Analysis of growth strategies. Organic vs. inorganic growth

Contents

List of acronyms, figures and tables

1. Introduction
1.1 Statement of the problem
1.2 Approach of this paper

2. Concepts and strategies of business growth models
2.1 Organic business growth
2.1.1 The Ansoff Matrix
2.1.2 Success factors
2.2 Inorganic business growth
2.2.1 Alliances
2.2.2 Mergers & Acquisitions
2.2.3 Success factors

3. Practical analysis of business growth strategies
3.1 Sony
3.2 Cisco Systems

4. Critical appraisal
4.1 Advantages and disadvantages
4.2 Which strategy to choose?

5. Conclusion

Bibliography

List of acronyms, figures and tables

Acronyms

KPIs Key Performance Indicators

Figures

Figure 2.1: Business growth tree

Figure 2.2: The Ansoff matrix (growth vector components)

Figure 3.1: Sales Growth Sony

Tables

Table 4.1: Deciding between inorganic and organic growth

1. Introduction

When companies are trying to start, expand or save their business they are forced to choose a business growth strategy to achieve the goals set. There are two main options for companies to grow: Organically, with the own and internal resources of the company or inorganically with the help of external cooperation. Before choosing one of these growth options companies have to thoroughly evaluate which strategy is best for them, as every strategy has its advantages and disadvantages and the strategy has to fit the cur- rent economy situation of the companies. There are several of factors which the compa- nies have to consider for a successful implementation of the growth strategy.

1.1 Statement of the problem

As already mentioned above both growth strategies are having advantages and disad- vantages. As soon as a company has made a strategical decision, which path of growth the company will choose a prompt withdrawal is not possible anymore. Due to a wrong decision the company could suffer damages in different areas, such as reputation, cus- tomer relations and financial loss which could lead in the worst case scenario to the bank- ruptcy of the company. Therefore the decision has to be balanced thoroughly by the com- panies.

1.2 Approach and goal of this paper

The chapter two will focus on the theoretical literature of the business growth strategies. In this chapter growth will be defined and organic and inorganic business growth will be explained in more detail and common theories will be expounded. Also for each strategy the success factors will be described. In the subsequent chapters three the practical aspects of both growth strategies will be discussed with a practical example each. Chapter four will critically appraise both strategies with its advantages and disadvantages. The last chapter will summarize this seminar paper with a conclusion. The goal of this paper is to describe the business growth strategies with all its general theories, to provide an over- view of the subject as a whole. With a practical example the theory will be made clearer.

2. Concepts and strategies of business growth models

The term business growth is a highly used word in business life but there is no consistent use or definition. As Young states: “Growth is one of the most frequently used yet least well-defined words in the business dictionary.” (1961, p. 52). To this day, there has been no change in this circumstance, as most of the relevant articles are avoiding a consistent definition and conceptualization of business growth (Achtenhagen et al., 2010, pp. 289ff.). In literature Penrose’s “The Theory of the Growth of the Firm” counts as the most considerable writings in the field of business growth. Penrose differentiates business growth into two fundamental aspects. Firstly, she states that business growth is the in- crease in the amount of output, exports and/or sales. Secondly, business growth describes a surge in size or an enhancement in quality as a result of a process of development, akin to natural biological processes in which an interacting series of internal changes leads to increases in size accompanied by changes in the characteristics of the growing object (1966, p. 1). According to the statements of Penrose, business growth can be generally seen as an increase of a company and on the other hand business growth stands for the development process, where internal amendments lead to the increase in the size of the company. These two characteristics can be separated into qualitative and quantitative business growth (Schmid, 1993, p. 34). Penrose denotes revenue, number of employees and the net worth of the company as the most important quantitative business growth indicators (1966, p. 199). Whereas qualitative business growth describes the performance improvement of a company which cannot be quantified directly (Hutzschenreuter, 2006, p. 34). An example for this case is the improvement in quality regarding products and customer relations (Wieselhuber, 1986, p. 16).

The following subchapters will have a closer look on the organic and inorganic business growth strategies, which are considered as the most important business growth paths (Lockett et al., 2011, p. 49), and a deeper insight will be provided. For each strategy the main theories will be expounded, also factors for a successful implementation will be shown. As introduction into the subject, figure 2.1 gives an overview of both business growth strategies.

illustration not visible in this excerpt

Source: Own design based on Puranam et al. (2016), p. 121 Figure 2.1: Business growth tree

2.1 Organic business growth

Organic business growth, also known as internal growth, is an expansion of a company by means of the reinvestment of the already earned profits. To go into more detail, organic business growth uses internal funds for production improvements and costs controls. Also organic growth is created through economic value added which means in particular in- creasing sales and cash flow from operations (Swalling Fettig, 2012, p. 34). Reuvid spec- ifies organic business growth as growth through increased sales, which occur through the development of the company as an organism represented by its services and products. In this context, ‘organic’ means structured, organized, systematic and coordinated (2003, p. 253). Organic business growth is often used by young companies during the early stage stages of corporate development as companies build markets and develop new products. Large companies also may use this strategy to consolidate market position. As a simpli- fied example of organic business growth can be named the development of a new super- market outlet. Profits from the previous year are channeled into the development and the supermarket company benefits from the increased market share and increased revenue from the new supermarket outlet (Campbell et al., 2002, p. 228).

2.1.1 The Ansoff Matrix

Organic business growth can be achieved by several strategies and there are many paths leading to growth. The most commonly used tool for analyzing the possible strategic directions a company can follow is the Ansoff matrix, shown in figure 2.2. This matrix shows potential areas where core competencies and strategies can be applied.

illustration not visible in this excerpt

Source: Own design based on Ansoff (1988), p. 83

Figure 2.2: The Ansoff matrix (growth vector components)

According to Ansoff (1988, pp. 83ff.) there are four broad alternatives: (1) Market pene- tration: Market penetration aims to increase market share using existing products within existing markets. This may involve taking steps to enhance existing core competencies or building new ones. Such competencies development may be intended to improve service or quality so as to enhance the reputation of the company and differentiate it from com- petitors. Equally, competence development may be centered on improving efficiency so as to reduce costs below those of competitors. Mature or declining markets are more dif- ficult to penetrate than those which are still in the growth phase. In the case of a declining market, the company may also consider the opportunity of withdrawal so as to redeploy resources to more lucrative markets. When a company’s current market shows signs of saturation, it may consider alternative directions for development. (2) Market develop- ment: Market development is based on entry into new markets or new segments of exist- ing markets while employing existing products. Entering new markets is likely to be based on leveraging existing competencies but may also require the development of new competencies. Entering new segments of existing markets may require the development of new competencies that serve the particular needs of customers in these segments. In- ternationalization and globalization are commonly used examples of market develop- ment. It is likely that a company will need to build new competencies when entering international markets to deal with linguistic, cultural, logistical and other potential prob- lems. The major risk of market development is that it centers on entry into markets in which the company may have only limited experience. (3) Product Development: Product development centers on the development of new products for existing markets. As with the previous two growth strategies, the intention is to attract new customers, retain exist- ing ones and increase market share. Providing new products will be based on exploiting existing competencies but may also require that new competencies are built, as in product research. Product development offers the advantage to a company of dealing with cus- tomers’ needs of which it has experience because they are within the existing market. (4) Diversification: Diversification is potential organic business growth through new prod- ucts and markets. It is an appropriate option when current markets are saturated or when products are reaching the end of their life circle. It can help to spread risk by broadening the product and market portfolio.

2.1.2 Success factors

‘How do I implement or maintain a successful organic business growth strategy?’ This is the question which companies and their CEOs have to ask themselves and call into ques- tion regularly, if the company has chosen or will choose the path of organic business growth. Lange et al. (2003, pp. 31ff.) describe the following five interdependent success factors for companies: (1) The product/service portfolio has to be adjusted permanently: The mix of the product/service portfolio has to be adjusted permanently towards the cus- tomer and market needs. Innovative combinations of products/services have to be created in a form which is not common on the market and is not requested directly by customers. As an example could be named the combination of products and services, such as car leasing with an insurance and service package. (2) Pricing has to be performance-related based on value proposition: The pricing has to be based on a persuasive and need-based value proposition. In the field of capital goods a performance-related pricing with bonus arrangements creates an opportunity to takeover further enterprising responsibilities on the side of the supplier. For consumer goods the known rule counts that a price premium

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