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In today’s competitive business landscape, companies often seek ways to grow their operations and increase their market presence. Business expansion and integration strategies play a crucial role in achieving these goals. This section explores the various approaches companies can take to expand their business, including external growth strategies and different types of business integration.
Reasons for business growth
Businesses strive for growth for several reasons:
- Increased profits: Selling more products at lower costs through economies of scale (reduced cost per unit as production increases) leads to higher profits.
- Reduce costs. Increasing output leads to higher economies of scale, allowing the cost per unit to decrease.
- Reduce risk. Relying on old products has the potential to fail because the business environment changes (consumer tastes and competitors’ competitiveness changes), forcing companies to introduce new products.
- Dominate the market. Companies want to be market leaders because this gives them the power to set market prices and higher bargaining power with stakeholders.
- Diversify business. Companies reduce their risk exposure in one market by expanding into other unrelated markets, enabling them to benefit from diversification.
- Security and survival. Large companies are more resilient than small businesses when facing more established competitors, as they have more resources to compete with.
Business growth strategies
There are two main approaches to business growth:
- Internal growth (organic growth): This type of expansion relies on a company’s own resources and competencies. Examples include launching new products, increasing production, entering new markets, and boosting advertising efforts.
- External growth (inorganic growth) involves combining resources with other companies to achieve faster growth. This can be through acquisitions, mergers, joint ventures, franchising, or licensing.
Internal growth
Internal growth, also known as organic growth, relies on internal resources and competencies. For example, a company opens a new factory to expand production. Other alternatives include:
- Launching a new product
- Increasing production
- Finding new markets
- Opening new distribution channels
- Increasing advertising and promotion
Internal growth has less risk than external growth. However, this strategy tends to be slow for most businesses.
Internal growth offers several advantages, such as:
- Less risky than taking over another company
- Allows businesses to grow at a more reasonable rate
- Requires relatively smaller resources than the acquisition
- Can be financed through internal funds such as retained earnings
- Leverage core competencies and internal strengths to grow
- Have more control because outsiders are not involved
- Increase employee engagement to support growth
- Encouraging staff to think broader to bring new ideas
However, internal growth also comes with some drawbacks, including:
- Relatively slow growth
- Disliked by shareholders as they may prefer faster growth
- More difficult to achieve if the business is already a market leader
- Limited growth if the market is mature
- Depends on the market size
- Intensifies competition than if acquiring or merging with a competitor
Launching a new product
For example, a company introduces a new product to complement its existing product and targets the same market segment. It may bundle with a current product and offer lower prices to attract more sales.
In addition, new products may target different market segments. In this case, the company serves different consumers. For example, Unilever introduced beauty and personal care products to diversify revenue from its previous focus on food and beverage products.
Increasing production
Expanding production capacity allows companies to meet higher demand and achieve economies of scale. For example, a company may hire new employees to push operations closer to full capacity. Thus, in addition to increasing output, costs also decrease because fixed costs, such as machines, are spread over more output.
When operations have reached maximum capacity, the company may purchase new machinery and equipment to increase production. Or it invests by opening a new production facility.
Finding new markets
The company has two alternatives. First, it offers existing products to new markets. For example, it sells existing products to foreign or domestic markets but in different geographic locations.
Second, the company develops new products and sells them to new markets. This alternative is riskier than the first.
In summary, this strategy can involve introducing existing products to new geographic areas or developing new products for new markets.
Opening new distribution channels
Companies can expand their reach by adding retail outlets. Or they expand their network by partnering more cooperation with wholesalers and retailers.
Another way is to enter the online channel. For example, the company may launch a new website to serve customers or rely on existing e-commerce.
Increasing advertising and promotion
Companies strategically leverage advertising spending to achieve multiple goals. Of course, attracting new customers is a primary objective, and effective advertising can raise brand awareness, generate interest in new products, and ultimately drive sales.
Advertising also plays a crucial role in customer retention. Targeted campaigns can remind existing customers about the value proposition of the brand, incentivize repeat purchases, and foster brand loyalty.
Increased advertising spending may also be directed at stealing customers from competitors by highlighting products. Companies use advertising more aggressively to target competitors’ customers. Here, comparative messaging comes into play. By highlighting their product’s unique features, superior quality, or competitive pricing compared to the competition, they can entice customers to switch brands.
External growth
External growth focuses on using external and internal resources and capabilities to expand business. This can be much faster than relying solely on internal development and may involve the following:
- Merger
- Acquisition
- Joint venture
- Strategic alliance
- Franchising
- Licensing
Although riskier, external growth is a faster way to scale operations than internal growth. In addition, external growth offers other advantages, such as:
- Reducing competition by taking over or merging with competitors
- Preferred by shareholders because it provides fast growth
- Integrate external resources and competencies to complement each other
- Not adding new supply to the market (as in acquisitions and mergers); therefore, market profitability is unchanged
However, external growth also comes with drawbacks, including:
- Riskier because management lacks the experience to deal with other businesses.
- Expensive – as in acquisitions – than building a new plant or increasing promotions
- Conflict because it involves two organizations with different corporate cultures
- Gain market share immediately by combining customers (acquisitions and mergers)
- Spreading risk, such as through joint ventures and strategic alliances
- Regulatory issues if an acquisition or merger leads to an increase in market power
Merger
A merger occurs when two companies are combined into a single new entity. As a result, there is only one surviving entity, which may be a new entity or one of two merged companies.
Reasons for the merger:
- Higher profits due to combining two companies
- Synergizing core competencies and resources
- Strengthening market position by combining two market shares
- Reduced competition because only one entity survives
- Higher economies of scale by combining two operations into one
Mergers can be a powerful tool for growth, offering several advantages:
- Increased market share and bargaining power: Merging combines the customer bases and resources of two companies, leading to a larger market presence and stronger negotiating power with suppliers.
- Economies of scale: Merging operations can lead to cost savings through efficiencies and bulk purchasing.
- Synergy: Combining the strengths and resources of two companies can create new opportunities and unlock hidden value.
However, mergers also come with challenges:
- Integration challenges: Merging two different corporate cultures and management styles can be difficult and lead to conflict.
- Redundancies and downsizing: Merged companies may have overlapping functions, necessitating layoffs and potentially impacting employee morale.
- Regulatory scrutiny: Large mergers can raise concerns about reduced competition and may face regulatory hurdles.
Acquisition
An acquisition occurs when a company buys a controlling stake in another company. Unlike a merger, after this corporate action, the target company becomes a subsidiary and continues to operate independently.
There are two types of acquisitions, namely:
- Friendly acquisition
- Unfriendly acquisition
Under the friendly acquisition, the target company’s management approves the proposal and possibly, helps implement it. Thus, the acquisition was carried out without difficulty.
In contrast, under the unfriendly acquisition, the target company’s management opposed it. They develop anti-takeover strategies to thwart this corporate action, including through:
- Pac-Man defense: The target company attempts to acquire the acquiring company, essentially turning the tables.
- Macaroni defense: The target company makes itself less attractive by issuing large amounts of debt, making it a less desirable acquisition target.
- Poison pills: The target company issues securities that become more valuable if someone acquires a large stake, potentially diluting the acquirer’s ownership.
An unfriendly acquisition is also known as a hostile acquisition or hostile takeover. In addition, the term takeover is often identified with this term.
Acquisition offers several advantages, including:
- Faster growth: Acquisitions offer a quicker way to expand than internal development, especially when targeting complementary businesses.
- Increased market share & power: Acquiring competitors directly boosts market share and strengthens bargaining power with suppliers.
- Reduced integration challenges: Unlike mergers, acquisitions allow acquired companies to operate somewhat independently, minimizing cultural clashes and streamlining integration.
- Overcoming entry barriers: Acquisitions can help bypass the time and resources needed to build brand loyalty or distribution networks from scratch.
However, acquisitions also come with downsides:
- High costs: Acquisitions are often expensive, with the buyer potentially paying a premium over the target’s fair market value.
- Potential for culture clash: Even with a friendly acquisition, integrating different corporate cultures can be difficult and lead to employee morale issues.
- Integration challenges: Merging operations, even partially, can lead to redundancies and require workforce reductions.
- Synergy risks: Poor target selection or inexperience can lead to a failure to achieve the expected synergies and value creation.
Joint venture
A joint venture is an agreement between two or more companies to collaborate on a particular project or business for the common good. It is a formal strategic alliance in which the companies involved establish a new, separate entity.
Joint ventures have several advantages, including:
- Combine resources and expertise: Joint ventures offer access to a wider pool of resources, knowledge, and technology than each company could access alone.
- Share risks and profits: Partners share both the financial risks and potential rewards of the venture.
However, joint ventures also present challenges:
- Management complexity: Balancing the interests and goals of multiple partners can be complex and lead to disagreements.
- Communication challenges: Effective communication and collaboration are crucial for success, but cultural and language differences can create hurdles.
- Unequal commitment: Partners may not contribute equally in terms of resources or effort, leading to frustration and potential failure.
Strategic alliance
A strategic alliance is a cooperation between two or more parties without establishing a new separate entity. Each party shares resources and expertise to achieve common goals. Different from joint ventures, cooperation in strategic alliances is less permanent. In addition, partners usually have low involvement.
Strategic alliances have advantages, including:
- Lower investment: Strategic alliances require a lower initial investment compared to setting up a new venture.
- Shorter-term focus: These collaborations are often less permanent and may be focused on achieving a specific objective within a defined timeframe.
However, strategic alliances also have limitations:
- Shorter life cycle: The temporary nature of these alliances can limit their long-term impact.
- Communication and cultural issues: Similar to joint ventures, communication and cultural differences can hinder collaboration.
- Risk of partner mistakes: A partner’s missteps can damage the reputation and goodwill of all involved companies.
Franchising
Franchising offers rapid growth without having to get involved in running day-to-day activities. Here’s how it works:
- A franchisor (established company) grants rights to operate under its brand and business model to a franchisee (individual or company).
The franchisee pays fees and royalties in exchange for the franchisor’s:
- Established brand recognition
- Proven business model and operational expertise
- Ongoing support and training
Growing through franchising offers several advantages, such as:
- Rapid growth: Franchising allows for quick expansion into new markets without the need for extensive investment in infrastructure or personnel.
- Reduced risk: Franchisees benefit from the franchisor’s established brand and proven business model, reducing the inherent risks of starting a new business.
- Shared knowledge and resources: Franchisees gain access to the franchisor’s expertise in marketing, operations, and supply chain management.
However, franchising also comes with risks, including:
- Loss of control: Franchisees must adhere to strict guidelines and operating procedures set by the franchisor, limiting their autonomy.
- Inconsistent quality: The success of the franchise system relies heavily on the franchisees’ commitment to maintaining quality standards. Poor management by a franchisee can damage the overall brand reputation.
- Franchisee dependence: The franchisor’s success is directly tied to the performance of its franchisees.
Licensing
Licensing involves a company (licensor) granting another party (licensee) the right to use a technology, manufacturing process, or patented design in a particular market or geographic area. The licensee then uses the technology to make money, and the company receives fees and royalties as compensation.
Licensing offers benefits for companies, such as:
- Revenue generation: Licensing creates an additional revenue stream without requiring the licensor to manufacture or sell the product directly.
- Market expansion: Licensing can be a cost-effective way to enter new markets by leveraging the licensee’s existing distribution network.
- Reduced costs: The licensee handles production, marketing, and distribution, minimizing the licensor’s involvement and associated costs.
However, growing through licensing also carries risks, such as:
- Loss of control: The licensor has limited control over the quality of products or services produced under the license, which can risk the brand’s reputation.
- Competition risk: In some cases, the licensee may become a competitor if they develop their own version of the licensed product or service.
- Dependence on the licensee: The licensor’s success depends on the licensee’s ability to market and sell the licensed product effectively.
Business Integration
Now that we’ve explored various external growth methods, let’s delve into business integration strategies. Business integration is a strategy or action by a company to unite or combine various businesses to be under control. For example, a company takes over a controlling stake in its supplier and makes it a subsidiary.
Integration can be through acquisitions or mergers. And the goal is to maximize synergy. Here are the three main types of integration:
- Horizontal integration
- Vertical integration
- Conglomerate integration
Horizontal integration
Horizontal integration involves combining one business with another at the same stage in its current supply chain. For example, a bank merges with another bank to expand its customer base and branch network. Or a fast-food restaurant chain acquiring a competitor to increase market share.
Horizontal integration has several advantages, including:
- Increased market share and bargaining power: Combining businesses strengthens the overall market presence and allows for better negotiation with suppliers.
- Economies of scale: Merging operations can lead to cost savings through bulk purchasing and streamlining processes.
- Reduced competition: Horizontal integration eliminates a competitor, potentially leading to higher profits.
However, horizontal integration also has disadvantages, such as:
- Antitrust concerns: Regulatory bodies may scrutinize large mergers to prevent monopolies and ensure fair competition.
- Cultural integration challenges: Merging different corporate cultures can be difficult and lead to employee morale issues.
- Redundancies and downsizing: Merged companies may have overlapping functions, necessitating layoffs.
Vertical integration
Vertical integration involves two businesses in the same supply chain within the same industry. There are two main types:
- Backward integration: A company acquires or merges with suppliers to gain more control over raw materials or production processes.
- Forward integration: A company acquires or merges with distributors or retailers to gain control over distribution channels and customer relationships.
Advantages of vertical integration:
- Increased control: Vertical integration provides greater control over the supply chain, potentially leading to cost savings and quality improvements.
- Improved efficiency: Streamlining operations across different stages of the supply chain can enhance overall efficiency.
- Barriers to entry: Vertical integration can create barriers for new competitors by making it more difficult to enter the market.
Disadvantages of vertical integration:
- Increased investment: Acquiring or merging with other businesses can be expensive and require significant capital investment.
- Reduced flexibility: Companies become less adaptable to changes in the market when they are heavily vertically integrated.
- Loss of focus: Managing businesses at different stages of the supply chain can be complex and divert focus from core competencies.
Conglomerate integration
Under conglomerate integration, companies combine unrelated businesses under one control. In other words, the company enters another business outside its current supply chain.
Conglomerate integration aims to diversify and reduce concentration risk. Thus, the company can compensate for losses in one business from profits in other businesses.
Besides conglomerate integration, there is also lateral integration. It involves integrating several companies where they sell related goods or services but do not compete directly with each other. For example, a cinema company acquires a restaurant. After the acquisition, the company operated restaurants in its cinema network.
Another example is a hairdresser’s business acquiring a beauty therapist’s business. The two operate in different supply chains and are not in competition with each other but are linked.
Growing through conglomerate integration offers several advantages, such as:
- Diversification: Conglomerate integration helps spread risk across different industries, potentially mitigating the impact of economic downturns in any single sector.
- Access to new resources: Merging with companies in different industries can provide access to new resources, markets, and expertise.
However, conglomerate integration also has drawbacks, such as:
- Management complexity: Managing diverse businesses with different operational models can be challenging.
- Limited synergies: It can be difficult to achieve significant synergies or cost savings when combining unrelated businesses.
- Loss of focus: Diversifying too broadly can lead to a loss of focus on core competencies and potentially hinder overall performance.