The growth of the Firm: Internal Development
I. Internal Growth Strategies
Business expansion refers to raising the market share, sales revenue and profit of the present product or services. The business can be expanded through product development, market development, expanding the line of product etc.
Expansion leads to better utilisation of the resources and to face the competition efficiently. Business expansion provides economics of large-scale operations.
Business can be expanded through:-
- Market penetration strategy:
This strategy involves selling existing products to existing markets. To penetrate and capture the market, a firm may cut prices, improve distribution network, increase promotional activities etc.
- Market Development strategy:
This strategy involves extending existing products to new market. This strategy aims at reaching new customer segments or expansion into new geographic areas. Market development aims to increase sales by capturing new market area.
- Product Development strategy:
This strategy involves developing new products for existing markets or for new markets. Product development means making some modifications in the existing product to give value to the customers for their purchase.
Diversification is another form of internal growth strategy. The purpose of diversification is to allow the company to enter new lines of business that are different from current operations. There are four types of diversification:
a) Vertical diversification
b) Horizontal diversification
c) Concentric diversification
d) Conglomerate diversification
a) Vertical Diversification
Vertical diversification is also called as vertical integration. In vertical integration new products or services are added which are complementary to the present product line or service. The purpose of vertical diversification is to improve economic and marketing ability of the firm. Vertical diversification includes:
- Backward integration:
In backward integration, the company expands its business activities in such a way that it moves backward of its present line of business.
Despite of being the leaders in Textiles, to strengthen his Position, Dhirubhai Ambani decided to integrate backwards and produce fibres.
- Forward integration:
In forward integration, the company expands its activities in such a way that it moves ahead of its present line of business.
New Zealand based Natural health care products company Comvita purchased its Hong Kong distributor Green Life Ltd. And thus achieved forward integration by having access to greenlife’s retail stores, sales staff and in store promoters.
b) Horizontal Diversification:
Horizontal diversification involves addition of parallel products to the existing product line. For example: A company, manufacturing refrigerator may enter into manufacturing air conditioners. The purpose of horizontal diversification is to expand market area and to cut down competition.
c) Concentric Diversification:
When a firm diversifies into business, which is related with its present business it is called concentric diversification. It is an extreme form of horizontal diversification. For example: Car dealer may start a finance company to finance hire purchase of cars.
d) Conglomerate Diversification:
When a firm diversifies into business, which is not related to its existing business both in terms of marketing and technology it is called conglomerate diversification.
It involves totally a new area of business. There is no relation between the new product and the existing product.