Growth Strategy

Constrains on growth:

There are several factors that can restrict the ability of a business to expand..

• Financial conditions

This determines the ability of a firm to fund its growth. Growth can be financed in 3 ways..

- Internal funds (i.e. ploughed-back profit)

- Borrowing

- Issuing of new shares

• Shareholder confidence -

The rate of business growth is influenced by shareholder demands and expectations and the fear of takeover.

• Demand conditions -

The profitability of a business is dependent upon market demand and demand growth. If a firms current market becomes saturated, profits and sales will fall.

• Managerial conditions -

A managerial team lacking entreprenurial vision, or various organisational skills, could have a detrimental effect on growth.

Alternative growth strategies:

A firm will need to increase its capacity, either through..

- Internal expansion (i.e. - diversify product range)

- External expansion (i.e. - merger or acquisition)

Internal growth:

Growth through vertical integration -

Reasons as to whya business might wish to expand via vertical integration..

• Greater efficiency (i.e - product economies)
• Reduced uncertainty (may be able to erect barriers to entry for rivals)

Problems with vertical integration -

• Reduces ability to respond to changing market demands
• Purchasing inputs from a supplier might be cheaper than supplying itself

Tapered vertical integration -

This is where a firm is partially integrated with an earlier stage of production, where it produces some of an input itself and buys some from another firm.

Advantages..

• Gains the benefits of VI, but avoids the costs
• Better cost information
• More leverage over suppliers
• Smaller capital outlay

Disadvantages..

• Share production might fail to generate economies of scale, and is hence less efficient than might otherwise be the case

Growth through diversification -

There are 4 directions in which diversification might be undertaken..

• Using the existing technological base and market area
• Using the existing technological base and new market area
• Using a new technological base and existing market area
• Using a new technological base and a new market area

Why diversification? -

There are 3 factors which might encourage a business to diversify..

• Sustainability (i.e. - spread risk)
• Maintaining profitability (i.e. - protect existing profit levels)
• Growth (i.e. - maintain high growth performance)

External growth through merger:

Below are the 3 types of mergers and acquisitions..

• Horizontal merger (i.e. - 2 firms in the same stage of production)

• Vertical merger (different stages of production in the same industry)

• Conglomerate merger (unrelated industry firms merge)

Why merge? -

Reasons as to why firms may decide to merge..

• Increased monopoly power
• Increased growth
• Reduced uncertainty
• White knight strategy (defending itself from unwanted predators)

External growth through strategic alliance:

Strategic alliances may be horizontal, vertical, or involve networks of firms across industries..

Horizontal strategic alliances (i.e - joint venture, franchising) -

These involve formal or informal agreements between firms to co-operate on a particular activity at the same stage of production.

Vertical strategic alliances (i.e. - consortium) -

These are formal or informal agreements between firms operating at different stages of production, to provide jointly a particular product or service.

Networks -

These consist of multi-form alliances across sector between organisations, some of which may be formal others informal.

Being part of a network may give firms access to technology and resources at lower costs. It may also give greater access to global markets.

Why form strategic alliances? -

Reasons as to why firms may decide to set up a strategic alliance..

• New markets
• Risk sharing
• Capital pooling (i.e.- high start-up costs become feasible if firms co-operate and pool their capital)