THE major players in the Philippine industries have taken two different strategies to expand and sustain growth amid the global economic and financial crisis. These slowed down the country’s economic growth last year, after recording a three-decade high of 7.2-percent growth in terms of gross domestic product (GDP) in 2007.

It’s a good thing that some companies in the country are still able to expand, while those in major economies, including the global corporate giants, are divesting or collapsing because of the US-led recession that has affected two-thirds of the world.

One strategy is organic growth, or growth within a company’s existing business, including expansion into related operations. This is the same kind of strategy of the SM Group, which has been building new malls, as well as expanding existing ones.

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The group’s mall operator and developer, SM Prime, plans to spend P12 billion this year for the construction of four new malls here in the Philippines (in addition to expanding some existing malls) and three in China.

Its property unit, SM Development Corp., continues to develop housing and office units, while newly established SM Hotels Corp. plans to build hotels adjacent to SM malls.

Jose Sio, executive vice president of SM Investments Corp., quoted SM founder Henry Sy as saying, “Focus on something you already know.”

SM’s expansion strategy is driven by anticipation of growing demand for its products and services, which is the primary reason for pursuing organic growth.

The other strategy is acquisition. It is driven or made imperative by market maturity or declining margins. For example, the telecom industry in the Philippines, particularly its wireless segment, is considered as matured—with about 60 million subscribers. The wireless segment alone indicates a penetration rate of about 66 percent, based on the country’s 90 million population.

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Thus, the major players are now seeing low single-digit growth rates in subscriber base and even in revenues and profits. One major player even saw a significant decline in profits last year.

The Philippine Long Distance Telephone Co. and its sister firm, Metro Pacific, are expanding into utilities (water distribution and electricity) and infrastructure (North Luzon Expressway) to develop new revenue and profit streams.

Low margins on the food business is the main reason for the diversification of San Miguel Corp. into nonallied industries, like electricity (it has acquired 27 percent of the Manila Electric Co.), energy (it has signed an option to acquire 50.1 percent of Petron Corp.), and water (it has proposed to develop Laiban Dam in Rizal as a new source of water for Metro Manila).

Between the two strategies, I prefer organic growth. That is, as long as the industry where a company is engaged continues to enjoy big demand and good returns on investment.

I’m in housing and with the 3 million units of housing backlog, there is a lot of room for organic growth in the real-estate business.

This is why the players in the real-estate business remain bullish on their industry’s prospects despite the global crisis.

Acquisition or diversification as a growth strategy faces more risks than organic growth. For one, we have seen wild fluctuations in valuations. How much is a company being acquired really worth today and five years after acquiring it?

For instance, the slump in the stock market between 2008 and the start of 2009 saw the shares of even blue-chip companies plummeting nearly 50 percent. An investor who bought the shares of such companies at a premium over the market price a year ago should now be crying over his losses.

Of course, if the company is in a business where profit margins are thinning and growth is slowing down, there is no recourse but to look for other sunrise industries. But there has to be a great potential for growth to ensure that acquisitions will yield good returns for the investments.

All these brings us to another requirement for growth: the cash hoard, otherwise known as war chest. Or, to put it simply, how much money do you have.

Highlander buy The best source of funds for investments is internal funds. You don’t have to worry about repayments or interests. On the other hand, loans with reasonable interest rates and long-term maturities may be preferable for liquidity purposes.

Big Ain’t Bad move In conclusion, companies must continue to grow. It’s up to them to choose which strategy to follow that can bring the best results.

The strategies for growth carry inherent and sometimes unexpected risks, but the alternative—inaction—is worst. Trying to survive in an industry that has no more room for expansion, and where profit margins continue to narrow down, is tantamount to slow corporate suicide.

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