Ch.11 - Methods of development

Question 1

What are the options for companies development?

Answer 1

• organic growth
• acquisitions and mergers
• joint development methods
  a) joint venture/strategic alliance
  b) franchising
  c) licensing
  d) agency arrangements
  e) outsourcing
• international expansion

Question 2

What are advantages and disadvantages of organic growth?

Answer 2

Advantages:
	Acquisition cost may be too high
	Costs/risks may be spread over time
	Control over change management
	Control over products/markets
	Reputation
	Easier to finance

Disadvantages:
	Too slow
	No access to proprietary knowledge, brands, customer base, etc.
	Risk of failure
	May intensify competition

Question 3

What are advantages and disadvantages of mergers adn acquisitions?

Answer 3

Advantages:
 Quicker than organic growth
 Synergies (cost savings and efficiencies)
 Lower risk as target already has a goodwill
 Circumventing barriers to entry (patents)
 One less competitor
 Target may be undervalued

Disadvantages:
	Lack of strategic fit
	Lack of understanding of business
	Paying too much
	Failure to retain key staff/customers
	May occur as a result of ‘empire building’
	Lack of governance and control

Question 4

What are advantages and disadvantages of joint venture/strategic alliance?

Answer 4

Advantages:
 Access to local resources/expertise/brand
 Shared risks
 Shared finance
 Learning experience
 Attractive to smaller/risk-averse businesses

Disadvantages:
	Shared profits
	Disagreement over decision making
	May have to share trade secrets
	May not allow new competences to be developed (each partner concentrating on existing competencies)

Question 5

What are advantages and disadvantages of franchising/licensing?

Answer 5

Advantages:
	Increased number of distribution outlets without extensive capital investment
	Local expertise
	Economies of scale (marketing)
	Rapid expansion
	Risk sharing

Disadvantages:
	Shared profit
	Successful franchises may set up on their own in direct competition
	Conflicts over operating decisions
	Quality control

Question 6

What are advantages and disadvantages of international expansion?

Answer 6

Advantages:
	Sales growth by expanding the market
	Product life cycle may be extended
	Spreading the risk by diversification
	Global image = business reputation

Disadvantages:
	Lack of market knowledge
	Cultural differences
	Exchange rates movement
	Logistical issues

Question 7

What is Lynch’s expansion matrix?

Answer 7

Internal/Home development = Internal domestic development

Internal/Abroad development = Exporting, Overseas office, Overseas manufacture, Multinational operation, Global operation

External/Home development = Joint ventures, Merger, Acquisition, Alliance, Franchise, Licence

External/Abroad developement = Overseas joint ventures, Merger, Acquisition, Alliance, Franchise, Licence

Question 8

What are Porter’s tests for successful acquisition?

Answer 8

 The better of test – the shareholders have DUY option to simply buy shares themselves. The acquisition must generate extra benefits/synergies.

 The cost of entry test – there may be cheaper ways of entering market

Question 9

What are sources of synergies?

Answer 9

• market power, economies of scales, rationalisation of shared activities, surplus assets, synergies of vertical integration, diversification of risk, additional finance options