1.5 Growth and Evolution

reasons for growth

more profit

internal growth organic growth

using the organization’s own capabilities and resources to increase the scale of it’s operations and sales revenue

Internal growth financed from

issue more shares

bank loans

IPO

retained profit

internal growth stategies

changing price

effective promotion

improved products

widening distribution network

offer preferential credit

increase capital expenditure (investment)

improved training development

providing overall value for money

External growth definition

Occurs when a business grows and evolves by collaborative with buying up or merging with other organizations

Merges and acquisition

Integration of two or more business to form a single company

Merger

Take place when two or more firms agree to create a new company with its own identity

Acquisition

When a company buys a controlling interest in another firm with permission and agreement - occur in businesses that are not of equal state

Types of integration in ma

horizontal vertical (backwards and forward) lateral conglomerate

Horizontal

Two firms in exactly the same fury and at the same stage or production join together - larger market share less disruption

Vertical integration backwards

A firm joining with one that operates in the previous stage of production - guarantee and control supply

Vertical forward

A firm joining with one that operates in the next stage of production - guarantee an outlet and enjoy profit margin that would otherwise be earned by retailers

Lateral integration

Firms joining together that produce related products but not in direct completion - wide range of product diversify risk

Conglomerates

Firms operating in completely different industries join together - diversify risk

Take over

Company purchasing a controlling interest in other company hostile

Advantage of takeover

Relatively quick growth method

Economies of scale

Create synergies

Disadvantages of takeover

Very expensive

Too large to manage efficiently

Unsettling for many stakeholders

Organizational culture clashes

Franchises

A form of business ownership whereby an individual or businesses buys a license to trade using another’s firms name logo brands and trade market

Franchisor

The growth company

Sells the right

Devices royalty

Provides support

Franchisee

External company

Runs the business

Pays a license fee

Pays royalty

Received support

Franchisor pro

Less risk lower cost utilize franchisees local knowledge gain international presence

Franchisor con

Less control reputation risk not as fast as m and a

Franchisee pro

Less risk reduced start up cost support free advertising

Franchisee con

License cost royalty payments less flexible

Joint venture

Agree to set up a new legal entity

Splitting cost risk control rewards of a business project

Separate business will keep their corporate identity

Joint venture advantage

Synergy

Leading of cost and risks

Entry to foreign markets

Relatively cheaper than hostile take over

High success rate

Exploitation of local knowledge

Competitive advantage

Joint venture disadvantage

Rely heavily on resources and goodwill of counterpart

Dilution of brand

Culture clashes

Strategic alliances

Two or more business cooperate in a business venture for mutual benefits but remain as a independent organization

Alliance ends when goal are achieved

Strategic alliance advantage

Share cost

Synergy

Entry into market

Economies of scale

Customer greater convenience

Strategic alliance disadvantage

Affected by reputation of alliance partner

Culture clash

External growth strategies

1. Mergers & acquisitions

2. Takeovers

3. Franchises

4. Joint venture

5. Strategic alliances