Methods of Business Growth

a. Building up new businesses from scratch and developing them (organic growth)
b. Acquiring already existing businesses from the current owners by the acquisition of a controlling interest.
c. A merger is the joining of two or more separate entities to form a single company.
d. Spreading the costs and risks

The purpose of acquisitions

a. Marketing advantages
i. Buy in a new product range
ii. Buy a market presence
iii. Unify sales departments or to rationalize distribution and advertising
iv. Eliminate competition or to protect an existing market

b. Production advantage
i. Gain a higher utilization of production facilities
ii. Buy in technology and skills
iii. Obtain greater production capacity
iv. Safeguard future supplies of raw materials
v. Improve purchasing by buying in bulk

c. Finance and management
i. Buy a high quality management team – which exists in the acquired company
ii. Obtain cash resources where the company acquired is liquid
iii. Gain undervalued assets or surplus assets that can be sold off
iv. Obtain tax advantage

d. Risk-spreading
e. Independence
f. Overcome barriers to entry

Problems with acquisitions and mergers

a. Cost – they might be too expensive especially if resisted by directors of the target company.
b. Customers – of the target company might resent a sudden takeover and consider going to other suppliers for their goods.
c. Incompatibility – The problems of assimilating new products, customers, suppliers, markets, employees and different systems of operating might create management overload in the acquiring company.
d. Asymmetric information – purchaser not really knowing the actual value of the company thereby overpaying or ignoring a potentially profitable acquisition.
e. Driven by personal goals
f. Corporate financiers and banks
g. Poor success records of acquisitions
h. Firms rarely take into account non-financial factors

Organic growth

Reasons for organic growth
a. Learning – the process of developing a new product gives the firm the best understanding of the market and the product.
b. Innovation – It might be the only way to achieve genuine technological innovations, and exploit them.
c. There is no suitable target for acquisition d. Organic growth can be planned more meticulously and offers little disruption e. More convenient since it is financed from the firms own cashflows f. The style of management and corporate culture can be maintained. g. Hidden and unforeseen losses are less likely with organic growth than acquisitions. h. Economies of scale can be achieved by efficient use of head office functions such as finance, purchasing, personnel and management services.

Problems with organic growth

a. Time – it takes a long time to growth organically b. Barriers to entry – e.g. distribution networks c. The firm will have to acquire the resources independently d. Organic growth may be too slow for the dynamics of the market.

Alliances

Alliance are gradually becoming more popular. An alliance is a business arrangement whereby firms share data, resources and activities to achieve mutually beneficial objectives. Alliances can take a number of forms.

a. Agreement to corporate on various issues b. Shared research and development c. Joint ventures, in which the partners create a separate business unit. d. Supply chain rationalization e. Licensing and franchising

Obtaining synergy from alliances a. Marketing synergy b. Operating synergy c. Investment synergy d. Management synergy

Consortia – organizations co-operate on specific business projects. Airbus is an example.

Joint ventures – two forms or more join forces for manufacturing, financial and marketing purposes and both have a share in the equity and management of the business. A joint venture is a business that has been set up for the following reasons:

a. Share funding – more attractive to smaller and/ or more risk averse firms since capital outlay is less
b. Cut risk – reduce the risk of government intervention if a local firm is involved.
c. Close control – over marketing and other operations
d. Overseas partner provides local knowledge quickly
e. Synergies – one firm’s production technology can be combined with another firms marketing expertise.
f. Learning – one partner learns as much as possible from the other partner.
g. Technology – these type of alliances provides funds for risky research projects that lead to new technology
h. The joint venture can generate innovations

Disadvantages of joint ventures

a. Conflicts of interests between the different parties
b. Disagreements may arise over the profit shares, amounts invested and marketing strategy
c. One partner may wish to withdraw from the arrangement

Licensing

A licensing agreement is a commercial contract whereby the licenser gives something of value to the licensee in exchange for certain performances and payments.

a. The licenser may provide:
i. Rights ti produce a patented product
ii. Manufacturing know-how
iii. Technical advice assistance
iv. Marketing advice assistance
v. Rights to use trade mark, brand

b. The licenser receives a royalty.
c. Production is higher with no investment.
d. The licensee might eventually become a competitor.
e. The supply of essential materials, components and plant.

Subcontracting – is also a type of ‘alliance’ Co-operative arrangements also feature in supply chain management, JIT and quality programs

Franchising

Franchising is a method of expanding on less capital than would otherwise be possible. For suitable businesses, it is an alternative business strategy to raising extra capital for growth. Franchisers include Budget rent-a-car, McDonalds and KFC.

Franchiser offers its:
a. Name and any goodwill associated with it
b. System and business methods
c. Support services such as advertising, training and proprietary technology.

The franchisee
a. Provides capital, personal involvement and local market knowledge.
b. Pays the franchiser in one way or another for being granted numerous rights and services.
c. Has responsibility for the day-to-day running and the ultimate profitability of the franchise.

Disadvantages of Franchising
a. The search for competent candidates is both costly and time consuming where the franchiser requires many outlets.
b. Control over franchisees.

The virtual firm

An extreme example of an alliance is the so called virtual firm. A virtual firm is created out of a network of alliances and sub contracting arrangements: it is as if most of the activities in a particular value chain are conducted by different firms, even though the process is loosely coordinated by one of them.

For example in the manufacture of furniture it is possible in theory to outsource:

a. The design to a consultancy
b. Manufacture to a sub-contractor in a low cost country
c. Delivery to a specialist logistics firm
d. Debt collection to a bank – factoring
e. Filing, bookkeeping and tax returns to accountancy firm.

Virtual corporations effectively put market forces in all linkages of the value chain – this has the advantage of creating incentives for suppliers, perhaps to take risks to produce a better product, but can lead to loss of control.