Entrepreneurial Finance: Strategies for Growth/Exit Flashcards
What is the core concept of the risk/reward trade-off?
Grow the business one “rung” at a time, maximize that growth strategy and then move on to the next one (even if it doesn’t have the most reward) because it will give you the best chance long-term of success
What are the four intensive growth strategies?
- Market penetration
- Market development
- Alternative channels
- Product development
Describe market penetration and explain WHY it is the first step
Sell more of your current product to current customers BEFORE jumping to your next product because it doesn’t require new capital/new expenses
Describe market development
Sell your current product in new markets (this will have some more costs associated with it)
Describe alternative channels (give an example)
Pursuing customers through a different distribution channels (eg. opening an online store, starting a delivery service, selling products in physical stores, etc.). This will cost more, but there is not too much capital incurred
Describe product development
Develop new products to sell to existing customers as well as new ones: get new products into the hands of people who understand and like your products, but also try to get it into some new stores
Give an example of a company who used integrative growth strategies
- Polaris: was originally a company that made snowmobiles, but they realized that winters are always changing. They decided that they wouldn’t survive if they kept going the way they were going, so the introduced a new product: ATV’s: they could go in grass and mud instead of snow. This was much more fitting for the environment
What are the three integrative growth strategies?
- Horizontal integration
- Backward vertical integration
- Forward vertical integration
Describe horizontal integration
Acquiring/merging with a competitor. This creates growth because you have more products, more customers, and more facilities, as well as one less competitor. This is not cheap or easy: 75% of all acquisitions usually fail to deliver the value that they are promised
Give an example of a company that completed a horizontal integration
Tim’s and Burger King merged (Burger King bought Tim’s)
Describe backwards vertical integration
Acquiring/margining with a supplier. You would do this if you were trying to increase control over your supplies (prices, timing of production, quality of production). This can grow the company and be an important strategic decision if you are having difficulty with your suppliers
Give an example of a company that completed a backwards vertical integration
Virgin records: instead of just selling music, they integrated backwards and they got into music production and talent management. They did this because they wanted to earn more profit than just from selling their records (especially as trends were changing away from records)
Describe forwards vertical integration
Acquiring/merging with a distributor. You would do this if you think that you could be more profitable with your own distribution channel, or if you are not happy with the level of effort being put into selling your product by your retailers/seller. This could be done through acquisitions, merges, or by creating your own physical store. This strategy is a lot more expensive and complex than the other two options
What is diversification?
Acquiring/merging with a company that is completely unrelated to your business. This is not as strategic a decision in terms of competitors, suppliers, or distributors because it is not connected to the supply chain (it is purposely disconnected from the supply chain)
Give an example of a company that used the diversification strategy
GE (general electric) once only sold appliances, but now they have a nuclear division, a financial services division, and a railcar division
