Corporate Strategies: Growth, Integration and Diversification

A family business owns a textile mill that is growing and a sugar mill that has lost money for years. The owners must decide, for each, whether to hold steady, grow, shrink, or do different things in each. That choice is grand strategy.

Corporate strategy sets the scope of the firm: which businesses to be in and how to allocate resources among them. Its broad options are often drawn as a strategy wheel.

A strategy wheel draws these options as spokes around the firm. The classic grouping of grand strategies (William Glueck) is shorter: stability, expansion, retrenchment and combination. In it, integration, diversification and cooperation are routes to expansion, alongside concentration and internationalisation.

Back to the family business. Growing the textile mill is expansion. Selling or shrinking the sugar mill is retrenchment. Doing both at the same time is a combination strategy, the usual position of a firm with several businesses.

Don't confuse grand strategy with business strategy. Grand (corporate) strategy decides which businesses to be in. Business-level strategy, such as cost leadership or differentiation, decides how to compete within one of them. Nor is stability the same as doing nothing: a stable firm still makes small improvements.

Where it breaks. The categories overlap. Buying a rival is expansion, integration and cooperation at once, depending on the list used. Stability can also hide drift: a firm that holds still while its market changes may slowly fall behind.

For exams. Know Glueck's four, and the five routes to expansion. Questions usually describe a move, such as closing a loss-making unit, and ask which grand strategy it is.

Stability, expansion, retrenchment, or a combination.

A Rajkot maker of engine parts has a full order book and spare cash. It could push harder with its present buyers, sell the same parts to new buyers, or design new parts for the buyers it has. All three grow the firm without leaving the business it knows.

An expansion (growth) strategy seeks faster growth, higher profits, a larger market share, economies of scale or a bigger brand. It is often called the ‘entrepreneurial’ strategy and is usually seen as the way to improve performance. Strategists must still tell desirable expansion from undesirable.

Why firms expand.

• In a volatile environment, growth may be needed to survive.
• Top managers find growth satisfying and rewarding.
• Some believe growth benefits society.
• Growth brings experience-curve and scale advantages.

Five routes to expansion: concentration, integration, diversification, cooperation and internationalisation. Concentration is described here; the others have their own sections.

Concentration (also called intensification, focus or specialisation) puts resources into one or a few of the firm's businesses, using proven technology for an identified market. It builds on existing competence and avoids major change. It takes three forms, which are three cells of the Ansoff matrix.

Back to the Rajkot firm, as an illustration. Winning a bigger share of orders from the tractor makers it already supplies is market penetration. Selling the same parts to pump-set makers, or abroad, is market development. Designing parts for its customers' new engines is product development.

Don't confuse concentration with stability. Both stay in the present business. Stability keeps scope and effort roughly as they are. Concentration pushes substantially harder in that business in order to grow.

Where it breaks. Concentration puts many eggs in one basket. A shift in prices, customer sentiment or rival offers can undo it. Suppose 80% of the Rajkot firm's ₹50 crore sales, ₹40 crore, come from one buyer. If that buyer moves a quarter of its orders to a rival, sales fall by ₹10 crore: a fifth of the firm's turnover.

For exams. Remember the synonyms (intensification, focus, specialisation) and that concentration's three forms are the Ansoff cells other than diversification.

Concentrate: penetrate the market, develop the market, or develop the product.

A mithai shop in Jaipur wants to grow next year. It could sell more to its regulars, ship boxes to other cities, add sugar-free sweets, or start catering for offices. These four moves carry very different risks.

The matrix comes from H. Igor Ansoff's article “Strategies for Diversification” (Harvard Business Review, 1957). Ansoff saw two ways to grow: changing what is sold (products) and who it is sold to (markets). Combined, they give four options. Each move into a new quadrant raises the risk.

Don't confuse market penetration with market development. Penetration sells more of the same product to the same kind of buyer. Development finds a new kind of buyer, a new use or a new region for the same product. Selling sweets to existing customers at Diwali is penetration; selling them in Delhi is development.

Where it breaks. The matrix shows the direction of a move, not whether it will pay. ‘New’ is a matter of degree: a sugar-free range is far less new than an office-catering business. The grid also leaves out competitors' reactions and the firm's own resources.

For exams. Expect an example to classify. Ask two questions in turn: is the product new, and is the market new? Remember the year (1957) and the risk order.

Go deeper for practitioners

A decision. The mithai shop can afford one move this year. Penetration through a festival loyalty scheme uses skills it has. Shipping to other cities needs packaging that keeps sweets fresh, and couriers it can trust. Office catering needs new staff, new hours and new customers. The matrix does not pick the move. It tells the owner which unknowns each move adds, and so what to test first.

Links. Product development connects to new-product development in Product decisions (Unit 7). Market development abroad is covered in Internationalisation, in the next chapter, and in International marketing (Unit 7).

Penetration, product development, market development, diversification: risk rises as you leave home.

A Ludhiana bicycle maker keeps missing deliveries because its steel-tube supplier is late. It could buy the supplier, open its own showrooms, or buy a rival bicycle maker. Each is a kind of integration.

The value chain here is the sequence of stages a product passes through: inputs, making, distribution and sale. Moving along that chain is vertical integration; moving sideways to a rival at the same stage is horizontal integration.

Back to the bicycle maker. Buying the steel-tube supplier is backward integration. Opening its own showrooms is forward integration. Buying a rival bicycle maker is horizontal integration.

Vertical integration is sometimes listed as a third type of diversification, since the firm moves into activities it once bought from suppliers or left to distributors.

Don't confuse horizontal integration with horizontal diversification. Horizontal integration buys a rival that makes the same product. Horizontal diversification adds a new product for the firm's existing customers.

Where it breaks. Vertical integration ties up capital and reduces flexibility. If a cheaper or better supplier appears, the firm is locked into its own unit, and an in-house unit with an assured buyer can grow inefficient. Horizontal integration can reduce competition, so large combinations need clearance from competition authorities, in India the Competition Commission of India.

In practice. Integrate when supply is unreliable, or the next stage earns large margins, and the firm can run that stage well. Otherwise a long-term contract may give most of the gain at less cost. Oliver Williamson's transaction cost economics adds a test: integration makes most sense when contracts are hard to write and enforce, as when a supplier must invest in equipment that serves only one buyer.

Backward to suppliers, forward to customers, horizontal to rivals.

A leather-shoe maker in Agra sees shoe sales flattening. It could make wallets and belts from the same leather and sell them in the same shops, or start a soap factory. Both are diversification, with very different risks.

Diversification moves the firm away from both its current products and its current markets at once. It is really a set of strategies, which can be internal or external, related or unrelated, horizontal or vertical, and active or passive.

Synergy means two businesses together produce more than they would apart, because they share something: a plant, a brand, a sales force or a skill. The Agra firm's wallets use its leather buyers, craftsmen and shops, so they cost less to launch.

Unrelated diversification reduces exposure to one industry's downturn, since profits in one business can offset losses in another. Example: ITC, long known for cigarettes and hotels, diversified into stationery (Classmate), personal care (Fiama, Vivel) and packaged foods (Bingo, Sunfeast). These products are far from cigarettes, though they reach buyers through many of the same shops.

Don't confuse the two meanings of ‘horizontal’. In Ansoff's own terms, horizontal diversification means new products, often technologically unrelated, sold to the firm's existing customers. Concentric diversification means new products that draw on the firm's existing technology or marketing. ‘Horizontal’ is often used loosely for any related diversification, which is not Ansoff's meaning. Horizontal integration, buying a rival, is a different idea again.

Where it breaks. Managers of an unrelated business may lack the skills to run it, and head-office attention gets spread thin. Critics also note that shareholders can spread their own risk more cheaply, by holding shares in several firms.

For exams. Pair the names: related with concentric, unrelated with conglomerate. Judge an example by what the new business shares with the old: technology, brand, channels or customers.

Go deeper for practitioners

What the evidence shows. Richard Rumelt's study of large US firms (1974) found that firms diversifying into related businesses generally performed better than unrelated diversifiers. Studies in the 1990s by Lang and Stulz, and by Berger and Ofek, found that US conglomerates were on average valued below comparable single-business firms. Later work argued that part of this ‘diversification discount’ reflects which firms choose to diversify, not diversification itself.

Emerging markets differ. Tarun Khanna and Krishna Palepu (1997) argued that in countries with weak capital, labour and product markets, diversified business groups can supply what markets fail to: capital, trained managers and a trusted brand. On this view, diversified groups in India can be a sensible response to their setting, not only empire-building.

A decision. The Agra firm has ₹5 crore to invest. Wallets and belts use its leather, craftsmen and shops; soap needs new suppliers, new chemists and new distributors. Unless the soap market is far more attractive, the synergy case favours wallets.

Related for synergy; unrelated for spreading risk.