Market expansion strategies are the most common and popular strategies adopted to accelerate the pace of growth of an organization. These strategies have a great impact on the organization’s structure and processes. Market expansion strategies are also known as growth strategies.
These strategies help in gaining control over market and competitors. These strategies are practiced when an organization demands increase in pace of activities, due to increase in large opportunities available in the market. If an organization exists in the business for a long time, it can gain advantage from its experience and go for expansion strategies. Similarly, if an organization’s resources are lying idle, it may utilize them for expansion purposes.
1. Expansion through Concentration:
Expansion through concentration involves attaining expansion by combining the resources in one or more area of the organization’s business. This is also known as focus or intensification strategy, implying that an organization would like to concentrate more on the business that it is already doing. It involves investment of larger resources in a product line for an identified market, with the help of a proven technology.
The expansion can be followed by adopting the following means:
i. Market Penetration – Implies selling more products in the same market.
ii. Market Development – Involves identifying the new markets for selling the existing products.
iii. Product Development – Refers to selling new products in the existing markets.
Expansion through concentration has numerous advantages.
Some of the prime advantages are as follows:
i. Involves minimum organizational changes, thus, it is less threatening
ii. Enables an organization to master in one or a few businesses and gain specialization in them
iii. Focuses intensely on the available resources and creates conditions to develop competitive advantage
iv. Helps managers to deal easily with problems, as they are already familiar with the type of problems
v. Develops user-friendly systems and processes
In addition to advantages, expansion through concentration strategies suffers from various limitations, which are as follows:
i. Highly Concentrated – Implies that concentration strategies are highly dependent on the industry; thus, adverse conditions in an industry can affect organizations. For instance, if the textile industry is hit by recession then it would be difficult for an export house to avoid the impact of recession.
ii. Doing a Known Thing Intensely – Creates organizational inertia. Employees may not sustain interest and may not perceive work as a challenge, resulting in decreased output.
iii. Cash Flow Problem – Makes the sustainability of an organization difficult. For instance, large cash inflows are required when the organization plans to expand. However, if an organization is in the maturity stage and does not plan to expand further, it does not utilize the options to invest its surplus cash. In this scenario, the problem of surplus cash flow arises.
iv. Other Threats – Illustrate the factors, such as product obsolescence and emergence of newer technologies, which can become a threat to the organizations following expansion through concentration strategy.
2. Expansion through Integration:
Expansion through integration is performed through value chain, which ensures the integration of an organization’s interlinked activities. For example, an organization can integrate the activity of procuring raw material with the activity of producing finished product. Expansion through integration widens the scope of an organization’s growth by combining the activities related to the present activity of an organization.
An organization moves either vertically or horizontally in the value chain to concentrate more broadly on customer groups. For example, if the cost of producing the products is less than the cost of procuring them from suppliers, an organization moves vertical in the value chain by making the products itself. In such a scenario, the organization itself supplies the raw material.
From the preceding discussion, we can divide the expansion through integration strategies into two types, which are as follows:
i. Vertical Integration:
It implies an activity that is carried out with the purpose of supplying inputs, such as raw materials; or distributing the final product to customers. Backward and forward integration are two types of vertical integration. In backward integration, the organizations become their own suppliers; whereas, in forward integration, the organizations take control of product distribution.
For example, if an automobile organization buys its supplier organization, which sells tyres for its cars, it is known as backward integration. However, if a wholesaler purchases a retailing outlet to directly sell products to end costumers, it is known as forward integration.
ii. Horizontal Integration:
It refers to a situation when an organization merges with or acquires other organizations serving the same customers, with the same or similar products. Horizontal integration increases the size and profits of an organization by increasing its market share. An example of horizontal integration can be a pizza restaurant expanding its product range by acquiring a hamburger chain.
3. Expansion through Diversification:
Expansion through diversification involves an extensive change in the business of an organization in terms of customer functions, customer groups, or alternative technologies. In simple words, it means diversification into related or unrelated businesses. Under the diversification strategies, an organization launches new products, serves new markets, or does both simultaneously.
There are two types of diversification strategies, which are as follows:
i. Concentric Diversification:
It refers to an expansion activity taken by an organization that is related to its existing business. This is also known as related diversification. For instance, an organization in the business of household electrical equipment diversifies itself into kitchenware appliances to serve the same set of consumers.
ii. Conglomerate Diversification:
It implies a strategy that requires taking up activities unrelated to the existing business of an organization. This is also called unrelated diversification. Conglomerate diversification is practiced in organizations when they have excess surplus capital. For example, ITC is into numerous unrelated businesses, such as agri-business, hotels, paperboards, and packaging.
Diversification strategies are adopted because of the following reasons:
a. Minimize the risks by spreading it over several businesses
b. Help in capitalizing strengths and minimizing weaknesses
c. Maximize the returns by investing into profitable businesses
d. Assist in migrating from a stagnant business to a lucrative business
e. Stabilize returns by avoiding economic fluctuations
f. Help in reaping the benefits of synergies.
Diversification strategies may suffer from the following risks:
a. Demand a high level of managerial, operational, and financial competence
b. Demand a wide variety of skills, as different businesses require different skills
c. Create imbalance in one or more businesses of an organization due to lack of adequate attention
d. Increase the administrative costs of managing, integrating, and controlling different businesses.
4. Expansion through Cooperation:
Expansion through cooperation refers to the mutual cooperation between organizations belonging to the same industry to achieve a shared objective. For example, if an organization works in cooperation with other organizations, it can establish a favorable position in the industry relative to its competitors.
The cooperation strategies available to organizations are as follows:
i. Mergers and Acquisitions
ii. Joint Ventures
iii. Strategic Alliances
Let us discuss each of these strategies in detail.
i. Mergers and Acquisitions:
Mergers and acquisitions have become popular strategies in the last two decades to expand the scope of business for an organization. A merger can be defined as the combination of two or more organizations, in which both the organizations are dissolved and their assets and liabilities are combined to form a new business entity. It is also referred as an agreement in which one organization obtains the assets and liabilities of the other in exchange for shares or cash. Thus, in mergers, organizations pool their resources together to create competitive advantage.
An acquisition refers to the process of gaining partial or full control of one organization by another. In most of cases, acquisitions are unfriendly in nature as one organization tries to take over another organization by adopting hostile measures, which may not be in the interest of the acquired organization.
The main reason behind mergers and acquisitions is the desire of organizations to increase their market power and gain synergy. There are various types of mergers that help in expanding the size of organizations.
These are briefly explained in the following points:
a. Horizontal Mergers:
It takes place when two or more organizations in the same business activity merge. The merger results in a larger organization and large-scale operations for the merged organization. Organizations may merge horizontally by sharing their resources and skills. For example, an organization in computer hardware manufacturing may merge with the organization having the same business.
b. Vertical Mergers:
It refers to a merger between two or more organizations having different stages of business in the same industry. For instance, organization A, which is involved in the manufacturing of certain products, merges with organization B, which sells the products of organization A. In such a case, it is the vertical merger that has taken place between two organizations. The reasons for vertical mergers are reducing the costs of communication, coordinating production, and better planning for inventory and production.
c. Concentric Mergers:
It refers to a combination of two or more related organizations with similar production or distribution technologies. For example, a merger between the motorcycle manufacturer and a car manufacturer.
d. Conglomerate Mergers:
It implies a situation when two or more unrelated organizations merge horizontally or vertically. For example, the merger of a fast-food outlet with a cloth manufacturing organization is a conglomerate merger.
Mergers and acquisitions happen to achieve the following results:
a. Increase the value of the organization’s stock
b. Increase the growth rate by making wise investments
c. Balance and diversify the product lines
d. Reduce competition
e. Acquire competence and capabilities
f. Enter new markets for increasing market share.
Note – We also have the concept of demergers, which implies spinning off or demerging an unrelated business division into standalone organizations. For instance, after the death of Dhirubhai Ambani, Reliance Industries Ltd. was demerged into four different organizations, such as Reliance Communication Ventures Ltd, Reliance Energy Ventures Ltd, Reliance Capital Ventures Ltd, and Reliance Natural Resources Ltd.
ii. Joint Ventures:
Joint venture can be defined as a creation of an entity by combining two or more organizations that want to attain similar objectives for a specific time period. In other words, it is a cooperative business agreement between two organizations to fulfil their mutual needs. The joint venture strategy allows organizations to share their technological skills and specific knowledge; and represents a potential source for the growth of organizations. In addition, it is very useful for organizations entering the international market.
An organization can enter into a joint venture in the following situations:
a. When it is uneconomical for an organization to perform an activity as a standalone organization
b. When the risk of the business must be shared and reduced for the participating organizations
c. When the distinctive competence of the organizations can be brought together
d. When setting an independent organization requires surmounting hurdles, such as tariffs and import quota.
An organization, which has surplus cash, may enter into an agreement with an organization that has technical expertise but lacks funds. According to Friedman, “50% of joint ventures take place for the purpose of knowledge acquisition.” It is because every organization would like to utilize the knowledge gained from one project and use it in other projects. Thus, it can be said that learning is one of the reasons to enter into joint ventures.
The other reasons for the growth of joint ventures are as follows:
a. Sharing technological knowledge and management skills
b. Extending the business by sharing investments
c. Diversifying the risk involved in the project
d. Obtaining the distribution channels or raw materials supply
e. Facilitating tax-related matters
f. Creating access to foreign technology.
Though joint ventures have various benefits, there are various reasons due to which they may fail to realize the desired objectives.
The reasons for the failure of the joint ventures are as follows:
a. Inability of organizations to share control or compromise on difficult issues
b. Lack of adequate planning for joint ventures
c. Refusal by managers possessing expertise in one organization to share knowledge with their counterparts in the other organization of the joint venture
d. Failure to achieve an agreement to meet the basic objectives of joint venture
e. Lack of commitment and time in implementing the joint venture.
Joint ventures can be a risky but rewarding strategy, if the concerned organizations cooperate with each other to achieve the common objectives. Organizations entering into joint ventures should work together for successful partnership for both the organizations.
iii. Strategic Alliances:
A strategic alliance is a mutual agreement between two or more organizations. According to Yoshino and Rangan, “A strategic alliance is a partnership between two or more organizations that unite to pursue a set of agreed upon goals but remain independent subsequent to the formation of the alliance to contribute and to share benefits on a continuing basis in one or more key strategic areas.”
Organizations enter into the strategic alliance with their suppliers or competitors to gain competitive advantage. These alliances enable organizations to enter new markets, obstruct competitors, and generate higher revenues.
The benefits of strategic alliances are as follows:
a. Help organizations to enter into new markets by forming partnership with other organizations
b. Reduce the manufacturing costs by pooling resources to utilize them efficiently
c. Develop technological capabilities by sharing technological expertise.
There are four types of strategic alliances, which are discussed as follows:
a. Pro-Competitive Alliance – Involves the relationship between inter-industry alliances, such as manufacturers, suppliers, or distributors. These alliances offer the advantages of vertical integration.
b. Non-Competitive Alliance – Involves the intra-industry partnerships between non-competitive organizations. In non-competitive alliance, the areas of activities of organizations do not coincide with each other. Thus, there is no competition between them.
c. Competitive Alliance – Refers to a partnership between two or more rival organizations. There can be intra- industry or inter-industry competitive alliance. Many foreign organizations enter into strategic alliance with local competitive organizations.
d. Pre-Competitive Alliance – Implies the partnership between two or more organizations from unrelated industries. This alliance is formed to work on different activities, such as development of new technology, new product, or new idea. Joint research and development activities are an example of pre-competitive alliance.
5. Expansion through Internationalization:
Expansion through internationalization refers to an expansion strategy that helps organizations to market their products or services internationally. Organizations need to devise their strategies to enter into foreign markets. Today, many organizations are internationalizing their business activities because of high competition in domestic markets.
Organizations that plan to operate in international markets need to consider various issues, such as government regulations and economic, social, and legal forces that shape the international markets. Thus, international strategies require a different strategic perspective than domestic strategies.
According to Bartlett and Ghoshal, there are four types of international strategies, which are as follows:
i. International Strategy:
It creates value by transferring products and services to foreign markets where these products and services are not available. This helps in acquiring market share in foreign markets.
ii. Multi-Domestic Strategy:
It tries to customize organization’s products and services according to the local conditions operating in different countries. Multi-domestic strategy, also known as high level of local responsiveness, matches the products and services according to the conditions prevailing in different countries.
iii. Global Strategy:
It implies a low cost approach that is based on reaping the benefits of the experience curve. In global strategy, organizations offer standardized products and services across different countries.
iv. Transnational Strategy:
It involves both low cost and high level of local responsiveness approaches. This type of strategy requires a creative approach for managing production and marketing goods and services.
Thus, international strategies offer various strategic alternatives for expansion and provide rewards in the form of lower costs, increased sales, and higher profits.
Expansion through internationalization offers the following advantages:
a. Realizes economies of scale by expanding sales volume
b. Develops valuable competencies and skills by operating in global markets and working on different business models
c. Expands local markets to global markets, which lead to increase in organization’s market share
d. Helps in the possession of valuable resources globally, which leads to a competitive advantage for an organization.
Expansion through internationalization has the following disadvantages:
a. Involves a higher risk related to economic and political environment of foreign countries
b. Faces challenges of cultural diversity, for example, organizations have to manage the employees of different cultural backgrounds
c. Requires coordination between domestic and foreign operations, which leads to high bureaucratic costs
d. Leads to higher costs because of differences in distribution channels
e. Involves trade barriers, such as tariffs, pricing restrictions, or different standards for different countries.
6. Expansion through Digitalization:
Expansion through digitalization refers to a progressive phenomenon within organizations in various areas, such as business, social science, or technology. The terms used in the context of digitalization are computerization, electronization, and digitization. Computerization includes entering, processing, or storing information in a computer. Electronization is the conversion of physical data into electronic data through digitalization; whereas, digitization is a term that denotes the conversion of electrical signals into digital signals.
Computerization, electronization, and digitization are supported by networking and telecommunication. Computerization is the best strategic alternative available to organizations since the last few decades. Organizations have accepted and adopted computerization to a considerable degree.
Digitalization and electronization have guided the usage of e-commerce, e-learning, and e-banking. These developments have created a new term for product category, called bitable or digitized products. For instance, books, magazines, newspapers, and financial services.
The digitalization strategies used by organizations are as follows:
i. E-Channel Pattern:
Involves four business models, which are as follows:
a. Transaction Enhancement- Involves replacing the old transaction method with advanced functional technologies
b. E-Channel Compression – Implies using technology to reduce the number of steps in the distribution and marketing through e-channel
c. E-Channel Expansion – Involves distribution and marketing through e-channel to save time
d. E-Channel Innovation – Develops new e-channels to satisfy unmet customer needs online.
ii. Click and Order Pattern:
It refers to a digitalization strategy that relies on information technology. Earlier, traditional organizations that relied on physical distribution of goods were called brick and mortar organizations. However, when these traditional organizations adopt some features of modern organizations; for example, use of e-channels or online distribution channels, they are called click and order organizations.
iii. E-Portal Pattern:
It implies intermediaries offering a set of services to a specific group of users. For example, Yahoo, Google, and e-Bay, are e-portals. They act as middlemen between suppliers and customers and offer value added services.
iv. Pure E-Digital Products Pattern:
It involves production, delivery, and consumption of products or services electronically, such as music downloads.