Internal Growth Strategies of the firm

Internal growth strategies involve efforts taken within the firm itself, such as new product development, other product-related strategies, and interna- tional expansion, for the purpose of increasing sales revenue and profitabil- ity. Many businesses, such as Modcloth, Sir Kensington’s, and Zappos, are growing through internal growth strategies. The distinctive attribute of in- ternally generated growth is that a business relies on its own competencies, expertise, business practices, and employees. Internally generated growth is often called organic growth because it does not rely on outside intervention. Almost all companies grow organically during the early stages of their organi- zational life cycles.

Effective though it can be, there are limits to internal growth. As a company enters the middle and later stages of its life cycle, sustaining growth strictly through internal means becomes more challenging. Because of this, the con- cern is that a company will “hit the wall” in terms of growth and will experience flat or even declining sales. This can happen when a company has the same product or service that it’s trying to sell to the same list of potential buyers. Companies in this predicament need to either expand their client list, add new products or services to complement their existing ones, or find new avenues to growth. Sometimes companies face this challenge through no fault of their own.

Some start-ups, to avoid quickly hitting the wall in terms of growth, config- ure their initial products or services in ways that have built-in growth potential. This tactic is illustrated in this chapter’s “Savvy Entrepreneurial Firm” feature. SwitchFlops is an example of a company that has “built-in” avenues for future growth as a result of the unique nature of its product and how it’s configured.

We list the distinct advantages and disadvantages of internal growth strat- egies in Table 14.1.

1. New product development

New product development involves designing, producing, and selling new products (or services) as a means of increasing firm revenues and profitabil- ity. In many fast-paced industries, new product development is a competitive necessity. For example, the average product life cycle in the computer soft- ware industry is 14 to 16 months, at the most. Just thinking of how quickly we are introduced to new computers, new smartphones, and related products highlights for us how rapidly products change in this industry. Because of these rapid changes, to remain competitive, software companies must always have new products in their pipelines. For some companies, continually devel- oping new products is the essence of their existence.

Although developing new products can result in substantial rewards, it is a high-risk strategy. The key is developing innovative new products that aren’t simply “me-too” products that are entering already crowded markets. When properly executed though, there is tremendous upside potential to developing new products and/or services. Many biotech and pharmaceutical companies, for example, have developed products that not only improve the quality of life for their customers but also provide reliable revenue streams. In many cases, the products are patented, meaning that no one else can make them, at least until the patents expire. Successful new products can also provide sufficient cash flow to fund a company’s operations and provide resources to support developing additional new products. For example, Amgen, a large and histori- cally profitable biotech company, has several stellar pharmaceutical products, including Enbrel and Neupogen. Enbrel is a tumor necrosis factor (TNF) blocker that is used to treat rheumatoid arthritis as well as some related conditions, and Neupogen helps prevent infection in cancer patients undergoing certain types of chemotherapy. These products have provided the company sufficient revenue to cover its overhead, fund new product development, and generate profits for an extended period of time.1

The keys to effective new product and service development, which are con- sistent with the material on opportunity recognition (Chapter 2) and feasibility analysis (Chapter 3), follow:

■ Find a need and fill it: Most successful new products fill a need that is presently unfilled. “Saturated” markets should be avoided. For example, in the United States as well as in most developed countries, consumers have a more-than-adequate selection of appliances, tires, credit cards, and cell phone plans. These are crowded markets with low profit margins. The chal- lenge for entrepreneurs is to find unfilled needs in attractive markets and then find a way to fill those needs.

■ Develop products that add value: In addition to finding a need and fulfilling it, the most successful products are those that “add value” for customers in some meaningful way.

■ Get quality and pricing right: Every product represents a balance be- tween quality and pricing. If the quality of a product and its price are not compatible, the product may fail and have little chance for recovery. To put this in slightly different terms, customers are willing to pay higher prices for higher-quality products and are willing to accept lower quality when they pay lower prices.

■ Focus on a specific target market: Every new product and service should have a specific target market in mind, as we have highlighted throughout this book. This degree of specificity gives the innovating entre- preneurial venture the opportunity to conduct a focused promotional cam- paign and select the appropriate distributors. The notion that “it’s a good product, so somebody will by it” is a naïve way to do business and often contributes to failure.

■ Conduct ongoing feasibility analysis: Once a product or service is launched, the feasibility analysis and marketing research should not end. The initial market response should be tested in focus groups and surveys, and incremental adjustments should be made when appropriate.

There is also a common set of reasons that new products fail, as articu- lated by eSeller Media and shown in Table 14.2.2 It behooves entrepreneurs to be aware of these reasons and to work hard to prevent new product failures as a result of poor execution in these areas.

This discussion is a reminder that to achieve healthy growth, whether via the development of new products or another means, a firm must sell a prod- uct or service that legitimately creates value and has the potential to generate profits along with sales.