1.6.4 Discuss The Advantages and Disadvantages of (Growth Strategy) and Evaluate It As A Growth Strategy PDF

Methods of External Growth
(AO3)
Discuss the advantages and disadvantages of (growth strategy) and
Evaluate it as a growth strategy
Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah
Barqouni
Assessment Objective (AO3)
Barqouni
External Growth
Strategies:
1. M&A – Mergers & Acquisition

(takeover)
2. Joint Ventures
3. Strategic Alliances
4. Franchising
Peter Simpson, Alex Smith & Paul Hoang - Prepared by:

Danyah Barqouni
External Growth –Merger
& Acquisition (Takeover)
• Merger:
• An agreement by shareholders and
managers of two businesses to
bring both firms together under a
common board of directors with
shareholders in both businesses
owning shares in the newly merged
business.
• Therefore: it’s a friendly deal where two
businesses join together (each business
owns a share of the other business for
mutual benefit)

Danyah Barqouni
Merger Example: Disney and Pixar
Peter Simpson, Alex Smith & Paul Hoang - Prepared by: Danyah Barqouni
External Growth –Merger
& Acquisition(Takeover)
• Takeover:
• When a company buys over 50% of the shares of another
company and becomes the controlling owner – often
referred to as “acquisition”
• An acquisition (also called a takeover) involves one company
buying a controlling interest (majority stake) in another
company. This means the buyer purchases enough shares in
the target company to own more shares than any other
shareholder, leading to a change of ownership.
• Takeovers are almost always hostile in nature.
• Example:
• Michael Kors buys Jimmy Choo
• Amazon bought Whole Foods, the American organic-food
grocer for $13.7 billion.

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As mentioned earlier…
• External growth is often referred

to as integration as it involves
bringing together two or more
firms.
• Therefore, we have different
types of integration:
• Each integration has its:
• Common advantages
• Common disadvantges
• Impact they often have
on stakeholder groups
Figure 1.6.3 Forms of External Growth
Types of Business Integration
1. Horizontal Integration
2. Forward Vertical
Intergration
3. Backward Vertical
Integration
4. Conglomerate Integration
• When a merger or acquisition occurs between two companies operating within the same industry
(i.e. they are rivals), this is called a horizontal integration.
• An example is the purchase of The Body Shop by L’Oreal (the world’s largest cosmetics and beauty
Horizontal firm) back in 2006.
• Another example is the merger of US Airways with American Airlines in 2013, which created the
Integration world’s largest airline. Other examples of horizontal integration include:
• Tata Motors buying Jaguar Land Rover from Ford (2008)
• Volkswagen buying Škoda (1994), Bentley (1998), Lamborghini (1998), Bugatti (1998), and
Porsche (2012)
• Facebook buying Instagram (2012) and WhatsApp (2014).
Horizontal Integration
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• When an acquisition occurs between two companies operating in
different industries, this is called a vertical merger or takeover.
• If the purchaser buys a company closer to the consumer in the chain
Forward Vertical of production, this is known as a forward vertical merger or
takeover
Integration • A typical example is a manufacturer buying a retailer, such as a car
manufacturer buying car showrooms (retailers that sell cars directly
to the general public).
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Backwards Vertical Takeover
• If the purchaser buys a company further away from the consumer in the chain of production, this
is known as a backwards vertical takeover. An example is IKEA buying Romanian, Baltic Forests in
November 2015 in order to control its supply of timber.
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• A fourth category of M&A (merging
and acquisition) exists, when two
businesses in unrelated industries
engage in a merger or takeover. This
type of integration is known as
a conglomerate
M&A (or diversification, under
the Ansoff matrix model).
• For example, Berkshire Hathaway is
one of the world’s largest multinational
conglomerates, with operations in an
array of industries, such as: property
(real estate), insurance, diamonds,
food processing, toys, home furnishing,
newspaper publishing, computing,
clothing, aerospace, and airlines (it is
the largest shareholder in United
Airlines and Delta Air Lines).
Conglomerate Integration
• A conglomerate M&A is the riskiest
method of integration.
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Advantages of M&As:
• It is a relatively quick growth method, especially if

the organization wishes to enter new markets (with
new/existing products in new/existing markets). It is
a faster method of expansion than internal growth
and evolution.
• Growth through M&A enables the newly formed
company to benefit from greater economies of
scale. For example, backward vertical integration
enables the firm to gain from having direct access to
its supplier, thereby cutting average costs of
production (third party suppliers charge higher
prices as they need to earn a greater profit margin).
Advantages of M&As:
• M&As enable the larger organization to

spread its fixed costs and risks, and to share
its resources and expertise. This can improve
the larger company’s chances of success.
• The cost savings and synergies created by a
merger or acquisition enables the
organization to earn greater profits, gain
market power, and increase its market share.
Customers also benefit from the possibility of
lower prices arising from the cost savings and
synergies. This helps to enhance the
company's competitiveness.
Advantages of M&As:
• M&As provide opportunities for businesses to diversify,
which enables them to enter new markets as well as to
spread risks. For example, Coca-Cola's acquisition of
Costa Coffee in 2018 allowed the soft drinks company
to diversify into the mainstream coffee retail market
during a time when there has been growing perception
that its signature soft drinks are unhealthy.
• A takeover can be friendly, rather than hostile, if the
target company wishes to sell its controlling stake in the
business to the buyer. This is usually because the target
company is experiencing liquidity problems.
Disadvantages of M&As:
• M&As are typically very expensive. For a

company to buy out a rival firm is often
unaffordable. Even for businesses that can
afford M&As, the amount of money
involved can be huge. For example, in
2014, Facebook bought WhatsApp for a
staggering $19.3bn.
• There is potential loss of management
control of the company, especially in the
case of a hostile takeover of the business.
M&As often cause redundancies of senior
managers. For instance, there is no need to
have two separate marketing or finance
directors from the integrated companies.
Disadvantages of
M&As:
• M&As are unsettling for many stakeholders.
There is likely to be resistance of change
from the workforce and trade union
members, especially if an acquisition results
in mass-scale job losses due to purchasing
company’s desire to cut costs.
• The newly formed company can be too large
to manage efficiently, i.e. it may experience
diseconomies of scale. This can happen due
to several reasons, such as a lack of effective
cost control, culture clashes, resistance to
change, and a loss of focus on core business
operations (in the case of vertical M&As or a
diversification strategy).

Danyah Barqouni
• There are likely to be challenges faced by employees who may need to adapt to new
working practices, company policies, and management styles.
Disadvantages of • M&As do not always work, especially in the case of organizational culture clashes.
Contrasting and conflicting management styles and organizational structures, for
M&As: example, can cause major issues for creating a newly merged or acquired organization,
especially if the core values of the companies are changed. It is a high-risk growth
strategy, especially if the company pursues a diversification growth strategy.
Disadvantages of
M&As:
• As the firm becomes larger through an M&A, there
could be a deterioration in customers loyalty due to
less of a personalized / individualized service due to
growth of the company.
• Unlike strategic alliances and joint ventures as
methods of external growth, M&As cannot be easily
reversed if the new business venture goes wrong.
Hence, it is a riskier external growth strategy than
strategic alliances and joint ventures.
Joint ventures (AO3)
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Joint Venture
• A joint venture is an external growth

method that involves two or more
organizations agreeing to create a new
business entity, usually for a finite period
of time. The newly created business is
funded by its parent companies.
• Examples of JVs include:
• Sony–Ericsson – formed by Finland’s
Ericsson and Japan’s Sony.
• Hong Kong Disneyland – formed by
the Hong Kong SAR government and
the Walt Disney Company
• Caradigm – formed by Microsoft
and GE (General Electric)
The reasons for joint ventures & their
risks:
Volkswagen & Ford Joint Venture
• In 2018, Volkswagen (VW)

and Ford announced they
would form a joint venture.
Watch this short video and
identify the key reasons why
VW and Ford would want to
form a joint venture despite
being rivals in the same
industry.
• https://www.youtube.com/w
atch?v=G3ItF-_Qlhw
Advantages of joint ventures
• As the JV is set up for a finite time, it can be dissolved at the end the
project if needed, without compromising the operations of the parent
companies.
• The parent companies combine their expertise, technologies and
financial resources, to create the new business, thereby increasing its
chances of success. For example, more finance is raised than if the
companies were to grow organically, and the financial risks are split
between the parent companies.
• Joint ventures are generally cheaper than M&As, which involve high
legal and administrative costs. It is also quicker to form a JV than to go
through with a merger or acquisition.
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Advantages of joint ventures
• The parent companies can enjoy the benefits of growth without
losing their individual corporate identities. At the same time, the JV
can also create synergies from working with a partner company (such
as the transfer of specialist skills), thus strengthening the position of
both firms in the market.
• For international joint ventures, the partner company can provide
local knowledge to cope with any problems related to cultural
differences and business etiquette in overseas markets.
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Disadvantages of joint ventures
• As with all forms of partnerships with other entities, there are possible
conflicts and disagreements between the parent companies. This might be
due to different organizational cultures and management styles . This can
create communication and productivity problems, thus jeopardising the
joint venture.
• In the case of poor performance, a joint venture is more difficult to
terminate than a strategic alliance. This is partly due to the legally binding
responsibilities committed by the parent companies of the joint venture.
• Many joint ventures are short-lived as they do not succeed or are
purchased outright by one of the parent companies.
• For joint ventures that do succeed, the parent companies have to share the
profits.
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Strategic alliances (AO3)
• Strategic alliances are created
Strategic when two or more organizations
join together to benefit from
Alliances external growth without having to
set up a new separate entity or to
make major changes to their own
business models.
• Examples include:
• Apple and MasterCard (the
first credit card company to
offer Apple Pay)
• Spotify and Uber (riders can
listen to their own playlists)
• Starbucks and PepsiCo
(bottling, distributing and
selling Frappuccino coffee)
In order for
Strategic
Alliances to
work:
• Information sharing and genuine willingness to support other companies is

vital.
• This includes a commitment to a common goal
• The exchange of knowledge
• Joint company events (partly to promote the Strategic Alliance).
• Strategic alliances are built on trust and a true desire to grow together.
Advantages of strategic
alliances
• Businesses in a SA retain their individual corporate identities,
without the expenses of establishing a new company with its own
legal status (as in the case of joint ventures). This also means it is
usually quicker to set up a SA than a JV.
• As with a JV, a strategic alliance fosters cooperation rather than
competition. In theory, if there is less competition, profits should
rise.
• There is greater flexibility with a strategic alliance than a joint
venture because membership (of the alliance) can change without
having to terminate the coalition.
• Similarly, it is more straightforward to terminate a SA than a JV, or to
demerge, if the alliance does not work out for whatever reason.
Disadvantages of strategic
alliances
• Unlike a JV, there are few barriers to entry and exit in a strategic
alliance. For example, as it is much easier for members to pull
out of a strategic alliance, they may be less committed. This can
be destabilizing for the business venture.
• Many strategic alliances are only short-term agreements. This
can limit the options for an organization’s external growth
strategies.
• As there can be numerous members in a SA, the business
organization in question is exposed to the potential mistakes or
misconduct of member firms in the alliance.
• As with all cases of working with and relying on third parties,
there is the potential of conflict and misunderstandings.
Communication problems, divergent corporate cultures and
perspectives, and mistrust are key reasons for the failure of
many strategic alliances.

Danyah Barqouni
Franchisees (AO3)
Franchising
A franchise contract allows the franchise to use the:

1. Name
2. Logo of the franchiser
3. Marketing methods
- This franchisee can, separately, decide which form of
legal structure to adopt.
- Franchises are a rapidly expanding form of business
operation.
- They have allowed certain multinational businesses,
such as McDonald's and Ben & Jerry’s, to expand
much more rapidly than they could otherwise have
done.
Advantages of franchising for the franchisor
• Franchising is a faster method of growth than using internal growth. It is
advantageous for the franchisor to use partner firms to purchase, own and
run additional franchised outlets. This means franchising can actually be
cheaper than internal methods of growth for the franchisor.
• Franchisees fund the growth of the franchise as they pay an upfront fee to
purchase the franchise license. In addition, the franchisor received
royalties, usually calculated as a percentage of the franchisee’s sales
revenues.
• The franchisor benefits from selling the franchise agreement to someone
who has been vetted and is more motivated to succeed than salaried
managers employed to run a particular store, unit or outlet.
• The franchisor, in its pursuit of growth in other geographical locations, can
also again from the franchisee’s local knowledge.
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Advantages of franchising for the franchisee
• The success rate of franchising is very high in most industries. Franchisees gain
access to a tried and test business model.
• In many cases, the franchisee benefits from the brand recognition and brand
loyalty established by the franchisor. Hence, there are opportunities for the
franchisee to earn large profits.
• Franchisees receive ongoing support and expert advice from the franchisor, such
as upskilling training, market research findings, and legal advice. This improves
the chances of success for the franchisees. For example, before a person is
approved to operate as a McDonald's franchisee, they have to complete a
comprehensive restaurant training programme for a minimum of 26 weeks.
• They gain from the purchasing economies of scale of the franchisor, rather than
facing much higher costs (of inventory, for example) if operating as a sole trader
of a much smaller, independent organization.
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Disadvantages of franchising for the
franchisor
• The franchisor’s corporate image and brand reputation is at risk if a
franchisee is negligent and/or incompetent. Breaking the franchise
agreement with such franchisees can be a both time consuming and costly.
• Therefore, although not the owner of a franchised outlet, the franchisor
still needs to ensure quality standards are met. This means the franchisor
may need to closely monitor the operations of their franchisees; after all,
their reputation and overall business model is at stake.
• The franchisee, as the owner of the franchised unit, gets to keep the profits
they generate. This would not be the case if the franchise chose to grow
organically.
• The franchise method of growth is not applicable to all businesses as they
lack the expertise, resource and brand awareness to attract buyers
(franchisees).
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Disadvantages of franchising for the
franchisee
• Buying a franchise is usually very expensive. Even so, the process of
applying for a franchise license is typically complex and time consuming.
Even after paying for the start-up costs and running costs of the business,
the franchisee must also pay a percentage of its sales revenues to the
franchisor as royalty payments. This can cut a franchisee’s profit margins
quite substantially.
• The franchisee is constrained by the standards and practices set by the
franchisor. The franchisee must follow the franchisor’s established business
model, without scope for truly independent decision making or innovation.
• Like the franchisor, each individual franchisee is at risk of a damaged
reputation if another franchisee of the business makes a serious blunder.
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Table 1.6.5 summarizes the benefits and
disadvantages of a franchised business for the
franchisee:
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CUEGIS task
• Investigate the external growth of an organization of your choice.
Outline the method(s) of external growth with consideration of any
combination of the following:
• Mergers and acquisitions
• Strategic alliances
• Joint ventures
• Franchising
• Consider the impact of any two of the CUEGIS concepts on the
growth of your chosen organization.
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Methods of External Growth

1. M&A – Mergers & Acquisition

Peter Simpson, Alex Smith & Paul Hoang - Prepared by:

Peter Simpson, Alex Smith & Paul Hoang - Prepared by:

Peter Simpson, Alex Smith & Paul Hoang - Prepared by:

• External growth is often referred

• It is a relatively quick growth method, especially if

• M&As enable the larger organization to

• M&As are typically very expensive. For a

Peter Simpson, Alex Smith & Paul Hoang - Prepared by:

• A joint venture is an external growth

• In 2018, Volkswagen (VW)

• Information sharing and genuine willingness to support other companies is

Peter Simpson, Alex Smith & Paul Hoang - Prepared by:

A franchise contract allows the franchise to use the:

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