Most companies want to grow, the issue is just how and when. And determining an advantageous growth strategy can be challenging for executives. Less than 1 percent of companies ever reach $250 million in annual revenue and fewer still eclipse $1 billion. Unless you judiciously evaluate your options and select the right growth strategy, your small business may stay that way.
“Some companies boost revenue through organic growth while others diversify their products/services or build strategic alliances,” says Yi Jiang, assistant professor and associate director of MBA for Global Innovators for the College of Business and Economics at California State University, East Bay. “The key is understanding your options and selecting a growth strategy that fits your situation.”
Smart Business spoke with Jiang about growth strategies and what executives should consider when making a selection.
How have growth strategies evolved over time?
History and experience have altered our thinking about growth strategies. For example, vertical integration was a popular diversification strategy in the 1960s and 1970s. Companies decided to boost profits by expanding into upstream or downstream activities, thereby seizing control of the entire supply chain.
Oil companies were among the first to embrace vertical integration. They ventured beyond traditional petroleum exploration activities by purchasing refineries and distributors. However, the strategy’s popularity waned when several large, multinational companies were accused of monopolistic practices and their diversification efforts were thwarted by U.S. and European anti-trust regulations. In addition, many companies struggled to manage a slate of unfamiliar entities.
As a result, smart companies turned to building a network of complementary offerings to create synergistic expansion opportunities and economies of scope. For example, Amazon boosted e-book sales by introducing Kindle, and Sony grew from a tape-recorder company to an entertainment provider with a wide range of movie and music products, which helped it to edge out Toshiba in the format war.
What kinds of companies should focus on organic growth?
Niche companies with limited market penetration should focus on building brand equity before incurring additional risk by venturing beyond their core competencies. Organic growth maximizes existing resources and helps companies gain market recognition without diluting their brand. Organic growth is a good way to show the strength of innovation to investors who are interested in paying more for a strong brand with a loyal customer following and continuous growth potential.
The downside to organic growth is time. Executives have to be patient, committed to the company culture and willing to make additional investments without succumbing to the instant revenue gratification that accompanies cultural divergence.
When should executives consider strategic alliances?
Strategic alliance is a viable expansion strategy when the joined forces in technology development and market dominance benefit all players in the coalition. Google TV is an example of a collaborative effort in which a few strong players have united to make an even stronger team. Google, LG, Sony and Samsung are contributing technology and resources and joining market power in an effort to develop a smart television platform that may revolutionize the home entertainment industry.
The bottom line is: Why risk being left behind when you can be part of a winning team?
Are companies changing the way they view and integrate acquisitions?
We used to believe that fully integrating acquisitions was the best way to lower operating costs and reap the union’s financial rewards. But assimilation is tricky and executives often failed to meld disparate cultures and people.
Instead of making integration mandatory, companies should selectively and strategically integrate parts of an acquired organization. They may combine rudimentary functions such as distribution and accounting, while allowing areas of strength to flourish autonomously.
For example, Disney wanted to strengthen its market position with young boys by acquiring Marvel Comics’ cast of super heroes such as Iron Man, Thor, Captain America and the X-Men. However, if Disney execs were to force the influence of Disney’s culture on Marvel, Marvel’s brazen creativity would be stifled.
What should executives consider when selecting a growth strategy?
Time and timing are key considerations because organic growth and synergistic expansion tend to be slow and safe, while an acquisition or merger is risky but jumpstarts new growth. History shows that growth is rarely sustained when it results from knee-jerk reactions to unanticipated competitor moves or industry changes. Executives need time to build consensus and socialize their ideas, and half-hearted alliances or acquisitions often fail because it takes commitment and tenacity to work through the inevitable challenges.
CafePress, a San Mateo company that debuted on Nasdaq last month, has been growing slowly and steadily through both organic growth and acquisition. CafePress committed many years in organic growth and developed the strength in print-on-demand services. The acquisitions helped it to diversify the portfolio and establish a network of partners and customers. Without clear positioning and dedication, CafePress may have jumped into other services and diverted from its competence.
Lastly, even the best marriages sometimes fail. So with alliance or acquisition, executives should hope for the best but plan for the worst by developing an exit strategy to end the relationship and still be friends.
Yi Jiang is an assistant professor and associate director of MBA for Global Innovators for the College of Business and Economics at California State University, East Bay. Reach her at (510) 885-2932 or email@example.com.