23 Jul Financial Growth Strategy: Meaning and Types
Financial growth strategy is desirable for businesses to raise their financial status. Financial growth is usually the result of increasing the level of objectives of a company with regard to their past accomplishments – and is often indicated through a rise in market shares, sales, and brand image.
Growth entails risk, especially in dynamic economies. So, a financial growth strategy can be best described as one that maximizes gains and minimizes risks & untoward outcomes. Growth strategies are typically classified into two categories – internal and external.
Internal financial growth strategy
Internal growth is when an organization flourishes on its own, without the intervention of others. Internal growth is made possible through diversification, increasing existing capacity, market growth, and so on.
Popular internal growth strategies include:
Market penetration – Where a firm seeks higher sales volume of existing products by penetrating existing markets through aggressive advertising, introducing new uses for old products (e.g. drinking tea in summer as iced-tea), and offering exchange offers (e.g. exchanging an old refrigerator for a new one at a discounted price).
Market development – Where sales of existing products are increased by exploring new markets. For instance, tapping a new market of senior citizens for selling fitness wristbands, citing health benefits, and real-time vital stats monitoring.
Product development – As the name implies, this strategy uses new and improved products to entice existing customers. For example, a milk beverage company could introduce dairy-free alternatives for vegan and lactose-intolerant customers.
Diversification – This implies designing a wider range of products to reduce risks associated with growth.
Modernization – Replacement of old and obsolete services, machinery, or products to accommodate the latest technology; for achieving objectives like cost reduction, improved efficiency, etc.
External financial growth strategy
An organization can aim to expand its financial strength by taking over operations of another firm. Joint ventures, mergers, and strategic partnerships are examples of external growth strategy. Firms usually prefer external growth for quick increment in market shares, cash flows, and revenues.
Popular external growth strategies include:
Joint ventures – Where two or more companies come together to establish a new enterprise with equity capital and equally divided management.
Mergers – Integration of two or more firms into one, either as absorption or consolidation. The merger is defined as ‘a transaction involving two or more companies in the exchange of securities and only one company survives.’
Strategic alliances – Associations among companies to further their common interests. In this arrangement, two or more firms cooperate and collaborate to achieve common commercial objectives.
Franchising – Providing immediate access to the business operations of a company to interested stakeholders. Ideal for business growth across states and countries. McDonald’s is a prime example of success through franchising.
Licensing agreement – Commercial contract by the licenser to offer valuable takeaways to the licensee in lieu of payments and certain performances.
What kind of financial growth strategy do you follow in your business? We’d love to know.