Internal growth strategies involve efforts taken within the firm itself, such as new product development, other product-related strategies, and international expansion, for the purpose of increasing sales revenue and profitability.
New Product Development
New product development involves designing, producing, and selling new products (or services) as a means of increasing firm revenues and profitability. In many fast-paced industries, new product development is a competitive necessity.
Advantages of Internal Growth Strategies:
- Incremental, even-paced growth.
- Provides maximum control
- Preserves organizational culture
- Encourages internal entrepreneurship
- Allows firms to promote from within
- Slow form of growth
- Need to develop new resources
- Investment in a failed internal effort can be difficult to recoup
- Adds to industry capacity
The keys to effective new product and service development:
- Find a need and fill it
- Develop products that add value
- Get quality and pricing right
- Focus on a specific target market
- Conduct ongoing feasibility analysis
The Top 5 Reasons New Products Fail
- The potential market was overestimated
- Customers saw the product as too expensive
- The product was poorly designed
- The product was no different than the competition’s
- The costs of developing the product line were too high
Additional Internal Product-Growth Strategies
Firms also grow by improving existing products or services, increasing the market penetration of an existing product or service, or pursuing a product extension strategy.
A. Improving an Existing Product or Service
Enhancing quality, making it larger or smaller, making it more convenient to use, improving its durability, or making it more up-to-date. Improving an item means increasing its value and price potential from the customer’s perspective.
B. Increasing the Market Penetration of an Existing Product or Service
A market penetration strategy involves actions taken to increase the sales of a product or service through greater marketing efforts or through increased production capacity and efficiency.
C. Extending Product Lines
A product line extension strategy involves making additional versions of a product so that it will appeal to different clientele or making related products to sell to the same clientele.
D. Geographic Expansion
Geographic expansion is another internal growth strategy. Many entrepreneurial businesses grow by simply expanding from their original location to additional geographic sites. This type of expansion is most common in retail settings.
The keys to successful geographic expansion follow:
- Perform successfully in the initial location
- Establish the legitimacy of the business concept in the expansion locations
- Don’t isolate the expansion location
International new ventures are businesses that, from inception, seek to derive competitive advantage by using their resources to sell products or services in multiple countries. From the time they are started, these firms, which are sometimes called “global start-ups” or “born globals,” view the world as their marketplace rather than confining themselves to a single country.
A. Assessing a Firm’s Suitability for Growth Through International Markets
Evaluating a Firm’s Overall Suitability for Growth Through International Markets:
1. Management/Organizational Issues
- Depth of management commitment
- Depth of international experience
- Interference with other firm initiatives
2. Product and Distribution Issues
- Product issues
- Distribution issues
3. Financial and Risk Management Issues
- Financing export operations
- Foreign currency risk
B. Foreign Market Entry Strategies
The majority of entrepreneurial firms first enter foreign markets as exporters, but firms also use licensing, joint ventures, franchising, turnkey projects, and wholly-owned subsidiaries to start international expansion.
C. Selling Overseas
It is important to handle the inquiry appropriately and to observe protocols when trying to serve the needs of customers in foreign markets.
External Growth Strategies
External growth strategies rely on establishing relationships with third parties. Mergers, acquisitions, strategic alliances, joint ventures, licensing, and franchising are examples of external growth strategies.
A. Mergers and Acquisitions
A merger is the pooling of interests to combine two or more firms into one.
An acquisition is the outright purchase of one firm by another. In an acquisition, the surviving firm is called the acquirer, and the firm that is acquired is called the target.
Emphasizing External Growth Strategies
Advantages:
Disadvantages:
1. Finding an Appropriate Acquisition Candidate
There are typically two steps involved in finding an appropriate target firm. The first step is to survey the marketplace and make a “shortlist” of promising candidates. The second is to carefully screen each candidate to determine its suitability for acquisition.
2. Steps Involved in an Acquisition
Step 1: Schedule a meeting with the target firm’s executives:
Step 2: Evaluate the feelings of the target firm’s executives about the acquisition:
Step 3: Determine how to most appropriately finance the acquisition:
Step 4: Actively negotiate with the target firm:
Step 5: Make an offer if negotiations indicate that doing so is appropriate:
Step 6: Develop a non-compete agreement with key target firm employees who will be retained:
Step 7: Hire an attorney to prepare the closing documents:
Step 8: As soon as practical, meet with all employees to explain the acquisition:
Step 9: Move forward with the plan for adding the acquired firm to the organization:
B. Licensing
Licensing is the granting of permission by one company to another company to use a specific form of its intellectual property under clearly defined conditions. Virtually any intellectual property a company owns that is protected by a patent, trademark, or copyright can be licensed to a third party. Licensing also works well for firms that create novel products but do not have the resources to build manufacturing capabilities or distribution networks, which other firms may already have in place.
1. Technology Licensing
Technology licensing is the licensing of proprietary technology that the licensor typically controls by virtue of a utility patent.
2. Merchandise and Character Licensing
Merchandise and character licensing are the licensing of a recognized trademark or brand that the licensor typically controls through a registered trademark or copyright.
C. Strategic Alliances and Joint Ventures
Participating in Strategic Alliances and Joint Ventures
Advantages:
1. Strategic Alliances
A strategic alliance is a partnership between two or more firms that are developed to achieve a specific goal. Various studies show that participation in alliances can boost a firm’s rate of patenting, product innovation, and foreign sales.
Technological alliances and marketing alliances are two of the most common forms of alliances.
2. Joint Ventures
A joint venture is an entity created when two or more firms pool a portion of their resources to create a separate, jointly owned organization.
External growth strategies rely on establishing relationships with third parties. Mergers, acquisitions, strategic alliances, joint ventures, licensing, and franchising are examples of external growth strategies.
A. Mergers and Acquisitions
A merger is the pooling of interests to combine two or more firms into one.
An acquisition is the outright purchase of one firm by another. In an acquisition, the surviving firm is called the acquirer, and the firm that is acquired is called the target.
Emphasizing External Growth Strategies
Advantages:
- Reducing competition
- Getting access to proprietary products or services
- Gaining access to new products and markets
- Obtaining access to technical expertise
- Gaining access to an established brand name
- Economies of scale
- Diversification of business risk
Disadvantages:
- Incompatibility of top management
- Clash of corporate cultures
- Operational problems
- Increased business complexity
- Loss of organizational flexibility
- Antitrust implications
1. Finding an Appropriate Acquisition Candidate
There are typically two steps involved in finding an appropriate target firm. The first step is to survey the marketplace and make a “shortlist” of promising candidates. The second is to carefully screen each candidate to determine its suitability for acquisition.
2. Steps Involved in an Acquisition
Step 1: Schedule a meeting with the target firm’s executives:
Step 2: Evaluate the feelings of the target firm’s executives about the acquisition:
Step 3: Determine how to most appropriately finance the acquisition:
Step 4: Actively negotiate with the target firm:
Step 5: Make an offer if negotiations indicate that doing so is appropriate:
Step 6: Develop a non-compete agreement with key target firm employees who will be retained:
Step 7: Hire an attorney to prepare the closing documents:
Step 8: As soon as practical, meet with all employees to explain the acquisition:
Step 9: Move forward with the plan for adding the acquired firm to the organization:
B. Licensing
Licensing is the granting of permission by one company to another company to use a specific form of its intellectual property under clearly defined conditions. Virtually any intellectual property a company owns that is protected by a patent, trademark, or copyright can be licensed to a third party. Licensing also works well for firms that create novel products but do not have the resources to build manufacturing capabilities or distribution networks, which other firms may already have in place.
1. Technology Licensing
Technology licensing is the licensing of proprietary technology that the licensor typically controls by virtue of a utility patent.
2. Merchandise and Character Licensing
Merchandise and character licensing are the licensing of a recognized trademark or brand that the licensor typically controls through a registered trademark or copyright.
C. Strategic Alliances and Joint Ventures
Participating in Strategic Alliances and Joint Ventures
Advantages:
- Gain access to a particular resource
- Economies of scale
- Risk and cost-sharing
- Gain access to a foreign market
- Learning
- Speed to market
- Neutralizing or blocking competitors
Disadvantages:
- Loss of proprietary information
- Management complexities
- Financial and organizational risks
- Risk becoming dependent on a partner
- Partial loss of decision autonomy
- Partners’ cultures may clash
- Loss of organizational flexibility
A strategic alliance is a partnership between two or more firms that are developed to achieve a specific goal. Various studies show that participation in alliances can boost a firm’s rate of patenting, product innovation, and foreign sales.
Technological alliances and marketing alliances are two of the most common forms of alliances.
- Technological alliances feature cooperation in research and development, engineering, and manufacturing. Research-and-development alliances often bring together entrepreneurial firms with specific technical skills and larger, more mature firms with experience in development and marketing.
- Marketing alliances typically match a company that has a distribution system with a company that has a product to sell in order to increase sales of a product or service.
2. Joint Ventures
A joint venture is an entity created when two or more firms pool a portion of their resources to create a separate, jointly owned organization.
