Chapter 11: Methods of Development Flashcards
What are methods of development?
- Organic growth
- Acquisitions/mergers
- Joint development methods
- International expansion
What are the advantages of organic growth?
- 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)
What are the disadvantages of organic growth?
- 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
What are the advantages of acquisition growth?
- 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
What are the disadvantages of acquisition growth?
- 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
What are 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)
What is a synergy?
Synergies are the benefits gained from two or more businesses combining that would not have been available to each inependently
What are some 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
What is the difference between a joint venture and a strategic alliance?
A joint venture is a contractual agreement whereby two or more parties undertake an economic activity which is subject to joint control
A strategic alliance is a looser contractual agreement than a joint venture and no separate company is formed
What are the 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
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
What is the difference between franchising and licensing?
In both, 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
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)
What are the advantages and disadvantages of franchising and licensing?
Advantages:
- Increases the number of distribution outlets without extensive capital investment
- Local expertise and access to enthusiastic entrepreneurs
- Economies of scale (e.g., marketing)
- Rapid expansion
- Risk sharing with franchisee
Disadvantages:
- Shared profit
- Successful franchisees may set up on their own in direct competition
- Conflicts over operating decisions
- Quality control
What is a problem with agency agreements?
Agency agreements use intermediaries to sell your products
- Commonplace when exporting products
- Business may get cut off from direct customer contact
What is outsourcing and what are some issues to consider?
- Outsourcing is the use of external suppliers as a source of finished products, components or services previously provided in-house
Issues:
- Competence of business to perform task internally
- Better risk management - e.g. build in penalty clauses for poor delivery by 3rd party
- Level of control and assurance over work outsourced
- Level of intellectual capacity that may need to be disclosed to a 3rd party
- Track record of 3rd party
- Strategic aims and culture of 3rd party
- Cost (time and financial)
- Quality of service and relationships required with 3rd party
What is Lynch’s expansion matrix?
Lynch’s expansion matrix can be used to summarise the combinations of expansion techniques that have been adopted by a business
Considers the company wanting to develop internally and externally and whether this will be in the home country or abroad.
Regardless of where, external development is always:
- Joint ventures, merger, acquisition, alliance, franchise/licence
Home country, Internal Development:
- Internal domestic development
Abroad, Internal Development:
- Exporting, Overseas office, Overseas manufacture, Multinational operation, Global Operation
