ISSUES IN MANAGING GROWTH OF SMEs

GROWTH STRATEGIES

Q-1 Explain various growth strategies for an SME.

Ans : Growth Strategies for an SME : Business growth is a natural process of adaptation and
development that occurs under favourable 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. However, business growth is not a homogenous process. The rate of growth
varies from firm to firm. Some firms grow at a fast rate, while others grow slowly.
Growth is a necessary stimulant for the survival of a business firm. As a matter of fact, growth
is precondition for the survival of a business firm. Growth means expansion of the firm and
addition of new operations. Practically, it means more sales, more revenues, more employees
and more of the market share.
Growth strategy refers to a strategic plan formulated and implemented for expanding firms
business. The following are the main growth strategies available to SMEs :

Market Product
Existing penetration Development
MARKET

Market Diversification
Development
New

Existing New
PRODUCT
1) Market penetration : This strategy aims at increasing the sale of existing product in the
existing market through aggressive promotion. The firm penetrates deeper in the market
by encouraging existing customers to buy more of the firms existing products. The
objective here is to capture a larger share of the market. e.g., promoting the idea of cold
coffee during summer. This growth strategy relies on taking market share from competitors
and expanding the size of the existing market.
2) Market development This strategy implies increasing sales by selling existing products in
the new markets. New groups of customers can be categorized in terms of geography,
demographics, and new product use.
A) New geographical market : It means selling the existing product in new location.
e.g., a firm selling is products in Singapore may start selling its products in Malaysia,
Thailand, and Indonesia. The firm has the potential of increasing sales by offering the
product to those customers, who have not previously had the chance to purchase its
products. The entrepreneur must be aware of possible regional differences in customer
preferences, language and legal requirements.
B) New demographic market : Demography means study of population. Demographics
are used to characterize (potential) customers on the basis of their income, education,
age, gender and so on. An entrepreneur, who is currently selling the firms existing product
to a specific demographic group, may grow the business by offering the same product to a
different demographic group. e.g., a company currently selling chocolates to children and
youngsters may expand its sales by also targeting middle aged and old persons.
C) New product use : An entrepreneur might find out that people use its products in an
unexpected or unintended way. Knowledge of this new use may allow the entrepreneur to
modify his/her product slightly to better satisfy customers who use the product. e.g., a baseball
bat is used for playing. The possible new use of it can be as a tool for protection or self-defence.

3) Product Development : Here, the firm tries to grow by developing improved products and
selling them to the firms existing customers. Experience with a particular customer group
helps the firm to know the weak areas. This Knowledge helps in coming up with a new product.
 Besides, it can take the advantage of its existing distribution systems and the reputation of the
firm. e.g., A.C. with remote control, refrigerator with automatic defreezing and flexible shelves.

4) Diversification : Beyond a particular point, it is no longer possible for a firm to expand in the
basic product market. So, it tries to increase the sales by developing new products for new
markets. Diversification does not simply involve adding variety in a product, but adding
entirely different types of products. Diversification is a widely popular strategy for growth.
Many companies have opted for this e.g., LIC, an insurance company has diversified into
mutual funds. SBI has diversified into merchant banking and mutual funds. L&T, an engineering
company has diversified into cement.
A firm may chose to diversify under the following situations :
When diversification promise greater profitability than expansion.
When the firm cannot attain its growth target by the expansion strategy alone.
When the financial resources of the firm are much more than those required for
expansion.
Diversification can mainly be of two types :
(1) Vertical integration (2) Horizontal integration
Value-added chain (Product 1) Value-added chain (Product 2)

Raw materials producer Raw materials producer

Backward
integration

Raw materials wholesaler Raw materials wholesaler

Horizontal
integration
Manufacturer Manufacturer

Finished goods wholesaler Finished goods wholesaler

Finished goods wholesaler Finished goods wholesaler

Retailer Forward Retailer

Retailer Retailer
integration

Customer Customer
Customer Customer

(1) Vertical integration : In vertical integration, new products/services are added, which are
complementary to the existing product line or service. New products fulfil the firms own
requirements by either supplying inputs or by serving as a customer for its output.
Vertical integration may be of two types :

A) Backward integration : Backward integration refers to moving towards the input of the
existing product. It means taking a step back (up) on the value-added chain towards
the raw materials. In this case, it means that the manufacturer also becomes a wholesaler
of raw materials. In short, the firm becomes its own supplier. e.g., 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 - critical raw materials for
textiles; PTA and MEG - raw materials for PFY and PSF; propylene raw material for PTA
and MEG; and finally naphtha for producing propylene.

B) Forward integration : Forward integration refers to firm entering into the business of
distributing or selling its existing products. It means taking a step forward (down) on
the value-added chain towards the customers. In this case, it means that the
 manufacturer also becomes a finished goods wholesaler. In short, the firm becomes its
own buyer. It may also set up its own retail outlets to sell its own products. e.g.,
companies like Bata, Bombay Dyeing, Raymonds and Reliance have set up their own
retail outlets to sell their fabrics.

(2) Horizontal integration : It involves addition of parallel new products to the existing
product line. Here the growth opportunity occurs at the same level of the value-added chain.
But, it involves a different, yet complementary, value-added chain. For example, a firm that
manufactures washing machines may start manufacturing detergent, too. These products are
complementary, because they need each other to work. Moreover, the existing product and the
new product may be bundled and sold together. It can increase the value to customers and
increase sales. Examples of bundled products include computer hardware and software,
televisions and video recorders, and telephones and answering machines.

Thus, different types of growth strategies are available; each having its own merits and
demerits. 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.

IMPLICATIONS OF GROWTH
Q-3. State various implications of growth for a firm.
Ans : Implications of growth for the firm : Growth makes a firm bigger. It starts getting the
advantages of size. For example, higher volume increases production efficiency, which makes
the firm more attractive to suppliers, and therefore, increases its bargaining power. Size also
enhances the authority of the firm. Usually customers, financiers, and other stakeholders
consider larger firms to be more stable and prestigious. But as the firm grows, it changes. These
changes introduce a number of managerial challenges. These challenges arise from the
following pressures :

Financial resources : Growth demands cash; further investment in the business.

Investing in growth weakens the firms existing resources. Unexpected expenses may
push the firm over the edge and into bankruptcy.

Human resources : Growth is also affected by work of employees. If employees are

stretched too much for pursuing firm's growth, it may result into lack of employees morale,
burn out and an increase in employee turnover. Moreover, management of such firms
may lose personal touch with employees and customers. Such issues can also have a
negative impact on firms corporate culture, which is a source of competitive advantage.

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. Moreover, usually, entrepreneurs-cum-
managers prefer to make decisions on their own, but it can be dangerous to the success
of a growing firm. Many mangers do not realize the importance of "participative"
decision-making. However, in order to survive, an entrepreneur has to consider necessary
managerial changes.

Social problems : From social point of view, big firms may be undesirable as they may
lead to concentration of economic power and creation of monopolies, which may
exploit the customers. Fast growth also creates a cultural gap, when society finds it
difficult to cope with technological changes.