Business Strategies for Organic Growth

MPM703
Week 6
Business Strategies for Organic Growth
1
Managerial challenge:
What are the basic strategies that are available to a manager of a firm
in order to pursue organic growth in business?
2
Outline
Ansoff’s Product-Market Expansion Grid (aka Ansoff’s Matrix)
Diversification
3
Unit Learning Outcomes (ULOs)
Upon completion of this unit, successful students can:
ULO 1: Analyse systematically the internal an external business environments of a firm to inform
managerial and business decisions
ULO2: Apply appropriate theories, concepts, and analytical tools in strategy
development, implementation and evaluation across diverse business contexts
ULO3: Recommend relevant and sustainable strategic business decisions
in addressing various business issues
ULO4: Contribute to building a cohesive and productive team with effective business skills
GLO1: Discipline-specific
knowledge and capabilities (
in
Strategic Management
)
Deakin’s Graduate Learning
Outcomes GLOs
GLO2: Communication
GLO5: Problem solving
ULO5: Communicate effectively, in oral or written form, the results of
managerial analysis of various business issues and relevant recommendations
4
GLO7: Teamwork
The Strategy Tripod: Three Leading Perspectives on Strategy
5
INDUSTRY FORCES
INSTITUTIONAL
FORCES

ORGANISATIONAL
CAPABILITIES

STRATEGIES
OF FIRMS
PERFORMANCE
OUTCOMES
Source: Peng, M., Sun, S., and Chen, H. 2009, The institution-based view as a third leg for a strategy
tripod, Academy of Management Perspectives, August, pp. 63-81
Our focus
this week!

As a manager how would you like to grow the
business?
Sell your products more to your current customers? How?
Sell your products to new customers? How?
Create new products and sell them to your current customers?
How?
Create new products and sell them to new customers? How?
6
Ansoff’s Product/Market Expansion Grid
Figure 7.2 Corporate strategy directions
Source: Adapted from H.I. Ansoff, Corporate Strategy, Penguin, 1988, Chapter 6. Ansoff originally had a matrix with four separate boxes, but in practice strategic directions involve
more continuous axes. The Ansoff matrix itself was later developed – see Reference 1
7
What is the Ansoff’s Matrix?
The Ansoff’s Matrix, also called the
Product/Market Expansion Grid, is a tool
used by firms to analyse and plan their
strategies for growth.
The matrix shows four strategies that
can be used to help a firm grow and also
analyses risk associated with each
strategy.
8
Market penetration
Market penetration refers to a strategy of increasing share of current markets
with the current product range.
Seeks to achieve four main objectives:
Maintain or increase the market share of current products – this can
be achieved by a combination of competitive pricing strategies,
advertising, sales promotion and perhaps more resources dedicated
to personal selling
Secure dominance of growth markets
Restructure a mature market by driving out competitors; this would
require a much more aggressive promotional campaign, supported by
a pricing strategy designed to make the market unattractive for
competitors
Increase usage by existing customers – for example by introducing
loyalty schemes
A market penetration marketing strategy is very much about “business as
usual”.
The business is focusing on markets and products it knows well. It is likely to
have good information on competitors and on customer needs. It is
unlikely, therefore, that this strategy will require much investment in new
market research.
9
Constraints of market penetration
Retaliation
from
competitors
Legal
constraints
Economic
Constraints
(recession or
funding
crisis)
10
Product development
Product development refers to a strategy by which an organisation
delivers modified or new products to existing markets.
This strategy :
involves varying degrees of related diversification (in terms of
products);
can be an expensive and high risk
may require new strategic capabilities
typically involves project management risks.
A strategy of product development is particularly suitable for a business
where the product needs to be differentiated in order to remain competitive.
A successful product development strategy places the marketing emphasis
on:
Research & development and innovation
Detailed insights into customer needs (and how they change)
Being first to market
11
Market development
Market development refers to a strategy by which an
organisation offers existing products to new markets
This strategy involves varying degrees of related diversification
(in terms of markets)
may also entail some product development (e.g. new styling or
packaging);
can take the form of attracting new users (e.g. extending the
use of aluminium to the automobile industry);
can take the form of new geographies (e.g. extending the
market covered to new areas – international markets being the
most important);
must meet the critical success factors of the new market if it is
to succeed;
New distribution channels (from stores to e-stores)
may require new strategic capabilities especially in marketing.
12
Diversification
Diversification involves increasing the range of
products or markets served by an organisation.
Related diversification involves diversifying into
products or services with relationships to the
existing business.
Conglomerate (unrelated) diversification
involves diversifying into products or services with
no relationships to the existing businesses.
13
14
Samsung Construction and Trading Corp
IT
Company
Renewable
energy,
battery
Hotels, resorts,
hospital, food mfg,
entertainment
Heavy
industry,
eng’g,
construction
An example of a firm that has been pursuing
diversification (conglomerate and related)

15
Drivers for diversification
• Exploiting economies of scope efficiency gains through
applying the organisation’s existing resources or competences
to new markets or services.
• Stretching
corporate management competences.
• Exploiting superior internal processes.
• Increasing
market power.
16
Synergy
Synergy refers to the benefits gained where activities or
assets complement each other so that their combined effect is
greater than the sum of the parts.
N.B. Synergy is often referred to as the
‘2 + 2 = 5’ effect.
17
Value-destroying diversification drivers
Some drivers for diversification which may involve value
destruction (negative synergies):
Responding to market decline
Spreading risk and
N.B. Despite these being common justifications for diversifying, theory suggests these
are misguided.
Managerial ambition.
18
Why Companies Diversify?
In addition to achieving higher profitability, there are several reasons
for a company to diversify. For example:
Diversification mitigates risks in the event of an industry downturn.
Diversification allows for more variety and options of products and services. If
done correctly, diversification provides a tremendous boost to brand image
and company profitability.
Diversification can be used as a defense. By diversifying products or services,
a company can protect itself from competing companies.
19
Risks in Diversification
Entering an unknown market puts a significant risk on a company. Therefore, companies should only
pursue a diversification strategy when its current market demonstrates slow or stagnant future
opportunities for growth.
To measure the riskiness or the chances of success of diversification, there are three tests used:
The Attractiveness Test – The industries or markets chosen for diversification must be attractive. Porter’s 5
Forces Analysis can be performed to determine the attractiveness of an industry.
The Cost-of-entry Test – The cost of entry must not capitalize all future profits.
The Better-off Test – There must be synergy; the new unit must gain a competitive advantage from the
corporation or vice-versa.
Before considering diversification, a company must consider the three tests above.
20
Diversification and performance
Figure 7.3 Diversity and performance
21
Summary
Ansoff’s Strategy Matrix
Diversification
22
Unit Learning Outcomes (ULOs)
Upon completion of this unit, successful students can:
ULO 1: Analyse systematically the internal an external business environments of a firm to inform
managerial and business decisions
ULO2: Apply appropriate theories, concepts, and analytical tools in strategy
development, implementation and evaluation across diverse business contexts
ULO3: Recommend relevant and sustainable strategic business decisions
in addressing various business issues
ULO4: Contribute to building a cohesive and productive team with effective business skills
GLO1: Discipline-specific
knowledge and capabilities (
in
Strategic Management
)
Deakin’s Graduate Learning
Outcomes GLOs
GLO2: Communication
GLO5: Problem solving
ULO5: Communicate effectively, in oral or written form, the results of
managerial analysis of various business issues and relevant recommendations
23
GLO7: Teamwork