Chapter 11 Methods of development Flashcards
1.1 Organic growth
Organic growth is expansion of a firm’s size, profits, activities achieved without taking over other firms. Advantages are acquisition costs may be too high, costs and risks can be spread over time, control over change management, control over which products/markets to develop, reputation of target company/lack of target company and growth may be easier to finance.
Disadvantages are it may be slow, no access to proprietary knowledge, brands, customer base or distribution channels, risk of failure as business lacks experience in new fields and it may intensify competition with existing competitors.
2.1 Acquisitions and mergers
An acquisition is the purchase of a controlling interest in another company. A merger is the joining of two separate companies to form a single company. Advantages include it being quicker than organic growth, synergies created from combination, lower risk as the target has goodwill, brands and customer base, circumventing barriers to entry, one less competitor and target may be undervalued.
Disadvantages include possible lack of strategic fit, lack of understanding of business, paying too much for expected efficiencies that do not materialise, failure to retain key staff and customers, acquisitions may occur as a result of empire building and lack of governance and control over businesses being acquired.
2.2 Porter’s tests for successful acquisition
The better off test: shareholders have other option of buying shares in target company without a merger or acquisition. The acquisition must generate extra benefits/synergies
Cost of entry test: even if the market is attractive, there may be cheaper ways of entering it (organic growth, joint ventures, alliances)
2.3 Synergies
These are the benefits gained from two or more businesses combining that would not be available independently. Typical sources of synergy include market power, economies of scale (bulk discounts from combined buying quantities), rationalisation of shared activities (shared research and development), surplus assets (don’t need two head offices, less warehouses etc), synergies of vertical integration (control over supply/distribution chains), diversification of risk (if product ranges/markets are different) and additional finance options (large enough to consider flotation).
3.1 Joint development methods – joint ventures and strategic alliances
Joint ventures is a contractual arrangement where two or more parties undertake an economic activity which is subject to joint control. A strategic alliance is a lesser contractual arrangement than a joint venture and no separate company is formed. Advantages include access to local resources, reduction in nationalist sentiment, shared risks, shared finance, learning experience for both parties and attractive to smaller/risk averse businesses.
Disadvantages include shared profits, disagreement over decision making, may have to share trade secrets with a potential competitor and alliances may not allow new competences to be developed.
3.2 Franchising and licencing
With both, the franchisee/licensee is granted rights to sell/manufacture a branded product in return for fees. Franchising is the purchase of the right to exploit a business brand in return for a capital sum and share of profits or revenue. Franchiser usually provides marketing and technical support. Licensing grands a third party the rights to exploit an asset belonging to the licensor. Differs from franchise as there is little central support.
Advantages are it increased the number of distribution outlets without extensive capital investment, local expertise, economies of scale, rapid expansion and risk sharing with franchisee. Disadvantages are shared profit, successful franchisees may set up on their own in direct competition, conflicts over operating decisions and quality control.
3.3 Agency arrangements
Use intermediaries to sell products. This is commonplace when exporting products and business may get cut off from direct customer contact.
3.6 Outsourcing
Is the use of external suppliers as a source of finished products, components or services previously provided in-house. Issues to consider include competence of business to perform task internally, better risk management, level of control and assurance of work outsourced, level of intellectual capital that needs to be disclosed to the third party, track record of third party, strategic aims and culture of third party, cost and quality of service and relationship required with third party.
4.1 Lynch’s expansion matrix
Summarises the combinations of expansion techniques that have been adopted by a business.
- Home county with internal development: internal domestic development
- Aboard and internal development: exporting, overseas office, overseas manufacture, multinational and global operation
- Home county and external development: joint ventures, merger, acquisition, alliance and franchise/licence
- Abroad and external development: joint ventures, merger, acquisition, alliance and franchise/licence
The advantages of international expansion are sales growth, product life cycle may be extended, spreads the risk by diversifying in more than one market and a global image increases business reputation. Risks are lack of market knowledge, cultural differences may require adaptations to products or services, exchange rates and logistical issues.
