Shahriar I.

Halim
Chapter 11: Methods of Development

ICAB:Business Strategy Course Sunday, January 16, 2022

1
Growth and Expansion
External

Sunday, January 16, 2022

Internal
Development Development

The mechanisms and rate of Joint Venture

growth of firms experiencing Internal Merger
organic growth was extensively Domestic
studied by Edith Penrose in her Home Development
Acquisition
Alliance

ICAB:Business Strategy Course

1958 book The Theory of the Franchise/License
Growth of the Firm.

Exporting
An early reference to 'Organic Joint Venture
Growth' appeared in Inazo Overseas Office
Nitobe's book The Soul of Abroad Overseas
Merger
Acquisition
Japan, written in 1899. manufacturing
Alliance
MNC/Global Ops
Franchise/License

2
Growth and Expansion: Organic Growth

Sunday, January 16, 2022

• Best understanding of Market and Product
• Genuine Technological Innovation
• No suitable target for acquisition
• Easy planning and financing

Benefits • Same management and culture

• No hidden loss

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• Career development
• Cheaper way
• Less risky

• Intensify competition
• Slow process not suitable in fastest growing market

Drawback • Less access to new knowledge

• Lack of economies of scale/experience effect
• Prohibitive barrier to entry in new market 3
International Expansion

Sunday, January 16, 2022

Reason for expansion Reason for supporting Reason for avoiding
Chance High profit margin Uncontrollable factors to profit

Life cycle Sales volume increase Product adaptation

Seasonal variation avoidance Extension of PLC and impact

ICAB:Business Strategy Course

Competition
Balancing supply and demand Opportunity cost
Reduce dependency
Spread risk Anti dumping duty
Economies of scale
Sale of obsolete product
Variable quality
Enhance global image
Finance

Familial

Aid agencies 4
International Expansion: Management issues

Sunday, January 16, 2022

• Financial return
Strategic •
•
Fit with mission and vision
Resource to opportunity
issues • Risk profile impact

ICAB:Business Strategy Course

• Method of entry

• Understand customer needs and

Tactical preference
• How to conduct business
Issues • Foreign regulation and hidden cost
• Management skill and expertise
5
Merger and Acquisition (M&A)

Sunday, January 16, 2022

• New product range
• Market presence
Marketing Advantage • Rationalize distribution and advertising
• Eliminate competition

• Economies of scale
• Technology and skills
Production Advantage • Greater production capacity

ICAB:Business Strategy Course

• Safeguard future supplies
• Bulk purchase
• Management team
• Cash resource
Finance and management • Gain assets
• Tax advantage

Risk Spreading • Diversification

Retain Independence • Too big to buy

Overcome barriers to entry • License and patent facility 6

Outplay rivals • Stop rival getting the target

Porter’s attractiveness test

Sunday, January 16, 2022

• If the cost of entry is so high that it
prejudices the potential return on
Cost of Entry investment, profitability is
eroded before the game has started.

ICAB:Business Strategy Course

• How will the acquisition provide
Better off advantage to either the acquirer or the
test acquired? One must offer significant
advantage to the other.

7
Value of acquisition

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Price Earning Ratio

Present share price of Target

ICAB:Business Strategy Course

Accounting Rate of Return

Value of Net Assets

Dividend Yield

Discounted Cashflow 8
Joint Venture (JV)

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• Large coverage
• Less govt intervention
• Close control
Major advantages • Local knowledge
of JV • Learning exercise
• Technology and research

ICAB:Business Strategy Course

• Alternative approach
• Access to core competence

• Conflict of interest
• Problem of protecting intellectual properties
Major • Partner may seek to leave JV
disadvantages of JV • Lack of management interest
• Exit route unclear
• Contractual right enforcement 9
Alliances

Sunday, January 16, 2022

• Share development cost
Feature • When take over prohibited
• Complementary market

ICAB:Business Strategy Course

• Unable to created core competence
Limitations • Strategic priority

10
Franchising

Sunday, January 16, 2022

• Grant a license to use name, goodwill and system
• Pay for right and subsequent service
• Responsible for running day to day ops
Mechanism • Capital supplied by both parties
• Franchiser provide support service

ICAB:Business Strategy Course

• Rapid expansion
• Local knowledge sharing
Advantage • Low capital low risk
• Quick Economies of Scale achievement

• Dependency on franchiser
• Clash between need and strategy
Disadvantages • Lack of mutual action 11
• Break away
Licensing

Sunday, January 16, 2022

ICAB:Business Strategy Course
• To use brands and recipe
• Patent or technology
Mechanism • Particular asset

12
Capital to finance Growth

Sunday, January 16, 2022

Growth Model

Small Growth to Mature

Start up
business cooperation cooperation

ICAB:Business Strategy Course

Source of Finance
Retained Earnings

Capital Market

Bank Borrowings

Government Source

Venture Capital
13
International Source