Business growth

Business Growth Definition

Business growth is the process of making a business bigger and more successful over time. This can be achieved in a number of ways, such as increasing sales, expanding into new markets, or developing new products or services.

Types of business growth?

There are several ways of classifying business growth. The two main types of business growth include organic and inorganic growth. The type of business growth chosen by the company will determine its business growth strategy.

Other types of business growth include:

• Horizontal Integration
• Vertical Integration
• Conglomerate Integration

Organic business growth

The organic growth strategy depends on the company’s resources and capabilities. The following are the most common organic business strategies:

• New product offerings

• Reallocation of resources

• Investing in new technologies

• Process optimization

Organic growth ensures owners of their company’s control. This is a much slower process compared to inorganic growth.

Advantages of organic business growth:

• Internally financed

• Lower risks (as compared to inorganic growth)

• Company growth at a reasonable rate

• Build according to the company’s strengths

Disadvantages of organic business growth:

• Slow process

• Growth depends on market growth

• Difficult for companies with franchises to manage them.

Inorganic business growth

Acquisitions increase market share and boost a company’s earnings. Opening new stores and branches are also part of inorganic growth.

Advantages of inorganic business growth:

• Faster growth process

• More market share and assets

• More attractive for financial investors

• More skilled management and their expertise

Disadvantages of inorganic growth:

• Loss of control from owners

• Need for more coordination and control

• Corporate cultural changes

• Large up-front costs

Vertical Integration

This saves money and time and increases efficiency. Figure 2 shows how vertical integration can be forward or backwards.

• Backwards vertical integration - acquisition of ownership of companies up the supply chain. When a company expands to perform tasks previously performed by companies that supplied raw materials for production is called backwards vertical integration. This occurs when the company realises that it is better off in terms of time and money to source raw materials themselves rather than outsourcing the job. Companies can either merge or acquire their suppliers, or have their own subsidiary for the task.

• Forward vertical integration - company strategy wherein the company owns and acquires operations of businesses ahead in the supply chain. In a forward vertical integration, the company distributes and sells its products to customers directly, rather than having a third party do it. Forward integration can also be done either by merging, acquiring or by having a subsidiary for the task.

Figure 2. Vertical Integration, StudySmarter

Horizontal Integration

It creates economies of scale, increases product differentiation, increases revenue, and helps companies enter into new markets. Companies in horizontal integration benefit from synergies.

Although horizontal integration is beneficial for the company, it can lead to joblessness, and changes in the business can have a negative impact on customers. Another drawback is that purchasing another company can be expensive. Figure 3 outlines how horizontal integration works.

Figure 3. Horizontal Integration, StudySmarter

Conglomerate Integration

This strategy helps spread the risk across several markets and helps target new markets. The newly acquired market brings in more customers and revenue. The acquiring company can learn the know-how of the acquired company, and also acquire its customers. Take a look at Figure 4 for a visual reference.

If the acquiring company does not have enough knowledge to run the newly acquired business, this could hurt both companies' business activities. Another drawback is having to share expertise and resources while entering into new markets, which could hurt the core activities of the acquiring company.

Figure 4. Conglomerate Integration, StudySmarter

These are the different ways in which companies grow. Next time you hear about a business expansion, it might be interesting to analyse and understand what type of growth strategy the company has adopted.

Stages of Business Growth

A business growth goes through different stages and each stage has crises associated with it. Functions in a rapidly growing company may not be as smooth as it was before and managers may not be as efficient as they were before, as their span of control and responsibility increases. Greiner’s model helps in understanding the root cause of crises that an organisation may face during its growth phase. Understanding the model helps to foresee a problem before it occurs, helping organisations to take the required measures.

This model was proposed by Larry E. Greiner in 1972 with five phases of growth, which he then updated in 1998 with the sixth phase (see Figure 1 below). The six phases are:

• Growth through creativity

• Growth through direction

• Growth through delegation

• Growth through coordination

• Growth through collaboration

• Growth through alliances

Figure 1. Greiner's Growth Model, StudySmarter

• Growth through creativity

In this phase, there aren’t many staff, and the founders are busy innovating new products and trying to enter new markets. Informal communication works just fine during this stage. As the company starts to grow, the number of staff increases, and the workload increases, there is a need for formal communication and a change in management style is required. This phase ends with a leadership crisis.

• Growth through direction

Now, there is more formal communication in the workplace. The activities become more intense and numerous, making it difficult for them to be managed by one person. This phase ends with an autonomy crisis, calling for new structures based on delegation.

• Growth through delegation

The autonomy crisis is solved in this phase, and the company now has functional management. Having functional management means having the organisation grouped into areas of speciality to better manage each functional sector. This helps reduce chaos in the company, as each manager can take necessary and well-informed actions in their departments. The problem arises when the founder or the entrepreneur finds it hard to pass their control to the newly assigned managers. This leads to a control crisis.

• Growth through coordination

Coordination is important for a company facing a control crisis. It helps bring together every functional area and ensures efficiency. This process adds many layers of hierarchy to the system, increasing bureaucracy and leading to a red-tape crisis.

• Growth through collaboration

Collaboration helps in simplifying and standardizing formal systems. Managers and employees are given more educational training programs. Collaboration helps with acquiring more resources such as different marketing channels, various products and services, etc. During the collaboration phase, companies experiment with new technologies and processes which cause changes within the company’s people and their practices. This phase results in an internal growth crisis.

• Growth through alliances

This phase is the latest addition to Greiner’s growth model. This phase shows that companies facing an internal growth crisis can be saved by strong strategic alliances to form growth strategies. It also suggests the option of acquiring another company for expanding or growing the organisation. This is the last phase of the model.

Business growth strategies

While business growth types and strategies are very similar concepts and are sometimes used interchangeably, we will focus on four business growth strategies based on Ansoff's corporate strategy mix. There are four main business growth strategies (directions):

• Market penetration
• Product and service development
• Market development
• Diversification

It is important to note that, large businesses usually integrate more than one growth strategy.

Market penetration strategy

This strategy is typically used when a company already has a significant market share in a particular market and wants to maintain its position while increasing its sales. The company may achieve this goal by offering special promotions, improving the product quality or features, or by lowering prices to attract more customers. By increasing its market share, a company can achieve economies of scale and improve its profitability.

Product and service development strategy

This strategy is typically used to satisfy the changing needs and preferences of customers or to take advantage of new technological advancements. The company may achieve this goal by investing in research and development, improving product design, or adding new features to existing products.

Market development strategy

This strategy is typically used when a company has saturated its existing market and wants to explore new opportunities for growth. The company may achieve this goal by expanding geographically, targeting new customer segments, or by offering its existing products or services to new markets.

Diversification strategy

This strategy is typically used when a company wants to reduce its dependence on a single market or product, and spread its risks across different markets. The company may achieve this goal by acquiring other businesses or investing in new technologies or products. By diversifying its business, a company can achieve long-term growth and reduce its exposure to market risks.

Examples of Business Growth

Examples of organic growth:

• Poundland in the UK has adopted an organic business growth strategy. They focused on opening new stores in different locations to grow their business.
• The popular toy brand LEGO has also grown organically through product innovation, which has helped them increase their revenue.
• A1 Engineering solutions, Affiliate squared, and Alquity UK is a few companies in the UK that have grown organically.

Examples of inorganic growth:

• The acquisition of Careem - a Dubai-based vehicle-for-hire company - by the American mobility company Uber is an example of inorganic growth.
• One of the most popular examples of inorganic growth is the acquisition of WhatsApp by Facebook.