topic 9 notes

7/29/2019 Topic 9 Notes

1/16

TOPIC 9: ALTERNATIVE GROWTH STRATEGIES FOR SMALL BUSINESS

ENTERPRISES.

Introduction

This topic introduces the learner to the concept of Alternative Growth Strategies for Small

Business Enterprises.

Objectives

After going through the lesson you should be able to:

Explain the meaning and need for growth

Discuss the benefits and limitations of growth

Explain the meaning of growth strategy

Identify the alternative strategies available for growth

Discuss the pros and cons of different strategies

Identify the crisis of business growth

Your Learning Activity:

Core Task

Read the topic notes introducing the concept of Entrepreneurship and participatein the discussion in the topic discussion forum.

Assessment

The discussion will be graded.

Discussion

Q.1 Explain the term 'growth strategy'. Why does a firm seek to grow?

Q.2 Distinguish between horizontal integration and vertical integration.

Q.3 What is modernization? Describe its advantages as a growth strategy


2/16

TOPIC 9 NOTES : ALTERNATIVE GROWTH STRATEGIES FOR SMALL

BUSINESS ENTERPRISES.

INTRODUCTION

In earlier topics we discussed the processes involved in the setting up of

commercially viable and technically feasible small scale enterprises (SSE).

We also examined the processes of finding an ideal location and layout for aSSE. In this topi c we will take a view of different alternatives available for

the growth of a small scale enterprise.

Business growth is a natural process of adaptation and development that

occurs under favorable conditions. The growth of a business firm is similar to

that of a human being who passes through the stages of infancy, childhood,

adulthood and maturity. Many business firms started small and have become

big through continuous growth. However, business growth is not a homogenous

process. The rate and pattern of growth varies from firm to firm. Some firms

grow at a fast rate while others grow slowly. Also, not all enterprises

survive to grow big. This may be due either to the nature of the firm or the

entrepreneur. Some entrepreneurs do not want to grow their ventures,choosing instead to pursue other interest, spend more time with family or

develop other business activities.

MEANING OF BUSINESS GROWTH

Generally, the term 'business growth' is used to refer to various things such as

increase in the total sales volume per annum, an increase in the production

capacity, increase in employment, an increase in production volume , an

increase in the use of raw material and power. These factors indicate growth

but do not provide a specific meaning of growth. Simply stated, business

growth means an increase in the size or scale of operations of a firm usually

accompanied by increase in its resources and output.

NEED FOR GROWTH

As we have already said that business enterprise is like a human being, growth

is a necessary stimulant to most of the business firms. As a matter of fact,

growth is precondition for the survival of a business firm. An enterprise that

does not grow may, in course of time have to be closed down because of its

obsolete products. The market is full of examples of very popular products

disappearing from the scene for lack of growth plans. For example, pagers

vanished from the market because better technology product i.e. cell phones

were introduced. The reasons which drive business enterprises toward growth

are described below:

(I) Survival: In a competitive market no single enterprise can have

monopoly. The competition can be direct or indirect. Direct competition

comes from other firms manufacturing the same product. For example, there

are many brands of shampoos available in the market. To survive the

competition the manufacturer of each brand of shampoo has to continuously

bring new versions of basic product to maintain an edge over his competitors.

Indirect competition may come from availability of cheaper substitutes. For

example, the khadi industry faced a problem when polyester emerged. Severe

competition forces a firm to grow and gain competitive strength. Any business

firm that fails to grow can't survive for long. A growing concern will be an

innovator and can easily face the risk of competition. Thus growth is means of


3/16

survival in a competitive and challenging environment.

(ii) Economies of Scale: Growth of a firm may provide several economies

in production, purchasing, marketing, finance, management etc. A growing

firm enjoys the advantages of bulk purchase of materials, increased bargaining

power, spreading of overheads, expert management etc. This leads to low cost

of production and higher margin of profit. This also ensures full utilization of

plant capacity.

(iii) Owners mandate: The owners of a company get the ultimate benefit

of growth in the form of higher profits. They may direct the management to

reinvest a substantial portion of the earnings in the business rather than paying

them out. Capable management may on its own like to take carefully

calculated risk and expand the size of the company.

(iv) Expansion of the market - Increase in demand for goods and services

leads business firms to increase the supply also. Population explosion and

transportation led to increase in the size of markets which in turn resulted in

mass production. Business firms grow to meet the increasing demand.

Expanding markets provide opportunity for business growth.

(v) Latest Technology - Some business firms invest in research and

development activities to create new products and new techniques, while

others try to acquire latest technology from the market. Rationalization and

automation results in more efficient use of resources and a firm may grow to

obtain them.

(vi) Prestige and Power- The more the size of the business firm increase

the more is the prestige and power of the firm. Businessmen satisfy their urge

for power by increasing the size of their business firm.

(vii) Government Policy - In a planned economy like India, business firms

operate under a large number of rules and restrictions. A big firm is in a betterposition to carry out the various legal formalities required to obtain licenses

and quotas. Business firms may plan for growth to make use of the incentives

provided by the government. The government provides certain subsidies and

tax concessions to the new industrial units in the backward areas and those

producing goods for export only.

(viii) Self-sufficiency - Some firms grow to become self sufficient in terms

of marketing of raw material or marketing of products. Growth in either or

both of these forms reduces the dependency of the firm over other firms.

ADVANTAGES OF GROWTH

Business firms try to achieve growth in order to obtain the followingadvantages:

(i) For obtaining the economies of scale.

(ii) For exploitation of business opportunities.

(iii) For facing competition in the market by diversifying the product line.

(iv) For providing protection against adverse business conditions eg.

Depression.

(v) For gaining economic and market power

(vi) For raising profits and creating resources for further reinvestment into

business.

(vii) For making optimum utilization of resources.

(viii) For securing subsidies, tax concessions and other incentives offered by

the government


4/16

LIMITATIONS OF GROWTH

Business firms cannot grow indefinitely. Growth has its own limitations which

are:

(i) Finance: Growth, especially external growth, requires additional

capital investment which is sometimes difficult for a small firm to arrange.

(ii) Market: Growth can be achieved to the extent that the size of market

permits. If a firm grows faster than increase in the size of the market, it is

likely to face failure.

(iii) Human Relations Problems: In a big firm, management losespersonal touch with employees and customers. Motivation and morale tend to

be low resulting in inefficiency.

(iv) Management: Growth increases the functions and complexities of

operations. As the number of functions and departments increase, coordination

and control become very difficult. If the organization and management

structure is not capable of accommodating them, growth may be harmful.

(v) Lack of knowledge: Under conglomerate growth, a firm enters new

industries and new markets about which the managers know little. Managers

find it difficult to find and develop managers who can quickly handle new

units and improve their earning potential against heavy odds. Many growing

firms could not succeed because their managers felt that they could manage

anything anywhere.

(vi) Social problems: From social point of view also big firms may be

undesirable as they may lead to concentration of economic power and creation

of monopolies which may exploit consumers. In their desire for growth firms

indulge in combative advertising. The quickening growth creates a cultural

gap when society finds it difficult to cope with technological change.

FORMS OF GROWTH

Once an entrepreneur understands some of the factors that influence growth

and development, he can choose a suitable way for achieving it. Business

growth can take place in many ways. Broadly, various types of growth can be

divided into two broad categories - organic and inorganic growth.

Organic Growth - It can also be termed as internal growth. It is growth from

within. It is planned and slow increase in the size and resources of the firm. A

firm can grow internally by ploughing back of its profits into the business

every year. This leads to the growth of production and sales turnover of the

business. Internal growth may take place either through increase in the sales ofexisting products or by adding new products. Internal growth is slow and

involves comparatively little change in the existing organization structure. It

can be planned and managed easily as it is slow. The ways used by the

management for internal growth include: (I) intensification; (ii) diversification

and (iii) modernization.

Inorganic Growth - it can also be termed as external growth. It involves a

merger of two or more business firms. A firm may acquire another firm or

firms may combine together to improve their competitive strength. External

growth has been attempted by the business houses through the two strategies

(a) mergers and acquisitions and (b) joint ventures. Merger again can be of

two types: (i) a firm merges with other firm in the same industry having


5/16

similar or related products. This type of merger leads to coordination problem

between the two firms (ii) a firm merges with another firm in altogether

different lines of business and have little common in their products or proceses

such a merger is known as conglomerate merger.

Inorganic growth is fast and allows immediate utlization of acquired assets.

There is no risk of overproduction as the capacity of the industry as whole

remains unchanged. Merger leads to combination of independent units to

control competition, to gain economics of scale and also sometimes, to

modernize production facilities. But merger also leads to social problem of

monopoly, problem of coordination, strain on capital structure, etc. Thus,

external growth involves problem of reorganization.

MEANING OF GROWTH STRATEGY

The term strategy means a well planned, deliberate and overall course of

action to achieve specific objectives. According to chandler, "strategy is the

determination of the basic long term goals and objectives of an enterprise and

the adoption of courses of action and the allocation of resources necessary to

carry out these objectives". The concept of strategy has been derived from

military administration wherein it implies 'Grand' military plan designed to

defeat the enemy. As applied to business, strategy is a firm's planned course

of action to fight competition and to increase its market share.

'Growth Strategy' refers to a strategic plan formulated and implemented for

expanding firm's business. For smaller businesses, growth plans are especially

important because these businesses get easily affected even by smallest

changes in the marketplace. Changes in customers, new moves by

competitors, or fluctuations in the overall business environment can negatively

impact their cash flow in a very short time frame. Negative impact on cash

flow, if not projected and adjusted for, can force them to shut down. That is

why they need to plan for their future. Small entrepreneurs generally feel that

strategic planning is for large business houses; but it is very necessary for

small and medium enterprises. Strategic Planning gives a formal direction to

the business. Strategic planning is necessary to take care of the additional

efforts and resources required for faster growth.

Different type of growth strategies are available each having advantage and

disadvantage of its own. A firm can adopt different strategies at different

points of time. Every firm has to develop its own growth strategy according to

its own characteristics and environment.

TYPES OF GROWTH STRATEGIES

The following are the main growth strategies available to firms:

1. Intensive Growth Strategy (Expansion)

2. Diversification

3. Modernization


6/16

4. External Growth Strategy

(a) Mergers

(b) Joint Ventures

GROWTH STRATEGIES

Organic / Internal Growth Strategy

Intensive growth Diversification

Modernization

Inorganic / External Growth Strategy

Merger

Joint Ventures

Figure 10.1: Types ofGrowth Strategies

INTENSIVE GROWTH STRATEGY

Intensive growth strategy or expansion involves raising the market share, sales

revenue and profit of the present product or services. The firm slowly

increases its production and so it is called internal growth strategy. It is a good

strategy for firms with a smaller share of the market. Three alternative

strategies are available in this regard. These are:

(a) Market Penetration - This strategy aims at increasing the sale of

present product in the presented market through aggressive promotion.

The firm penetrates deeper into the market to capture a larger share of

the market. For example, promoting the idea of cold coffee during the

summer season, also the idea of instant coffee, instant tea and tea bags.

(b) Market Development-

It implies increasing sales by selling presentproducts in the new markets. For example selling electronic goods in

rural areas or sale of chocolates to middle aged and old persons.

Market development leads to increase in sale of existing products in

unexplained markets.

(c) Product Development: In this, the firm tries to grow by developing

improved products for the present market. For example, A.C. with

remote control, Refrigerator with automatic defreezing and flexible

shelves.

Advantages ofIntensive Growth Strategy

(1) Growth is slow and natural. Therefore, it can be handled easily.(2) Capital required for expansion can be taken from the firm's own funds.

(3) Existing resources can be better utilized

(4) The growing firm is in a better position to face competition in the

market.

(5) Only a few changes are required in the organisation and management

systems of business.


7/16

7

(6) Expansion provides economics of large-scale operations.

Limitations ofIntensive Growth Strategy

(1) Growth is very slow and it takes a long time for growth to actually happen.

(2) A business firm loses the possibility of exploiting many business

opportunities by restricting its operations to the present products and

markets.

(3) It is not always possible to grow in the present product market.

Practical Problems ofIntensive Growth Strategy

When small business firms try to expand many problems obstruct their way.

Some of these problems are given below:

(I) Scarcity of Funds: For expansion additional funds are required forinvesting in both fixed assets and current assets. Funds for fixed capital and

working capital are not easily available. Many a times a small firm has to

borrow funds at high rates of interest.

(ii) Risk: Expansion means more risk. Many small-scale firms do not have the

ability or will-power to assume these risks particularly where the

competition is acute and raw materials have to be imported. Some

small-scale owners continue to operate at a given scale due to the risks and

difficulties involved in expansion.

(iii) Technology: Expansion often requires upgradation of technology and

replacement of plant and machinery. Upgradation of technology is a

time-consuming and expensive process. It becomes essential to recruit new

staff or retrain the existing staff in the use and operation of new technology

(iv) Marketing. Expansion is profitable only when the increased output can

be sold at good prices. Small-scale units face hurdles in selling and

distribution of their products due to competition from large-scale units

DIVERSIFICATION

Beyond a certain point, it is no longer possible for a firm to expand in the

basic product market. So the firm seeks increased sales by developing new products

for new markets. This strategy towards growth is called diversification.

The diversification does not simply involve adding variety in a product but adding

entirely different types of products. Products added may be

complementary. Diversification is a much talked about and widely used

strategy for growth. Many companies have opted for this. For example, LIC, an

insurance concern initially, diversified into mutual funds. State Bank of India

diversified into merchant banking and mutual funds. Similarly, Larsen and

Toubro, an engineering company diversified into cement.

Table 1. Product-Market Matrix and Growth Strategy

ProductsMarkets

Present New

Present Market Penetration(Penetrate existing markets

with existing products)

Product development(Introduce new products in

existing markets)

New Market Development (Enternew markets with existing

Products)

Diversification

(Introduce new products in

new markets)


8/16

8

Source: H. Igor, Ansoff, Corporate Strategy, 1965, p.51A firm may choose the strategy of diversification under the following

situations:

(a) When diversification promises greater profitability than expansion.

(b) When the firm cannot attain its growth target by the strategy of

expansion alone.

(c) When the financial resources of the firm are much in excess of the

requirements of expansion.

The distinction between intensive growth strategy and diversification strategy must

be carefully noted. In the case of intensive growth, the firm increases the production

and sales of its existing products. But in case of diversification, there is

addition of new products and new markets.

Advantages of DiversificationCompanies have increasingly adopted diversification strategy due to the following

reasons:

(i) Better use of its resources. By adding up related products to its

existing product portfolio, a company can more effectively utilize its

managerial personnel, marketing network, research and development facilities, etc.

(ii) Reduce the decline in sales. By developing new products the sales

revenue and earnings can be maintained or even increased.

(iii) More competitive With greater resources, more products and higher

profits, the diversified firm is more competitive than a single product firm.

(iv) Minimize risk. When one line of business faces recession, another line

may be in high growth stage. For example, a well-diversified engineering firmlike Larsen and Toubro did well even when the engineering industry was

facing recession.

(v) Use of cash surplus of one business to finance another business

having good potential for growth.

(vi) Economies of scale Diversification adds to size of business which

improves the competitiveness of a firm. It offers a lot of economy in

operations because common facilities can be used for several products.

Limitations of Diversification. The limitations of diversification are as givenbelow:

(I) Huge funds are required for diversification. The internal savings of the

business may not be sufficient to finance growth.

(ii) The functions and responsibilities of top executives increase because of

need to handle new product, technology and markets. They may find problems

in coordination which may lead to inefficient operations.

(iii) Diversification may involve new technology and new markets and the

present staff may face problems in adjusting to this growth pattern.


9/16

9

(iv) Diversification may lead to unknown products and markets leading to more

risk.

Types of Diversification:

1. Horizontal Integration,

2. Vertical Integration,

3. Concentric, and

4. Conglomerate

Horizontal Integration: It involves addition of parallel new products to the

existing product line.

This may happen internally or externally, internally, a company may decide to enter

a parallel product market in addition to the existing product line. Externally, a

company combines with a competing firm. For example, Sparta Ceramics Ltd.

took over Naively Ceramics and Refractory Ltd. Both the companies are insanitary ware and tiles business. Two or more competing firms are brought

together under single ownership and control. Seven small cement firms combined

and formed Associated Cement Companies (ACC).

Advantages. Horizontal integration has the following advantages:

(i) Wasteful competition among the combining firms is removed. (ii)

It provides economies of large-scale production and distribution.

(iii) It provides better control over the market and increases the

competitiveness of the company.

(iv) The firm gets better control over supply and prices of the product.

Disadvantages. Horizontal integration has the following limitations: (I)

The firm is not confident of supply of raw materials.

(ii) If many firms combine to form horizontal integration, there is a risk of over-

capitalisation.

(iii) The management of the firm may become bureaucratic and inflexible. (iv)

The firm may acquire exploit consumers and labour by becoming a

monopoly.

Vertical Integration

In vertical integration new products or services are added which are complementary

to the present product line or service. New products fulfill the firm's own

requirements by either supplying inputs or by serving as a customer for its

output. In vertical integration the firm moves backward or forward from the

present product or service. Vertical integration may be of two types-backward

and forward.

Backward integration. It involves moving toward the input of the present product.


10/16

1

It is aimed at moving lower on the production process so that the firm is able to

supply its own raw materials or basic components. For example, a Car

manufacturer may start producing tire tubes; Reliance Industries Ltd. has been able

to grow largely through backward integration. It started business with textiles

and went for backward integration to produce PFY and PSF critical raw

materials for textiles, PTA and MEG raw materials for PFY and PSF, propylene

raw materials for PTA and MEG, and finally naphtha for producing propylene.

Advantages. Backward integration has the following advantages:

(I) Regular supply It ensures regular supply of raw materials or

components.

(ii) High return on investment It facilitates higher return on investment for

the company as a whole through better use of overhead facilities

(iii) Competitiveness It improves the competitive power of the company. As

it controls more elements of the production process, it has advantages over the

uninterested firms in the form of lower costs, lower prices and lower risks.

(iv) Quality control It improves quality control over imports for the final

product.

(v) Bargaining power It improves the company's power of negotiation with

suppliers on the basis of known costs.

(vi) Tax saving It saves indirect taxes payable on the purchase of inputs.

Disadvantages. Backward integration has the following limitations:

(a) If an existing input producing unit is taken over, it may involve large

investment

(b) By investing heavily in backward integration the developments of the finalproducts nay get hampered. This in turn may lead to undue pressure on pricing and

sales effort.

(c) In the absence of backward integration the firm may purchase at a

lower cost from technically more efficient suppliers. With backward

integration, this opportunity gets lost.

(d) Any adverse Changes in the economy affecting the present product

market will also affect adversely the production of inputs.

(e) When the divisions using the inputs do not have the freedom of

comparing market conditions of supply, the problem of transfer pricing may become

acute.

Forward integration. Forward integration means the firm entering into the

business of distributing or selling its present products. It refers to moving

upwards in the production/distribution process towards the ultimate consumer. The

firm sets up its own retail outlets for the sale of its own products. For example, many

companies like Bata, Raymond's and Reliance have set up their own retail outlets to

sell their fabrics.

Advantages. Forward integration has the following advantages:

(I) The firm can exercise greater control over sales and prices of its


11/16

1

products. This is very useful in an oligopolistic market.

(ii) The firm's own retail stores serve as better source of customer

feedback. Thus the firm gets better control over quality

(iii) The firm can improve its profits by reducing the costs of distribution and

the costs of middlemen.

(iv) The firm can secure the economies of integration. Handling and transportation

costs can be reduced.

Disadvantages. Forward integration suffers from the following drawbacks:

(a) The proportion of fixed costs in the firm's costs increases. As a result the

firm is exposed to greater cyclical changes in earnings. Moreover, the fortunes

of business are tied to the in-house distribution system. From this point of view,

forward Integration increases business risk.

(b) Since its processes are interdependent, a slight interruption in one

process may dislocate the entire production system.

(c) In the absence of proper balance between up-stream and down-stream units,

the firm has to buy from or sell in the open market. The firm may be competing with

its own customers.

(d) It is very difficult to efficiently manage an integrated firm because

every business has its own structure, technology and problems.

Concentric Diversification

When a firm diversifies into some business which is related with its present business

in terms of marketing, technology, or both, it is called concentric

diversification.

When in concentric diversification new product or service is provided with the help

of existing or similar technology it is called technology-related concentric

diversification. For example, Mother dairy has added 'curd and Lassi' to its

range of milk products. In marketing-related concentric diversification, the new

product or service is sold through the existing distribution system. For instance,

a bank may start providing mutual fund services to its customers.

Concentric diversification is suitable for the following purposes:

(a) When cyclical fluctuations in the present products or services are to be

counteracted;

(b) When the cash flows generated by the existing product or service are in

surplus;

(c) When demand for present product or service has reached saturation

point;

(d) To gain managerial expertise in new field of business; and

(e) When reputation of present product or service is high and can be used for

new products or service.


12/16

1

Conglomerate Diversification

When a firm diversifies into business which is not related to its existing

business both in terms of marketing and technology it is called conglomerate

diversification. Several Asian companies have adopted this strategy. Reliance,

Sahara, DCM, Essar group, ITC, Godrej, HMT are examples of conglomerate

diversification.

Conglomerate diversification strategy is suitable for the following purposes: (I)

To grow faster than the growth realized through expansion;

(ii) To avail of potential opportunities for profitable investment; (iii)

To achieve competitive edge and greater stability;

(iv) To make better use of cash surplus of present products or service; (v)

To allocate the risks.

MODERNISATIONA firm may use the strategy of modernization to achieve growth.

Modernization basically involves up gradation of technology to increase production,

to improve quality and to reduce wastages and cost of production. The worn-out

and obsolete machines and equipment are replaced by the modern machines

and equipment. Modernization plans can have the following implications:

(i) A firm may go for modernization at a low pace to maintain its position in

the market. Thus, it may be considered a stability strategy.

(ii) Modernization may be used with full strength to achieve internal

growth. Thus, it is used as an internal growth strategy.

Advantages of Modernization. The modernization has following advantages: (i)

Modernization improves the productivity and efficiency of the firm.

(ii) The profitability of the firm goes up because of increased efficiency and

reduced wastages.

(iii) It makes available better quality products to the customers.

(iv) The firm becomes more competitive in the long-run because of

modernization.

(v) The growth is systematic and does not affect the normal functioning of the

firm.

(vi) The workers acquire modern skills because of which their wages go up.

However, the strategy of modernization can be used only if the firm has

adequate capital through accumulated savings or is able to raise capital from

different sources for the acquisition of modern plant and machinery. Modernization

will actually serve its purpose only if the workers are adequately trained in

the new method of production.

Limitations ofModernization. Modernization has following limitations:


13/16

1

(i) The accumulated savings of the business may not be sufficient to

Finance modernization of plant and machinery.

(ii) The responsibilities of top executives would increase because of need to

handle new product, technology and markets.

(iii) The existing staff may face problems in adapting to the newtechnology.

MERGERMerger is an external growth strategy. When different companies combine

together into new corporate organizations, such a process is known as

mergers. Merger can occur in two ways: (a) Acquisition or takeover and (b)

amalgamation.

Takeover or acquisition takes place when a company offers cash or securities in

exchange for the majority shares of another company. It involves one

company taking over control of another. Amalgamation takes place when two or

more companies of equal size or strength formally submerge their corporate

identities into a single one in a friendly atmosphere.

Advantages

The mergers take place with a number of motivations. Some of the benefits of

merger are:

(i) A merger provides economies of large-scale operations. (ii)

Better utilization of funds can be made to increase profits. (iii)

There is possibility of diversification.

(iv) More efficient use of resources can be made.

(v) Sick firms can be rehabilitated by merging them with strong and

efficient concerns.

(vi) It is often cheaper to acquire an existing unit than to set up a new one. (vii)

It is possible to gain quick entry into new lines of business.

(viii) It can provide access to scarce raw materials and distribution network and

managerial expertise.

Disadvantages. Mergers are not always successful due to the following

drawbacks:

(a) The combined enterprise may be unwieldy. Effective co-ordination andcontrol becomes difficult. As a result efficiency and profitability may

decline.

(b) Mergers give rise to monopoly and concentration of economic power which

often operate against the interest of the society and the country.

Guidelines forSuccessful Mergers

Willard Rockwell1, based on his experience, has given the following

guidelines to make the merger successful:


14/16

1

(i) Identify the merger objectives, especially economic objectives.

(ii) Specify gains for the shareholders of both the joining companies. (iii)

Be convinced that the acquired company's management is or can be

made competent.

(iv) Report the existence of important dovetailing resources; but do not

expect perfect compatibility.

(v) Start the process of merger with active involvement of the top

executives.

(vi) Define clearly the business that the company is in.

(vii) Analyze and identify the strengths, weaknesses and key performance

factors for both the combining units,

(viii) Foresee possible problems and discuss them at the initial stage with the

other company so as to create a climate of trust.

(ix) Don't threaten the management to be acquired.

(x) Human considerations should be of prime importance in planning for

merger and designing the organization structure for the new set up.

JOINT VENTURE

When two or more firms mutually decide to establish a new enterprise by

participating in equity capital and in business operations, it is known as joint

venture. A joint venture is a business partnership between two or more

companies for a specific business operation.

Joint venture can be with a firm in the same country or a foreign country. For

example, Birla Yamaha Ltd. is a joint venture of Birla and Yamaha Motor Co. of

Japan, DCM and Daewoo Corporation of Korea established DCM Daewoo Motors

Ltd. Hindustan Computers Ltd. and Hewlett - Packard of USA formed HCL-HP

Ltd, a joint venture company.

CRISIS OF BUSINESS GROWTH

All organizations pass through various stages of growth and at each stage the

organization is required to solve some specific problems.

A very useful model of organizational growth has been developed by Greiner.

He argues that each organization moves through five phases of development as it

grows. There are five phases in organizational growth-

creativity, direction,delegation, coordination and collaboration followed by a particular crisis and

management problems.

1. Creativity Stage. Growth through creativity is the first phase. This phase

is dominated by the entrepreneurs of the organizations and the emphasis is

on creating both a product and a market. However, as the organization

grows in size and complexity, the need for greater efficiency cannot be

achieved through informal channels of communication. Thus, many

managerial problems occur which the entrepreneur may not solve effectively


15/16

1

because they may not be suited for the kind of job or they may not be

willing to handle such problems. Thus, a crisis of leadership emerges and the

first revolutionary period begins. Such questions as 'who is going to lead the

organisation out of confusion and solve the management problems

confronting the organisation; who is acceptable to the entrepreneurs and

who can pull the organisation together arise. In order to solve the problems a

new evolutionary phase-

growth through direction-

begins.

2. Direction Stage. When leadership crisis leads to the entrepreneursrelinquishing some of their power to a professional manager, organizational

growth is achieved through direction. During this phase, the

professional manager and key staff take most of the responsibility for

instituting direction, while lower level supervisors are treated more as

functional specialists than autonomous decision making managers. Thus,

directive management techniques enable the organization to grow, but

they may become ineffective as the

organization becomes more complex and diverse. Since lower level

supervisors are most knowledgeable and demand more autonomy in

decision making, a next period of crisis-

crisis for autonomy begins. In

order to overcome this crisis, the third phase of growth - growth through

delegation - emerges.

3. Delegation Stage. Resolution of crisis for autonomy may be through

powerful top managers relinquishing some of their authority and a

certain amount of power equalization. However, with decentralization of

authority to managers, top executives may sense that they are losing control

over a highly diversified operation. Field managers want to run their own

show without coordinating plans, money, technology or manpower with the

rest of the organization and a crisis of control emerges. This crisis can be

draft with the next evolutionary phase-

the coordination stage.4. Coordination Stage. Coordination becomes the effective method for

overcoming crisis of control. The coordination phase is characterized by

the use of formal systems for achieving greater coordination with top

management as the watch dog. The new coordination system proves

useful for achieving growth and more coordinated efforts by line managers,

but result in a task of conflict between line and staff, between head

quarters and field. Line becomes resentful to staff, staff complains about

unco-operative line managers, and everyone gets bogged down in the

bureaucratic paper system. Procedure takes precedence over problem

solving; the organization becomes too large and complex to be managed

through formal programmes and rigid systems. Thus, crisis of red - tape

begins. In order to overcome the crisis of red-tape, the organization mustmove to the next evolutionary stage - the collaboration stage.

5. Collaboration Stage. The Collaboration stage involves more flexible and

behavioral approaches to the problems of managing a large organization.

While the coordination stage was managed through formal systems and

procedures, the collaboration stage emphasizes greater spontaneity in

management action through teams and skilful confrontation of

interpersonal differences. Social control and self- discipline take over from

formal control. Though Greiner is not certain what will be the next crisis


16/16

1

because of collaboration stage, he feels that some problems may emerge as it

will centre round the psychological saturation of employees who grow

emotionally and physically exhausted by the intensity of team work and of

the heavy pressure for innovating solutions.

SUMMARY

In the unit we have discussed what strategic alternatives a firm could consider forgrowth. Once a firm has identified the various strategic possibilities, it has to make

a selection from among these alternatives. And this would depend upon its

growth objectives, attitude towards risk, the present nature of business and the

technology in use, resources at its command, its own internal strengths and

weakness, Government policy etc. There are several managerial factors which

moderate the ultimate choice of a strategy. For a firm desiring immediate

growth and quick returns, mergers and take-over afford attractive

opportunities as they obviate the necessity of starting from scratch. However,

identifying the right candidate for merger or acquisition is an art at which only a

few managements can really excel. Establishing joint venture, especially in the

international arena, is a low risk alternative. Many firms prefer this approach.

GLOSSARY

Red Tape - Too much attention to rules and regulations.

Obsolete Technology - Technology which is no longer used as it is out of

date.

Automation - Use of methods and machines to save labour.

Monopoly - Possession of the sole right to supply which is not or

cannot be shared by others.

Overheads - Those expenses which are needed for carrying on

a business e.g., rent advertising, salaries, light, not

manufacturing costs.

Mass Production - Production in large quantities.Subsidy - Money granted by a govt. to an industry to keep prices

at a low level.

Unexplored sector - Those sectors of the economy which are hitherto not

served.

topic 9 notes

Documents