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There are many opportunities for entrepreneurs to pursue integrative growth strategies –  to grow their venture through acquisition.  The acquisition is in many respects less about the financial ability of the entrepreneur to purchase another company and more about the ability to negotiate a good deal.

With several research studies reporting that upwards of 75 per cent of all acquisitions damage shareholder value, it is clear that this approach to growth must be taken very carefully.  In general, successful acquisitions target opportunities that integrate well with the core business, that can be implemented quickly, and that ensure the continuation of smooth operating processes.

Traditionally, when entrepreneurs have wanted to grow their businesses

Within their industries, they have looked to vertical and horizontal integrated strategies, but now that it is important to run leaner operations, they have been looking, more often than not, to a modular or network strategy.

Vertical Integration Strategies

An entrepreneurial venture can grow by moving backwards or forward within the distribution channel. This is called Vertical Integration. With a backward strategy, either the company gains control of some or all of its supplies or it becomes its own supplier by starting another business from scratch or acquiring an existing supplier that has a successful operation. This is a common strategy for a business that has instituted a just-in-time inventory control system.

By acquiring the core supplier(s), the entrepreneur can streamline the production process and cut costs. With a forward strategy, the company attempts to control the distribution of its products by either selling directly to the customer (that is, acquiring a retail outlet) or acquiring the distributors of its products. This strategy gives the business more control over how its products are marketed.

Horizontal Integration Strategies

Another way to grow the business within the current industry is to buy up competitors or start a competing business (sell the same product under another label). This is called Horizontal Integration. For example, an entrepreneur who owns a chain of sporting goods outlets could purchase a business that has complementary products, such as a batting cage business, so that customers can buy their bats, balls, helmets, and the like from the retail store and use them at the batting cage.

Another example of growing horizontally is agreeing to manufacture a product under a different label. This strategy has been used frequently in major-appliance and groceries. Likewise, many major food producers put their brand name food items into packaging labeled with the name of a major grocery store.

Modular or Network Strategies

The latest way for a company to grow within an industry is for the entrepreneur to focus on what he or she does best and let others do the rest.  If the core activities f the business include designing and developing new products for the consumer market, other companies can make the parts, assemble the products, and market and deliver them.

In essence, the entrepreneur’s company and its core activities become the hub of the wheel, with the best suppliers and distributors as its spokes. This Modular Strategy or Network Strategy, helps the business grow more rapidly, keep unit costs down, and turn out new products more quickly. In addition, the capital saved by not having to invest in fixed assets can be directed to those activities that provide a competitive advantage.

The electronics and apparel industries used this growth strategy before it became trendy. Today, many other industries are beginning to see the advantages of a modular approach. Even service businesses can benefit from outsourcing functions such as accounting, payroll, and data processing, which require costly labour.

Outsourcing non-core functions to strategic partners can often help a company get products to market faster and in greater quantities, while at the same time spreading risk and delivering the capabilities of a larger company without the expense.

Finding key capabilities that will help the venture grow more rapidly is another use of outsourcing. The cost to the entrepreneur is perhaps the same as that of performing the task in the house, but the company acquires access to key processes and expertise that will speed its growth.

One study found out that firms that used “transformational outsourcing” (outsourcing to facilitate rapid change, launch new strategies, and radically change the scope of the company) achieved dramatic results.

As with anything else, there are some drawbacks to outsourcing. If most functions are outsourced, it becomes difficult to develop any kind of corporate culture that will bind workers together and make them loyal to the company. When “employees” are no longer employees, they find it easier to leave on a moment’s notice. They also will tend to be less committed to the company’s goals because they don’t see a long term role for themselves.

] These problems also apply to suppliers and distributors to whom an entrepreneur may outsource a capability. They must understand how they can also benefit from the relationship. That way, when the business begins to grow rapidly,  they will be willing to ramp up to meet the demand.

Bernard TaiwoBernard Taiwo
Bernard Taiwo
I am Management strategist, Editor and Publisher.

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