Size Of Business: Business Growth (Copy)

1.3.3 Business Growth

Why And How A Business Might Grow Internally (Organic Growth)

• Definition: Growth achieved from within the business by using its own resources rather than merging or taking over another business.
• Why Businesses Grow Internally:
  • Desire to increase sales and market share.
  • To exploit economies of scale and reduce average costs.
  • To spread risks by diversifying products or markets.
  • To increase competitiveness and strengthen brand recognition.
  • To improve long-term profitability.
• How Businesses Grow Organically:
  • Increasing output and sales through investment in production.
  • Expanding product range (product development).
  • Entering new geographical markets (regional, national, or international expansion).
  • Expanding distribution networks (opening more outlets, strengthening online platforms).
  • Marketing strategies (advertising campaigns, promotions, brand-building).
• Examples:
  • Starbucks opening new stores globally.
  • Coca-Cola introducing new products (flavours, low-sugar drinks).

The Different Types Of External Growth Through Merger And Takeover

• Horizontal Integration
  • Merging with or acquiring a competitor at the same stage of production.
  • Advantages: Increases market share, reduces competition, economies of scale.
  • Disadvantages: Risk of monopoly investigations, cultural clashes.
  • Example: Facebook acquiring Instagram.
• Vertical Integration
  • Merging with or acquiring a business at a different stage of production in the same industry.
  • Backward Vertical Integration: Taking control of suppliers.
    • Example: Starbucks buying coffee farms.
    • Advantage: Secure supply of raw materials.
    • Disadvantage: May lack expertise in farming.
  • Forward Vertical Integration: Taking control of distributors or retailers.
    • Example: A dairy company opening its own chain of shops.
    • Advantage: Direct access to customers, better control over distribution.
    • Disadvantage: May distract from core operations.
• Conglomerate Diversification
  • Merging with or acquiring a business in an unrelated industry.
  • Advantages: Spreads risk, gains access to new markets.
  • Disadvantages: Lack of expertise, risk of over-diversification.
  • Example: Virgin Group operating airlines, gyms, and music.
• Friendly Merger
  • Both businesses agree to join together for mutual benefit.
  • Example: Disney merging with Pixar.
• Hostile Takeover
  • One business takes control of another without agreement from the target company’s management.
  • Often by buying a majority of shares on the stock market.
  • Example: Kraft’s takeover of Cadbury in 2010.

The Impact Of A Merger/Takeover On Stakeholders

• Owners/Shareholders
  • May benefit from higher profits and share value.
  • Risk of reduced dividends in short term due to integration costs.
• Employees
  • May gain from increased job security in a larger company.
  • Risk of redundancies if roles overlap.
• Customers
  • May benefit from wider product range and innovation.
  • Risk of higher prices if competition reduces.
• Suppliers
  • Larger firms may negotiate lower prices, hurting suppliers.
  • Could also mean more consistent, bulk orders.
• Government
  • Larger businesses contribute more taxes.
  • Concern about monopolistic practices and reduced competition.
• Local Communities
  • Could benefit from increased investment and job creation.
  • May suffer if merger leads to closures of local branches.

Why A Merger/Takeover May Or May Not Achieve Objectives

• Reasons For Success:
  • Economies of scale reducing costs.
  • Access to new markets and customers.
  • Synergy (combined company performs better than two separate ones).
  • Strengthened market position and brand image.
• Reasons For Failure:
  • Cultural clashes between merged businesses.
  • Management conflicts and power struggles.
  • Overestimation of potential synergies.
  • High costs of integration.
  • Loss of key employees from the acquired business.
  • Regulatory intervention (antitrust laws).
• Examples:
  • Success: Disney and Pixar merger led to highly profitable animations.
  • Failure: Daimler-Benz and Chrysler merger failed due to cultural and strategic differences.

The Importance Of Joint Ventures And Strategic Alliances As Methods Of External Growth

• Joint Ventures
  • Two or more businesses form a new business entity for a specific purpose.
  • Each contributes capital, expertise, and shares profits and risks.
  • Importance: Allows access to new markets, spreads risk, combines strengths.
  • Example: Sony and Ericsson formed Sony Ericsson for mobile phones.
• Strategic Alliances
  • Businesses collaborate but remain independent.
  • Can involve shared resources, technology, or distribution networks.
  • Importance: Flexible way to expand without full commitment of merger.
  • Example: Airlines in alliances like Star Alliance sharing routes and facilities.
• Benefits Of Both:
  • Access to local knowledge and expertise.
  • Reduced financial risk compared to full takeover.
  • Speed of entry into new markets.
  • Sharing of research and development costs.
• Limitations Of Both:
  • Conflicts over decision-making.
  • Risk of knowledge transfer to competitors.
  • Unequal commitment from partners may harm success.