Growth Strategies

Growth Strategy

• Growth strategies include internal expansion, external expansion, business finance and investment, and alternatives to business growth

Alternative Growth Strategies

• A firm can achieve growth through internal or external expansion

Internal Expansion

• Horizontal expansion involves the same product, but increases market share or diversifies into new varieties
• Vertical integration maintains the same product, but expands to different stages of the production process
• Conglomerate diversification introduces totally different products

Internal Growth Strategy: Financing

• Internal expansion can be financed through borrowing, share issues, ploughing-back profit, and is subject to the takeover constraint
• Means of achieving internal growth include product differentiation, vertical integration, and diversification

Vertical Integration

• Vertical integration includes backward ('upstream') and forward ('downstream') integration
• Firms vertically integrate for economies of scale, reduced uncertainty, monopoly power, and reduced transaction costs
• Tapered vertical integration is another strategy for internal growth
• Vertical integration can lead to managerial costs, higher component costs, and failure to gain full economies of scale
• Diversification advantages include saturation of existing markets and spreading risks

Mergers and Takeovers

• Types of mergers and takeovers are horizontal, vertical, and conglomerate

External Expansion

• Horizontal integration involves merging or acquiring firms that produce the same product at the same stage of production
• Vertical integration involves merging or acquiring firms at different stages of the same process
• Conglomerate diversification is achieved through mergers or acquisitions of firms producing totally unrelated products

External Growth Strategy: Mergers and Takeovers

• Motives for mergers and takeovers: growth, economies of scale, monopoly power, increased market valuation, reduced uncertainty, and other reasons
• Mergers affect consumers
• Growth can occur through strategic alliances

Strategic Alliances

• Horizontal alliances: informal or contractual alliances between firms at a technically similar production stage, potentially leading to a joint venture
• Vertical alliances are informal or contractual alliances between firms at different stages of the same process, potentially leading to a joint venture
• Networks: informal or contractual alliances between firms across sectors, including supply chain development

Types of Strategic Alliances

• Strategic alliances can take the form of joint ventures, consortia, franchising and licensing, subcontracting, and networks

Forming Strategic Alliances

• Strategic alliances are formed to access new markets, share risk, and pool capital

Financing Business Growth

• Internal sources of business finance include ploughed-back profit
• External sources of finance include banks (mainly short- and medium-term), stock market (longer-term), and international sources
• The stock market has a 'short-termism' problem

Stock Exchange Role

• The stock exchange consists of primary and secondary markets
• Advantages of the stock exchange include bringing savers and firms together, regulating firms, facilitating mergers/takeovers, and reducing transaction costs
• Disadvantages include the cost of listing, public scrutiny, and possible short-termism

Stock Market Efficiency

• The efficient market hypothesis suggests share prices reflect firms' current/expected future performance
• Stock market efficiency means the benefit of speculation decreases and perfect efficiency results in share prices following a 'random walk'

EU Definition of SMEs

• SMEs (small and medium enterprises) are defined by:
  • Number of employees
    • Micro: <10 employees
    • Small: 10-49 employees
    • Medium: 50-249 employees
  • Turnover

EU SME Definitions (Detailed)

• To qualify as an SME, criteria 1 and 3 must be met along with either 2a or 2b
  • Micro -Max employees is 9 -maximum annual turnover is €2m -maximum annual balance sheet total is €2m
  • Small -Max employees is 49 -maximum annual turnover is €10m -maximum annual balance sheet total is €10m
  • Medium -Max employees is 249 -maximum annual turnover is €50m -maximum annual balance sheet total is €43m
• The maximum percentage owned by one, or jointly by several enterprise(s) not satisfying the same criteria for all the SME's is 25%

Competitive Advantage of Small Firms

• Competitive advantages of small firms include flexibility, quality service, production efficiency, low overheads, product development, and innovation

Problems Facing Small Businesses

• Small businesses face challenges in selling, marketing, funding R&D, management skills, and less ability to gain economies of scale

The Entrepreneur

• An entrepreneur's role includes attitudes towards entrepreneurship and is tracked by The Global Entrepreneurship Monitor (GEM)