Most companies want to grow — the issue is just how and when. However, determining an advantageous growth strategy can be challenging. Less than 1 percent of companies reach $250 million in annual revenue and fewer still eclipse $1 billion.
“Some companies boost revenue through organic growth, while others diversify their products/services or build strategic alliances,” says Yi Jiang, associate 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 what growth strategy executives should consider.
How have growth strategies evolved?
History and experience have altered the approach to growth. Vertical integration was a popular diversification strategy in the 1960s and 1970s. Companies boosted profits by expanding into upstream or downstream activities, seizing control of the supply chain.
However, the strategy’s popularity waned when large, multinational companies were accused of monopolistic practices. Many also struggled to manage unfamiliar entities.
Smart companies then turned to building a network of complementary offerings, creating synergistic expansion opportunities and economies of scope. Amazon.com boosted e-book sales with the Kindle. Sony grew to an entertainment provider with a wide range of movie and music products.
Who 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 gain market recognition without diluting your brand. It’s 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 is time. Executives must be patient, committed to the company culture and willing to make additional investments without succumbing to instant revenue gratification.
When should you look at strategic alliances?
Strategic alliance is a viable expansion strategy when the joined forces benefit all players in the coalition. Google TV is an example where a few strong players — Google, LG, Sony and Samsung — united to make a stronger team, contributing technology and resources and joining market power to develop smart television.
Bottom line: Why risk being left behind when you can be part of a winning team?
Are companies changing the way they integrate acquisitions?
We used to believe that fully integrating acquisitions was the best way to lower operating costs and reap financial rewards. But assimilation is tricky; executives often fail 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 — Iron Man, Thor, Captain America and the X-Men. However, if Disney execs forced Disney’s culture on Marvel, Marvel’s 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 jump-starts new growth. 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. Half-hearted alliances or acquisitions often fail without the commitment and tenacity to work through the inevitable challenges.
Also, with alliance or acquisition, 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 associate professor and associate director of the MBA for Global Innovators program at California State University, East Bay. Reach her at (510) 885-2932 or [email protected].
Learn more about the College of Business and Economics at California State University, East Bay.
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