business growth_v1.pdf

8/14/2019 Business Growth_v1.pdf

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Business Growth


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Business Growth_v1 Dr. Harald Fien 2

Business growth

Business size can be measured in many ways: e.g.

Assets

Sales revenue

Operating profit

Market share

Value added

Number of employees

Growth implies increase in one or more of the above metrics


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Business Growth

Aims of business growth (1)

To increase profit

To achieve market leadership / dominance To enjoy economies of scale and therefore lower unit costs

To control outlets and/or suppliers

To spread risks by diversifying

To reduce the danger of takeover


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Business Growth

Aims of business growth (2)

To increase security

To remain competitive

To ride out fluctuations in the economy

For survival

As a defensive strategy

To increase status To obtain the benefits of synergy

Reasons of personal ambition


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Business Growth

Problems of growth

Cash flow problems

Danger of overtrading

Expanding with insufficient working capital

Diseconomies of scale

Problems associated with large scale

Personnel problems Employee motivation and employee relations problems

Risk of loss of direction and control


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Business Growth

Growth Opportunities

Internal

Organic growth

External

Acquistion

Merger


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Business Growth

Organic growth

The mechanism for organic growth:

Profits are re-invested

This increases capacity

As a result output and sales rise

Increased profit leads to a rise in the capital (balance sheet) value of the

business

Favourable conditions for organic growth

When the market is growing fast

When one firms performs better than others and therefore gains market

share

When new firms enter the market


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Business Growth

Advantages of organic growth

Makes best use of existing resources

Consistent with existing management style

Consistent with existing culture

Leads to economies of scale

Easier to control

Can be planned carefully

Can be financed from retained profits

Involves less risk

Long term, working relationships maintained

Capitalises on existing expertise


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Business Growth

Disadvantages of organic growth

Takes place slowly as the firm builds capacity and grows markets

Firms have to acquire resources

Organic growth is limited by growth in the market

It can result in an over-cautious approach

Handicapped by limitations of existing skills and expertise

May be too slow for the dynamics of the market


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Business Growth

External growth

This is growth by acquisition/take-over or merger

Instead of build up resources internally the firm seeks to acquire

additional resources from other businesses Resources acquired include capacity, a workforce, intangible assets,

technology, and a customer base

It is a much used strategic option

A voluntary joining together of companies is know as a merger, aforced acquisition of one company by another known as a take over(or acquisition)


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Business Growth

When is external growth is the preferred strategy?

An external growth strategy is used when

Existing products are in the later stages of its life cycle

Business lacks knowledge or resources to develop internally

Speed of growth is a high priority

Costs are more favourable than those of organic growth


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Business Growth

Advantages of external growth

Quick access to resources the business needs

Overcomes barriers to entry

Helps spread risks

Wider range of products and greater geographical spread

Provides cost saving opportunities

Reduces competition Economies of scale

Provides benefits of synergy


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Business Growth

Disadvantages of external growth

High cost involved

Problems of valuation

Clash of cultures Upsets customers

Customers might not remain loyal

Involves high risk

Problems of integration Problems of implementing the

changes

Resistance from employees

Problems in achieving the benefits

Incompatibility of management

styles, structures and culture Negative synergy (2+2=3!)

Often driven more by personalambition

Firms rarely take non-financial

factors in to account High failure rate

Diseconomies of scale


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Business Growth

Synergy

Synergy occurs when the combined results produce a better rate of return

than would be achieved by using the same resources independently

The benefits of combining exceed the aggregate. i.e. 2+2=5!

Synergy is an example of the whole is greater than the sum of its parts

Synergy is any unrealised potential open to a group from mixing and

matching resources better

The resulting firm is more efficient and effective than the aggregate of theprevious firms


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Business Growth

Acquisitions usually fail

The results of external growth are often disappointing - in fact external

growth is notoriously difficult to achieve successfully

At least 50% of all mergers and acquisitions fail to add value to the existingfirms

The benefits of synergy are often elusive. Rather than performing better

than the previously independent enterprises it is quite common for the

enlarged company to perform less well than prior to acquisition or merger

Porter found that in a study he undertook 53% of related acquisitions were

soon followed by divestment (selling off). The figure rose to 74% in the case

of unrelated acquisitions


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Business Growth

Reasons for failure of acquisitions

Cultural incompatibility

Lack of communication

Loss of key personnel Price paid for acquisition was too high

Lack of research prior to acquisition

Personnel ambition over-ruled business

Increased bureaucracy The creation of a lumbering giant that is soon outpaced by smaller rivals

Many mergers fail because the new companys managementunderestimated, ignored or mishandled the integration tasks.


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Business Growth

Alternatives to organic and external growth

Consortia - formal agreement between companies to collaborate

Joint venture with another firm

Licensing - allowing other firms to produce the goods

Franchising - allows the franchisee to undertake part of the business

Sub-contracting/outsourcing non-core activities


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Business Growth

Lessons Learned

What are aims of business growth?

Explain economies of scale.

What are typical problems of growth?

Give examples for growth opportunities.

Explain organic growth.

What are advantages/disadvantages of organic growth? Explain external growth.

What are advantages/disadvantages of external growth?

What are synergies?

What are reasons for failure of acquisitions?

What are alternatives to organic and external growth?

business growth_v1.pdf

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