Why is growth important?
- Shows progress
- Managers
- Shareholders
- Achievement
- Creates financial benefit
- Lower costs increased revenues
- Can’t afford to not grow
- Creates positive working environment
Internal Growth
- Sometimes organic growth
- Occurs when the business expands it’s own operations opposed to the business making acquisitions
Causes of internal growth
- Increasing existing production capacity through investment in new capital & technology
- Development and launch of new products
- Finding new markets, exporting to other countries or diversification
- Growing a customer base through improved marketing
External Growth
- Many advantages compared to internal growth
- Faster speed of access to new product or market areas
- Increased market share / increased market power
- Access internal economies of scale
- Secure better distribution channels or control of of supplies
- Acquire intangible assets such as brands, patents and trademarks
- Overcome barriers to entry to target new markets
- Enter new segments of an existing market
- To take advantage of deregulation in an industry or market
Horizontal Integration
-
Two companies in the same market merge, direct competitors.
-
Advantages of horizontal integration:
- Increases size of business and enables economies of scale
- Synergies
- A wider range of products
- Reduces competition
Vertical Integration
-
Two companies in the same industry but different points on the supply chain
-
Forward Vertical: Closer to the final consumers of the product (a manufacturer buying a retailer)
-
Backward Vertical: Closer to the raw materials in the supply chain (eg, a retailer buying a manufacturer)
-
Advantages of vertical integration
- Control of the supply chain
- Improved access to key raw materials (possibly at the expense of rivals)
- Better control over distribution channels
- Removing supplier and crucial competitor information
Franchises in Internal Growth
- Spread costs: franchisees cover some of the costs and shield the franchiser from some of the risk
- Growth can be far quicker as franchisees can be given responsibility
- Franchisee can handle the day to day growth and operation whilst the franchiser can build a strong brand for the business, creating a sort of symbiotic relationship between the two.
- Franchises typically lead to far quicker internal growth, however may dilute the control of the franchiser if their contract is not watertight.
Joint Ventures
- A joint venture is a separate business entity created by two or more parties involving shared ownership, returns and risks
- Usually in a 50:50 share but this does not have to be the case
- Parties entering into a joint venture usually do so to benefit from complementary strengths or shared resources whilst also mitigating risks.
Advantages
- Shared benefit from each others expertise and resources
- Each partner might have the option to acquire the JV business
- Reduce the risk of a growth strategy
Disadvantages
- Risk of clashing organisational structures
- The objectives of each partner may change leading to a conflict of objectives
- In practice there may be an imbalance in levels of expertise, investment or assets brought into the venture by different partners
- Failure could lead to disagreement over ownership of assets
Examples
- BMW and Brilliance Auto Group
- Microsoft and General Electric
- Walmart and Eko
- Verily and GlaxoSmithKline
- Boeing and Lockheed Martin