Strategies for Growth
A market penetration strategy is one where various tactics are employed to build market share and sales and profits with existing products in the same market. To increase market penetration, businesses can hire more salespeople or reorganize to be more effective in selling and marketing products or services. A business can lower prices or increase advertising and promotions to increase unit sales and overall revenue. Companies may also pursue higher prices with the expectation of greater overall revenue, bigger market share, and profits. Another option is to lead initiatives to improve products or packaging, and initiate tactics (e.g. loyalty programs) to increase usage of products or services among new and current customers.
Depending on the market, competition, and consumer response, each of these initiatives have varied levels of success. Often described as organic growth, a strategy of market penetration is among the least risky of many growth strategies. At some point, a marketplace can become saturated or the return on investment associated with different tactics is not sufficient to continue pursuing this strategy.
Expanded Distribution Channels
Another successful growth strategy is expansion into new distribution channels. One of the most prominent initiatives is selling products and services online in
addition to retail. Other channels of distribution include selling direct to customers (e.g. online transactions, mail order), self-service, micro-shops, internet-based retailers (e.g. Amazon), classes of trade such as wholesalers, smaller outlets, big box stores, and more. Generally speaking, each new trade class requires businesses to operate and sometimes staff differently, and all will deliver different levels of profitability.
Often called market development, market expansion involves selling current products in new markets. Business owners are advised to pursue this strategy only after a product or service is proven and the proper evaluation of market conditions, along with financial models favor expanding. This strategy is often pursued when the opportunity for growth is limited in a current market, the probability of success in the new market is deemed high, or expansion is necessary to establish a foothold and preempt competitors’ actions. Market expansion has been the underpinning of many large companies that have expanded from a proven concept in one or limited markets to markets throughout the U.S. and
Also known as product development, product expansion involves developing new products to sell in current markets to existing and new customers. Product expansion is most successful when new or improved products for a current market align well with a company’s core competencies and organizational structure and are a natural fit for a brand that is already well known. Most often businesses must add new products to stay current with changing consumer and customer preferences, evolving market conditions, and competitive actions.
Growth strategies also include diversification, where a company will sell new products or services, unrelated to its current business. This type of strategy can be very risky, as it often requires a substantial investment, and the company must develop expertise and operational capabilities around a business very different than what made it successful.
Companies pursuing this strategy must have a clear understanding of what level of capital is needed along with a realistic assessment of potential growth based on customer and consumer research and competitive conditions. They also need to make an honest assessment of the risks involved and have a solid plan for entering and then sustaining the new business.
There are three different approaches to diversification: full diversification, backward diversification, and forward diversification. Full diversification is when a totally new product or service is introduced. It is the most risky of the three. Backward integration is where an organization implements a product or service that relates to the preceding development or production of a current product or service. For example, a supplier of fresh produce invests in farms that grow much of what the company distributes. Forward diversification involves entering into a business that relates to the later stage of a products sale and delivery to a customer or consumer. An example
would be a manufacturer of snacks
enters into the direct store delivery business to ensure that its snacks are delivered fresh and more broadly in a market.
Mergers and Acquisitions
Mergers and acquisitions are very effective strategies for a company to gain a competitive advantage, strengthen its business in current markets, and compete in new markets with existing and different product offerings. Generally speaking, mergers or acquisitions that create the best return for business owners or shareholders will meet one or more of the following: improve the operational performance of the acquiring company (e.g. improve margins, lower costs, increase cash flow), remove excess capacity for an industry (which can benefit competitors as well), create access to new markets, acquire skills or technologies more quickly and at a lower cost, and consolidate highly fragmented markets where competitors are too small to achieve scale economies. In the case of an acquisition, picking a promising business early that can be developed is a key advantage for future growth and profitability.