Methods of development Flashcards
Organic growth
Organic growth is expansion of a firm’s size, profits, activities achieved
without taking over other firms.
Advantages and disadvantages of organic growth
Advantages
Advantages
Acquisition cost may be too high (substantial goodwill payments)
Costs/risks can be spread over time with organic growth
Control over change management e.g. cultures/ systems
Control over which products/markets to develop
Reputation of target company/lack of target company
Organic growth may be easier to finance (e.g. new jobs may result in grants)
Advantages and disadvantages of organic growth
Disadvantages
Disadvantages
May be too slow
No access to proprietary knowledge, brands, customer base, distribution channels etc. of established players (barrier to entry)
Risk of failure – business lacks experience in new fields
May intensify competition with existing competitors
Acquisitions and mergers
Acquisitions
An acquisition is the purchase of a controlling interest in another
company
Acquisitions and mergers
A merger
A merger is the joining of two separate companies to form a single
company.
Advantages and disadvantages of acquisition growth
Advantages
Advantages
Quicker than organic
growth
Synergies: Cost savings
and efficiencies resulting
from the combination
Lower risk as the target
already has goodwill,
brands and a customer
base
Circumventing barriers
to entry (e.g. acquiring
patents)
One less competitor
Target may be
undervalued
Advantages and disadvantages of acquisition growth
Disadvantages
Possible lack of strategic
fit
Lack of understanding of
business/ management
being acquired
Paying too much for
expected efficiencies
(synergies) that do not
materialise
Failure to retain key
staff/customers
Acquisitions may occur
as a result of ‘empire
building’
Lack of governance and
control over businesses
being acquired
Porter’s tests for a successful acquisition
The better off test – The shareholders have DIY option of simply buying
shares in the target company without a full merger or acquisition. The
acquisition must generate extra benefits/synergies.
The cost of entry test – even if the market is attractive, there may be cheaper
ways of entering it (e.g. organic growth, joint ventures, alliances etc.) What are
the costs of delayed entry? (e.g. lack of brand re-enforcement).
Synergies
Synergies are the benefits gained from two or more businesses
combining that would not have been available to each independently.
Typical sources of synergy
Market power – especially if the company buys a competitor.
Economies of scale – e.g. bulk discounts for combined buying quantities.
Rationalisation of shared activities – e.g. shared research and development.
Surplus assets – e.g. don’t need two head offices/sets of central warehouses.
Synergies of vertical integration – e.g. control over supply/distribution chains.
Diversification of risk – if product ranges/markets are different.
Additional finance options – e.g. large enough to consider flotation
Joint development methods
Businesses may agree to collaborate in certain activities.
Joint ventures and strategic alliances
A joint venture is a contractual arrangement whereby two or more
parties undertake an economic activity which is subject to joint control.
A strategic alliance is a looser contractual arrangement than a joint
venture and no separate company is formed.
Advantages and disadvantages of joint ventures and strategic alliances
Advantages
Access to local resources/
expertise/brands
Reduction in nationalist sentiment
Shared risks (e.g. in R&D)
Shared finance
Learning experience for both
parties
Attractive to smaller/risk averse
businesses
Advantages and disadvantages of joint ventures and strategic alliances
Disadvantages
Shared profits
Disagreement over decision making
(e.g. profit share, operating
decisions)
May have to share trade secrets
with a potential competitor
Alliances may not allow new
competences to be developed –
each partner concentrating on
existing core competences only
Franchising and licensing
With both mechanisms, the franchisee/licensee is granted the 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 a share of profits or revenue.
The franchiser also usually provides marketing and technical support to
the purchaser of the franchise. (e.g. Burger King, Subway)
Licensing grants a third-party organisation the rights to exploit an asset
belonging to the licensor.
Differs from franchise because there will be little central support.
(e.g. Guinness is brewed under licence by several breweries around the
world)
