Chapter 15:
Growth strategies
and options
AIM AND SCOPE OF CHAPTER
Aim
This chapter focuses on the various growth strategies and the methods for putting them into effect.
Scope
• What is strategy?
• Growth strategies and methods.
• External growth methods.
• Mergers and acquisitions.
• Joint ventures.
• Franchising.
• Alliances.
• Exclusive agreements.
• Licensing.
• Dealerships.
• Broad-based black economic empowerment (B-BBEE).
• Financing growth.
LEARNING OUTCOMES
1. Understand that a growth strategy is necessary for a business
venture.
2. Explain internal and external growth strategies.
3. Distinguish between growth strategies and the methods for
exploiting them.
4. Discuss the various methods of internal or organic growth.
5. Explain the various integration strategies.
6. Discuss the various methods of external growth.
7. Explain how to obtain growth financing.
8. Discuss issues relating to raising growth capital.
WHAT IS STRATEGY
• Definition – Large-scale, future-oriented plans for interacting
with the competitive environment to achieve company objectives.
• A strategy is normally the result of a strategic planning session.
• Strategic planning involves making decisions about the firm’s
long-term goals and strategies.
WHAT IS STRATEGY (cont.)
• This is a process that normally involves the following steps:
Develop the firm’s vision (“dream”) and mission (i.e. the
reason for its existence).
Analyse the business environment (macro, market and
micro)
Set long-term objectives
Develop strategies (corporate, business and functional)
Develop action plans for the attainment of each strategy,
with a resource and time allocation for each
Implement and control the most appropriate strategies
selected
GROWTH STRATEGIES AND
METHODS
• Growth or expansion of the business means expanding the
amount of trade it undertakes.
• This means the resources, systems and structures of the
business venture will need expansion.
• The basic growth strategies are aimed at either internal or
external growth, or a combination of these.
GROWTH STRATEGIES AND METHODS (cont.)
Internal growth
• Internal growth is also known as organic, generic, internal base
or core growth.
• With organic growth, the entrepreneur brings new resources
together in an innovative combination to create new value.
• This means growing the business through increasing market
share, developing new products and/or entering new markets.
GROWTH STRATEGIES AND METHODS (cont.)
Internal growth (cont.)
• The internal expansion and growth strategies can take one or
more of the following forms:
Increase of market share.
Expansion and growth of turnover, volume, income or profit.
Achieving economies of scale and command of technology
and distribution.
Commanding the means of gaining and maintaining
customer and consumer confidence.
Expansion into new market areas and niches. Related to this
is often the extension and expansion of the range of offerings
(real or differentiated).
Expansion into new locations, both local and international.
GROWTH STRATEGIES AND METHODS (cont.)
Internal growth (cont.)
• For internal or organic growth, a distinctive strategic position must
first be identified.
• The venture has to decide which parts of the market it wants to
serve and then establish a distinctive basis for achieving this.
• The bases are:
Cost leadership. The gaining of advantage through being the most
efficient operator and competing in the market on the price
advantage that is available as the result of this.
Focus or specialisation. The offering of a distinctive and often
narrow range of products in a particular niche.
Differentiation. The basing of business success on marketing,
advertising and image-building activities, the purpose of which is
to set the product apart from others in the sector, and
maintaining the ability to sell at a premium price.
GROWTH STRATEGIES AND METHODS (cont.)
External growth
• The external growth strategies deal with factors outside the
micro- and market business environment.
• External growth is beyond the boundaries of the existing
business.
• External growth strategies must position the firm in relation to
the industry value chain.
• The firm’s position within the value chain and the various
options it has to expand within the value chain is important.
GROWTH STRATEGIES AND METHODS (cont.)
External growth (cont.)
Figure 15.1: External growth strategies in the industry value chain
Source: Adapted from Wickham (2006)
GROWTH STRATEGIES AND METHODS (cont.)
External growth (cont.)
Vertical integration
This happens when the venture acquires a firm that is positioned
either above or below it in the value addition chain, i.e. it
acquires a business that is either a customer or a supplier.
• The acquisition of customers is referred to as “forward
integration” and that of a supplier as “backward integration”.
GROWTH STRATEGIES AND METHODS (cont.)
External growth (cont.)
• Backward integration:
To control the supply of offerings.
May also serve the purpose of limiting the volume or
quantity of an offering to competitors.
Can also occur when the firm purchases the makers of its
own production or information technology, or the means of
transporting supplies.
Example: tour operator buys a hotel
GROWTH STRATEGIES AND METHODS (cont.)
External growth (cont.)
• Forward vertical integration:
Where the firm buys up its customers.
This can be extended to means of distribution, transport
fleets, retail outlets and any agencies that provide aftersales
such as repair activities.
Example: Tour operator buys travel agency
GROWTH STRATEGIES AND METHODS (cont.)
External growth (cont.)
Horizontal integration
This happens when the venture integrates a business that is on
the same level of value addition as itself, i.e. a business that is in
essence a competitor.
• Horizontal integration can take the form of a merger or joint
venture between two or more competitors in the sector or
industry in order to create a dominant or more influential
organisation.
• Often the reason for this integration is to create synergy with
regard to the technology, customer base, location, distribution
and outlets at each of the firms contemplating the merger.
• Examples:
• A ski tour operator merges with a sun/beach holiday tour
operator
• Tour operator in Spain merges with tour operator in Portugal
GROWTH STRATEGIES AND METHODS (cont.)
External growth (cont.)
Lateral integration
• This occurs when the business that is integrated is neither a
supplier, a customer nor a competitor.
• Lateral integration is usually pursued when a business wishes
to diversify into another industry or product in order to
reduce the risk or the seasonality of its existing business.
MERGERS AND ACQUISITIONS
• Acquisition
Refers to the purchase of an existing business or firm or part
thereof such that it is completely absorbed and no longer
exists.
Acquisitions or takeovers are attractive for rapid growth
because the only limitation to the growth rate is the
availability of targets (i.e. firms to acquire) and the funds
with which to buy them.
MERGERS AND ACQUISITIONS (cont.)
• Mergers
Are transactions involving two or more firms in which only
one survives or a new corporate name and firm emerges.
The reasons for mergers range from survival to protection,
and from diversification to growth.
Mergers differ from acquisitions purely in the way in which
the relationship is entered into.
A merger is normally much more collaborative, voluntary
and mutually entered into than an acquisition. In an
acquisition, the firm responsible for the merger dominates
the other firm.
MERGERS AND ACQUISITIONS (cont.)
• Mergers and acquisitions may be contemplated for the purpose
of gaining access to, and control of, the following:
Customer bases and portfolios.
Specialised technology and expertise.
High-profile brand names.
High-value firms.
Prime sites.
Footholds in new markets, sectors, locations and markets.
Control of capacity, output, price and value in the sector.
MERGERS AND ACQUISITIONS (cont.)
Challenges to the success of mergers and acquisitions
• Much can be gained from mergers and acquisitions, but there
are a number of challenges or important matters that need to
be considered in these processes:
Evaluation of the business.
Cultural factors.
Implementation difficulties.
MERGERS AND ACQUISITIONS (cont.)
Challenges to the success of mergers and acquisitions (cont.)
• Evaluation of the business
All aspects of the targeted firm or firms must be examined.
This requires an investigation of the financial statements for
a number of years, as well as all legal aspects.
Broader business aspects also need to be taken into account,
such as management relationships.
It is similar to the investigation required in a business
buyout, except that in this more formal setting, it should be a
due diligence investigation performed by a team consisting
of chartered accountants, marketing specialists and legal
experts.
Due diligence investigations are costly, but cannot be
ignored or neglected.
MERGERS AND ACQUISITIONS (cont.)
Challenges to the success of mergers and acquisitions (cont.)
• Cultural factors
Corporate culture refers to an organisation’s values,
traditions, norms, beliefs and behavioural patterns.
Cultural differences are almost certain to be involved when
firms are combined, and have caused mergers to fail as they
prevented the firms from achieving their potential.
In takeovers, the new owners quite often impose their
culture on the targeted firm.
This dominance often leads to loss of productivity and
motivation.
It is important for the acquiring firm to recognise differences
in corporate culture and to respect them.
MERGERS AND ACQUISITIONS (cont.)
Challenges to the success of mergers and acquisitions (cont.)
• Implementation
Implementation should start when mergers or acquisitions
are contemplated as a strategy or method of growth.
It should not start only when the agreement is signed.
The key is to formulate implementation and integration
plans to accomplish effectively the goals of the takeover
process
JOINT VENTURES
• Joint ventures, or strategic alliances, are separate entities
involving two or more active participants as partners.
• For example, Boeing, Mitsubishi, Fuji and Kawasaki entered into
a joint venture for the production of small aircraft in order to
share technology and cut costs
• The participants in a joint venture continue as separate firms,
and usually only a fraction of their activities is involved.
JOINT VENTURES (cont.)
• The entrepreneur needs to assess this method of growth
carefully to understand the factors that help ensure success, as
well as the problems involved.
• Requirements for successful joint ventures:
Each participant must have something to offer.
Careful pre-planning must be done and key executives must
be assigned to implement the plans.
There must be a written agreement in which matters such as
profit sharing, management, termination or buyout by one
party are set out.
The objectives of the venture must be clear.
Expectations regarding the results of the joint venture must
be reasonable and realistic.
JOINT VENTURES (cont.)
• Joint ventures can be an excellent tool for promoting the
interests of the parties concerned.
• The participating firms get the opportunity to share risks, while
working with other firms reduces the investment costs of
entering potentially risky new markets.
• In addition, joint ventures allow firms to gain knowledge and to
share managerial skills and technology.
• A joint venture also presents an opportunity to combine certain
assets without violating the regulations governing mergers and
acquisitions.
ALLIANCES
• Alliances are less formal than joint ventures and offer flexibility.
• They may involve multiple partners.
• These partner firms pool resources, expertise and ideas so that
they will have a continuing need for one another.
• Alliances have their own distinctive characteristics.
• There might not be a formal written contract and the relative
sizes of participating firms may be highly unequal.
• The initial resource commitment may be quite small.
• Alliances create the ability to initiate and disband projects with
a minimum of paperwork.
LICENSING
• A licence agreement confers on the licensee the right to
manufacture, sell or use something that is the exclusive
property of the licensor.
• The licence agreement normally stipulates an exclusive
territory in which the licensee is allowed to exercise this right.
• The licensee pays the licensor a royalty (commission) on sales
in exchange for the licence.
• The licensor usually has little or no control over the licensee
beyond the terms of the agreement.
FINANCING GROWTH
• Growth puts a tremendous strain on the resources of the
business at a time when it most needs them.
• Growth requires capital, and often the financial resources that
saw the business through start-up and early growth are not
sufficient to feed the demands of rapid growth.
• Growth capital consists of those funds needed to take the firm
out of the start-up phase and into becoming a significant
contender in the marketplace.
• Raising growth capital is a time-consuming and costly process.
FINANCING GROWTH (cont.)
• Most of the extended growth strategies and methods would not
be available or accessible to small, medium and micro-
enterprises (SMMEs).
• Mergers, acquisitions, joint ventures and franchising will
require capital injection.
• These funds will normally be acquired through the corporate
banking division of commercial banks or even merchant
bankers.
• The most common sources of finance for growth would be the
venture capital market or even private placement or listing of
shares on the JSE.