growth_methods_flashcards
What is internal growth?
Used by businesses to expand their products or market presence using their own resources. It is less risky and related to the Ansoff matrix.
What is external growth?
When a business relies on another business’ resources to grow. It is riskier but offers potential for higher rewards.
What are the main types of external growth?
Mergers and acquisitions (M&A’s), joint ventures, strategic alliances, and franchises.
What is a merger?
When one business combines with another to manage a new company formed from the combination.
What is an acquisition?
When one company acquires another and dominates its decision-making process.
What is horizontal integration?
When a business acquires one of its competitors to reduce competition and increase market leadership. When M&As happen between companies in the same sector of industry
○ For example, a bank takes over another bank (both are in tertiary sector)
What is vertical integration?
When a business acquires another company in its chain of production, either backward or forward.
What is backward vertical integration?
When a business acquires one of its suppliers to reduce operational costs and gain market control. when a company merges with or takes over a company from a “lower” sector of industry. For example, a furniture shop (tertiary sector) merges with a furniture factory (secondary sector)
What is forward vertical integration?
When a business acquires one of its customers to increase profit and enhance brand image. When a company merges with or takes over a company from a “higher” sector of industry
○ For example, a car manufacturer (secondary sector) takes over a car dealership (tertiary sector)
What is lateral integration?
When a business acquires an indirect competitor. It’s a growth strategy where a business acquires or merges with another company that operates in a related but not directly competitive industry. The companies involved usually serve the same customers but offer different products or services.
For example:
- A clothing manufacturer acquiring an accessory brand.
- A smartphone company merging with a smartwatch manufacturer.
What is conglomerate integration?
When a business acquires a company in a different industry. This type of integration helps businesses diversify their operations and spread risk by entering markets or sectors that are not directly connected to their core business.
For example:
- A car manufacturer acquiring a food production company.
- A tech company merging with a construction firm.
What is a joint venture (JV)?
formed when two or more companies create a third company that operates for their mutual benefit
· (A and B create C) · They agree to cooperate in specific areas but do not fully join together all aspects of their operations * Must make a contract - rights, objective, how a day-to-day operations will be carried out and profits distributed
What are advantages of joint ventures?
Limited lifespan, shared expertise, diversified risks, and maintaining high performance, reduced competition, splitting costs, entry to foreign markets
What are disadvantages of joint ventures?
Clash of opinions, profit sharing, and potential poor performance, Too much reliance on a partner
+ Having to share certain expertise (for example, some methods of production or some secret technologies)
What is a strategic alliance?
An agreement between two or more companies to share resources for mutual benefits without legal obligations.
* (A and B cooperate, C is not created) * A new business entity is not created (unlike joint ventures) * Similar to joint ventures, strategic alliances can happen between competitors because sometimes cooperation with competitors has benefits * Built on trust & a true desire to grow together (increase customer base, increase profit, increase company size)
What are advantages of strategic alliances?
Mutual benefits, no legal obligations, less competition, and flexibility.
What are disadvantages of strategic alliances?
Abuse of agreement, short-term nature, brand image risks, and misunderstandings.
What is a franchise?
A form of business ownership whereby a person or business buys a license to trade using another firm’s name, brand, & trademark
○ The purchaser of a franchise pays a license fee to the parent company of the business
(external growth strategy)
What are advantages of a franchise for the franchisor?
Expansion at low costs, upfront fees, low risks, and higher brand awareness.
What are disadvantages of a franchise for the franchisor?
Brand image risks, profit sharing, high follow-up costs, and required technical support.
What are advantages of a franchise for the franchisee?
High success rate, technical support, and economies of scale.
What are disadvantages of a franchise for the franchisee?
High initial cost, lack of flexibility, and dependence on the franchisor.
Franchisor
A business or individual that grants the rights to another party (the franchisee) to operate a business under its brand name, trademark, and established business model.
Franchisee
An individual or business that purchases a license from a franchisor to operate under the franchisor’s established brand, trademark, and proven business model.
→ Buys the license!
→ Pays a royalty payment to the franchisor (royalties)
