Methods of development

Question 1

Organic growth

Answer 1

Organic growth is expansion of a firm’s size, profits, activities achieved
without taking over other firms.

Question 2

Advantages and disadvantages of organic growth
Advantages

Answer 2

Advantages
 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)

Question 3

Advantages and disadvantages of organic growth
Disadvantages

Answer 3

Disadvantages
 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

Question 4

Acquisitions and mergers
Acquisitions

Answer 4

An acquisition is the purchase of a controlling interest in another
company

Question 5

Acquisitions and mergers
A merger

Answer 5

A merger is the joining of two separate companies to form a single
company.

Question 6

Advantages and disadvantages of acquisition growth
Advantages

Answer 6

Advantages
 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

Question 7

Advantages and disadvantages of acquisition growth
Disadvantages

Answer 7

 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

Question 8

Porter’s tests for a successful acquisition

Answer 8

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).

Question 9

Synergies

Answer 9

Synergies are the benefits gained from two or more businesses
combining that would not have been available to each independently.

Question 10

Typical sources of synergy

Answer 10

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

Question 11

Joint development methods

Answer 11

Businesses may agree to collaborate in certain activities.

Question 12

Joint ventures and strategic alliances

Answer 12

A joint venture is a contractual arrangement whereby two or more
parties undertake an economic activity which is subject to joint control.

A strategic alliance is a looser contractual arrangement than a joint
venture and no separate company is formed.

Question 13

Advantages and disadvantages of joint ventures and strategic alliances
Advantages

Answer 13

 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

Question 14

Advantages and disadvantages of joint ventures and strategic alliances
Disadvantages

Answer 14

 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

Question 15

Franchising and licensing

Answer 15

With both mechanisms, 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. (e.g. Burger King, Subway)

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)

Question 16

Advantages of franchising and licensing

Answer 16

 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

Question 17

Disadvantages of franchising and licensing

Answer 17

 Shared profit
 Successful franchisees may set up
on their own in direct competition
 Conflicts over operating decisions
 Quality control

Question 18

Agency arrangements

Answer 18

Agency arrangements use intermediaries to sell your products. (e.g. Ann Summers
agents, Independent Financial Advisors, Avon reps)
 Commonplace when exporting products.
 Business may get cut off from direct customer contact.

Question 19

Outsourcing

Answer 19

Outsourcing is the use of external suppliers as a source of finished
products, components or services previously provided in-house.

Question 20

Outsourcing
Issues to consider

Answer 20

 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 capital 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 relationship required with 3rd party.

Question 21

Lynch’s expansion matrix

Answer 21

Lynch’s expansion matrix can be used to summarise the combinations of expansion
techniques that have been adopted by a business.

Question 22

Lynch’s expansion matrix:
Company: Internal
development
New location: Home
country

Answer 22

Internal
domestic
development

Question 23

Lynch’s expansion matrix:
Company: Internal
development
New location:Abroad

Answer 23

Exporting
Overseas office
Overseas manufacture
Multinational operation
Global operation

Question 24

Lynch’s expansion matrix:
Company:External
development
New location: Home
country

Answer 24

Joint ventures
Merger
Acquisition
Alliance
Franchise/Licence

Question 25

Lynch’s expansion matrix:
Company:External
development
New location: Abroad

Answer 25

Joint ventures
Merger
Acquisition
Alliance
Franchise/Licence

Question 26

Advantages of international expansion

Answer 26

 Sales growth can be achieved by expanding the potential market.
 The product life cycle may be extended by selling the product in a market
which is in the early stages of the life cycle.
 Spread the risk by diversifying into more than one market.
 A global image can enhance the businesses reputation.

Question 27

Risks of international expansion

Answer 27

 Lack of market knowledge may lead to an increased risk of making mistakes.
 Cultural differences may require adaptations to products or services.
 Exchange rates may move unfavourably and remove competitive advantage.
 Logistical issues will need to be addressed to ensure effective contro