Strategies for Firm Growth

What do we learn?

a.     What is the internal growth strategies?

Ø  Involve efforts taken within the firm itself, such as new product development, other product related strategies, and international expansion.

Ø  Advantages:

·         Incremental, even-paced growth.

·         Provides maximum control.

·          Preserves organizational culture.

·          Encourages internal entrepreneurship.

·          Allows firms to promote from within.

Ø  Disadvantages:

·         Slow form of growth.

·          Need to develop new resources.

·          Investment in a failed internal growth

·           strategy can be difficult to recoup.

·          Adds to industry capacity.

b.    Types of internal growth trategies.

Ø  New product development

·         Involves the creation and sale of new products (or services) as a means of increasing firm revenues.

·         In many fast-paced industries, new product development is a competitive necessity.

·         Keys to effective new product and service development:

o   Find a niche and fill it.

o   Develop products that add value.

o    Get quality right and pricing right.

o   Focus on a specific target market.

o   Conduct ongoing feasibility analysis.

Ø  Other product related strategies

·         Improving an exsisting product or service: A business can increase its revenues by simply increasing the quality of an existing product or service.

·         Increasing market penetration: Increasing the sales of a product or service through greater marketing efforts or through increased production capacity.

·         Extending product lines: Making additional variations of a product so it will appeal to a broader range of clientele.

·         Geographic expansion: Growth via expanding to additional geographic locations.

Ø  International expansion

·         Seek to derive significant competitive advantage by using their resources to sell products or services in multiple countries.

·         A fairly complex form of growth.

·         Foreign-Market Entry Strategies:

o   Exporting: Producing a product at home and shipping it to a foreign market.

o   Licensing: An arrangement whereby a firm with the proprietary rights to a product grants permission to another firm to manufacture that product for specified royalties or other payments.

o   Joint Ventures: Involves the establishment of a firm that is jointly owned by two or more otherwise independent firms.

o   Franchising: An agreement between a franchisor and a franchisee.

c.      What is external growth?

Ø  Rely on establishing relationships with third parties, such as mergers, acquisitions, strategic alliances, joint ventures, licensing, and franchising.

d.    Different types of external growth strategy.

Ø  Mergers and acquisitions

·         Merger: the pooling of interests to combine two or more firms into one.

·         Acquisition: the outright purchase of one firm by another.

o   The purpose of acquisition:

§  Expanding its product line.

§  Gaining access to distribution channels.

§  Achieving competitive economies of scale.

o   Process of acquisition:

1.      Meet with the target firm’s top management team.

2.      Assess the mood of the acquisition target.

3.      Identify sources of financing for the transaction.

4.      Continue negotiations.

5.      Make an offer to purchase if acceptable terms are available.

6.      Negotiate a noncompete agreement with the target firm’s key employees who are to be retained.

7.      Retain an attorney to prepare documents for closing.

8.      Meet as soon as possible with all affected employees.

9.      Implement the plan for the acquired firm.

Ø  Licensing

·         The granting of permission by one company to another company to use a specific form of its intellectual property under clearly defined conditions.

·         Virtually any intellectual property a company owns that is protected by a patent, trademark, or copyright can be licensed to a third party.

·         Licensing agreement: The terms of a license are spelled out by a licensing agreement.

·         Types:

1.      Technology licensing: licensing of proprietary technology that the licensor typically controls by virtue of a utility patent.

2.      Merchandise and character licensing: licensing of a recognized trademark or brand that the licensor typically controls through a trademark or copyright.

Ø  Strategic alliances and joint venture

·         Strategic alliances

o   Partnership between two or more firms developed to achieve a specific goal.

o   Tend to be informal and do not involve the creation of a new entity.

o   Participating in strategic alliances can boost a firm’s rate of product innovation and foreign sales.

o   Types:

1.      Technological alliances: Feature cooperation in R&D, engineering, and manufacturing.

2.      Marketing alliances: Typically match a company with excess distribution capacity with a company that has a product to sell.

·         Joint ventures

o   an entity created when two or more firms pool a portion of their resources to create a separate, jointly owned organization.

o   typically consists of the firm trying to reach a foreign market and one or more local partners.

o   Types:

1.      Scale joint venture: Partners collaborate at a single point in the value chain to gain economies of scale in production or distribution.

2.      Link joint venture: Positions of the partners are not symmetrical, and the partners help each other access adjacent links in the value chain.

·         Advantages:

o   Gain access to a specific resource.

o    Economies of scale.

o    Risk and cost sharing.

o    Gain access to a foreign market.

o    Learning.

o    Speed to market.

o    Neutralizing competitors.

o    Blocking competitors.

·         Disadvantages:

o   Loss of proprietary information.

o    Management complexities.

o    Financial and organizational risks.

o    Risk becoming depending on a partner.

o    Partial loss of decision autonomy.

o    Partners’ cultures may clash.

o    Loss of organizational flexibility.