External growth strategies

4.5.2 External growth strategies

Internal strategies do not always provide the answer to an organisation regarding how to compete in an industry to remain profitable. Organisations often have to look for growth opportunities outside of the organisation. Higher risk external growth strategies, compromising integration and diversification, can also be considered, if they are in line with the organisation’s mission.

Backward vertical integration is the strategy followed by an organisation seeking increased control of its supply sources. This strategy is very attractive if there is uncertainty about availability, cost, or reliability of deliveries by suppliers. An example of this strategy would

be Sappi (a paper producer) acquiring a plantation to secure raw suppliers for the acquisition of a business nearer to the ultimate consumer, it is called `forward vertical

integration’. An example would be paper producer purchasing a bookstore. Forward vertical integration is an attractive alternative if an organisation is receiving unsatisfactory service

from the distribution of its products.

Horizontal integrating is a long-term growth strategy by which one or more similar organisations are taken over for reasons such as scale-of-operations benefits or a larger market share. Such acquisitions provide access to new markets, on the one hand, and get rid of competition, on the other. The integration of two paper producers, two restaurant chains, or two world boxing associations, for example, would be classified as horizontal integration.

Diversification growth strategies may be appropriate to organisations that cannot achieve their growth objectives in their current industry with their current products and markets. The reasons for an organisation to diversify could include the following:

 The markets of current businesses are approaching the saturation or decline phase of the product life cycle.  Risk can be distributed more evenly.  Current businesses are generating excess cash that can be invested more profitably

elsewhere.  Synergy is possible when diversifying into new businesses.

Concentric diversification involves the addition of a business related to an organisation in terms of technology, markets, or products (the core components of a mission statement). In this type of grand strategy, the new business selected must possess a high degree of compatibility with the current businesses. The key to successful concentric diversification is

to take advantage of at least one of the organisation’s major strengths. A major strength could be an organisation’s knowledge of the market or its processes that can be easily adapted for other types of business or any other strength that it possesses. Nando’s decision

to diversify, by selling its sauces used in its Nandos outlets to retailers such as Checkers, is an example of a concentric diversifica tion strategy based on Nandos’ knowledge of the market as well as its technical know-how.

Conglomerate diversification involves seeking growth by acquiring a business because it represents the most promising investment opportunity available. Neither the new market nor new products have to be technologically related to the product currently being offered by an organisation. This strategy can be chosen to offset deficiencies such as seasonality, a lack of cash, or lack of opportunities in the marketplace. However, this strategy is not without its pitfalls, the primary one being the lack of managerial experience in the new business.