Organic And External Growth Flashcards
organic growth
As organic growth is achieved by the selling of more products, the most-used method is through the opening of more factories (for manufacturers) to increase capacity or retail outlets to sell more products.
other organic growth strategies
Expanding the product range: Once a product is established, further related products can be introduced.
Targeting new markets: This means selling your products to new market sectors.
Expanding the distribution network: Make your product available in more places such as the internet, more retail outlets, through agents and distributors.
Benefiting from economies of scale: Economies of scale reduce costs, meaning that prices can be reduced, which should gain new customers.
advantages of organic growth
it is a less risky form of growth as it is more likely to be funded with retained profit
there is less threat of brand dilution
it allows for greater consistency
growth can be steady
there is less loss of control.
disadvantages of organic growth
opportunities may be missed from acquisitions
the potential for growth may be more limited
there could be a lack of shared expertise
a lack of competitiveness could result due to a lack of economies of scale (especially if competitors are growing via external methods)
there could be dissatisfaction from shareholders if they believe that they are losing out on the return on their investment.
external growth (inorganic growth)
External growth is achieved via takeovers (acquisitions) or mergers. It is a quicker method of growth than organic growth.
takeover
A takeover is the acquisition of one business by another, either on an agreed or hostile basis. The vulnerability of a company to takeover depends on who controls the majority of shares, what shares have the voting rights, the value of the shares and the performance of the business.
A takeover will take place when a business sells more than 50% of its shares. Public limited companies are vulnerable as shares are bought and sold on the stock market. Private limited companies are less open to takeovers, especially hostile takeovers, as shareholders have to invite and agree to the selling of their shares.
merger
A merger is the process by which two companies become one. Usually the businesses are of equal size and will agree on the share ownership of the new business. In recent years, the numbers of mergers that have taken place in the global economy have increased.
Types of mergers and takeovers
Forward integration
Backward integration
Horizontal integration
Conglomerate integration
Benefits of horizontal integration
the removal of some of the competition, possibly for defensive reasons
may increase economies of scale
increases market power to compete with market leaders by spreading the brand
synergy may result – the two companies joined together may form an organisation that is more powerful and efficient than the two companies operating on their own; it’s a quick way for a business to expand as opposed to growing internally
increased capital of merged businesses
opportunity to cut costs – for example combining HR/ICT services
combination of new ideas/innovation.
The Competition and Markets Authority
In the UK, the Competition and Markets Authority (CMA) investigates mergers and anti-competitive practices in markets that could potentially give rise to a substantial lessening of competition. They have the power to stop mergers or impose restrictions and conditions on the merged business.
Backward integration
The objective here is to reduce costs or secure supplies. Another benefit includes having more control over the quality of the product and the supply chain.
Examples of backward vertical integration include Starbucks buying a coffee farm in China, and Dunlop owning rubber plantations.
Forward integration
The objective here is to reduce costs or secure supplies. Another benefit includes having more control over the quality of the product and the supply chain.
Examples of backward vertical integration include Starbucks buying a coffee farm in China, and Dunlop owning rubber plantations.
Benefits of vertical integration
security of supplies and control of suppliers’ prices
improves supply chain co-ordination
can guarantee the quality of its raw materials
security of distribution outlet for products
can determine standard of outlets/shops
use of outlets to determine brand image
keeps all profit and removes middlemen; increased profit margins and does not have to buy raw materials from a third party outlets
control over quality
possible benefits of economies of scale.
Conglomerate integration
Conglomerate integration takes place when businesses wish to diversify. For example, a parent company may own a number of subsidiary companies that include concrete producers, a chain of hotels and a pharmaceutical company, all under the same overall ownership.
Conglomerates can arise by the wish of directors to seek rapid growth or asset-stripping a business and selling of assets, or even the desire just to operate in different markets.
Due to the risky nature of diversification, conglomerate integration is the most likely form of integration to fail.
The main reasons for mergers and takeovers
Access to new markets, especially overseas.
Increased market share leading to increased market power in the market.
Diversification.
Acquiring new products and technology. A takeover is one way of acquiring technology that may be protected by patent or may be expensive or time consuming to develop internally.
Economies of scale are derived from becoming larger.
Synergy: the idea that 2+2=5. The synergy argument is that by combining two businesses, total profits can be increased by reducing duplicated services such as head office costs, or the two businesses fit together in a way that allows costs to be reduced and profits increased.
Cost savings: takeovers are often followed by significant numbers of redundancies in the short term. In order to convince shareholders that a takeover is in their interests, managers in the bidding business often promise that cost savings will result from the merger and shedding staff is a principal way in which this is achieved. Currently, this pattern of cost savings through redundancies is most evident in the financial sector where a wave of mergers and takeovers are associated with large-scale job losses.
Underperforming management teams can be removed giving an immediate boost to performance.
Higher returns to shareholders.
