Growth Stategies & Options Flashcards
What is business growth?
Business growth refers to the process of improving some measure of the enterprises success.
Why is business growth important?
- Customer taste and preferences are continuously changing.
- New entrants in the market erode market share.
- To meet internal demands, such as profits for its owners.
What is a strategy?
A strategy is a pattern of actions and resource allocation in order to achieve the goals of an organization.
What are the 2 types of basic growth strategies?
- Internal growth strategy
- External growth strategy
Explain internal growth strategy.
Internal growth strategy refers to the expansion from within the organization. This is by increasing their own assets or outputs through the reinvestment of cash flows in existing businesses.
Advantages of internal growth?
- Incremental (slow paced) growth
- Provides maximum control
- Preserves organization culture
Disadvantages of internal growth strategies are.
- Need to develop new resources
- Slow form of growth
What is external growth strategy?
External growth strategy refers to the expansion outside the organization. This is by performing mergers and acquisitions.
What are the main 3 external growth strategies?
- Vertical integration
- Horizontal integration
- Lateral integration
Explain vertical integration.
Occurs when a firm buys another that is at a different level of value addition than itself. For instance, buying its supplier or it’s customer.
When a firm buys it supplier, it is known as backwards integration. When a firm buys its customer, it is known as forward integration.
Explain horizontal integration.
Occurs when a firm buys another in the same level of value addition to itself.
An example of this is when Facebook bought Instagram.
Explain lateral integration
Occurs when a firm does not buy its supplier, customer or competitor. This happens when a firm wants to diversity into another industry or product to reduce risks.
Name the other 2 external growth strategies.
- Northern integration
- Southern integration
Explain northern integration
Occurs when a firm buys others seeking to enter in a particular sector, in order to prevent this from happening. Market DOMINANCE is the motive.
Explain Southern integration.
Occurs when a firm buys up the means of production of critical substitutes products. This is motivated to exert dominance and to increase influence.
Advantages of external growth strategy.
- Diversification of business risks.
- Reducing competition
- Gaining access to new products and markets.
- Access to an astablished name
Disadvantages of external growth strategies.
- Clash of corporate cultures.
- Operational problems.
- Loss of organizational flexibility
What is a merger?
A merger is the pooling of interests to combine two or more firms into one.
What is an acquisition?
An acquisition occurs when a firm completely acquires another firm.
Advantages of merger?
- Companies become large and therefore can buy materials on a large scale and get discounts on their purchase.
- A merged company can produce and distribute its goods and services on a large scale.
Advantages of an acquisition?
- You can implement the same marketing and sales strategies for the new company, which lowers costs and helps to boost productivity.
- Another advantage is that you can broaden your target audience by tapping into the existing market that the company you bought has already attracted.
What is a joint venture?
When two companies join forces to complete a project.
Advantages of a joint venture?
- Pooling together of resources to improve efficiency.
- New insight and expertise
- Both parties share the risks and costs.
