Growth Strategy

GROWTH STRATEGY

PRESENTED BY: Neeraj Kumar NITK MBA 2012-2014

By neeraj kumar

GROWTH STRATEGY

Diversification to increase sales volume from new products and new markets. Expanding into a new segment of an industry that the business is already in, or investing in a promising business outside of the scope of the existing business.

The notion of diversification depends on the subjective interpretation of “new” market and “new” product, reflect the perceptions of customers

New markets promote product innovation.

Igor Ansoff's Product Market matrix

PRESENTED BY: Neeraj Kumar NITK MBA 2012-2014

Market Penetration

Market Development

Product Development

Diversification

PRODUCTSPresent New

Present

New

MARKET

Related Diversification

Unrelated Diversification /Conglomeratic diversification

Vertical Diversification

Concentric Diversification

Forward integration

Backward integration

GROWTH STRATEGY

Diversification

PRESENTED BY:Neeraj Kumar NITK MBA 2012-2014

DIVERSIFICATION

1. Requires the most careful investigation as it involves a simultaneous departure from current business, familiar product and familiar markets to an unknown market with an unfamiliar product offering ,a lack of experience in the new skills and techniques.

2. Highest level of risk , the company puts itself in a great uncertainty.

It makes addition to the portfolio of business Firms will adopt this , when they make high profits and want to explore new

markets If the existing products does not show much profit


Related Diversification

Related Diversification occurs when the company adds to or expands its existing line of production or markets

The firm enters into new business, which is linked to a company ‘s existing business

Linkage are based on manufacturing , marketing and technology

Ex: Johnson & Johnson all baby products from soaps shampoo oil to diapers.


CONCENTRIC DIVERSIFICATION

Its like related diversification Synergy effect when new business is related

to existing business through the process, technology, and marketing.

New products will be spin off from the existing facilities, products and process.

Example: Philips – strong in lighting and electronics company which entered into communication systems, telecommunication equipment, cable television and multimedia


Concentration : Results in concentration of resources on those products lines, which have growth potential

Diversification: strategy is adopted in growing industry by growing firms

Concentration

Growth Strategies

Diversification

Vertical IntegrationHorizontal Integration


HORIZONTAL INTEGRATION It’s a process in which a firm acquires another firm that

produces the same type of products with similar production process/ marketing strategies

Why ??

This strategy is adopted to acquire competitors business or to acquire market share or to reduces the competition or to gain economy of the scales operation

Examples :Cocacola acquiring Thums UP and other Cola Brands From Parle Agro

Coca cola coming up with new varieties in cola / drinks Brands.


Advantages• Economics of scale:

Selling more of the same product in different parts of the world

• Economics of Scope: Sharing resources common to different products. “Synergies”

• Increased Market Power

• Reduction in cost

Disadvantages

• Costs• Increased work

load• Increased

Responsibilities• Anti-trust issues• Creating a

monopoly


Trends in global Steel Industry

Consumption of steel increased after 1950 and trend was continued till 1970

Consumption of steel started decline from 70s to 80s

After 80s, demand for steel increased continually International Iron and Steel Institute (IISI)

forecasted increment in demand for steel from 1.32 billion tones (in 2010)to 1.62 billion tones(in 2015)

This demand will increase due to countries like India and china


Mittal Steel Company N.V. – CEO Lakshmi Mittal

World’s largest steel producer by volume and also the largest in turnover

Headquartered in Rotterdam, Netherlands. 2005 Revenues was $28.10 billion

Major player in following products : Steel, Flat Steel products, Coated Steel, Tubes and Pipes

Arcelor – CEO Guy Dolle

World's largest steel producer in terms of turnover before takeover.Second largest in terms of steel output.

Headquartered in Luxembourg city.In 2005, Arcelor had revenues of $38.84 billion.


Mittal Steel Arcelor

An Attractive Target: •Arcelor had 71% premerger revenue share from Europe while Mittal had only 34%•In North America the revenue share for Arcelor was only 9% but Mittal had 42% •Complementary industrial and market footprint

Deal finally clinched when the shareholders of Arcelor agreed to Mittal Steel’s offer – In June 2006 Mittal raised its valuation of Arcelor to $32.9 billion.

The Mittal family holds 43 percent of the combined group. The combined company holds 10 percent of the global market for steel.


Why Arcelor

Outcome

VERTICAL INTEGRATION The degree to which a firm operates vertically in multiple locations on an industries value chain from extracting raw materials to manufacturing and retailing. It occurs when a company produces its own inputs It is either backward integration or forward integration

Backward integration : doing the suppliers function Forward integration : doing the retailers functions Balanced Vertical Integration : doing the suppliers

function as well as doing the retailers functions

Reduction of cost, Gain control, Guarantee quality and Access to potential customers


Textile Mill Retail show room

Forward Integration

Backward Integration

Textile Mill Cotton Farm

Balanced Integration

Retail show roomTextile Mill Cotton Farm


Advantages Reduce transportation cost Improve supply chain

coordination More opportunities to

differentiate by means of increased control of inputs

Capture upstream and downstream profits

Helps to make investments in specialized asset

It helps company to exercise control over critical sources of supply

Increase entry barriers to potential competitors

Disadvantages• Capacity balancing:

Making sure that inputs will match outputs at all levels

• Potentially higher cost due to the lack of supplier competition

• Decreased Flexibility • Developing new

competencies may compromise existing competencies

• Monopolization of markets • Its risky when demand

conditions are unstable and un predictable


WHAT IS FORWARD INTEGRATION?

If the manufacturing company engages in sales or after-sales industries it pursues forward integration strategy.

To achieve higher economies of scale and larger market share.

Example : Many manufacturing companies have built their online stores and started selling their products directly to consumers, bypassing retailers


WHEN IS FORWARD INTEGRATION EFFECTIVE?

Few quality distributors

High profit margins.

Expensive & unreliable Distributors

Growing Industry

Benefits of stable production and distribution.

Available resources and capabilitiesPRESENTED BY:Neeraj Kumar NITK MBA 2012-2014

PEPSICO ACQUIRING ITS BOTTLERS

In 2009 acquired “Two largest independent bottlers, PBG and PepsiAmericas

The world's largest & second-largest manufacturer, seller and distributor of Pepsi-Cola beverages respectively


OBJECTIVES

1.Consolidate 80 percent of the North American beverage volume

2. Offer more compelling bundles across food and beverage

3.Consolidate manufacturing networks

4.Eliminate redundant costs

3. Cost benefits and also optimize investments in growth and innovation

1. Speed the decision-making process and eliminate friction points

4. Leverage scale efficiencies

2. Enhanced customer service

BENEFITS


RESULT OF FORWARD INTEGRATION

Innovative products and packages to market faster, streamlined manufacturing and distribution systems and react more quickly to changes in the marketplace.


TATA GROUP

MULTINATIONAL CONGLOMERATE

SEVERAL PRIMARY BUSINESS SECTORS

11TH MOST REPUTABLE COMPANY IN THE WORLD-BY REPUTATION INSTITUTE

FIFTH LARGEST STEEL COMPANY IN THE WORLD


There are both advantages and disadvantages that accrue to backward integration. Going back to the Indica project, the Rs 1,700 crore it cost to put up a plant on a literally greenfield project is a price tag fourth of what western or eastern automakers would find cost effective.

They bought a manufacturing plant from nissan which was unused lying in Australia for Rs 108 crore at that time which was very cheap and then transported it to India.

The economy of diesel,inside space of an ambassador external dimension of Zen and pricing close to Maruti 800……first Indian Car.

Backward Integration: Examples


TATA not only built a car, but also designed test fixtures and operations.

There was a tremendous amount of value that that the company was able to unlock out of its assets — a compelling reason to say backward integration can work.


Now, does backward integration work all the time? Absolutely not. The primary disadvantage is that one must make every element of the operations competitive. But sometimes, the model does not force that degree of competitiveness all along. Let’s see General Motors for a case.

General Motors,was a backward integrated company to the point where the company even did research on the ceramics for the spark plugs that go in engines of the vehicles sold.

Over time, there were disadvantages and that led to the spin-off of auto component manufacturing companies like Delphi that now courts business from GM and several other automakers.

?


TATA STEELTata Steel’s India operations have raw material security of up to 40% in coking coal and 100% in iron ore, Corus completely lacks in backward integration.

The company had been taking several initiatives to cut down costs at its European plants and bring in raw material security

Plant in Port Talbot, South Wales, UK, the only steel maker in Europe with its own captive coal mine.

The company spent six million pounds to conduct a geoseismic study to develop a pit-head mine near the plant.

The Margam mine, develop to feed Port Talbot unit. It would lead to savings of up to $400 million for the company’s European operations


• After several cost-cutting measures, backward integration is being looked as the most important and vital step for Corus to increase its profitability and the company is scouting for various resources across the world.


For TATA Indica It worked

For TATA Steels it worked

For GENERAL MOTORS ???

CONCLUSION


A + B = C may be D may be failure who knows ??

No formula on how companies can decide on what to make and what to outsource.

Everything depends on the context and size of the company, the areas of focus, the depth of resources and the availability of alternatives for sourcing.

It may not be true that backward integration never worked and it may be false that disintegration is always the best thing to do.

Dependence on critical skills and fewer alternatives to supply or deliver the results you are looking for.

In areas, freely available solutions are available and the barriers for entry are low, backward integration may not be the answer

CONGLOMERATE/LATERAL DIVERSIFICATION

The unrelated diversification has very little relationship with the firm's current business.

It is based on the concept that any new business or company, which can be acquired under favorable financial conditions and has the potential for high revenues, is suitable for diversification.

Objectives:

To improve the profitability and the flexibility of the company.

To get a better reception in capital markets as the company gets bigger.



When the current product or market orientation does not offer further opportunities for growth.

No obvious connection or commercial synergies with any of the existing business

Core functional skills are highly specialized and have few applications outside the companies core business

New business / products are unrelated to process/ technology functions of existing business



Using the existing basic competences

Penetrating completely new markets. Usually such opportunity can be identified as a result of the main company business.

For example: a car dealer may start offering financial services by developing a car leasing scheme and selling cars through leasing.

Developing new competences to use new market opportunities.

Examples : TATA in Steel, Automobiles, Watches Cosmetics ,Retail Sector

ITC from Hotels Tobacco Milk Products etc.


Advantages Disadvantages


Good financial results & potential for high returns.

Secure funds on hand during a seasonal slowdown, adding to the cash flow for the main business activity.

Spreading the risk through different sectors of the economy by identify industries in which the business activity slowdown does not coincide with the slowdowns in the main business of the company.

The greater the number of business activities, the more difficult is the total management task. In many instances the overall performance of the unrelated business activities does not exceed the individual ones. Sometimes it is even worse.

Requires allocation of significant financial and human resources and there is always the risk of harming the main company business.

Porter’s Three tests

1. The Attractiveness Test: diversification must be directed towards actual or potentially-attractive industries.

2. The Cost of Entry Test: the cost of entry must not capitalize all future profits.

3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the corporation, or vice-versa. (i.e. synergy must be present)


Calori and Harvatopoulos (1988), rationale for diversification.

First Dimension : The nature of the strategic objective. Diversification may be defensive or offensive.

Defensive reasons may be spreading the risk of market contraction, or being forced to diversify when current product or current market orientation seems to provide no further opportunities for growth.

Offensive reasons may be conquering new positions, taking opportunities that promise greater profitability than expansion opportunities, or using retained cash that exceeds total expansion needs.

Second dimension : The expected outcomes of diversification:

Management may expect great economic value (growth, profitability) or first and foremost great coherence and complementary to their current activities (exploitation of know-how, more efficient use of available resources and capacities).


Synergy

Obtained in three ways:○ Exploiting economies of scale.

Unit costs decline with increases in production.

○ Exploiting economies of scope.Using the same resource to do different things.

○ Efficient allocation of capital.Many assets in acquired firms are undervalued -- managers

seek to exploit these opportunities and improve their operations and add value to their businesses


Synergy & Relatedness


Operational Relatedness-- synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D)

Strategic Relatedness-- synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses.

Problems in Exploring Potential Synergies

1. Poor understanding of how diversification activities will “fit” or be coordinated with existing businesses.

2. Acquisition process is fraught with risks.

Managers might fail to conduct an adequate strategic analysis of acquisition candidate.

○ Will often try to complete the deal too quickly before other potential buyers begin a bidding war.

○ Focus on the attractive features, while giving less attention to the negative features.


Problems in Exploring Potential Synergies

3. Integrate the new business into company’s existing portfolio of businesses.

○ Differences in organizational cultures.○ Should new business be standalone operation or should it be

merged into one of the existing businesses?

4. Internal development of new businesses.

Most problems due to considerable time and investment required to launch new business.

○ On average, most new product lines require 10 years before

generating positive cash flows and net income.


Conclusion

Size alone does not guarantee firms an advantage.

Coordination required to exploit economies of scale and scope is not without cost.

Size creates additional challenges and difficulties, including problems of communication and coordination.

Higher levels of diversification are not incompatible with high performance -- nor do they necessarily imply that firms will suffer lower performance levels.


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Marketing

Growth Strategy