Business Growth

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

Business Growth_v1

Dr. Harald Fien

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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Dr. Harald Fien

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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Dr. Harald Fien

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

Business Growth_v1

Dr. Harald Fien

Business Growth Growth Opportunities

Internal Organic growth External Acquistion Merger

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Dr. Harald Fien

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

Business Growth_v1

Dr. Harald Fien

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

Business Growth_v1

Dr. Harald Fien

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

Business Growth_v1

Dr. Harald Fien

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, a forced acquisition of one company by another known as a take over (or acquisition)

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Dr. Harald Fien

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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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Dr. Harald Fien

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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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Dr. Harald Fien

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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 personal ambition Firms rarely take non-financial factors in to account High failure rate Diseconomies of scale

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Dr. Harald Fien

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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 the previous firms

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Dr. Harald Fien

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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 existing firms 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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Dr. Harald Fien

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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 management underestimated, ignored or mishandled the integration tasks.

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Dr. Harald Fien

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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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Dr. Harald Fien

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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?

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Dr. Harald Fien

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