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Evaluating how to grow a business

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Businesses can achieve growth organically; through acquiring or merging with other businesses; through expanding into other areas or countries; or (if a less permanent solution is preferred) through engaging in an alliance with one or more other businesses.

Acquisitive / Equity-Based Growth

Growth achieved through acquiring, merging with or working with other companies. This can involve sharing profits and risk. Below are some of the advantages and disadvantages of acquisitive/equity-based growth.

Pros:

  • Rapid Expansion: can facilitate rapid expansion through providing immediate access to, for instance, distribution networks, customers, employees, or retail outlets that are under the control of another firm.
  • Additional Experience: one firm can benefit from the experience that another firm may have accumulated in new markets. This can help it to learn about new markets quickly, reducing the costs associated with market research and increasing its chances of commercial success.

Cons:

  • Costs: it can be very costly to purchase other firms, as payment of a premium and extensive fees to legal/financial advisors may be required.
  • Time: it can be very time consuming to purchase other firms, as ample negotiation and shareholder consent may be required.
  • Complexity: effective integration can be difficult to achieve if the organisations involved are large and complex.

Organic Growth

Growth facilitated by an increase in demand achieved, for instance, through effective marketing and branding, expanding distribution (perhaps through exporting), diversifying the product range, licensing or franchising. Below are some of the advantages and disadvantages of growing a business organically.

Pros:

  • Reduced Risk: there is generally less risk in the sense that growth depends more on a natural increase in demand, rather than estimates and projections of the potential returns that an acquisition could generate.
  • Easier Integration: easier for a firm to retain its culture, protect its brand and maintain effective communication.

Cons:

  • Slow Expansion: growth may be slower than growth achieved through acquiring other organisations.
  • Costs: it can be expensive to build brands from scratch in new jurisdictions, as this can require extensive market research and large-scale promotional campaigns.
  • Increased Risk: Foreign Direct Investment (FDI), for instance opening a new store abroad, is risky as it can be difficult to break into new markets if more established competitors exist. In contrast, exporting or franchising can be less risky alternatives, as these do not require direct investment (such as purchasing a factory or an office building abroad)

Exporting: when firms sell products from their home country to other countries. It can enable firms to expand their operations without committing to direct investment in another country, thus reducing risk and costs. However, distribution (e.g. transportation) costs, currency value fluctuations and potentially high taxes may hinder effective cost control.

Franchising: when firms sell the right for others to set up identical firms under the same name (using the same brand and selling the same products) in exchange for a lump sum payment and/or royalties. This can enable rapid expansion that boosts a franchisor’s brand exposure and customer base. A franchisor can usually exert some control over a franchisee to ensure that the franchisee does not act in a manner that damages the brand. Starbucks and Burger King are good examples of franchises.

Licensing: when one firm permits another firm to use an element of its business, for instance the right to manufacture its products, incorporate its technology into a product or use its intellectual property (IP) rights, usually in exchange for a royalty. If a firm lacks the capabilities to commercialise a product but has developed the technology, licensing to a firm that can commercialise it could provide a source of revenue. However, if the technology is embedded into a product, the licensor may generate little brand recognition or customer loyalty. There is also a risk that the licensee will expropriate the technology and emerge as a competitor.

. . .

By Jake Schogger - City Career Series