11. growth strategy

18
Growth Strategy

Transcript of 11. growth strategy

Growth Strategy

Growth and Profitability

• Growth and a firm’s long-run average costs– shape of the LRAC curve–minimum efficient scale

• Demand considerations– nature of the product– possibilities for diversification

• Relationship between growth & profitability– how growth depends on profitability– how growth affects profitability

Constraints on Growth

• Financial considerations– internal sources of finance– borrowing– share issue

• Shareholder confidence– problem of retaining large proportion of

profits– excessive borrowing– the takeover constraint– share performance• the valuation ratio

Constraints on Growth

• Demand conditions

– importance of market demand

– importance of promoting demand for the firm's product and increasing market share

• Managerial conditions

– the composition of the managerial team

–management structure

Alternative Growth Strategies

• Growth by internal expansion

– product differentiation

– vertical integration

– diversification

• Growth by external expansion: mergers and takeovers

– horizontal mergers

– vertical mergers

– conglomerate mergers

Alternative growth strategy

GROWTH OF A FIRM

Internal expansion External expansion

(1) DifferentiationHorizontal expansion

(same product, increasein market share)

(1) Horizontal integrationMergers of firms

producing the sameproduct

(2) Vertical integrationDifferent products, butbelonging to different

stages of same product

(2) Vertical integrationMergers of firms producing at different stages of same

process

(3) ConglomerateDiversification -

introduction of totally different products

(3) ConglomerateDiversification - merger of

firms producing totally unrelated products

Growth through Vertical Integration

• Types of vertical integration– backward integration ('upstream'

integration)

– forward integration ('downstream' integration)

• Measuring the extent of vertical integration– primary production

– auxiliary operations

• Examples of vertically integrated firms

Growth through Vertical Integration

• Why vertically integrate?

– greater efficiency

• production economies

• co-ordination economies

• managerial economies

• financial economies

– reduced uncertainty

–monopoly power

– barriers to entry

Growth through Vertical Integration

• Problems with vertical integration– lack of flexibility– risks

• Tapered vertical integration– partial vertical integration– advantages• better cost information• more leverage over suppliers• smaller capital outlay

– disadvantages• possible lack of economies of scale

Growth through Diversification

• Directions of diversification– using existing technological base &

market area– using existing technological base & new

markets– using new technological base & existing

market– using new technological base & new

markets• Why diversify?– stability–maintaining profitability– growth

Growth through Merger

• Mergers and takeovers

– distinction between mergers and takeovers

• Motives for mergers and takeovers

– growth

– economies of scale

–monopoly power

– increased market valuation

– reduced uncertainty

Growth through Merger

• Motives for mergers and takeovers (cont.)

– opportunities

– other motives

• to avoid being taken over

• White Knight strategy

• asset stripping

• empire building

• geographical expansion

0

100

200

300

400

500

600

700

800

900

1000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

€ b

illi

on

s

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Nu

mb

er

of

de

als

Inter-EU EU/non-EU

Mergers and acquisitions involving an EU company

Source: European Economy, Supplement A , No 12 - December 2001 (European Commission): based on Table 1 and Graphs 7 and 10

0

100

200

300

400

500

600

700

800

900

1000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

€ b

illi

on

s

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Nu

mb

er

of

de

als

Inter-EU EU/non-EU

Mergers and acquisitions involving an EU company

Source: European Economy, Supplement A , No 12 - December 2001 (European Commission): based on Table 1 and Graphs 7 and 10

0

100

200

300

400

500

600

700

800

900

1000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

€ b

illi

on

s

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Nu

mb

er

of

de

als

EU/non-EU

Inter-EU

Total number of mergers

Mergers and acquisitions involving an EU company

Source: European Economy, Supplement A , No 12 - December 2001 (European Commission): based on Table 1 and Graphs 7 and 10

Growth through Strategic Alliance

• Types of strategic alliance

– joint ventures

– consortia

– franchising

– licensing

– subcontracting

– networks

37%

27%

20%

16%

Star Alliance Oneworld Skyteam Northwest - KLM

United, Lufthansa, Singapore, Nippon,

Air Canada, US, Varig, bmi, Thai, Air New Zealand, Austrian, Asiana,

Tyrolean, Spanair, Scandinavian,

Mexicana.

American, BA, Qantas, Aer Lingus,

Cathay Pacific, Iberia, Finnair,

LanChile

Air France, Delta, Alitalia, Korean Air,

Czech Airlines, AeroMexico

Northwest, KLM, Continental,

Emirates, Malaysia, Air Pacific, Kenya,

South Africa

Airline strategic alliances

Figures show percentages of total

alliance capacity (2003)

Growth through Strategic Alliance

• Why form strategic alliances?

– new markets

– risk sharing

– capital pooling