What is Expansion Strategy? | Meaning, Types, Reasons & Issues

What is Expansion Strategy ?

In the competitive environment, growth is considered as the most common long-term goal of every enterprise in order to sustain their existence. Growth provides wide range of opportunities to each and every individual in the organisation for its existence and expansion. In order to grow successfully, the organisation has to ensure that the considerations for expansion are met. Growth allows the organisation to maintain and enhance position of the industry, both in domestic and international markets.

Therefore, the expansion strategies is a strategic option which is vital for the survival of the organisation. This also helps the enterprise to speed up the growth rate of sales, profits and market share by introducing new products, entering new markets, utilizing new technologies and developing effective managerial competencies.

Growth/Expansion strategy provides an outline or draft for the organisation to achieve long-term business objectives. It permits the organisation to grow even if the industry is in the maturity stage of its life cycle. A growth strategy creates economies of scale and scope in the organisation. This brings down the cost of operations and also increases the earnings of an organisation. Other than this, it also holds control over its external environment and protects the market share from aggressive competitors.

Reasons to Pursue/Adopt Expansion Strategy

An organisation follows a growth strategy because of the following reasons :

1) Creates Strength : 

Growth acts as a source of strength. It is time and again compared with the cultural values of the company. Hence, a growing company is considered successful while a company unable to expand its business is regarded as a failure.

2) Necessary for Survival : 

The strategy of growth is relevant in industries which are subject to frequent changes in technology environmental conditions. Such industries and should exploit all opportunities and overcome its threats.

3) Employee Satisfaction : 

Expansion strategy increases the motivation of top management. When an organisation is able to achieve growth in a particular industry its employees are also able realise their individual career growth. It also opens up opportunities for management to exhibit their skills.

4) Increases Productivity : 

According to experience curve theory, over time with increasing size and experience of an enterprise the productivity increases and cost decreases.

Issues Involved in Growth/Expansion Strategy

1) Growing too Fast : 

Organisations doing successful business and having high demand for their product and/or services are generally affected by this issue. Rapid growth can turn into severe problems for organisations lacking effective contingency strategies. Sometimes organisations growing too fast may have to suffer huge consequences in order to achieve success.

2) Expansion Capital : 

Sometimes additional capital is required by small organisations so as to maintain their position in the growth stage. It may be a frustrating situation for the unprepared organisations to arrange such expansion capital but for organisations having effective contingency plan, it is not an issue. In order to secure sufficient financing, organisations should regularly review their business plan along with updating marketing strategies.

3) Personnel Issues :

Issues concerning the personnel of the organisation are also relevant here. Variety of personnel is required for different organisational objectives and operations like new product development, record-keeping, marketing, administration, etc., during the expansion of the organisation. Therefore, identifying and managing issues related to personnel is very crucial for effective expansion of the organisation.

4) Customer Service :

During expansion or growth, organisations generally lack in customer service, although it is the most crucial factor for the success of any organisation. Thus, it becomes very difficult for organisations to maintain their growth along with retaining current customers. Large size of work staff is the key to this problem as it enables fulfillment of all their needs and desires.

5) Disagreements among Ownership : 

Several incidences have proved that positioning of business ownership which performed quite efficiently during the initial growth phases of the business have later on become more and more troublesome as business problems become more complicated.

Types of Expansion Strategy

Types of Growth Strategy include : 

1) Concentration strategy

2) Diversification strategy,

3) Integration strategy

4) Internationalisation strategy

5) Cooperation strategy

1) Concentration Strategy

Another name for concentration strategy is intensive strategy. Intensive strategies aim to increase the market share of the company by launching new products and services and by increasing the number of offerings of the company in the market.

The company offers innovative new products to its customers in order to fulfill their needs and demands. It also plays a significant role in increasing both the revenue and sales of the organisation.

Advantages of Concentration Strategy :

1. It applies fewer changes in the organisational structure.
2. It becomes comfortable to continue with the present business.
3. The decision-making process is easy and predictable.
4. It helps the organisation to gain in-depth knowledge of its business and become an expert.
5. The organisation can gain from its past experience. 

Disadvantages of Concentration Strategies :

1. Concentration strategies can be counter productive when the external environment of the company is uncertain and prone to rapid change. In such a situation, relying on a single product or sticking to an established business line can be dangerous for the company's long-term sustainability.
2. The organisation's product line can be subjected to obsolescence or the industry in which the company exists can turn mature. This can impact the performance of the company till the time it launches a new product or caters to a new market.
3. As the organisation becomes a specialist in a particular product line or acquires expertise in catering to a particular set of customers, it is not able to launch new products or satisfy new customer needs in the market. It thus loses market share to more proactive competitors and becomes bankrupt.
4. Concentration strategies also fail when the incumbent industry is in a state of constant evolution and in close convergence with other industries. The end of the pager technology in the Indian telecommunications industry is a good example Companies which invested in the paging technology lost out because the telecom industry changed because of the convergence of voice and data. External influences like government policy also impacted the rapid explosion of telecom industry.
5. Concentration strategies also lead to cash flow problems for the company because it calls for sizable investment from the company in the form of advertising and also capital equipment.
6. A concentration strategy also suffers because it causes monotony among managers as they keep on repeating the same set of activities. However, organisations which grow rapidly do not suffer so much on this count because employees get a e of incentives and rewards in these companies.

2) Diversification Strategy

Is a diversification strategy, the company enters into new lines of business from existing lines of business. calls for a new set of capabilities and competencies from existing ones. In this strategy, the organisation adds markets, products, services or even modification in the production process to existing ones. In the diversification strategy, the company aims to add new product or service to the existing one.

For example, Reliance industries started off in Textiles with its Vimal brand. However, afterwards it expanded into Petrochemicals, Telecommunications Reliance CDMA), Organised Retail (Reliance Retall), Similarly, Wipro has expanded in Retail and FMCG. ITC has expanded in Cigarettes, FMCG (Biscuits, Oil) and Hotels. Diversification strategies can be related (concentric) if they utilise the existing capabilities and competencies or they be unrelated (conglomerate). In the above example, expansion of ITC in various FMCG businesses is related diversification; however, its expansion into Hotels is unrelated diversification.

The diversification strategy is a growth strategy. It involves a great improvement in the performance of the organisation from the past levels in terms of both sales and profits. Most organisations practice growth strategies in some form or the other. This is because the investors and the management of the company perceive growth strategies in a favorable manner. Even a growth in top line (sales) with a stable of declining profit satisfies the investors of the cay. The assumption is an increase in the sales level will ultimately lead to better profitability level for the company.

Advantages of Diversification Strategy :

The advantages of diversification are as follows: 

i) Limiting Risk :

The main advantage of a diversification strategy is that it helps the organisation to limit its risks. Like the proverbial "do not keep all your eggs in one basket", the organisation does not limit itself to only one business line. It is therefore secure from excessive volatility and instability in the product's industry. Losses from one industry are made up by profits from the other and hence the overall profitability of the organisation is maintained. A similar example can also be found from the financial world where investors. look at stable returns from the bond market as a hedge from the excessive risk of the stock markets.

ii) Maximising Returns : 

The other advantage of the diversification strategy is that it maximizes the return from the portfolio of businesses. The investor makes the portfolio based on his risk capacity. If he wants to return from high growth industries then he can add them to his portfolio or he can eschew risk and look at stable industries.

iii) Stabilising Influence : 

Diversification also helps in generating stability in the organisation. Focusing on single market may cause the degradation of profitability and organisational resources; therefore diversification is helpful in improved productivity and smooth flow of the organisation. For example, different media companies prefer to diversify their clients to avoid the instability in the company due to client loss.

Disadvantages of Diversification Strategy :

The disadvantages of diversification are as follows: 

i) Over-extension : 

Diversification as a reckless strategy can lead to excessive acquisition of companies without any thought or logic. This can lead to depletion of organisational resources. The existing businesses and product line of the company are in the need of resources and attention. However, if the management of the company spends its time in the expansion and does not pay enough attention and resources to existing businesses, then both the old sectors and the new ones of the company suffer and ultimately become unprofitable.

ii) Lack of Expertise : 

Sometimes the acquiring company acquires a company which is totally unrelated to its existing capabilities. For example, if an FMCG company acquires a software company then it will be totally unproductive with the new set of competencies and challenges.

iii) Cost : 

A strategy of diversification that leads to the creation of business units which are widely separated lead to an explosion of costs on matters involving new infrastructure, training of employees and travelling required. The increase in cost is such that the profitability of the business is severely impacted. Therefore, organisations need to analyse the cost of diversification carefully so that the risks do not outnumber the returns. The best way of doing this is to diversify into areas which are similar to the existing business of the company so that there is substantial synergy in the expertise required and the infrastructure.

iv) Reduced Innovation : 

An increasing proportion of business innovation happens in smaller sized organisations which are focused on technological and business objectives. Once these companies expand, they tend to lose focus and become more burdened with bureaucracy. This inhibits their core competence of being fast in responding to market challenges. This also impacts their culture of innovation. This causes a cascading effect which ultimately leads to lesser growth and a further reduction in innovation.

3) Integration Strategies

An performs many functions right from sourcing the raw materials, converting the same into a finished product and finally marketing the finished product to the customer. The entire set of these activities comprises the value chain of the organisation. Integration strategics denote efforts by the company to move up or down its value chain and adding to the present activities of the organisation This helps the organisation to increase its business and serve its customers' needs in a far more effective manner. Integration is also a kind of diversification strategy because it adds to the activities of the organisation. It also increases the scope of operations of the company.

Types of Integration Strategies :

An integration strategy is undertaken by a company when certain conditions are met. The chief reason is a situation when the organisations are confronted with make or buy decisions. Economies which accrue to the organisation because of transaction costs also make integration strategies necessary. Integration strategies can be of two types- vertical integration and backward integration, Vertical integration, and Horizontal integration.

i) Vertical Integration :

Another name for vertical integration is vertical diversification. In this type of integration strategy, the company adds new business which is complementary to the existing business of the company. Here, the company adds products and services which complement the existing products of the company. - For. example, company a manufacturing cold drinks gets into the direct distribution of the same to its end consumers.

The act of converting inputs into output by a company involves many activities right from procurement of the raw material, processing of the same into a product, assembly line processing, distribution, marketing and sale. In vertical diversification, the company decides which of these activities, it wants to perform. In other words, when the firm acquires another firm which is producing a good or a service which is in exact continuation or preceding the activities of the firm, then it performs an act of vertical integration. Vertical diversification involves the extension of the firm's activities in two directions backward or forward. Vertical diversification, therefore leads to a growth in the organisation's activities by adding products and services either in a forward, or backward direction from the current products and services and establishes linkages in products, processes and distribution.

ii) Horizontal Integration :

Corporate level strategy determines the competition that a firm is likely to face so that its goal of long-run profitability is maintained. Many firms can grow successfully and expand within the same industry. For example, Big bazaar has limited itself to being a discount retailer, whereas Airtel has limited itself to GSM telecom mobility in India. By staying in the same industry the firm is able to bring better focus in its efforts in terms of resources which involve managerial, financial, technological and functional capabilities. In the case of dynamic and rapid change, this strategy is absolutely essential. It is this strategy that has enabled Airtel to become the largest GSM operator in India. It is able to utilise its resources in the best possible manner so as to maximise its profitability and also satisfy its customers.

Another benefit of being in a same industry is that in. this the company "sticks to the knitting" or it becomes a specialist in what it knows best instead of stretching itself thin. By extending into other industries the organisation runs the risk of exposing itself to a new set of success rules which may not be in congruence with the competencies it has built over the years. It may require new skill sets regarding competitors, suppliers and customers and may also reveal unseen challenges to the organisation. For example, failure of Kingfisher Airlines of the UB Group can be helpful in understanding the requirements of this strategy. The UB Group is the undisputed market leader in the organised liquor market in India. Similarly Coca Cola's attempt to venture into movie and wine business was a very big strategic blunder. Ultimately Coca Cola was forced to write off both these businesses and focus on its carbonated soft drink business.

4) Internationalisation Strategy

Under internationalization strategy, the organisations expand their market by offering their products and services beyond the national boundaries or markets. For this, organisations adopt four strategies, viz., international, multi-domestic, global and transnational strategies. These strategies substantially vary in their operating strategy, orientation, world view and practices of firms who operate in more than one country. Orientation of companies is the biggest difference in these strategies. In order to enter and strive in the international environment, multinational corporations select any one strategy from the four basic strategies. These strategies help the companies to meet out the relative demands which are required for achieving global integration and national responsiveness.

International Corporate-Level Strategies :

The global business level strategies existing in a company are dependent on the type of international corporate level strategy that the firm has adopted. In some companies, local business units have a lot of power to decide their own strategies. Such companies are more decentralized in their decision making. For example, Unilever gives each of its international business units, total autonomy to make strategies best suited for their markets. In some other companies, international corporate strategics are decided from the center so that there is greater standardization in the products and services of the company and also in the sharing of resources. International corporate level strategy is necessary in companies which have operations in multiple countries and industries. The overall thrust of the strategy is decided by the corporate headquarters, however the implementation is decentralized to the individual business units depending on the corporate philosophy of the organisation.

The basis of following a global strategy is to regard each country or location as a market and to establish competitive advantage in each. This includes the location in isolation and also in synergy with the rest of the organisation. Organisations which are global in nature must devise strategies for international expansion, diversification and integration to develop and make best use of the resources and capabilities.

i) Global Company Strategy : 

The global company has a slightly different strategy from an MNC. While the MNC has operations in different countries and treats, all of these as SBUS, the global company can adopt the strategy of either being a global manufacturing one or a global souring one. In a global manufacturing company the firm chooses to focus on various global markets but its sourcing is from a single country. In the Global sourcing strategy, the company sources from the entire world but caters to only its domestic markets. The global company strategy can be developed into a competitive advantage by the firm if it is able to manage its value chain effectively.

To successfully adopt a global strategy the firm needs to ensure standardisation and consistency in its worldwide operations. The emphasis is typically on cost reductions than local responsiveness in this strategy. Typically a firm adopting this strategy will aim to be a low cost producer in its industry. It adopts large scale productions in a few low cost locations. R&D, production and marketing are also not widely distributed but concentrated in a few locations to maximise their effectiveness. The widely scattered activities of the organisation are

connected through linkages which are ensured through a strong management team. The main management team resides in the corporate headquarters from where it supervises the global effort. For example, Walmart gets its apparel manufactured in low cost locations like, China and now even Bangladesh. The headquarter of Walmart is in Arkansas, USA.

ii) International Company Strategy : 

In the international company strategy the firm decides to explore business opportunities outside its home country. It extends its marketing. manufacturing and other activities outside its home country. However the culture of the company is based on its home country. This stems from the belief that the processes, practices, products of the home country are vastly superior to the other countries.

The management team typically contains of people with international experience who have been grouped together. The marketing strategy of the company is basically an extension of that practiced in the home country. Facets of marketing like products, advertising, promotion, etc., are not developed for the other markets, but basically extended versions of their home country.

iii) Transnational Company Strategy : 

The transnational company is different from the other two in the sense that it aims to make the maximum use of its core competencies, exploit location advantages as well as be responsive to local needs. It is in fact the direct approach to the growing globalization phenomenon. The transnational corporation is not just an entity with healthy sales and profits, but a highly integrated organisation that utilises global resources and also responds to local issues. There are many corporations in the world today, which show the traits of a transnational corporation. Unilever is a very good example of a transnational corporation. It utilizes the global brand equity of its brands, utilises its global management pool, it utilizes manufacturing advantages in low cost countries and also attends to local needs which are different from market to market.

The transnational company is geocentric in its approach. It does not customize its products to local markets unless it sees a need for it. Unlike s global corporation, it recognizes that there are some differences between markets which need to be addressed. At the same time it harnesses the similarities to the extent possible. It does not adapt for the sake of adaptation, but only does so when it is necessary. The basic premise, which governs if an adaptation is necessary, is the value that it will confer on the end user.

iv) Multi-domestic Company Strategy : 

The multi-domestic company strategy recognizes the wide divergence in the needs of all the country markets that it caters to. It decides to develop a country specific strategy for each of the countries that it operates in. The focus of such a strategy shifts from ethnocentric to polycentric. It accordingly changes the marketing mix (product, price, place and promotion) for each of the countries in its portfolio.

A polycentric orientation is governed by the thought process that the success ingredients for each of the markets are widely different and the only way the corporation can achieve its goals is to have a different strategy for each of these markets. In a polycentric multinational company, each of the country businesses are managed as if it were a separate city or state.

5) Co-operation Strategy

The term co-operation' denotes efforts by the companies to constantly engage with their competitors in such a manner that the end result is an increased value for the customers of the company. It is thus a process by which the companies combine their resources in such a manner that the greatest amount of value is created for the stakeholders of the company. Critical in having co-operation in an organisation is the existence of a shared objective. By co-operating with the competitors the company is able to provide value to its customers at a lower cost than otherwise possible.

Co-operation is emerging as a successful strategy. both on the Indian corporate landscape as well as worldwide. Organisations are basically a network of co-operative relationships. They constantly engage with their internal as well as their outside stakeholders. Through the process of co-operation, the organisations form the meaningful partnerships with their stakeholders and are thus able to achieve common objectives. Co-operation can be an important strategy for the organisations to align their stakeholders and also overcome uncertainty in the environment.

Types of Co-operation Strategy :

Co-operative strategies be of the following types:

1) Mergers

2) Acquisition/Takeover Strategies 

3) Strategic Alliances

4) Joint Ventures

i) Mergers :

An organisation grows externally by adopting a strategy of merger. The merger typically happens between two organisations which are equal. For this reason the merger is often approved by the board of the organisations. The board of the merged organisation is likely to be equally represented by both organisations.

On the flip-side a merger is not always likely to lead to a shared appreciation for both the companies. This is because mergers also suffer from the same problem of acquisitions. The intended benefits of mergers are often overestimated and the real costs make the merger a costly exercise. Also integration of the two organisations is a difficult task.

Mergers are also an attempt by the company to build up scale so that they cannot be acquired by other companies. Many times they are blocked or done subject to fulfillment of conditions. The Indian market is full with examples of mergers like the one between Polyolefin Industries with NOCIL, Sandoz (India) Ltd with Hindustan Ciba Geigy, etc.

ii) Acquisitions and Takeover Strategies :

Acquisition is another growth strategy in which the company purchases or takes over another business. In this manner the company can enter new markets or new products or get access to a new distribution channel. The company which acquires new business needs to manage the acquisition carefully otherwise it could suffer financially. It can make phase wise payments so that these are matched to the funds generated by the organisation. The logic behind the acquisition is that companies are always available for being acquired. However, when the choice facing the company is limited then it can expedite the acquisition process.

The thought that acquisitions will always lead to organic growth for the company is not true. This is because the acquisition is a time consuming process where the target company has to be searched by the acquiring company first. After that there are substantial negotiations so that the right price is paid for the target company. At the end, there is the difficult problem of integrating the target company with the acquired so that value is created in the transaction. The process of acquisition is a case of dominance of one company over the other. Here a bigger company will take over the shares and assets of the smaller company and either run it under the bigger company's name or might run it under a combined name. The acquisition is an act of dominance. In this the target company is taken over by the acquiring company. After this it is run either in the acquiring company's name or by a new name. For example, when Satyam was taken over by Mahindra and Mahindra, the erstwhile Satyam name got merged in Tech Mahindra.

In an acquisition the firm buys a controlling stake in the target company. This is done with the intention of making it a subsidiary business or merging with one of the existing businesses of the acquiring company. For most companies acquisition is a one-time activity which is done with a specific objective in mind.

iii) Strategic Alliances :

A strategic alliance is a kind of partnership or collaboration between two independent organisations to achieve a common set of objectives. In making a strategic alliance neither company loses its independence. Strategic alliances can quantum and size and their scope may cover a wide vary in range of objectives. A strategic alliance makes maximum when the two organisations complement each other.

In the past few years, corporate have entered into strategic alliances and partnerships to boost their competitiveness both in domestic and international markets. This phenomenon can be seen both in India and overseas. This was a major departure in the past when most companies did not believe in strategic alliances and preferred to play a lone hand with the firm belief that they had the competency and resources to succeed in their industry. There has thus been a major change in the corporate mind-set with respect to strategic alliances and collaborative partnerships. This phenomenon can also be seen in the field of higher education in India where all the top management and engineering colleges have entered into alliances with foreign universities to develop state of the art curriculum. Nowadays companies are facing challenges on two fronts:

1. To be a part of the global race and have operations in as many countries as possible, this is necessary to be called a global company. 
2. The challenge to be a pioneer in the adoption of technology and to develop the resource base of the company in such a manner that it is able to make future ready products and build the competitive position in the industry.

Even companies which are industry leaders like Reliance Industries know that it will not be possible. to develop into a global market leader and also develop futuristic products alone. To do this alone will require an immense amount of resource, skills, technological access and capabilities and may be beyond the reach of a single enterprise. Doing the exercise alone will also increase the risk of failure of the organisation. Therefore, companies, which want to have a global leadership position and are, aiming to create products and services with the future demand in mind, prefer strategic alliances in a big way. As a result, companies form strategic alliances and joint ventures. Here, two or more companies come together to form an alliance to achieve a common strategic objective. Such alliances go beyond the routine company to company interactions and also fall short of a full-fledged merger or full partnership with formal relationships. However, some strategic alliances do involve signing an agreement between the two companies and in which one or more companies could also have a minor holding.

Strategic alliances and collaborative partnerships are thus important means to bridge the technological and resource gaps of a company. More and more companies are adopting strategic alliances to achieve their strategic objectives.

iv) Joint Ventures :

A joint venture is created when two or more independent companies cooperate to create an entirely new entity which is totally different from the parent companies. A joint venture may take many forms. A joint venture may be formed to exploit market opportunities through marketing or manufacturing. The idea behind the joint venture is that each of the participating companies will bring in some expertise and thus through a process of synergy the joint venture will have a distinct competitive advantage.

Joint ventures differ from other forms of collaboration like Licensing in the sense that in this each of the partners takes an equity stake in the new entity. The stake enjoyed by a partner may be as low as 10% but he still has the power to influence the policies of the joint venture. For example, HCL-HP was a joint venture between Hindustan Computers Ltd. and Hewlett Packard Computers. Similarly Maruti had a joint venture with Suzuki Motors (Japan).

Forms of Joint Ventures :

Joint ventures can be of many types. These are:

1) Jointly Controlled Operations: 

In this, the operation of the joint venture utilises the assets of different partners. No separate entity is formed for the operation of the joint venture. The participating firms use their own set of assets, resources; and inventories for joint operations.

2) Jointly Controlled Assets: 

In some joint ventures the assets are jointly controlled and in some cases even jointly owned by the various partners of the joint venture. The assets are utilised by the joint venture partner for their benefit and in return they agree to bear a portion of the cost.

3) Jointly Controlled Entities: 

A jointly controlled entity is formed when a joint venture involves the creation of a corporation or partnership in which each of the participating companies has an interest. The working of the corporation is just like a business enterprise. The joint control of the corporation rests with the partners of the joint venture as per a contractual agreement.