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