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.

Preparing For and Evaluating the Challenges of Growth

 What do we learn?

a.     How firms properly prepare for growth?

Ø  Growth indicates success to firms.

Ø  3 important things business can do to prepare for growth:

1.      Appreciating the nature of business growth

·         Not all businesses have the potential to be aggressive growth firms.

·         A business can grow too fast.

·         Business success doesn’t always scale.

2.      Staying committed to a core strategy

·         It is important that a business not lose sight of its core strategy as it prepares to grow.

·         Core strategy defines how it competes relative to its rivals.

·         Core strategy determined by its core competencies.

3.      Planning for growth

·         Involves firms to think ahead and anticipate the type and amount of growth it wants to achieve.

·         Writing a business plan greatly assists in preparing growth plans.

b.    6 most common reasons firms pursue growth.

Ø  Firms cannot always choose their pace of growth.

Ø  Pace of growth: the rate at which it is growing on an annual growth.

Ø  6 reasons:

1.      Economics of scale

·         Occur when increasing production lowers the average cost of each unit produced.

·         Occurs for 2 reasons:

o   If a company can get a discount by buying components part in bulk, it can lower its variable costs per unit as its grows larger. (variable costs: the costs a company incurs as it generates sales)

o   Company can spread its fixed costs over a greater number of units by increasing production. (fixed costs: costs that company incures whether it sells something or not)

2.      Economics of scope

·         Occur when the scope/ range of a firm’s operations creates efficiencies.

3.      Market leadership

·         Occurs when a firm holds the number one or the number two position in an industry or niche market in terms of sales volume.

4.      Influence, power, and survivability

·         Larger businesses usually have more influence and power than smaller firms.

5.      Need to accommodate the growth of key customers

·         Sometimes firms are compelling to grow to accommodate the growth of a key customer.

6.      Ability to attract and retain talented employees

·         Growth is a firm’s primary mechanism to generate promotional opportunities for employees.

c.      Importance of being able to manage the stages of growth.

Ø  Introduction stage:

·         Start-up phase where a business determines what its core strengths and capabilities are.

·         The main challenge is to make sure the initial product or service is right.

·         It’s important to document what works and what doesn’t work during this stage.

Ø  Early growth stage:

·         Characterized by increasing sales and heightened complexity.

·         Two important things must happen for a business to be successful in this stage:

o   The founder must start working “on the business” rather “in the business.”

o   Increased formalization must take place, and the business has to start developing policies and procedures.

Ø  Continuous growth stage:

·         The need for structure and formalization increases.

·         Often the business will start developing related products and services.

·         The toughest decisions take place in this stage.

·         One tough decision is whether the owner of the business and the current management team has the experience and the ability to take the business further.

Ø  Maturity stage:

·         Enters when its growth stalls.

·         A firm is typically more intently focused on managing efficiently than developing new products.

·         Well-managed firms often look for partnering opportunities or opportunities for acquisitions or licensing deals to breath new life into the firm.

·         If new growth cannot be achieved through a firm’s existing product mix, the “next generation” of products should be developed.

Ø  Decline stage:

·         It isn’t inevitable for a business to enter the decline stage.

·         A business’s ability to avoid decline hinges on the strength of its leadership and its ability to adapt over time.

d.    The challenges of firm growth.

Ø  2 categories of challenges fo firms growth:

1.      Managerial capacity

·         Firms are collections of productive resources that are organized in an administrative framework.

·         As a firm goes about its routine activities, it recognizes opportunities to grow.

·         firms aren’t always prepared or able to grow, because of limited “managerial capacity."

·         Productive opportunity set: the set of opportunities the firm feels its capable of pursuing.

·         2 important kinds of services in the firm’s administrative framework:

o   Entrepreneurial services: generate new market, product, and service ideas.

o   Managerial services: administer the routine functions of the firm and facilitate the profitable execution of new opportunities.

·         Managerial capacity problem: when a firm’s managerial resources are insufficient to take advantage of its new product and services opportunities.

·         Dual challenges:

o   Adverse selection: the number of employees a firm needs increases. (it becomes increasingly difficult for the firm to find the right employees, place them in appropriate positions, and provide adequate supervision)

o   Moral hazard: a firm grows and adds personnel. (the new hires typically do not have the same ownership incentives as the original founders, so the new hires may not be as motivated as the founders to put in long hours and may even try to avoid hard work)

2.      Day-to-day challenges of growing a firm

·         Involved with growing a firm.

·         4 most common challenges:

1.      Cash flow management: A firm requires an increasing amount of cash as it grows.

2.      Price stability: If growth comes at the expense of a competitor’s market share, a price war could ensue.

3.      Quality control: An increase in firm activity can result in quality control issues if a firm is not able to increase its resources to handle the extra work.

4.      Capital constraints: an ever-present problem for growing firms.