discover a New Niche • Marketing Innovation
  23. 23. ENTRY THRU ACQUISITION • Does Not Add a New Player • Speed of Entry • Synergy • Evaluation : – Projected Cash Flow & Cost of Acquisition – Acquisition Price Determined by Market for Firms
  24. 24. ENTRY THRU ACQUISITION • Seller will Sell Only if Bid Above Present Value • Sale Only At Premium • Will Acquisition Change Value – Synergy ?? – Horizontal Intgn/Market Power – Vertical Integration – Strategic
  25. 25. ACQUISTION PROFITABLE • If Floor Price Low • Market for Firms Imperfect • Bidder Has Unique Resources / Ability to Operate Business & Enhance value
  26. 26. Strategic Alliances • Joint Ventures • Minority Equity Stake • Management Contracts • Legal Long Term Contracts • Franchise
  27. 27. Cross Border Alliances: Motivation • Access New Markets • Gain Skills, Technology, Products, • Share Fixed Costs • Share Risk (Oil Exploration) • Access Complementary Products • Access Skills Not Available in the Organisation
  28. 28. Asian Firms : Motivation • Access International Brands • Access Global Markets • Access International Financial Markets • Access Proprietary Technology
  29. 29. Issues in Managing Growth • Growth Usually Means Starting New Business • Probability of Failure is High (50-60% Fail) • Organizational Culture as Barrier – Most Firms Geared to Mature Businesses with Predictable parameters; New Business Usually Exploratory with No Clear Strategy • Creating Separate Organisations Does Not Always Help Due to Culture Clash • Experimentation Key to Evolving Viable Strategy • Distinct Stages of Business Development
  30. 30. Risks • Internal Development – – Clash of Culture & System • Acquisition – – Price of Acquisition – Understanding New Business – Culture of Acquired Firm – Integration with Existing Business for Synergy
  31. 31. Risks • Joint Ventures & Strategic Alliances – Joint Control – Complementarities or Overlap? – Lack of Clarity on Strategic Goals of Two Partners
  32. 32. Global Experience With Cross Border Alliances • 50 % of Alliances Fail • 75 % End With Acquisition by One Partner • 75 % of Alliances Where Partners Have Overlapping Product-market Positions Fail
  33. 33. Causes of failure • Differences in Strategic Intent and Vision of Partners • Alliances Unable to Evolve Beyond Initial Expectations and Objectives • Alliances Between Strong and Weak Companies
  34. 34. Causes of failure • One Partner Brings More to the Table • Gains From Alliance Are Unclear and Changes in the Environment Negates Initial Assumptions • Gains Unequally Shared
  35. 35. Preconditions for Successful Alliances • Clarity and Agreement on Strategy • Equal, Proportional Sharing of Gains • Partners of Equal Size and Capabilities That Are Complimentary • More Than Financial Stake Is Clear Management Control
  36. 36. Preconditions for Successful Alliances • Cross Border Alliances to Access Global Markets Better Than Acquisition or New Greenfield Unit. • Cross Border Alliances Used to Expand Core Business or Access New Geographical Markets Highly Successful--core Competence Is the Key Factor
  37. 37. Criteria for success • Both Partners Achieve Their Strategic Objectives – (Market Share, New Product Development, Risk Sharing Etc) • Both Recover Their Financial Costs • Both Share in Gains Proportionately
  38. 38. Choosing Partners • Capitalise on the Distinct Competence of Partner (Technology, Brand, Distribution Network) • Capitalise on His Geographical Position • Clarity and Agreement on Strategic Goals and Sharing of Benefits • Look for Synergy/complementarities in Competence or P-M Position
  39. 39. Integrating JV • Devise Appropriate Integration Policies So That JV Remains Within the Umbrella • Provide Adequate Operational Autonomy • Ensure That Both Partners Get What They Expected Out of Alliance • Mutual Respect and Trust

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