Growth of Firms

External Growth
Kidzania

 Opened in 1999 in The

Santa Fe Park
 Next in Monterrey in
2006
 Followed by franchise
in Tokyo
Why Businesses Grow?

 Economies of scale

 Greater market share and market power

 Survival

 Spread Risk
Methods of Growth
 Internal/Organic Growth – Business grows using
its own capabilities and resources to increase
scale of operations and sales revenue. Financed
through retained earnings, sale of shares, loans.
 External/Inorganic Growth – Occurs when the
business grows by collaborating with, buying up
or merging with another firm.
Internal Growth
 Price Change
 Promotion
 Product – New and improved
 Distribution Network
 Credit Preferences – “Buy now, Pay later”
 Increasing Investment – New production

facilities, location
 Training and Development
 Value for Money
 After Sales Service, Environment, Brand Image
Portakabin
Portakabin

http://www.portakabin.co.uk/
External Growth
 Mergers – Two firms agree to form a new company.
 Takeover – When a company buys a controlling interest
(enough shares to hold a majority stake) in another firm.

 Marriott International closed $13 billion acquisition of 

Starwood Hotels & Resorts Worldwide, bringing together

its Marriott, Courtyard and Ritz Carlton brands with

Starwood's Sheraton, Westin, W and St. Regis properties.
(Horizontal Integration)

http://www.cnbc.com/2016/09/23/marriott-buys-starwood-becoming-worlds-largest-hotel-chain.html
Types of Integration
 Horizontal – Between firms in the same industry.
 Vertical – Backward – M&A at earlier production stage.
E.g. Amazon becomes a publisher, Reliance Industries
with Infotel Broadband, Starbucks buys coffee farms in
China.
 Vertical – Forward - M&A at later production stage.
Furniture manufacturer acquires a showroom.
 Lateral – Between business of similar operations but not
competitors. E.g. Mars’ purchase of Wrigley.
 Conglomerate – M&A of businesses in different markets.
E. g. Merger of L&T and Voltas
Considerations in M&A
 Planning: All stakeholders must know of the
rationale of the decision.
 Cultural Conflict: Especially between senior
management of the concerned businesses.
 Regulatory Issues: Government may intervene to
prevent one business from having too much market
power. E.g. AT&T and T-Mobile in the interest of
consumer.
Advantages & Disadvantages
Advantages Disadvantages

Market Share Redundancies

Economies of Scale Conflicts & Cultural Clashes

Synergy Loss of Control

Survival Diseconomies of Scale

Diversification Regulatory Problems

Joint Ventures - Two or more businesses agree to split costs, risks, control and rewards of a business
project.

 Tata Global Beverages Limited and Starbucks Coffee Company . The

50/50 joint venture, named TATA Starbucks Limited, will own and
operate Starbucks Coffee “A Tata Alliance.”

Advantages Disadvantages
Synergy Dependence on Counterparts
Spread Costs & Risks Dilution of Brands
Enter Foreign Markets, Access to Operational Problems
Local Knowledge
Cheaper Method Cultural Differences

Competitive Advantage

High Success Rate

https://news.starbucks.com/news/tata-global-beverages-and-starbucks-form-joint-venture-to-open-
starbucks-ca
Strategic Alliance – Two or more businesses
cooperate in a venture but maintain their autonomy.

 E.g. Starbucks with United Airlines, Eli Lilly with BioMS Medical for

new treatments.

 Steps:

 - Feasibility Study

 - Potential Assessment of Parties

 - Contract Negotiation

 - Implementation
Franchising- Business buys license to trade using
another firm’s name, logo, brand and trade mark.

http://www.franchisedirect.com/top100globalfranchises/rankings/
Advantages & Disadvantages - Franchisor

Advantages Disadvantages

Rapid Growth, Economical Risk to reputation and brand name

Presence in Domestic & Poor control over franchise

International Markets operations

No stress of Operational Costs Slower when compared to M&A

Royalty

Higher success due to motivated

franchisees.
Advantages & Disadvantages - Franchisee
Advantages Disadvantages

Low Risk Limit on entrepreneurial initiative

Lower start up cost due to lower Expensive due to licence fee,

R&D expense royalty

Franchisor gives training, financial % of revenue paid to franchisor

advice

Free advertising benefits

Better placed to serve local needs

Reflection and Recap
 Headlines: A Routine for Capturing Essence

If you were to write a headline for this topic or

issue right now that captured the most
important aspect that should be remembered,
what would that headline be?

http://www.visiblethinkingpz.org/VisibleThinking_html_files/03_ThinkingRoutines/03d_UnderstandingRoutines/Headlines/
Headlines_Routine.html
Research Assignment, Link to TOK
TATA Tea and Tetley Group (David & Goliath)
 What is the impact of language on Sense
Perception in Group three Subjects?
 Does the link to mythology increase the
significance of an event?
 On what basis can we evaluate the relationship
between language and sense perception in
Business Management?
Evaluation – 7 C Framework
 Cost: whether a firm decides to grow internally or externally, the financing of the
new strategy will have to be considered. Will the firm have to borrow or can it use
retained earnings?
 Control: Clearly, the larger a firm grows the more difficult it will be to manage.
Will the structure of the organization have to change? Will spans of control have to
rise?
 Conflict: how will change be managed? Will there be any resistance .rom internal
and external stakeholders to the new strategy? If two firms combine as in a
merger and acquisition, will there need to be redundancies to avoid duplication of
roles?
 Compromise: will the vision of the company be compromised by growth? Second,
if the firm needs to attract more capital to finance this strategy, it may have to
give up elements of ownership, perhaps with resulting impacts on objectives and
vision.
 Communication: as the firm grows, can we ensure that communication channels
will be effective to ensure that everyone is aware of the process of change?
 Culture clash: can a firm assume that, if it grows externally by either. Evidence
indicates that unless the culture of the new organization is appropriate, then
strategic success is unlikely
 Confusion: in the case of joint ventures and mergers, clear lines of accountability
and responsibility need to be drawn so that subordinates know to whom they are
to report. This is especially true when the expansion involves moving into
international markets and firms operate over a number of time zones.